Press Releases - Final Results for the 52 Weeks to 30 March 2013

Final Results for the 52 Weeks to 30 March 2013

13 June 2013

Record results and continued dividend growth

Halma, the leading safety, health and environmental technology group, today announces its preliminary statement for the 52 weeks to 30 March 2013.

• Adjusted pre-tax profit from continuing operations¹ up 8% to £130.7m (2012: £120.5m) on revenue up 7% at £619.2m (2012: £579.9m). Return on Sales⁴ of 21.1% (2012: 20.8%).
• Organic growth⁵ at constant currency: Profit up 5%, Revenue up 3%.
• US and China revenue up strongly; UK and Mainland Europe revenue lower.
• Strong performances in Medical and Process Safety sectors; solid progress in Infrastructure Safety; slightly lower profit in Environmental & Analysis.
• Order intake ahead of revenue in the second half and order books increased across all sectors.
• Adjusted earnings per share from continuing operations² up 7% to 26.22p (2012: 24.46p). Statutory earnings per share up 10% to 25.22p (2012: 23.01p).
• Six acquisitions and one disposal completed. Acquisition pipeline remains healthy.
• Good cash flow maintained. Net debt of £110.3m at period end (2012: £18.7m). Borrowing facilities of £260m in place until 2016, providing significant financial capacity for investment in organic growth and value adding acquisitions.
• Final dividend of 6.37p per share, representing a 7% increase in total dividend to 10.43p per share for the year (2012: 9.74p) marking the Group’s 34^th consecutive year of dividend increases of 5% or more.

Andrew Williams, Chief Executive of Halma, commented:

“During the past year, we have continued to strengthen our business by further increasing investment in our drivers of organic growth - innovation, people development and international expansion. We have significantly improved the fundamental quality of our portfolio through six acquisitions and one disposal.

Order intake since the start of 2013 has been consistent with our expectations of sustaining year-on-year organic growth and high returns. We remain confident that Halma will make further progress in the year ahead.”

Notes:

1. Adjusted to remove the amortisation of acquired intangible assets, acquisition transaction costs, movement on contingent consideration and profit on disposal of operations of £8.4m (2012: £8.5m). See note 2 to the Preliminary Statement.
2. Adjusted to remove the amortisation of acquired intangible assets, acquisition transaction costs, movement on contingent consideration, profit on disposal of operations and the associated tax. See note 6 to the Preliminary Statement.
3. Total dividend paid and proposed per share.
4. Return on Sales is defined as adjusted¹ 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 11 to the Preliminary Statement.

For further information, please contact:

Halma plc
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 four business sectors:

   • Process Safety
     Products which protect assets and people at work.
   • Infrastructure Safety
     Products which detect hazards to protect assets and people in public spaces and commercial buildings.
   • Medical
     Products used to improve personal and public health.
   • Environmental & Analysis
     Products and technologies for analysis in safety, life sciences and environmental markets.

   The key characteristics of Halma's businesses are that they are based on specialist technology and application knowledge, offering strong growth potential. Many Group businesses are market leaders in their specialist field.

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)1494 721111, 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 25 June 2013 either by post or online at www.halma.com and will be available to the general public online 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.

Chairman's Statement

A glance backwards and a glimpse forwards
As previously announced, I will be stepping down from the Board immediately after the AGM on 25 July 2013. Halma has only had two Chairmen in the past 40 years, the founder, David Barber, and myself. When David stepped down in July 2003 he departed from the annual reporting format of commenting on the year’s results and instead reflected on some of Halma’s achievements over the years. I thought I would do the same, as the results are reported fully elsewhere in this report, save to say that 2012/13 was another record year and we are recommending a dividend increase of 7%, the 34th year of increases of 5% or more.

“Welcome to Halma Mr Unwin”
My first AGM was in July 2003 and what immediately struck me was the number of private shareholders who were there – all passionate Halma followers. One gentleman came up to me and said, “I have been a loyal shareholder for many years and thanks to the progressive dividends from Halma, have been able to educate my children. So thank you, welcome to Halma Mr Unwin”. He then fixed me with a look that said “and don’t mess it up” (it may have been stronger!). It then really struck home what a privileged and onerous responsibility I had taken on.

Glancing back
So what has changed over the ten years?

