"...Provided markets remain stable we expect profit growth..."

Stephen O'Shea, Chief Executive

Results in the second half of the year moved ahead of the first half not only in organic terms but also from the success of the acquisitions of BEA and Radcom. We have produced good results even though improvements in markets did not occur.

Our operations made pre-tax pre-goodwill profit of £46.5 million (see consolidated profit and loss account) (2001/02: £48.3 million) on sales of £267 million (2001/02: £268 million). Our very strong operating cash generation, 110% of operating profit, funded a further dividend growth of 10% at the interim and subject to shareholder approval, a final dividend growth also of 10%.

This cash is generated by our remarkably high return on sales and return on capital employed, which this year reached 54% (2001/02: 41%). This is the highest level ever achieved in the Group. This is a testament to the quality of management in our subsidiaries who have made more effective use of their resources, controlled costs, developed new products and in a number of cases improved their market shares.

For the first time the USA became our largest market, representing 31% of the Group's sales. However, movements Sterling value of our American earnings. We made our greatest growth in mainland Europe where sales grew by 10%. Sales increased to Africa and the Middle East, and to the Far East and Australasia. There is a trend towards increased manufacturing migration from Europe and the USA towards the Far East and Eastern Europe. Indeed an increasing proportion of components and sub-assemblies used in the Group are sourced from these territories as we continue to keep our product costs low.

I am pleased but not surprised by the success of BEA. This was our largest acquisition so far at £46 million net of cash but including earn-out payments for results to the end of March 2003. In the six months we have owned it, net of interest on the cash we used, BEA delivered £2.1 million to Group profits. Operating profits at £2.9 million reached our target levels. The acquisition was fully funded from cash accumulated from earnings in operating companies so that even after a further small acquisition the Group was cash neutral at the end of the year.

In the year we invested record amounts in product development. This produces growth opportunities and refreshes our offering to customers. Together with the acquisitions we have a stronger set of products to start the new year.

Despite challenging conditions in the markets we serve, three of our six business groups - Fire and Gas, Elevator Electronics and Process Safety - achieved an improved profit performance.

Profits were increased in our FIRE & GAS sector as the mix of products sold was moved towards more profitable products, causing the return on sales to improve. Apollo, our professional smoke detector business, increased sales to almost all territories with particularly impressive sales growth into mainland Europe. R&D has been continuing at a high pace with several new products launched at the beginning of the new financial year. This will lead to a short-term increase in marketing costs, but will allow us to grow market share by providing our customers with a larger range of products and training them in their use. This reinforces customer loyalty which is a strong feature of our fire detection business.

We have been growing sales of gas detectors in the USA and in mainland Europe but experienced reduced volume of sales into the UK. We are concentrating on products with a high ease of use, usually single button operation, that are tough enough to survive the aggressive and hazardous environments where they are used. We also launched new products in May 2003. These include a new range of personal gas monitors for hostile environments. These are potentially life-saving products. Our customers include water, electricity and gas utilities and also telecoms, construction and chemical companies.

Our two strengths in the WATER sector are leak detection and water sterilisation using ultraviolet (UV) light technology. Our leak detection and flow management business is based in the UK and France and is affected by the spending patterns of the water utilities. They have been deferring capital expenditure and the UK water regulator has reduced the emphasis on cutting leakage. Our efforts have therefore increasingly been directed towards the USA where sales are growing, and to other countries where, because of shortages, the wastage of large amounts of clean water through leaks is unacceptable. We are offering technology that is new to some of these territories and we are confident of long-term development even though the start up phase can be relatively slow and resource intensive.

At the end of the financial year we further strengthened our flow measurement activities by the purchase of Radcom which added a strength in measuring flows of dirty water and reporting results by using satellite communications.

In UV sterilisation we take contaminated water and make it fit for use in a variety of applications including for drinking, in swimming pools, as water used for irrigation, and also to improve the quality and shelf-life of food and drinks. Chlorination of water is not always effective in eliminating parasites and chlorine by-products have been shown to damage both people and buildings. We minimise or eliminate the use of this poisonous gas in many critical applications thereby making a useful contribution to improving the environment. There is growing recognition of the value of this technology and its use is increasing particularly in the USA.

We make a considerable number of products that protect people at work. In our PROCESS SAFETY sector we make pressure relief products and safety systems that ensure machines are safe before people can gain access. We specialise in situations where it is critical that an ordered process is carried out correctly to safely manage the plant, protect the operations and to prevent accidents and emissions.

Growth in profits during the year has been partly driven by some recovery in spending by the petrochemical companies which includes safety spending with us. We are also operating successfully in the USA where safety expectations are rising towards the high levels demanded in Europe. Automotive applications have had a good year as customers have moved, changed, upgraded or made new production lines.

