Summary of Halma p.l.c. Annual report and accounts 2006
Accounting Policies and Notes
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With a world economic growth rate forecast to be in the region of 4.8%, we anticipate that the 2006/07 macro-economic environment will be broadly favourable to our growth strategy. In global terms, we see the US and Chinese economies as the principal growth drivers.We also expect that the continuing development of the Indian economy will create growth in demand for several core products, albeit from a low base.
Safety and environmental legislation is constantly evolving, worldwide, towards increased safeguards and protection. This favours us because it relentlessly drives demand growth in many of our core markets. Legislative change challenges us to continually refresh our product portfolio whilst regulatory compliance is also a powerful barrier-to-entry for competitors. Our well developed capacity to innovate, coupled with strong R&D resources, positions our companies for leadership of chosen markets dominated by regulatory control.
The markets we operate in are generally highly competitive. Our diversified product portfolio and wide geographic coverage means that competitive product manufacturers are analysed at subsidiary company or operating sector level. We have commented on the competitive environment in the sector reviews.
Our core values are Innovation, Empowerment and Achievement. Our culture is one of openness, integrity and accountability. We encourage our employees to act fairly in their dealings with fellow employees, customers, suppliers and business partners. We recognise that our employees determine our success and therefore have invested in and encouraged their development more this year than ever before, not only through our new intranet training facilities and Halma Executive Development Programme, but also through clearer leadership and decisive action. By ensuring that our team has the approach and skills required to succeed, we are better placed to meet the challenges of the future.
We recognise the necessity of safeguarding the health and safety of our own employees whilst at work and operate so as to provide a safe and comfortable working environment for employees, visitors and the public. Our policy is to manage our activities to avoid causing any unnecessary or unacceptable risks to health and safety and the environment. We have an excellent long-term record for addressing environmental issues that affect our businesses and for developing products that protect the environment and improve safety at work and in public places.
Many of our innovative products play a very direct role in monitoring and improving the environment. Our brands lead the world in a number of technologies which help to minimise environmental damage.
We support the concept of sustainability and recognise that, in common with all businesses, our activities have an environmental impact. Our products do not require capitalintensive manufacturing processes, so the environmental effect of our operations is relatively low compared to manufacturers in other sectors.
Halma was designated a member of the FTSE4Good UK index on its establishment in July 2001.
The main intangible resources which deliver competitive advantage and which support our strategic objectives are: the patents and trade marks which protect our products; our employees, whose understanding of our customers’ needs and the dynamics of the markets we operate in, enable us to maintain leadership in many markets; and the enviable reputation enjoyed by our brands for superior product quality and market-leading customer support. Our businesses build competitive advantage and strengthen barriers-to-entry in many ways including patents, product approvals, technical innovation, product quality, customer service levels and branding. We look for these qualities in the businesses we seek to acquire.
We like regulated markets which require suppliers to achieve compliance with demanding product standards but also look for other long-term growth drivers such as demographic change.
We seek to continuously grow our profit, generating a high return for shareholders over the long term. We view risk within the context of this objective as well as in absolute terms.
In any business the inherent risks that are an integral component of business activities must be identified, managed and mitigated. Our key means of risk control is the choice of the markets in which we operate and the people and methods we use to exploit those market opportunities.We perceive our primary operational risks to emanate from remoteness of operation and the actions and quality of our people.
Our choice to operate in the safety products and health-related technology markets, and the depth of market knowledge we have built up within the Group, allows us to adequately evaluate and assess the risks we encounter throughout our operations.
We do not place undue reliance on any one Group company nor does any one Group company rely heavily on one customer or transaction. In managing the portfolio of companies within the Group and in managing the transactions in any one company, we seek to spread our risks.We have processes in place to ensure any major transactions are reviewed at the appropriate level, including at Board level if necessary.
Another factor limiting risk is that our products are predominantly critical components or instruments which are warranted as fit for the purpose rather than systems or intangible products where satisfactory performance is contingent upon third parties.
Our procedures to identify, manage and mitigate the risks within the Group address the following major risk factors:
The Group is affected by competition in the form of pricing, service, reliability and substitution. Our focus on improving our rate of innovation is a direct result of assessing this risk and determining how best to concentrate our efforts. In addition, all businesses analyse revenue and margin by product line on a monthly basis. By ensuring that management are well resourced and responsive to their markets, we feel that the adverse impact of competition can be mitigated.
The Group does not use complex derivative financial instruments and no speculative treasury transactions are undertaken. Foreign currency risk is the most significant treasury related risk for the Group. Significant currency denominated net assets are hedged but future currency profits are not hedged. Therefore, the Sterling value of overseas profit earned during the year is sensitive to the strength of Sterling, particularly against the US Dollar and the Euro. The Group is exposed to a lesser extent to other treasury risks such as interest rate risk and liquidity risk. These financial risks are discussed more fully in note 26 to the Accounts.
We recognise that the size and remoteness of some operations may not permit full segregation of duties and that Internal and External Audit procedures may not always identify a financial irregularity. Therefore the Group regularly reiterates to the operating company officers their fiduciary responsibilities and ensures they are adequately trained in financial matters whilst maintaining a culture of openness to promote disclosure.
Monitoring the funding needs of the pension obligations is essential to controlling the cash the pension plan requires from Halma. We are currently awaiting the final results of the main scheme’s December 2005 Actuarial Valuation at which time the Company will examine its options to deliver on its pension obligations at an acceptable cost.
Group operations are subject to wide-ranging laws and regulations including employment, environmental and health and safety legislation. All Group companies have an employee handbook detailing employment practices and, we consider our relations with our employees to be good. Each operating company has a health and safety manager responsible for compliance and our performance in this area is excellent.
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