Summary of Halma p.l.c. Annual report and accounts 2006

Group overview

Halma protects lives and improves quality of life for people worldwide through innovation in market leading products which make our customers safer, more competitive and more profitable.

Business overview

Halma is made up of three sectors each comprising autonomous operating companies which mainly manufacture innovative electronic and electrical products for niche markets with global dimensions. We are an international group with businesses in 20 countries and major operations in Europe, the USA, Asia and, most recently, Africa. You will find a description of our products, the industries in which we operate and trends in our markets in the sector reviews. These sectors are:

Infrastructure Sensors	detecting hazards, and protecting people and property in buildings
Health and Analysis	improving public and personal health; protecting the environment
Industrial Safety	protecting property and people at work

Key performance indicators

Financial key performance indicators (KPIs) used by the Board to monitor progress are listed in the table on the left. Similar indicators are used to review performance in our three sectors. KPIs are calculated on results from continuing operations.

We have performed well this year against our KPI targets. This impressive operating performance is not uncommon for Halma although 2005/06 demonstrated levels of organic revenue and profit growth well above those seen in recent years. The stated targets represent the shape we aim for in our business.

We achieved a higher percentage of organic profit growth (15%) than organic revenue growth (11%) and this is a relationship we expect to see because of our high operating leverage. Our ROCE and ROTIC both increased this year and these are important measures of our creation of value for shareholders. Further discussion of the Group’s financial performance can be found in the Financial review.

KPI	Group target	2006	2005
Organic revenue growth1	>5%	11%	5%
Organic profit growth1	>5%	15%	1%
Return on sales2	~18%	18.7%	18.0%
ROCE3 (Return on Capital Employed)	>45%	56.9%	48.8%
ROTIC3 (Return on Total Invested Capital)	>12%	12.8%	12.1%
R&D as a % of sales4	~4%	4.3%	4.2%
Operating cash to operating profit5	100%	117%	121%

1. Organic growth measures the change in the revenue and profit from continuing Group operations. The effect of acquisitions made during the current or prior financial period has been equalised by subtracting from the current year results a pro-rated contribution based on their revenue and profits at the date of acquisition.
2. Return on sales is defined as adjusted⁶ profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.
3. ROCE and ROTIC are non-GAAP measures used by management in measuring the returns achieved from the Group’s asset base. See note 3 to the Accounts for details of the calculation basis.
4. Research and development expenditure as a percentage of revenue from continuing operations.
5. Cash generated from continuing operations is expressed as a percentage of adjusted⁶ operating profit from continuing operations.
6. Adjusted to remove the amortisation of acquired intangible assets.

Strategy and business objectives

Our strategy for driving growth and creating shareholder value centres on five key principles:

• Operate in specialised global markets offering long-term growth underpinned by robust growth drivers;
• Build businesses which lead specialised global markets through innovative products differentiated on performance and quality rather than price alone;
• Recruit and develop top quality boards to lead our businesses and nurture an entrepreneurial culture within a framework of rigorous financial discipline;
• Acquire companies and intellectual assets that extend our existing activities, enhance our entrepreneurial culture, fit into our decentralised operating structure and meet our demanding financial performance expectations;
• Achieve a high Return on Capital Employed to generate cash efficiently and to fund organic growth, closely targeted acquisitions and sustained dividend growth.

Organic growth is the key to our value creation strategy. The "blended" long-term growth rate of our markets is around 5% per year and our aim is grow faster than our markets. Achieving organic revenue and profit growth above 10% this year was, therefore, a very good performance, especially since organic growth has been disappointing in recent years.

R&D and innovation play an important role. Strategically, we aim to provide technical resources within each business as close as possible to the customer. We encourage collaboration between Halma companies and see this as a potential competitive advantage that has been under-utilised in the past. The creation of three major market-focused sectors will provide greater transparency and already we are seeing new collaboration opportunities.

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. For example, during the year our Fire detectors business added 500 new product approvals totalling over 2,500 international, national and local approvals.

We cultivate a highly decentralised operating culture which encourages our businesses to focus on establishing market leadership in their selected niche within a global market. Each subsidiary is led by a management team who enjoy genuine autonomy and the freedom to grow in an entrepreneurial environment.

These management teams are chaired by Halma’s Divisional Chief Executives (DCEs) who understand the market needs and can contribute broadly to the individual company’s strategy in technical, operational and commercial areas. These DCEs meet with the Group Chief Executive regularly to review progress against their operating division’s strategic objectives.

When new acquisitions join Halma they invariably retain their name and identity, and vendors often continue to work with us. Elsewhere entrepreneurs typically find working in a large international organisation too constraining but our autonomous culture and decentralised structure allows them to develop further. Over the years, many of our top executives have joined us through acquisition.

Outlook

As well as achieving excellent short-term progress during 2005/06 by substantially raising organic growth, we established firm foundations for the long-term growth of our business.

We will pursue geographic expansion and new product development energetically. Continued investment to extend our presence in key developing markets and continuing development of senior management are key actions aimed at sustaining profitable revenue growth.

Key growth drivers, like regulation, legislation and attitudes to the risk of accidents, will continue to play an important role in creating favourable market conditions. Growth in the coming year will be aided by a full year’s contribution from our new acquisitions and we will continue to explore collaboration opportunities between our businesses.

Our underlying growth prospects are positive and we are in a better position to exploit them following the rapid recovery of our Water business and the acquisitions and disposals completed during the year. We enter the new year in good shape.