Halma Holdings Inc Annual Report 2011

Plain-text annual report

Halma p.l.c. Annual Report and Accounts 2011 Halma p.l.c. Annual Report and Accounts 2011 Directors’ Report Business Review Directors’ Report Business Review 01 Financial Highlights 02 Investment Proposition 03 Chairman’s Statement 04 Our Business Model 06 Global Capability 07 Our Resources 08 Strategy and Performance 12 Chief Executive’s Strategic Review 16 Adding value through 22 Management development 24 International expansion with a focus on Asia Sector Reviews 26 Health and Analysis 30 Infrastructure Sensors 34 Industrial Safety 38 Financial Review 42 Our Risk Factors 44 Corporate Responsibility acquisitions 18 High rate of innovation Directors’ Report Governance 48 Board of Directors and Executives 51 Corporate Governance 55 Nomination Committee Report Financial Statements 71 Independent Auditor’s Report – Group 72 Consolidated Income Statement 72 Consolidated Statement of Comprehensive Income and Expenditure 73 Consolidated Balance Sheet 74 Consolidated Statement of Changes in Equity 75 Consolidated Cash Flow Statement 56 Audit Committee Report 58 Remuneration Report 67 Other Statutory Information 70 Directors’ Responsibilities 76 Accounting Policies 83 Notes to the Accounts 115 Independent Auditor’s Report – Company 116 Company Balance Sheet 117 Notes to the Company Accounts 122 Summary 2002 to 2011 124 Halma Directory 128 Shareholder Information and Advisers Halma p.l.c. Annual Report and Accounts 2011 01 Revenue Adjusted proﬁt before taxation Return on Sales Dividend paid and proposed Year on year growth +13% Year on year growth +21% Year on year growth +7% £600m £125m £450m £300m £150m £100m £75m £50m £25m 25% 20% 15% 10% 5% £40m £30m £20m £10m 0 02 03 04 05 06 07 08 09 10 11 0 02 03 04 05 06 07 08 09 10 11 0 02 03 04 05 06 07 08 09 10 11 0 02 03 04 05 06 07 08 09 10 11 Continuing operations Revenue Adjusted Proﬁt before Taxation1 Statutory Proﬁt before Taxation Adjusted Earnings per Share2 Statutory Earnings per Share Total Dividend per Share3 Return on Sales4 Return on Total Invested Capital5 Return on Capital Employed5 Change +13% +21% +21% +21% +19% +7% 2011 £518.4m £104.6m £98.3m 20.49p 19.23p 9.10p 20.2% 15.5% 71.9% 2010 £459.1m £86.2m £81.4m 16.89p 16.10p 8.50p 18.8% 13.6% 61.3% Pro-forma information: 1 Adjusted to remove the amortisation of acquired intangible assets and acquisition costs of £6.3m (2010: £4.8m). See note 1 to the Accounts. 2 Adjusted to remove the amortisation of acquired intangible assets, acquisition costs and the associated tax. See note 2 to the Accounts. 3 Total dividend paid and proposed per share. 4 Return on Sales is deﬁned as adjusted1 proﬁt before taxation from continuing operations expressed as a percentage of revenue from continuing operations. 5 Organic growth rates, Return on Total Invested Capital and Return on Capital Employed are non-GAAP performance measures used by management in measuring the returns achieved from the Group’s asset base. See note 3 to the Accounts. Halma p.l.c. Annual Report and Accounts 2011 02 Directors’ Report Business Review Halma has an impressive record of creating sustained shareholder value through the economic cycle. Our reputation is built on consistently delivering record proﬁts, high returns, strong cash ﬂows, low levels of balance sheet gearing and a 30+ year track record of growing dividend payments by 5% or more every year. We are one of only three companies quoted on the London Stock Exchange with this record of dividend increases. Our ability to achieve record proﬁts through the recent period of unprecedented economic turbulence is derived from our strategy of having a group of relatively small, autonomous businesses operating in diverse specialised global markets with resilient growth drivers. These include Health, Safety and Environmental regulation which stimulate ‘non-discretionary’ purchase of products whose technical, quality and reliability requirements enable us to build competitive advantage. We maintain organic growth momentum by increasing levels of investment in management development, new product development and establishing platforms for growth in developing markets, where Health, Safety and Environmental regulation is starting to emerge. Organic growth generates the ﬁnancial and business resources we need to fund acquisitions. Through acquisitions we add value to our business by bringing new intellectual assets and a wider technological and geographic footprint. Over the long term, we actively manage the mix of businesses in our Group to ensure we can continue to generate strong growth and returns. Whilst acquisitions accelerate entry into more attractive market niches, we also exit markets which promise to offer less attractive opportunities in the future through carefully planned disposals. Halma’s defensive market qualities, organic growth momentum and potential to acquire new businesses position us strongly to continue to create shareholder value and achieve even higher levels of performance in the future. Halma p.l.c. Annual Report and Accounts 2011 03 The Group has made strong progress Halma: what we do and our strategy Our business is to make products which protect lives and improve the quality of life for people worldwide. We do this through continuous innovation in market-leading products which meet the increasing demands for improvements to health, safety and the environment. We build strong positions in niche markets where the demand is global. Our businesses are autonomous and highly entrepreneurial. Strategically we aim to grow proﬁt and revenue in excess of 5% p.a. organically, to have Return on Sales in the region of 18% to 22% and generate post-tax Return on Total Invested Capital of more than 12%. As a result, we are highly cash generative and reinvest in our businesses through people, product and market development, continue to acquire more companies with like characteristics and strive to give annual dividend growth of 5% or more to our shareholders; something we have achieved for more than 30 consecutive years. Performance Full year revenue increased by 13% to £518.4m (2010: £459.1m), organic revenue growth1 was 11%, and also 11% at constant currency. Proﬁt before tax, amortisation of acquired intangibles and acquisition costs increased by 21% (to break through the £100m level for the ﬁrst time) to £104.6m (2010: £86.2m), organic proﬁt growth was 19% and also 19% at constant currency. Statutory proﬁt before tax increased by 21% to £98.3m. Return on Total Invested Capital1 increased to 15.5% (2010: 13.6%), Return on Capital Employed1 at the operating level increased signiﬁcantly to 71.9% (2010: 61.3%). Return on Sales1 improved to 20.2% compared to 18.8% the previous year. Net debt at the year end was £37.1m having spent £82m on acquiring a number of excellent companies during the year. You will see therefore, that the Company made excellent progress during the year against its key performance indicators. As a result the Board is recommending a ﬁnal dividend of 5.56p per share giving a total dividend of 9.1p for the year, an increase of 7.1%. The ﬁnal dividend is subject to approval by shareholders and will be paid on 24 August 2011 to shareholders on the register at 22 July 2011. Dividend cover is 2.25 times (2010: 1.98 times) meeting our objective of around 2 times cover. Acquisitions In contrast to the previous year, we judged that the climate was right to put more capital to work and during the year we invested a record £82m in acquisitions. With the maximum earn-outs, this sum could increase by a further £25m. Continued strong investment in markets and products The Group has continued to invest strongly in developing markets, which in turn is boosting our growth rates. Our regional development in China is progressing well and sales in China grew by 28% to £24m. Many companies in the Group are now also developing a stronger focus on South America, Brazil in particular. As usual, the year has seen the launch of many new innovative products. Technical collaboration across the Group has increased which accelerates our adoption of new technologies and speeds our time to market. Although we believe passionately in autonomy, collaboration is also encouraged, these are key differentiators for the Group. Research and Development was 5.0% of revenue (2010: 4.7%). People We continue to invest strongly in people development, introducing new tailor-made training courses for our technical staff as well as even more management training. As a result, it is pleasing to see more and more internal promotions across the Group. To everyone in the Group, these outstanding and record results are the result of your imagination and dedication, sincere thanks to you all. Governance In July 2010, we appointed Norman Blackwell and Steven Marshall to the Board and I am delighted to say that already they are making strong contributions. At this year’s AGM, Richard Stone will be stepping down from the Board after 10 years of exemplary service. Richard has made a huge contribution to the Board during his tenure, and we offer him our sincere thanks and wish him well for the future. In line with the recommendations of the UK Corporate Governance Code, the Board has agreed to submit all Directors to annual election starting at this year’s AGM on 28 July 2011, ahead of being obliged to do so at the 2012 AGM. Following publication of the FRC’s Consultation Document: Gender Diversity on Boards, we are reviewing our own position and contributing to the consultation process. We intend to explore the establishment of wider diversity targets and report annually on our progress. Outlook Despite many economic uncertainties across the globe, the Group has made strong progress. Some excellent acquisitions have added to our strength. We are pleased with the momentum we have coming into 2011/12 and are looking forward to making further good progress in the year ahead. 1 See Financial Highlights. Geoff Unwin Chairman Halma p.l.c. Annual Report and Accounts 2011 04 Directors’ Report Business Review Our strategic priorities Our growth drivers We are making the following key strategic investments across the group to accelerate growth above market rates: Demand in each of our markets is driven by one or more of the following long-term growth drivers: – Acquisitions – Innovation (products and process) – People development – International expansion (especially Asia) – Increasing demand for healthcare – Increasing demand for energy and water – Increasing urbanisation of population – Increasing health and safety regulation Our strategy We aim to achieve high returns on invested capital and create shareholder value. We operate in relatively noncyclical, specialised global markets where technology and application know-how provide the opportunity to generate growth at sustainable high returns through strong competitive advantage. Our chosen markets have signiﬁcant barriers to entry. Demand for our products is underpinned by long- term, resilient growth drivers. We place our operational resources close to our customers through local, autonomous businesses. Our values Our organisational structure Our operational culture Our values help to ensure a consistent set of standards and behaviours throughout the Group. This is particularly important given the Group’s decentralised structure. Our core values are Achievement, Innovation, Empowerment and Customer Satisfaction. We encourage our employees to act fairly in their dealings with fellow employees, customers, suppliers and business partners. A small head ofﬁce team focuses on setting the strategic framework and maintains a standard process of ﬁnancial planning, reporting and control. Halma’s 12 sub-sectors are composed of 38 autonomous operating companies, each with their own board of directors. These sub-sectors are grouped into operating divisions, each chaired by a Halma Divisional Chief Executive (DCE), responsible for its own growth. DCEs understand the market needs of their companies and contribute broadly to their strategies. Through regular interaction between Executive Board members, common challenges and opportunities are identiﬁed. Our decentralised structure delivers real competitive advantage. Tactical decision making takes place at operating company level by managers closest to markets with the ability to allocate resources. This ensures quick and agile responses to market changes. Acquisition prospects are attracted by our operating culture which affords them the autonomy they are accustomed to while providing access, amongst other things, to new markets and technology via the Group’s collective resources. Halma p.l.c. Annual Report and Accounts 2011 05 Our Sectors Health and Analysis Infrastructure Sensors Industrial Safety Improving public and personal health; protecting the environment. Detecting hazards and protecting assets and people in buildings. Protecting assets and people at work. Revenue £218m 42% of Group Revenue £197m 38% of Group Revenue £103m 20% of Group Proﬁt1 Sub-sectors £46m 42% of Group Proﬁt1 £39m 36% of Group Proﬁt1 £25m 22% of Group Sub-sectors Sub-sectors Water Products to detect leaks in water pipes. UV technology for disinfecting water and water quality test kits. Photonics Opto-electronic technology for scientiﬁc, medical, environmental and other applications. Health Optics Devices used to assess eye health, diagnose disease, assist with eye surgery and general medical applications. Fluid Technology Critical components such as ﬂow controllers, pumps, probes, valves, connectors and tubing used by scientiﬁc, environmental and medical diagnostic OEMs. Fire Detection Fire and smoke detectors and audible/visual warning devices. Security Sensors Security sensors and signals used in public and commercial property. Automatic Door Sensors Sensors used on automatic doors in commercial buildings, industrial sites and transportation. Elevator Safety Elevator/lift door safety sensors, emergency communication devices, displays and control panels for elevators. Gas Detection Portable instruments and ﬁxed systems which detect ﬂammable and hazardous gases. Bursting Disks ‘One time use’ pressure relief devices to protect large vessels and pipework in process industries. Safety Interlocks Specialised mechanical, electrical and electromechanical locks which ensure that critical processes operate safely. Asset Monitoring Products for monitoring physical assets under water using sensors and communications technologies. See page 26 See page 30 See page 34 1 See note 1 to the Accounts. Halma p.l.c. Annual Report and Accounts 2011 06 Directors’ Report Business Review Our global capability is developing as we continue to put our resources close to our customers. We operate in 22 countries selling to customers in over 150 countries. We are not over-reliant on any single region, market or customer with our largest customer constituting less than 3% of revenue. Contribution to Group revenue Other countries Revenue by destination £19m Employees 1 United States of America Revenue by destination £150m Employees 1,215 Asia Paciﬁc and Australasia Revenue by destination £76m Employees 529 Africa, near & Middle East Revenue by destination £29m Employees 34 United Kingdom Revenue by destination £106m Employees 1,622 Mainland Europe Revenue by destination £138m Employees 692 Halma p.l.c. Annual Report and Accounts 2011 07 We have access to the resources necessary to support investment for organic growth and acquisitions. Operationally, we have a decentralised structure which places our R&D, manufacturing, sales and marketing resources within each Halma company under the management of the local board. Relationships and resource breakdown Strategic partners Suppliers Shareholders and advisers Customers Regulators Employees Brand Fixed assets Financial Technical External relationships We work in partnership with our customers not only to ensure their short-term needs are met but also to ensure that we design new products which meet their medium- and long-term needs. Since we have a diverse customer base, our decentralised structure enables our companies to develop closer relationships with their customers than would be possible if we were more centralised. We assemble products locally, but source our components globally. Halma companies often collaborate to identify high quality suppliers of common technologies or component types and are required to ensure suppliers meet our ethical standards. We develop relationships with strategic partners such as universities, specialist design businesses and value-adding distributors to complement our technical and commercial resources. From these relationships come new technologies and expertise to aid product development or identify new market opportunities. We develop good relationships with industry regulators who regulate the quality of suppliers (like us) or our customers. Many Halma companies will be represented on industry regulatory bodies as technical experts to ensure regulatory codes are implemented in light of the latest technology and best practice. Halma recognises the need to listen closely to the views given by shareholders and corporate advisers such as our bankers, brokers, solicitors and investor relations partners. They provide valuable insight gained through their involvement with a broad array of other businesses and commercial situations. Internal resources We continue to increase our investment in training and development of employees since this is critical to our medium- and long-term success. In 2010, we launched a new programme aimed at technical staff. In general our manufacturing is “asset light” and not capital intensive. We do have some ﬁxed assets which are critical to our businesses (for example, thin ﬁlm coaters in Photonics). The average direct labour content of our products is less than 7% of the selling price. This allows us to locate operations close to our customers rather than be driven to position them in the lowest cost region. Decisions to establish manufacturing facilities in low cost regions are made because we see local sales opportunities. Our technical resources include our people, patents and specialist application know- how. Often our competitive advantage is built on knowing how to reliably apply a proven technology in very speciﬁc situations whilst meeting stringent regulatory requirements. We invest at least 4% of revenue in R&D and this, together with acquisitions, continues to refresh and strengthen our intellectual assets. We encourage our companies to collaborate on technical issues through our various training programmes and the HITE events held in May 2009 and May 2011. We have sufﬁcient ﬁnancial resources to meet our organic and acquisition growth objectives. We operate with a strong system of ﬁnancial control and audit the value and location of our cash on a weekly basis. Due to our high returns, we encourage our companies to make capital investments in accordance with a strict but speedy approvals process. Halma companies are typically the leader (in the top ﬁve) in their specialised markets and therefore each has a strong product brand. These brands are synonymous with high quality products and service levels and in some cases are used as the generic industry term for a particular product type. Halma p.l.c. Annual Report and Accounts 2011 08 Directors’ Report Business Review Objective To create sustained shareholder value and high returns on invested capital. Strategic direction To operate in global specialised markets offering long-term growth with technology able to sustain high returns. Organic Growth Strategic focus Through strategic investment in people development, international expansion and innovation we aim to achieve organic growth in excess of our blended market growth rate of 5%. KPI deﬁnition/strategic focus Organic revenue growth Organic revenue growth measures the change in revenue achieved in the current year compared with the prior year from continuing Group operations. The effect of acquisitions and disposals made during the current or prior ﬁnancial period has been equalised. Organic proﬁt growth Organic proﬁt growth measures the change in proﬁt achieved in the current year compared with the prior year from continuing Group operations. The effect of acquisitions and disposals made during the current or prior ﬁnancial period has been equalised. 2010/11 performance Organic Revenue Growth1 % Organic Proﬁt Growth1 % 20 15 10 5 0 2007 2008 2009 2010 2011 20 15 10 5 0 2007 2008 2009 2010 2011 Target Performance >5% 11% Target Performance >5% 19% Strong organic growth following the tough economic conditions in 2010. Over the last ﬁve years our average rate of annual organic revenue growth has been 8% p.a. which is 3% in excess of our minimum target. Very strong organic proﬁt growth. Over the last ﬁve years our average rate of annual organic proﬁt growth has been 10% p.a. The Board established a long-term minimum organic growth target of 5% representing the blended long-term average growth rate of our markets. This target remains appropriate to the Group’s achievement of an overall revenue and proﬁt objective of growing by 15% p.a. after acquisition revenue and proﬁt are taken into account. In order to meet the target of organic growth in excess of 5%, the Group will need to maintain its focus on innovation, people development and growth in Asia in order to ensure the momentum developed over recent years is retained. The primary factors affecting our ability to meet the target relate to competitive innovations overtaking the Group’s technology and macro-economic factors. Comment 2011/12 target Link to other disclosures Chief Executive’s Strategic Review, Financial Review and Risk Factors. 1 See Financial Highlights. 2 See note 1 to the Accounts. Halma p.l.c. Annual Report and Accounts 2011 09 International Expansion High Rate of Innovation Acquisitions The Health, Safety and Environmental markets in Asia and other developing regions are developing fast and offer us higher rates of growth in the future. We continue to invest in establishing local selling, technical and manufacturing resources to meet this current and future need. We have maintained high levels of R&D investment and spending on innovation. The successful introduction of new products is a key contributor to the Group’s ability to build competitive advantage and grow organically and internationally. We buy companies with business and market characteristics like Halma. They have to be a good ﬁt with our operating culture and strategy in addition to being value-enhancing ﬁnancially. International expansion Total sales to markets outside the UK, Mainland Europe and the USA as a percentage of total revenue from continuing operations. R&D as Percentage of Revenue Total research and development expenditure in the ﬁnancial year (regardless of whether or not it was capitalised) as a percentage of revenue from continuing operations. Acquisitions The cash outﬂow disclosed in the Consolidated Cash Flow Statement under Acquisition of businesses. Revenue outside the USA and Europe2 % R&D as Percentage of Revenue % Acquisitions £m 30 25 20 15 10 5 0 2007 2008 2009 2010 2011 5 4 3 2 1 0 2007 2008 2009 2010 2011 100 75 50 25 0 2007 2008 2009 2010 2011 Target (by 2015) Performance 30% 24% Target Performance >4% 5.0% Performance £82m Revenue outside the USA and UK/Europe was 24% of the Group total with revenue from Asia Paciﬁc and Australasia up by 29%. Revenue from China grew by 28% to £24m which is now 4 times the level in 2006 when we established our ﬁrst Halma hubs. During 2010 we opened three new regional ofﬁces in China and doubled the number of local staff in our hub in India. Our aim is for revenue outside the USA and UK/Europe to be 30% of the Group total by 2015. Halma corporate hubs have been established in China and India to assist companies in setting up local operations. We will review our options for South America during 2011/12. Total spend in the year was £26m (2010: £21m) exceeding the 4% of revenue target. All three sectors exceeded the 4% target both this year and last year. We began the year with good ﬁnancial capacity with net cash and facilities in place to comfortably ﬁnance a further £100m of investment and we succeeded in buying a number of excellent companies during the year. New products contribute strongly to achieving organic growth, maintaining high returns and building strong market positions. The 4% minimum investment target is appropriate to the mix of product life cycles and technologies within Halma. The recently introduced HCAT development programme for engineers in the Group helps drive our technical and process innovation to fuel organic growth. 2011 ended with sufﬁcient ﬁnancial capacity to ﬁnance further acquisitions. Such investment will be kept under close scrutiny to ensure market conditions remain appropriate and acquisition targets meet our exacting standards. Chief Executive’s Strategic Review and Financial Review, Note 1 to the Accounts. Chief Executive’s Strategic Review, Corporate Responsibility. Chief Executive’s Strategic Review, Financial Review and Risk Factors. Halma p.l.c. Annual Report and Accounts 2011 10 Directors’ Report Business Review Strategy and Performance continued Strategic focus KPI deﬁnition Return on Sales ROTIC (Return on Total Invested Capital) We choose to operate in markets which are capable of delivering high returns. The ability to sustain these returns is a product of maintaining strong market and product positions together with excellent management of our operations and assets. Return on Sales Return on Sales is deﬁned as adjusted proﬁt before taxation1 from continuing operations expressed as a percentage of revenue from continuing operations. ROTIC Return on Total Invested Capital is deﬁned as the post-tax return from continuing operations before amortisation of acquired intangibles as a percentage of adjusted shareholders’ funds as detailed in note 3 to the Accounts. 2010/11 performance Return on Sales1 % ROTIC1 % 25 20 15 10 5 0 2007 2008 2009 2010 2011 20 15 10 5 0 2007 2008 2009 2010 2011 Target Performance >18% 20.2% Target Performance >12% 15.5% High returns achieved representing a signiﬁcant improvement in performance against the previous year. This performance reﬂects both good management to ensure increases in ﬁxed and variable costs do not overtake revenue growth, and the quality of acquisitions. High returns maintained in excess of our long-term Weighted Average Cost of Capital (WACC) of 8.5% (2010: 8.5%). Earnings increased faster than our asset base due to good operational management and acquisitions at sensible values. We aim to achieve a Return on Sales within the 18% to 22% range whilst continuing to deliver proﬁt growth. The target of 12% was set in 2005 when the Group’s ROTIC was 12.1% and WACC was 7.9%. A range of 12% to 14% is considered representative of the Board’s expectations over the long term. Comment 2011/12 target Link to other disclosures Chief Executive’s Strategic Review, Financial Review. Chief Executive’s Strategic Review, Financial Review. 1 See Financial Highlights. Halma p.l.c. Annual Report and Accounts 2011 11 ROCE (Return on Capital Employed) Operating Cash to Proﬁt Generating sufﬁciently high levels of cash provides the Group with freedom to pursue its strategic goals of organic growth, acquisitions and progressive dividends without becoming highly-leveraged. Operating Cash to Proﬁt Cash generated from operations expressed as a percentage of adjusted proﬁt from continuing operations1. ROCE Return on Capital Employed is deﬁned as the operating proﬁt from continuing operations before amortisation of acquired intangibles as a percentage of capital employed as detailed in note 3 to the Accounts. ROCE1 % Operating Cash to Proﬁt % 75 50 25 0 2007 2008 2009 2010 2011 150 100 50 0 2007 2008 2009 2010 2011 Target Performance >45% 71.9% Target Performance >100% 108% Very high returns above the target level achieved. The signiﬁcant increase in recent years is due to concerted efforts to improve proﬁtability and improve efﬁciency in our operations. Cash conversion of 108% was above the target, an excellent performance across the Group. The target of >45% is set in order to ensure the efﬁcient generation of cash at all levels to fund organic growth, closely targeted acquisitions and sustained dividend growth without Halma becoming a highly-leveraged group. The goal of cash inﬂow exceeding 100% is a metric that has relevance at all levels of the organisation and aligns management action with the strategic goals of organic growth, acquisitions and progressive dividends. Chief Executive’s Strategic Review, Financial Review. Financial Review. Halma p.l.c. Annual Report and Accounts 2011 12 Directors’ Report Business Review Higher rates of return Return on Sales1 increased to 20.2% (2010:18.8%) reﬂecting excellent operational management across the Group, an impressive recovery in Industrial Safety and the increasing proportion of our revenue coming from the Health and Analysis sector. Our strategic objective is to operate in the 18% to 22% range for Return on Sales and recent acquisitions support this goal. All Halma companies are incentivised to deliver both proﬁt growth and high return on capital. This year, the average Return on Capital Employed1 of our operating companies increased to 71.9% (2010: 61.3%) demonstrating the strength of our operational management and the beneﬁts of decentralised, light-assembly manufacturing operations. The combination of strong earnings growth, effective operational management and paying sensible prices for acquisitions resulted in Halma’s post-tax Return on Total Invested Capital improving to 15.5% (2010: 13.6%). Growth in all regions and sectors Revenue from the USA increased by 18% to £150m (2010: £127m) and Europe was up by 2% to £138m (2010: £136m). We achieved 8% growth in the UK, which now represents just 20% of total revenue at £106m (2010: £98m). Revenue from outside our largest markets in Europe and the USA increased by 26% to £124m (2010: £98m), contributing 24% of the Group’s total. The strongest performance came from the Far East and Australasia region, which increased by 29%. China grew by 28% to £23.6m (2010: £18.4m). Health and Analysis is now Halma’s largest sector Health and Analysis performed strongly to become our largest sector. Revenue was up by 23% to £218m (2010: £178m) whilst proﬁt2 was 33% higher at £46m (2010: £35m), representing 42% of the Group. All four sub-sectors increased revenue and proﬁt. Growth was stronger in the USA and UK than Mainland Europe, with revenue outside these core territories increasing by 34% to £53m (2010: £40m). Here Photonics, Fluid Technology and Health Optics made the major contributions whilst Water made greater progress in the developed countries. Andrew Williams Chief Executive Record results and increased strategic investment Halma has had a terriﬁc year, achieving strong organic growth and adding greater product and market strength to our existing business sectors through acquisitions. We are creating value for customers and shareholders in the short term, yet we are also increasing investment for growth in the future. We have a proven product, market and operational strategy which adapts as technology and market needs change. Adjusted1 proﬁt increased by 21% to £104.6m (2010: £86.2m), including strong underlying organic growth of 19%, and a 2% contribution from recent acquisitions. There was a minimal (<1%) positive impact on proﬁt and revenue growth due to currency exchange rate movements. Revenue grew 13% to £518m (2010: £459m). Organic growth of 11% underlined the fact that our continued investment in management development, innovation and emerging markets is enabling us to achieve and sustain higher rates of growth. Acquisitions contributed 2% to growth. Cash generation and operational management were excellent across the Group. We ended the year in a strong ﬁnancial position with net debt of £37m (2010: £9m net cash) after having spent £82m (2010: £2m) on acquisitions and paying a total of £33m (2010: £30m) to shareholders in dividends. We have core borrowing facilities of £165m in place until 2013 and therefore have the capital resources available for further acquisitions in 2011/12, should we ﬁnd the right opportunities. After a strong ﬁrst half year it was encouraging to see order intake growth momentum maintained throughout the second half, continuing to run slightly ahead of revenue, giving us a positive start to 2011/12. Halma’s sustained high level of performance over the past four decades has been achieved through the commitment, innovation and excellence of our employees. However, I believe their achievements during the recent ﬁnancial downturn have been outstanding. I would like to thank all Halma employees for both their contribution to these successes and in ensuring that we are well placed to achieve even greater things in the future. Halma p.l.c. Annual Report and Accounts 2011 13 Proﬁt +++2111%%% Infrastructure Sensors made good progress Our Infrastructure Sensor sector has continued to increase proﬁt throughout the downturn with demand largely driven by safety regulation globally and increasing urbanisation of population in developing countries. This year revenue was up by 8% to £197m (2010: £183m) whilst proﬁt2 grew by 10% to £39m (2010: £36m). Steady growth was achieved in the UK, USA and Mainland Europe with an encouraging 20% increase from outside these three regions. All four sub-sectors increased revenue and proﬁt. Elevator Safety and Door Sensors performed very well in the Far East and Australasia whilst our Security business made good progress in all regions, most notably in South Africa. Fire Detection had a positive year, especially in the USA. Industrial Safety achieved high proﬁt growth and Return on Sales Industrial Safety maintained the positive momentum it had coming into the year to deliver an excellent performance. Revenue improved by 5% to £103m (2010: £98m) whilst proﬁt2 grew by 20% to £25m (2010: £20m) giving a Return on Sales of 24%, the highest of our three sectors. All four sub-sectors increased proﬁt whilst all, except Safety Interlocks, grew revenue. Revenue grew steadily in the UK and USA. In Mainland Europe, there was a slight decline in revenue due to the non-repeat of a major order for Safety Interlocks last year although this was more than compensated for by 34% growth in the Far East and Australasia. Clear strategic priorities We aim to operate in global specialised markets offering long-term growth and establish strong market positions with products and technology that can sustain high returns. Our strategic priorities guide our activities and resource allocation at both a corporate and subsidiary company level ensuring a balance between organic and acquisition led growth in the medium term. Organic growth We aim to continue to deliver organic growth above the blended medium-term growth rates of our end markets, which we believe to be at least 5%. Over the past ﬁve years, the average of our annual organic growth rates has been 8% per annum (revenue) and 10% per annum (proﬁt) reﬂecting our ability to consistently outperform our markets by building sustainable competitive advantage through our products and customer service. Innovation excellence in Halma is recognised through the monthly Eureka award and the Halma Annual Innovation Award. Both are open to all employees, and award a top prize of £1,000 and £20,000 respectively. International expansion with a focus on Asia Our strategic objective is for at least 30% of revenue to come from outside the UK, USA and Mainland Europe by 2015 (2011: 24%) and, by that time, for China to be 10% of the Group total (2011: 4.5%). Since 2006, we have made a series of strategic central investments in China and India to accelerate the rate at which Halma subsidiaries can establish a local presence to design, sell and manufacture their products in these faster growth economies. In the past year, we opened three new regional ofﬁces in China (Guangzhou, Chengdu and Shenyang), expanded our Door Sensor manufacturing facilities and acquired the assets of a Beijing based business to give us a local manufacturing base for our Fire Detection products. In India, 10 companies now have a direct presence in our Halma hub in Mumbai compared with ﬁve at the start of the year. During the past year, revenue from India grew by 32% to £6.4m. More Halma companies are investigating establishing a direct presence in South America. In the coming year, we will determine whether any central investment is appropriate to accelerate this process. High rate of innovation Product and process innovation enables us to build competitive advantage, gain market share and sustain high ﬁnancial returns. All Halma businesses measure the direct contribution of major innovations in their business each month and increasingly are collaborating more with each other to share best practice or ﬁnd new solutions to technical and operational problems. In May 2011, we held our second Halma Innovation and Technology Exposition in Orlando, Florida. The focal point of HITE is a two-day exhibition where every Halma company exhibits transferrable technology and processes to each other. This ability to transfer state of the art technology from one sector to another is something most of our competitors simply don’t have. The Halma Annual Innovation Award for 2011 was won by an employee from Ocean Optics who developed a new way of testing products, resulting in superior product quality, faster lead times for customers and a £400,000 annual cost saving for the company. The runners-up included the Ricochet wireless security sensor system from Texecom and the Memcom elevator emergency telephone from Memco. R&D expenditure in 2010/11 increased by 20% to £26m (2010: £21m), equivalent to 5% of revenue and well above our minimum spend target of 4% of revenue. R&D investment is greater in our higher technology businesses where the execution risk on new product development is higher too. In response to this challenge, we have established a training programme for our technical engineers called Halma Certiﬁcate in Applied Technology (HCAT). HCAT provides engineers with training in ﬁnance and project management as well as providing them with the opportunity to visit and network across other Halma companies. Management development Halma’s decentralised operating structure relies on local managers making good, timely decisions in the best interests of their business. R&D, manufacturing, sales and administrative resources are controlled locally where the intimate knowledge of market dynamics and customer needs resides. Strategic objectives, annual performance, goals and management incentives are aligned together with a real commitment to attract and develop high quality talent at all levels. Halma offers a range of training programmes for employees including the Halma Executive Development Programme (HEDP), Halma Management Development Programme (HMDP) and Halma Certiﬁcate in Applied Technology (HCAT). During 2010/11, over 130 employees attended these Halma-run programmes and many more beneﬁted from training provided by their subsidiary company. The value of this investment is shown both in our excellent Halma p.l.c. Annual Report and Accounts 2011 14 Directors’ Report Business Review Chief Executive’s Strategic Review continued ﬁnancial performance and in succession planning. The latest example of the latter is the promotion of one of our US company Presidents, Dr Rob Randelman, to the Executive Board in April 2011. In future, we recognise the need to increase the diversity of our management talent in order to meet the new challenges ahead. This objective will be integrated into a new management development strategy being implemented in early 2011/12. Acquisitions, mergers and disposals We look to buy companies with business and market characteristics like Halma. They have to be a good ﬁt with our operating culture and strategy in addition to being value-enhancing ﬁnancially. As the Group has grown, the average size of our transactions has increased. This remains in line with our increasing capacity and capability to successfully grow businesses of that larger size thereby not materially altering our risk proﬁle. As expected, 2010/11 saw a pick-up in M&A activity globally and we successfully completed seven transactions spending a total of £82m (2010: £2m). Four of these were small bolt-on additions to existing Halma businesses adding new technology and local manufacturing or sales resources in Photonics, Water, Health Optics and Fire Detection. We acquired three larger businesses, all within our Health and Analysis sector, which will operate as stand-alone companies. Within our Fluid Technology sub-sector we paid $26.3m for Alicat Scientiﬁc (Arizona, USA) in November 2010 and $24.8m for Accudynamics (Massachusetts, USA) in December 2010. In March 2011, we paid CHF70m for Medicel (Switzerland) who specialise in cataract lens injector devices and will operate within Health Optics. The Medicel deal includes an earn-out of up to CHF30m for achieving proﬁt growth targets over the next three years. All these acquisitions are forecast to be earnings enhancing in year one. We are continuing to search for further acquisitions in Health and Analysis, Infrastructure Sensors and Industrial Safety and will be increasing resources to search for opportunities. Our strategic objective is to grow our businesses organically and through acquisitions but maintain our ﬂat organisational structure and devolved management approach. Consequently, in addition to acquiring businesses, we also consider internal mergers or divestment. Our success in this active management of our portfolio is demonstrated by the fact that since the start of ﬁnancial year 2005/06, our proﬁt has more than doubled, yet the number of principal operating companies has reduced from 44 to 38. Macro-economic, regulatory and competitive environment Our expectation at the start of 2010/11 was that the stability and slow recovery which had returned in Europe and the USA in late 2009 would be maintained as would the higher rate of growth enjoyed in developing economies. This was broadly borne out with our predominant focus in Europe on Northern markets providing some insulation from the economic problems in countries in Southern Europe. Many Halma businesses have products where demand is driven by relatively non-discretionary customer spend and all beneﬁt from strong market positions providing upgrade and replacement sales opportunities. All these factors give us genuine resilience in tough economic conditions and enable us to achieve organic growth well above the market rate. Increasingly environmental, health and safety regulation in our markets creates a relatively robust demand for our products and enables us to invest for the longer term with conﬁdence. Global, regional and national product approvals or technical validations are an increasing cost and technical challenge, but also allow us to build competitive advantage too. Many of our businesses have a presence on industry representative bodies, enabling them to inﬂuence and anticipate new market trends. We serve a wide range of market niches, each with its own unique competitive environment. Our strategy is to empower local management to create or respond to their changing markets by controlling their own competitive strategy including product pricing, product development and market positioning. More details are given in the sector reviews on pages 26 to 37. Our primary market growth drivers Halma’s strategy is to develop market positions with a horizon of 10 years or more. Growth strategies within our individual operating businesses tend to have three to ﬁve-year horizons. Our selected markets must have robust growth drivers with the potential for organic growth at rates well above background GDP growth. All of our businesses operate in markets underpinned by at least one of the following growth drivers: Increasing demand for healthcare Three key demographic trends underpin the increasing demand for healthcare: population ageing in developed economies, and population growth and increasing afﬂuence in the developing world. Demand for healthcare services and health-related products drives growth in our Health and Analysis markets. Spending on healthcare continues to grow rapidly throughout the developed world, particularly in the USA where it is projected to rise from about 17.5% of GDP in 2010 to about 20% by 2020.3 Population growth and rising incomes in the developing world also drive healthcare demand. The world’s population is also ageing. Globally, the number of people over 60 years old is growing annually by 2.6%, considerably faster than the general population growth of 1.2%.4 Population ageing creates rising healthcare needs and, as incomes rise, health services become available to an increasing number of people in the developing world. In China, for example, the healthcare budget will have increased threefold between 2000 and 2015.5 Continuous advances in medical technology create new medical procedures, which also stimulate demand for new instruments and equipment. Increasing demand for energy and water Throughout the world rising energy consumption and water usage is driven by three key trends: population growth; rising living standards; and changing patterns of food consumption and agriculture. In many Halma p.l.c. Annual Report and Accounts 2011 15 Delivering quality and growth Over the next few pages we will demonstrate how Halma adds value by focusing on higher growth markets, more innovation, developing our people and international expansion. Outlook In 2010/11 we achieved our objective of signiﬁcant organic growth and higher rates of return. We made substantial investments in acquiring businesses and developing new products and markets. This will remain a strategic focus for the year ahead to ensure we continue to position the Group’s activities into markets offering growth and high returns. We are pleased with the momentum we have coming into 2011/12 and are looking forward to making further good progress in the year ahead. 1 See Financial Highlights. 2 See note 1 to the Accounts. 3 Introduction to the Health Care Industry, Plunkett Research, 2010. 4 World Population Aging, 2009. United Nations, 2010. 5 Healthcare Market in China: Opportunities and Barriers of a Developing Economy, Scientia Advisers, 2009. 6 Energy’s Water Demand: Trends, Vulnerabilities, and Management, US Congressional Research Service, November 2010. 7 International Energy Outlook 2010, US Energy Information Administration, May 2010. 8 UN Water Policy Brief, UN Water, 2011. 9 International Atomic Energy Authority, IAEA Programme on Water Resources, 2010-2011. 10 Global Environmental Outlook GEO4, United Nations, 2007. 11 Water Conflicts – Chronology, Paciﬁc Institute, 2010. 12 Big oil groups forecast to spend $128bn, Financial Times, January 2011. 13 World Population Graphs, US Census Bureau. 14 2010 World Population Data Sheet, Population Reference Bureau, 2010. 15 World Urbanization Prospects, 2009 Revision, United Nations, 2010. 