Firstly, what has not changed is the fundamental business model: our companies operate in niche markets where demand is underpinned by strong growth drivers. They produce high returns on sales and capital, and those returns go to pay taxes, dividends and re-investment in the business, including buying more companies with similar characteristics. All this is embraced by strong reporting and controls.

One significant change was the appointment of Andrew Williams as CEO in February 2005, only the third CEO in Halma’s history. Andrew provides clear, calm, insightful leadership and the Group’s performance under his tenure speaks for itself. He is a pleasure to work with.

Our strategy has been sharpened, and the framework under which we operate more clearly defined (as set out in the Annual Report).

Delegation and strong autonomy has been re-enforced at the subsidiary company level. Our Managing Directors have huge freedom to operate and to innovate in response to what their customers are telling them. This freedom also generates high job satisfaction.

The necessary financial and management resources have been put in place to support our strategy. Two examples illustrate this.

• Acquisitions: our Divisional Chief Executives (DCEs) are tasked with identifying suitable acquisitions. The pressure on their time was such that we found we were not seeing sufficient opportunities and when we decided ‘to put money to work’ we could not always reach our goals. So, we strengthened our acquisition sourcing efforts with a few highly experienced executives to support the DCEs. Our recent acquisition history illustrates that this is working effectively but, there will continue to be times when we decide that the economic climate or prices are not favourable and therefore we will stand aside for a while.
• Geographic expansion: we recognised that we were underweight in the faster growing economies and unless addressed, our growth would suffer. The problem was how to make it easier for our companies to enter those markets? Our solution was to create hubs in China and India (with other sector-based hubs now following) staffed by people with the remit to do whatever was necessary to make it easier for our companies to start operating there. One can see a logical progression of our business in, say, China. We start with a hub, then increase local sales through our regional offices, then local product assembly, then local R&D. As a result more MDs are resident in the region and finally we start to acquire companies, e.g. Longer Pump acquired this year in China. In 2003 under 10% of our business came from Asia Pacific, this year it is over 16% and in China our headcount has moved from 70 to 770. We have made a significant investment and the foundations are strong for growth in the future.

Incentives. At the beginning of the period, bonuses were rarely achieved and options were under-water. We refreshed the total remuneration framework based around Economic Value Added (EVA) together with introducing new long-term incentives all aligned with our strategy and adding shareholder value. Shareholders can see very clearly that in very good years bonuses will hit their maximum and in poor years may well be zero. They correlate. No surprises there, they are based on EVA. It was also flattering to hear that one of our major shareholders cites the Halma remuneration scheme as a model for others!

Much emphasis has also been placed on the quality of our company boards, particularly against the ever-increasing demands of global markets. Formal management training has been introduced tailored to our needs. This started with the Halma Executive Development Programme and now runs right through to our own graduate development programme. This has also encouraged our companies to develop training programmes of their own.

We have taken steps on gender diversity at the Board level, although at the company level it is much more difficult unless more female talent is encouraged throughout our operations. Pleasingly, in 2013, the majority of our graduate programme recruits are female.

A number of promotions have come from within so that people can see career opportunities across the Group – not just their own company.

There has been a major shift in sharing and co-operation, helped by our training programmes and using technology (intranets and social media) to enable it. We introduced a Halma Innovation and Technology Exposition four years ago, which is now held every two years to enable all the companies to share their innovation and technology with other Halma companies. This event has become more and more powerful and effective; there is a palpable buzz in the air.

In the period since March 2003 we have increased our dividend per share by 79% declaring £300m of dividends for shareholders. Halma’s market capitalisation has increased nearly five-fold and we have become one of the top 150 companies on the London Stock Exchange.

A glimpse forwards

• The basic model is sound and our strategy, which is kept under challenging review, will evolve, just as it has done over the years.
• More and more of our subsidiary boards will have to deal with the challenge of moving from domestic, single continent operations to global, multi-continent operations. As we know, this is not a trivial matter and the model that works best for each company will largely be dictated by the structure of their customers.
• To compete we have to have the best teams, so training, development and talent spotting will continue to increase in importance.
• 2016 or thereabouts will be a key year; the year when China is forecast to overtake the USA as the world’s biggest economy (according to the OECD after accounting for price differences). This will have a profound effect. For Halma, it means that the centre of gravity of R&D will change, and that’s only three years ahead!
• These changes will test our structures, but I know Halma will rise to these challenges.
• Progress up the FTSE also brings new pressures. More and more people will be aware of Halma.
• Finally, for sure, the pace of business and innovation will not get any slower. I used to say in a previous life, that what used to take us nine months to achieve would shortly be required in nine weeks and then, who knows, nine days!

