Press Releases - Preliminary results for the 52 weeks to 2 April 2011

Preliminary results for the 52 weeks to 2 April 2011

21 June 2011

Record results and increased strategic investment

Halma, the leading safety, health and sensor technology group, today announces its preliminary results for the 52 weeks to 2 April 2011.

Highlights include:

• Pre-tax profit ⁽¹⁾ from continuing operations up 21% to £104.6m (2010: £86.2m) on revenue up 13% to £518.4m (2010: £459.1m).
• Strong organic growth, reflecting Halma’s commitment to investing in management development, innovation and emerging markets: Organic profit growth⁽²⁾ of 19%, Organic revenue⁽²⁾ up 11%.
• Successful acquisition of seven businesses totalling £82m (2010: £2m).
• High and increased level of returns achieved with Return on Sales⁽³⁾ of 20.2% (2010: 18.8%), Return On Total Invested Capital⁽²⁾ of 15.5% (2010: 13.6%) and Return on Capital Employed⁽²⁾ of 71.9% (2010: 61.3%).
• All three sectors reported increased revenue and profit. Health & Analysis is now Halma’s largest sector, Infrastructure Sectors made good progress and Industrial Safety achieved high profit growth and Return on Sales.
• Revenue outside the UK/Europe and the USA reached 24% (2010: 21%) of total revenue: good progress towards the Group's strategic objective for 30% of revenue to come from markets in the rest of the world by 2015.
• Order intake growth momentum maintained throughout the year.
• Adjusted earnings per share⁽⁴⁾ from continuing operations up 21% to 20.49p (2010: 16.89p). Statutory earnings per share up 19% to 19.23p (2010: 16.10p).
• A record dividend of 9.1p, increased by 7%, marking the 32nd consecutive year of dividend increases of 5% or more.
• Strong balance sheet with net debt of £37m (2010: £9m net cash) and borrowing facilities of £165m in place until 2013, providing significant headroom for M&A in 2011/12.

1. Adjusted to remove the amortisation of acquired intangible assets and acquisition costs (including transaction costs and movement on contingent consideration) of £6.3m (2010: £4.8m).
2. Organic growth rates, Return on Total Invested Capital (ROTIC) and Return on Capital Employed (ROCE) are non-GAAP performance measures used by management in measuring the returns achieved from the Group's asset base. See note 10 to the Preliminary Announcement.
3. Return on Sales is defined as adjusted⁽¹⁾ profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.
4. Adjusted to remove the amortisation of acquired intangible assets, acquisition costs and the associated tax. See note 6 to the Preliminary Announcement.

Andrew Williams, Chief Executive of Halma, commented:

“In 2010/11 we achieved our objective of significant organic growth and higher rates of return. We made substantial investments in acquiring businesses and developing new products and markets. This will remain a strategic focus for the year ahead to ensure we continue to position the Group’s activities into markets offering growth and high returns.

We are pleased with the momentum we have coming into 2011/12 and are looking forward to making further good progress in the year ahead.”

For further information, please contact:

Halma p.l.c.
Andrew Williams, Chief Executive, Tel: +44 (0)1494 721111
Kevin Thompson, Finance Director, Tel: +44 (0)1494 721111

MHP Communications
Rachel Hirst/Andrew Jaques, Tel: +44 (0)20 3128 8100

Note to editors

1. Halma develops and markets products used worldwide to protect life and improve the quality of life. The Group comprises three business sectors:

   • Health and Analysis
     Products used to improve personal and public health. We develop technologies for analysis in safety, life sciences and environmental markets.
   • Infrastructure Sensors
     Products which detect hazards to protect assets and people in public and commercial buildings.
   • Industrial Safety
     Products which protect assets and people at work.

   The key characteristics of Halma's businesses are that they are based on advanced technology and offer strong growth potential. Many Group businesses are clear market leaders in their specialist field and, in a number of cases, are the dominant world supplier.

2. High resolution photos of Halma senior management, including Chief Executive Andrew Williams, and images illustrating Halma business activities can be downloaded from the Image library on this website.  Photo queries: David Waller +44 (0)20 8205 0038, e-mail: [email protected].

3. You can view or download copies of this announcement and our latest Half Year and Annual reports from this website or request free printed copies by contacting [email protected].

4. A copy of the Annual Report and Accounts will be made available to shareholders on 27 June 2011 either by post or on-line at www.halma.com and will be available to the general public on-line or on written request to the Company's registered office at Misbourne Court, Rectory Way, Amersham, Bucks HP7 0DE, UK.

