Halma p.l.c. Annual report and accounts 2007 We are protecting lives and improving quality of life for people worldwide. Find out what it takes... Performance Financial highlights Chairman’s statement Chief Executive’s strategic review Three sectors... one approach People in action Business and financial review 02 03 04 06 08 20 20 22 22 24 26 – Operating environment, risks and uncertainties 28 30 – Corporate responsibility 34 – Financial review Infrastructure Sensors Health and Analysis Industrial Safety – Group overview – Sector reviews Results 38 Consolidated income statement 39 Consolidated balance sheet Statement of recognised income and expense 40 Reconciliation of movements in shareholders’ funds 40 41 Consolidated cash flow statement 42 Accounting policies 45 Notes to the accounts 68 Independent Auditors’ report – Group 69 Company balance sheet 70 Notes to the Company accounts 75 Independent Auditors’ report – Company 76 Summary 1997 to 2007 Governance Management team, Directors and advisers Report of the Directors Statement of Directors’ responsibilities Corporate governance Report on remuneration Group directory Notice of meeting Shareholder information 78 80 83 84 87 92 94 96 > Record revenue and profit Strong organic growth builds on last year’s progress > Delivering on strategic objectives Balancing short-term achievement with investment for the long-term > Increased people development Training of senior management is a key part of our success > Dividend increase of 5% Progressive dividend policy raising dividend cover towards target > Strong internal control maintained Continuous improvement and additional resources This annual report and accounts is printed on Revive Special Silk, which is composed of 30% de-inked post-consumer waste with the remainder being virgin wood fibre from sustainable sources. The bleaching is a mix of TCF and ECF processes. The paper mill involved in the production supports the growth of responsible forest management and is accredited to ISO 14001 which specifies a process for continuous environmental improvement, and is FSC certified. The printer is ISO 9001:2000, ISO 14001, EMAS and FSC certified. They also hold the Queen’s Award for Enterprise for sustainable development and were the world’s first printer to be Carbon Neutral. If you have finished reading this report and no longer wish to retain it, please pass it on to other interested readers or dispose of it in your recycled paper waste. This annual report is available at: www.halma.com/halmaplc/investors/reports.jsp Designed and produced by Radley Yeldar (London) Halma p.l.c. 2007 01 We protect lives and improve quality of life for people worldwide. We do this through innovation in market leading products. We make our customers: safer, more competitive, and more profitable. We invest in and develop businesses where: people are creating innovative products; there are significant barriers to entry; and the market is demand driven and global. 02 Halma p.l.c. 2007 Financial highlights Continuing operations: Revenue Adjusted profit before taxation(1) Statutory profit before taxation Adjusted earnings per share(2) Statutory earnings per share Total dividends (paid and proposed) per share Return on sales(3) Return on total invested capital(4) Return on capital employed(4) Change 2007 2006 +14% +14% +11% +14% +11% +5% £354.6m £310.8m £66.1m £62.6m 12.50p 11.86p 7.18p 18.6% 14.0% 60.1% £58.1m £56.6m 11.01p 10.73p 6.83p 18.7% 12.8% 56.9% Pro-forma information: (1) Adjusted to remove the amortisation of acquired intangible assets of £3,458,000 (2006: £1,500,000). (2) Adjusted to remove the amortisation of acquired intangible assets. See note 2 for details. (3) Return on sales is defined as adjusted(1) profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations. (4) 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 for details. Profit* £m Revenue* £m 07 06 05 04 03 02 01 00 99 98 07 06 05 04 03 02 01 00 99 98 £20m £40m £60m £80m £150m £300m £450m ROTIC** % Dividends*** £m 07 06 05 04 03 02 01 00 99 98 07 06 05 04 03 02 01 00 99 98 0 5% 10% 15% 20% £10m £20m £30m Weighted average cost of capital * Revenue and profit include the results of discontinued operations up to the date of their discontinuance. Profit is before amortisation of acquired intangibles/goodwill and taxation. Figures prior to 2005 have not been restated for IFRS. ** Figures prior to 2005 have not been restated for IFRS. *** Dividends paid and proposed. Halma p.l.c. 2007 03 Chairman’s statement Another good year with continuing investment in people, innovation, market development and acquisitions. All of these investments, together with our investments in strengthening our selling and distribution resources, feed and support our strategy for healthy organic growth, so it is encouraging to see that this focus continues to bear fruit. This also gives us even more confidence that we can deliver significant value for shareholders from acquisitions that fit our strategic framework and meet our strict acquisition criteria. Furthermore we have significant financial resource at our disposal to do more. In March, Andrew Walker stepped down from the Board and I should like to record our thanks for all his contribution during his four-year tenure as a non-executive Director of the Group and wish him well for the future. On behalf of the Board, I should also like to thank all our employees for producing such a good performance. In summary, another good year with continuing investment in people, innovation, market development and acquisitions. This, together with strong and effective leadership from our management team, gives us confidence for the future. Geoff Unwin Chairman The last financial year has again seen good progress for Halma. Revenue from continuing operations increased 14% to £354.6 million (£310.8 million in 2006) with underlying organic growth* of 8.1% despite adverse currency effects of 2.3% i.e. 10.4% at constant currency. Profit before tax and amortisation of acquired intangibles on continuing operations was £66.1 million (2006: £58.1 million) an increase of 14%, organic growth* at constant currency was 10.1%. This organic profit growth* compares with an equivalent figure of 14% in 2006 where we benefited from the rebound in the Water business, so in the year under review we faced slightly tougher comparables. Statutory profit before tax increased by 11% to £62.6 million. The Board is recommending a final dividend of 4.33p per share, an increase of 5% for the year and our 28th consecutive year of dividend increases of 5% or