16 Facts on Health and Safety at Work, International Labor Organisation, 2009. economies energy and water supply are mutually dependent. In the USA for example, the energy sector’s water consumption is forecast to rise by 50% from 2005 to 2030. This will account for 85% of the country’s total increase in water demand.6 Worldwide consumption of marketed energy is projected to increase by 49% from 2007 to 2035 with the highest increase in non-OECD economies.7 While water demand rises relentlessly, both the quality and availability of clean water is declining.8,9 Contaminated water is the primary environmental cause of human sickness and death.10 Several of our Health and Analysis businesses are positioned to beneﬁt from the global trend of rising demand for energy and water. In both developed and developing regions we see increasing competition for water resources between economic groups and between national governments.11 The increasing value placed on water resources drives demand for our water conservation, treatment and quality analysis products. Continued investment in oil and gas exploration and extraction drives demand for our Industrial Safety products.12 Increasing urbanisation Current expectations for continued global population expansion predict growth from today’s population of about 7 billion people to 9 billion by 2050.13 In many developed economies, such as Europe and Japan, falling birth rates mean that population numbers will decline; future global population growth will be concentrated in developing countries.14 Population increase will also be an almost entirely urban phenomenon. The world’s urban population is expected to increase by 84% between 2009 and 2050; Asia’s urban population is predicted to grow by 1.7 billion, Africa’s by 0.8 billion, and Latin America and the Caribbean’s by 0.2 billion.15 Urbanisation drives investment in non- residential buildings like shops, ofﬁces, schools and hospitals, the primary market for our Infrastructure Sensors businesses, while it also requires investment in utilities such as Water, one of our target markets in Health and Analysis. Increasing health and safety regulation According to the International Labour Organisation about 2.3 million people die each year from work-related accidents and diseases. This comprises almost 360,000 fatal accidents and an estimated 1.95 million fatal work-related diseases. By the end of each day nearly 1 million workers will have suffered a workplace accident, and around 5,500 people will die due to a work-related accident or disease. In addition to the human cost, workplace accidents and sickness restrain economic development. Taking account of the direct and indirect costs of occupational accidents and diseases, such as lost working time, employee compensation, production downtime and medical expenses, the economic impact is estimated at around 4% of global GDP (US$1.25tn).16 Throughout the world, governments are requiring employers to comply with increasingly strict laws and regulations to protect workers from workplace hazards. In parallel with government regulations, many multinational employers based in the developed world are extending health and safety protocols to developing regions. This combination of increasing safety regulation and globalisation drives demand for our Industrial Safety and Infrastructure Sensors products. Delivering corporate responsibility and sustainability Our primary market growth drivers mean that Halma companies operate in markets in which their products contribute positively to the wider community. These market characteristics and our commitment to health and safety, the environment and people development are reﬂected in the values held by our employees and our operating culture. We review our responsibility and sustainability reporting in accordance with best practice. Recent legislative changes, particularly concerning the environment and bribery and corruption, have provided an opportunity to review and ensure that our procedures in these important areas are accessible, compliant and ﬁrmly embedded within our businesses. A detailed report on Corporate Responsibility is on pages 44 to 47. Halma p.l.c. Annual Report and Accounts 2011 16 Directors’ Report Business Review Adding value through acquisitions Higher growth markets Since 2005 we have reshaped our business. We have moved into markets with higher growth potential which can sustain higher margins and exited from markets with unattractive growth prospects. We have achieved growth combined with increased returns by giving high priority to M&A activity. Since 2005 we have bought 18 businesses and sold 12. We acquired businesses in our existing markets or closely allied sectors, with strong, long-term growth prospects. We sold businesses where market growth was uncertain, where competition was increasing and where mature technologies could not sustain high returns. Over the past six years we have grown revenue by 73% and Return on Sales (ROS) has risen; all three sectors now have ROS above 18% and overall ROS is over 20%. Return on Sales Health and Analysis 15.9% £95m Revenue 21.1% £218m Revenue Infrastructure Sensors 19.8% 20.1% £118m Revenue £197m Revenue Industrial Safety 13.2% 23.7% £86m Revenue £103m Revenue 2005 2011 Halma p.l.c. Annual Report and Accounts 2011 17 Recent acquisitions have focused on our Health and Analysis sector. Alicat We acquired Alicat Scientiﬁc, Inc. in November 2010. It makes precision instruments which measure and control the ﬂow of gases in analytical and life sciences industries such as pharmaceuticals. Alicat’s secondary market is specialised industrial processes. The company shares many customers with our existing Fluid Technology businesses. Accudynamics Accudynamics LLC, which we bought in December 2010, makes components used in scientiﬁc and medical analysis systems such as in vitro diagnostics. Accudynamics is a good ﬁt with our other Fluid Technology businesses and enables us to offer OEM customers integrated sub-assemblies which incorporate components from different Halma ﬂuidics companies. Medicel In March 2011 we bought Medicel AG. This extended our interests in the ophthalmic surgical instrument market. Medicel is a leader in very high precision surgical instruments that inject replacement lenses into the eyes of people suffering from cataracts. Cataracts are the leading cause of treatable blindness, with approximately 15 million surgeries performed annually. There is a migration towards the specialist instruments made by Medicel because they allow surgeons to make a smaller incision which leads to improved patient safety and outcomes. Halma p.l.c. Annual Report and Accounts 2011 18 Directors’ Report Business Review High rate of innovation Higher technology markets Why is Halma in the Photonics sector? To deliver growth with quality returns we are moving into higher technology markets. Photonics technologies are replacing traditional technologies both within our companies and in the global marketplace. Our photonics businesses operate in fast-growing market niches with strong drivers and beneﬁt from the protection of strong barriers to entry. Halma p.l.c. Annual Report and Accounts 2011 19 What is photonics? Every aspect of our lives Real or fake? Photonics is basically about how we make use of light. It is the science of generating, controlling and detecting light. Light lets us see, but it can also transmit data and control electronic equipment. While electronic devices communicate via electricity using electrons, photonics devices use photons, the fundamental ‘particles’ of light. So many of the products we rely on are made using photonics components and principles. Light bulbs, TVs, digital cameras, cell phones, PDAs, the internet and computers all depend on the science of photonics and components that emit or measure light. Halma businesses match the science of photonics with products that solve customers’ problems. Which Halma sub-sectors use photonics? In Infrastructure Sensors, our Fire Detection, Security Sensors, Automatic Door Sensors and Elevator Safety products all use a variety of optical technologies. In Health and Analysis, our Water products, Health Optics products and our Photonics businesses use light and optics within their products. In our Industrial Safety sector our Gas Detection and Asset Monitoring businesses use optics and imaging technologies. Photonics products are crucial to many cutting-edge areas of science and technology, often involving lasers, optics, ﬁbre optics and hybrid electro- optical devices. The range of photonics applications is huge. Photonics devices play a major role in scientiﬁc research and medicine, and technology used in manufacture, lighting, communications, defence, aerospace, environmental monitoring, security, safety and consumer electronics. The ability to measure the quality of light which materials reﬂect, absorb or transmit, can tell us a lot about the world we live in. In Beijing Antique City, China, nationally renowned antiques appraiser Guan Haisen uses our spectrometers to tell genuine ceramics from fakes. Water on the moon? Our photonics products helped NASA to discover that there really is water on the moon in the form of ice crystals. NASA deliberately crashed a rocket carrying scientiﬁc instruments into the Moon’s surface and our spectrometer analysed the light to reveal the presence of water. Halma p.l.c. Annual Report and Accounts 2011 20 Directors’ Report Business Review High rate of innovation Our photonics markets and applications Leisure 8% Science / Research 27% Environmental 11% Defence 16% Industrial 17% Medical /Life science 21% Building our presence in photonics We acquired Ocean Optics, a world-leading photonics business based in Florida, USA, in 2004 for £28m. Since then we have acquired a series of stand-alone and bolt-on photonics businesses and spent another £28m in acquisitions to generate a sub-sector within our Health and Analysis sector which generates around £73m of revenue. What photonics products do we make? We make products that generate and capture light, transmit light, analyse light and change light to deliver desired optical characteristics. Ocean Optics makes instruments that analyse light. When something is hit by light it either reflects the light, emits energy, absorbs the light or does all three. Our spectrometer instruments record how light reacts with a sample which reveals what the sample is made of. Applications include scientific analysis, space research, medical diagnostics and environmental monitoring. Fiberguide makes fibre optic products that transmit light carrying digital data. These are strands of glass thinner than a human hair sometimes coated with aluminium or gold to add strength or temperature resistance. Fiberguide’s multimode fibres deliver high power laser beams in scientific and industrial applications. Halma p.l.c. Annual Report and Accounts 2011 21 Revenue £90m £80m £70m £60m £50m £40m £30m £20m £10m Ocean Optics SphereOptics (bolt-on to Labsphere) Sandhouse Design (bolt-on to Ocean Optics) Fiberguide Ocean Thin Films (spin-off from Ocean Optics) Oerlikon Optics (bolt-on to Ocean Thin Films) Labsphere Mikropack (bolt-on to Ocean Optics) 2005 2006 2007 2008 2009 2010 2011 Fiberguide manufactures the raw ﬁbre and produces assemblies that carry the energy from a light source to the point of use or transmit information from a test sample to a detector or analyser. Applications include photodynamic therapy, ophthalmology, laser delivery systems, industrial process control, illumination, remote sensing and smoke detection. Labsphere is a world leader in capturing emitted light for analysis. They make high precision test chambers internally coated with highly reﬂective material. Customers include some of the world’s largest consumer electronics manufacturers and leading research scientists. Ocean Thin Films specialises in changing light. They deposit coatings on glass or plastic which behave like ﬁlters, separating speciﬁc wavelengths of light. Applications include colour wheels for projecting light and coatings for surgical lamps. Positioned to beneﬁt from fast growth in the LEDs market Our businesses are world leaders in devices that capture light so that it can be measured. Our products enable the energy output and colour spectrum of light sources to be analysed with extraordinary accuracy. These systems are used to check quality in the manufacture of LED light ﬁxtures and electronic consumer products such as TVs, cameras and mobile phones. The LED market is moving from niche to high volume. Market forecasts for the high brightness LED market suggest that applications such as backlights for LCD TVs and solid-state lighting will grow faster than 50% per year over the next ﬁve years. The global high brightness LED market is projected to grow at almost 30% per year between 2010 and 2014. Photonics – the new electronics Almost any physical or environmental parameter can be measured using light and the applications for photonics are growing all of the time. The areas where we expect exciting growth are photonics applications in remote sensing, biotechnology, medicine and other life sciences. Many people believe that photonics will be the fundamental transforming technology of the 21st century in the same way that electronics was the key technological development in the last century. Ocean Optics’ NeoFox is a new type of portable optical sensing system for measuring dissolved and gaseous oxygen. Halma p.l.c. Annual Report and Accounts 2011 22 Directors’ Report Business Review Management development Changing our culture Our people play a vital role in delivering quality and growth. We have worked to develop a more collaborative, interactive, knowledge-sharing organisation consisting of many formal and informal cross-subsidiary networks. In 2005 we initiated the Halma Executive Development Programme (HEDP) and subsequently the Halma Management Development Programme (HMDP) and the Halma Certiﬁcate in Applied Technology (HCAT). These programmes bring together senior and middle management and engineers respectively from across subsidiaries and disciplines, develop their talents and encourage future communication and collaboration. Halma p.l.c. Annual Report and Accounts 2011 23 Halma Innovation & Technology Exposition In 2009 we held our ﬁrst Halma Innovation & Technology Exposition (HITE) in London in order to improve cross-subsidiary communication, collaboration and innovation. We held a second HITE in Orlando in 2011, providing opportunities to cement relationships developed at the ﬁrst HITE and during training, in addition to showcasing new products and sharing innovative technologies and best practices. Networks have developed throughout Halma for many disciplines from Human Resources to Operations. The latter, in particular, has led to manufacturing efﬁciency savings throughout the Group. Halma p.l.c. Annual Report and Accounts 2011 24 Directors’ Report Business Review International expansion with a focus on Asia Global expansion Investment in international expansion has been a key strategic priority since 2005. A speciﬁc aim has been to grow the proportion of sales from emerging markets where we can achieve higher revenue growth rates than in more mature markets. In the past year we grew sales outside of Europe and the USA to 24% of total revenue, taking us towards our target of at least 30% by 2015. We have focused on Asia and aim that China alone will account for 10% of total revenue within four years. This year, we invested around £1m in three new regional ofﬁces with centrally-funded regional sales people. We are investing in expanded R&D and manufacturing so that we can design, make and sell appropriate products for the market. In India 10 of our businesses now have people based in our centrally-funded hub in Mumbai, ﬁve more than a year ago. Revenue from India grew by 32% during 2010/11. Now that many of our companies have thriving operations in China and India, we are turning our attention to South America. Our Health Optics businesses have already set up a shared service centre in São Paulo, Brazil. Halma p.l.c. Annual Report and Accounts 2011 25 £25m China revenue growth +28% We grew revenues in China by 28% during 2010/11 £22.5m £20m £17.5m £15m £12.5m £10m £7.5m £5m £2.5m 2007 2008 2009 2010 2011 Innovation Award in China Halma won the Innovation Award at the British Business Awards in Shanghai, China, in September 2010. The Award recognised the achievements of Halma’s Chinese subsidiaries having introduced over 130 innovative products to the Chinese market since 2006. Over 20 Halma subsidiaries now operate in China selling products for water treatment and testing, industrial safety, photonics, laboratory instrumentation and healthcare. Pictured: Martin Zhang (left) Director of Halma China, receives the Innovation Award from Roy Brown, Chairman of GKN Plc. Halma p.l.c. Annual Report and Accounts 2011 26 Directors’ Report Business Review Health and Analysis What we do We make products used to improve personal and public health. We develop technologies for analysis in safety, life sciences and environmental markets. Sector growth drivers – Increasing demand for healthcare – Increasing demand for energy and water – Increasing urbanisation Sector performance Sector performance KPIs Revenue growth1 Proﬁt growth1 Return on Sales2 ROCE3 R&D % of Revenue4 1 Sector revenue and adjusted5 sector proﬁt before ﬁnance expense are Group target 23% >5% 33% >5% 21.1% >18% 80% >45% 5.3% >4% (cid:57)/x (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) compared to the equivalent prior year ﬁgure. 2 Return on Sales is deﬁned as adjusted5 proﬁt before ﬁnance expense and taxation expressed as a percentage of sector revenue. 3 Adjusted5 sector proﬁt before ﬁnance expense expressed as a percentage of sector operating net assets. 4 Sector research and development expenditure expressed as a percentage of sector revenue. 5 Adjusted to remove the amortisation of acquired intangibles and acquisition costs. Where we operate Contribution to Group 12 9 11 5 10 4 3 7 6 8 Percent of Group 2011 £m Revenue6 42% 218 46 Proﬁt6 6 Prior years’ ﬁgures have been restated for the transfer of Radio-Tech 2010 £m 178 35 2008 £m 137 28 2009 £m 167 29 42% 2007 £m 120 24 Limited between reporting segments. 2 1 Sub-sector revenue split Fluid Technology 18% 23% Water 1. Australia 2. Brazil 3. China 4. France 5. Germany 6. India 7. Japan 8. Malaysia 9. The Netherlands 10. Switzerland 11. UK 12. USA Health Optics & Other 25% 34% Photonics Strategic summary Achievements – Organic proﬁt growth 27% – Organic revenue growth 18% – 52% revenue growth in China – Acquisition of Medicel AG – Acquisition of Wagtech International WTD – Acquisition of Alicat Scientiﬁc – Acquisition of Accudynamics Directions – Sustain high organic growth – Expansion in Asia and South America – Collaborative product development – Acquisitions – Local manufacture in export territories Water World leader in products to detect leaks in water pipes; among the world leaders in UV technology for disinfecting water; and water quality test kits. Halma p.l.c. Annual Report and Accounts 2011 27 Photonics Market leading opto-electronic technology for scientiﬁc, medical, environmental and other applications. Water Market trends and growth drivers A combination of water scarcity and pressure on ﬁnite water resources drives demand across our Water sub-sector. Capital investment in water infrastructure decreased during the global recession, but a return to pre-crisis growth is expected with global water capital expenditure projected to increase by 6% per year from 2010 to 20161. Spending on non-chemical water disinfection technologies, such as UV, is expected to grow even faster2. In the UK a new ﬁve-year regulatory cycle of water infrastructure investment began in April 2010. This allowed utilities to increase capital spending and delivered a stimulus that will support sales growth of our network monitoring and control instrumentation3. Strategy We plan to increase market share in drinking water and waste water network management instruments. In the water leakage instrumentation market our strategy is to maintain world leadership through continuous technological innovation and geographic expansion. We made progress in reducing our Water businesses’ dependency on UK government-regulated infrastructure spending cycles with double-digit export sales growth. To broaden exposure to the NGO-funded water analysis market, and increase market share in Africa and Asia, in March 2011 we acquired the Water Technology Division of Wagtech International Limited, a distributor of water testing kits. Performance Continued investment in R&D and people development within our Water businesses delivered good increases in revenue and proﬁt. Outlook We expect continued expansion of the global markets for our water products. Growth is underpinned by increasing regulation to protect water supply security and drinking water quality, plus environmental regulation of wastewater discharge and management4. Capital investment by UK utilities will increase for the next two years3. Water sector sales growth in China is variable but increased regional sales resources and the stimulus of increasing regulation5,6 will deliver faster growth in the medium term. Photonics Market trends and growth drivers Demand strengthened in several Photonics niches during 2010/11. The US spectroscopy market is forecast to continue to grow by 6% per year to at least 20147 whilst annual growth of 29.5% is predicted for the LED lighting market8. Photonics demand proved resilient in 2010/11 despite cuts to US federal budgets. Any future impact of lower US government spending will be offset by growth in emerging economies and new technology. Strategy In Photonics our primary strategy is to reinforce technological leadership in our niche markets and expand geographical sales, particularly in Asia. High R&D investment is required to maintain market leadership in advanced technologies. While development risks can be relatively high, we often achieve rapid payback from technological innovation. Novel products with unique user beneﬁts targeted at fast-growing market sectors command high sales margins. We continue to seek value-enhancing acquisitions in our existing and closely allied Photonics niches. Halma p.l.c. Annual Report and Accounts 2011 28 Directors’ Report Business Review Sector Reviews: Health and Analysis continued Health Optics Devices used to assess eye health, diagnose disease, assist with eye surgery and for general medical applications. Performance Our Photonics business comfortably exceeded all sectoral KPI targets delivering record revenue and proﬁt. Reﬂecting the rapid pace of technological innovation in this sub-sector, Photonics R&D spending was over 7% of sales. Successful integration of the SphereOptics business, acquired in January 2010 continued. Outlook We expect further growth from new product launches in 2011 and we should beneﬁt from the high growth forecast for the solid-state low energy lighting (LED) market8. Strong Asian sales growth should continue and we expect increasing returns from our Chinese photonics manufacturing investments. In the USA and Europe, governments will cut spending in 2012 and we expect lower sales growth in these regions than seen in 2010/11. Health Optics Market trends and growth drivers New diagnostic and therapeutic technologies, ageing populations and greater access to healthcare in the developing world continued to drive growth in our Health Optics markets. In the USA, the largest ophthalmic market, annual growth of 3% to 4% is forecast9 over the next ﬁve years. We expect strong growth in South East Asia as governments increase healthcare investment. The Chinese market for medical devices was estimated to have grown by over 13% during 201010. Even in developing markets, increasingly stringent, complex and costly medical product certiﬁcation procedures create strong market entry barriers which favour our market-leading brands. Strategy Geographic expansion remains key to our Health Optics growth strategy with a strong focus on South East Asia, China, India and Latin America. Recently we set up a health optics sales and distribution company in São Paulo, Brazil. We acquired a key US distributor in March 2011 to grow sales in North America at a faster rate. R&D is focused on projects to develop instruments marketed to existing customers. We are broadening health optics product lines with new products to maximise the value of our highly developed sales channels. A new family of ophthalmic diagnostic products, due for launch in 2011, has been created by collaborative R&D between two of our Health Optics businesses. Performance In Health Optics we achieved record sales and proﬁt. Sales growth was particularly strong in South East Asia. Outlook We expect our Health Optics businesses to continue to grow ahead of their markets. Growth will come from export channel investment, market expansion in South East Asia and Latin America and new products. We expect the newly acquired Medicel business to continue its recent growth trajectory as their OEM customers grow and as demand for their market-leading cataract surgery instruments increases. Other Volumatic, our small cash handling business, increased both revenue and proﬁt. „ Market focus Wireless lighting colour measurement Our ColorBug product measures colour values and brightness in theatrical, studio and architectural lighting applications. Its software allows technicians to wirelessly share data with their iPhone or iPad, making lighting colour analysis simple and convenient. Fluid Technology Critical components such as pumps, probes, valves, connectors and gas conditioning products used by scientiﬁc, environmental and medical diagnostic OEMs for demanding applications. Fluid Technology Market trends and growth drivers We saw continued growth in the medical diagnostic sector despite customer consolidation leading to some pricing pressure. A continuous stream of new diagnostic tests developed by our OEM customers drives growth in the medical instrumentation market. Predictive medicine, in particular analysis of genetic DNA sequences, offers good sales prospects and this niche could deliver 5% of total ﬂuid technology sales during 2011/12. The scientiﬁc analysis market stabilised and returned to modest growth. Halma p.l.c. Annual Report and Accounts 2011 29 1 2 3 4 5 6 7 8 9 10 11 12 13 Global Water Market 2011. Global Water Intelligence, March 2010. World Water Disinfection Products; Industry Study with Forecasts for 2014 & 2019. Freedonia Group, February 2011. Future water and sewerage charges 2010–15: Final determinations, OFWAT. The Drinking Water Directive, EU. The Ministry of Water Resources, China, 5 Year Plan. China Issues New Regulation on Water Management, WorldWatch Institute. Spectroscopy market: Outlook positive. Photonics.com, September 2010. High-Brightness LED: Market Review and Forecast 2010. Strategies Unlimited. February 2010. The Future of Ophthalmic Devices, Market Forecasts and Growth Opportunities to 2016 – The Vision Care Segment Emerges as a Key Revenue Generator. GBI Research, March 2010. The Medical Device Market: China. Epsicom, February 2011. Visual impairment and blindness, Fact Sheet N°282. World Health Organisation, April 2011. 2010 Comprehensive Report on the Global Cataract Surgical Equipment Market. Marketscope LLC, September 2010. Cataract Surgery – Global Pipeline Analysis, Opportunity Assessment And Market Forecasts To 2016. GlobalData, November 2010. Strategy The key strategic direction for our US-based Fluid Technology businesses is geographic diversiﬁcation in line with their customer base. They will become less US-centric by expanding sales in Europe and Asia. With the acquisition of Alicat Scientiﬁc and Accudynamics, our ﬂuid technology target markets have broadened and our potential acquisition pool is larger. Alicat gives us greater exposure to the scientiﬁc analysis market, particularly laboratories and niche industrial applications. Accudynamics consolidates our position in clinical diagnostics, and gives us a platform to offer customers more complete ﬂuidic assemblies. We began to manufacture ﬂuidics components in China during 2010 which has underpinned entry into the Chinese market. Performance Our Fluid Technology businesses achieved record organic sales and proﬁt growth. All Fluid Technology companies achieved record sales in China. Outlook The scientiﬁc analysis market is recovering post-recession albeit at a slower rate than medical markets. With enlarged sales teams and expanded product offerings we expect continued growth in the Fluid Technology sub-sector. Recent R&D investment will also grow market share and enable entry to more non-US markets. Market focus „ Cataract operations rise The acquisition of Medicel AG extends our ophthalmic surgery interests. Throughout the world cataracts are the primary cause of vision loss among people aged 55 and over. In many developing countries cataracts are the main cause of blindness11. Recently acquired Medicel AG is a world leader in specialist cataract surgery instruments. The global market for cataract surgical equipment is forecast to grow by 80% between 2010 and 201512 driven by improving surgical techniques, increasing affordability of healthcare and rising demand in emerging economies like India where over ﬁve million cataract operations are performed every year.13 Halma p.l.c. Annual Report and Accounts 2011 30 Directors’ Report Business Review Sector Reviews Infrastructure Sensors What we do We make products which detect hazards to protect assets and people in public and commercial buildings. Sector growth drivers – Increasing urbanisation – Increasing health and safety regulation Sector performance Sector performance KPIs Revenue growth1 Profit growth1 Return on Sales2 ROCE3 R&D % of Revenue4 1 Sector revenue and adjusted5 sector profit before finance expense are Group target 8% >5% 10% >5% 19.8% >18% 80% >45% 4.9% >4% /x      compared to the equivalent prior year figure. 2 Return on Sales is defined as adjusted5 profit before finance expense and taxation expressed as a percentage of sector revenue. 3 Adjusted5 sector profit before finance expense expressed as a percentage of sector operating net assets. 4 Sector research and development expenditure expressed as a percentage of sector revenue. 5 Adjusted to remove the amortisation of acquired intangibles and acquisition costs. Where we operate Contribution to Group 2 16 14 6 10 5 7 17 3 15 9 13 4 11 8 1 12 Percent of Group 2011 £m 38% 197 36% 39 2010 £m 183 36 2009 £m 186 33 2008 £m 167 29 2007 £m 155 28 Revenue Profit Sub-sector revenue split Security Sensors 13% 39% Fire Detection 1. Australia 2. Belgium 3. Brazil 4. China 5. Czech Republic 6. France 7. Germany 8. Hong Kong 9. India 10. Italy 11. Japan 12. New Zealand 13. Singapore 14. Spain 15. UAE 16. UK 17. USA Elevator Safety 22% Automatic Door Sensors 26% Strategic summary Achievements – Organic profit growth of 10% – Organic revenue growth of 8% – 24% revenue growth in China – Security Sensor businesses consolidated – Diversification of Automatic Door Sensors into industrial, security and transport markets Directions – Sustain organic growth – Increase resources and revenue in Asia – Increase revenue from the USA for Fire and Security – Continue automatic door safety diversification – Bolt-on acquisitions 014338_Halma_AR11_Rev_v23.indd 30 21/06/2011 13:54 Halma p.l.c. Annual Report and Accounts 2011 31 Security Sensors Security sensors and signals used in public and commercial property. Market leaders in the UK. Security Sensors Market trends and growth drivers After two years of recession, demand for intruder sensors is forecast to return to growth during 2011 with strongest demand in Europe, the Middle East, Africa and Asia3. Improved sensor technologies are driving upgrades to intruder detection systems and the trend towards integration of building management systems. The commercial intruder alarm market is migrating to wireless technology. Almost one-third of our security sensor revenue growth in 2010/11 came from new battery-powered wireless products. Fire Detection Fire and smoke detectors and audible/ visual warning devices. World’s second largest manufacturer of point smoke detectors used in public and commercial property. Fire Detection Market trends and growth drivers Legislation remains the strongest growth driver in the Fire Detection market. Standards governing the installation, maintenance and servicing of ﬁre products are extensive and may differ even within a single country at national, regional and city level. As the European Union enlarges, the newly admitted states will be governed by EU ﬁre codes creating a growing, regulation-driven market. A combination of increasingly strict legislation, new technology and a slight recovery in building construction is expected to stimulate ﬁre industry growth in 2011 after reduced capital investment during the recession1. Asia is expected to deliver signiﬁcant growth; amendments to China’s ﬁre laws have stimulated demand with market expansion estimated at 12.9% per year between 2009 and 20142. Strategy Our primary strategy in Fire Detection is world leadership in safety-critical sensor products for infrastructure monitoring in commercial buildings. Our market-leading products eliminate hazards and protect buildings and their occupants. Investment in international Fire Detection product approvals and innovation in new products and technology platforms will continue to underwrite market share growth, competitive advantage and good margins. Further investment in our businesses and extension of sales coverage in emerging markets will aid organic growth. We will continue to seek acquisitions that enhance our product and geographical strength. Performance Fire Detection achieved record revenue and proﬁt. Despite challenging market conditions, we grew market share strongly in the UK and made signiﬁcant gains in Europe. We continue to innovate and launch exciting new products. Outlook We anticipate a continuation of current demand trends for Fire Detection in the short to medium term as many economies gradually recover from recession. Our businesses are positioned to gain market share due to technology leadership, our portfolio of worldwide product approvals and penetration of new regional markets. Halma p.l.c. Annual Report and Accounts 2011 32 Directors’ Report Business Review Sector Reviews: Infrastructure Sensors continued Automatic Door Sensors World leader in sensors used on automatic doors in public and commercial buildings. Automatic Door Sensors Market trends and growth drivers Legislation to enhance the safety and security of people continues to drive growth in our niche Automatic Door Sensors markets. Although we continue to forecast medium-term annual expansion in our core business of 3% to 4%, we expect higher growth in Asia. We continued to diversify into industrial, transport and security markets supported by increased R&D and marketing spending. Investment in market-leading levels of product quality, reliability, service and product development has enabled us to win new customers in our core and diversiﬁed markets. We see considerable growth prospects in the transport sector. Strategy Our core strategy in Automatic Door Sensors is to maintain market leadership in pedestrian door sensors and diversify further into industrial doors, security and transportation applications. We continue to seek complementary acquisitions. Implementation of lean manufacturing and improved logistics will increase competitiveness via improved customer service. Our unique laser scanner sensor products will ensure global technology leadership and assist market diversiﬁcation. Performance We achieved a very strong performance in Automatic Door Sensors with record revenue and proﬁt. We completed a signiﬁcant management reorganisation to support future growth. Revenue growth was strongest in Asia. Almost one-third of the workforce in this sub-sector is now based in China. Outlook Increasing safety regulation will continue to drive door sensor growth.4 Our strategy of developing innovative new technologies, extending global reach and investing in market diversiﬁcation has created a strong growth platform. Strategy In Security Sensors our growth strategy centres on reducing exposure to the UK by increasing sales in Europe, the Middle East and Africa together with long-term investment in India and China. We will continue to increase the proportion of non-residential sales with new wireless products targeted at commercial customers. Our two Security Sensors businesses which make intruder sensors and hazard signalling products were successfully consolidated into a single company. Direct sales operations were set up in India and China. Performance Our Security Sensors business achieved double-digit increases in both revenue and proﬁt. We delivered strong market share growth despite ﬂat or receding markets in many of the countries where we operate. We made progress in reducing dependence on the UK market. During 2010/11, UK sales were less than half of total revenue for the ﬁrst time. Outlook Supported by a return to growth in the global intrusion alarm market, we anticipate further growth from Security Sensors based on geographic expansion, particularly in Asia, extending market share in Europe and positive customer response to our recently launched and upcoming advanced intrusion detection technology. „ Analysts predict that the Chinese market for ﬁre detection and suppression products will grow at a compound annual growth rate of about 13% from 2009 to 2014.5 Market focus China’s stricter ﬁre regulations At China’s 11th National People’s Congress the country’s leaders announced major changes to national ﬁre laws which came into force in May 2009. The stricter laws, which increase ﬁre safety liabilities for enterprises, are predicted to have a signiﬁcant impact on attitudes towards ﬁre safety and the way in which ﬁre detection equipment is used in Chinese buildings. Halma p.l.c. Annual Report and Accounts 2011 33 1 Global Fire Market Regroups after a Troublesome 2009. IMS Research, March 2010. 2 The Dawn of China’s New Fire Industry. IMS Research, May 2010. 3 Intrusion Alarm Market Set to Recover. IMS Research, May 2010. 4 Recovery imminent for global construction markets, RLB Global Research and Development, January 2011. 5 The Dawn of China’s New Fire Industry, IMS Research, May 2010. 6 Chinese Elevator Industry, Credit Suisse, March 2011. 7 World Elevators to 2013 – Demand and Sales Forecasts, Market Share, Market Size, Market Leaders, Freedonia Group, 2009. Elevator Safety World leader in elevator/ lift door safety sensors. We also make emergency communication devices, displays and control panels for elevators. Elevator Safety Market trends and growth drivers Western countries account for the majority of the installed elevator customer base. Here, demand for our safety products depends on building modernisation and elevator upgrades driven by legislation. The Asian elevator market, in contrast, is mainly driven by new elevator installations. China is now the world’s largest installer of new elevators and accounts for about 60% of all new elevator projects. Social housing is the largest segment of the Chinese market, forecast to grow signiﬁcantly in 2011 fuelled by government investment6. The competitive environment in the Elevator Safety market is changing as we face stronger competition from Chinese manufacturers in global markets. A rigorous and continuous cost reduction programme will maintain competitiveness and protect margins. European demand has been steady, driven by stronger safety regulations while US markets have been ﬂat. Strategy In contrast to other Halma sub-sectors, R&D and marketing activity among our Elevator Safety businesses is closely co-ordinated within a global business framework. Our three elevator companies sell the products of their sister businesses within their regional markets. Our core growth strategy in Elevator Safety is to increase investment in new products and expand global sales channels. Performance Elevator Safety performance improved due to more favourable market conditions and a return to growth at our Asian business. We saw growth in both sales and proﬁt. Our elevator emergency telephone product line achieved high UK market share with a number of signiﬁcant customer conversions. Outlook Global demand for Elevator Safety products is forecast to rise by over 4% annually at least until 2013. China will account for over half of all new demand, while Western Europe remains the largest market for modernisation7. Outside Asia, demand is expected to be ﬂat but we expect to maintain growth momentum from market share gains and new technology. In the medium term we anticipate that the Chinese authorities will adopt European standards for elevator safety. These standards favour our market-leading elevator door control sensors and monitored emergency telephones. Market focus „ Intruder alarms go wireless Wireless intruder alarms use radio waves in place of cables to communicate between the control panel and the security sensors. Wireless security products are more expensive than hard-wired equivalents but, because there are no cabling costs, wireless systems can be less costly overall. Our new RICOCHET system is based on mesh network technology. This means that intruder sensors can communicate with their control panel by sending signals to any other sensor in the network. If the wireless connection between two devices weakens, the network ‘self-heals’ and automatically re-routes signals via other devices. Halma p.l.c. Annual Report and Accounts 2011 34 Directors’ Report Business Review Industrial Safety What we do We make products which protect assets and people at work. Sector growth drivers – Increasing health and safety regulation – Increasing demand for energy and water Sector performance Sector performance KPIs Revenue growth1 Proﬁt growth1 Return on Sales2 ROCE3 R&D % of Revenue4 1 Sector revenue and adjusted5 sector proﬁt before ﬁnance expense are Group target 5% >5% 20% >5% 23.7% >18% 88% >45% 4.3% >4% (cid:57)/x (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) compared to the equivalent prior year ﬁgure. 2 Return on Sales is deﬁned as adjusted5 proﬁt before ﬁnance expense and taxation expressed as a percentage of sector revenue. 3 Adjusted5 sector proﬁt before ﬁnance expense expressed as a percentage of sector operating net assets. 4 Sector research and development expenditure expressed as a percentage of sector revenue. 5 Adjusted to remove the amortisation of acquired intangibles and acquisition costs. Where we operate Contribution to Group Percent of Group 2011 £m Revenue6 20% 103 25 Proﬁt6 6 Prior years’ ﬁgures have been restated for the transfer of Radio-Tech 2009 £m 103 22 2008 £m 91 20 2010 £m 98 20 22% 2007 £m 77 16 Limited between reporting segments. 1 Sub-sector revenue split Asset Monitoring 9% 29% Gas Detection 11 6 10 9 4 3 2 5 7 8 1. Australia 2. China 3. France 4. Germany 5. India 6. The Netherlands 7. Saudi Arabia 8. Singapore 9. Tunisia 10. UK 11. USA Safety Interlocks 43% 19% Bursting Disks Strategic summary Achievements – Record organic revenue and proﬁt – Revenue growth in China and Asia Paciﬁc – R&D expenditure exceeded 4% of revenue with new products launched in all sub-sectors Directions – Organic revenue and proﬁt growth – Continued expansion in China and Asia – Maintain R&D investment above 4% of revenue and increase rate of new product introductions – R&D collaboration – Bolt-on acquisitions Gas Detection Portable instruments and ﬁxed systems which detect ﬂammable and hazardous gases. Halma p.l.c. Annual Report and Accounts 2011 35 Bursting Disks ‘One time use’ pressure relief devices to protect large vessels and pipework in process industries. Gas Detection Market trends and growth drivers Fixed and portable Gas Detection equipment is increasingly required in industrial workplaces for compliance with health and safety regulations. In addition to our core oil & gas and chemicals markets, we see expanding sales opportunities in monitoring commercial buildings, conﬁned space working and wastewater treatment1. The worldwide market for Gas Detection products is expected to grow by 3% to 4% annually at least until 20132. We have seen demand grow strongly in China, India and South America and there are indicators of recovery from the 2009 recession in global markets such as power generation, offshore oil, utilities and chemical processing. We anticipate fastest growth from the Asia Paciﬁc region. Key market drivers in Asia are the increasing pace of industrialisation and adoption of Western safety standards by emerging economies1. Strategy In Gas Detection our strategic focus is to increase competitive advantage and gain market share by continuous technical upgrading and extension of our portable gas detectors. We will continue to invest in manufacturing, marketing and development resources to maintain market-leading customer service. Geographic expansion, particularly penetration of markets in North and South America, and Asia, will support our strategic objective of increasing sales ahead of underlying market growth. Performance We achieved record Gas Detection sales and proﬁt in 2010/11, with solid market share gains across all trading territories. Outlook The outlook for Gas Detection is for good growth underpinned by resilient legislative growth drivers in industrial safety markets. The launch of innovative new products during 2011/12 will support this objective. Bursting Disks Market trends and growth drivers Our Bursting Disks are sold into industrial manufacturing and process industry markets where increasing regulation and rising expectations of health and safety drive demand. A rising oil price and greater safety awareness during 2010/11 stimulated increased petrochemical capital spending by government-owned oil companies and created opportunities for sales growth3. Strategy Our core Bursting Disks strategy is to build on growth in our core industry sectors and home markets by diversifying and expanding our customer base. We will increase sales resources beyond Europe and North America, particularly in Asia and South America. We will diversify into medical instrumentation, energy exploration and other new health and safety applications. We will enhance competitiveness through advanced manufacturing processes and extend collaboration between our businesses to add new technologies. Halma p.l.c. Annual Report and Accounts 2011 36 Directors’ Report Business Review Sector Reviews Industrial Safety continued Safety Interlocks Specialised mechanical, electrical and electromechanical locks which ensure that critical processes operate safely. Performance Increasing demand from the process industries, combined with upgraded products, delivered a return to solid organic growth in line with historic levels. Our Bursting Disks businesses achieved double-digit revenue increases and major expansion in developing economies. Asia Paciﬁc sales almost doubled. Outlook We expect to maintain momentum in the medium term in our core geographic and industrial markets. Our strategy of differentiating ourselves from the competition through product innovation and service will support expansion into non-process industries and OEM markets. Safety Interlocks Market trends and growth drivers We sell Safety Interlocks into two distinct global industrial markets: machine safety and process valve control. In both markets growth is driven by health and safety regulation and the gradual adoption of more stringent safety protocols by the emerging economies. During 2010/11, demand from machine safety grew faster than valve control. This resulted from continuing industrial growth in Asia pulling through investment in raw material extraction, switchgear installation and infrastructure. Despite the high oil price, the main driver in the valve control sector is new reﬁning capacity construction and refurbishment which remained muted. Geographically, we saw lower safety interlock sales in Europe, a strong recovery in the USA and the highest growth in the rest of the world. Strategy In Safety Interlocks, we will maintain our high market share by focusing on customers’ needs, applications engineering support and product quality. We will continue to extend sales and manufacturing resources in developing markets and expand our manufacturing hub in China. In addition, the acquisition of Kirk Key Interlock Company in May 2011 strengthens our market position in the USA. Performance Our Safety Interlocks businesses delivered increased proﬁt. Revenue was slightly lower than last year due to the non-repeat of a major order for an end customer in South America. The underlying revenue growth trends remained positive. Manufacture of safety interlocks in China increased signiﬁcantly to enable fast delivery to Asian customers. Outlook We anticipate strong growth from the power generation and mining sectors but ﬂat demand from oil & gas reﬁning. We should beneﬁt from continuing growth of the Chinese economy. We expect to develop and introduce more diverse safety products to expand sales opportunities. Market focus „ State oil companies drive market growth Market analysts are reporting a rise in the relative importance of state oil companies in comparison to private oil producers. The oil and gas market has seen a marked split in investment behaviour with state-owned oil companies gearing up capital investment but independent oil producers behaving more cautiously. Recent capital spending by national oil companies has risen steeply, growing by 131% from 2005 to 2009. Over the same period the major international oil companies only increased capital spending by 59%. This capital investment trend appears to be continuing. Capital spending by the major international oil companies was ﬂat for the ﬁrst 9 months of 2010 while spending by the national oil companies appeared to be increasing.3 Asset Monitoring Products for monitoring physical assets under water using sensors and communications technologies. Asset Monitoring Market trends and growth drivers We make products which monitor the condition of physical assets underwater using innovative sensor and communications technologies. Spending on subsea inspection, repair and maintenance is forecast to rise by 10% per year from 2010 to 20144. A similar growth rate is forecast for underwater remotely operated vehicle (ROV) services5. Tougher safety measures proposed for the offshore industry in the wake of the Deepwater Horizon tragedy may increase spending on underwater inspection.6 Halma p.l.c. Annual Report and Accounts 2011 37 1 2 3 4 5 6 7 8 Gas Detection Equipment: A Global Strategic Business Report, Global Industry Analysts, Inc., September 2010. Toxic and Combustible Gas Detectors Worldwide Outlook. ARC Advisory Group study, 2009. NOC’s Capital Spending Leaves IOC’s Behind, Evaluate Energy, November 2010. Offshore Operations & Maintenance Market Report 2010–2014, Douglas-Westwood, December 2009. World ROV Market Report 2010-2014, Douglas-Westwood, 2009. Deepwater; The Gulf Oil Disaster and the Future of Offshore Drilling, Oil Spill Commission, January 2011. The Future of the Offshore Drilling Industry to 2015, GBI Research, February 2010. Subsea Market Update Report to 2014, Inﬁeld Energy Analysts, 2010. Strategy Our growth strategy in this sub-sector is to gain market share through market-leading technology, investment in sales channels and diversiﬁcation into new applications such as offshore renewable energy and subsea mining. We are establishing a sales and technical support ofﬁce for our sonar products in Brazil, one of the world’s fastest growing deepwater oil & gas markets7. Performance High investment in R&D, 8% of revenue in 2010/11, has been a key driver for growth. The beneﬁts from restructuring in 2009/10 delivered higher revenue and strong proﬁt growth aided by only a modest recovery in market demand. Outlook Current market forecasts for the subsea industry are very positive8, foreseeing growth over the next ﬁve years as the economy recovers, energy prices increase, technology improves, delayed projects come back online and investment in deep-water exploration increases. New market opportunities will be exploited in offshore energy generation and ﬁre and rescue services. Market focus Deepwater Horizon prompts tougher safety regulations for offshore oil A US government commission set up to investigate the BP Deepwater Horizon oil rig disaster in the Gulf of Mexico which killed 11 workers and created an environmental catastrophe has revealed systematic failures in risk management and highlighted the need for a dramatic „ increase in safety and further reforms to the offshore regulatory regime. The commission’s report6 said that the technology, laws and regulations, and practices for containing and responding to oil spills lag behind the risks associated with deepwater drilling. According to the report, if the industry’s safety practice and regulatory oversight do not improve, another disaster is inevitable. Halma p.l.c. Annual Report and Accounts 2011 38 Directors’ Report Business Review Kevin Thompson Finance Director Record results and increased returns maintaining a strong ﬁnancial position Another year of good progress Halma delivered strong growth once again with characteristically high returns. We exceeded all of our ﬁnancial Key Performance Indicators (KPIs) as shown on pages 8 to 11 and further increased our rate of proﬁtability as well as putting our ﬁnancial resources to work to acquire high quality businesses that ﬁt our long-term strategy. In a year when market conditions were more stable Halma delivered record results and continued its long history of strong performance. Percentage change 2010 £m Increase £m Total Organic growth* Organic growth* at constant currency 459.1 59.3 12.9% 11.0% 10.5% 2011 £m 518.4 104.6 86.2 18.4 21.3% 18.9% 18.6% Revenue Adjusted1 proﬁt * Organic growth2 is calculated excluding the results of acquisitions. Revenue increased by 12.9% to £518.4m (2010: £459.1m) and this resulted in adjusted1 proﬁt before tax of £104.6m (2010: £86.2m), an increase of 21.3%, exceeding £100m for the ﬁrst time. Currency translation had a very modest impact on the results. Organic revenue growth at constant currency was 10.5% and adjusted1 proﬁt on the same basis was up 18.6%. Statutory proﬁt before tax increased by 21% to £98.3m (2010: £81.4m). Adjusted proﬁt before tax1 £m 100 75 50 25 0 2007 2008 2009 2010 2011 Health and Analysis has grown to become the largest of our three sectors with 42% of revenue and 42% of the segmental proﬁt. All three sectors grew well and increased their proﬁtability, as did all but two of our 12 sub-sectors, showing that growth was widespread. The ﬁrst half/second half adjusted1 proﬁt split this year was more typical than last year at 47%/53%. Following a record ﬁrst half performance we continued that upward trend in the second half with a result that was 14% higher in revenue and 15% higher in adjusted1 proﬁt than the second half of last year. Growth in all geographic regions 2011 % of total 29% 27% 20% Revenue £m United States 150.3 of America 138.3 Mainland Europe United Kingdom 106.1 Asia Paciﬁc and Australasia Other Countries 15% 76.2 47.5 9% 518.4 100% 2010 £m % of total Change £m % growth 127.2 135.7 98.3 59.1 38.8 459.1 28% 23.1 2.6 30% 7.8 21% 13% 17.1 8.7 8% 100% 59.3 18% 2% 8% 29% 22% 13% Notes: 1 In addition to those figures reported under IFRS, Halma uses adjusted figures as key performance indicators as the Directors believe the adjusted figures give a more representative view of underlying performance. Adjusted profit figures continue to exclude the amortisation of acquired intangible assets and for the first time in 2010/11, following the introduction of IFRS 3 (Revised), they exclude acquisition costs and fair value adjustments on acquisition contingent consideration, which are included in statutory figures. More details are given in the Accounting policies and note 1 to the Accounts. 