5. This announcement contains certain forward-looking statements which have been made by the Directors in good faith using information available up until the date they approved the announcement. Forward-looking statements should be regarded with caution as by their nature such statements involve risk and uncertainties relating to events and circumstances that may occur in the future. Actual results may differ from those expressed in such statements, depending on the outcome of these uncertain future events.

HALMA p.l.c.

Group results for the 52 weeks to 2 April 2011

Financial Highlights

Pro-forma information:

1. Adjusted to remove the amortisation of acquired intangible assets and acquisition costs of £6.3m (2010: £4.8m). See note 1 to the Preliminary Announcement.
2. Adjusted to remove the amortisation of acquired intangible assets, acquisition costs and the associated tax. See note 6 to the Preliminary Announcement.
3. Total dividend paid and proposed per share.
4. Return on Sales is defined as adjusted⁽¹⁾ profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.
5. Organic growth rates, Return on Total Invested Capital and Return on Capital Employed are non-GAAP performance measures used by management in measuring the returns achieved from the Group’s asset base. See note 10 to the Preliminary Announcement.

Chairman’s Statement

The Group has made strong progress

Halma: what we do and our strategy

Our business is to make products which protect lives and improve the quality of life for people worldwide. We do this through continuous innovation in market-leading products which meet the increasing demands for improvements to health, safety and the environment. We build strong positions in niche markets where the demand is global. Our businesses are autonomous and highly entrepreneurial.

Strategically we aim to grow profit and revenue in excess of 5% p.a. organically, to have Return on Sales in the region of 18% to 22% and generate post-tax Return on Total Invested Capital of more than 12%. As a result, we are highly cash generative and reinvest in our businesses through people, product and market development, continue to acquire more companies with like characteristics and strive to give annual dividend growth of 5% or more to our shareholders; something we have achieved for more than 30 consecutive years.

Performance

Full year revenue increased by 13% to £518.4m (2010: £459.1m), organic revenue growth¹ was 11%, and also 11% at constant currency. Profit before tax, amortisation of acquired intangibles and acquisition costs increased by 21% (to break through the £100m level for the first time) to £104.6m (2010: £86.2m), organic profit growth was 19% and also 19% at constant currency. Statutory profit before tax increased by 21% to £98.3m. Return on Total Invested Capital¹ increased to 15.5% (2010: 13.6%), Return on Capital Employed¹ at the operating level increased significantly to 71.9% (2010: 61.3%). Return on Sales¹ improved to 20.2% compared to 18.8% the previous year. Net debt at the year end was £37.1m having spent £82m on acquiring a number of excellent companies during the year.

You will see therefore, that the Company made excellent progress during the year against its key performance indicators.

As a result the Board is recommending a final dividend² of 5.56p per share giving a total dividend of 9.10p for the year, an increase of 7.1%. The final dividend is subject to approval by shareholders and will be paid on 24 August 2011 to shareholders on the register at 22 July 2011. Dividend cover is 2.25 times (2010: 1.98 times) meeting our objective of around 2 times cover.

Acquisitions

In contrast to the previous year, we judged that the climate was right to put more capital to work and during the year we invested a record £82m in acquisitions. With the maximum earn-outs, this sum could increase by a further £25m.

Continued strong investment in markets and products

The Group has continued to invest strongly in developing markets, which in turn is boosting our growth rates. Our regional development in China is progressing well and sales in China grew by 28% to £24m. Many companies in the Group are now also developing a stronger focus on South America, Brazil in particular. As usual, the year has seen the launch of many new innovative products.

Technical collaboration across the Group has increased which accelerates our adoption of new technologies and speeds our time to market. Although we believe passionately in autonomy, collaboration is also encouraged, these are key differentiators for the Group. Research and Development was 5.0% of revenue (2010: 4.7%).

People

We continue to invest strongly in people development, introducing new tailor-made training courses for our technical staff as well as even more management training. As a result, it is pleasing to see more and more internal promotions across the Group.

To everyone in the Group, these outstanding and record results are the result of your imagination and dedication, sincere thanks to you all.

Governance

In July 2010, we appointed Norman Blackwell and Steven Marshall to the Board and I am delighted to say that already they are making strong contributions.

At this year’s AGM, Richard Stone will be stepping down from the Board after 10 years of exemplary service. Richard has made a huge contribution to the Board during his tenure, and we offer him our sincere thanks and wish him well for the future.

In line with the recommendations of the UK Corporate Governance Code, the Board has agreed to submit all Directors to annual election starting at this year’s AGM on 28 July 2011, ahead of being obliged to do so at the 2012 AGM.