I hope this gives some insight into the way Halma has evolved over the last ten years and gives a glimpse to the future.

What is certain is that these changes, and the performance over these years is due to a truly dedicated team of people across the Group. It is their focus on our customers and the markets they serve that make the difference. To everyone in Halma, I say a sincere thank you for all that you have achieved, you have made my role a pleasure.

I should also like to thank my predecessor, David Barber, for making my induction into the Company he founded so smooth; to all my colleagues on the Board, they have been terrific, both challenging and supportive as needed.

Finally, in Paul Walker, we have a highly successful international businessman with the relevant experience and the right personal attributes to chair Halma to even greater heights. I look forward to you welcoming him at the AGM.

It has been a privilege.

Geoff Unwin, Chairman

Strategic Review

Halma made good progress during the year delivering a strong trading performance, significant M&A activity and further increases in investment in geographic expansion, innovation and people development. Our four new reporting sectors, announced earlier this year, are clearly aligned with our long-term market growth drivers yet offer the potential for Halma to enter new, adjacent market niches within each sector. Halma’s record of sustaining short-term financial success while investing to develop opportunities for the longer term gives us confidence for the future.

Record revenue and profit for the tenth consecutive year
Full year revenue increased by 7% to £619.2m (2012: £579.9m). Organic growth was 2% and 3% at constant currency. Full year adjusted¹ profit increased by 8% to £130.7m (2012: £120.5m) with organic growth of 4% which was 5% at constant currency.

Excluding businesses sold during the current and prior years, revenue grew by 9% and profit was up by 10%.

We maintained steady growth momentum throughout the year. Order intake in the second half remained slightly ahead of revenue enabling us to make a positive start to the 2013/14 financial year.

Excellent returns and cash generation
We continued to achieve high returns with Return on Sales improving further to 21.1% (2012: 20.8%). Return on Capital Employed at the operating level remained high at 71.3% (2012: 74.7%) while our post-tax Return on Total Invested Capital was 15.8% (2012: 16.8%).

Cash generation was in line with expectations and we ended the period with net debt of £110m (2012: £19m) having spent £148m (2012: £20m) on acquisitions, £15.5m on capital expenditure (2012: £16.5m) and paid out £37.8m and £25.5m on dividends and tax respectively.

Strong growth in Asia, steady progress in USA and Europe
The relative trading patterns across the major global regions were consistent through the year. Growth from Asia Pacific of 15% was strong, with revenue exceeding £100m for the first time (2012: £87m). In aggregate, revenue from outside our traditional ‘home’ markets of the UK, Mainland Europe and USA grew by 14% to £157m (2012: £138m), now representing 25% of the Group and maintaining progress towards our target of 30% by 2015.

In total, revenue from the UK, Mainland Europe and USA increased by 5%. Revenue from the USA increased 20% to £195m (2012: £162m) boosted by recent acquisitions and organic growth (constant currency) of 4%. Trading conditions were tougher in the UK and Mainland Europe. In the UK, revenue decreased by 8% to £116m (2012: £126m) although excluding the impact of disposals, the organic decline at constant currency was only 3%. Revenue from Mainland Europe was 2% lower at £152m (2012: £154m) although, here again, the organic decline in constant currency terms was lower, at just 0.5%.

New reporting sectors
For the first time Halma’s results are reported under four sectors which are clearly aligned with our core markets of safety, health and environmental. Full details of the background to this change were released in our announcement on 14 February 2013 and can be seen on this website.

Process Safety performed strongly with revenue up by 3% to £125.7m (2012: £122.2m) and profit² increasing by 11% to £32.3m (2012: £29.2m). Excluding the contribution of Tritech, which was sold in August 2012, continuing operations revenue grew by 10% and profit by 16%. Organic revenue growth at constant currency was 10% with continued strong demand from energy and resources markets. Together with process industries these markets contribute around 60% of sector revenue and benefit from increasing Health and Safety regulation.

Return on Sales increased from 23.9% to 25.7% through a combination of strong revenue growth and gross margins supported by continuous improvement in new product innovation.