2 See Financial Highlights. Halma p.l.c. Annual Report and Accounts 2011 39 The USA overtook Mainland Europe once again to be our largest revenue destination. Health and Analysis was a signiﬁcant contributor to the US growth with the stronger US Dollar also lifting reported revenue when translated to Sterling. The more modest growth in Mainland Europe is dampened by translation of revenue earned in weaker Euros. Over 60% of our revenue in Mainland Europe is in the Northern European countries. Health and Analysis and Infrastructure Sensors grew revenue in Europe. Revenue to the UK held up well with all sectors growing, however, the faster growth in most other territories means that revenue to the UK continues to be a reducing element of the total; now 20% compared with 26% in 2005. Our target is for revenue outside the USA, Mainland Europe and the UK to be 30% of Group revenue by 2015. We have taken another useful step toward this goal in 2010/11 with it increasing to 24% (2010: 21%). Asia Paciﬁc and Australasia revenue increased by 29% with all sectors growing strongly. Within that our revenue to China, targeted to be 10% of Group revenue by 2015, increased by 28% to £24m, now representing 4.6% (2010: 4.1%) of revenue. Revenue to Japan is approximately 1.5% of the Group total. Revenue to India, with its recently established hub, grew by 32% to £6.4m (2010: £4.9m) as we continue to expand our coverage there. Limited currency impacts this year The Group has both translational and transactional currency exposure. Translational exposures arise on the consolidation of overseas company results into Sterling. Transactional exposures arise where the currency of sale or purchase invoices differs from the functional currency in which each company prepares its local accounts. Halma reports its results in Sterling. The most important other trading currencies are the US Dollar and Euro, and with the acquisition of Medicel, the Swiss Franc will become more signiﬁcant. Approximately 30% of Group revenue is denominated in US Dollars and 20% in Euros. As the US Dollar strengthened and the Euro weakened against Sterling in 2010/11, the currency translation of results resulted in only a net 0.5% increase to reported revenues and a net 0.3% increase in adjusted1 proﬁt. Translational currency exposures are not hedged. Weighted average rates used in Income Statement Year end exchange rates used to translate Balance Sheet US Dollar Euro 2011 1.56 1.18 2010 1.60 1.13 2011 1.60 1.13 2010 1.53 1.13 Based on the current mix of currency denominated revenue and proﬁt, a 1% movement in the US Dollar relative to Sterling changes revenue by £1.8m and proﬁt by £0.3m. Similarly, a 1% movement in the Euro changes revenue by £0.9m and proﬁt by £0.2m. Within the Group there is a good degree of natural hedging (similar amounts of purchase and sale transactions) in US Dollars. We typically buy less products in Euros than we sell and so have a net exposure of approximately Euro 40m in any year. Our transactional hedging strategy, ﬁxing currency rates up to 12 months forward for approximately 50% of our trading transactions, gives our businesses greater certainty in their overseas trading. We take a neutral view of the future movements of currencies. Where we have debt we aim for some diversity of borrowing in currency to provide an element of balance sheet hedging although no more than 50% of our borrowing is drawn in currency at any time to ensure that currency movements do not unduly impact on our bank facility headroom. Higher returns and strong margins Return on Sales2 increased further to a record of 20.2% (2010: 18.8%). It has been above 16% every year for the past 26 years and this is the ﬁrst year in that time it has exceeded 20%. Return on Sales is an important metric for the Group and is an indicator of the high value our customers place on our products. Return on Sales2 % 25 20 15 10 5 0 2007 2008 2009 2010 2011 As noted, Return on Sales increased in all sectors this year with Industrial Safety the highest at 24% following its strong recovery in the past 18 months although all three sectors continue to operate at high levels. Our target is for the Group to operate in the 18 to 22% Return on Sales range and this is supported by the high proﬁtability of recent acquisitions. Gross margins (revenue less direct materials and direct labour) continue to exceed 60%. Whilst no single commodity or component is signiﬁcant to the Group there is some upward pressure on input costs. Active management of the supply chain and alternative sources of supply largely mitigate these effects although we expect them to continue to be present across the Group in the coming year. Halma p.l.c. Annual Report and Accounts 2011 40 Directors’ Report Business Review Financial Review continued Reduced ﬁnance costs The net ﬁnance cost in the Income Statement reduced to £1.1m (2010: £2.9m). Net bank interest and related expense reduced to £0.7m (2010: £0.9m) while the net pension ﬁnance charge of £2.0m last year reduced to £0.4m due to the increased return on higher pension assets this year. Looking ahead we expect the net pension cost to be lower again in 2011/12 but other interest costs, primarily bank interest expense, are expected to rise due to the increased level of debt following recent acquisitions, with the scale of the impact dependent on any changes in bank borrowing rates. Lower tax rates Our approach to taxation is to minimise the tax burden where possible in a responsible manner, maintaining good relationships with tax authorities based on legal compliance, transparency and co-operation. The Group has its main operating subsidiaries in 11 countries so the Group’s effective tax rate is a blend of these different national rates applied to locally generated proﬁts. As expected, the effective tax rate on adjusted1 proﬁt reduced slightly to 26.2% (2010: 26.5%) because of the mix of proﬁt in various jurisdictions. A substantial element of our tax is paid in the UK and so the reduction of UK Corporation tax by 2% in 2011/12 will beneﬁt the Group. Together with the low rates in Switzerland enjoyed by Medicel, we expect these factors to lead to a lower Group effective tax rate in 2011/12. Earnings per share grow and dividend increases Adjusted earnings per share increased to 20.49p (2010: 16.89p), up 21.3%. Statutory earnings per share increased by 19.4% to 19.23p (2010: 16.1p) due to the amortisation of acquired intangibles being higher this year, the write off of acquisition related costs as now required by revised IFRS rules, and the associated tax credit thereon being proportionately lower. Halma has a long record of dividend increases. The recommended 7% increase in the ﬁnal dividend to 5.56p (2010: 5.19p) together with the 7% increase in the interim dividend gives a total dividend of 9.1p (2010: 8.5p). At the year end share price this represents a dividend yield of 2.6%. Halma’s progressive dividend policy is reﬂected in the fact that it will have increased its dividend by 5% or more for every one of the last 32 years, paying out over £350m in dividends to shareholders over that period. Dividend cover (the ratio of proﬁt after taxation to dividends paid and proposed) calculated using adjusted1 proﬁt is now 2.25 times (2010: 1.98 times) meeting our target of around 2 times cover. Record returns Return on Total Invested Capital (ROTIC), the post-tax return on all the Group’s assets including all historical goodwill, was a record at 15.5% (2010: 13.6%). This high and increased rate resulted from proﬁts growing much faster than the asset base. Halma’s ROTIC compares very favourably to our long-term Weighted Average Cost 1 See Financial Highlights. of Capital (WACC) calculated as being 8.5% (2010: 8.5%), highlighting the shareholder value generated by the Group. We operate an ‘asset light’ model and aim to be efﬁcient in our use of working capital and tangible assets within our businesses. This year our Return on Capital Employed (ROCE), which measures this operating efﬁciency, was also a record at 71.9%, exceeding the previous record of 61.3% set last year. Both the ROTIC and ROCE ﬁgures (see note 3 to the Accounts for detailed calculations) comfortably exceeded our KPI targets. Another year of good cash generation Cash generated from operations excluding taxation paid, was £113.2m (2010: £112.7m) and represented 108% (2010: 131%) of adjusted proﬁt1. A summary of the year’s cash ﬂow is as follows: Cash ﬂow Operating cash ﬂow before movement in working capital (Increase)/decrease in working capital Cash generated from operations Acquisition of businesses Investment in associates Disposal of businesses Development costs capitalised Net capital expenditure Dividends paid Taxation paid Issue of shares/treasury shares purchased Net interest paid Exchange adjustments Net cash/(debt) brought forward Net (debt)/cash carried forward 2011 £m 2010 £m 116.8 (3.6) 113.2 (82.1) (1.7) – (4.7) (14.8) (32.9) (18.1) (4.5) (0.5) (0.1) (46.2) 9.1 (37.1) 99.6 13.1 112.7 (1.7) – 0.5 (3.1) (10.2) (30.4) (12.3) 0.8 (0.9) 4.9 60.3 (51.2) 9.1 Cash generation was higher last year because of the exceptional amount of cash released from working capital. This year working capital increased although the increase represented 5% of total working capital (inventory plus trade receivables less trade payables) which compares well with the 13% increase in revenue. Expenditure on property, plant and computer software this year was £15m (2010: £11m) with 2010 having been at a low level. This year’s ﬁgure represents 121% of depreciation, falling within the 100 to 125% range which we would expect. We constantly encourage our businesses to invest in assets given the high returns we can generate. Taxation paid of £18.1m was higher than last year’s ﬁgure of £12.3m and more typical for us. We expect a higher ﬁgure for taxation payable in the coming year despite the reducing tax rates as we continue to pay tax in advance on increased proﬁts. Strong ﬁnancial position and capital structure Halma is highly cash generative and has substantial bank facilities. We use these facilities and our retained earnings to sustain and Halma p.l.c. Annual Report and Accounts 2011 41 develop our business. We have access to competitively priced ﬁnance at short notice and spread our risks to provide good liquidity for the Group. Group treasury policy is conservative and no speculative transactions are allowed. We have a ﬁve-year £165m syndicated revolving credit facility with a well established core group of banks which runs to February 2013 on attractive terms. The Group continues to operate well within its banking covenants. We are comfortable with using debt to accelerate the Group’s development and keep our funding needs under regular review so that we have ample headroom to ﬁnance potential opportunities. This year we have been successful in deploying cash on acquisitions and continue to search for more acquisitions which meet our demanding criteria. We ended the year with £37.1m of net debt (2010: £9.1m of net cash). The net debt ﬁgure is a combination of £79.7m of debt and £42.6m of cash held around the world to ﬁnance local operations or awaiting repatriation to the UK. We have an active repatriation programme to maintain efﬁcient cash/debt management. Value adding acquisitions This year we spent £82.1m (2010: £1.7m) on three larger and four smaller acquisitions plus £1.7m on an investment in an associate. The Chief Executive’s Strategic Review outlines the main businesses acquired. The multiple of initial consideration to Earnings Before Interest and Tax (EBIT), paid for these acquisitions was in the range of 6.5 to 8, showing that we can acquire good businesses at sensible prices. At the run-rate of proﬁts at the time of acquisition these businesses added £8.8m to revenue and £2.0m to proﬁt net of the costs of ﬁnancing in 2010/11. In 2011/12 we would expect them to contribute an additional £26.4m of revenue and £8.3m of proﬁt net of ﬁnancing costs, on the same basis. Intangible assets of £44.5m were recognised in respect of the acquisitions made in the year, as was Goodwill of £66.8m. Amortisation of acquired intangible assets was £4.8m and is shown in the Income Statement together with acquisition costs of £1.3m and acquisition related contingent consideration fair value adjustments of £0.2m which are expensed there for the ﬁrst time under revised International Financial Reporting Standards (IFRS) rules. We expect the amortisation of acquired intangibles to be closer to £9m in 2011/12. In December 2010 the Group made an investment of Euro 2m in Optomed Oy, a Finnish manufacturer of ophthalmic equipment whose products offer us good commercial opportunities. Our share of the results of Optomed are shown as an Associate. See note 14 to the Accounts for more information. The integration of all acquisitions is progressing well. Continuing to meet our pension obligations On an IAS 19 basis the deﬁcit on the deﬁned beneﬁt plans was £36.2m (2010: £43.1m) before the related deferred tax asset. Plan assets increased to £140.8m (2010: £127.8m) following further recovery in equity values, with approximately 60% of the plan assets invested in return seeking assets including equities. Plan liabilities increased to £177.1m (2010: £170.9m) with relatively few changes required in the valuation assumptions. The Group’s deﬁned beneﬁt pension plans were closed to new members in 2003 to reduce the ongoing liability. The Board monitors the funding of our pension plans closely. We continue to make extra contributions to the plans at the rate of £6.4m per year as agreed with the actuary with the objective of eliminating the deﬁcit, as measured on an IAS 19 basis, over a 10-year period. Investing in R&D Expenditure on R&D this year increased to £25.7m (2010: £21.4m) and represents 5% (2010: 4.7%) of revenue. All three sectors increased their absolute level of R&D expenditure and maintained or increased the percentage of revenue invested. We have been increasing our rate of investment in R&D steadily in recent years, continually enhancing our technology base. We aim to maintain this rate at around 5% of revenue, ahead of our benchmark KPI ﬁgure of 4% of revenue. We are required under IFRS to capitalise certain development expenditure and amortise it over an appropriate period, for us three years. R&D by its nature carries risk and all R&D projects, particularly those requiring capitalisation, are subject to close scrutiny and a rigorous approval and review process. In 2011 we capitalised £4.7m (2010: £3.1m) and amortised £4.2m (2010: £3.8m). This results in an asset carried on the Consolidated Balance Sheet of £9.7m (2010: £9.2m). Managing risks and going concern considerations The main risks facing the Group and how we address them are reviewed on pages 42 and 43. The key operating risks are covered in the Chief Executive’s Strategic Review and Sector reviews. We spread risk across the Group via well resourced independent operating units. There is extensive and regular review of operations at a local and divisional level. This review is supplemented by Internal Audit, which we have strengthened during the year with the appointment of an additional auditor based in China. During the year we upgraded our Group risk assessment process and undertook a detailed review of cash controls and related segregation of duties at all operating locations, resulting in further strengthening of controls. We are in the process of rolling out a centralised IT disaster recovery solution to complement existing local processes within subsidiaries. Shortly after year end we issued new and comprehensive guidance on Health and Safety procedures across the Group. Our record in this area is excellent and we aim to maintain best practice performance. We are also updating our long-standing policy on the mitigation of Bribery and Corruption to ensure we continue to meet developing requirements. The Board considers all of the above factors in its review of Going Concern as described on page 54 and has been able to conclude its review satisfactorily. Sound management of risks and high performance across the Group should enable Halma to continue its tremendous long-term record of creating value for its shareholders. Kevin Thompson Finance Director Halma p.l.c. Annual Report and Accounts 2011 42 Directors’ Report Business Review We recognise major risks and uncertainties facing us and take action to identify, manage and mitigate them Description Operational Risk We seek to continuously grow our proﬁts, generating a high return for shareholders over the long term within a clear strategic framework. 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. We perceive our primary operational risks to emanate from remoteness of operation and the actions and quality of our employees. Organic Growth, Supplier Risk and Competition The Group faces competition in the form of pricing, service, reliability and substitution. We rely on high quality supply from our partners. These constitute an ongoing potential threat to our growth. Research and Development New products are critical to our organic growth and underpin our ability to earn high margins and high returns over the long term. Intangible Resources 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. Protection of our intellectual property is important to our continued success. Laws and Regulations Group operations are subject to wide-ranging laws and regulations including business conduct, employment, environmental and health and safety legislation. There is also exposure to product litigation and contractual risk. Mitigation 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. Our choice is to operate in the safety products and health-related technology markets which we consider to be robust over the long term. 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. We invest heavily in identifying, recruiting and training talented people who are able to manage the risks we face while delivering the excellent results we require. We do not place undue reliance on any one Group company nor does any one Group company rely heavily on one customer, supplier or transaction. We always seek to spread our risks. We have processes in place to ensure any major transactions are reviewed at the appropriate level. Our focus on investing in management development, innovation and international growth is a direct result of assessing these risks. We aim to manage the risk of timing and quality of component supply by dual sourcing and long-standing working relationships. By empowering and resourcing local operations to respond to changing market needs, the potential adverse impact of downward price pressure and competition can be mitigated and growth maintained. We recognise the competitive threat coming from emerging economies and by operating within these economies, typically using local staff, we are better placed to make fast progress ourselves. R&D is of necessity a risky activity but by devolving control of product development into the autonomous operating businesses, we spread the risk and ensure that the resource is as close to the customer as possible. New product development ‘best practice’ is shared between Group companies and return on investment of past and future innovation projects is tracked monthly. Large R&D projects, especially those which are capitalised, require Head Ofﬁce approval. The main intangible resources which deliver competitive advantage and which support our strategic objectives are: the patents and trademarks 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. Whilst no single product or process is critical to the Group as a whole, all appropriate actions are taken to protect our intellectual property rights. With our development activity increasing in emerging economies we will often segregate the elements of a project to protect the know how. All Group companies have an employee handbook detailing employment practices, including the need to report any major legal or contractual risks. 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 product failure, litigation and contractual issues. Each operating company has a health and safety manager responsible for compliance and our performance in this area is excellent. Updated Health and Safety policies and guidance were issued in the year, with enhanced monthly reporting. We carry comprehensive insurance against all standard categories of insurable risk. Contract review and approval processes mitigate exposure to contractual liability. Our well established policies on bribery and corruption continue to be updated to ensure continued compliance with best practice. Halma p.l.c. Annual Report and Accounts 2011 43 Description Acquisitions 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, as is ensuring the new businesses are rapidly integrated into the Group. Mitigation We pay sensible multiples for businesses whose technology and markets we know well. Divisional Chief Executives are responsible for ﬁnding and completing acquisitions in their business sectors subject to Board approval. We support them with central resources to search for opportunities and assist with implementation of a post-acquisition plan. Incentives are aligned to encourage acquisitions which are value-enhancing from day one. Information Technology/Business Interruption Group and operational management depend on timely and reliable information from our software systems. We seek to ensure continuous availability and operation of those systems as disruption could delay or impact on decision making and service to our customers. There is substantial redundancy and back up built into any Group-wide systems. The spread of business offers good protection from individual events and disaster recovery plans are widespread. We have a small central resource available, Halma IT Services, to assist Group companies with any major IT needs and to ensure adequate IT security policies are set across the Group. We carry out regular IT audits across the Group. This year we have increased external penetration testing and are rolling out a centralised IT disaster recovery solution to supplement local processes. Financial Irregularities and International Expansion Our objective is to grow our business across the world and to export outside of developed markets and particularly in Asia. This presents both operating and cultural risks. 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. The Group ensures that there is adequate local management and ﬁnancial resource in each operational location ensuring they are adequately trained in ﬁnancial matters whilst maintaining a culture of openness to promote disclosure. Responsibility for remote operations rests with operational management in the sponsoring company who supervise closely and visit frequently. Group companies operate a common set of reporting procedures and accounting policies, disseminated via the Group intranet. Internal Audit regularly reviews operations and we appointed a new Internal Auditor in China this year. Cash For any business a key risk is that it will run out of cash or have inadequate access to cash. In addition, cash deposits need to be held in a secure form or location. The strong cash ﬂow generated by the Group provides ﬁnancial ﬂexibility. Cash needs are monitored regularly. In addition to short-term overdraft facilities the Group holds a ﬁve-year revolving credit facility, renewable in February 2013, which provides sufﬁcient headroom for its needs. Cash deposits are monitored centrally and spread amongst a number of highly rated banks. Treasury Risks Foreign currency risk is the most signiﬁcant treasury related risk for the Group. In times of increased volatility this can have a signiﬁcant impact on performance. 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. Economic Conditions In times of uncertain economic conditions businesses face additional or elevated levels of risk. These include market and customer risk, customer default, fraud, supply chain risk and liquidity risk. Pension Deﬁcit Monitoring the funding needs of the Group’s pension plans is essential to funding our pension obligations effectively. Our UK deﬁned beneﬁt pension plans are closed to new members. The Group does not use complex derivative ﬁnancial instruments and no speculative treasury transactions are undertaken. Currency proﬁts are not hedged. Currency hedging must ﬁt with the commercial needs of the business and we have in place a hedging strategy to manage Group exposures. This requires the hedging of a substantial proportion of expected future transactions up to 12 months ahead. Longer term currency trends can only be covered through a wide geographic spread of operations. We closely monitor performance against the ﬁnancial covenants on our revolving credit facility and are operating well within these covenants. We manage such risks primarily at local company level where they are best understood and where we are closest to the markets and our customers. The ﬁnancial strength, availability of ﬁnance and diversity of the Group provides mitigation to much of this risk. We operate robust credit management at each operating company. Each business regularly undertakes a close examination of its cost structure to determine that it is appropriate to the economic circumstances it faces. High quality subsidiary boards provide close monitoring of operations whilst the Halma Executive Board identiﬁes any wider trends which require action. 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 has increased pension contributions with the overall objective of paying off the deﬁcit in line with the Actuary’s recommendations. We monitor and consider alternative means of reducing our pension risk in light of the best long-term interest for shareholders. Halma p.l.c. Annual Report and Accounts 2011 44 Directors’ Report Business Review Achievements We deliver sustainable value to our customers and shareholders. 1. Halma’s carbon policy was ﬁrst approved by the Board in 2007. In 2010 the policy target was reviewed and continues to call for a 10% reduction in the carbon footprint every three years. KPIs Non-ﬁnancial Key Performance Indicators (KPIs) are used by the Board to monitor progress on Group initiatives; ﬁnancial KPIs are considered on pages 8 to 11. CO2 emissions: tonnes/£m of revenue* 46 2011 47 44 44 46 10% reduction 2010 2009 2008 2007 Group target Good progress with new initiatives now launched particularly in the UK. *Prior year ﬁgures restated to reﬂect current carbon conversion rates. 2. Halma conducts an annual survey of its employees to assess how well the Group’s values are aligned with its employees and how well the Group communicates its values to employees. Values alignment 5 5 5 2011 2010 Group target 3. The Halma Executive Development Programme (HEDP) and the Halma Management Development Programme (HMDP) provide executives and middle managers with the necessary skills they need in their current and future roles. Survey of senior managers matched the target of ﬁve of their desired values being present in our business culture. Subsidiary directors/managers who had completed HEDP/HMDP by March 2011 71% 2011 67% 2010 >50% Group target Continued commitment to training our people. Governance and commitment to Corporate Responsibility As Halma companies are involved in the manufacture of a wide range of products for the protection and improvement to quality of life for people worldwide, safety is critical to the Group and is a major priority for management. Likewise, the reduction of the Group’s carbon footprint has received elevated attention since 2007 with the initial objective of a 10% reduction in relative carbon usage in the three years to March 2010 and over the subsequent three years to March 2013. Our core values are Achievement, Innovation, Empowerment and Customer Satisfaction. These 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 Development Programmes, but also through clear 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 deployed to actively reduce our own carbon footprint. Halma has been a member of the FTSE4Good UK index since its establishment in July 2001. A summary of our progress and performance for all areas of corporate responsibility follows. Halma has developed meaningful key performance indicators (KPIs) that reﬂect the importance the Group places on corporate responsibility and enable the Board to monitor the Group’s progress in meeting its objectives and responsibilities in these areas. Halma has an excellent health and safety record and a culture of safety is deeply embedded within the Group. We will continue to actively promote our safety culture over the coming year following a major update and relaunch of our internal Health and Safety policy and guidance. Halma p.l.c. Annual Report and Accounts 2011 45 Halma and the environment We have an excellent long-term record and a clear strategy 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. Our products Many of our innovative products play a very positive role in monitoring and improving the environment. Halma brands lead the world in a number of technologies which help to minimise environmental damage. Our principal environmental technologies are water leakage detection, gas emissions monitoring, water and efﬂuent analysis, UV water treatment and optical sensing. We tirelessly promote the use of UV water sterilisation which eliminates the need to use dangerous chemicals, as well as products that minimise the waste of clean water. Our commitment to the development of equipment for measuring environmental changes and controlling the damaging impact of industrial activities is long term. We make safety equipment for use at work, in public places and in transportation systems that contribute to increased personal safety by ensuring safe practice at work, protecting people from ﬁre and making elevators and automatic doors safe and effective. We are the major world supplier in several of these areas. Carbon policy The Group’s policy on carbon is published on our website and has been distributed and explained to all Halma business units. A senior executive in each of our higher- impact business units is responsible for implementing the carbon policy at local level. Our Finance Director, Kevin Thompson, has principal responsibility for coordinating and monitoring the policy. Environmental management system We are committed to developing and implementing an environmental management system (EMS) throughout the Group to measure, control and, where practical, reduce our environmental impacts. We have developed performance indicators that assist local management in implementing the policy and ultimately developing an EMS. The requirement for an EMS and the related reporting has been rolled out to all UK business units, which represent approximately 43% of Group production facilities in terms of external turnover. All Group companies are encouraged to undertake ISO 14001, the international environmental accreditation, where warranted. The requirement to implement an EMS will be extended to the rest of the Group in the medium term. In terms of revenue, currently 19% of the Group has ISO 14001 approval. Our impact The environmental effect of our operations is relatively low compared to manufacturers in other sectors. Our manufacturing model is decentralised permitting our operations to be located close to their customers. Manufacturing operations are established across the world for this very reason rather than to save labour costs. The ethos of being close to our customers reﬂects the importance we place on the quality of our products and the service levels we provide to our customers. It also makes our operations more ﬂexible and responsive to their markets and customers. With operations spread around the globe, our supplier base is understandably fragmented. Therefore, responsibility for vetting and managing suppliers is devolved to local management whilst meeting the Group’s ethical standards. FTSE4Good has assessed Halma as having a low impact on the environment. Nevertheless, Group companies are encouraged to improve energy efﬁciency, reduce waste and emissions and reduce the use of materials in order to minimise their environmental impact. The Group established baseline data in 2004/05 on emissions to air and water, water and energy consumption, and waste production, the results of which are updated on the Halma website each year. The data collected for the past ﬁve years has enabled the Group to set comprehensive and quantiﬁable objectives for reducing its environmental impacts in those areas and to set and monitor targets for reduction in key areas. The collected data conﬁrms that the main area of impact on the environment is energy consumption. The Group does not operate a ﬂeet of distribution vehicles although we do own a number of company cars. From May 2007, we implemented a cap on permissible CO2 emissions of all UK company vehicles and will extend this requirement to the rest of the world in due course. This limit is reduced each year so as to consistently reduce our vehicles’ environmental impact. We have also set a fuel consumption standard for company vehicles in the USA which is reviewed annually. Due to revisions to best practice in conversion of energy usage into carbon tonnes we have restated prior year carbon ﬁgures to enable comparability. We are committed to reducing our carbon footprint. We set a target in 2007 to reduce the Group’s total carbon emissions relative to revenues by 10% over three years. Following a total reduction of 7% in the ﬁrst two years, 2009/10 showed an increase following the acquisition of a high energy usage facility in the USA. We are working hard to reduce the energy impact of that facility and excluding that operation we would have achieved our target reduction. We renewed our target in 2010 and in the ﬁrst year achieved a useful reduction. We have initiated a number of carbon reduction actions, particularly in the UK, which are designed to help us meet our targets. Halma p.l.c. Annual Report and Accounts 2011 46 Directors’ Report Business Review Corporate Responsibility continued From April 2010, we have worked with a provider of energy efﬁciency and carbon reduction solutions to ensure compliance with the new Carbon Reduction Commitment Energy Efﬁciency Scheme (CRC), which is the UK’s mandatory climate change and energy saving scheme, and administered by the Environment Agency. We are well on track to be in full compliance with the CRC requirements. Already we have rolled out Automatic Meter Reading (AMR) technology to the majority of UK sites. In 2010/11 all major UK sites received an energy survey and set an action plan for improved energy usage. This initiative is backed up by specialist carbon management software and comprehensive training on its use. Our carbon policy can be found on the Halma website. The Group’s environmental performance will continue to be reported both in the Annual report and on our website. The Group is committed to examining the establishment of ‘green’ procurement policies and increasing our use of recycled materials. Halma and its people The Group has a policy of equal opportunities and preventing harassment, which applies in relation to recruitment of all new employees and to the management of existing personnel. This gives us access to the widest labour market and enables us to secure the best employees for our needs. We offer all of our staff training relevant to their roles and we believe that this contributes to an increase in employee motivation and job satisfaction. The culture alignment survey results mentioned below support this trend. Periodically we complete a survey of employees to determine whether our core values are authentic in our organisation. The survey establishes the values individual employees wish to see in our operating culture and to what extent they exist in our current culture. In 2006, our survey of senior managers showed that ﬁve of the values they wanted to see in our business were actually present. Again in 2011, our survey of senior managers showed that ﬁve desired values were still present in our business. This indicates that there is a healthy level of alignment between the culture we aspire to have and the culture we have today. No survey is capable of capturing all the appropriate sentiments, but our executives, who regularly visit all Group companies, agree that observable and valuable improvements in the Group culture have occurred over recent years. The Group will continue to monitor the survey results to enable us to better support our people bringing these values and strengths to work so that they and we may derive further beneﬁt from them. Disabled employees Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. Employee consultation The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through formal and informal meetings, the Group intranet and the annual ﬁnancial statements. Employee representatives are consulted routinely on a wide range of matters affecting their current and future interests. An employee share plan has been running successfully since 1980. It is open to all UK employees and aligns the interests of all UK employees to those of shareholders. Health and safety The Group manages its activities to avoid causing any unnecessary or unacceptable risks to health and safety to our employees in the work place or to the public as a result of our activities. The policy is understood by all Group companies and was reinforced during the year through improved guidance and reporting following a comprehensive review led by an external expert. The reporting of Health and Safety incidents and corrective action where needed has been give an even higher proﬁle. Given the autonomous structure of the Group, operational responsibility for compliance with relevant local health and safety regulations is delegated to the board of directors of each Group company. We believe health and safety training is important and it is carried out within companies as appropriate. Adequate internal reporting exists in order that the Group’s Finance Director may monitor each company’s compliance with this policy. Major injuries recorded Days lost due to work-related injuries Total recorded injuries to all employees 2011 2010 2009 455 133 706 505 233 496 The Group has collected details of its worldwide reported health and safety incidents which are available on our website at www.halma.com. We are pleased to report that there were no fatalities during 2010/11, 2009/10 or 2008/09. Halma p.l.c. Annual Report and Accounts 2011 47 12 programmes have now been completed and the success of the programme can be measured by the enthusiasm of the participants upon their return to their businesses, the achievements of a number of participants and their eagerness to coordinate further sessions to explore topics of particular interest to their programme Group. Now that a signiﬁcant proportion of executives have completed HEDP, a follow up programme, HEDP+, has been developed to provide updated training and to reinforce the original course contents. Complementing the HEDP is a programme for subsidiary managers and supervisors – the Halma Management Development Programme (HMDP). During the year, three programmes were completed giving a cumulative total of 319 employees who have completed HMDP. Programmes were held in the USA, Europe and Asia. In 2011, we introduced a new programme targeted at our technical engineers to equip them with a broader understanding of Halma’s technology, improve their productivity and provide speciﬁc skills training in areas such as project management. One such programme with 20 participants has been completed with great success. Community In line with our decentralised structure, social and community activities are sponsored and undertaken at the direction of subsidiary management. Each subsidiary has the freedom to implement its own initiatives. This approach recognises that priorities will vary from business to business. People development The Halma Executive Development Programme (HEDP), which is based on our recognition of the fundamental part our people play in the success of the Group, continued to strengthen in 2010/11. HEDP is an integrated development plan for our senior people – including the next generation of Managing Directors and Divisional Chief Executives. Our objective is to provide these individuals with the tools and training to achieve more in their existing role and potentially to advance through the organisation if their achievements merit it. Training Cumulative number of candidates that have completed HEDP Cumulative number of candidates that have completed HMDP 2011 2010 2009 166 152 113 319 277 206 HEDP is aimed squarely at employees already serving on subsidiary boards but we also encourage applications from senior functional managers who can demonstrate they already have equivalent responsibilities and will beneﬁt from the programme. There are approximately 200 such eligible employees in total. The programme has been developed from a proven course structure and is speciﬁcally and continuously tailored to suit Halma’s needs, aligning the content to the Group’s four core values of Achievement, Innovation, Empowerment and Customer Satisfaction. It focuses strongly on strategic and leadership capabilities and developing personal attributes – commitment, determination and resilience. There is an emphasis on performance management and team development. It includes skill- based elements such as sales and marketing management, project leadership, corporate governance, ﬁnance and innovation, but all are presented in a strategic context. Responsible investment Investing in Halma shares meets the criteria of many professional and private investors who base their decisions on environmental, ethical and social considerations. The Group is a world leader in several key environmental technologies and has a reputation for honesty and integrity in its relationships with employees, customers, business partners and shareholders. Social conditions can be improved for all through the creation of wealth. Halma creates wealth responsibly allowing our employees, customers, business partners and shareholders