Summary of Halma p.l.c. Annual report and accounts 2006
Accounting Policies and Notes
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Record profit and revenues achieved against a background of major strategic change.
We have had an outstanding year producing profit growth from continuing operations* of 20% (18% on a statutory basis) and revenue growth of 16%. Organic growth* was 15% and 11% for profit and revenue respectively.
This is a record performance by a significant margin and was achieved against a background of major strategic change. This is a testament to the robustness of our growth strategy and the quality of the contributions made by our employees.
We now report our results under three market-defined sectors: Infrastructure Sensors, Health and Analysis and Industrial Safety. These replace the previous six product-based divisions and more closely reflect the coherent nature of our activities and the way we operate, as well as making it easier for shareholders to gain a better understanding of what we do. You will find details about each sector in the comprehensive business review which follows.
Our return to organic growth was widespread across the Group and was underpinned by a tremendous performance in the Health and Analysis sector. Strong organic growth was boosted further by a rapid recovery by our Water business. Infrastructure Sensors started to show promising revenue growth in the second half, although continued investment in the sales and support structure for the longer term suppressed short-term profits. All parts of our Industrial Safety sector performed strongly with the buoyant oil and petrochemical market contributing to healthy revenue and profit growth.
I am very pleased with the record Return on Capital Employed ("ROCE")* of 57% achieved during the year. Our success in achieving growth has not come at the expense of diluting the quality of our returns. Another year of strong cash generation has funded organic growth, acquisitions and, for the 27th consecutive year, enabled a further increase in our dividend of 5%. Between self-generated cash and a longer term debt facility of £60 million, we have sufficient capital resources to support our growth plans for the coming year.
We completed three acquisitions, all of which are performing ahead of expectations. Netherlocks, acquired in July, increased our presence in the oil and petrochemical market and strengthened further our leadership in valve safety interlocks. Radio-Tech, acquired in August, brought important wireless communications technology to our Water business and offers new opportunities elsewhere in the Group. In November, we acquired Texecom giving us an entry into the strategically important security sensor market. Texecom offers us attractive growth potential in its own right. It has common sales distribution channels with Fire and similar technology platforms to our Door Safety activities, providing additional opportunities for the longer term.
The disposal of eight businesses demonstrated our commitment to actively allocate capital and people resources. In February we sold our high power Resistors business for £14 million. While this business had generated good value for shareholders over many years, its recent performance relative to other Halma companies, and in absolute terms, fell short of expectations. The net result of the acquisitions and disposals made this year is that we are making more profit, we have allocated more resource to markets with higher growth potential and we have 10% fewer companies.
We are expanding geographically. We have opened additional sales and technical support offices in China, India, Malaysia, Spain, Ireland, US and, most recently, Dubai. In addition, we have established new manufacturing facilities in Eastern Europe and Tunisia. Although we have manufactured Infrastructure Sensor products in China for over a decade, we are increasing our direct presence in this important long-term growth market at a faster pace. For example, we are creating new Halma "hubs" in Shanghai and Beijing to help our companies get new activities established or develop their existing activities more rapidly. We expect those companies which are successful to spin-out and develop as strong, independent operations in their own right.
Last year, I mentioned the need for us not only to maintain our high level of investment in Research & Development ("R&D"), currently 4% of revenues, but improve speed to market too. This year we launched over 100 new products. There are some early signs of improvement in speed to market in some parts of the Group, although we can still do more. For example, high quality R&D resources in lower cost territories, such as India, can supplement our essential in-house technical capabilities to achieve shorter product development cycles.
Our highly decentralised operating structure makes us particularly dependent on the quality of our local management teams. Following the significant people changes made at operating company board level over the past two years, it is pleasing to see this action translate into improved results. To build further momentum, we have created a bespoke development programme for our senior management at Henley Management College, a leading UK business school. This leadership development programme not only helps our management become even more successful in their current role, but also gives us a stronger pool of talent to draw on as new opportunities arise.
I thank all the employees for their contribution during an exciting and successful year. We can take great confidence in the exceptional results that have been achieved during the year but recognise there is no room for complacency. Our goal is to achieve growth and create value for shareholders every year.
We have made tremendous progress in 2005/06 in terms of both achieving organic growth in the short term and improving our growth potential for the future. Our underlying growth prospects remain good and we enter the new year better placed to exploit them due to the rapid recovery in our Water business and new acquisitions. I look forward to the year ahead with confidence.
Andrew Williams Chief Executive
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