Following publication of the FRC’s Consultation Document: Gender Diversity on Boards, we are reviewing our own position and contributing to the consultation process. We intend to explore the establishment of wider diversity targets and report annually on our progress.

Outlook

Despite many economic uncertainties across the globe, the Group has made strong progress. Some excellent acquisitions have added to our strength. We are pleased with the momentum we have coming into 2011/12 and are looking forward to making further good progress in the year ahead.

Geoff Unwin, Chairman

1. See Financial Highlights
2. Subject to the approval of this year’s recommended dividend increase at the AGM on 28 July 2011

Chief Executive’s Strategic Review

Record results and increased strategic investment

Halma has had a terrific year, achieving strong organic growth and adding greater product and market strength to our existing business sectors through acquisitions. We are creating value for customers and shareholders in the short term, yet we are also increasing investment for growth in the future. We have a proven product, market and operational strategy which adapts as technology and market needs change.

Adjusted¹ profit increased by 21% to £104.6m (2010: £86.2m), including strong underlying organic growth of 19%, and a 2% contribution from recent acquisitions. There was a minimal (<1%) positive impact on profit and revenue growth due to currency exchange rate movements.

Revenue grew 13% to £518m (2010: £459m). Organic growth of 11% underlined the fact that our continued investment in management development, innovation and emerging markets is enabling us to achieve and sustain higher rates of growth. Acquisitions contributed 2% to growth.

Cash generation and operational management were excellent across the Group. We ended the year in a strong financial position with net debt of £37m (2010: £9m net cash) after having spent £82m (2010: £2m) on acquisitions and paying a total of £33m (2010: £30m) to shareholders in dividends. We have core borrowing facilities of £165m in place until 2013 and therefore have the capital resources available for further acquisitions in 2011/12, should we find the right opportunities.

After a strong first half year it was encouraging to see order intake growth momentum maintained throughout the second half, continuing to run slightly ahead of revenue giving us a positive start to 2011/12.

Halma’s sustained high level of performance over the past four decades has been achieved through the commitment, innovation and excellence of our employees. However, I believe their achievements during the recent financial downturn have been outstanding. I would like to thank all Halma employees for both their contribution to these successes and in ensuring that we are well placed to achieve even greater things in the future.

Higher rates of return

Return on Sales¹ increased to 20.2% (2010:18.8%) reflecting excellent operational management across the Group, an impressive recovery in Industrial Safety and the increasing proportion of our revenue coming from the Health and Analysis sector. Our strategic objective is to operate in the 18% to 22% range for Return on Sales and recent acquisitions support this goal.

All Halma companies are incentivised to deliver both profit growth and high return on capital. This year, the average Return on Capital Employed¹ of our operating companies increased to 71.9% (2010: 61.3%) demonstrating the strength of our operational management and the benefits of decentralised, light-assembly manufacturing operations.

The combination of strong earnings growth, effective operational management and paying sensible prices for acquisitions resulted in Halma’s post-tax Return on Total Invested Capital improving to 15.5% (2010: 13.6%).

Growth in all regions and sectors

Revenue from the USA increased by 18% to £150m (2010: £127m) and Europe was up by 2% to £138m (2010: £136m). We achieved 8% growth in the UK, which now represents just 20% of total revenue at £106m (2010: £98m).

Revenue from outside our largest markets in Europe and the USA increased by 26% to £124m (2010: £98m), contributing 24% of the Group’s total. The strongest performance came from the Far East and Australasia region, which increased by 29%. China grew by 28% to £23.6m (2010: £18.4m).

Health and Analysis is now Halma’s largest sector
Health and Analysis performed strongly to become our largest sector. Revenue was up by 23% to £218m (2010: £178m) whilst profit² was 33% higher at £46m (2010: £35m), representing 42% of the Group. All four sub-sectors increased revenue and profit. Growth was stronger in the USA and UK than Mainland Europe, with revenue outside these core territories increasing by 34% to £53m (2010: £40m). Here Photonics, Fluid Technology and Health Optics made the major contributions whilst Water made greater progress in the developed countries.

Infrastructure Sensors made good progress
Our Infrastructure Sensor sector has continued to increase profit throughout the downturn with demand largely driven by safety regulation globally and increasing urbanisation of population in developing countries. This year revenue was up by 8% to £197m (2010: £183m) whilst profit² grew by 10% to £39m (2010: £36m). Steady growth was achieved in the UK, USA and Mainland Europe with an encouraging 20% increase from outside these three regions. All four sub-sectors increased revenue and profit. Elevator Safety and Door Sensors performed very well in the Far East and Australasia whilst our Security business made good progress in all regions, most notably in South Africa. Fire Detection had a positive year, especially in the USA.