to determine where this wealth is best distributed. Halma’s policies reﬂect the core requirements of the Universal Declaration of Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work. We do not tolerate practices which contravene these international standards. Regulatory demands upon us vary considerably around the world, so Halma establishes the core structure to ensure that Group companies fully comply with legislative and regulatory requirements while permitting them to tailor the solutions to their particular needs. Ethics The Group culture is one of openness, integrity and accountability. Halma encourages its employees to act fairly in their dealings with fellow employees, customers, suppliers and business partners. We aim to have suppliers of high quality and operate to accepted international standards. Halma operates a conﬁdential whistleblowing policy, which enables all Group employees to raise any concerns they may have. Halma has a zero-tolerance policy on bribery and corruption which extends to all business dealings and transactions in which we are involved. This includes a prohibition on making political donations, offering or receiving inappropriate gifts or making undue payments to inﬂuence the outcome of business dealings. Policy and guidance in this area continues to be updated in line with best practice. Cautionary note The Business review has been prepared solely to assist shareholders to assess the Board’s strategies and their potential to succeed. It should not be relied on by any other party, for other purposes. Forward-looking statements have been made by the Directors in good faith using information available up until the date that they approved the Report. Forward-looking statements should be regarded with caution because of the inherent uncertainties in economic trends and business risks. Halma p.l.c. Annual Report and Accounts 2011 48 Directors’ Report Governance Name: Geoff Unwin Title: Chairman Name: Andrew Williams Title: Chief Executive Name: Kevin Thompson Title: Finance Director Appointment: July 2003 Chairman September 2002 Deputy Chairman Age: 68 Committees/Sub-sectors: Nomination (Chairman) and Remuneration Skills and experience: Geoff is Chairman of Taptu Limited, a Non-voting Board Director of Capgemini Group, a member of the Advisory Board of Palamon Capital Partners and also chairs one of their investments, Retail Decisions Limited. Previously he was Chief Executive of Cap Gemini Ernst & Young until 2002, Chairman of United Business Media plc from 2002 to 2007, Alliance Medical Group until December 2010 and Liberata plc from 2003 to 2011. Appointment: July 2004 (Board) April 2002 (Executive Board) Age: 44 Committees/Sub-sectors: Nomination Skills and experience: Andrew was appointed Chief Executive of Halma p.l.c. in February 2005. He became a member of the Halma Executive Board in 2002 as Divisional Chief Executive of the Optics and Water Instrumentation Division and was promoted to a Director of the Halma p.l.c. Board in 2004. He joined Halma in 1994 as Manufacturing Director of Reten Acoustics (now HWM-Water) and became Managing Director of that company in 1997. Andrew is a Chartered Engineer and a production engineering graduate of Birmingham University. Appointment: April 1998 (Board) January 1995 (Executive Board) Age: 51 Skills and experience: Kevin is Finance Director of Halma. In 1995 he joined the Halma Executive Board as Finance Director, in 1997 became Group Finance Director and in 1998 was appointed to the Halma p.l.c. Board. He joined Halma in 1987 as Group Financial Controller and qualiﬁed as a Chartered Accountant with Price Waterhouse. Kevin is an economics and accounting graduate of Bristol University. Name: Jane Aikman Name: Norman Blackwell Name: Steve Marshall Title: Non-executive Director Appointment: August 2007 Age: 45 Committees/Sub-sectors: Audit (Chairman) Skills and experience: Jane was appointed a non executive Director of Halma in August 2007. She is Finance Director of Inﬁnis Limited. Jane qualiﬁed as a Chartered Accountant with Ernst & Young and has a degree in civil engineering from Birmingham University. Previously Jane was ﬁnance director of both Wilson Bowden Plc and Pressac plc. She spent three years as an internal audit manager with GEC Alsthom and ﬁve years in East Asia with Asia Pulp and Paper Co Limited. Title: Non-executive Director Appointment: July 2010 Age: 58 Committees/Sub-sectors: Remuneration and Audit Skills and experience: Norman was appointed a non-executive Director of Halma in July 2010. He is non-executive Chairman of Interserve Plc, Senior Independent Director at Standard Life Plc and a non-executive director of Ofcom, the communications regulator. He is also a non-executive Commissioner of Postcomm. His past business roles have included Senior Independent Director at SEGRO plc, Director of Group Development at NatWest Group and Partner at McKinsey & Company. He served as Head of the Prime Minister’s Policy Unit from 1995 to 1997 and was subsequently Chairman of the Independent Centre for Policy Studies from 2000 to 2009 where he remains a board member. He was created a Life Peer in 1997. Title: Non-executive Director Appointment: July 2010 Age: 53 Committees/Sub-sectors: Nomination, Remuneration and Audit Skills and experience: Steve was appointed a non-executive Director of Halma in July 2010. He is non-executive Chairman of Balfour Beatty plc. He is a former chairman of Delta plc, Queens’ Moat Houses plc and Torex Retail plc as well as a former non-executive director at Southern Water Services Limited. He was Group Chief Executive of Railtrack Group plc and prior to that Thorn plc, having also served as Finance Director at each company. His earlier career included a wide range of corporate and operational roles at Grand Metropolitan plc, Burton Group, Black & Decker and BOC Group. He is a fellow of the Chartered Institute of Management Accountants. Halma p.l.c. Annual Report and Accounts 2011 49 Name: Neil Quinn Name: Adam Meyers Title: Chief Executive, Safety Sensors Division Appointment: April 1998 (Board) April 1995 (Executive Board) Age: 61 Committees/Sub-sectors: Bursting Disks, Gas Detection and Automatic Door Sensors Skills and experience: Neil is Chief Executive of the Safety Sensors Division. He was appointed to the Halma Executive Board in 1995 and to the Halma p.l.c. Board in 1998. He joined Halma as Sales Director of Apollo Fire Detectors in 1987, becoming Managing Director in 1992. Neil has a material sciences degree from Shefﬁeld University. Title: Chief Executive, Health Optics Division Appointment: April 2008 (Board) April 2003 (Executive Board) Age: 49 Committees/Sub-sectors: Health Optics Skills and experience: Adam is Chief Executive of the Health Optics Division. He was promoted to a Director of Halma’s p.l.c. Board in April 2008. He became a member of the Halma Executive Board in 2003 as Divisional Chief Executive. He joined Halma in 1996 as President of Bio-Chem Valve. Adam is a systems engineering graduate of the University of Pennsylvania and gained his MBA from Harvard Business School. Name: Stephen Pettit Name: Richard Stone Title: Non-executive Director Appointment: September 2003 Age: 60 Committees/Sub-sectors: Nomination, Remuneration and Audit Skills and experience: Stephen was appointed a non-executive Director of Halma in September 2003. He is a non-executive director of National Grid plc and BT Group plc – Equality of Access Board. Stephen is an Economics and Politics graduate of Cardiff University, has an MSc from London School of Economics and an MBA from INSEAD. Previously Stephen was non-executive Chairman of ROK plc, an executive director with Cable & Wireless PLC and a divisional chief executive with BP PLC. Title: Non-executive Director Appointment: January 2001 Age: 68 Committees/Sub-sectors: Nomination, Remuneration (Chairman) and Audit Skills and experience: Richard is the Senior Independent Director. He is Chairman of Candover Investments plc, a non-executive director of Gartmore Global Trust p.l.c., Trust Union Finance (1991) plc, Engandscot Limited and TR Property Investment Trust plc. Previously Richard was Chairman of Drambuie Limited, a member of the Global Board of PricewaterhouseCoopers and Chairman of Coopers & Lybrand. Name: Carol Chesney Title: Company Secretary Appointment: April 1998 Age: 48 Skills and experience: Carol was appointed Company Secretary of Halma p.l.c. in 1998. She spent three years with English China Clays p.l.c. before joining Halma in 1995 as Group Finance Manager. She is a maths graduate of Randolph-Macon Woman’s College, Virginia and qualiﬁed as a Chartered Accountant with Arthur Andersen. Halma p.l.c. Annual Report and Accounts 2011 50 Directors’ Report Governance Board of Directors and Executives continued Name: John Campbell Name: Charles Dubois Name: Mark Lavelle Name: Rob Randelman Title: Chief Executive, Elevator Safety Division Appointment: April 1998 (Executive Board) Age: 52 Committees/Sub-sectors: Elevator Safety Skills and experience: John is Chief Executive of the Elevator Safety Division. He previously led the successful disposal of the Group’s resistor businesses. He joined the Halma Executive Board in 1998 and has also operated Halma businesses in the Safety Interlock, Bursting Disk and Automatic Door Sensor areas. He joined Halma in 1995 as President of IPC Resistors and is an electrical engineering graduate of the University of Toronto. Title: Chief Executive, Fluid Technology Division Appointment: April 2008 (Executive Board) Age: 45 Committees/Sub-sectors: Fluid Technology Skills and experience: Charles is Chief Executive of the Fluid Technology Division. He was appointed to the Executive Board in April 2008. He was previously President of Diba Industries having joined the Group in 1999 as Vice President of Perma Pure LLC. He holds a Bachelor’s degree in physics from the College of the Holy Cross and earned his MBA from the F.W. Olin School of Business at Babson College. Title: Chief Executive, Process Safety and Asset Monitoring Division Appointment: April 2007 (Executive Board) Age: 52 Committees/Sub-sectors: Safety Interlocks and Asset Monitoring Skills and experience: Mark is Chief Executive of the Process Safety and Asset Monitoring Division. He joined Keeler in November 2001 as Managing Director and was promoted to Divisional Chief Executive and the Executive Board in 2007. Mark has a chemistry degree from Cambridge University and an MBA from INSEAD. Title: Chief Executive, Photonics Division Appointment: April 2011 (Executive Board) Age: 51 Committees/Sub-sectors: Photonics Skills and experience: Rob is Chief Executive of the Photonics Division. He became a member of the Halma Executive Board in 2011 as Divisional Chief Executive. He was previously President of Ocean Optics having joined the group in 2006 as Vice President of Sales at Ocean Optics. Rob is a Chemistry and Physics graduate of Ursinus College, and gained his MSE and PhD in Chemical Engineering from Lehigh University. Name: Allan Stamper Name: Nigel Trodd Name: Martin Zhang Title: Chief Executive, Water Division Appointment: October 2007 (Executive Board) Age: 56 Committees/Sub-sectors: Water Management and Water – UV Skills and experience: Allan is Divisional Chief Executive of the Water Division. He was appointed to the Executive Board in October 2007. He joined Halma in 2002 as Managing Director of Crowcon Detection Instruments. Allan is an engineering graduate of both Loughborough University (BSc) and Imperial College (MSc) and has an MBA from Cranﬁeld. Title: Chief Executive, Fire and Security Division Appointment: July 2003 (Executive Board) Age: 53 Committees/Sub-sectors: Fire Detection and Security Sensors Skills and experience: Nigel is Chief Executive of the Fire and Security Division. He joined Halma in July 2003 as Chief Executive of Process Safety Division and a member of the Executive Board. Nigel is a business studies graduate of Thames Valley University and is a member of the Chartered Institute of Marketing. Title: Director – Halma China Appointment: February 2008 (Executive Board) Age: 44 Committees/Sub-sectors: Halma China Skills and experience: Martin was appointed as Adviser to the Halma Executive Board in February 2008. Martin joined the Group in June 2006 as Director of Halma China and successfully established Halma China ofﬁces in Beijing and Shanghai. Martin holds a Bachelor’s degree in Chemical Engineering from Chengdu University of Science and Technology and he also studied for his Executive MBA at University of Texas at Arlington (Tongji University Shanghai). Corporate Governance Halma p.l.c. Annual Report and Accounts 2011 51 Board committees Our committees are a valuable part of the Company’s corporate governance structure. The workload of the committees is far more than the table of scheduled meetings would indicate as ad hoc meetings and communications between meetings frequently require considerable amounts of time. Our appointment of two non-executive Directors mid-year enabled us to review the committee allocations during the year to ensure their composition matched the resources available. Board performance The Board evaluates its performance and that of the Remuneration, Audit and Nomination Committees at least annually with each Committee also evaluating its own performance. Each year, we consult the Board to determine whether an external facilitator would enhance our process. To date, we have concluded that the current, open climate that the Board enjoys ensures a full and frank discussion of all matters, so an external facilitator is not necessary. However the Board feels that it would be worthwhile to engage an external facilitator periodically and plans to do so during 2011/12. For 2010/11 the evaluation commenced with an updated self-assessment questionnaire, the results of which were compiled by the Company Secretary and discussed by the Board at the February 2011 Board and Committee meetings. The Board also met in February 2011, separate from any scheduled meeting, for a general discussion on Board effectiveness followed by a meeting of the executive Directors with the Chairman, the executive Directors with the Senior Independent Director, a meeting of the Chairman and non-executive Directors, and then a meeting of the non-executive Directors without the Chairman present. The outcomes of these meetings were then fed back to individuals by the Chairman, Senior Independent Director or Chief Executive, as appropriate. Overall, our process conﬁrms that the blend of behaviours and skills around the Halma Board table are well suited to the task and consistent with Group values. With a Board that is free to openly express concerns comes more considered outcomes emphasising collective responsibility, transparency, clarity and sustainable conduct. Shareholder communication I would like to encourage all shareholders to ﬁnd the time to attend our AGM on 28 July 2011. It is an excellent opportunity to meet the Board, the Executive Board and a selection of the CEOs from our operating companies. Geoff Unwin Chairman 21 June 2011 Geoff Unwin Chairman Corporate governance is about behaviour and this section of the report deals with how the Board and its committees discharge their duties and how we apply the principles of good governance in the Combined Code on Corporate Governance which is appended to the Listing Rules of the Financial Services Authority and for which the Board is accountable to shareholders. Governance is complex, so the Board is committed to the shared endeavour of maintaining high standards of corporate governance to ensure the Board sends consistent messages on values and behaviours. The policy of the Board is to manage the affairs of the Company in accordance with the principles of corporate governance contained in the Combined Code not by merely following regimented rules, but by the promotion of wide discussion on topics to which Board members properly contribute, demonstrating mutual engagement amongst the participants. I continue to be pleased with the progress Halma has made to ensure best practice is maintained and we continually seek to improve our practices for the beneﬁt of our shareholders. Succession planning I have always maintained that a key part of my role involves ensuring that the right people are doing the right jobs within the Group and that there is a sufﬁcient cadre of individuals being nurtured throughout the Group to enable effective succession planning. The additional emphasis placed on our succession planning practices over the past year has demonstrated the importance we place on developing talent in house, for example, Rob Randelman’s promotion to the Executive Board in April 2011. Reviews of management capabilities and potential are performed on a routine basis and I am satisﬁed that sufﬁcient resource within the Group exists and continues to be developed through programmes such as the Halma Executive Development Programme which itself evolves to meet the changing needs of the Group. Where a need for improvement to management resources is identiﬁed, the necessary attention is provided to ensure full strength is attained as soon as practicable. Board appointments The Board has been strengthened during the year by the appointment of both Lord Blackwell and Steven Marshall. These appointments have resulted in the Company’s full compliance with the principles of the Combined Code; a position which we plan to continue aided by the recruitment of an additional non-executive Director due to Richard Stone’s upcoming retirement. Halma p.l.c. Annual Report and Accounts 2011 52 Directors’ Report Governance Corporate Governance continued Compliance with the Code of best practice Since 29 July 2010 when Lord Blackwell and Steven Marshall were appointed, the Company complied with the Code provisions set out in Section 1 of the 2008 FRC Combined Code. Prior to that date the Company did not comply with provision A.3.2 which involves the composition of the Board and the number of members who are independent non-executive Directors. The Board recently determined its ideal composition as a Chairman, ﬁve independent non-executive Directors and four executive Directors. The Board adjudged this composition as an appropriate structure for the Company providing valuable direct knowledge of operations and effective challenge surrounding the issues facing the Group. With Richard Stone’s upcoming retirement, the Board will appoint a further non-executive Director, placing an emphasis on improving its diversity. Application of the principles of good governance The Company has applied the principles set out in section 1 of the Code, including both the Main Principles and supporting principles, by complying with the Code as reported above. The Group is controlled and directed by a Board consisting of a Chairman, four executive Directors and ﬁve other non-executive Directors. Their biographies appear on page 48. The Board considers the Chairman and each of the non-executive Directors to be independent. In assessing independence, the Board considers that the Chairman and non-executive Directors are independent of management and free from business and other relationships which could interfere with the exercise of independent judgment now and in the future. The Board believes that any shareholdings of the Chairman and non-executive Directors serve to align their interests with those of all shareholders. Richard Stone is acknowledged as the Senior Independent Director and, upon his retirement after the AGM, will be succeeded in this role by Stephen Pettit. Upon appointment and at regular intervals, all Directors are offered appropriate training. Under the Company’s Article’s, each Director is subject to re-election at least every three years however, commencing this year, the Board is adopting annual re-election of Directors. The Board conﬁrms that each Director standing for re-election continues to be effective and demonstrates commitment to their roles. Richard Stone is not standing for re-election as he is retiring after the Annual General Meeting. The Directors retain responsibility for the formulation of corporate strategy, investment decisions, and treasury and risk management policies. There is a formal schedule of matters reserved for the Board’s decision and the Board meets at least six times each year with further ad hoc meetings as required. Directors are issued an agenda and comprehensive board papers in the week preceding each Board meeting. All Directors have access to the advice and services of the Company Secretary as well as there being an agreed procedure for obtaining independent professional advice. Engagement with management The Directors have a programmed schedule of meetings and visits with the Executive Board, Group companies and Development Programmes to ensure that they are able to engage with management and employees at all levels. Such contact, especially between the non-executive Directors and Group employees, is where much value is added and supports the messages from the Executive team. Committees of the Board Halma has six committees of the Board: the Remuneration Committee, the Audit Committee, the Nomination Committee, the Share Plans Committee, the Bank Guarantees and Facilities Committee and the Acquisitions and Disposals Committee. Each of these committees has terms of reference approved by the Board, copies of which are available on the website or on request from the Company Secretary. Board meeting attendance During the year attendance by Directors at Board meetings was as follows: Geoff Unwin Andrew Williams Kevin Thompson Neil Quinn Richard Stone Stephen Pettit Jane Aikman Adam Meyers Norman Blackwell Steve Marshall 6 of 6 6 of 6 6 of 6 6 of 6 6 of 6 6 of 6 5 of 6 6 of 6 3 of 3 3 of 3 Training During the year the Board received training and brieﬁng updates on changes in corporate governance, bribery and corruption legislation, health and safety matters and other relevant legislative changes. Newly appointed non-executive Directors followed an induction programme which included scheduled trips to companies in each of the 12 sub-sectors to be achieved over a 3-year period. Halma p.l.c. Annual Report and Accounts 2011 53 The processes which the Board has applied in reviewing the effectiveness of the Group’s system of internal control are summarised below. – Operating companies carry out a detailed, relevant risk assessment each year and identify mitigating actions in place or proposed for each signiﬁcant risk. This risk assessment process was renewed and enhanced in line with best practice in 2010/11. A risk register is compiled from this information, against which action is monitored through to resolution. Group management also compile a summary of signiﬁcant Group risks, documenting existing or planned actions to mitigate, manage or avoid the risk. – Each month the board of each operating company meets, discusses and reports on its operating performance, its opportunities, the risks facing it and the resultant actions. The relevant Divisional Chief Executive chairs this meeting. Divisional Chief Executives meet regularly with the Chief Executive and Finance Director and report progress to the Executive Board. – ‘Warning signs’ are reported to Group and divisional management. These are designed to provide an early warning of potential risks and to direct appropriate action where necessary. – The Chief Executive submits a report to each Halma p.l.c. Board meeting which includes ﬁnancial information, the main features of Group operations and an analysis of the signiﬁcant risks facing the Group at that time. – Cyclical and risk-based internal control visits are carried out by internal audit personnel or senior ﬁnance staff resulting in actions fed back to each company and followed up by Divisional Finance Directors and Divisional Chief Executives. Visit reports are coded in terms of risk and a summary of all such visits reported to the Audit Committee regularly with any signiﬁcant control failings being reported directly to the Audit Committee; senior ﬁnance staff also conduct ﬁnancial reviews at each operating company prior to publication of half-year and year- end ﬁgures. A programme of IT audits is also carried out and reported on. – The Chief Executive and Finance Director report to the Audit Committee on all aspects of internal control for its review. The Board receives the papers and minutes of the Audit Committee meetings and uses these as a basis for its annual review of internal control. Internal control The Board has overall responsibility to the shareholders for the Group’s system of internal control, and responsibility for reviewing its effectiveness has been delegated to the Audit Committee. Whilst not providing absolute assurance against material misstatements or loss, this system is designed to identify and manage those risks that could adversely impact the achievement of the Group’s objectives. The principal risks are detailed on pages 42 and 43. Following publication by the Turnbull Committee of the guidance for directors on internal control (‘Internal Control: Guidance for Directors on the Combined Code’), the Board conﬁrms that there is an ongoing process for identifying, evaluating and managing the signiﬁcant risks faced by the Group, that this has been in place for the year under review and up to the date of approval of the Annual report and accounts. This process has been reviewed by the Board and the Group accords with the Turnbull guidance. The Group’s external auditors, Deloitte LLP, have audited the ﬁnancial statements and have reviewed the internal ﬁnancial control systems to the extent they consider necessary to support their audit report. The Board meets regularly throughout the year and has adopted a schedule of matters which are required to be brought to it for decision. This procedure is intended to ensure that the Directors maintain full and effective control over all signiﬁcant strategic, ﬁnancial and organisational issues. Group risk is mitigated by means of an operating structure which spreads the Group’s activities across a number of autonomous subsidiary companies. Each of these companies operates with a high-quality board of directors including a ﬁnance executive. Group companies operate under a system of controls which includes but is not limited to: – a deﬁned organisational structure with an appropriate delegation of authority to operational management which ensures appropriate segregation of key duties; – the identiﬁcation and appraisal of risks both formally, through the annual process of preparing business plans and budgets, through an annual detailed risk assessment carried out at local level and informally through close monitoring of operations; – a comprehensive ﬁnancial reporting system, further enhanced during the last ﬁnancial year, within which actual and forecast results are compared with approved budgets and the previous year’s ﬁgures on a monthly basis and reviewed at both local and Group level; – an investment evaluation procedure to ensure an appropriate level of approval for all capital expenditure and other capitalised costs; – self-certiﬁcation by operating company management of compliance and control issues; and – a prescribed robust structure under which it is appropriate to adopt means of electronic communication and to conduct e-commerce. Halma p.l.c. Annual Report and Accounts 2011 54 Directors’ Report Governance Corporate Governance continued Investor relations In regular meetings with shareholders and analysts the Chief Executive and Finance Director communicate the Group’s strategy and results, disclosing such information as is permitted within the guidelines of the Listing Rules. Such meetings ensure that institutional shareholders representing over 50% of the Company’s issued share capital meet or hold discussions with the Company on a regular basis. Major shareholders are also offered the opportunity to meet the Chairman and/or Senior Independent Director. All shareholders are encouraged to attend the annual general meeting, and major shareholders are also invited to brieﬁngs following the half-year and annual results. The content of presentations to shareholders and analysts at results announcements and all announcements are available on the Group website, www.halma.com. The Group website also contains electronic versions of the latest Annual Report and Accounts, Half-Year Reports, biographical information on key Directors and Ofﬁcers, share price information, and full subsidiary company contact details as well as hotlinks to their own websites. The website also features the facility to request e-mail alerts relating to announcements made by the Group and contains information in Chinese, French, German and Spanish as well as English. The Financial calendar is set out on page 128. Auditor independence The Audit Committee has responsibility for reviewing auditor independence and objectivity annually. During 2003/04, the Committee set down the ‘Policy on Auditor Independence and Services provided by the External Auditor’. This policy states that the Group will only use the appointed external auditor for non-audit services in cases where these services do not conﬂict with the auditor’s independence. The policy also sets a fee level per project of £100,000 above which non-audit services are subject to a tendering process. The above fee levels for non-audit services regarding the external auditors are also subject to an annual cap equal to the audit fee. During the year, actions to strengthen the control environment continue to be taken centrally by Group management, principally in the area of health and safety and bribery and corruption. The duties and responsibilities of subsidiary management are continually refreshed as well as documented in a manual circulated to all subsidiary managing directors. The dedicated resources established to identify and investigate potential acquisitions and to ensure a rapid and successful integration following acquisition remain in place, and the scope of the Group’s IT policies and the programme of compliance audits are regularly reviewed to ensure they are sufﬁcient to address current risks. During the year we refreshed our processes to ensure that appropriate tax accounting arrangements are maintained in particular to enable continued compliance with local tax requirements. As noted above, a programme of internal control visits is conducted. The internal audit function has independently operated since 2004, reporting on the outcome of these visits to the Audit Committee. In 2008/09, a dedicated Internal Audit manager was added to support the function and during 2010/11 an internal auditor based in China was recruited to the function. Each year we implement further improvements to our Internal Audit activities as the result of benchmarking activities and continue to target further revisions for the coming year to enhance our processes. Going concern The Group’s business activities, together with the main trends and factors likely to affect its future development, performance and position, and the ﬁnancial position of the Group, its cash ﬂows, liquidity position and borrowing facilities, are set out in the Business Review. In addition, note 26 to the ﬁnancial statements includes the Group’s objectives, policies and processes for managing its capital, its ﬁnancial risk management objectives, details of its ﬁnancial instruments and hedging activities, and its exposures to currency and liquidity risks. The Group has considerable ﬁnancial resources (including a £165m ﬁve-year revolving credit facility) together with contracts with a diverse range of customers and suppliers across different geographic areas and industries. No one customer accounts for more than 3% of Group turnover. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. After making enquiries and after conducting a formal review of the Group’s ﬁnancial resources, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Nomination Committee Report Halma p.l.c. Annual Report and Accounts 2011 55 Governance The Nomination Committee was in place throughout the ﬁnancial year. It is chaired by the Chairman of the Company who was deemed to be independent upon appointment to the Board. Three of the ﬁve members of the Committee are independent non-executive Directors in accordance with provision A.3.1 of the Combined Code. During the year attendance by Committee members at meetings was as follows: Name Geoff Unwin (Chairman) Andrew Williams Richard Stone Stephen Pettit Steve Marshall Jane Aikman Attendance 2 of 2 2 of 2 2 of 2 2 of 2 1 of 1 1 of 1 Activities The Committee is responsible for nominating appropriate executive and non-executive candidates for appointment to the Board. During the past year, the Committee has been occupied with succession planning discussions and the appointment of two non-executive Directors. When the necessity to appoint a Director is identiﬁed, a candidate proﬁle is developed indicating the ideal skills, knowledge and experience required taking into account the Board’s existing composition. External search consultancies are retained when recruiting non-executive Directors and are used to evaluate internal and external candidates for succession planning. The Committee meets at least annually and more frequently during times that a search is being conducted. The coming year will involve the Committee in identifying a non-executive director candidate bringing additional diversity to the Board. As noted on page 51 the process of appointments to the Board is paramount in ensuring the Company’s performance is maintained and continually improved upon. The Committee is committed to identifying the right candidates to take Halma forward. On behalf of the Nomination Committee Geoff Unwin Chairman 21 June 2011 Geoff Unwin Chairman Members – Geoff Unwin (Chairman) – Andrew Williams – Richard Stone – Stephen Pettit – Steve Marshall (from 1 August 2010) – Jane Aikman (to 1 August 2010) The Nomination Committee is appointed by the Board from the non-executive Directors of the Group and the Chief Executive. The Nomination Committee’s terms of reference include all matters indicated by the Combined Code. The terms of reference are considered annually by the Nomination Committee and are then referred to the Board for approval. Responsibilities – regularly reviewing the structure, size and composition (including the skills, knowledge and experience) required of the Board compared to its current position and making recommendations to the Board with regard to any changes; – giving full consideration to succession planning for directors and other senior executives in the course of its work, taking into account the challenges and opportunities facing the Company, and what skills and expertise are therefore needed on the Board in the future; and – being responsible for identifying and nominating, for the approval of the Board, candidates to ﬁll Board vacancies as and when they arise. The full terms of reference, which remain unchanged from the previous year, can be found on the Company’s website or can be obtained from the Company Secretary. Halma p.l.c. Annual Report and Accounts 2011 56 Directors’ Report Governance Audit Committee Report – reviewing and monitoring the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration the periodic rotation of audit personnel and relevant UK professional and regulatory requirements; and – developing and implementing a policy on the engagement of the external auditors to supply non-audit services, taking into account relevant guidance regarding the provision of non-audit services by the external audit ﬁrm. The full terms of reference, which were subject to minor revision in February 2011 can be found on the Company’s website or can be obtained from the Company Secretary. Governance The Audit Committee was in place throughout the ﬁnancial year with Jane Aikman as the chair. All ﬁve members are independent non-executive Directors in accordance with provision A.3.1 of the Combined Code. The Chairman, Chief Executive, Finance Director and representatives from the Auditors attend Committee meetings by invitation in order to provide appropriate advice. The Committee routinely meets the Auditors without the involvement of the executive Directors; the Committee meets at least three times per year. During the year attendance by Committee members at meetings was as follows: Name Jane Aikman (Chairman) Richard Stone Stephen Pettit Norman Blackwell Steve Marshall Attendance 3 of 3 3 of 3 3 of 3 2 of 2 2 of 2 The Board has designated Jane Aikman as the member of the Audit Committee with recent and relevant ﬁnancial experience. Her background is as a chartered accountant and ﬁnance director with listed company experience. Training The external auditors, Deloitte LLP, conducted a training exercise for the Committee, the Chairman, the Chief Executive and the Finance Director as part of its refreshing of the audit process. The audit partner and audit manager led the participants in an interactive discussion on relevant ﬁnancial reporting matters. Jane Aikman Chairman Members – Jane Aikman (Chairman) – Stephen Pettit – Richard Stone – Norman Blackwell (from 1 August 2010) – Steve Marshall (from 1 August 2010) The Audit Committee is appointed by the Board from the non- executive Directors of the Group. The Audit Committee’s terms of reference include all matters indicated by Disclosure Transparency Rule 7.1 and the Combined Code. The terms of reference are considered annually by the Audit Committee and are then referred to the Board for approval. Responsibilities The Audit Committee assists the Board in fulﬁlling its responsibilities in respect of: – monitoring the integrity of the ﬁnancial statements of the Group and any formal announcements relating to the Group’s ﬁnancial performance and reviewing signiﬁcant ﬁnancial reporting judgments contained therein; – oversight of risk management including the review of the Group’s ﬁnancial, operational and compliance internal controls as well as whistleblowing procedures; – monitoring and reviewing the effectiveness of the Group’s internal audit function; – making recommendations to the Board, for a resolution to be put to the shareholders for their approval in general meeting, on the appointment of the external auditors and the approval of the remuneration and terms of engagement of the external auditors; Halma p.l.c. Annual Report and Accounts 2011 57 Activities The Committee not only reviews the ﬁnancial reporting of the Company, but spends a signiﬁcant amount of its time reviewing the effectiveness of the Group’s internal control process. Combined with the Committee’s review of the internal and external audit functions, it is able to obtain sufﬁcient information to discharge its responsibilities. More speciﬁcally, the Committee: – reviewed the 2 April 2011 report and ﬁnancial statements, the 2 October 2010 half-yearly report and the Interim Management Statements issued in July 2010 and February 2011. As part of these reviews the Committee received a report from the external auditors on their audit of the Annual Report and Accounts; – considered the quality of the reports and the output from the Group-wide process used to identify, evaluate and mitigate risks; – reviewed the effectiveness of the Group’s internal controls and disclosures made in the annual report and ﬁnancial statements on this matter; – reviewed and agreed the scope of the audit work to be undertaken by the auditors; – evaluated the independence and objectivity of the external auditors; – agreed the terms of engagement and fees to be paid to the external auditors for their audit of the 2 April 2011 ﬁnancial statements; – reviewed its own effectiveness; – evaluated the performance of the Internal Audit function; – agreed a programme of work for the Company’s Internal Audit function; and – received reports from the Internal Audit Coordinator on the work undertaken by Internal Audit and management responses to proposals made in the audit reports issued by the function during the year. The Group’s policy on external audit sets out the categories of non-audit services which the external auditors will and will not be allowed to provide to the Group, subject to de minimis levels. The audit fees payable to Deloitte LLP during 2010/11 were £653,000 (2010: £608,000) and non-audit service fees were £251,000 (2010: £263,000). The principal non-audit service is tax related. The Committee conﬁrms that Deloitte LLP remains best placed to advise the Group on matters related to compliance and the structure of the Group. The independent auditors, Deloitte LLP, were appointed in 2003. The Committee has considered the risk of the withdrawal of their independent auditors from the market and has concluded that the risk is small. During the year a review of their independence was undertaken, and the Committee concluded that the independence criteria under the relevant standards continued to be met. As part of their review, the Committee ensured that adequate procedures were in place to safeguard the auditors’ objectivity and independence. At the year-end the auditors formally conﬁrmed that their independence and objectivity has been maintained. In addition, they are required to rotate the audit partner responsible for the Group audit every ﬁve years. In 2010/11 the Audit Committee considered whether to fully tender for the audit work in 2011 by conducting a rigorous joint re-evaluation of the audit service provided by Deloitte LLP. Following a change in audit partner and a thorough review of the audit process, from both Deloitte’s and Halma’s perspective, the Audit Committee agreed that a full tender was not required at this time. There are no contractual obligations that acted to restrict the Committee’s choice of auditor. Accordingly, the Committee unanimously recommended to the Board that a resolution for the reappointment of Deloitte LLP as the Company’s independent auditors be proposed to shareholders at the AGM in July 2011. The Group’s whistleblowing policy contains arrangements for the Group Internal Audit Coordinator to receive, in conﬁdence, complaints on accounting, risk issues, internal controls, auditing issues and related matters for reporting to the Audit Committee as appropriate. On behalf of the Audit Committee Jane Aikman Chairman 21 June 2011 Halma p.l.c. Annual Report and Accounts 2011 58 Directors’ Report Governance Remuneration Report None of the Committee has any personal ﬁnancial interest (other than as shareholders), conﬂicts of interests arising from cross- directorships or day-to-day involvement in running the business. The Committee makes recommendations to the Board. No Director plays a part in any discussion about his or her own remuneration. In determining the Directors’ remuneration for the year, the Committee consults Andrew Williams (Chief Executive) on his proposals and relates the proposals to remuneration packages at comparable listed companies. The Committee consults Towers Watson regarding the structuring of executive remuneration packages and reviews other external published material. Independent pension advice is provided to the Company by Lane, Clark & Peacock LLP. During the year attendance by Committee members at meetings was as follows: Name Richard Stone (Chairman) Geoff Unwin Stephen Pettit Norman Blackwell Steve Marshall Jane Aikman Attendance 5 of 5 5 of 5 5 of 5 2 of 2 2 of 2 2 of 2 Activities During 2010/11, the Committee continued to review the Company’s remuneration strategy such that executives remain appropriately incentivised to meet the Group’s objectives in the prevailing economic conditions. That strategy relies upon three key components which produce an appropriate balance between ﬁxed and variable pay over the short and long term: – setting salaries close to median levels; – a performance related bonus scheme, as described below, tying bonuses to a weighted average increase in economic value added; and – a long-term equity-based incentive with entry and exit performance hurdles. Accordingly the Committee agreed that: – executive base salaries for 2010/11 should be increased by an average of 3.5%; – executive base salaries for 2011/12 should be increased by an average of 5%; – the annual targets on the granting of performance shares were set appropriately; and – the award of bonuses in respect of 2010/11 should only be based on objective measures and be related to the Company’s performance. The Committee has reviewed the Remuneration Report for 2010/11 and the Company’s remuneration strategy, policy and details of executive remuneration follow. On behalf on the Remuneration Committee Richard Stone Chairman 21 June 2011 Richard Stone Chairman Members – Richard Stone (Chairman) – Geoff Unwin – Stephen Pettit – Norman Blackwell (from 1 August 2010) – Steve Marshall (from 1 August 2010) – Jane Aikman (to 1 August 2010) Remuneration Committee Report The Committee makes recommendations to the Board on the framework for executive Directors’ and senior executives’ remuneration based on proposals formulated by the Chief Executive. Responsibilities – determining and agreeing with the Board the policy and framework for the remuneration of the Chief Executive, the executive Directors, the Company Secretary and such other members of the executive management as it is designated to consider; – approving the design of, and determining targets for, any performance-related pay plans operated by the Company and agreeing the total annual payments made under such plans; – reviewing the design of all share incentive plans for approval by the Board and shareholders, and determining, each year, whether awards will be made, and if so, the overall amount of such awards, the individual awards to executive Directors and other senior executives and the performance targets to be set; and – determining the policy for, and scope of, pension arrangements for each executive Director and other senior executives. The Committee also monitors and considers, with the Chief Executive, the framework of remuneration for subsidiary chief executives and directors and ensures a consistent approach is applied. The full terms of reference, which were updated in February 2011, can be found on the Company’s website or can be obtained from the Company Secretary. Governance The Remuneration Committee, which meets at least twice per year, was in place throughout the ﬁnancial year. All members are independent in accordance with provision A.3.1 of the Combined Code. Halma p.l.c. Annual Report and Accounts 2011 59 Report on Remuneration Strategy and Policy Introduction This report has been prepared in accordance with Schedule 8 to the Accounting Regulations under the Companies Act 2006. