Summary of Halma p.l.c. Annual report and accounts 2007
Accounting Policies and Notes
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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
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 over 20 countries and major operations in Europe, the US, Asia and 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 |
Financial key performance indicators (KPIs) used by the Board to monitor progress are listed in the table below. Similar indicators are used to review performance in our three sectors. KPIs are calculated on results from continuing operations.
We have delivered an impressive performance against our KPI targets. The prior year comparatives for 2006/07 were demanding as, unlike that year, there were no "recovery" situations in the current year to benefit from. Underlying organic profit growth remained healthy and was again driven by top line growth rather than cost reduction.
Strong Return on sales, ROCE and ROTIC metrics confirm Halma's ability to deliver growth without diluting the quality of its returns. Indeed, the increase in ROTIC indicates enhanced value creation for shareholders.
R&D investment remained high relative to many of our peers reflecting both increased innovation activity and an overall uplift in the technology level of Group companies due to M&A actions in the past two years. Further discussion of the Group’s financial performance is given in the Financial review later in this Annual report.
| KPI | Group target | 2007 | 2006 |
|---|---|---|---|
| Organic revenue growth1 | >5% | 8% | 11% |
| Organic profit growth1 | >5% | 8% | 15% |
| Return on sales2 | ~18% | 18.6% | 18.7% |
| ROCE3 (Return on capital employed) |
>45% | 60.1% | 56.9% |
| ROTIC3 (Return on total invested capital) |
>12% | 14.0% | 12.8% |
| R&D as a % of revenue4 | ~4% | 4.3% | 4.3% |
| Operating cash to operating profit5 | 100% | 106% | 117% |
Our strategy for driving growth and creating shareholder value centres on five key principles:
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 to grow faster than our markets. Following a strong year in 2005/06, achieving 8% organic growth in 2006/07 was an excellent result and represents a second year of good progress following low organic growth in the preceding years 2000 to 2005.
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. Whilst respecting the autonomy of subsidiary companies, we encourage collaboration between Halma companies and see this as a potential competitive advantage that has been under-utilised in the past. During 2006/07, the increased collaboration started to bear fruit with new products launched incorporating technology and know-how from two or more Halma companies. These included fire products, which combined visual and audible alarm modules together with our market leading smoke detectors.
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 robust long-term growth drivers such as demographic change.
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.
Through the regular interaction between the Group’s Executive Board members, common challenges and opportunities for Group businesses are identified which sometimes leads to a central initiative. Examples of initiatives underway are sales process improvement, innovation, people development and increasing activity in China via our Halma hubs in Shanghai and Beijing.
DCEs are responsible for finding, negotiating, completing and managing acquisitions in their own business sectors. Acquisition costs, including goodwill, are incorporated in the incentive plans of all Executive Board members.
When new acquisitions join Halma they invariably retain their name and identity, and vendors often continue to work with us. Elsewhere entrepreneurs who typically find working in a large international organisation too constraining welcome our autonomous culture and decentralised structure which allows them to develop further.
2006/07 marked another year of good progress for the Group with record revenues and profits. Significant investment continues in R&D, capital expenditure and strengthening channels to market. This combination of delivering strong results whilst increasing investment provides a solid platform from which it is possible for the Group to sustain organic growth above market rates.
Good quality prospects for further acquisitions in our target markets exist and acquisitions will continue to play an important role in the Group’s long-term growth.
We have clear growth strategies for our markets and we continue to work hard to improve the quality of our execution through active resource allocation and people development. We are well placed to deliver sustained growth and enter the new year in good shape.
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