Organic revenue growth at constant currency for markets outside the UK, Mainland Europe and USA was an impressive 29% resulting in these fast developing markets now representing 28% of the sector. Encouragingly, the performance in our traditional ‘home’ markets was robust with mid-single digit organic revenue growth at constant currency in Mainland Europe and USA and flat UK organic growth.

Infrastructure Safety delivered another solid year. Revenue increased 1% to £205.3m (2012: £204.3m) and profit² grew by 7% to £41.8m (2012: £39.1m). Return on Sales improved from 19.1% to 20.3% with a significant factor being the improved profitability following the reorganisation of our companies selling elevator products. Organic revenue growth at constant currency was 1% which, following a flat first half, reflected a slight improvement during the second half. This resilience in demand comes from our focus on safety-critical product niches for regulated non-residential applications. Approximately two-thirds of sector revenue is installed in existing infrastructure rather than new construction.

New product introductions and increased investment in sales resources contributed to strong growth in the USA where organic revenue growth (constant currency) was 18%. Elsewhere we saw modest rates of growth in the UK and Asia Pacific while, unsurprisingly, almost every business in this sector experienced difficult conditions in Mainland Europe, resulting in organic revenue decline there of 8%.

Medical had an outstanding year, increasing revenue by 36% to £136.1m (2012: £100.4m) and profit² by 37% to £35.9m (2012: £26.3m). Return on Sales increased further from 26.2% to 26.4%. The underlying organic revenue growth (constant currency) was 12%. As expected, slowly improving demand for fluid control components from major medical OEM customers, steady growth in ophthalmology markets and our increased product innovation were the significant contributory factors to this excellent result.

Our strategic focus on small medical devices and components rather than high value capital equipment, enabled us to mitigate the negative impact from government austerity spending cuts in certain markets. The fundamental market drivers of an ageing population in the West and a growing and wealthier population in the East, give us continued confidence for the future.

Both the USA and Mainland Europe performed well with organic revenue growth (constant currency) of 12% and 17% respectively, whilst the UK saw organic revenue decline of 3%. Revenue from outside these three major territories increased organically by 12%, to now represent 25% of the sector. Our real exposure to these faster growing markets is greater, as a sizeable proportion of our revenue from the USA and Mainland Europe is to global OEMs who subsequently export their finished systems to other global regions.

Environmental & Analysis had a relatively disappointing year as revenue declined by 1% to £152.4m (2012: £153.4m) and profit² reduced by 4% to £30.4m (2012: £31.6m). Return on Sales was 19.9% (2012: 20.6%). Organic revenue at constant currency was down 6%. Reduced government research spending in the USA and lower investment by water utilities in the UK were the two major adverse market factors.

These market factors are clearly reflected in the regional trends with organic revenue (constant currency) declines of 14% in the UK and 10% in the USA. Organic revenue from Mainland Europe fell by 4%. Our companies continue to invest in growth in markets outside the UK, Mainland Europe and USA with revenue from these developing markets being 27% of the total sector, contributing organic growth of 6%.

Despite the challenges faced by Environmental & Analysis in the past year, we are confident that the management and organisational changes currently being made will improve performance in the future. These include simplifying global sales channels and manufacturing operations together with increasing senior management resources to focus on accelerating growth in Asia and from recent new technology innovation. It is expected that the total cost of this reorganisation will be around £1m in 2013/14.

Six acquisitions and one disposal completed
During the year we spent £136.8m (2012: £13.3m) on acquisitions plus £15.8m (2012: £5.4m) contingent consideration on acquisitions made in previous years but excluding £4.6m (2012: (£1.1m)) of net cash/(debt) acquired.

We acquired Accutome, Sensorex and SunTech Medical Group in the first quarter of the financial year for a total initial consideration of US$108.6m (£68.7m). Full details of these transactions were included in our Annual Report and Accounts 2012. Since acquisition, these companies have continued to trade in line with our expectations with the vendors of SunTech receiving an earn-out payment of US$6m and Accutome’s vendors expected to receive an estimated earn-out of US$5m for profit growth since joining Halma.

In December 2012, we acquired MicroSurgical Technologies (MST) for US$57.4m (£35.5m) plus an earn-out of up to US$43m (£26.6m) based on future profit growth. Based in Redmond, Washington, USA, the company designs and manufactures ophthalmic surgical products with a focus on single-use devices used in cataract surgery. MST’s results are reported as part of Halma’s Medical sector.