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles relating to directors’ remuneration in the Combined Code. As required by the Act, a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the ﬁnancial statements will be approved. The Act requires the auditors to report to the Company’s members on certain parts of the Directors’ Remuneration Report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Accounting Regulations. The report has therefore been divided into separate sections for audited and unaudited information. Unaudited information Remuneration policy Executive remuneration packages are designed to attract, retain and motivate executives of the high calibre needed to manage the Group successfully and align their interests with those of the shareholders by rewarding them for enhancing value to shareholders. The performance measurement of the executive Directors and key members of senior management and the determination of their annual remuneration package are undertaken by the Committee. There are four main elements of the remuneration package for executive Directors and senior management: Element Salary Purpose To provide competitive ﬁxed remuneration that will attract and retain key employees and reﬂect their experience and position in the Group. Annual bonus Incentivises the achievement of an objective annual target which supports the short- to medium-term strategy of the Group. Equity incentive Pension Performance share plan incentivises executives to achieve superior returns to shareholders over a three-year period. Retain key individuals and align interests with shareholders. To provide competitive post-retirement beneﬁts. Operation Reviewed every 12 months. Benchmarked against appropriate median market comparators. Linked to individual performance and contribution. Maximum bonus potential is set at a market competitive level (100% of salary). Bonus is based on Economic Value Added. Paid in cash. Share awards are made annually to senior executives and are based on a combination of TSR (50%) and ROTIC (50%) targets over a three-year period. Maximum awards range from 100% to 140% of salary. Executives may participate in either a Group deﬁned beneﬁt pension plan, Group deﬁned contribution pension plan or the US 401k money purchase arrangement. Cash supplements in lieu of Company pension contributions are made to some individuals. The Company’s policy is that a substantial proportion of the remuneration of the executive Directors should be performance-related. As described below, executive Directors may earn annual bonus payments of up to 100% of their basic salary together with the beneﬁts of participation in share plans which are subject to a maximum value, in the year of grant, of 140% of basic salary. Each executive Director currently holds shares in the Company in excess of the guideline of one year’s salary. Split of package (expected) Split of package (2010/11) Salary (base) Pension (employer contributions)(cid:3) Annual incentive (expected)(cid:3) Equity incentive (expected value at grant)(cid:3) (cid:3) 39% 8% 24% 29% Salary (base) Pension (employer contributions)(cid:3) Annual incentive (paid)(cid:3) Equity incentive (vested)(cid:3) 31% 4% 30% 35% Halma p.l.c. Annual Report and Accounts 2011 60 Directors’ Report Governance Remuneration Report continued Basic salary An executive Director’s basic salary is reviewed by the Committee against the market, Company performance and future strategy prior to the beginning of each year and when an individual changes position or responsibility. The Chief Executive is responsible for assessing the performance of each senior executive taking account of the complexity of the operations under their control, their opportunities for advancement with the Group, their remuneration relative to other executives in the Group and their bonus earning potential. He then formulates a remuneration proposal for the Committee’s consideration. In deciding appropriate remuneration levels, the Committee also considers the Group as a whole and relies on objective external research which gives information on a comparator group of companies. Basic salaries are reviewed in January/February of each year with increases, if appropriate, taking effect from 1 April. Executive Directors’ contracts of service which include details of remuneration will be available for inspection at the Annual General Meeting. Annual bonus payments During the year the Committee carefully assessed existing incentive arrangements and determined that incentive levels are appropriately set. The Committee establishes the economic value added (EVA) objectives that must be met for each ﬁnancial year if a cash bonus is to be paid. In setting appropriate bonus parameters the Committee has determined that bonuses of approximately 60% of salary are payable on the achievement of targeted levels of growth. The maximum performance-related bonus that can be paid is 100% of basic annual salary. Executive Director bonus payments for 2011 were £1,127,000 versus £322,000 in the prior year reﬂecting the Group’s improved performance in terms of reported proﬁt and EVA. This performance-related bonus plan, which applies to executive Directors and Divisional Chief Executives, is reviewed annually by the Committee and approved by the Board. In the case of a Divisional Chief Executive a bonus is earned if the proﬁt of the Division for which he is responsible exceeds a target calculated from the proﬁts of the three preceding ﬁnancial years. The proﬁts calculated for this purpose regard each Division as a stand- alone group of companies charging it with the cost of capital it utilises including the cost of acquisitions. For the Chief Executive and Finance Director, bonuses are calculated as above but based on Group proﬁt exceeding a target calculated from the proﬁts for the three preceding ﬁnancial years after charging cost of capital, including the cost of acquisitions. Proﬁt for each year Minus a notional charge on working capital Minus a notional charge on cost of acquisitions Minus unrealised proﬁt in inventory Minus the resultant bonus itself (to make it self-ﬁnancing) Equals the Economic Value Added (EVA) for each year For 2010/11, a supplemental cash bonus of up to 20% of salary could be earned, subject to the 100% of salary cap for total bonus paid, dependent upon attainment of a Return on Capital Employed of 45% and operating cash generation over 100%. Transitional provisions exist for divisional restructuring to ensure Divisional Chief Executives remain appropriately incentivised. Subsidiary directors participate in bonus arrangements similar to those established for senior executives. Performance share plan (PSP) The Directors have long believed that share plans are an excellent way to align the interests of senior management with those of shareholders and that share plans provide excellent motivation. The Committee, recognising the need to assess and evaluate such incentives, adopted a performance share plan following shareholder approval at the 2005 annual general meeting; this Plan replaced the existing share option plans in respect of future share awards. The Committee has responsibility for supervising the Plan and the grants under its terms. The Committee believes that any incentive compensation awarded should be tied to the interests of the Company’s shareholders and that the principal measure of those interests is Total Shareholder Return. PSP vesting table % ROTIC (Return on Total Invested Capital)1 % Percentage of award which vests ROTIC (post-tax) TSR (percentile) <50% 0.0 16.7 33.3 50.0 50% 16.7 33.3 50.0 66.7 75% 50.0 66.7 83.3 100.0 100% 50.0 66.7 83.3 100.0 15 10 5 0 9.5% 11.0% 12.5% 14.0% 2007 2008 2009 2010 2011 Halma p.l.c. Annual Report and Accounts 2011 61 How the PSP works Performance criteria determine the amount to be granted and, after three years, the amount to vest as illustrated below: Stages Process Timeline Award Performance criteria determine the number of shares to be granted out of a Maximum Award level. Primary emphasis is placed upon the attainment of personal strategic objectives coupled with ﬁnancial and operational success. Criteria set one year prior to grant. PSP value Maximum Award. The assessment of the individual’s achievement of their objectives establishes the proportion of the Maximum Award that an individual is granted (the Actual Award in the table below). Assessment occurs immediately prior to grant. x % attainment of individual objectives. Vesting 50% of the amount granted is subject to TSR growth relative to the FTSE 250, excluding ﬁnancial companies, over the three-year vesting period. 50% of the amount granted is subject to ROTIC performance over each of the three years. Vesting conditions apply throughout the three-year vesting period. x % attainment of Group performance conditions. Awards vest on a sliding scale, as set out on page 60. Three years from grant or pro rata for good leavers. = Final shares vested. Vested awards are satisﬁed in shares with sufﬁcient shares being sold to meet tax and social costs owing, as directed, and the net balance of shares transferred to the individual. Awards lapse if they do not vest on the third anniversary of their award. Current vesting expectations for awards made in 2008, 2009 and 2010 range from 93% to 100%. Performance against objectives Chief Executive Finance Director Executive Directors Divisional Chief Executives Managing Directors and Divisional Finance Directors * Expressed as a percentage of 2010/11 base salary. Maximum award permitted 140% 140% 140% 100% 40% At individual % assessment level Actual award 2010/11 136% 131% 132% 85% 33% At 67% vesting expectation Estimate of vesting in 2013/14 91% 88% 89% 57% 22% Awards vest after three years on a sliding scale, as set out on page 60, subject to the Company’s relative TSR performance against the FTSE 250, excluding ﬁnancial companies, combined with a measure based upon an absolute ROTIC. The ﬁve-year graph below shows the Company’s total shareholder return performance over the ﬁve years to 2 April 2011 as compared to the FTSE 250 and the FTSE 350 Electronic & Electrical Equipment sector indices, the latter of which the Company has been a constituent since it was reclassiﬁed in June 2006. Over the period indicated, the Company’s total shareholder return was 224% compared to 136% for the FTSE 250 and 197% for the FTSE 350 Electronic & Electrical Equipment sector. At the commencement of the ﬁve-year period depicted in the graph, the Halma p.l.c. ordinary share price was 187.75p and the total of dividends paid in the year ended 1 April 2006 was 6.63p per share. The Halma p.l.c. ordinary share price at 2 April 2011 was 355p and the total of dividends paid in the year then ended was 8.73p per share. The Plan contains provisions permitting share option grants, restricted share awards and performance share awards. To date, the Committee has used the Plan only to award both approved and unapproved performance shares. Total Shareholder Return (three years) Total Shareholder Return (ﬁve years) 250 200 150 100 50 250 200 150 100 50 2007 2008 Halma FTSE 250(cid:3) FTSE 350 Electronic & Electrical Equipment(cid:3) 2009 (cid:3) 2010 2005 2006 2007 Halma FTSE 250(cid:3) FTSE 350 Electronic & Electrical Equipment(cid:3) 2008 (cid:3) 2009 2010 Halma p.l.c. Annual Report and Accounts 2011 62 Directors’ Report Governance Remuneration Report continued Share option plans The 1999 share option plan provided for the grant of two categories of option both of which are subject to performance criteria. The exercise criteria for this plan are noted in note 23 to the accounts. No further grants may be made from this plan which has been replaced by the performance share plan approved by shareholders at the 2005 annual general meeting. The granting of options was spread over the life of the plan. Dilution The total dilution effect under these various discretionary share plans is less than 5%. The Company does not operate any long-term incentive plans other than the share plans described above. No signiﬁcant amendments are proposed to be made to the terms and conditions of any entitlement of a Director to share options or performance share awards. Pension arrangements Except as noted below, the executive Directors participate in the appropriate section of the Halma Group Pension Plan. This section is a funded ﬁnal salary occupational pension plan registered with HM Revenue & Customs, which provides a maximum pension of two-thirds of ﬁnal pensionable salary after 25 or more years’ service at normal pension age (60). Up to 5 April 2006, ﬁnal pensionable salary was the greatest salary of the last three complete tax years immediately before retirement or leaving service. From 6 April 2006, ﬁnal pensionable salary is capped at 7.5% of the Lifetime Allowance equating to £135,000 for the year ended 2 April 2011. From 6 April 2011, ﬁnal pensionable salary is capped at £139,185 and will be increased annually thereafter by CPI. Bonuses and other ﬂuctuating emoluments and beneﬁts-in-kind are not pensionable nor subject to any pension accrued supplement. The Plan also provides for life cover of three times salary, pensions in the event of early retirement through ill health and dependants’ pensions of one-half of the member’s prospective pension. Early retirement pensions, currently possible from age 55 with the consent of the Company and the Trustees of the Plan, are subject to actuarial reduction. Pensions in payment increase by 3% per annum for service up to 5 April 1997, by price inﬂation (subject to a maximum of 5%) through to 31 March 2007 and 3% thereafter. Whilst pension beneﬁts are accruing, executive Directors receive pension supplements to compensate them for the fact that their pension accrual entitlement under the Halma Group Pension Plan deﬁned beneﬁt arrangements is limited by a pensionable salary cap introduced from 6 April 2006. The Company introduced a pensionable salary cap in order to address changes affecting the Plan made in the Pension Act 2006. Without the introduction of such a cap, there would, effectively, have been no beneﬁt limits. This could have resulted in beneﬁts in excess of prescribed levels with some individuals suffering penal rates of tax and potentially causing a limitation on the tax deductibility of employer contributions. The Company obtained external advice regarding the changes to the Plan and executive pension arrangements and required each affected executive to obtain independent advice prior to implementing the changes. These changes reduce the Plan’s future liabilities and their associated funding risk. Prior to receiving pension payments, to the extent that an executive’s current salary exceeds the Plan salary cap, the Company compensates him at an annual rate of 26% of the excess. In April 2006, Kevin Thompson chose to cease entirely future service accrual in the Halma Group Pension Plan in return for the pension supplement on his full salary. Beneﬁts-in-kind The executive Directors receive certain beneﬁts-in-kind, principally use of a car and private medical insurance. Directors’ contracts It is the Company’s policy that executive Directors should have contracts with an indeﬁnite term providing for a maximum of one year’s notice. The details of the Directors’ contracts are summarised in the table below: Andrew Williams Kevin Thompson Neil Quinn Adam Meyers Date of contract April 2003 April 2003 April 2003 July 2008 Notice period one year one year one year one year In the event of early termination, no predetermined compensation is provided for in the Directors’ contracts. Non-executive Directors Unless otherwise indicated, all non-executive Directors have a speciﬁc three-year term of engagement which may be renewed for further three-year terms if both the Director and the Board agree. Stephen Pettit, who is proposed for re-election had his terms of engagement extended for a further third three-year term in 2009 in contemplation of attaining six years of service in 2009. The remuneration of the Chairman and the non-executive Directors is determined by the Board based on independent surveys of fees paid to the Chairman and the non-executive Directors of similar companies. The Chairman receives a basic fee and the non-executive Directors receive a basic fee supplemented by additional fees for membership and/or chairmanship of the Audit, Remuneration and Nomination Committees. The contract in respect of Geoff Unwin’s services provides for termination, by either party, by giving not less than six months’ notice. Richard Stone, Stephen Pettit, Jane Aikman, Norman Blackwell and Steve Marshall have contracts in respect of their non-executive Director services which can be terminated, by either party, by giving not less than three months’ notice. The Board has accepted Richard Stone’s notice to retire after the AGM on 28 July 2011. The Chairman’s and the non-executive Directors’ fees were reviewed by the Board in April 2010 and July 2010, with increases taking effect from April 2010 and August 2010. Halma p.l.c. Annual Report and Accounts 2011 63 AUDITED INFORMATION Aggregate Directors’ remuneration The total amounts for Directors’ remuneration were as follows: Emoluments Pension supplements (including 401k company contributions) Gains on vesting of performance shares Gains on exercise of share options Directors’ remuneration Geoff Unwin Andrew Williams Kevin Thompson Neil Quinn Richard Stone Stephen Pettit Jane Aikman Adam Meyers** Norman Blackwell* Steve Marshall* Salaries and fees £000 145 414 267 214 52 42 43 232 27 28 1,464 Bonus £000 – 414 267 214 – – – 232 – – 1,127 Beneﬁts £000 – 25 14 16 – – – 3 – – 58 Pension supplement £000 – 73 69 – – – – – – – 142 * From appointment. ** Remunerated in US Dollars and translated at the prevailing average rate for the year. Directors’ interests The Directors who held ofﬁce at 2 April 2011 had the following interests in the ordinary shares of the Company: Geoff Unwin Andrew Williams Kevin Thompson Neil Quinn Richard Stone Stephen Pettit Jane Aikman Adam Meyers Norman Blackwell Steve Marshall 2011 £000 2,649 142 1,377 228 4,396 2011 Total £000 145 926 617 444 52 42 43 467 27 28 2,791 2010 £000 1,719 156 1,122 966 3,963 2010 Total £000 140 569 387 276 43 36 40 384 – – 1,875 Shares 02.04.11 68,250 364,885 279,553 219,571 20,000 2,000 2,000 182,929 2,000 2,000 Shares 03.04.10 68,250 328,028 241,775 178,689 20,000 2,000 2,000 125,131 – – There are no non-beneﬁcial interests of Directors. There were no changes in Directors’ interests from 2 April 2011 to 21 June 2011. Halma p.l.c. Annual Report and Accounts 2011 64 Directors’ Report Governance Remuneration Report continued Performance share plan The movements in performance share awards during the ﬁnancial year were as follows: Andrew Williams Kevin Thompson Neil Quinn Adam Meyers Date of grant July 2007 Aug 2008 Aug 2009 Aug 2010 July 2007 Aug 2008 Aug 2009 Aug 2010 July 2007 Aug 2008 Aug 2009 Aug 2010 July 2007 Aug 2008 Aug 2009 Aug 2010 As at 03.04.10 218,144 274,297 226,610 141,632 173,154 157,473 109,695 143,964 125,620 62,025 110,507 80,909 Granted/ (vested) in the year (208,458) 200,215 (135,343) 124,126 (104,824) 97,531 (59,271) 110,005 Five-day average share price on grant 204.67p 201.30p 194.36p 281.08p 204.67p 201.30p 194.36p 281.08p 204.67p 201.30p 194.36p 281.08p 204.67p 201.30p 194.36p 281.08p As at 02.04.11 – 274,297 226,610 200,215 – 173,154 157,473 124,126 – 143,964 125,620 97,531 – 110,507 80,909 110,005 Performance conditions for the awards made in the ﬁnancial year are set out above. The 2007 grants vested in August 2010 at a value of 271.034p per share with 95.56% of the original number of shares granted being transferred to participants net of any tax and social charges; the balance of the 2007 award lapsed. The current vesting expectation for grants made in 2008 is 100%; for grants made in 2009, 93% and for grants made in 2010, 95%. Share Incentive Plan As part of their participation in the performance share plan, UK executive Directors were awarded a proportion of their 2010 awards in Free Shares under the provisions of the UK share incentive plan (SIP) on 1 October 2010, as follows: Andrew Williams, 857 shares; Kevin Thompson, 882 shares; and Neil Quinn, 882 shares. The Free Shares are held in trust for the participants and may transfer to them from the third anniversary of the award, on request and subject to continued employment. The share price on the award date was 319.6p. SIP shareholdings are included in Directors’ interests above. Directors’ share options The movements in share options during the ﬁnancial year were as follows: Andrew Williams Kevin Thompson Neil Quinn Adam Meyers As at 03.04.10 119,337 216,986 277,756 468,481 Lapsed (15,500) (39,700) (43,700) (26,700) Exercised – – (63,800) (89,000) Share price on exercise – – 281.44p 283.10p As at 02.04.11 103,837 177,286 170,256 352,781 2011 Gains on exercise (£) – – 75,246 153,169 2010 Gains on exercise (£) 278,367 499,128 171,293 17,410 Halma p.l.c. Annual Report and Accounts 2011 65 There were no share plan grants during the ﬁnancial year. The gains are calculated by deducting the exercise price from the closing middle market price at the date of exercise or the actual gross sales proceeds if appropriate. The closing middle market price of the Company’s ordinary shares on Friday, 1 April 2011, the last trading day preceding the ﬁnancial year end, was 355p per share and the range during the year was 239.5p to 366.6p. Details of Directors’ options outstanding at 2 April 2011 are set out in the table below. The status of the options can be summarised as follows: 1. Exercisable at that date at a price less than 355p. 2. Not yet exercisable, will only be exercisable when the performance criteria, set out in note 22 to the accounts, have been met and have an exercise price per share of less than 355p. Andrew Williams Kevin Thompson Neil Quinn Adam Meyers Status of options (see above) 2 2 2 1 2 Year of grant 2001-2004 2001-2004 2001-2004 2003-2005 2001-2004 Number of shares 103,837 177,286 170,256 218,783 133,998 Weighted average exercise price (p) per share 142.74 144.47 144.56 140.10 144.14 All options lapse if not exercised within ten years from the date of grant. The Company’s Register of Directors’ Interests, which is open to inspection at the Registered Ofﬁce, contains full details of Directors’ shareholdings and share options. There have been no variations to the terms and conditions or performance criteria for share options during the ﬁnancial year. Directors’ pension entitlements Two Directors are members of the Company’s deﬁned beneﬁt pension plan. The following Directors had accrued entitlements under the plans as follows: Andrew Williams Kevin Thompson Years of pensionable service at 02.04.11 16 18 Age at 02.04.11 43 51 Accrued pension 2010 £000 40 100 Increase in the year £000 4 – Accrued pension 2011 £000 44 100 Halma p.l.c. Annual Report and Accounts 2011 66 Directors’ Report Governance Remuneration Report continued The accrued pension shown is that which would be paid annually on retirement based on service to the end of the year. Andrew Williams Kevin Thompson Transfer value 03.04.10 £000 456 1,534 Directors’ contributions £000 15 – Increase in value net of contributions £000 26 39 Transfer value 02.04.11 £000 497 1,573 The transfer values disclosed above do not represent a sum paid or payable to the individual Director. Instead they represent a potential liability of the pension plan. These values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. Adam Meyers is a member of the US 401k money purchase scheme. Company contributions paid in the year were $24,015 (£15,394) (2010: $12,654 (£7,909)). The report was approved by the Board of Directors and signed on its behalf by: Richard Stone Remuneration Committee (Chairman) 21 June 2011 Other Statutory Information Halma p.l.c. Annual Report and Accounts 2011 67 Activities Halma p.l.c. is a holding company. A list of its principal subsidiary companies and their activities is set out on pages 124 to 127. Ordinary dividends The Directors recommend a ﬁnal dividend of 5.56p per share and, if approved, this dividend will be paid on 24 August 2011 to ordinary shareholders on the register at the close of business on 22 July 2011. Together with the interim dividend of 3.54p per share already paid, this will make a total of 9.10p (2010: 8.50p) per share for the ﬁnancial year. Share capital and capital structure Details of share capital issued in the ﬁnancial year are set out in note 22 to the accounts. Details of the share capital, together with details of the movements in the share capital during the year, are shown in note 22 to the accounts. The Company has one class of ordinary shares which carry no right to ﬁxed income. Each share carries the right to one vote at general meetings of the Company. There are no other classes of share capital. There are no speciﬁc restrictions on the size of a holding nor on the transfer of shares, with both governed by the general provisions of the Articles of Association and prevailing legislation. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. Rights and obligations of ordinary shares Holders of ordinary shares are entitled to attend and speak at general meetings of the Company and to appoint one or more proxies or, if the holder of shares is a corporation, one or more corporate representatives. On a show of hands, each holder of ordinary shares who (being an individual) is present in person or (being a corporation) is present by a duly appointed corporate representative, not being himself a member, shall have one vote, as shall proxies (unless they are appointed by more than one holder, in which case they may vote both for and against the resolution in accordance with the holders’ instructions). On a poll every holder of ordinary shares present in person or by proxy shall have one vote for every share of which he is the holder. Electronic and paper proxy appointments and voting instructions must be received not later than 48 hours before the meeting. A holder of ordinary shares can lose the entitlement to vote at general meetings where that holder has been served with a disclosure notice and has failed to provide the Company with information concerning interests held in those shares. Except as set out above and as permitted under applicable statutes, there are no limitations on voting rights of holders of a given percentage, number of votes or deadlines for exercising voting rights. Restrictions on transfer of shares The Directors may refuse to register a transfer of a certiﬁcated share that is not fully paid, provided that the refusal does not prevent dealings in shares in the Company from taking place on an open and proper basis or where the Company has a lien over that share. The Directors may also refuse to register a transfer of a certiﬁcated share unless the instrument of transfer is: (i) lodged, duly stamped (if necessary), at the registered ofﬁce of the Company or any other place as the Board may decide accompanied by the certiﬁcate for the share(s) to be transferred and/or such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer; (ii) in respect of only one class of shares; (iii) in favour of a person who is not a minor, infant, bankrupt or a person of unsound mind; or (iv) in favour of not more than four persons jointly. Transfers of uncertiﬁcated shares must be carried out using CREST and the Directors can refuse to register a transfer of an uncertiﬁcated share in accordance with the regulations governing the operation of CREST. There are no other restrictions on the transfer of ordinary shares in the Company except certain restrictions which may from time to time be imposed by laws and regulations (for example insider trading laws); or where a shareholder with at least a 0.25% interest in the Company’s certiﬁcated shares has been served with a disclosure notice and has failed to provide the Company with information concerning interests in those shares. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. Treasury shares Shares held in treasury do not have voting rights and are not eligible for dividends. Employee share plans Details of employee share plans are set out in note 23 to the accounts. Appointment and replacement of directors With regard to the appointment and replacement of directors, the Company is governed by its Articles of Association, the UK Corporate Governance Code, the Companies Acts and related legislation. Directors can be appointed by the Company by ordinary resolution at a general meeting or by the Board. If a director is appointed by the Board, such director will hold ofﬁce until the next annual general meeting and shall then be eligible for re-election at that meeting. The Company can remove a director from ofﬁce, including by passing a special resolution or by notice being given by all the other directors. The Articles themselves may be amended by special resolution of the shareholders. Power of directors The powers of Directors are described in the Matters Reserved for the Board, copies of which are available on request, and the Corporate Governance Statement on page 51. Essential contracts and change of control There are a number of agreements that take effect, alter or terminate upon a change of control of the Company, principally bank loan agreements and employee share plans. The only signiﬁcant agreement, in terms of its likely impact on the business of the Group as a whole, containing such provisions is that governing the £165m revolving credit facility which on change of control, if the majority lenders require, can result in 30 days’ notice being given to the Company for all amounts outstanding to be immediately due and payable, at which time the facility would be cancelled. Halma p.l.c. Annual Report and Accounts 2011 68 Directors’ Report Governance Other Statutory Information continued The Group has contractual arrangements with a wide range of suppliers. The Group is not unduly dependent upon contractual arrangements with any particular customer. Whilst the loss or disruption to certain of these arrangements could temporarily affect the Group’s business, none is considered to be essential. The Company’s share plans contain provisions as a result of which options and awards may vest and become exercisable on a change of control of the Company in accordance with the rules of the plans. The Directors are not aware of any agreements between the Company and its directors or employees that provide for compensation for loss of office or employment that occurs because of a takeover bid. Allotment authority Under the Companies Act 2006 the Directors may only allot shares if authorised by shareholders to do so. At the Annual General Meeting an ordinary resolution will be proposed which, if passed, will authorise the Directors to allot and issue new shares up to an aggregate nominal value of £12,500,000 (up to 125,000,000 new ordinary shares of 10p each), being just less than one-third of the issued share capital of the Company (excluding treasury shares) as at 20 June 2011 (the latest practicable date prior to the publication of the Notice of Meeting). In accordance with the Directors’ stated intention to seek annual renewal, the authority will expire at the conclusion of the Annual General Meeting of the Company in 2012. Passing this resolution will give the Directors flexibility to act in the best interests of shareholders, when opportunities arise, by issuing new shares. As at 20 June 2011 (the latest practicable date prior to the publication of the Notice of Meeting), the Company had 378,247,685 ordinary shares of 10p each in issue of which 1,847,368 were held as treasury shares, which is equal to approximately 0.5% of the issued share capital of the Company (excluding treasury shares) as at that date. The Companies Act 2006 also requires that, if the Company issues new shares for cash or sells any treasury shares, it must first offer them to existing shareholders in proportion to their current holdings. At the Annual General Meeting a special resolution will be proposed which, if passed, will authorise the Directors to issue a limited number of shares for cash and/or sell treasury shares without offering them to shareholders first. The authority is for an aggregate nominal amount of up to 5% of the aggregate nominal value of the issued share capital of the Company as at 20 June 2011 (the latest practicable date prior to the publication of the Notice of Meeting). The resolution will also modify statutory pre-emption rights to deal with legal, regulatory or practical problems that may arise on a rights issue or other pre-emptive offer or issue. The authority will expire at the same time as the resolution conferring authority on the Directors to allot shares. The Directors consider this authority necessary in order to give them flexibility to deal with opportunities as they arise, subject to the restrictions contained in the resolution. There are no present plans to issue shares, except under share plans previously approved in general meeting. Directors The names of the Directors of the Company who served throughout the year including brief biographies, are set out on pages 48 and 49. Directors’ indemnities The Company has entered into deeds of indemnity with each of the current Directors which remain in force at the date of this report. These are qualifying third-party indemnity provisions for the purposes of the Companies Act 2006. Purchase of the Company’s own shares The Company was authorised at the 2010 Annual General Meeting to purchase up to 37,600,000 of its own 10p ordinary shares in the market. This authority expires at the end of the 2011 Annual General Meeting. In accordance with the Directors’ stated intention to seek annual renewal, a special resolution will be proposed at the Annual General Meeting to renew this authority, until the end of next year’s Annual General Meeting, in respect of up to 37,600,000 ordinary shares, which is approximately 10% of the Company’s issued share capital (excluding treasury shares) as at 20 June 2011 (the latest practicable date prior to the publication of the Notice of Meeting). The Directors consider it desirable that the possibility of making such purchases, under appropriate circumstances, is available. Their present intention is that the shares purchased under the authority will be held in treasury for future cancellation, sale for cash or transfer for the purposes of, or pursuant to, an employee share plan, although in the light of circumstances at the time it may be decided to cancel them immediately on repurchase. The effect of any cancellation would be to reduce the number of shares in issue. For most purposes, while held in treasury, shares are treated as if they have been cancelled (for example, they carry no voting rights and do not rank for dividends). Following approval of the Performance Share Plan (PSP) at the 2005 Annual General Meeting, the Directors made, and intend to continue to make, routine purchases of Halma shares in the market for holding in treasury until required for vesting under the PSP. In the year to 2 April 2011, 1,793,572 shares, with a nominal value of £179,357.20, which is 0.5% of the Company’s issued share capital as at 20 June 2011 (the latest practicable date prior to the publication of the Notice of Meeting), were purchased in the market for treasury. Otherwise, the Directors have no present intention of using this authority. In reaching a decision to purchase shares, the Directors will take into account the Company’s cash resources, capital requirements and the effect of any purchase on the Company’s earnings per share. It is anticipated that renewal of the authority will be requested at subsequent annual general meetings. As at 20 June 2011, which is the latest practicable date prior to the publication of the Notice of Meeting, options were outstanding to subscribe for a total number of 2,975,991 ordinary shares, or 0.8% of the Company’s issued share capital. If the proposed authority were to be used in full and all of the repurchased shares were cancelled (but the Company’s issued share capital otherwise remained unaltered), the total number of options to subscribe for ordinary shares at that date would represent approximately 0.9% of the Company’s issued share capital (excluding treasury shares). Halma p.l.c. Annual Report and Accounts 2011 69 Supplier payment policy The Company does not follow any particular supplier payment code of practice. The Company has due regard to the payment terms of suppliers and generally settles all undisputed accounts within 30 days of the due date for payment. At 2 April 2011 the Company’s trade creditors amounting to £0.9m (2010: £1.1m) represented 25 days (2010: 39 days) of its annual purchases. Donations Group companies made charitable donations amounting to £2,451 (2010: £4,383) during the ﬁnancial year. There were no political donations (2010: £nil). Substantial shareholdings On 20 June 2011, the Company had been notiﬁed, in accordance with chapter 5 of the Disclosure and Transparency Rules, of the following voting rights as a shareholder of the Company. Auditors Each of the persons who is a Director at the date of approval of this Annual Report conﬁrms that: – so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and – the Director has taken all the steps that he/she ought to have taken as a director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This conﬁrmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Deloitte LLP have expressed their willingness to continue in ofﬁce as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. No. of ordinary shares Percentage of voting rights and issued share capital By order of the Board Carol Chesney Company Secretary 21 June 2011 Sprucegrove Investment Management Ltd Massachusetts Financial Services Company Capital Research and Management Company Schroder Investment Management Barclays Bank PLC Sanderson Asset Management Ltd Legal & General Group Plc Norges Bank Investment Management 22,317,670 18,910,784 18,804,168 18,667,466 15,724,354 14,891,762 14,874,651 11,293,494 5.93 5.02 5.00 4.96 4.18 3.96 3.95 3.00 Annual General Meeting The Company’s Annual General Meeting will be held on 28 July 2011. The Notice of Meeting, together with an explanation of the proposed resolutions, is enclosed with this Annual Report and is also available on the Company’s website at www.halma.com. Special Business The Board will propose a special resolution under Special Business at the Annual General Meeting, in accordance with the EU Shareholder Rights Directive implemented in August 2009, to permit the Company to retain the ability to call general meetings (other than annual general meetings) at 14 days’ notice rather than 21 days’ notice. Halma p.l.c. Annual Report and Accounts 2011 70 Directors’ Report Governance Directors’ Responsibilities The Directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the Company and enable them to ensure that the ﬁnancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Directors’ responsibility statement We conﬁrm that to the best of our knowledge: – the ﬁnancial statements, prepared in accordance with the relevant ﬁnancial reporting framework, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the Company and the undertakings included in the consolidation taken as a whole; and – the management report, which is incorporated into the Directors’ Report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Andrew Williams Chief Executive 21 June 2011 Kevin Thompson Finance Director 21 June 2011 The Directors are responsible for preparing the Annual Report and the ﬁnancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the Directors are required to prepare the Group ﬁnancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the parent company ﬁnancial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the accounts unless they are satisﬁed that they give a true and fair view of the state of affairs of the Company and of the proﬁt or loss of the Company for that period. In preparing the parent company ﬁnancial statements, the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgments and accounting estimates that are reasonable and prudent; – state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the ﬁnancial statements; and – prepare the ﬁnancial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. In preparing the Group ﬁnancial statements, International Accounting Standard 1 requires that Directors: – properly select and apply accounting policies; – present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; – provide additional disclosures when compliance with the speciﬁc requirements in IFRSs are insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance; and – make an assessment of the Company’s ability to continue as a going concern. Halma p.l.c. Annual Report and Accounts 2011 71 Independent Auditor’s Report to the Members of Halma p.l.c. We have audited the Group financial statements of Halma p.l.c. for the 52 week period ended 2 April 2011 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income and Expenditure, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and the related notes 1 to 31. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the Group financial statements: −(cid:3) give a true and fair view of the state of the Group’s affairs as at 2 April 2011 and of its profit for the 52 week period then ended; −(cid:3) have been properly prepared in accordance with IFRSs as adopted by the European Union; and −(cid:3) have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the Group financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: −(cid:3) certain disclosures of Directors’ remuneration specified by law are not made; or −(cid:3) we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: −(cid:3) the Directors’ Statement contained within Corporate Governance in relation to going concern; −(cid:3) the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review; and −(cid:3) certain elements of the report to the shareholders by the Board on Directors’ remuneration. Other matters We have reported separately on the parent company financial statements of Halma p.l.c. for the 52 week period ended 2 April 2011 and on the information in the Directors’ Remuneration Report that is described as having been audited. Alexander Butterworth ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Reading, UK 21 June 2011 Halma p.l.c. Annual Report and Accounts 2011 72 Financial Statements Consolidated Income Statement 52 weeks to 2 April 2011 53 weeks to 3 April 2010 Before amortisation of acquired intangibles and acquisition costs* £000 Amortisation of acquired intangibles and acquisition costs* (note 1) £000 Notes Before amortisation of acquired intangibles £000 Amortisation of acquired intangibles (note 1) £000 Total £000 Total £000 1 518,428 – 518,428 459,118 – 459,118 4 5 6 9 1 2 10 105,708 (59) 9,420 (10,518) 104,551 (27,367) (6,259) – – – (6,259) 1,509 99,449 (59) 9,420 (10,518) 98,292 (25,858) 89,135 – 6,566 (9,487) 86,214 (22,807) (4,840) – – – (4,840) 1,870 84,295 – 6,566 (9,487) 81,374 (20,937) 77,184 (4,750) 72,434 63,407 (2,970) 60,437 20.49p 16.89p 19.23p 19.19p 34,269 9.10p 16.10p 16.05p 32,009 8.50p Continuing operations Revenue Operating profit Share of results of associates Finance income Finance expense Profit before taxation Taxation Profit for the year attributable to equity shareholders Earnings per share From continuing operations Basic Diluted Dividends in respect of the year Paid and proposed (£000) Paid and proposed per share * Acquisition costs include transaction costs and movement on contingent consideration. Consolidated Statement of Comprehensive Income and Expenditure Profit for the year Exchange differences on translation of foreign operations Actuarial gains/(losses) on defined benefit pension plans Effective portion of changes in fair value of cash flow hedges Tax relating to components of other comprehensive income Other comprehensive expense for the year Total comprehensive income for the year attributable to equity shareholders Notes 28 26 9 52 weeks to 2 April 2011 £000 72,434 53 weeks to 3 April 2010 £000 60,437 (4,268) 857 (311) (887) (4,609) (8,613) (4,644) (47) 2,917 (10,387) 67,825 50,050 Consolidated Balance Sheet Halma p.l.c. Annual Report and Accounts 2011 73 Non-current assets Goodwill Other intangible assets Property, plant and equipment Interests in associates Deferred tax asset Current assets Inventories Trade and other receivables Tax receivable Cash and cash equivalents Derivative financial instruments Total assets Current liabilities Borrowings Trade and other payables Provisions Tax liabilities Derivative financial instruments Net current assets Non-current liabilities Borrowings Retirement benefit obligations Trade and other payables Provisions Deferred tax liabilities Total liabilities Net assets Equity Share capital Share premium account Treasury shares Capital redemption reserve Hedging and translation reserve Other reserves Retained earnings Shareholders’ funds 2 April 2011 £000 3 April 2010 £000 Notes 11 12 13 14 21 15 16 26 17 18 19 26 17 28 20 19 21 22 259,954 73,490 69,891 1,989 10,779 416,103 54,540 110,456 237 42,610 327 208,170 624,273 – 85,511 2,887 14,997 858 104,253 103,917 79,688 36,237 22,848 1,593 24,269 164,635 268,888 355,385 37,824 21,744 (5,016) 185 34,511 3,634 262,503 355,385 195,334 33,705 66,786 – 10,612 306,437 47,014 98,077 1,067 31,323 232 177,713 484,150 317 66,955 1,515 7,843 331 76,961 100,752 21,924 43,071 4,554 1,954 13,193 84,696 161,657 322,493 37,765 20,959 (2,581) 185 39,013 4,178 222,974 322,493 The financial statements of Halma p.l.c., company number 40932, were approved by the Board of Directors on 21 June 2011. A J Williams Director K J Thompson Director Halma p.l.c. Annual Report and Accounts 2011 74 Financial Statements Consolidated Statement of Changes in Equity At 3 April 2010 Profit for the period Other comprehensive income and expense: Exchange differences on translation of foreign operations Actuarial gains on defined benefit pension plans Effective portion of changes in fair value of cash flow hedges Tax relating to components of other comprehensive income Total other comprehensive income and expense Share options exercised Dividends paid Share-based payments Deferred tax on share-based payment transactions Excess tax deductions related to share-based payments on exercised options Net movement in treasury shares At 2 April 2011 At 28 March 2009 Profit for the period Total other comprehensive income and expense Share options exercised Dividends paid Share-based payments Deferred tax on share-based payment transactions Excess tax deductions related to share-based payments on exercised options Net movement in treasury shares At 2 April 2010 Share capital £000 37,765 – Share premium account £000 20,959 – Treasury shares £000 (2,581) – Capital redemption reserve £000 185 – Hedging and translation reserve £000 39,013 – Other reserves £000 4,178 – Retained earnings £000 222,974 72,434 Total £000 322,493 72,434 – – – – – 59 – – – – – 37,824 37,539 – – 226 – – – – – – – – 785 – – – – – 21,744 18,146 – – 2,813 – – – – – – – – – – – – – (2,435) (5,016) (2,759) – – – – – – – – – – – – – – – – – 185 185 – – – – – – (4,268) – (311) 77 (4,502) – – – – – – – – (4,268) 857 857 – (311) (964) (887) – – – (764) (107) – (32,891) – (4,609) 844 (32,891) (764) – 220 – 220 – – 34,511 47,673 – (8,660) – – – – – 3,634 4,246 – 93 – 262,503 194,585 60,437 – – – (1,017) (1,727) – (30,394) – 93 (2,435) 355,385 299,615 60,437 (10,387) 3,039 (30,394) (1,017) – 949 – 949 – – 37,765 – – 20,959 – 178 (2,581) – – 185 – – 39,013 – – 4,178 73 – 222,974 73 178 322,493 Treasury shares are ordinary shares in Halma p.l.c. purchased by the Company and held to fulfil the Company’s obligations under the performance share plan. At 2 April 2011 the number of treasury shares held was 1,847,368 (2010: 1,130,036) and their market value was £6,558,156 (2010: £2,926,793). The Capital redemption reserve was created on repurchase and cancellation of the Company’s own shares. The Hedging and translation reserve is used to record differences arising from the retranslation of the financial statements of foreign operations and the portion of the cumulative net change in the fair value of cash flow hedging instruments that are deemed to be an effective hedge. Other than a net charge of £281,000 (2010: charge of £47,000), all amounts at year end relate to translation movements. The Other reserves represent the provision established in respect of the value of the equity-settled share option plans and performance share plan. Consolidated Cash Flow Statement Halma p.l.c. Annual Report and Accounts 2011 75 Net cash inflow from operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of computer software Purchase of other intangibles Proceeds from sale of property, plant and equipment Development costs capitalised Interest received Acquisition of businesses, net of cash acquired Acquisition of investments in associates Disposal of businesses Net cash used in investing activities Financing activities Dividends paid Proceeds from issue of share capital Purchase of treasury shares Interest paid Proceeds from borrowings Repayment of borrowings Net cash from/(used in) financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents brought forward Exchange adjustments Cash and cash equivalents carried forward 52 weeks to 2 April 2011 £000 95,064 53 weeks to 3 April 2010 £000 100,338 Notes 25 (14,399) (1,019) (6) 677 (4,735) 317 (82,093) (1,708) – (102,966) (32,891) 844 (5,358) (825) 76,156 (18,152) 19,774 11,872 31,006 (268) 42,610 24 25 25 25 (9,781) (1,260) (38) 854 (3,072) 189 (1,676) – 520 (14,264) (30,394) 3,039 (2,252) (1,047) – (58,845) (89,499) (3,425) 34,987 (556) 31,006 Halma p.l.c. Annual Report and Accounts 2011 76 Financial Statements Accounting Policies Basis of accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union (EU) and therefore comply with Article 4 of the EU IAS legislation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. The financial statements have also been prepared in accordance with IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued and effective at the time of preparing these accounts. The principal Group accounting policies are explained below and have been applied consistently throughout the years ended 3 April 2010 and 2 April 2011 other than those noted below. The Group accounts have been prepared under the historical cost convention, except as described below under the heading ‘Derivative financial instruments and hedge accounting’. New, revised or changes to existing standards which have been adopted by the Group in the year ending 2 April 2011 The Group has adopted IFRS 3 (Revised) ‘Business Combinations’ for transactions arising after 3 April 2010. This has changed the treatment of contingent purchase consideration and acquisition-related costs. The adoption of IFRS 3 (Revised) has been applied prospectively and has had no material impact on assets, profit or earnings per share in the year ended 2 April 2011. Had this accounting policy change not arisen, then acquisition related costs of £1,268,000 would have been capitalised within goodwill arising on acquisition and operating costs reduced and profit before tax increased by the same amount. Basic earnings per share would have been 0.34p per share higher at 19.57p per share. Adjusted earnings per share, as defined, would not differ from that presented. Previously, transaction costs to effect a business combination were included in the cost of acquisition, but under IFRS 3 (Revised) these acquisition-related costs are expensed as incurred. For transactions relating to acquisitions before 3 April 2010, subsequent adjustments to contingent purchase consideration were made against goodwill. However, under IFRS 3 (Revised) unless the contingent purchase consideration is classified as equity, subsequent changes to the fair value of the contingent purchase consideration are recognised in the Consolidated income statement. Additionally the following new standards and interpretations have been adopted in the current year but have not impacted the reported results or the financial position: −(cid:3) IFRIC 9 and IAS 39 ‘Embedded Derivatives’ −(cid:3) IFRIC 17 ‘Distribution of non-cash assets to owners’ −(cid:3) IFRIC 18 ‘Transfers of assets from customer’ −(cid:3) IAS 27 (revised) ‘Consolidated and separate financial statements’ −(cid:3) IAS 28 (revised) ‘Investments in associates’ −(cid:3) Amendment to IAS 32 ‘Classfication of Rights Issue’ −(cid:3) Amendments to IAS 39 ‘Elgible Hedged Items’ −(cid:3) Amendments to IFRS 1 ‘Additional exemption for first time presentation’ −(cid:3) Amendments to IFRS 2 ‘Group Cash-settled Share-based Payment Transactions’ New standards and interpretations not yet adopted At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): −(cid:3) Amendments to IFRS 7, ‘Financial Instruments: Disclosure’, effective for annual periods beginning on or after 1 July 2011. This standard has not yet been endorsed for use in the EU −(cid:3) IFRS 9 ‘Financial Instruments – Classification and Measurement’ −(cid:3) IFRS 10 ‘Consolidated Financial Statements’ −(cid:3) IFRS 11 ‘Joint Arrangements’ −(cid:3) IFRS 12 ‘Disclosure of Interests in Other Entities’ −(cid:3) IFRS 13 ‘Fair Value Measurement’ −(cid:3) Amendment to IFRS 1, ‘Limited Exemption from Comparative IFRS 7 disclosures for first time adopters’ −(cid:3) Amendment to IAS 24, ‘Related Party Disclosures’ −(cid:3) Amendment to IFRIC 14, ‘Prepayment on a Minimum Funding Requirement’ −(cid:3) IFRIC 19, ‘Extinguishing Financial Liabilities with Equity Instruments’ −(cid:3) Improvements to IFRSs – 2010 Halma p.l.c. Annual Report and Accounts 2011 77 The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group, except for IFRS 9 ‘Financial Instruments’, which will introduce a number of changes in the presentation of financial instruments. IFRS 10 – 13 were issued by the IASB on 12 May 2011 and are effective for annual periods beginning on or after 1 January 2013. These pronoucements have not yet been endorsed for use in the EU. The Group has not completed its assessment of the impact of these pronoucements on the consolidated results, financial position or cash flows of the Group. Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained on page 54. Key sources of estimation uncertainty and critical accounting judgments The preparation of Group accounts in conformity with IFRS requires the Directors to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experiences and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The following three areas of key estimation uncertainty and critical accounting judgment have been identified as having significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next financial year: −(cid:3) Goodwill impairment Determining whether goodwill is impaired requires an estimation of the value in use of cash generating units (CGUs) to which goodwill has been allocated. In turn, the value in use calculation involves an estimation of the present value of future cash flows of CGUs. The future cash flows are based on annual budgets, as approved by the Board, to which the management’s expectation of market-share and long-term growth rates are applied. The present value is then calculated based on management’s judgment of future discount rates. The Board reviews these key assumptions (market-share, long-term growth rates, and discount rates) and the sensitivity analysis around these assumptions. Further details are provided in note 11. −(cid:3) Defined benefit pension scheme liabilities Determining the value of the future defined benefit obligation requires judgment in respect of the assumptions used to calculate present values. These include future mortality, discount rate, inflation and salary increases. Management makes these judgments in consultation with an independent actuary. Details of the judgments made in calculating these transactions are disclosed in note 28. −(cid:3) Intangible assets IFRS 3 (revised) ‘Business Combinations’ requires that goodwill arising on the acquisition of subsidiaries is capitalised and included in intangible assets. IFRS 3 (revised) also requires the identification of other intangible assets at acquisition. The assumptions involved in valuing these intangible assets require the use of estimates and judgements which may differ from the actual outcome. These estimates and judgements cover future growth rates, expected inflation rates and the discount rate used. Basis of consolidation The Group accounts include the accounts of Halma p.l.c. and its subsidiary companies made up to 2 April 2011, adjusted to eliminate intra-Group transactions, balances, income and expenses. The results of subsidiary companies acquired or discontinued are included from the month of their acquisition or to the month of their discontinuation. Business combinations and goodwill Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. For acquisitions after 3 April 2010, the Group measures goodwill at the acquisition date as: −(cid:3) the fair value of the consideration transferred; plus −(cid:3) the recognised amount of any non-controlling interests in the acquiree; plus −(cid:3) the fair value of the existing equity interest in the acquiree; less −(cid:3) the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. Halma p.l.c. Annual Report and Accounts 2011 (cid:2) 78 Financial Statements Accounting Policies continued Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Any contingent purchase consideration payable is recognised at fair value at the acquisition date. If the contingent purchase consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent purchase consideration are recognised in the Consolidated income statement. For acquisitions between 4 April 2004 (the date from which the financial statements were reported under IFRS) and 2 April 2010, goodwill represents the difference between the cost of the acquisition, including acquisition costs and the fair value of the net identifiable assets acquired. Goodwill is not amortised, but is tested annually for impairment. Goodwill is recognised as an intangible asset in the Consolidated balance sheet. Goodwill therefore includes non-identified intangible assets including business processes, buyer-specific synergies, know-how and workforce-related industry-specific knowledge and technical skills. Negative goodwill arising on acquisitions would be recognised directly in the Consolidated income statement. On closure or disposal of an acquired business, goodwill would be taken into account in determining the profit or loss on closure or disposal. As permitted by IFRS 1, the Group elected not to apply IFRS 3 ‘Business Combinations’ to acquisitions prior to 4 April 2004 in its consolidated accounts. As a result, the net book value of goodwill recognised as an intangible asset under UK GAAP at 3 April 2004 was brought forward unadjusted as the cost of goodwill recognised under IFRS at 4 April 2004 subject to impairment testing on that date; and goodwill that was written off to reserves prior to 28 March 1998 under UK GAAP will not be taken into account in determining the profit or loss on disposal or closure of previously acquired businesses from 4 April 2004 onwards. Investments in associates An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not in control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group’s interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate) are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any deficiency of the cost of acquisition below the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition (i.e. discount on acquisition) is credited in profit or loss in the period of acquisition. Where a Group company transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for impairment. Other intangible assets (a) Product development costs Research expenditure is written off in the financial year in which it is incurred. Development expenditure is written off in the financial year in which it is incurred, unless it relates to the development of a new or substantially improved product, is incurred after the technical feasibility and economic viability of the product has been proven and the decision to complete the development has been taken, and can be measured reliably. Such expenditure is capitalised as an intangible asset in the Consolidated balance sheet at cost and is amortised through the Consolidated income statement on a straight-line basis over its estimated economic life of three years. Halma p.l.c. Annual Report and Accounts 2011 79 (b) Acquired intangible assets An intangible resource acquired with a subsidiary undertaking is recognised as an intangible asset if it is separable from the acquired business or arises from contractual or legal rights, is expected to generate future economic benefits and its fair value can be measured reliably. Acquired intangible assets, comprising trademarks and customer relationships, are amortised through the Consolidated income statement on a straight-line basis over their estimated economic lives of between three and 10 years. (c) Computer software Computer software that is not integral to an item of property, plant or equipment is recognised separately as an intangible asset, and is amortised through the Consolidated income statement on a straight-line basis over its estimated economic life of between three and five years. (d) Other intangibles Other intangibles are amortised through the Consolidated income statement on a straight-line basis over their estimated economic lives of between three and five years. Impairment of non-current assets All non-current assets are tested for impairment whenever events or circumstances indicate that their carrying value may be impaired. Additionally, goodwill and capitalised development expenditure relating to a product that is not yet in full production are subject to an annual impairment test. An impairment loss is recognised in the Consolidated income statement to the extent that an asset’s carrying value exceeds its recoverable amount, which represents the higher of the asset’s net realisable value and its value in use. An asset’s value in use represents the present value of the future cash flows expected to be derived from the asset or from the cash generating unit to which it relates. The present value is calculated using a discount rate that reflects the current market assessment of the time value of money and the risks specific to the asset concerned. Impairment losses recognised in previous periods for an asset other than goodwill are reversed if there has been a change in the estimates used to determine the asset’s recoverable amount, but only to the extent that the carrying amount of the asset does not exceed its carrying amount had no impairment loss been recognised in previous periods. Impairment losses in respect of goodwill are not reversed. Segmental reporting An operating segment is a distinguishable component of the Group that is engaged in business activities from which it may earn revenues and incur expenses, and whose operating results are reviewed regularly by the Chief Operating Decision Maker (the Chief Executive Officer) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Reportable segments are operating segments that either meet the thresholds and conditions set out in IFRS 8 or are considered by the Board to be appropriately designated as reportable segments. Segment result represents operating profits and includes an allocation of head office expenses. Segment result excludes tax and financing items. Segment assets comprise goodwill, other intangible assets, property, plant and equipment (excluding land and buildings), inventories, trade and other receivables. Segment liabilities comprise trade and other payables, provisions and other payables. Unallocated items represent land and buildings, corporate and deferred taxation balances, defined benefit scheme liabilities, contingent purchase consideration, all components of net cash/borrowings and derivative financial instruments. Foreign currencies The Group presents its accounts in Sterling. Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates prevailing at that date. Any gain or loss arising from subsequent exchange rate movements is included as an exchange gain or loss in the Consolidated income statement. Net assets of overseas subsidiary companies are expressed in Sterling at the rates of exchange ruling at the end of the financial year, and trading results and cash flows at the average rates of exchange for the financial year. Goodwill arising on the acquisition of a foreign business is treated as an asset of the foreign entity and is translated at the rate of exchange ruling at the end of the financial year. Exchange gains or losses arising on these translations are taken to the Hedging and translation reserve within Shareholders’ funds. In the event that an overseas subsidiary is disposed of or closed, the profit or loss on disposal or closure will be determined after taking into account the cumulative translation difference held within the Hedging and translation reserve attributable to that subsidiary. As permitted by IFRS 1, the Group has elected to deem the Hedging and translation to be £nil at 4 April 2004. Accordingly, the profit or loss on disposal or closure of foreign subsidiaries will not include any currency translation differences which arose before 4 April 2004. Halma p.l.c. Annual Report and Accounts 2011 80 Financial Statements Accounting Policies continued Derivative financial instruments and hedge accounting The Group enters into derivative financial instruments to manage its exposure to foreign exchange rate risk using forward exchange contracts. Further details of derivative financial instruments are disclosed in note 26. Derivative financial instruments are classified as fair value through profit and loss (held for trading) unless they are in a designated hedge relationship. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each balance sheet date. The resulting gain or loss is recognised in the Consolidated income statement, unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in the Consolidated income statement depends on the nature of the hedge relationship. The Group designates certain derivatives as hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges), or hedges of net investments in foreign operations. A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities. Cash flow hedge accounting The Group designates certain hedging instruments as cash flow hedges. At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument has been or is expected to be highly effective in offsetting changes in fair values or cash flows of the hedged item. Note 26 sets out details of the fair values of the derivative instruments used for hedging purposes and the movements in the hedging reserve in equity. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in Other comprehensive income. The gain or loss relating to the ineffective portion as a result of being overhedged is recognised immediately in Consolidated income statement. Amounts previously recognised in Other comprehensive income and accumulated in equity are reclassified to the Consolidated income statement in the periods when the hedged item is recognised in the Consolidated income statement. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. Any gain or loss recognised in Other comprehensive income at that time is accumulated in equity and is recognised, when the forecast transaction is ultimately recognised, in the Consolidated income statement. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in the Consolidated income statement. Net investment hedge accounting The Group uses US Dollar and Euro denominated borrowings as a hedge against the translation exposure on the Group’s net investment in overseas companies. Where the hedge is fully effective at hedging the variability in the net assets of such companies caused by changes in exchange rates, the changes in value of the borrowings are recognised in the Statement of comprehensive income and accumulated in the Hedging and translation reserve. The ineffective part of any change in value caused by changes in exchange rates is recognised in the Consolidated income statement. Revenue Revenue represents sales, less returns, by subsidiary companies to external customers excluding value added tax and other sales related taxes. Transactions are recorded as revenue when the delivery of products or performance of services takes place in accordance with the contracted terms of sale. Halma p.l.c. Annual Report and Accounts 2011 81 Property, plant and equipment Property, plant and equipment is stated at historical cost less provisions for impairment and depreciation which, with the exception of freehold land which is not depreciated, is provided on a straight-line basis over each asset’s estimated economic life. The principal annual rates used for this purpose are: Freehold property Leasehold properties: Long leases (more than 50 years unexpired) Short leases (less than 50 years unexpired) Plant, equipment and vehicles 2% 2% Period of lease 8% to 331⁄3% Leases Leases that confer rights and obligations similar to those that attach to owned assets are classified as finance leases, of which the Group has none. All other leases are classified as operating leases. Operating lease rentals, and any incentives receivable, are charged to the Consolidated income statement on a straight-line basis over the lease term. Pensions The Group makes contributions to various pension schemes, covering the majority of its employees. For defined benefit schemes, the asset or liability recorded in the balance sheet is the difference between the fair value of the scheme’s assets and the present value of the defined obligation at that date. The defined benefit obligation is calculated separately for each scheme on an annual basis by independent actuaries using the projected unit credit method. Actuarial gains and losses are recognised in full in the period in which they occur, and are taken to Other comprehensive income. Current and past service costs, along with the impact of any settlements or curtailments, are charged to the Consolidated income statement. Interest on pension plans’ liabilities are recognised within finance expense and the expected return on the schemes’ assets are recognised within finance income in the Consolidated income statement. Contributions to defined contribution schemes are charged to the Consolidated income statement when they fall due. Employee share schemes Share-based incentives are provided to employees under the Group’s share incentive plan, the share option plans and the performance share plan. (a) Share incentive plan Awards of shares under the share incentive plan are made to qualifying employees depending on salary and service criteria. The shares awarded under this plan are purchased in the market by the plan’s trustees at the time of the award, and are then held in trust for a minimum of three years. The costs of this plan are recognised in the Consolidated income statement over the three-year vesting periods of the awards. (b) Share option plans All grants of options under the 1990 and 1996 share option plans and the 1999 company share option plan (together, the ‘share option plans’) are equity settled, and so, as permitted by IFRS 1, the provisions of IFRS 2 ‘Share-Based Payment’ have been applied only to options awarded on or after 7 November 2002 which had not vested at 3 April 2005. The fair value of awards under these plans has been measured at the date of grant using the Black-Scholes model and will not be subsequently remeasured. The fair value is charged to the Consolidated income statement on a straight-line basis over the expected vesting period, based on the Group’s estimate of shares that will ultimately vest and adjusted for the effect of non market-based vesting conditions. The corresponding credit is to Shareholders’ funds. No further awards will be made under the share option plans. Halma p.l.c. Annual Report and Accounts 2011 82 Financial Statements Accounting Policies continued (c) Performance share plan On 3 August 2005 the share option plans were replaced by the performance share plan. Awards under this plan are partly equity-settled and partly cash-settled, and are subject to both market based and non-market based vesting criteria. The fair value of the equity-settled portion at the date of grant is established by using an appropriate simulation method to reflect the likelihood of market-based performance conditions being met. The fair value is charged to the Consolidated income statement on a straight-line basis over the vesting period, with appropriate adjustments being made during this period to reflect expected and actual forfeitures arising from the non-market based performance conditions only. The corresponding credit is to Shareholders’ funds. For the cash-settled portion, a liability equal to the portion of the services received is recognised at the current fair value determined at each balance sheet date. Inventories Inventories and work in progress are included at the lower of cost and net realisable value. Cost is calculated either on a ‘first in, first out’ or an average cost basis and includes direct materials and the appropriate proportion of production and other overheads considered by the Directors to be attributable to bringing the inventories to their location and condition at the year end. Net realisable value represents the estimated selling price less all estimated costs to complete and costs to be incurred in marketing, selling and distribution. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of the cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Operating profit Operating profit is stated after charging restructuring costs but before the share of results of associates, investment income and finance costs. Taxation Taxation comprises current and deferred tax. Tax is recognised in the Consolidated income statement except to the extent that it relates to items recognised directly in Shareholders’ funds, in which case it too is recognised in Shareholders’ funds. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or subsequently enacted at the balance sheet date, along with any adjustment to tax payable in respect of previous years. Taxable profit differs from net profit as reported in the Consolidated income statement because it excludes items that are never taxable or deductible. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes and is accounted for using the balance sheet liability method, apart from the following differences which are not provided for: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit; and differences relating to investments in subsidiaries to the extent they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amounts of assets and liabilities, using tax rates and laws, which are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax assets are only recognised to the extent that recovery is probable. Cash and cash equivalents Cash and cash equivalents comprise cash balances, deposits with an initial maturity of less than three months, and bank overdrafts that are repayable on demand. Dividends Dividends payable to the Company’s shareholders are recognised as a liability in the period in which the distribution is approved by the Company’s shareholders. Notes to the Accounts Halma p.l.c. Annual Report and Accounts 2011 83 1 Segmental analysis Sector analysis The Group has three main reportable segments (Health and Analysis, Infrastructure Sensors, and Industrial Safety), which are defined by markets rather than product type. Each segment includes businesses with similar operating and marketing characteristics. These segments are consistent with the internal reporting as reviewed by the Chief Executive Officer. During the year, Radio-Tech Limited was moved from the Group’s Industrial Safety segment to its Health and Analysis segment. The prior year segment analysis has therefore been restated to reflect this change and to ensure that the presentation is on a consistent basis. Segment revenue and results Health and Analysis Infrastructure Sensors Industrial Safety Inter-segmental sales Revenue for the year Revenue (all continuing operations) 52 weeks to 2 April 2011 £000 218,330 197,209 103,058 (169) 518,428 (Restated) 53 weeks to 3 April 2010 £000 178,106 182,923 98,344 (255) 459,118 Inter-segmental sales are charged at prevailing market prices and have not been disclosed separately by segment as they are not considered material. The Group does not analyse revenue by product group. Segment profit before allocation of amortisation of acquired intangible assets and acquisition costs Health and Analysis Infrastructure Sensors Industrial Safety Segment profit after allocation of amortisation of acquired intangible assets and acquisition costs Health and Analysis Infrastructure Sensors Industrial Safety Segment profit Central administration costs Net finance expense Group profit before taxation Taxation Profit for the year Profit (all continuing operations) 52 weeks to 2 April 2011 £000 (Restated) 53 weeks to 3 April 2010 £000 46,108 39,023 24,435 109,566 40,170 38,981 24,156 103,307 (3,917) (1,098) 98,292 (25,858) 72,434 34,716 35,510 20,333 90,559 31,217 35,510 18,992 85,719 (1,424) (2,921) 81,374 (20,937) 60,437 The accounting policies of the reportable segments are the same as the Group’s accounting policies. For acquisitions after 3 April 2010, acquisition transaction costs and adjustments to contingent purchase consideration are recognised in the Consolidated Income Statement. Segment profit, before these acquisition costs and the amortisation of acquired intangible assets, is disclosed separately above as this is the measure reported to the Chief Executive Officer for the purpose of allocation of resources and assessment of segment performance. The amortisation of acquired intangible assets, acquisition transaction costs and adjustments to contingent purchase consideration (including any arising from foreign exchange revaluation) are analysed as follows: 2011 Acquisition costs Health and Analysis Infrastructure Sensors Industrial Safety Total Group Amortisation of acquired intangibles 4,481 – 279 4,760 Transaction costs 1,226 42 – 1,268 Adjustments to contingent consideration Total 231 5,938 42 279 231 6,259 – – Amortisation of acquired intangibles 3,499 – 1,341 4,840 Transaction costs – – – – Acquisition costs Adjustments to contingent consideration – – – – 2010 Total 3,499 – 1,341 4,840 Halma p.l.c. Annual Report and Accounts 2011 84 Financial Statements Notes to the Accounts continued 1 Segmental analysis continued Segment assets and liabilities Before goodwill, interests in associates and acquired intangible assets are allocated to specific segment assets/liabilities Health and Analysis Infrastructure Sensors Industrial Safety Total segment assets/liabilities excluding goodwill, interests in associates and acquired intangible assets Goodwill Interests in associates Acquired intangible assets Total segment assets/liabilities including goodwill, interests in associates and acquired intangible assets After goodwill, interests in associates and acquired intangible assets are allocated to specific segment assets/liabilities Health and Analysis Infrastructure Sensors Industrial Safety Total segment assets/liabilities including goodwill and acquired intangibles Cash and cash equivalents/borrowings Derivative financial instruments Other unallocated assets/liabilities Total Group (Restated) Assets 2010 £000 77,542 70,905 42,803 191,250 195,334 – 21,230 (Restated) Liabilities 2010 £000 23,025 23,429 16,432 62,886 – – – 2011 £000 33,733 28,702 17,967 80,402 – – – 2011 £000 90,854 77,051 45,300 213,205 259,954 1,989 60,851 535,999 407,814 80,402 62,886 (Restated) Assets 2010 £000 190,431 153,112 64,271 407,814 31,323 232 44,781 484,150 2011 £000 33,733 28,702 17,967 80,402 79,688 858 107,940 268,888 (Restated) Liabilities 2010 £000 23,025 23,429 16,432 62,886 22,241 331 76,199 161,657 2011 £000 310,219 159,622 66,158 535,999 42,610 327 45,337 624,273 Segment assets and liabilities, excluding the allocation of goodwill, interests in associates and acquired intangible assets, have been disclosed separately above as this is the measure reported to the Chief Executive Officer for the purpose of monitoring segment performance and allocating resources between segments. Other unallocated assets include land and buildings and tax assets, and unallocated liabilities include contingent purchase consideration, retirement benefit provisions and tax liabilities. Other segment information Health and Analysis Infrastructure Sensors Industrial Safety Total segment additions/depreciation and amortisation Unallocated Total Group (Restated) Additions to non-current assets (Restated) Depreciation and amortisation 2011 £000 120,593 6,733 3,576 130,902 2,324 133,226 2010 £000 10,435 4,517 3,506 18,458 395 18,853 2011 £000 11,221 5,852 4,034 21,107 623 21,730 2010 £000 9,930 5,633 5,087 20,650 582 21,232 Non-current asset additions comprise acquired and purchased goodwill, intangible assets and property, plant and equipment. There were no impairment losses incurred during the year (2010: £nil). Halma p.l.c. Annual Report and Accounts 2011 85 1 Segmental analysis continued Geographical information The Group’s revenue from external customers (by location of customer) and its non-current assets by geographical location are detailed below: United States of America Mainland Europe United Kingdom Asia Pacific and Australasia Africa, Near and Middle East Other countries Revenue by destination 2010 £000 127,152 135,676 98,339 59,143 23,695 15,113 459,118 Non-current assets 2010 £000 36,028 27,239 230,139 2,419 – – 295,825 2011 £000 38,977 26,296 336,673 3,378 – – 405,324 2011 £000 150,280 138,313 106,131 76,207 28,756 18,741 518,428 Non-current assets comprise goodwill, other intangible assets, investments in associates and property, plant and equipment. Information about major customers The Group had no revenue from a single customer, which accounts for more than 3% of the Group’s revenue. 2 Earnings per ordinary share Basic earnings per ordinary share are calculated using the weighted average of 376,608,974 shares in issue during the year (net of shares purchased by the Company and held as treasury shares) (2010: 375,485,642). Diluted earnings per ordinary share are calculated using the weighted average of 377,365,635 shares (2010: 376,513,219), which includes dilutive potential ordinary shares of 756,661 (2010: 1,027,577). Dilutive potential ordinary shares are calculated from those exercisable share options where the exercise price is less than the average price of the Company’s ordinary shares during the year. Adjusted earnings are calculated as earnings from continuing operations excluding the amortisation of acquired intangible assets and acquisition costs after tax. The Directors consider that adjusted earnings represent a more consistent measure of underlying performance. A reconciliation of earnings and the effect on basic earnings per share figures is as follows: Earnings from continuing operations Add back amortisation of acquired intangibles (after tax) Acquisition transaction costs (after tax) Adjustments to contingent consideration (after tax) Adjusted earnings Per ordinary share 2011 £000 72,434 3,315 1,268 167 77,184 2010 £000 60,437 2,970 – – 63,407 2011 pence 19.23 0.88 0.34 0.04 20.49 2010 pence 16.10 0.79 – – 16.89 Halma p.l.c. Annual Report and Accounts 2011 86 Financial Statements Notes to the Accounts continued 3 Non-GAAP measures The Board uses certain non-GAAP measures to help it effectively monitor the performance of the Group. These measures include Return on Capital Employed, Return on Total Invested Capital and organic growth. Return on Capital Employed Operating profit before amortisation of acquired intangible assets and acquisition costs, but after share of results of associates Computer software costs within intangible assets Capitalised development costs within intangible assets Other intangibles within intangible assets Property, plant and equipment Inventories Trade and other receivables Trade and other payables Provisions Net tax liabilities Non-current trade and other payables Non-current provisions Add back contingent purchase consideration Capital employed Return on Capital Employed Return on Total Invested Capital Post-tax profit before amortisation of acquired intangible assets and acquisition costs Total shareholders’ funds Add back retirement benefit obligations Less associated deferred tax assets Cumulative amortisation of acquired intangibles Goodwill on disposals Goodwill amortised prior to 3 April 2004 Goodwill taken to reserves prior to 28 March 1998 Total invested capital Return on Total Invested Capital 2011 £000 2010 £000 105,649 2,734 9,653 252 69,891 54,540 110,456 (85,511) (2,887) (14,760) (22,848) (1,593) 27,037 146,964 71.9% 2011 £000 77,184 355,385 36,237 (9,422) 26,642 5,441 13,177 70,931 498,391 15.5% 89,135 3,050 9,202 223 66,786 47,014 98,077 (66,955) (1,515) (6,776) (4,554) (1,954) 2,921 145,519 61.3% 2010 £000 63,407 322,493 43,071 (12,060) 21,919 5,441 13,177 70,931 464,972 13.6% Organic growth Organic growth measures the change in revenue and profit from continuing Group operations. The effect of acquisitions and disposals made during the current or prior financial year has been equalised by adjusting the current year results for a pro-rated contribution based on their revenue and profit before taxation at the date of acquisition or disposal, and has been calculated as follows: Continuing operations Acquired/disposed revenue/profit * Before amortisation of acquired intangible assets and acquisition costs. 2011 £000 518,428 (8,808) 509,620 2010 £000 459,118 – 459,118 Revenue % growth 11.0% Profit* before taxation 2011 £000 104,551 (2,012) 102,539 2010 £000 86,214 – 86,214 % growth 18.9% Halma p.l.c. Annual Report and Accounts 2011 87 4 Finance income Interest receivable Expected return on pension scheme assets 5 Finance expense Interest payable on bank loans and overdrafts Interest charge on pension scheme liabilities Other interest payable Fair value movement on derivative financial instruments Unwinding of discount on provisions 6 Profit before taxation Profit before taxation comprises: Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other operating income Share of results of associates Net finance expense Profit before taxation Included within administrative expenses are the amortisation of acquired intangible assets and acquisition costs. Profit before taxation is stated after charging/(crediting): Depreciation Amortisation Research and development1 Foreign exchange gain Profit on disposal of operations2 (Profit)/loss on sale of property, plant and equipment and computer software Cost of inventories recognised as an expense Staff costs (note 7) Auditors’ remuneration3 Audit services to the Company Audit services to the Group Total audit services pursuant to legislation Other services pursuant to legislation4 Interim review Tax services Other services Property Other Operating lease rents: 1 A further £4,735,000 (2010: £3,072,000) of development costs have been capitalised in the year. See note 12. 2 In 2010, the Group disposed of part of its Asset Monitoring business for a profit of £407,000. There was also a write down of £25,000 on a prior year disposal. 3 In 2010, £nil non-audit fees were paid to the auditors in respect of acquisition advice, which otherwise would have been included in cost of investments. In 2011, all acquisition advice is expensed. 4 Audit of the Halma Group Pension Plan. 2011 £000 317 9,103 9,420 2011 £000 690 9,525 135 10,350 121 47 10,518 2011 £000 518,428 (345,841) 172,587 (11,072) (62,066) – (59) (1,098) 98,292 2011 £000 11,523 10,207 20,953 (346) – (55) 259,322 135,035 123 530 653 13 12 216 10 5,871 837 2010 £000 189 6,377 6,566 2010 £000 972 8,375 75 9,422 52 13 9,487 2010 £000 459,118 (310,530) 148,588 (9,616) (55,059) 382 – (2,921) 81,374 2010 £000 11,461 9,771 18,299 (138) (382) 42 232,285 125,925 98 510 608 12 12 230 9 5,672 739 Halma p.l.c. Annual Report and Accounts 2011 88 Financial Statements Notes to the Accounts continued 7 Employee information The average number of persons employed by the Group (including Directors) was: United Kingdom Overseas Group employee costs comprise: Wages and salaries Social security costs Pension costs (note 28) Share-based payment charge (note 23) 2011 Number 1,705 2,170 3,875 2011 £000 113,705 16,971 4,638 2,783 138,097 2010 Number 1,755 1,934 3,689 2010 £000 103,530 15,692 4,636 2,067 125,925 8 Directors’ remuneration The remuneration of the Directors, who are the key management personnel of the Group, is set out on pages 63 to 65 within the Remuneration report described as being audited and forms part of these financial statements. Directors’ remuneration comprises: Wages, salaries and fees Pension costs Share-based payment charge 9 Taxation Current tax UK corporation tax at 28% (2010: 28%) Overseas taxation Adjustments in respect of prior years Total current tax charge Deferred tax Origination and reversal of timing differences Adjustments in respect of prior years Total deferred tax charge Total tax charge recognised in the Consolidated Income Statement Reconciliation of the effective tax rate: Profit before tax Tax at the UK corporation tax rate of 28% (2010: 28%) Overseas tax rate differences Permanent differences Adjustments in respect of prior years Effective tax rate (after amortisation of acquired intangible assets and acquisition costs) Profit before tax (before amortisation of acquired intangible assets and acquisition costs) Total tax charge (before amortisation of acquired intangible assets and acquisition costs) Effective tax rate (before amortisation of acquired intangible assets and acquisition costs) 2011 £000 2,791 54 1,004 3,849 2010 £000 1,875 75 580 2,530 2011 £000 2010 £000 10,009 14,154 947 25,110 1,361 (613) 748 25,858 8,608 10,941 238 19,787 1,013 137 1,150 20,937 98,292 81,374 27,522 2,996 (4,994) 334 25,858 26.3% 104,551 27,367 26.2% 22,785 2,144 (4,367) 375 20,937 25.7% 86,214 22,807 26.5% Halma p.l.c. Annual Report and Accounts 2011 89 9 Taxation continued In addition to the amount charged to the Consolidated Income Statement, the following amounts relating to tax have been recognised directly in the Consolidated Statement of Comprehensive Income and Expenditure: Current tax Corporation tax deduction on foreign exchange loss reclassified to Other comprehensive income on consolidation Other Deferred tax (note 21) Retirement benefit obligations Short-term timing differences 2011 £000 2010 £000 – – – 964 (77) 887 887 1,592 9 1,601 1,300 16 1,316 2,917 In addition to the amounts charged to the Consolidated Income Statement and the Consolidated Statement of Comprehensive Income and Expenditure, the following amounts relating to tax have been recognised directly in equity: Current tax Excess tax deductions related to share-based payments on exercised options Deferred tax (note 21) Change in estimated excess tax deductions related to share-based payments 10 Dividends Amounts recognised as distributions to shareholders in the year Final dividend for the year to 3 April 2010 (28 March 2009) Interim dividend for the year to 2 April 2011 (3 April 2010) Dividends declared in respect of the year Interim dividend for the year to 2 April 2011 (3 April 2010) Proposed final dividend for the year to 2 April 2011 (3 April 2010) 2011 £000 93 220 313 2010 £000 73 949 1,022 Per ordinary share 2011 pence 2010 pence 2011 £000 2010 £000 5.19 3.54 8.73 3.54 5.56 9.10 4.78 3.31 8.09 3.31 5.19 8.50 19,550 13,341 32,891 13,341 20,928 34,269 17,935 12,459 30,394 12,459 19,550 32,009 The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. 11 Goodwill Cost At beginning of year Additions (note 24) Exchange adjustments At end of year Provision for impairment At beginning and end of year Carrying amounts 2011 £000 2010 £000 195,334 66,798 (2,178) 259,954 – 259,954 198,084 4,585 (7,335) 195,334 – 195,334 Halma p.l.c. Annual Report and Accounts 2011 90 Financial Statements Notes to the Accounts continued 11 Goodwill continued Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. Before recognition of impairment losses, the carrying amount of goodwill has been allocated as follows: Health and Analysis Water Photonics Health Optics Fluid Technology Infrastructure Sensors Fire Detection Security Sensors Automatic Door Sensors Elevator Safety Industrial Safety Bursting Disks Safety Interlocks Asset Monitoring Total Group 2011 £000 (Restated)* 2010 £000 11,756 43,927 70,852 29,990 156,525 11,275 15,795 45,433 10,068 82,571 7,239 5,610 8,009 20,858 259,954 10,463 42,755 32,044 6,676 91,938 10,961 15,795 45,433 10,018 82,207 7,570 5,610 8,009 21,189 195,334 * During the year, Radio-Tech Limited was moved from the Group’s Asset Monitoring sub-sector to its Water sub-sector. The prior year has therefore been restated to reflect this change and to ensure that the presentation is on a consistent basis. Goodwill values have been tested for impairment by comparing them against the value in use in perpetuity of the relevant CGUs. The value in use calculations were based on projected cash flows, derived from the latest budget approved by the Board, discounted at the Group’s pre-tax estimated short-term discount rate to calculate their net present value. Key assumptions used in ‘value in use’ calculations The calculation of ‘value in use’ is most sensitive to the following assumptions, which are the same for all CGUs: −(cid:3) Discount rates; −(cid:3) Market share during the budget period for the financial year to March 2012; and −(cid:3) Growth rate used to extrapolate risk adjusted cash flows beyond the budget period. Discount rates are based on the Group’s borrowing and equity profile. The Directors do not currently expect any significant change in the present base discount rate of 9.05% (2010: 9.84%). The base discount rate of 9.05%, which is pre-tax and is based on short-term variables, may differ from the Weighted Average Cost of Capital (WACC) used in long-term return measures such as ROTIC. The base discount rate was increased to reflect the size of each business and specific geographic and industry factors, resulting in the impairment testing using a rate of 13.05%. Market share assumptions are important because, as well as the growth rates (as noted below), management assess how each unit’s relative position to its competitors might change over the budget period. Management expects each unit’s position to be stable over the projected period. Growth rate estimates of respectively 3.25%, 2.0% and 1.25% for the first, second and third year onwards into perpetuity following the budget year are based on conservative estimates keeping in view past performance growth. Sensitivity to changes in assumptions Management believes that no reasonable potential change in any of the above key assumptions would cause the carrying value of any unit to exceed its recoverable amount. Halma p.l.c. Annual Report and Accounts 2011 91 12 Other intangible assets Cost At 28 March 2009 Assets of businesses acquired Additions at cost Disposals Retirements Exchange adjustments At 3 April 2010 Assets of businesses acquired (note 24) Additions at cost Disposals Retirements Reclassification of category4 Exchange adjustments At 2 April 2011 Accumulated amortisation At 28 March 2009 Charge for the year Disposals Retirements Exchange adjustments At 3 April 2010 Charge for the year Disposals Retirements Reclassification of category4 Exchange adjustments At 2 April 2011 Carrying amounts At 2 April 2011 At 3 April 2010 Acquired intangibles Customer relationships1 £000 Trademarks2 £000 Total £000 Internally generated capitalised development costs £000 Computer software £000 Other intangibles3 £000 22,913 – – – – (662) 22,251 36,881 – – – – 171 59,303 11,768 2,260 – – (155) 13,873 2,398 – – – 5 16,276 43,027 8,378 21,871 – – – – (973) 20,898 7,509 – – – – (217) 28,190 5,592 2,580 – – (126) 8,046 2,362 – – – (42) 10,366 17,824 12,852 44,784 – – – – (1,635) 43,149 44,390 – – – – (46) 87,493 17,360 4,840 – – (281) 21,919 4,760 – – – (37) 26,642 60,851 21,230 18,286 – 3,072 – (640) (371) 20,347 – 4,735 (23) (29) – (163) 24,867 8,092 3,762 – (621) (88) 11,145 4,168 – – – (99) 15,214 9,653 9,202 7,773 6 1,260 (313) – (205) 8,521 1 1,019 (77) (241) (64) (127) 9,032 4,751 1,116 (286) – (110) 5,471 1,217 (66) (208) (40) (76) 6,298 2,734 3,050 264 – 38 – – (15) 287 127 6 (16) (21) – (15) 368 10 53 – – 1 64 62 – (6) – (4) 116 252 223 Total £000 71,107 6 4,370 (313) (640) (2,226) 72,304 44,518 5,760 (116) (291) (64) (351) 121,760 30,213 9,771 (286) (621) (478) 38,599 10,207 (66) (214) (40) (216) 48,270 73,490 33,705 1 Customer relationship assets are amortised over their useful economic lives estimated to be between three and ten years. 2 Trademarks (including protected technical knowledge) are amortised over their useful economic lives estimated to be between three and ten years. 3 Other intangibles comprise licences and product registration costs amortised over their useful economic lives estimated to be between three and five years. 