Summary of Halma p.l.c. Annual report and accounts 2007
Accounting Policies and Notes
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We anticipate that the 2007/08 macro-economic environment will be broadly favourable to our growth strategy. In global terms, we see the US, Europe and Asian economies offering good opportunities with Asia having higher growth rates from a lower base. Growth in the more mature economies is important to our overall growth prospects albeit that our products are often used in regulated markets and this affords some protection from the extremes of economic cycles.
Safety and environmental legislation is constantly evolving, worldwide, towards increased safeguards and protection. This favours us because it relentlessly drives demand growth in 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 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, Achievement and Customer Satisfaction. The core values have been selected following extensive surveying of employees across the Group. 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 with our 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 positive 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 strategy is not to have capital-intensive manufacturing processes, so the environmental impact of our operations is relatively low compared to manufacturers in other sectors. We also recognise that we can improve our own environmental performance and so resources are now being deployed to actively reduce our own carbon footprint. More information on these activities is given in the Corporate responsibility section of this review.
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 technology, 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 profits, 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 there are inherent risks that are an integral component of its business activities. Our strategy is to operate a continuous process to identify the risks faced by our companies and the Group, to assess each risk’s likelihood of occurring and impact were it to occur, and to ensure that a system of controls is in place to manage or mitigate those risks assessed as significant. Appropriate actions are taken to address any weaknesses. Comprehensive insurance cover is maintained where warranted and cost effective.
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. There is an ever present risk of losing market share or failing to adapt to market changes. High quality alternative products at low cost will always be a threat. Our focus on improving our rate of innovation is a direct result of assessing these risks and determining how best to concentrate our efforts. Maintaining the high quality of our products is critical. In addition, all businesses analyse revenue and margin by product line on a monthly basis. Through continual innovation and by ensuring that local management are well resourced and free to respond to changing market needs, we feel that the adverse impact of downward price pressure and competition can be mitigated.
The identification and purchase of businesses which meet our demanding financial and growth criteria is an important part of our strategy for developing the Group. Therefore we have been increasing the resource allocated to this activity, focusing on sectors where we see the greatest opportunity. There is always a significant potential integration risk, particularly in the purchase of private businesses, and this is an area which is being continually improved.
New products have always been critical to the growth of the Group and have underpinned its ability to earn high margins and high returns over the long term. R&D is of necessity a risky activity but by devolving control of product development into the autonomous operating businesses, the Group spreads the risk and ensures that the resource is as close to the customer as possible, giving the maximum chance of success. Protection of our intellectual property is important to the Group’s continued success. Whilst no single product or process is critical to the Group as a whole, all appropriate actions are taken to protect the Group's intellectual property rights.
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. This is increasingly the case as we pursue our strategy of geographic expansion often into regions with different accounting bases and cultures. Therefore the Group seeks to ensure there is adequate local management and financial resource and regularly reiterates to the operating company officers their fiduciary responsibilities, ensuring they are adequately trained in financial matters whilst maintaining a culture of openness to promote disclosure. Group companies operate a common set of reporting procedures and accounting policies, disseminated via the Group intranet.
Monitoring the funding needs of the pension obligations is essential to controlling the cash the pension plan requires from Halma. Our UK defined benefit pension plans are closed to new members. There is regular dialogue with pension fund trustees and pension strategy is a regular Halma Board agenda item. The Group’s strong cash flows and access to adequate borrowing facilities mean that the pensions risk can be adequately managed. The Group is currently increasing contributions with the overall objective of paying off the deficit in line with the Actuary’s recommendations.
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.
Group operations are subject to wide-ranging laws and regulations including employment, environmental and health and safety legislation. There is also exposure to litigation and contractual risk. 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. The Group’s emphasis on excellent financial control, the deployment of high quality management resource and strong focus on quality control over products and processes in each operating business helps to protect us from adverse litigation and contractual issues.
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