Industrial Safety achieved high profit growth and Return on Sales
Industrial Safety maintained the positive momentum it had coming into the year to deliver an excellent performance. Revenue improved by 5% to £103m (2010: £98m) whilst profit² grew by 20% to £25m (2010: £20m) giving a Return on Sales of 24%, the highest of our three sectors. All four sub-sectors increased profit whilst all, except Safety Interlocks, grew revenue. Revenue grew steadily in the UK and USA. In Mainland Europe, there was a slight decline in revenue due to the non-repeat of a major order for Safety Interlocks last year although this was more than compensated for by 34% growth in the Far East and Australasia.

Clear strategic priorities

We aim to operate in global specialised markets offering long-term growth and establish strong market positions with products and technology that can sustain high returns. Our strategic priorities guide our activities and resource allocation at both a corporate and subsidiary company level ensuring a balance between organic and acquisition led growth in the medium term.

Organic growth
We aim to continue to deliver organic growth above the blended medium-term growth rates of our end markets, which we believe to be at least 5%. Over the past five years, the average of our annual organic growth rates has been 8% per annum (revenue) and 10% per annum (profit) reflecting our ability to consistently outperform our markets by building sustainable competitive advantage through our products and customer service.

International expansion with a focus on Asia
Our strategic objective is for at least 30% of revenue to come from outside the UK, USA and Mainland Europe by 2015 (2011: 24%) and, by that time, for China to be 10% of the Group total (2011: 4.5%).

Since 2006, we have made a series of strategic central investments in China and India to accelerate the rate at which Halma subsidiaries can establish a local presence to design, sell and manufacture their products in these faster growth economies.

In the past year, we opened three new regional offices in China (Guangzhou, Chengdu and Shenyang), expanded our Door Sensor manufacturing facilities and acquired the assets of a Beijing based business to give us a local manufacturing base for our Fire Detection products.

In India, 10 companies now have a direct presence in our Halma hub in Mumbai compared with five at the start of the year. During the past year, revenue from India grew by 32% to £6.4m.

More Halma companies are investigating establishing a direct presence in South America. In the coming year, we will determine whether any central investment is appropriate to accelerate this process.

High rate of innovation
Product and process innovation enables us to build competitive advantage, gain market share and sustain high financial returns. All Halma businesses measure the direct contribution of major innovations in their business each month and increasingly are collaborating more with each other to share best practice or find new solutions to technical and operational problems. In May 2011, we held our second Halma Innovation and Technology Exposition in Orlando, Florida. The focal point of HITE is a two-day exhibition where every Halma company exhibits transferrable technology and processes to each other. This ability to transfer state of the art technology from one sector to another is something most of our competitors simply don’t have.

Innovation excellence in Halma is recognised through the monthly Eureka award and the Halma Annual Innovation Award. Both are open to all employees, and award a top prize of £1,000 and £20,000 respectively.

The Halma Annual Innovation Award for 2011 was won by an employee from Ocean Optics who developed a new way of testing products, resulting in superior product quality, faster lead times for customers and a £400,000 annual cost saving for the company. The runners-up included the Ricochet wireless security sensor system from Texecom and the Memcom elevator emergency telephone from Memco.

R&D expenditure in 2010/11 increased by 20% to £26m (2010: £21m), equivalent to 5% of revenue and well above our minimum spend target of 4% of revenue. R&D investment is greater in our higher technology businesses where the execution risk on new product development is higher too. In response to this challenge, we have established a training programme for our technical engineers called Halma Certificate in Applied Technology (HCAT). HCAT provides engineers with training in finance and project management as well as providing them with the opportunity to visit and network across other Halma companies.

Management development
Halma’s decentralised operating structure relies on local managers making good, timely decisions in the best interests of their business. R&D, manufacturing, sales and administrative resources are controlled locally where the intimate knowledge of market dynamics and customer needs resides. Strategic objectives, annual performance, goals and management incentives are aligned together with a real commitment to attract and develop high quality talent at all levels.

Halma offers a range of training programmes for employees including the Halma Executive Development Programme (HEDP), Halma Management Development Programme (HMDP) and Halma Certificate in Applied Technology (HCAT). During 2010/11, over 130 employees attended these Halma-run programmes and many more benefited from training provided by their subsidiary company. The value of this investment is shown both in our excellent financial performance and in succession planning. The latest example of the latter is the promotion of one of our US company Presidents, Dr Rob Randelman, to the Executive Board in April 2011.