4 The net transfer from property, plant and equipment to computer software relates to identifiable software assets. Halma p.l.c. Annual Report and Accounts 2011 92 Financial Statements Notes to the Accounts continued 13 Property, plant and equipment Land and buildings Freehold properties £000 35,243 21 – 44 – – (964) 34,344 – 1,881 – – – (385) 35,840 6,951 – 747 – – (225) 7,473 792 – – – (116) 8,149 Long leases £000 1,665 – (19) 104 (12) 450 18 2,206 1 120 (4) – – (30) 2,293 516 (11) 159 (1) 91 6 760 165 (1) – – (12) 912 27,691 26,871 1,381 1,446 Short leases £000 5,682 – – 217 (151) – (123) 5,625 6 584 (11) (231) 15 (54) 5,934 3,090 – 607 (136) – (89) 3,472 639 (10) (215) 7 (41) 3,852 2,082 2,153 Cost At 28 March 2009 Assets of businesses acquired Assets of businesses sold Additions at cost Disposals Reclassification of category Exchange adjustments At 3 April 2010 Assets of businesses acquired (note 24) Additions at cost Disposals Retirements Reclassification of category (note 12) Exchange adjustments At 2 April 2011 Accumulated depreciation At 28 March 2009 Assets of businesses sold Charge for the year Disposals Reclassification of category Exchange adjustments At 3 April 2010 Charge for the year Disposals Retirements Reclassification of category (note 12) Exchange adjustments At 2 April 2011 Carrying amounts At 2 April 2011 At 3 April 2010 14 Associates Interests in associates Optomed Oy PSRM Immobilien AG Acquisition cost of investments Exchange adjustments Group’s share of loss of associates Interests in associates Plant, equipment and vehicles £000 106,059 90 (575) 9,416 (7,806) (450) (3,001) 103,733 1,744 11,814 (3,051) (2,862) 49 (1,447) 109,980 66,684 (470) 9,948 (6,963) (91) (1,691) 67,417 9,927 (2,582) (2,773) 33 (779) 71,243 38,737 36,316 2011 £000 1,708 338 2,046 2 (59) 1,989 Total £000 148,649 111 (594) 9,781 (7,969) – (4,070) 145,908 1,751 14,399 (3,066) (3,093) 64 (1,916) 154,047 77,241 (481) 11,461 (7,100) – (1,999) 79,122 11,523 (2,593) (2,988) 40 (948) 84,156 69,891 66,786 2010 £000 – – – – – – Halma p.l.c. Annual Report and Accounts 2011 93 2011 £000 5,442 (5,094) 348 72 100 (406) (59) 2010 £000 – – – – – – – 14 Associates continued Aggregated amounts relating to associates Total assets Total liabilities Net assets Group’s share of net assets of associates Total revenue Loss Group’s share of loss of associates Although the Group holds only 15% of the voting rights, Optomed Oy is treated as an associate because the Group is one of three investors of which two must approve certain major decisions made by the business. The Group also holds 50% of the equity of PSRM Immobilien AG (PSRM), which it acquired as part of the Medicel AG business acquisition. PSRM is treated as an associate, and not a subsidiary, because the party holding the remaining 50% is considered to exert more control. Both associates have a 31 December year end, although results coterminous with the Group’s year end have been consolidated. Details of the Group’s associates at 2 April 2011 are as follows: Country of incorporation Finland Switzerland Proportion of ownership interest Principal activity 15% Design, manufacture and selling Property management 50% Name of associate Optomed Oy PSRM Immobilien AG 15 Inventories Raw materials and consumables Work in progress Finished goods and goods for resale 2011 £000 30,832 7,050 16,658 54,540 2011 £000 8,602 (917) 1,117 44 8,846 2010 £000 26,166 5,738 15,110 47,014 2010 £000 8,616 (700) 1,029 (343) 8,602 The above is stated net of provision for slow-moving and obsolete stock, movements of which are shown below: At beginning of the year Amounts reversed against inventories previously impaired Write downs of inventories recognised as an expense Exchange adjustments At end of the year There is no material difference between the balance sheet value of inventories and their cost of replacement. None of the inventory has been pledged as security. 16 Trade and other receivables Trade receivables Allowance for doubtful debts Other receivables Prepayments and accrued income 2011 £000 100,184 (2,150) 98,034 3,987 8,435 110,456 2010 £000 89,597 (1,566) 88,031 2,868 7,178 98,077 Halma p.l.c. Annual Report and Accounts 2011 94 Financial Statements Notes to the Accounts continued 16 Trade and other receivables continued The movement in the allowance for doubtful debts in respect of trade receivables during the year was as follows: At beginning of the year Net impairment loss recognised Amounts recovered against trade receivables previously written down Exchange adjustments At end of the year 2011 £000 1,566 1,163 (574) (5) 2,150 2010 £000 1,457 416 (289) (18) 1,566 An impairment has been recorded against the trade receivables which the Group believes may not be recoverable. In the case of trade receivables that are past due, management makes an assessment of the risk of non-collection, taking into account factors such as previous default experience, any disputes or other factors delaying payment and the risk of bankruptcy or other failure of the customer to meet their obligations. For trade receivables that are not past due, taking into account good historical collection experience, management records an impairment charge only where there is a specific risk of non-collection. The fair value of trade and other receivables approximates to book value due to the short-term maturities associated with these items. There is no impairment risk identified with regards to prepayments and accrued income or other receivables where no amounts are past due. The ageing of trade receivables was as follows: Gross trade receivables Trade receivables net of doubtful debts Not yet due Up to one month overdue Up to two months overdue Up to three months overdue Over three months overdue 17 Borrowings Unsecured bank overdraft falling due within one year Unsecured bank loans: Falling due within one year Falling due after more than one year Total borrowings 2011 £000 74,906 17,194 4,030 1,554 2,500 100,184 2010 £000 65,610 16,420 3,176 843 3,548 89,597 2011 £000 74,628 17,151 3,897 1,462 896 98,034 2011 £000 – – 79,688 79,688 2010 £000 65,362 16,401 3,149 811 2,308 88,031 2010 £000 317 – 21,924 22,241 Information concerning the security, currency, interest rates and maturity of the Group’s borrowings is given in note 26 to the accounts. 18 Trade and other payables: falling due within one year Trade payables Other taxation and social security Provision for contingent purchase consideration Other payables Accruals and deferred income 2011 £000 45,118 4,604 5,882 2,673 27,234 85,511 2010 £000 40,210 4,641 1,082 2,092 18,930 66,955 Halma p.l.c. Annual Report and Accounts 2011 95 2011 £000 2,887 1,593 4,480 Legal, contractual and other £000 398 306 274 (274) (113) 9 600 2010 £000 1,515 1,954 3,469 Total £000 3,469 1,150 744 (433) (427) (23) 4,480 Dilapidations and empty property £000 1,802 206 127 (112) (232) (17) 1,774 Product warranty £000 1,269 638 343 (47) (82) (15) 2,106 19 Provisions Provisions are presented as: Current Non-current At beginning of the year Additional provision in the year Acquired on acquisition Utilised during the year Released during the year Exchange adjustments At end of the year Dilapidations and empty property provisions Dilapidations and empty property provisions exist where the Group has lease contracts under which the unavoidable costs of meeting its obligations under the contracts exceed the economic benefits expected to be received under them. The provisions comprise the Directors’ best estimates of future payments: a) to restore the fabric of buildings to their original condition where it is a condition of the leases prior to return of the properties; and b) on vacant properties, the rental costs of which are not expected to be recoverable from subleasing the properties. These commitments cover the period from 2011 to 2028, though they predominantly fall due within five years. Product warranty Product warranty provisions reflect commitments made to customers on the sale of goods in the ordinary course of business and included within the Group companies’ standard terms and conditions. Warranty commitments typically apply for a 12-month period. Any warranties longer than 12 months are not significant and the provision represents the Directors’ best estimate of the Group’s liability based on past experience. Legal, contractual and other Legal, contractual and other comprise mainly amounts reserved against open legal and contractual disputes. The Company has on occasion been required to take legal or other actions to defend itself against proceedings brought by other parties. Provisions are made for the expected costs associated with such matters, based on past experience of similar items and other known factors, taking into account professional advice received, and represent Directors’ best estimate of the likely outcome. The timing of utilisation of these provisions is frequently uncertain reflecting the complexity of issues and the outcome of various court proceedings and negotiations. Contractual and other provisions represent the Directors’ best estimate of the cost of settling future obligations. Unless specific evidence exists to the contrary, these reserves are shown as current. However, no provision is made for proceedings which have been or might be brought by other parties against Group companies unless the Directors, taking into account professional advice received, assesses that it is more likely than not that such proceedings may be successful. 20 Trade and other payables: falling due after one year Provision for contingent purchase consideration Other payables 2011 £000 21,155 1,693 22,848 2010 £000 1,839 2,715 4,554 Halma p.l.c. Annual Report and Accounts 2011 96 Financial Statements Notes to the Accounts continued 21 Deferred tax At 3 April 2010 (Charge)/credit to Consolidated income statement (Charge)/credit to Consolidated statement of comprehensive income Credit to equity Acquired (note 24) Exchange adjustments At 2 April 2011 At 28 March 2009 (Charge)/credit to Consolidated income statement (Charge)/credit to Consolidated statement of comprehensive income Credit to equity Acquired Exchange adjustments At 3 April 2010 Retirement benefit obligations £000 12,060 Acquired intangible assets £000 (6,493) Accelerated tax depreciation £000 (8,579) Short–term timing differences £000 2,972 Share–based payment £000 1,801 Goodwill timing differences £000 (4,342) Total £000 (2,581) (1,674) 1,445 907 (1,102) (314) (10) (748) (964) – – – 9,422 – – (9,472) 90 (14,430) – – (211) – (7,883) 77 – (52) 96 1,991 – 220 – – 1,707 – – 55 – (4,297) (887) 220 (9,680) 186 (13,490) Retirement benefit obligations £000 11,920 Acquired intangible assets £000 (8,807) Accelerated tax depreciation £000 (8,247) Short–term timing differences £000 3,021 Share–based payment £000 1,218 Goodwill timing differences £000 (3,455) Total £000 (4,350) (1,160) 1,869 (676) 61 (366) (878) (1,150) 1,300 – – – 12,060 – – – 445 (6,493) – – – 344 (8,579) 16 – 140 (266) 2,972 – 949 – – 1,801 – – (277) 268 (4,342) 1,316 949 (137) 791 (2,581) Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes: Deferred tax liability Deferred tax asset Net deferred tax liability Movement in deferred tax liability: At beginning of year (Charge)/credit to Consolidated income statement: UK Overseas (Charge)/credit to Consolidated statement of comprehensive income Credit to equity Acquired (note 24) Exchange adjustments At end of year 2011 £000 (24,269) 10,779 (13,490) 2011 £000 (2,581) (849) 101 (887) 220 (9,680) 186 (13,490) 2010 £000 (13,193) 10,612 (2,581) 2010 £000 (4,350) (107) (1,043) 1,316 949 (137) 791 (2,581) The UK government's budget statement in March 2011 announced a phased reduction in the main UK corporation tax rate from 28% to 23% with the first 2% reduction taking effect from 1 April 2011 being substantively enacted on 29 March 2011. This rate reduction has no material impact on the financial statements as at 2 April 2011. No account will be taken of the expected further 3% reduction in UK tax rates until substantive enactment of these changes. Until this change and other potential changes are enacted it is not possible to identify the impact these changes might have. However, for indicative purposes only, had the UK main corporate tax rate been reduced to 23% the net impact on recognised deferred tax assets and liabilities at 2 April 2011 would not have been material. Halma p.l.c. Annual Report and Accounts 2011 97 21 Deferred tax continued No deferred tax liability is recognised on temporary differences of £16,079,000 (2010: £13,921,000) relating to the unremitted earnings of overseas subsidiaries as the Group is able to control the timings of the reversal of these temporary differences and it is probable that they will not reverse in the forseeable future. Temporary timing differences in connection with interests in associates are insignificant. At 2 April 2011 the Group had unused capital tax losses of £808,000 (2010: £871,000) for which no deferred tax asset has been recognised. 22 Share capital Ordinary shares of 10p each Issued and fully paid 2011 £000 37,824 2010 £000 37,765 The number of ordinary shares in issue at 2 April 2011 was 378,235,685 (2010: 377,654,037), including treasury shares of 1,847,368 (2010: 1,130,036). Changes during the year in the issued ordinary share capital were as follows: At 3 April 2010 Share options exercised At 2 April 2011 Issued and fully paid £000 37,765 59 37,824 The total consideration received in cash in respect of share options exercised amounted to £844,000. At 2 April 2011 options in respect of 2,975,991 (2010: 4,133,788) ordinary shares remained outstanding. Further details of these are given in note 23 to the accounts. At the date of these accounts, the number of ordinary shares in issue was 378,247,685 including treasury shares of 1,847,368. 23 Share-based payments The total cost recognised in the Consolidated income statement in respect of share-based payment schemes (the ‘employee share plans’) was as follows: Share incentive plan Share option plans Performance share plan Equity-settled £000 415 (9) 2,169 2,575 Cash-settled £000 – – 208 208 2011 Total £000 415 (9) 2,377 2,783 Equity-settled £000 337 (33) 1,509 1,813 Cash-settled £000 – – 254 254 2010 Total £000 337 (33) 1,763 2,067 The Group has recorded liabilities of £364,000 (2010: £398,000) in respect of the cash settled portion of the awards granted under the performance share plan. Share incentive plan Shares awarded under this Plan are purchased in the market by the Plan’s trustees at the time of the award and are held in trust until their transfer to qualifying employees, which is conditional upon completion of three years’ service. The costs of providing this Plan are recognised in the Consolidated income statement over the three-year vesting period. Halma p.l.c. Annual Report and Accounts 2011 98 Financial Statements Notes to the Accounts continued 23 Share-based payments continued Share option plans The Group has outstanding issued options to acquire ordinary shares in the Company under a share option plan, approved by shareholders in 1999. This share option plan provided for the grant of two categories of option, both of which are subject to performance criteria. Section A options are exercisable after three years if the Group’s earnings per share growth exceeds the growth in the Retail Price Index plus 3% per annum. Section B options are exercisable after five years if the Company’s earnings per share growth exceeds the earnings per share of all but the top quarter of companies which were within a peer group at the date of grant of any option. All options lapse if not exercised within 10 years from the date of grant. No further awards have been made under the Company share option plan since 3 August 2005. Options in respect of 2,975,991 ordinary shares remained outstanding at 2 April 2011 under the 1999 Plan. Subject to the performance restrictions on the exercise of options granted under this Plan, options are exercisable for the periods and at the prices set out below: Number of shares 73,300 92,830 284,042 360,378 104,528 360,600 509,975 562,424 627,914 Seven years from 2004 2005 2006 2007 2008 Option price 163.5p 144.33p 134.0p 142.25p 145.67p 163.5p 144.33p 134.0p 142.25p Five years from 2006 2007 2008 2009 A summary of the movements in options issued under the share option plans is as follows: Outstanding at beginning of year Exercised during the year Lapsed during the year Outstanding at end of year Exercisable at end of year 2011 Weighted average option price 139.90p 145.08p 115.88p 143.54p 141.99p Number of share options 4,133,788 (581,648) (576,149) 2,975,991 915,078 2010 Weighted average option price 137.98p 134.28p 139.12p 139.90p 143.19p Number of share options 6,776,695 (2,263,360) (379,547) 4,133,788 1,496,726 The weighted average share price at the date of exercise for share options exercised during the year was 303.17p (2010: 225.03p). The options outstanding at 2 April 2011 had exercise prices from 134.0p to 163.5p (2010: 111.0p to 163.5p) and a weighted average remaining contractual life of 2.2 years (2010: 2.6 years). Halma p.l.c. Annual Report and Accounts 2011 99 23 Share-based payments continued Under the transitional provisions of IFRS 1 only the options awarded in 2004, 2005 and 2006 under the 1999 Plan have been recognised under IFRS 2. The fair value of these options was calculated using the Black-Scholes model using the following assumptions: Option section Dividend yield Expected volatility Expected life (years) Risk free rate (%) Option price (p) Fair value per option (p) 2006 A 4% 25% 4 4.1% 145.67 24.70 A 4% 25% 4 4.3–4.9% 142.25–157.92 25.71-27.22 2005 B 4% 25% 6 4.9% 142.25 29.25 A 4% 25% 4 3.8% 134.00 22.18 2004 B 4% 25% 6 4.0% 134.00 25.35 The expected volatility was determined by calculating the historic volatility of the Group’s share price over the previous six years. Performance share plan The performance share plan was approved by shareholders on 3 August 2005 and replaced the previous share option plans from which no further grants can be made. Awards made under this Plan vest after three years on a sliding scale subject to the Group’s relative Total Shareholder Return against the FTSE 250 excluding financial companies, combined with an absolute Return on Total Invested Capital measure. Awards which do not vest on the third anniversary of their award lapse. A summary of the movements in share awards granted under the performance share plan is as follows: Outstanding at beginning of year Granted during the year Vested during the year (pro-rated for ‘good leavers’) Lapsed during the year Outstanding at end of year Exercisable at end of year 2011 Number of shares awarded 4,263,672 1,338,629 (1,076,240) (140,380) 4,385,681 – 2010 Number of shares awarded 3,939,960 1,640,315 (1,180,518) (136,085) 4,263,672 – The weighted average share price at the date of awards vesting during the year was 271.4p (2010: 197.0p). The performance shares outstanding at 2 April 2011 had a weighted average remaining contractual life of 1.4 years (2010: 1.5 years). The fair value of these awards was calculated using an appropriate simulation method to reflect the likelihood of the market-based performance conditions, which attach to half of the award, being met, using the following assumptions: Expected volatility (%) Expected life (years) Share price on date of grant (p) Option price (p) Fair value per option (%) Fair value per option (p) 2011 27% 3 281.08 nil 66.9% 188.04 2010 27.5% 3 196.90 nil 61.8% 121.68 2009 25% 3 192.75 nil 56% 107.94 The expected volatility was determined by calculating the historic volatility of the Group’s share price over the previous three years. Halma p.l.c. Annual Report and Accounts 2011 100 Financial Statements Notes to the Accounts continued 24 Acquisitions The Group made seven acquisitions during the year. Below, in order, are summaries of the assets and liabilities acquired and the purchase consideration of: A) the total of all acquisitions; B) each of the three largest acquisitions, namely Medicel AG (including its wholly-owned subsidiary Robutec GmbH and its associate, PSRM Immobilien AG), Accudynamics LLC and Alicat Scientific, Inc; and C) the total of the remaining four acquisitions. (A) Total of all acquisitions Non-current assets Intangible assets Investment in associate Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Deferred tax* Total assets Current liabilities Trade and other payables Provisions Corporation tax* Non-current liabilities Deferred tax* Total liabilities Net assets of businesses acquired Cash consideration Contingent purchase consideration (current year acquisitions) Contingent purchase consideration (revisions to prior year estimates) Total consideration Goodwill arising on current year acquisitions Goodwill arising on prior year acquisitions Goodwill arising on acquisitions Book value £000 1 – 769 2,490 5,374 2,672 – 11,306 (4,218) (680) (1,031) (10) (5,939) 5,367 Provisional fair value adjustments £000 44,517 338 982 290 (54) – 119 46,192 108 (64) (16) (9,789) (9,761) 36,431 Total £000 44,518 338 1,751 2,780 5,320 2,672 119 57,498 (4,110) (744) (1,047) (9,799) (15,700) 41,798 82,063 24,596 1,937 108,596 64,861 1,937 66,798 * Tax assets and liabilities of acquisitions in the same tax jurisdiction have been offset where applicable. Due to their contractual dates, the fair value of receivables acquired (shown above) approximates to the gross contractual amounts receivable. The amount of gross contractual receivables not expected to be recovered is immaterial. There are no material contingent liabilities recognised in accordance with paragraph 23 of IFRS 3 (Revised). £1,293,000 of the goodwill arising on acquisitions in the year is expected to be deductible for tax purposes. Together, these acquisitions contributed £6,910,000 of revenue and £1,503,000 of profit after tax for the year ended 2 April 2011. If these acquisitions had been held since the start of the financial year, it is estimated the Group’s reported revenue and profit after tax would have been £25,637,000 and £7,592,000 higher respectively. Adjustments were made to the book values of the net assets of the companies acquired to reflect their provisional fair values to the Group. Acquired inventories were valued at the lower of cost and net realisable value adopting Group bases and any liabilities for warranties relating to past trading were recognised. Other previously unrecognised assets and liabilities at acquisition were included and accounting policies were aligned with those of the Group where appropriate. The adjustment to goodwill arising on prior year acquisitions related to revisions to the estimated contingent purchase considerations payable on Fiberguide Industries, Inc (£1,478,000) and SphereOptics LLC (£459,000). Halma p.l.c. Annual Report and Accounts 2011 101 24 Acquisitions continued Analysis of cash outflow in the Consolidated cash flow statement Cash consideration in respect of current year acquisitions Cash acquired on acquisitions Contingent consideration paid in relation to prior year acquisitions* Net cash outflow relating to acquisitions 2011 £000 82,063 (2,672) 2,702 82,093 *Of the £2,702,000 (2010: £11,000) contingent purchase consideration payment, £1,122,000 (2010: £11,000) had been provided in the prior years’ financial statements. (B i) Medicel AG Non-current assets Intangible assets Investment in associate Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Provisions Corporation tax Non-current liabilities Deferred tax Total liabilities Net assets of businesses acquired Cash consideration Contingent purchase consideration Total consideration Goodwill arising on acquisition Book value £000 Provisional fair value adjustments £000 – – – 160 2,734 540 3,434 (1,774) (634) (456) – (2,864) 570 29,310 338 515 642 172 – 30,977 316 171 – (4,562) (4,075) 26,902 2010 £000 1,703 (38) 11 1,676 Total £000 29,310 338 515 802 2,906 540 34,411 (1,458) (463) (456) (4,562) (6,939) 27,472 46,312 19,416 65,728 38,256 On 8 March 2011, the Group acquired 100% of the issued share capital of Medicel AG, together with its subsidiary Robutec GmbH and a 50% owned associate PSRM Immobilien AG (together known as Medicel). Medicel is based in Switzerland and is a leader in the design and manufacture of single use injector devices for lenses used in cataract surgery. Medicel forms part of the Health and Analysis sector and was acquired to extend the Group’s presence in the ophthalmic surgical instrument market which is forecast to see continued growth. The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by customer-related and trademark intangibles of £24.2m and £5.1m respectively, with residual goodwill arising of £38.3m. The goodwill represents the value of the acquired workforce and the opportunity to extend Halma’s capability in the medical market. The initial consideration was CHF70,000,000 followed by contingent consideration payable on or around May 2012, May 2013 and May 2014 totalling between CHF nil and CHF30,000,000 dependent on the profits of the acquired business for each of the three years up to March 2014. The Directors estimate that the maximum earnout of CHF30,000,000 will be paid. The Medicel acquisition contributed £576,000 of revenue and £146,000 profit after tax for the year ended 2 April 2011. Halma p.l.c. Annual Report and Accounts 2011 102 Financial Statements Notes to the Accounts continued 24 Acquisitions continued (B ii) Accudynamics LLC Non-current assets Intangible assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Provisions Corporation tax Non-current liabilities Deferred tax Total liabilities Net assets of businesses acquired Cash consideration Contingent purchase consideration Total consideration Goodwill arising on acquisition Book value £000 – 711 1,188 1,198 1,859 4,956 (1,196) (46) (943) (10) (2,195) 2,761 Provisional fair value adjustments £000 7,160 422 (127) 45 – 7,500 (72) (126) (16) (2,773) (2,987) 4,513 Total £000 7,160 1,133 1,061 1,243 1,859 12,456 (1,268) (172) (959) (2,783) (5,182) 7,274 15,633 4,417 20,050 12,776 On 16 December 2010, the Group acquired 100% of the issued share capital of Accudynamics LLC (ADL). ADL is based in Massachusetts, USA and manufactures components primarily for the medical diagnostics system and device markets. ADL forms part of the Health and Analysis sector and was purchased for the reasons (a) to (c) below. The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by customer-related intangibles of £7.2m with residual goodwill arising of £12.8m. The goodwill represents: a) the value of the acquired workforce; b) the ability to offer OEM customers integrated sub-assemblies incorporating components from different Halma companies; and c) the ability to exploit the Group’s existing distribution arrangements, particularly outside of North America. The initial consideration was US$24,775,000 followed by contingent consideration payable on or around May 2011 of between US$nil and US$7,000,000 dependent on the earnings growth of the acquired business for the nine months up to March 2011. The maximum earnout of US$7,000,000 was paid in June 2011. The ADL acquisition contributed £2,833,000 of revenue and £561,000 of profit after tax for the year ended 2 April 2011. Halma p.l.c. Annual Report and Accounts 2011 103 Book value £000 Provisional fair value adjustments £000 1 – 432 784 213 368 – 1,798 (222) – – (222) 1,576 6,397 74 (20) 6 – – 47 6,504 (88) (94) (2,430) (2,612) 3,892 Total £000 6,398 74 412 790 213 368 47 8,302 (310) (94) (2,430) (2,834) 5,468 16,447 10,979 24 Acquisitions continued (B iii) Alicat Scientific, Inc. Non-current assets Intangible assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Corporation tax Deferred tax Total assets Current liabilities Trade and other payables Provisions Non-current liabilities Deferred tax Total liabilities Net assets of businesses acquired Cash consideration Goodwill arising on acquisition On 2 November 2010, the Group acquired 100% of the issued share capital of Alicat Scientific, Inc. (Alicat). Alicat is based in Arizona, USA and is a leading manufacturer of mass flow meters, mass flow controllers, laminar flow meters, volumetric flow meters, pressure meters and gauges used in life science and industrial applications requiring high precision measurement of fluid flows. Alicat forms part of the Health and Analysis sector and was acquired for the additional strength it brings to our Fluid Technology product range. The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by customer-related and trademark intangibles of £4.9m and £1.5m respectively with residual goodwill arising of £11.0m. The goodwill represents the value of the acquired workforce, cross-selling opportunities and the ability to exploit the Group’s existing distribution arrangements, particularly in Asia. The initial consideration was US$26,254,000. There are no contingent consideration payment arrangements. The Alicat acquisition contributed £2,958,000 of revenue and £789,000 of profit after tax for the year ended 2 April 2011. Halma p.l.c. Annual Report and Accounts 2011 104 Financial Statements Notes to the Accounts continued 24 Acquisitions continued (C) Remaining four acquisitions Non-current assets Intangible assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Deferred tax Total assets Current liabilities Trade and other payables Provisions Non-current liabilities Deferred tax Total liabilities Net assets of businesses acquired Cash consideration Contingent purchase consideration Total consideration Goodwill arising on acquisitions The remaining four acquisitions comprised: Book value £000 – 58 710 658 60 – 1,486 (1,026) – – (1,026) 460 Provisional fair value adjustments £000 1,650 (29) (205) (277) – 119 1,258 (48) (15) (71) (134) 1,124 Total £000 1,650 29 505 381 60 119 2,744 (1,074) (15) (71) (1,160) 1,584 3,671 763 4,434 2,850 On 20 May 2010, Ocean Optics, Inc., which is within the Health and Analysis sector, acquired the assets of Sandhouse Design, LLC, a designer and manufacturer of modular mid-infrared spectrometers, LEDs, light sources and other photonics products for an initial consideration of £236,000. On 30 November 2010, Apollo (Beijing) Fire Products Company, Ltd. acquired the initial assets and registrations of Beijing Luhe Fire Fighting Equipment Ltd. (Beijing Luhe) for an initial cash consideration of £371,000, but is subject to further consideration based on net asset valuations and other conditions. Bejing Luhe is a designer and manufacturer of fire detection devices and control equipment. This acquisition further improved Apollo’s access to the Chinese domestic fire market, which is within the Infrastructure Sensors sector. On 1 March 2011, Palintest Limited acquired the assets of the Water Technology Division (provider of water and environmental testing products) of Wagtech International Limited for cash consideration of £3,033,000. The acquired business was merged with Palintest Limited, which is within the Health and Analysis sector. On 16 March 2011, the Group acquired the issued share capital of Guromed USA, LLC (Guromed) for an initial cash consideration of £31,000, but is subject to further consideration based on net asset valuations and contingent consideration. Guromed is a distributor of diagnostic instruments. The acquired business is within the Health and Analysis sector. The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by customer-related and trademark intangibles of £0.7m and £0.9m respectively, with residual goodwill arising of £2.9m. The goodwill represents the value of the acquired workforces, cross-selling opportunities, and the ability to exploit the Group’s distribution arrangements. Together, the above acquisitions contributed £543,000 of revenue and £7,000 of profit after tax for the year ended 2 April 2011. The expected, minimum and maximum contingent considerations of the above acquisitions are £763,000, £nil and £1,089,000 respectively. Halma p.l.c. Annual Report and Accounts 2011 105 2011 £000 2010 £000 99,449 – 11,523 1,217 4,230 83 4,760 2,015 (6,399) (55) 116,823 (5,369) (7,944) 9,670 113,180 (18,116) 95,064 84,295 (382) 11,461 1,116 3,815 19 4,840 1,333 (6,902) 42 99,637 2,990 3,636 6,427 112,690 (12,352) 100,338 2011 £000 2010 £000 11,872 (58,004) (28) (46,160) 9,082 (37,078) 2011 £000 42,610 – 42,610 (3,425) 58,845 4,848 60,268 (51,186) 9,082 2010 £000 31,323 (317) 31,006 25 Notes to the Consolidated Cash Flow Statement Reconciliation of profit from operations to net cash inflow from operating activities Profit on continuing operations before finance income and expense and share of results of associates Profit on disposal of operations before taxation Depreciation of property, plant and equipment Amortisation of computer software Amortisation of capitalised development costs and other intangibles Retirement/disposals of capitalised development costs and other intangibles Amortisation of acquired intangible assets Share-based payment expense in excess of amounts paid Additional payments to pension plans (Profit)/loss on sale of property, plant and equipment and computer software Operating cash flows before movement in working capital (Increase)/decrease in inventories (Increase)/decrease in receivables Increase in payables and provisions Cash generated from operations Taxation paid Net cash inflow from operating activities Reconciliation of net cash flow to movement in net (debt)/cash Increase/(decrease) in cash and cash equivalents Cash (inflow)/outflow from (drawdowns)/repayment of borrowings Exchange adjustments Net cash/(debt) brought forward Net (debt)/cash carried forward Analysis of cash and cash equivalents Cash and bank balances Bank overdraft Analysis of net (debt)/cash Cash and cash equivalents Bank loans Analysis of net (debt)/cash At 3 April 2010 £000 31,006 (21,924) 9,082 Cash flow £000 Exchange adjustments £000 At 2 April 2011 £000 11,872 (58,004) (46,132) (268) 240 (28) 42,610 (79,688) (37,078) The net cash inflow from bank loans in 2011 comprised drawdowns of £76,156,000 offset by repayments of £18,152,000 (2010: solely repayments of £58,845,000). Included within cash and cash equivalents is an amount of £1,983,000 (2010: £1,418,000) which is restricted. Halma p.l.c. Annual Report and Accounts 2011 106 Financial Statements Notes to the Accounts continued 26 Financial instruments Policy The Group’s treasury policies seek to minimise financial risks and to ensure sufficient liquidity for the Group’s operations and strategic plans. No complex derivative financial instruments are used, and no trading or speculative transactions in financial instruments are undertaken. Where the Group does use financial instruments these are mainly to manage the currency risks arising from normal operations and its financing. Operations are financed mainly through retained profits and, in certain geographical locations, bank borrowings. Foreign currency risk is the most significant aspect for the Group in the area of financial instruments. It is exposed to a lesser extent to other risks such as interest rate risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and these policies are summarised below. The Group’s policies have remained unchanged since the beginning of the financial year. Details of the significant accounting policies and methods adopted (including the criteria for recognition, the basis of measurement and the bases of recognition income and expenses) for each class of financial asset, financial liability and equity instrument are disclosed in the Accounting policies note. Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 17 to the Accounts, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in the Consolidated Statement of Changes in Equity. The Group is not subject to externally imposed capital requirements. Foreign currency risk The Group is exposed to foreign currency risk as a consequence of both trading with foreign companies and owning subsidiaries located in foreign countries. The Group earns a significant proportion of its profit in currencies other than Sterling. This gives rise to translational currency risk, where the Sterling value of profits earned by the Group’s foreign subsidiaries fluctuates with the strength of Sterling relative to their operating (or ‘functional’) currencies. The Group does not hedge this risk, so its reported profit is sensitive to the strength of Sterling, particularly against the US Dollar and Euro. The Group also has transactional currency exposures. These arise on sales or purchases by operating companies in currencies other than the companies’ operating (or ‘functional’) currency. Significant sales and purchases are matched where possible and a proportion of the net exposure is hedged by means of forward foreign currency contracts. The Group has a significant investment in overseas operations in the USA and EU, with further investments in Australia, New Zealand, Singapore, Switzerland, China and India. As a result, the Group’s balance sheet can be affected by movements in these countries’ exchange rates. Where significant and appropriate, currency denominated net assets are hedged by currency borrowings. These currency exposures are reviewed regularly. Interest rate risk The Group is exposed to interest rate fluctuations on its borrowings and cash deposits. Where bank borrowings are used to finance operations they tend to be short term with floating interest rates. Borrowings used to provide longer term funding are drawn on the Group’s loan facilities and have fixed interest rates with maturities of not more than one year. Surplus funds are placed on short-term fixed rate deposit or in floating rate deposit accounts. Credit risk Credit risk is defined as the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties, as a means of mitigating the risk of financial loss from defaults. Credit ratings are supplied by independent agencies where available, and if not available, the Group uses other publicly available financial information and its own trading records to rate its major customers. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed regularly. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable and, where appropriate, credit guarantee insurance cover is purchased. The carrying amount of trade, tax and other receivables, derivative financial instruments and cash of £153,630,000 (2010: £130,699,000) represents the Group’s maximum exposure to credit risk as no collateral or other credit enhancements are held. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. Halma p.l.c. Annual Report and Accounts 2011 107 26 Financial instruments continued Liquidity risk The main source of long-term funding for the Group is its unsecured revolving credit facility for £165m, which is a five-year facility to February 2013, with a small syndicate of its principal bankers. The Group has a strong cash flow and the funds generated by operating companies are managed regionally based on geographic location. Funds are placed on deposit with secure, highly-rated banks. For short-term working capital purposes, most operating companies utilise local bank overdrafts. These practices allow a balance to be maintained between continuity of funding, security and flexibility. Because of the nature of their use, the facilities are typically ‘on demand’ and as such uncommitted. Overdraft facilities are typically renewed annually. Currency exposures Translational exposures It is estimated, by reference to the Group’s US Dollar and Euro denominated profits, that a one per cent change in the value of the US Dollar relative to Sterling would have had a £337,000 (2010: £285,000) impact on the Group’s reported profit before tax; and a one per cent change in the value of the Euro relative to the Sterling would have had a £204,000 (2010: £204,000) impact on the Group’s profit before tax for the year ended 2 April 2011. Transactional exposures The Group has net foreign currency monetary assets and liabilities that are assets and liabilities not denominated in the functional currency of the underlying company. These comprise cash and overdrafts as well as certain trade receivable and payable balances. These foreign currency monetary assets and liabilities give rise to the net currency gains and losses recognised in the Consolidated income statement as a result of movement in exchange rates. The exposures are predominantly Euro and US Dollar. Group policy is for a significant portion of foreign currency exposures, including sales and purchases, to be hedged by forward foreign exchange contracts in the company in which the transaction is recorded. Interest rate risk profile The Group’s financial assets which are subject to interest rate fluctuations comprise interest bearing cash equivalents which totalled £3,190,000 at 2 April 2011 (2010: £2,344,000). These comprised Sterling denominated deposits of £2,700,000 (2010: £1,591,000), and Euro, US Dollar and other currency deposits of £490,000 (2010: £753,000) which are placed on local money markets and earn interest at market rates. Cash balances of £39,420,000 (2010: £28,979,000) earn interest at local market rates. The financial liabilities which are subject to interest rate fluctuations comprise bank loans, bank overdrafts and certain unsecured loans, which totalled £79,688,000 at 2 April 2011 (2010: £22,241,000). All bank loans bear interest at floating rates or fixed rates where the fixed period is typically no more than three months. Interest rates are based on the LIBOR of the currency in which the liabilities arise plus a small margin. Bank overdrafts bear interest at local base rates. Analysis of interest bearing financial liabilities Sterling denominated bank loans US Dollar denominated bank loans Euro denominated bank loans Swiss Franc denominated bank loans Total bank loans Bank overdraft Total interest bearing financial liabilities 2011 £000 2010 £000 53,000 – 3,198 23,490 79,688 – 79,688 – 8,081 13,843 – 21,924 317 22,241 At 2 April 2011 it is estimated that a general increase of one percentage point in interest rates would reduce the Group’s profit before tax by £478,000 (2010: £510,000). Maturity of financial liabilities With the exception of the contingent purchase consideration, other payables, provisions and borrowings due after one year, all of the Group’s financial liabilities mature in one year or less or on demand. The total of the contractual contingent purchase consideration due after one year includes £8,164,000 (2010: £946,000) due between one and two years, with the balance of £13,290,000 (2010: £893,000) due between two and five years. Other creditors due after more than one year include £725,000 (2010: £1,758,000) due between one and two years, £284,000 (2010: £279,000) due between two and five years, with the balance of £684,000 (2010: £678,000) due after more than five years. Halma p.l.c. Annual Report and Accounts 2011 108 Financial Statements Notes to the Accounts continued 26 Financial instruments continued Borrowing facilities The Group’s principal source of long-term funding is its unsecured five-year £165 million revolving credit facility, which expires in February 2013. Short-term operational funding is provided by cash generated from operations and by local bank overdrafts. These overdraft facilities are uncommitted and are generally renewed on an annual or ongoing basis and hence the facilities expire within one year or less. The Group’s undrawn committed facilities available at 2 April 2011 were £100,312,000 (2010: £158,762,000) of which £15,000,000 (2010: £15,686,000) mature within one year and £85,312,000 (2010: £143,076,000) between two and five years. UK companies have cross-guaranteed £17,670,000 (2010: £20,684,000) of overdraft facilities of which £nil (2010: £169,000) was drawn. Fair values of financial assets and financial liabilities As at 2 April 2011 and 3 April 2010 there were no significant differences between the book value and fair value (as determined by market value) of the Group’s financial assets and liabilities. Fair value and carrying amount of financial instruments Trade and other receivables Trade, other payables and provisions (falling due within one year) Trade, other payables and provisions (falling due after one year) Cash and cash equivalents Floating rate borrowings Fixed rate borrowings Derivative financial instruments (in a designated cash flow hedge) Derivative financial instruments (not in a designated cash flow hedge) Carrying amount £000 102,021 (83,794) (24,441) 42,610 – (79,688) (475) (56) (43,823) 2011 Fair value £000 102,021 (83,794) (24,441) 42,610 – (79,688) (475) (56) (43,823) Carrying amount £000 90,899 (63,829) (6,508) 31,323 (317) (21,924) (71) (28) 29,545 2010 Fair value £000 90,899 (63,829) (6,508) 31,323 (317) (21,924) (71) (28) 29,545 The fair value of the floating and fixed rate borrowings approximate to the carrying value because interest rates are reset to market rates at intervals of less than one year. The fair value of the derivative financial instruments is estimated by discounting the future contracted cash flow, using readily available market data and represents a level 2 measurement in the fair value hierarchy under IFRS 7. Halma p.l.c. Annual Report and Accounts 2011 109 26 Financial instruments continued Hedging As explained previously, the Group’s policy is to hedge significant sales and purchases denominated in foreign currency using forward currency contracts. These instruments are initially recognised at fair value, which is typically £nil, and subsequent changes in fair value are taken to the Consolidated Income Statement, unless hedge accounted. The following table details the forward foreign currency contracts outstanding as at the year end, which all mature within one year and therefore the cash flows and resulting effect on profit and loss are expected to occur within the next 12 months: Average exchange rate/£ Foreign currency Contract value Fair value 2011 2010 2011 000 2010 000 2011 £000 2010 £000 2011 £000 2010 £000 Forward contracts not in a designated cash flow hedge US Dollars Euros Other currencies Forward contracts in a designated cash flow hedge US Dollars Euros Czech Koruna Other currencies Total forward contracts US Dollars Euros Czech Koruna Other currencies 1.61 1.17 – 1.55 1.13 – (5,106) 2,331 – 2,342 4,653 – 1.55 1.19 29.04 – 0.76 1.18 29.04 – 1.64 1.14 29.93 – 5,290 14,462 (48,300) – 4,322 11,288 (70,815) – 1.60 1.14 29.93 – 184 16,793 (48,300) – 6,664 15,940 (70,815) – (3,176) 1,995 732 (449) 1,516 4,116 233 5,865 3,418 12,186 (1,663) (1,424) 12,517 242 14,181 (1,663) (692) 12,068 2,643 9,913 (2,366) (1,415) 8,775 4,159 14,029 (2,366) (1,182) 14,640 Amounts recognised in the Consolidated Income Statement Amounts recognised in the Consolidated Statement of Comprehensive Income and Expenditure 17 (68) (5) (56) 113 (570) 78 (96) (475) 130 (638) 78 (101) (531) (173) (358) (531) The fair values of the forward contracts are disclosed as a £327,000 (2010: £232,000) asset and £858,000 (2010: £331,000) liability in the Consolidated Balance Sheet. Any movements in the fair values of the contracts are recognised in equity until the hedge transaction occurs, when gains/losses are recycled to finance income or finance expense. Analysis of movement in hedging reserves Amounts removed from statement of changes in equity and included in Consolidated Income Statement during the year Amounts recognised in the Consolidated Statement of Comprehensive Income and Expenditure Net movement in hedging reserves in the year At beginning of year At end of year There was no ineffectiveness arising with regards to forward contracts in a designated cash flow hedge. With the exception of currency exposures, the disclosures in this note exclude short-term receivables and payables. 2011 £000 47 (358) (311) (47) (358) (17) (2) (9) (28) (186) (89) 121 83 (71) (203) (91) 121 74 (99) (52) (47) (99) 2010 £000 – (47) (47) – (47) Halma p.l.c. Annual Report and Accounts 2011 110 Financial Statements Notes to the Accounts continued 26 Financial instruments continued Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates. The Group enters into derivative financial instruments to manage its exposure to foreign currency risk, including: −(cid:3) forward foreign exchange contracts to hedge the exchange rate risk arising on the export of goods to and from the USA, mainland Europe and the UK; and −(cid:3) foreign exchange loans to hedge the exchange rate risk arising on translation of the Group’s investment in foreign operations which have the Euro and Swiss Franc as their functional currencies. Market risk exposures are measured using sensitivity analysis as described below. There has been no change to the Group’s exposure to market risks or in the manner in which these risks are managed and measured. Foreign currency sensitivity analysis The Group is mainly exposed to the currency of the USA (US Dollar currency) and the currency of Mainland Europe (Euro currency). The carrying amount of the Group’s Euro and US Dollar denominated monetary assets and monetary liabilities at the reporting date are as follows: Euro US Dollar 2011 £000 66,472 95,572 Assets 2010 £000 62,463 82,589 2011 £000 16,308 23,308 If Sterling increased by 10% against the US Dollar and the Euro, profits before taxation and other equity would decrease as follows: Profit Other equity 2011 £000 3,097 6,144 US Dollar 2010 £000 2,620 6,951 2011 £000 1,871 4,655 Liabilities 2010 £000 13,601 16,973 Euro 2010 £000 1,871 13,706 The profit sensitivity arises mainly from the translation of overseas profits earned during the year. 10% is the sensitivity rate which management assesses to be a reasonably possible change in foreign exchange rates. The Group’s profit sensitivity has increased against the US Dollar because more of the Group’s profits are earned in this currency. 