Summary of Halma p.l.c. Annual report and accounts 2006
Accounting Policies and Notes
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We make components and products used to improve personal and public health. We also develop technologies and products which are used for analysis in safety, environmental and leisure related markets, including Water.
Health and Analysis is our fastest growing business sector and contributed 36% (£112 million) of Group revenue and 38% (£23 million) of Group profit.
We serve a very wide range of specialised applications in areas such as eye health, food and beverage manufacturing, clinical and medical diagnostics, bio-hazard detection, water purification, water conservation and leisure industries. There are four major sub-sector businesses.
We are the world leaders in monitoring and finding leaks in underground water pipelines and among the world leaders in UV technology used to disinfect and treat water. We manufacture water instrumentation in the UK, Europe and the US.
We make critical components such as pumps, probes, valves, connectors and tubing used by the major scientific, environmental and medical diagnostic instrument manufacturers for demanding fluid handling applications. These products are made in the US and UK.
We have market-leading technologies and products which generate light, condition light and analyse the interaction of light on substances. The range of applications is vast, ranging from cancer detection to specialised architectural and theatre lighting filters. We have three manufacturing sites in the US and two in Europe.
We make handheld devices used to assess eye health, diagnose disease and assist with eye surgery. Our Keeler and Volk brands are used by the world’s leading ophthalmologists and eye surgeons. Our ophthalmic products are made in the UK and US.
| KPI | Group target | 2006 | 2005 |
|---|---|---|---|
| Revenue growth1 | >5% | 20% | 27% |
| Profit growth2 | >5% | 56% | 17% |
| Return on sales3 | ~18% | 21.0% | 16.1% |
| ROCE4 (Return on Capital Employed) |
>45% | 79% | 58% |
| R&D as a % of sales5 | ~4% | 4.9% | 4.6% |
KPIs are calculated on results from continuing operations.
After a year of restructuring, our Water business recovered ahead of schedule. The costly product rationalisation completed on our network monitoring and leak detection product range and the changes to US management in our ultraviolet ("UV") business, enabled double-digit organic revenue and profit growth to be delivered this year. Market conditions helped because UK water companies increased capital investment as they started a new five-year AMP period (a five-yearly capital investment cycle regulated by the Drinking Water Inspectorate).
The acquisition of Radio-Tech brought new RF wireless communications technology to our Water business and a broader asset monitoring and wireless connectivity opportunity to many other businesses across the Group.
Our rate of innovation and that of our customers, in new products and processes, is a major driver of success in this sector. During the year we increased our investment in R&D at 4.9% of revenue and launched over 60 new products.
Relative to our other two sectors, Health and Analysis has a larger proportion of revenue and profit made in US Dollars, hence significant movement in this currency can have an impact on Sterling results.
We sell fluid technology products into the analytical, life science and medical instrumentation markets which continue to grow at high single-digit rates. Demand is driven by growing populations, improving conditions in developing countries and biotech/ pharmaceutical research. Typically, instrumentation for these markets must meet stringent testing and regulatory requirements which make it difficult for the instrumentation manufacturer to change key components once they are designed-in and certified. Our primary global market, life science instrumentation, continued to grow in the high single-digit range.
As we indicated in our 2004/05 Operating review, the United States Postal Service awarded further contracts for biohazard detection equipment which created additional demand for our components. Also predicted last year, the fuel cell market is moving slowly from prototyping towards low production volumes.
Markets for our ophthalmic instruments are heavily regulated. New health optics products require lengthy technical approvals, and instruments using new diagnostic methods need clinical trials. These factors add cost and time to new product development, but are a strong disincentive to new competitors.
There are very strong underlying drivers for moderate growth to continue in the health optics sector. The increasing number of older people in the developed world inevitably promotes demand for eye care. Added to this, as GDP rises in developing countries, demand for healthcare rises too.
We estimate the size of the global market for UV water treatment systems to be in the region of £350 million per year. Forecast growth rates vary from 5% to 15%, with highest growth predicted in the municipal sector. Demand for UV drinking water treatment systems in the US was boosted in 2005/06 when the Environmental Protection Agency (the principal regulator) approved UV technology for controlling the cryptosporidium micro-organism in drinking water.
UV water treatment is another market dominated by product certifications. During 2005/06 we launched new products to satisfy the latest European DVGW and Önorm approvals and a product line complying with the new US National Water Research Institute standards will be launched in 2006/07. The forecast recovery in our UV business, following reorganisation in the US, delivered 20% sales growth. The leisure industry is showing high growth and sales to semiconductor fabricators were the highest for several years.
Our photonics business saw record revenue and profit with the latter 24% ahead. Our core photonics products, miniature spectrometers which measure light, are sold into a highly fragmented but rapidly growing global market valued at between £50 million and £150 million per year.
The largest market for water leakage control products remains the UK due to its ageing water network, environmental and regulatory pressures on water companies, regional population growth and recent drought conditions. We expect these factors to drive UK demand for the foreseeable future. The US is our second largest leakage control market where we won further large contracts in 2005/06, notably for the cities of Albuquerque, New Mexico, and Birmingham, Alabama, and for the island of Hawaii. There is little regulatory pressure on US water companies to reduce leakage and rising US demand for our products is driven by water shortages and increasing energy costs.
The strong revenue and profit growth (20% and 56% respectively) continued the trend of the previous year. This growth came in part from acquisitions but predominantly from the recovery in our Water businesses and strong performances across the sector. These factors restored the return on sales to a more typically high figure of 21%. ROCE and investment in new products were both at good levels.
The exceptional growth levels achieved in 2005/06 included the benefit of a rapid recovery in our Water business. We expect the Health and Analysis sector to make further progress in the coming year albeit without this one-off extra boost to profits.
Canada
France
Germany
Netherlands
UK
USA
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