In January 2013, we acquired Baoding Longer Precision Pump Co (Longer Pump) for RMB242m (£24.3m). Longer Pump designs and manufactures its own range of precision pumps which are used in medical, laboratory and industrial applications, and is also part of Halma’s Medical sector. The business is based in Baoding, close to Beijing and is Halma’s largest ever stand-alone acquisition in China.

In March 2013, we acquired ASL Holdings for £6.4m and contingent consideration of up to £3.5m based on growth over the next two years. ASL designs and manufactures remote data monitoring solutions for a range of markets including utilities. It has become part of HWM-Water which is a global leader in datalogging and leak detection products for the water industry within Halma’s Environmental & Analysis sector.

Following the year end, in April 2013, we acquired a small technology bolt-on for one of our Infrastructure Safety businesses, Fire Fighting Enterprises (FFE). Talentum, based in Oldham, UK was acquired for £2.6m and adds new flame detection products to FFE’s existing range of fire optical beam smoke detectors.

We made one disposal during the year. In August 2012, we sold our single Asset Monitoring business, Tritech International, for £22m to Moog Components Group (Moog). We concluded that, despite the attractive aspects of Tritech’s end markets, we could create greater shareholder value by reallocating resources to other Halma sector niches and that Moog’s presence in the marine energy markets would enable Tritech to make stronger progress under their ownership. This disposal, along with the sale of Volumatic in March 2012, demonstrates the importance of Halma’s ability to manage our portfolio in order to sustain financial success over the long term.

We are continuing to add new opportunities to our acquisition pipeline process in all four of our new reporting sectors. Although the past year has been productive, we are working to both integrate these newly acquired businesses and progress further opportunities into the later stages of our acquisition process. We remain confident in our ability to find and acquire high quality businesses within our chosen markets over the medium term.

Strategic growth priorities
We have a clear strategy to generate sustained organic growth, actively manage our portfolio and deliver increased dividends. The average medium-term rate of organic growth determines the rate at which we can acquire companies and increase dividends. Our management reward structures are clearly aligned with this objective of delivering sustained growth and high returns. We actively manage our business portfolio through acquiring in (or adjacent to) our existing markets, merging companies as market needs change and selling businesses where we do not see the medium-term prospects for sustaining high returns or growth.

We drive organic growth through a focus on investing in the three areas of: Innovation, People Development and International Expansion.

Innovation
Our businesses build market leadership, gain market share or create new market opportunities through innovation in products and processes. Within Halma, companies have great opportunities to collaborate and share know-how with their sister companies. We have created a culture and environment to encourage this behaviour in a variety of ways including ensuring a diverse mix of representation at Halma training programmes and holding a biennial Halma Innovation and Technology Exposition (HITE). Network groups and forums focused on specific functional areas such as manufacturing and IT have also been established to foster regular benchmarking and continuous improvement.

In early May 2013, we held our third HITE event in Florida, USA which included a two-day Halma ‘trade-show’ where all the Group’s companies showcased their innovation and technologies to one another. HITE is a catalyst for collaboration between our businesses and is a visible example of how Halma’s culture has changed, and continues to evolve. Collaboration and learning from each other is increasing the rate of innovation and, consequently, building competitive advantage in our chosen markets. We invited institutional investors and analysts to join us at HITE 2013 and, following their positive feedback, it is something that we will be keen to repeat at HITE 2015.

Innovation is formally recognised in Halma through the annual Halma Innovation Awards where the first prize for the winning employee(s) is £20,000.

The Halma Innovation Award 2013, was won by a team from Hanovia in Slough, UK who developed a new UV treatment system for ensuring water in the ballast tanks of ships can be discharged without the risk of invasive species contamination, in compliance with impending global regulations. The runners up were a team from Oseco in Oklahoma, USA who developed a bursting disk which gives market-leading performance for both gas and liquid applications. In third place was a team from BEA who developed the new IXIO dual technology door sensor which combines BEA’s usual market-leading sensor performance with a multilingual LED graphical display, making it the ‘easiest to install’ product on the market.

Increased innovation in Halma is reflected in the greater investment which our companies are making in R&D. This year, R&D expenditure grew by over 13% to £31.1m (2012: £27.4m) with all four Halma sectors increasing R&D