27 Commitments Capital commitments Capital expenditure authorised and contracted at 2 April 2011 but not provided in these accounts amounts to £920,000 (2010: £740,000). Commitments under operating leases The Group has entered into commercial leases on properties and other equipment. The former expire between April 2011 and November 2014 and the latter between April 2011 and November 2028. Only certain property agreements contain an option for renewal at rental prices based on market prices at the time of exercise. Total payments under non-cancellable operating leases will be made as follows: Within one year Within two to five years After five years Land and buildings 2011 £000 6,027 14,526 4,038 24,591 2010 £000 5,303 10,535 3,025 18,863 2011 £000 377 648 – 1,025 Other 2010 £000 459 675 – 1,134 Halma p.l.c. Annual Report and Accounts 2011 111 28 Retirement benefits Group companies operate both defined benefit and defined contribution pension schemes. The Halma Group Pension Plan and the Apollo Pension and Life Assurance Plan have defined benefit sections with assets held in separate trustee administered funds. Both of these sections were closed to new entrants during 2002/03 and a defined contribution section was established within the Halma Group Pension Plan. Defined contribution schemes are mainly adopted in overseas subsidiaries. Defined contribution schemes The amount charged to the Consolidated Income Statement in respect of defined contribution schemes was £2,495,000 (2010: £2,433,000) and represents contributions payable to these schemes by the Group at rates specified in the rules of the plans. The assets of the schemes are held separately from those of the Group in funds under the control of trustees. Where there are employees who leave the schemes prior to vesting fully in the contributions, the ancillary contributions payable by the Group are reduced by the amount of forfeited contributions. Defined benefit schemes The Group operates defined benefit schemes for qualifying employees of its UK subsidiaries. Under the schemes, the employees are entitled to retirement benefits of up to two-thirds of final pensionable salary on attainment of a retirement age of 60, for members of the Executive Board, and 65, for all other qualifying employees. No other post-retirement benefits are provided. The schemes are funded schemes. The most recent actuarial valuation of the Halma Group Pension Plan assets and the present value of the defined benefit obligation was carried out at 1 December 2008 by Mr Adrian Gibbons, Fellow of the Institute of Actuaries. The present value of the defined benefit obligation, the related current service cost and past service cost were measured using the projected unit credit method. Mr Gibbons also carried out the 1 April 2009 actuarial valuation of the Apollo Pension and Life Assurance Plan on the same basis. The projected unit credit method is an accrued benefits valuation method in which the scheme liabilities make allowance for projected earnings. The accumulated benefit obligation (ABO) is an actuarial measure of the present value for service already rendered but differs from the projected unit credit method in that it includes no assumptions for future salary increases. At the balance sheet date the gross accumulated benefit obligation was £177m. An alternative method of valuation is a solvency basis, often estimated using the cost of buying out benefits at the balance sheet date with a suitable insurance company. This amount represents the amount that would be required to settle the scheme liabilities at the balance sheet date rather than the Group continuing to fund the ongoing liabilities of the scheme. The Group estimates that this would amount to £268m. Key assumptions used: Discount rate Expected return on scheme assets Expected rate of salary increases Future pension increases Inflation – RPI Inflation – CPI 2011 2010 2009 5.50% 6.69% 4.40% 3.30% 3.4% 2.9% 5.60% 7.00% 4.50% 3.40% 3.50% N/A 6.40% 6.80% 4.45% 3.20% 3.20% N/A Mortality assumptions: Investigations have been carried out within the past three years into the mortality experience of the Group's defined benefit schemes. These investigations concluded that the current mortality assumptions include sufficient allowance for future improvements in mortality rates. The assumed life expectations on retirement at age 65 are: Retiring today: Males Females Retiring in 20 years: Males Females 2011 Years 22.0 24.8 23.9 26.7 2010 Years 21.9 24.7 23.8 26.6 2009 Years 22.0 24.9 23.1 25.9 Halma p.l.c. Annual Report and Accounts 2011 112 Financial Statements Notes to the Accounts continued 28 Retirement benefits continued The Halma Group Pension Plan baseline mortality assumption in 2011 and 2010 is derived from the SN03 tables less one year (2009: PA92 medium cohort). The Apollo Pension and Life Assurance Plan baseline mortality assumption in 2011 is derived from the SN03 tables less one year (2010 and 2009: PA92 medium cohort tables plus one year). The sensitivities regarding the principal assumptions used to measure the scheme liabilities are set out below: Assumption Discount rate Rate of inflation Rate of salary growth Rate of mortality Change in assumption Increase/decrease by 0.5% Increase/decrease by 0.5% Increase/decrease by 0.5% Increase by one year Impact on scheme liabilities Decrease/increase by 10.5% Increase/decrease by 7.0% Increase/decrease by 2.6% Increase by 2.9% Amounts recognised in income in respect of these defined benefit schemes are as follows: Current service cost Interest cost Expected return on scheme assets 2011 £000 2,143 9,525 (9,103) 2,565 2010 £000 2,203 8,375 (6,377) 4,201 Actuarial gains and losses have been reported in the Consolidated Statement of Comprehensive Income and Expenditure. The actual return on scheme assets was £8.2m (2010: £32.9m). The cumulative amount of actuarial losses recognised in the Consolidated Statement of Comprehensive Income and Expenditure since the date of transition to IFRSs is £22m (2010: £23m). The amount included in the balance sheet arising from the Group’s obligations in respect of its defined benefit retirement benefit schemes is as follows: Present value of defined benefit obligations Fair value of scheme assets Deficit in scheme Past service cost not yet recognised in balance sheet Liability recognised in the balance sheet Movements in the present value of defined benefit obligations were as follows: At beginning of year Service cost Interest cost Actuarial gains and losses Contributions from scheme members Benefits paid Expenses paid Premiums paid At end of year 2011 £000 (177,055) 140,818 (36,237) – (36,237) 2010 £000 (170,901) 127,830 (43,071) – (43,071) 2011 £000 (170,901) (2,143) (9,525) 1,799 (1,025) 4,625 – 115 (177,055) 2009 £000 (132,379) 89,811 (42,568) – (42,568) 2010 £000 (132,379) (2,203) (8,375) (31,952) (1,094) 4,766 180 156 (170,901) Halma p.l.c. Annual Report and Accounts 2011 113 2011 £000 127,830 9,103 (942) – 8,542 1,025 (4,625) – (115) 140,818 2011 £000 1,799 (942) 857 2010 £000 89,811 6,377 27,308 (763) 9,105 1,094 (4,766) (180) (156) 127,830 2010 £000 (31,952) 27,308 (4,644) 28 Retirement benefits continued Movements in the fair value of scheme assets were as follows: At beginning of year Expected return on scheme assets Actuarial gains and losses Movement on section 75 receivable Contributions from the sponsoring companies Contributions from scheme members Benefits paid Expenses paid Premiums paid At end of year The net movement on actuarial gains and losses was as follows: Defined benefit obligations Fair value of scheme assets Net actuarial gains/(losses) The analysis of the scheme assets and the expected rate of return at the balance sheet date were as follows: Equity instruments Debt instruments Property 2011 % 7.50 5.20 6.00 6.69 Expected return Fair value of assets 2010 % 7.80 5.20 6.30 7.00 2009 % 7.50 6.00 7.50 6.80 2011 £000 86,934 42,419 11,465 140,818 2010 £000 83,641 33,604 10,585 127,830 2009 £000 57,407 28,880 3,524 89,811 The overall expected rate of return is a weighted average. In July 2010, the UK government announced that CPI should be used as the basis for statutory minimum pension increases. The impact of the change to CPI (from RPI) for the UK plan, where the pension rules mandate inflation according to the deemed statutory index, was a credit to the Consolidated Statement of Comprehensive Income and Expenditure of £2.5m. In conjunction with the trustees, the Group has recently conducted an asset-liability review for its defined benefit pension scheme. The results of this review are used to assist the trustees and the Group to determine the optimal long-term asset allocation with regard to the structure of the liabilities of the scheme. They are also used to assist the trustees in managing the volatility in the underlying investment performance and risk of a significant increase in the defined benefit deficit by providing information used to determine the scheme’s investment strategy. As a consequence, the Group will be giving more emphasis to a closer return matching of scheme assets and liabilities, both to ensure the long-term security of our defined benefit commitment and to reduce earnings and balance sheet volatility. Halma p.l.c. Annual Report and Accounts 2011 114 Financial Statements Notes to the Accounts continued 28 Retirement benefits continued The five-year history of experience adjustments was as follows. Present value of defined benefit obligations Fair value of scheme assets Deficit in the scheme Experience adjustments on scheme liabilities Amount Percentage of scheme liabilities Experience adjustments on scheme assets Amount Percentage of scheme assets 2011 £000 (177,055) 140,818 (36,237) 157 – (944) (1)% 2010 £000 (170,901) 127,830 (43,071) (136) – 2009 £000 (132,379) 89,811 (42,568) 2008 £000 (145,992) 110,035 (35,957) 2007 £000 (145,601) 108,341 (37,260) – – 273 – 27,648 22% (33,696) (37)% 12,327 11% 536 – 1,321 1% The estimated amounts of contributions expected to be paid to the schemes during the year ending 31 March 2012 is £8.5m. The levels of contributions are based on the current service cost and the expected future cash flows of the defined benefit scheme. The Group estimates the scheme liabilities on average to fall due over 19 and 25 years, respectively, for the Halma and Apollo plans. 29 Disposal of businesses The Group did not dispose of any businesses during the year. During 2010, the Group disposed of part of its Asset Monitoring business for £520,000 with a profit on disposal of £407,000. There was an additional write down on a prior year disposal of £25,000. Due to the nature and size of these disposed operations, they were not separately disclosed as discontinued operations as defined by IFRS 5. 30 Events after the balance sheet date On 9 May 2011 the Group acquired Kirk Key Interlock Company, LLC (Kirk Key) for a cash consideration of US$14.7m. Kirk Key manufactures and sells key interlocks and key interlock systems. Due to the proximity of the acquisition date to the date of approval of the Annual Report, it is impracticable to provide further information. 31 Related party transactions Associated companies Purchases from associated companies Amounts due to associated companies Other related parties Rent charged by other related parties Amounts due to other related parties 2011 £000 57 401 109 – 2010 £000 – – – – Other related parties comprise two companies with Halma employees on the Boards and from which two Halma subsidiaries rent property. All the transactions above are on an arm’s length basis and on standard business terms. Halma p.l.c. Annual Report and Accounts 2011 115 Independent Auditor’s Report to the Members of Halma p.l.c. We have audited the parent company financial statements of Halma p.l.c. for the 52 week period ended 2 April 2011 which comprise the parent company Balance Sheet and the related notes C1 to C12. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on Financial Statements In our opinion the parent company financial statements: −(cid:3) give a true and fair view of the state of the parent company’s affairs as at 2 April 2011; −(cid:3) have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and −(cid:3) have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: −(cid:3) the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and −(cid:3) the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the parent company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: −(cid:3) adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or −(cid:3) the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or −(cid:3) certain disclosures of Directors’ remuneration specified by law are not made; or −(cid:3) we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the Group financial statements of Halma p.l.c. for the 52 week period ended 2 April 2011. Alexander Butterworth ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Reading, UK 21 June 2011 Halma p.l.c. Annual Report and Accounts 2011 116 Financial Statements Company Balance Sheet Fixed assets Tangible assets Investments Current assets Debtors (amounts falling due within one year) Debtors (amounts falling due after more than one year) Short-term deposits Cash at bank and in hand Creditors: amounts falling due within one year Borrowings Creditors Current tax payable Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Borrowings Creditors Net assets Capital and reserves Share capital Share premium account Treasury shares Capital redemption reserve Other reserves Profit and loss account Shareholders’ funds 2 April 2011 £000 3 April 2010 £000 Notes C3 C4 C5 C5 C6 C7 C6 C8 C10 C11 C11 C11 C11 C11 C12 3,925 136,501 140,426 27,244 170,417 2,701 232 200,594 2,808 21,213 5,588 29,609 170,985 311,411 79,688 20,844 210,879 37,824 21,744 (5,016) 185 94 156,048 210,879 2,128 90,191 92,319 23,087 140,605 1,591 12 165,295 2,334 25,494 3,338 31,166 134,129 226,448 21,924 26,538 177,986 37,765 20,959 (2,581) 185 1,061 120,597 177,986 The financial statements of Halma p.l.c., company number 40932, were approved by the Board of Directors on 21June 2011. A J Williams Director K J Thompson Director Notes to the Company Accounts Halma p.l.c. Annual Report and Accounts 2011 117 C1 Accounting Policies Basis of preparation The separate Company financial statements are presented as required by the Companies Act 2006 and have been prepared on the historical cost basis and comply with applicable United Kingdom Accounting Standards and law. The principal Company accounting policies have been applied consistently throughout the current and preceding years and are described below. Related parties The Company is also exempt under the terms of FRS 8 ‘Related Party Disclosures’ from disclosing transactions with other members of the Halma Group. Foreign currencies Transactions in foreign currency are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates prevailing at that date. Any gain or loss arising from subsequent exchange rate movements is included as an exchange gain or loss in the profit and loss account. Share-based payments The Company has adopted FRS 20 and the accounting policies followed are in all material respects the same as the Group’s policy under IFRS 2. This policy is shown on page 81. Investments Investments are stated at cost less provision for impairment. Fixed assets and depreciation Fixed assets are stated at cost less provisions for impairment and depreciation which, with the exception of freehold land which is not depreciated, is provided on all fixed assets on the straight-line method, each item being written off over its estimated life. The principal annual rates used for this purpose are: Freehold property Plant, equipment and vehicles 2% 8% to 20% Leases The costs of operating leases of property and other assets are charged as incurred. Pensions The Company makes contributions to defined contribution pension plans, which are charged against profits when they become payable. The Company also participates in a Group-wide defined benefit pension plan. This plan is operated on a basis that does not enable individual companies to identify their share of the underlying assets and liabilities, and in accordance with Financial Reporting Standard 17 the Company accounts for its contributions to the plan as if it was a defined contribution plan. Taxation Taxation comprises current and deferred tax. Current tax is the expected tax payable, on the taxable income for the year, using tax rates enacted, or substantially enacted, at the balance sheet date, and any adjustments to tax payable in respect of previous years. The Company provides for tax deferred because of timing differences between profits as computed for taxation purposes and profits as stated in the accounts, on an undiscounted basis. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax assets are only recognised if recovery is considered more likely than not on the basis of all available evidence. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including direct issue costs, are accounted for on an accruals basis in profit or loss and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Halma p.l.c. Annual Report and Accounts 2011 118 Financial Statements Notes to the Company Accounts continued C2 Result for the year As permitted by Section 408(3) of the Companies Act 2006, the Profit and Loss Account of Halma p.l.c. is not presented as part of these accounts. The Company has reported a profit after taxation of £68,194,000 (2010: £71,570,000). Auditors’ remuneration for audit services to the Company was £123,000 (2010: £98,000). Total employee costs (including Directors) were: Wages and salaries Social security costs Pension costs Number of employees 2011 £000 4,285 439 398 5,122 2011 Number 41 Details of Directors’ remuneration are set out on pages 58 to 66 within the Remuneration Report and form part of these financial statements. C3 Fixed assets – tangible assets Cost At 3 April 2010 Additions at cost Disposals At 2 April 2011 Accumulated depreciation At 3 April 2010 Charge for the year Disposals At 2 April 2011 Carrying amounts At 2 April 2011 At 3 April 2010 C4 Investments Shares in Group companies Freehold properties £000 Plant equipment and vehicles £000 1,780 1,532 – 3,312 376 36 – 412 2,900 1,404 1,721 589 (210) 2,100 997 265 (187) 1,075 1,025 724 2010 £000 3,102 386 423 3,911 2010 Number 41 Total £000 3,501 2,121 (210) 5,412 1,373 301 (187) 1,487 3,925 2,128 At cost less amounts written off at beginning of year Increase/(reduction) At cost less amounts written off at end of year 2011 £000 90,191 46,310 136,501 2010 £000 120,317 (30 ,126) 90,191 The increase in the current year of £46,310,000 related to the Company’s increased investment in one of its subsidiaries. The reduction in the prior year related to write down of investments in non-trading subsidiary companies after one company’s reserves were distributed as dividends to Halma p.l.c. and three other companies’ trade, assets and liabilities were transferred to fellow subsidiary companies. Details of principal subsidiary companies are set out on pages 124 to 127. Halma p.l.c. owns 100% of the ordinary share capital of all its subsidiaries, which are incorporated in Great Britain, other than those listed below, where they principally operate. All of the companies’ interests below are held by subsidiary companies. Halma p.l.c. Annual Report and Accounts 2011 119 Country of incorporation Australia China France France Germany Germany Germany Japan The Netherlands The Netherlands Belgium New Zealand Singapore Switzerland Tunisia USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA 2011 £000 2010 £000 24,131 8 2,293 812 27,244 20,284 11 1,987 805 23,087 170,417 140,605 C4 Investments continued Name of company Fortress Interlocks Pty Limited Beijing Ker’Kang Instrument Limited Company Hydreka S.A.S. SERV Trayvou Interverrouillage S.A.S. Apollo Gesellschaft für Meldetechnologie mbH Ocean Optics Germany Rudolf Riester GmbH Diba Japan KK Berson Milieutechniek B.V. Netherlocks Safety Systems B.V. Bureau D’Electronique Appliquée S.A. TL Jones Limited E-Motive Display Pte Limited Medicel AG Fabrication de Produits de Sécurité SaRL Halma Holdings Inc. Accudynamics LLC Air Products and Controls Inc. Alicat Scientific, Inc. Aquionics Inc. B.E.A. Inc. Bio-Chem Fluidics Inc. Diba Industries, Inc. Fiberguide Industries Inc. Riester USA LLC Janus Elevator Products Inc. Labsphere, Inc. Ocean Optics, Inc. Oklahoma Safety Equipment Co. Inc. Perma Pure LLC SphereOptics Inc. Volk Optical Inc. C5 Debtors Amounts falling due within one year: Amounts due from Group companies Other debtors Prepayments and accrued income Deferred tax asset (note C9) Amounts falling due after more than one year: Amounts due from Group companies Halma p.l.c. Annual Report and Accounts 2011 120 Financial Statements Notes to the Company Accounts continued C6 Borrowings Falling due within one year: Overdrafts Falling due after more than one year: Unsecured bank loans Total borrowings 2011 £000 2010 £000 2,808 2,334 79,688 82,496 21,924 24,258 The facility under which the bank loans are drawn expires within two to five years (2010: within two to five years) and at 2 April 2011 £85,312,000 (2010: £143,076,000) remained committed and undrawn. The bank overdrafts, which are unsecured, at 2 April 2011 and 3 April 2010 were drawn on uncommitted facilities which all expire within one year, and were held pursuant to a Group pooling arrangement which offsets them against credit balances in subsidiary undertakings. The Company is part of an arrangement between UK subsidiaries whereby overdraft facilities of £17,670,000 (2010: £20,684,000) are cross-guaranteed. Of these facilities £598,000 (2010: £169,000) was drawn. C7 Creditors: amounts falling due within one year Trade creditors Amounts owing to Group companies Other taxation and social security Other creditors Accruals and deferred income C8 Creditors: amounts falling due after more than one year Amounts owing to Group companies Other creditors These liabilities fall due as follows: Within one to two years Within two to five years After more than five years C9 Deferred tax Movement in deferred tax asset: At beginning of year (Charge)/credit to profit and loss account Credit to reserves At end of year (note C5) Deferred tax comprises short-term timing differences. 2011 £000 911 13,975 1,401 919 4,007 21,213 2011 £000 20,451 393 20,844 393 – 20,451 2011 £000 805 (141) 148 812 2010 £000 1,075 21,151 1,308 694 1,266 25,494 2010 £000 26,158 380 26,538 309 71 26,158 2010 £000 477 33 295 805 Halma p.l.c. Annual Report and Accounts 2011 121 C10 Share capital Ordinary shares of 10p each Issued and fully paid 2011 £000 37,824 2010 £000 37,765 The number of ordinary shares in issue at 2 April 2011 was 378,235,685 (2010: 377,654,037), including treasury shares of 1,847,368 (2010: 1,130,036). Changes during the year in the issued ordinary share capital were as follows: At 3 April 2010 Share options exercised At 2 April 2011 Issued and fully paid £000 37,765 59 37,824 The total consideration received in cash in respect of share options exercised amounted to £844,000 (2010: £3,039,000). At the date of these accounts, the number of ordinary shares in issue was 378,247,685 (2010: 377,721,994), including treasury shares of 1,847,368 (2010: 1,523,217). Details of share options in issue on the Company’s share capital and share-based payments are included in note 23 to the Group accounts. C11 Reserves At 3 April 2010 Profit transferred to reserves Dividends paid Issue of shares Movement in other reserves Net movement in treasury shares Deferred tax to equity At 2 April 2011 Share premium account £000 20,959 – – 785 – – – 21,744 Non-distributable Distributable Treasury shares £000 (2,581) – – – – (2,435) – (5,016) Capital redemption reserve £000 185 – – – – – – 185 Other reserves £000 1,061 – – – (967) – – 94 Total profit and loss account £000 120,597 68,194 (32,891) – – – 148 156,048 The capital redemption reserve was created on repurchase and cancellation of the Company’s own shares. The other reserves represent the provision being established in respect of the value of equity-settled share option plans and performance share plan awards made by the Company. Treasury shares are the Company’s own shares purchased and are held to fulfil its obligations under the performance share plan. C12 Reconciliation of movement in shareholders’ funds At beginning of year Profit after taxation Dividends paid Issue of shares Net movement in treasury shares Movement in other reserves Deferred tax to equity At end of year 2011 £000 177,986 68,194 (32,891) 844 (2,435) (967) 148 210,879 2010 £000 134,237 71,570 (30,394) 3,039 178 (939) 295 177,986 Halma p.l.c. Annual Report and Accounts 2011 122 Financial Statements Summary 2002 to 2011 Revenue (note 2) Overseas sales (note 2) Profit before taxation, acquired intangibles amortisation and goodwill written off (note 3) Net tangible assets/capital employed Borrowings Cash and cash equivalents Employees (note 2) Earnings per ordinary share (note 2) Adjusted earnings per ordinary share (note 3) Year on year increase/(decrease) in adjusted earnings per ordinary share Return on Sales (notes 2 and 4) Return on Capital Employed (note 5) Year on year increase in dividends per ordinary share (paid and proposed) Ordinary share price at financial year end Market capitalisation at financial year end Notes: UK GAAP 2001/02 £000 267,597 183,259 48,255 117,515 15,047 45,657 2,859 8.58p 9.10p (2.6%) 18.0% 45.7% 15% 164p £598.2m UK GAAP 2002/03 £000 267,293 188,161 46,508 86,854 27,667 27,574 2,793 7.76p 8.55p (6.0%) 17.4% 41.7% 10% 114p £416.7m 1. The amounts disclosed for periods up to and including 2003/04 are stated on the basis of UK GAAP, as it is not practicable to restate amounts prior to the date of transition to IFRS. 2. Continuing and discontinued operations. 3. Adjusted to remove amortisation of acquired intangible assets and, from 2010/11, acquisition costs. IFRS figures include results of discontinued operations up to the date of their sales or closure but exclude profit on sale or closure. 4. Return on Sales is defined as profit before taxation, goodwill/acquired intangible asset amortisation, acquisition costs (from 2010/11) and exceptional items expressed as a percentage of revenue. 5. Return on Capital Employed is defined in note 3 to the accounts. Summary 2002 to 2011 Profit before taxation, acquired intangibles amortisation and goodwill written off (note 3) Year on year increase/(decrease) in adjusted earnings per ordinary share Year on year increase in dividends per ordinary share (paid and proposed) Revenue (note 2) Overseas sales (note 2) Net tangible assets/capital employed Borrowings Cash and cash equivalents Employees (note 2) Earnings per ordinary share (note 2) Adjusted earnings per ordinary share (note 3) Return on Sales (notes 2 and 4) Return on Capital Employed (note 5) Ordinary share price at financial year end Market capitalisation at financial year end Notes: 2. Continuing and discontinued operations. or closure but exclude profit on sale or closure. of revenue. 5. Return on Capital Employed is defined in note 3 to the accounts. 1. The amounts disclosed for periods up to and including 2003/04 are stated on the basis of UK GAAP, as it is not practicable to restate amounts prior to the date of transition to IFRS. 3. Adjusted to remove amortisation of acquired intangible assets and, from 2010/11, acquisition costs. IFRS figures include results of discontinued operations up to the date of their sales 4. Return on Sales is defined as profit before taxation, goodwill/acquired intangible asset amortisation, acquisition costs (from 2010/11) and exceptional items expressed as a percentage UK GAAP 2001/02 £000 267,597 183,259 48,255 117,515 15,047 45,657 2,859 8.58p 9.10p (2.6%) 18.0% 45.7% 15% 164p UK GAAP 2002/03 £000 267,293 188,161 46,508 86,854 27,667 27,574 2,793 7.76p 8.55p (6.0%) 17.4% 41.7% 10% 114p £598.2m £416.7m Halma p.l.c. Annual Report and Accounts 2011 123 UK GAAP 2003/04 £000 292,640 206,102 50,284 95,935 26,934 48,482 2,925 6.09p 9.44p 10.4% 17.2% 50.5% 7% 149p £546.5m UK GAAP 2004/05 £000 299,119 218,745 50,389 80,750 33,344 45,348 3,002 7.97p 9.42p (0.2%) 16.8% 52.1% 5% 161p £593.8m IFRS 2004/05 £000 299,119 218,745 49,912 104,417 33,344 45,348 3,002 9.38p 9.45p N/A 16.7% 48.8% 5% 161p £593.8m IFRS 2005/06 £000 337,348 249,055 59,641 105,396 32,308 35,826 3,187 11.08p 11.27p 19.3% 17.7% 56.9% 5% 188p £693.4m IFRS 2006/07 £000 354,606 258,050 66,091 113,048 29,762 22,051 3,326 11.86p 12.42p 10.9% 18.6% 60.1% 5% 220p £821.8m IFRS 2007/08 £000 397,955 288,701 73,215 134,320 72,393 28,118 3,683 13.49p 13.86p 11.5% 18.4% 55.8% 5% 192p £717.7m IFRS 2008/09 £000 455,928 351,522 79,087 173,128 86,173 34,987 4,018 14.07p 15.30p 10.4% 17.3% 47.7% 5% 156p £583.7m IFRS 2009/10 £000 459,118 360,779 86,214 145,519 21,924 31,006 3,689 16.10p 16.89p 10.4% 18.8% 61.3% 7% 259p IFRS 2010/11 £000 518,428 412,297 104,551 146,964 79,688 42,610 3,875 19.23p 20.49p 21.3% 20.2% 71.9% 7% 355p £978.1m £1,342.7m 014338_Halma_AR11_Financials.indd 123 20/06/2011 17:15 Halma p.l.c. Annual Report and Accounts 2011 124 Financial Statements Halma Directory Principal operating companies Main products Health and Analysis Accudynamics LLC. Alicat Scientific, Inc. Aquionics Inc. Berson Milieutechniek B.V. Bio-Chem Fluidics Inc. Diba Industries, Inc. Fiberguide Industries, Inc. Hanovia Limited HWM-Water Limited Hydreka S.A.S. Keeler Limited Labsphere, Inc. Medicel AG Ocean Optics, Inc. Ocean Thin Films, Inc. Palintest Limited Perma Pure LLC Rudolf Riester GmbH Volk Optical Inc. Volumatic Limited Infrastructure Sensors Components primarily for the medical diagnostic system and device markets Mass flow meters and controllers for high-precision fluid flow measurement Ultraviolet light equipment for water treatment Ultraviolet light equipment for treating drinking water, waste water and water reuse applications Miniature valves, micro pumps and fluid components for medical, life science and scientific instruments Specialised components and complete fluid transfer subassemblies for medical, life science and scientific instruments Design and manufacture of optical fibre cables and assemblies Ultraviolet light equipment for treating water used in the manufacture of food, drinks, pharmaceuticals and electronic components Instrumentation for recording data, and quantifying, detecting and controlling leakage in underground water pipelines Equipment and software for flow analysis of water and sewerage systems and leak detection systems Ophthalmic instruments for diagnostic assessment of eye conditions Light testing and measurement products and specialised optical coatings Instruments for ophthalmic surgery Miniature fibre optic spectrometers for consumer electronics, process control, environmental monitoring, life sciences and medical diagnostics Dichroic optical filters and precision optics for scientific, defence, metrology and entertainment applications Instruments for analysing water and measuring environmental pollution Gas dryers and humidifiers for fuel cell, medical, scientific and industrial use Diagnostic medical devices for ophthalmology, blood pressure measurement and ear, nose and throat diagnostics Ophthalmic equipment and lenses as aids to diagnosis and surgery Cash handling and security from point of sale to cash centre Air Products and Controls Inc. Apollo Fire Detectors Limited Duct detectors and control relays for smoke control systems Smoke and heat detectors, sounders, beacons and interfaces Apollo Gesellschaft für Meldetechnologie mbH Smoke and heat detectors, sounders, beacons and interfaces Bureau D’Electronique Appliquée S.A. Sensors for automatic doors Fire Fighting Enterprises Limited Janus Elevator Products Inc. Memco Limited Texecom Limited TL Jones Asia Pacific Limited Beam smoke detectors and specialist fire extinguishing systems Elevator safety components including fixtures, displays, door systems and emergency communications Infrared safety systems for elevator doors and elevator emergency communications Security sensor and signalling products Elevator infrared safety systems, emergency communications and electronic information displays for passengers Halma Directory Halma p.l.c. Annual Report and Accounts 2011 125 Health and Analysis Accudynamics LLC. Alicat Scientific, Inc. Aquionics Inc. Diba Industries, Inc. Fiberguide Industries, Inc. Hanovia Limited Hydreka S.A.S. Keeler Limited Labsphere, Inc. Medicel AG Ocean Optics, Inc. Palintest Limited Perma Pure LLC Rudolf Riester GmbH Volk Optical Inc. Volumatic Limited Infrastructure Sensors reuse applications and scientific instruments Specialised components and complete fluid transfer subassemblies for medical, life science and scientific instruments Design and manufacture of optical fibre cables and assemblies Ultraviolet light equipment for treating water used in the manufacture of food, drinks, pharmaceuticals and electronic components leakage in underground water pipelines and leak detection systems Ophthalmic instruments for diagnostic assessment of eye conditions Light testing and measurement products and specialised optical coatings Instruments for ophthalmic surgery Miniature fibre optic spectrometers for consumer electronics, process control, environmental monitoring, life sciences and medical diagnostics and entertainment applications Principal operating companies Main products Location Contact Telephone E-mail Website Components primarily for the medical diagnostic system and device markets Lakeville, Massachusetts Tom Winkelmann +1 (1)508 946 4545 info@accudynamics.com www.accudynamics.com Mass flow meters and controllers for high-precision fluid flow measurement Tucson, Arizona David Lashbrook +1 (1)520 290 6060 info@alicatscientific.com www.alicatscientific.com Ultraviolet light equipment for water treatment Erlanger, Kentucky Oliver Lawal +1 (1)859 341 0710 sales@aquionics.com www.aquionics.com Berson Milieutechniek B.V. Ultraviolet light equipment for treating drinking water, waste water and water Eindhoven, The Netherlands Paul Buijs +31 (0)40 290 7777 info@bersonuv.com www.bersonuv.com Bio-Chem Fluidics Inc. Miniature valves, micro pumps and fluid components for medical, life science Boonton, New Jersey Tim O’Sullivan +1 (1)973 263 3001 sales.us@biochem fluidics.com www.biochemfluidics. com HWM-Water Limited Instrumentation for recording data, and quantifying, detecting and controlling Cwmbran, South Wales Rob Fish +44 (0)1633 489 479 sales@hwm-water.com www.hwm-water.com Equipment and software for flow analysis of water and sewerage systems Lyon, France Philippe Jolivet +33 (0)4 72 53 11 53 hydreka@hydreka.fr www.hydreka.com Danbury, Connecticut Todd Burt +1(1)203 744 0773 salesdept@dibaind.com www.dibaind.com Stirling, New Jersey Slough, Berkshire Jack Kelly John Ryan +1(1) 908 647 6601 info@fiberguide.com www.fiberguide.com +44 (0)1753 515300 sales@hanovia.com www.hanovia.com Windsor, Berkshire Abbas Sotoudeh +44 (0)1753 857177 info@keeler.co.uk www.keeler.co.uk North Sutton, New Hampshire Peter Weitzman +1 (1)603 927 4266 labsphere@labsphere. com www.labsphere.com Wolfhalden, Switzerland Emil Hohl +41 71 727 1050 info@medicelag.com www.medicelag.com Dunedin, Florida Kevin Chittim +1(1)727 733 2447 info@oceanoptics.com www.oceanoptics.com Ocean Thin Films, Inc. Dichroic optical filters and precision optics for scientific, defence, metrology Largo, Florida Phil Buchsbaum +1 (1)727 545 0741 info@oceanthinfilms.com www.oceanthinfilms com Instruments for analysing water and measuring environmental pollution Gateshead, Tyne & Wear David Sidlow +44 (0)191 491 0808 sales@palintest.com www.palintest.com Gas dryers and humidifiers for fuel cell, medical, scientific and industrial use Toms River, New Jersey Richard Curran +1 (1)732 244 0010 info@permapure.com www.permapure.com Diagnostic medical devices for ophthalmology, blood pressure measurement Jungingen, Germany Gerhard Glufke +49 (0)74 77 92 700 info@riester.de www.riester.de and ear, nose and throat diagnostics Ophthalmic equipment and lenses as aids to diagnosis and surgery Cash handling and security from point of sale to cash centre Mentor, Ohio Peter Mastores +1 (1)440 942 6161 volk@volk.com www.volk.com Coventry, West Midlands Colin Amos +44 (0)247 668 4217 info@volumatic.com www.volumatic.com Air Products and Controls Inc. Apollo Fire Detectors Limited Duct detectors and control relays for smoke control systems Smoke and heat detectors, sounders, beacons and interfaces Pontiac, Michigan Peter Stouffer +1 (1)248 332 3900 info@ap-c.com www.ap-c.com Havant, Hampshire Danny Burns +44 (0)2392 492412 enquiries@apollo-fire.co.uk www.apollo-fire.co.uk Apollo Gesellschaft für Meldetechnologie mbH Smoke and heat detectors, sounders, beacons and interfaces Gütersloh, Germany Falk Blödorn +49 (0)5241 33060 info@apollo-feuer.de www.apollo-feuer.de Bureau D’Electronique Appliquée S.A. Sensors for automatic doors Liège, Belgium Philippe Felten +32 (0)4361 6565 info@bea.be Beam smoke detectors and specialist fire extinguishing systems Hitchin, Hertfordshire Ian Steel +44 (0)1462 444740 sales@ffeuk.com www.bea.be www.ffeuk.com Elevator safety components including fixtures, displays, door systems and Hauppauge, New York Mike Byrne +1 (1)631 864 3699 sales@januselevator.com www.januselevator.com Memco Limited Infrared safety systems for elevator doors and elevator emergency Maidenhead, Berkshire Paul Simmons +44 (0)1628 540100 sales@memco.co.uk www.memco.co.uk Elevator infrared safety systems, emergency communications and electronic Singapore Chris Stoelhorst +65 6776 4111 info@tljones.com Haslingden, Lancashire Jim Ludwig +44 (0)1706 220460 sales@texe.com www.texe.com www.tljones.com Fire Fighting Enterprises Limited Janus Elevator Products Inc. Texecom Limited TL Jones Asia Pacific Limited emergency communications communications Security sensor and signalling products information displays for passengers 014338_Halma_AR11_Financials.indd 125 21/06/2011 16:07 Halma p.l.c. Annual Report and Accounts 2011 126 Financial Statements Halma Directory continued Principal operating companies Industrial Safety Main products Castell Safety International Limited Safety systems for controlling hazardous industrial processes Crowcon Detection Instruments Limited Gas detection instruments for personnel and plant safety Elfab Limited Fortress Interlocks Limited Kirk Key Interlock Company, LLC Pressure sensitive relief devices to protect process plant Safety systems for controlling access to dangerous machines Key interlocks and interlocking systems for the protection of personnel and equipment Netherlocks Safety Systems B.V. Process safety systems for petrochemical and industrial applications Oklahoma Safety Equipment Co. Inc. SERV Trayvou Interverrouillage S.A.S. Pressure sensitive relief devices to protect process plant Safety systems for controlling access to dangerous machines Smith Flow Control Limited Process safety systems for petrochemical and industrial applications Tritech International Limited Group Halma Holdings Inc. Equipment for underwater surveying, condition monitoring, ROV piloting, infrastructure maintenance, construction and security Halma North American Head Office Halma International Limited Shanghai Representative Office Halma China hub Halma Trading and Services India Pvt Ltd Halma India hub Halma p.l.c. Annual Report and Accounts 2011 127 Principal operating companies Industrial Safety Main products Location Contact Telephone E-mail Website Castell Safety International Limited Safety systems for controlling hazardous industrial processes Kingsbury, London Tim Whelan +44 (0)20 8200 1200 uksales@castell.com www.castell.com Crowcon Detection Instruments Limited Gas detection instruments for personnel and plant safety Abingdon, Oxfordshire Mike Ophield +44 (0)1235 557700 sales@crowcon.com www.crowcon.com Elfab Limited Fortress Interlocks Limited Pressure sensitive relief devices to protect process plant Safety systems for controlling access to dangerous machines Kirk Key Interlock Company, LLC Key interlocks and interlocking systems for the protection of personnel and equipment Netherlocks Safety Systems B.V. Process safety systems for petrochemical and industrial applications North Shields, Tyne & Wear Simon Keenan +44 (0)191 293 1234 sales@elfab.com www.elfab.com Wolverhampton, West Midlands Massillon, Ohio Alphen aan den Rijn, The Netherlands Rob Lewis Scott Life +44 (0)1902 349000 sales@fortressinterlocks.com www.fortressinterlocks.com +1 (1)800 438 2442 sales@kirkkey.com.com www.kirkkey.com Daniel Ruiter +31 (0)172 471339 sales@netherlocks.com www.netherlocks.com Oklahoma Safety Equipment Co. Inc. SERV Trayvou Interverrouillage S.A.S. Pressure sensitive relief devices to protect process plant Broken Arrow, Oklahoma Bryan Sanderlin +1 (1)918 258 5626 info@oseco.com www.oseco.com Safety systems for controlling access to dangerous machines Paris, France Stéphane Majerus +33 (0)1 48 18 15 15 sales@servtrayvou.com www.servtrayvou.com Smith Flow Control Limited Process safety systems for petrochemical and industrial applications Witham, Essex Mike D’Anzieri +44 (0)1376 517901 sales@smithflowcontrol.com www.smithflowcontrol com Tritech International Limited Equipment for underwater surveying, condition monitoring, ROV piloting, Aberdeen, Scotland Simon Beswick +44 (0)1224 744111 info@tritech.co.uk www.tritech.co.uk infrastructure maintenance, construction and security Group Halma Holdings Inc. Halma International Limited Shanghai Representative Office Halma China hub Halma Trading and Services India Pvt Ltd Halma India hub Shanghai, China Martin Zhang +86 21 5206 8686 halmachina@halma.com www.halma.cn Mumbai, India Kuniyur Srinivasen +91 (22)6708 0400 srini@halma.com www.halma.com Halma North American Head Office Cincinatti, Ohio Steve Sowell +1 (1)513 772 5501 halmaholdings@ halmaholdings.com www.halma.com 014338_Halma_AR11_Financials.indd 127 21/06/2011 16:07 Halma p.l.c. Annual Report and Accounts 2011 128 Financial Statements Shareholder Information and Advisers 30 November 2010 9 February 2011 17 February 2011 21 June 2011 27 June 2011 28 July 2011 24 August 2011 22 November 2011 February 2012 February 2012 14 June 2012 Shareholders Number % Shares Number 5,219 616 304 175 81 6,395 2010 264 156 2010 3.31 5.19 8.50 9,729,475 81.6 8,215,558 9.6 15,364,156 4.8 2.7 51,213,681 1.3 293,724,815 100.0 378,247,685 2009 222 143 2009 3.15 4.78 7.93 2008 246 182 2008 3.00 4.55 7.55 2011 367 240 2011 3.54 5.56* 9.10 % 2.6 2.2 4.1 13.5 77.6 100.0 2007 240 172 2007 2.85 4.33 7.18 Financial calendar 2010/11 Interim results 2010/11 Interim dividend paid Interim management statement 2010/11 Preliminary results 2010/11 Report and Accounts issued Annual General Meeting and interim management statement 2010/11 Final dividend payable 2011/12 Interim results 2011/12 Interim dividend payable Interim management statement 2011/12 Preliminary results Analysis of shareholders at 27 May 2011 Number of shares held 1 – 7,500 7,501 – 25,000 25,001 – 100,000 100,001 – 750,000 750,001 and over Share price London Stock Exchange, pence per 10p share Highest Lowest Dividends Pence per 10p share Interim Final Total * Proposed. Registered office Misbourne Court Rectory Way Amersham Bucks HP7 0DE Tel: +44 (0)1494 721111 E-mail: halma@halma.com Website: www.halma.com Registered in England and Wales, No 40932 Registrars Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Tel: +44 (0)870 707 1046 Fax: +44 (0)870 703 6103 Website: www.investorcentre.co.uk 014338_Halma_AR11_Financials.indd 128 21/06/2011 16:08 Halma p.l.c. Annual Report and Accounts 2011 Investor information Visit our website, www.halma.com , for investor information and Company news. In addition to accessing financial data, you can view and download Annual and Half Year Reports, analyst presentations, find contact details for Halma senior executives and subsidiary companies and access links to Halma subsidiary websites. You can also subscribe to an e-mail news alert service to automatically receive an e-mail when significant announcements are made. Shareholding information Please contact our registrars, Computershare, directly for all enquiries about your shareholding. Visit their Investor Centre website for online information about your shareholding (you will need your shareholder reference number which can be found on your share certificate or dividend tax voucher), or telephone the registrars direct using the dedicated telephone number for Halma shareholders (+44 (0)870 707 1046). Dividend mandate Shareholders can arrange to have their dividends paid directly into their bank or building society account by completing a bank mandate form. The advantages to using this service are: the payment is more secure than sending a cheque through the post; it avoids the inconvenience of paying in a cheque and there is no risk of lost, stolen or out of date cheques. A mandate form can be obtained from Computershare or you will find one on the reverse of the tax voucher of your last dividend payment. Dividend reinvestment plan The Company operates a dividend reinvestment plan (‘DRIP’) which offers shareholders the option to elect to have their cash dividends reinvested in Halma ordinary shares purchased in the market. You can register for the DRIP online by visiting Computershare’s Investor Centre website (as above) or by requesting an application form direct from Computershare. Shareholders who wish to elect for the DRIP for the forthcoming final dividend, but have not already done so, should return a DRIP application form to Computershare no later than 3 August 2011. American Depositary Receipts The Halma p.l.c. American Depositary Receipts (ADRs) are traded on the Over The Counter market (OTC) under the symbol HLMLY. One ADR represents three Halma p.l.c. ordinary shares. JPMorgan Chase Bank, N.A. is the depositary. If you should have any queries, please contact: JPMorgan Chase & Co, PO Box 64504, St Paul, MN 55164-0504, USA. E-mail: jpmorgan.adr@wellsfargo.com. Telephone number for general queries: (800) 990 1135. Telephone number from outside the USA: +1 651 453 2128. Electronic communications All shareholder communications, including the Company’s Annual Report and Accounts, are made available to shareholders on the Halma website and you may opt to receive e-mail notification that documents and information are available to view and download rather than to receive paper copies through the post. Using electronic communications helps us to limit the amount of paper we use and assists us in reducing our costs. If you would like to sign up for this service, visit Computershare’s Investor Centre website, selecting ‘Electronic Shareholder Communications’ and follow the registration process. You may change the way you receive communications at any time by contacting Computershare. Share dealing facilities A low cost telephone dealing service has been arranged with Stocktrade which provides a simple way for buying or selling Halma shares. Basic commission is 0.5% up to £10,000, reducing to 0.2% thereafter (subject to a minimum commission of £15). For further information please call 0845 601 0995 and quote reference Low Co0198. Annual General Meeting The 117th Annual General Meeting of Halma p.l.c. will be held in the Ballroom at The Berkeley Hotel, Wilton Place, London SW1X 7RL on Thursday, 28 July 2011 at 11.30 am. Investor Relations contacts Rachel Hirst/Andrew Jaques MHP Communications 60 Great Portland Street London W1W 7RT Tel: +44 (0)20 3128 8100 Fax: +44 (0)20 3128 8171 E-mail: halma@mhpc.com Andrew Williams Halma p.l.c., Misbourne Court Rectory Way Amersham Bucks HP7 0DE Tel: +44 (0)1494 721111 Fax: +44 (0)1494 728032 E-mail: investor.relations@halma.com Brokers J.P. Morgan Cazenove 10 Aldermanbury London EC2V 7RF Solicitors CMS Cameron McKenna LLP Mitre House 160 Aldersgate Street London EC1A 4DD Auditors Deloitte LLP PO Box 3043 Abbots House Abbey Street Reading RG1 3BD Bankers The Royal Bank of Scotland plc 280 Bishopsgate London EC2M 4RB Financial advisers Lazard & Co., Limited 50 Stratton Street London W1J 8LL Halma p.l.c. Misbourne Court Rectory Way Amersham Bucks HP7 0DE Tel: Fax: Web: +44 (0)1494 721111 +44 (0)1494 728032 www.halma.com [FSC logo to come] Printed on revive 50:50 Silk, which contains 50% recycled waste and 50% virgin ﬁbre and is manufactured at a mill certiﬁed with ISO 14001 environmental management standard. The pulp used in this product is bleached using an Elemental Chlorine Free process. Printed by Halstan Designed and produced by radley yeldar www.ry.com To view our Annual Report & Accounts online, please visit: www.halma.com

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