We foresee opportunities to grow our emergency pressure relief operations. We currently have a moderate market share. There are three larger US based competitors, all of whom have a very large installed base, and a big and regular demand for spares. We have a greater dependence on the chemical industry, our largest customer, which has had a slow year for major new process plants. We provide an extraordinarily high level of service and response and thereby are capturing some of our competitors' developing products specifically for the food industry, a niche that we can develop into a strong market for us.

As expected, heavy industry in the USA has been slow to improve, such that our RESISTORS sector which is largely based in America, has continued to experience difficult conditions in its biggest market. Accordingly we have moved resource into exports. Sales have grown into the Near, Middle and Far East, and to Africa and Australasia, but this has only partially offset the reductions in US sales. The net effect is a £4 million sales reduction and £1 million profit reduction compared to last year.

Work is continuing on controlling our costs, further increasing exports and managing our working capital. In this sector our assets employed have been reduced by £2 million (22%) in the year and the cash generated used, in part, to purchase BEA. The return on sales reduced from 13% to 11% in our resistors sector, but as a result of good resource management the return on capital employed remained at 36%. In many engineering businesses this return would be considered high even in the best of times.

Because of our range of technologies and broad customer base, we expect to reverse the current trend in resistor sales. However, we will need better export strength or an improvement in American markets to reach previous levels of profit in this particular sector.

Within our OPTICS & SPECIALIST sector we include our ophthalmic diagnosis companies, and a grouping of other subsidiaries along with the national and international holding companies.

Our optics business has held steady in sales and profits, with new products launched last year making useful contributions. There is an increasing level of cross-fertilisation between these companies. The quality of Research & Development, for us mainly development, has been improving and producing a range of new products. Increasingly our customers are becoming more and more careful about cross-contamination of patients, and recently we introduced a number of unique precision aspheric lenses that can be sterilised regularly by high heat levels.

The specialist businesses in this sector have market shares that are lower than elsewhere in the Group. They are more subject to pricing pressures and do not have as much power with suppliers as our market leading companies. To improve profitability we have made a number of changes in the management of several of these companies.

As you travel around the world, automatic doors in elevators and in airports, shops and hotels help to maximise the comfortable and safe flow of people. Our businesses lead the world and hold by far the largest market shares in sensors for automatic doors. We have long held this position for elevator doors. In our ELEVATOR ELECTRONICS sector we also provide controls, displays and emergency communications for elevators and other transit applications.

Active management of costs has been important, particularly because the major US market has remained both dull and steady. By sourcing extrusions, electrical sub-assemblies and mechanical parts in Eastern Europe we have made valuable material cost savings. There is some consolidation of our smaller customers into our larger ones, which changes the pricing mix and offsets our productivity and material cost gains.

In October we purchased BEA. This company is the world market leader in sensors for fixed automatic doors. It is headquartered in Liège, Belgium with a major facility in Pittsburgh USA, an operation in China and offices in Japan and elsewhere. I am very pleased with our managers and BEA's purchase and integration of this operation. My initial targets have been met. BEA brings some new technologies and techniques into the Group and is being effective in transferring their best practice to other companies in the Group. They use a number of innovation techniques that are being reviewed for use elsewhere in the Group.

The Group's executive managers wholeheartedly with the remarks of David Barber in his Chairman's. We too were greatly saddened by Lord McGowan's regard for Hamish Ritchie. We are very pleased to have attracted Geoff Unwin and Andrew Walker to our Board. I have enjoyed working with Geoff over recent months and I am looking forward to working even more closely with him in the future.

On a personal note, I have learned hugely from David Barber for every one of the last 20 years. He is by any measure a remarkable man, his vision has guided the development of the Group. His enduring contribution includes the assembly and coaching of a management that is committed to exceptional standards. There is a deep seated, results orientated culture in Halma. David provided an outstanding environment for managers to develop and many of us owe much to him.

I would also like to thank executives and managers right the way through the Group, in every country and every company. Most have had to overcome market difficulties, have improved productivity and motivated their staff. Our employees contributed energy, enthusiasm and skill to the companies they work in - many thanks to each of you.

Our strategy of building high market shares in safety related markets has proved effective and shows in the Group's conditions. We continue to generate exceptional returns on capital employed, at a record level this year, thereby creating wealth for shareholders. We have again demonstrated the ability to find, complete and integrate related acquisitions successfully. We are creating new products for existing customers and also improving our effectiveness in export markets.

Provided markets remain stable, even at current levels, we expect to achieve sales and profit growth. We are not relying on markets to improve in order to achieve high profits and high returns. We consider the future is in our own hands. Significant new products are being launched at the start of 2003/04. Initially launch costs are incurred but these are high value units so payback is quite rapid.

We are aiming to return to a sequence of record profits.