" . . . entering the new year in good shape"

Kevin Thompson, Finance Director

The full year's turnover of £267 million taxation and goodwill amortisation was £46.5 million (see consolidated profit and loss account) (2001/02: £48.3 million). Turnover, profit before taxation and return on sales were higher in the second half of the year than the first, without including the benefit of acquisitions. The Group continues to operate at a high rate of profitability with return on sales now exceeding 17% for more than 10 consecutive years.

Relative to Sterling, the weak US dollar and stronger Euro have had an impact on these results. Approximately one-third of turnover and profits are made in US dollars and translating these weaker US dollars into Sterling has reduced turnover and profits by 2.4%, offset a little by the benefit of contributions in stronger Euros.

Looking ahead, I expect some continuation of the increase in insurance costs which we have seen impact the Group in 2002/03, together with higher UK National Insurance and pension costs. In total, I believe these costs will increase overheads by £1.7 million in 2003/04, however a number of initiatives are continuing which will reduce both overhead and material purchase costs and I expect these to mitigate the increases at least in part. We are managing to offset sales price pressures in some markets through improved product design and even better procurement.

Even by Halma standards, the cash flow performance this year was very good. Free cash flow (the cash left over from our operating activities and interest but after funding capital expenditure, working capital and tax) was £36 million, exceeding the record achieved last year. Excluding currency effects and acquisitions made in the year, stocks were reduced by £3.3 million (9%) following a £5.1 million reduction last year, and working capital in total was pushed down by £8.8 million (13%). We finished the year with net debt of less than £0.1 million after spending £47 million on acquisitions.

Operating cash flow for the year, being cash flow from operating activities less capital expenditure, amounted to £50.9 million. This means that the cash conversion rate (operating cash flow as a percentage of operating profit before goodwill amortisation) was very strong at 110%.

A consistently high return on capital employed has long been a feature of Halma. During the year we converted our cash, which earns a relatively low return, into businesses which earn a much higher return. I am very pleased to report a return on capital employed of 54% this year, the twentieth consecutive year over 40%, and the highest ever year-end figure.

Following the 10% increase in the interim dividend, the Directors recommend an increase of 10% in the final dividend per share. If approved, this dividend, amounting to 3.527p per share, will be paid on 18 August 2003 to shareholders on the register at the close of business on 18 July 2003, giving a total dividend for the year of 5.812p. Our excellent cash generation will therefore finance a distribution to shareholders of £21 million for the year.

The effective tax rate on profit before goodwill amortisation has increased from 31.5% to 32.9%, in part due to the increase in income earned in higher tax jurisdictions and in particular that of the BEA companies. I expect an effective tax rate closer to 32% in 2003/04 depending on the exact mix of profits earned around the world.

At 29 March 2003 the Group held currency loans amounting to US dollar 31 million and Euro 10 million. These loans are only for balance sheet hedging purposes, covering the majority of our US dollar and Euro assets.

We do not use complex tax planning schemes nor complex derivative financial instruments. No speculative treasury transactions are undertaken.

The triennial valuation of the Group pension schemes was carried out during the year. This showed that the main Group scheme is 69% funded, compared with 97% funding at the 1999 valuation. This reduction arises because of the fall in equity markets and investment returns.

We have increased both employer and employee contributions to the schemes during the year in line with the actuary's profit in 2003/04 will be £1 million higher than this year but there is no need for a further increase in the cash contributions. Under current assumptions the deficit would be eliminated over a 15-year period.

As with many companies, the cost of providing a defined benefit promise to employees has increased significantly in the last few years. The effects of increased longevity, loss of ACT relief and of course the fall in equity valuations more recently have led us to close the defined benefit pension scheme to new members and a defined contribution scheme has now been established.

We have adopted the transitional provisions of FRS 17 (Retirement Benefits) for the year ended 29 March 2003. There is no material difference between the charge to the Group profit and loss account under FRS 17 compared to SSAP 24 (the existing rules). Full adoption of FRS 17 will mean that the net deficit on the Group's defined benefit pension consolidated balance sheet. At 29 March 2003, the deficit, net of deferred tax, was £31 million. This figure reflects the prudent assumptions required under FRS 17 and the significant decline in equity values over the period, and represents a relatively small proportion of Halma's

High quality finance executives operate within each business, monitoring and assisting progress. In addition to self-certification, each business is subject to regular, comprehensive financial review, carried out by our senior finance staff. The output from these reviews supports the continued improvement in simple, valuable systems and allows us to address any weaknesses found. I am committed to maintaining the strong control in the Group and to increasing the pace of improvement even further.

During the year we carried out a review of our audit services and appointed Deloitte & Touche as our auditors. I am pleased with the quality of service they are able to provide to us.

The BEA group of companies was acquired in October 2002. At the company level, BEA's pre-tax return on its operating to pre-tax profit in the year, net of the cost of financing the acquisition, was £2.1 million and is of course strongly earnings enhancing. Including deferred consideration earned up to March 2003 but not including the cash we acquired, the purchase price is £46 million and the post-tax return on investment for the period we have owned BEA is 8.3%. We bought BEA for its long-term benefits but this figure still compares well with our cost of capital which has been calculated as falling in the range of 7% to 8.5%. This was a strong acquisition.

We are entering the new year in good shape. Returns and cash flow remain strong and we have minimal net debt. Good financial controls are embedded in the Group. It is against this background that we will push to increase the pace of improvement even further and continue to focus on the creation of value.