In future, we recognise the need to increase the diversity of our management talent in order to meet the new challenges ahead. This objective will be integrated into a new management development strategy being implemented in early 2011/12.

Acquisitions, mergers and disposals
We look to buy companies with business and market characteristics like Halma. They have to be a good fit with our operating culture and strategy in addition to being value-enhancing financially. As the Group has grown, the average size of our transactions has increased. This remains in line with our increasing capacity and capability to successfully grow businesses of that larger size thereby not materially altering our risk profile.

As expected, 2010/11 saw a pick-up in M&A activity globally and we successfully completed seven transactions spending a total of £82m (2010: £2m). Four of these were small bolt-on additions to existing Halma businesses adding new technology and local manufacturing or sales resources in Photonics, Water, Health Optics and Fire Detection.

We acquired three larger businesses, all within our Health and Analysis sector, which will operate as stand-alone companies. Within our Fluid Technology sub-sector we paid $26.3m for Alicat Scientific (Arizona, USA) in November 2010 and $24.8m for Accudynamics (Massachusetts, USA) in December 2010. In March 2011, we paid CHF70m for Medicel (Switzerland) who specialise in cataract lens injector devices and will operate within Health Optics. The Medicel deal includes an earn-out of up to CHF30m for achieving profit growth targets over the next three years.

All these acquisitions are forecast to be earnings enhancing in year one. We are continuing to search for further acquisitions in Health and Analysis, Infrastructure Sensors and Industrial Safety and will be increasing resources to search for opportunities.

Our strategic objective is to grow our businesses organically and through acquisitions but maintain our flat organisational structure and devolved management approach. Consequently, in addition to acquiring businesses, we also consider internal mergers or divestment. Our success in this active management of our portfolio is demonstrated by the fact that since the start of financial year 2005/06, our profit has more than doubled, yet the number of principal operating companies Halma has reduced from 44 to 38.

Macro-economic, regulatory and competitive environment

Our expectation at the start of 2010/11 was that the stability and slow recovery which had returned in Europe and the USA in late 2009 would be maintained as would the higher rate of growth enjoyed in developing economies. This was broadly borne out with our predominant focus in Europe on Northern markets providing some insulation from the economic problems in countries in Southern Europe.

Many Halma businesses have products where demand is driven by relatively non-discretionary customer spend and all benefit from strong market positions providing upgrade and replacement sales opportunities. All these factors give us genuine resilience in tough economic conditions and enable us to achieve organic growth well above the market rate.

Increasingly environmental, health and safety regulation in our markets creates a relatively robust demand for our products and enables us to invest for the longer term with confidence. Global, regional and national product approvals or technical validations are an increasing cost and technical challenge, but also allow us to build competitive advantage too. Many of our businesses have a presence on industry representative bodies, enabling them to influence and anticipate new market trends.

We serve a wide range of market niches, each with its own unique competitive environment. Our strategy is to empower local management to create or respond to their changing markets by controlling their own competitive strategy including product pricing, product development and market positioning. More details are given in the sector reviews.

Our primary market growth drivers

Halma’s strategy is to develop market positions with a horizon of 10 years or more. Growth strategies within our individual operating businesses tend to have three to five-year horizons.

Our selected markets must have robust growth drivers with the potential for organic growth at rates well above background GDP growth.

All of our businesses operate in markets underpinned by at least one of the following growth drivers:

Increasing demand for healthcare
Three key demographic trends underpin the increasing demand for healthcare: population ageing in developed economies, and population growth and increasing affluence in the developing world. Demand for healthcare services and health-related products drives growth in our Health and Analysis markets.

Spending on healthcare continues to grow rapidly throughout the developed world, particularly in the USA where it is projected to rise from about 17.5% of GDP in 2010 to about 20% by 2020.

Population growth and rising incomes in the developing world also drive healthcare demand. The world’s population is also ageing. Globally, the number of people over 60 years old is growing annually by 2.6%, considerably faster than the general population growth of 1.2%.

Population ageing creates rising healthcare needs and, as incomes rise, health services become available to an increasing number of people in the developing world. In China, for example, the healthcare budget will have increased threefold between 2000 and 2015. Continuous advances in medical technology create new medical procedures, which also stimulate demand for new instruments and equipment.

Increasing demand for energy and water
Throughout the world rising energy consumption and water usage is driven by three key trends: population growth; rising living standards; and changing patterns of food consumption and agriculture. In many economies energy and water