more. Our dividend cover has increased to 1.74 times (2006: 1.61 times). Return on total invested capital* was 14.0% (2006: 12.8%). We have also made a number of acquisitions during the year: Mikropack, Baldwin Environmental and Labsphere in the Health and Analysis sector and Tritech and System Technologies in the Industrial Safety sector. In total we invested £27 million in acquisitions with a maximum potential of a further £5 million in deferred consideration. After the positive action taken in the previous year, no disposals were made during the period under review. At the end of the year our net debt was £7.7 million. During the year we have seen a continuous flow of new products, some of which are detailed in this report. We are also beginning to see results from our investments in China. During the year seven additional companies within the Group established a local presence there and during the coming year we expect several more to commence. Our investment in people continues apace with enthusiastic attendance at our management training programmes and it is pleasing to see the energy with which attendees return to their companies, refreshed, invigorated, having learnt much, but more importantly, with a network of colleagues who actively support each other on all aspects of our business such as selling, innovation, technology and quality. *See Financial highlights. 04 Halma p.l.c. 2007 Chief Executive’s strategic review Record revenues and profits once again demonstrating our ability to deliver organic growth. Record results with 8% organic profit growth* We have achieved record revenues and profits once again, demonstrating our ability to deliver organic growth which is the primary measure of our success. For continuing operations, total revenues increased by 14%, including 8% organic growth*, with total profits before amortisation of acquired intangibles also increasing by 14%, including 8% organic*. Impressively, these significant increases were achieved despite a 2% to 3% adverse currency impact during the year. Strong returns and cash flow supports record dividend and investment Return on sales* (2007: 18.6%; 2006: 18.7%), Return on capital employed* (2007: 60.1%; 2006: 56.9%) and Return on total invested capital* (2007: 14.0%; 2006: 12.8%) all remained strong or increased in accordance with our objective of generating growth without diluting the quality of our returns. Cash flow was good and we ended the year with £7.7 million net debt having funded five acquisitions, significant organic growth and a further dividend increase of 5%. Acquisitions completed in targeted markets The Group completed five acquisitions during the year. Two of these acquisitions, Mikropack (April 2006) and Baldwin Environmental (September 2006) added new products to two of our leading Health and Analysis businesses and were merged with these existing businesses immediately on completion. Of greater significance were Tritech/System Technologies (November 2006) and Labsphere (February 2007) who are world leaders in subsea asset monitoring (Industrial Safety) and light measurement (Health and Analysis) respectively. All five businesses have performed well since joining the Group. We have allocated more resources to our acquisition search activity as acquisitions continue to be an important element of our long-term growth plans. Growth in all business sectors and all global regions Each of Halma’s three business sectors achieved record revenues and profits. > Infrastructure Sensors grew strongly with profits up 16% from 17% revenue growth following the increased investment in sales and product development made last year. > Health and Analysis performed well generating a 7% increase in profits from revenue up 9%. This sector makes just under half of all the Group’s sales into markets where the currency is US$ (or US$-related) and bore the brunt of adverse currency movements during the year. Halma p.l.c. 2007 05 Strategic achievements Strategic directions > 8% organic revenue and profit growth drives record results > Five acquisitions add technology and a new sub-sector business > Seven Group companies newly represented in Halma hubs in Shanghai and Beijing > 60 senior managers completed Halma Executive Development Programme > More than 70 new products launched during 2006/07 > Organic growth to exceed 5% p.a. > Targeted acquisitions > Build on Chinese hubs and grow revenues in Asia > Continued management development > Maintain strong new product introduction We have worked hard in recent years to change our culture from being too inwardly focussed on managing returns. This has included major people changes with over 65% of our subsidiary managers having joined the Group in the past four years. Increased investment in training and development, including the flagship Halma Executive Development Programme (HEDP) launched 18 months ago, is translating into improved financial performance and greater strategic clarity throughout the Group. By the end of 2007, over 80 of our senior managers will have benefited from the HEDP. This commitment to improving our people resources means that internal promotions are now a more realistic and frequent option. Accordingly, it was pleasing for me to promote Mark Lavelle to the Executive Board in April 2007 following five successful years as Managing Director of Keeler, one of our Health and Analysis businesses. This coincided with a change of divisional responsibilities in the Executive Board to ensure we continue to provide fresh insights and new approaches for our businesses. Halma’s long-term growth record continues Since 1970, Halma has increased revenue every year bar two. Today we have very modest net debt of £7.7 million having self-funded organic growth, acquisitions and paid dividends to shareholders over the years totalling £235 million, excluding the final dividend proposed for this year. So what has changed over the past two years to give us a new confidence that we can attain even higher levels of success? Simply that our proven ability to choose sustainable growth markets is being boosted with greater ambition, customer focus, more innovation, new technologies and stronger management resources all driven with a clear strategy for each part of our business. These results demonstrate that we are making good progress and we remain positive about our prospects for the year and the longer term. Andrew Williams Chief Executive > Industrial Safety proved once again to be a strong and consistent performer with revenue growth of 15% driving profits up by 19%. Geographically, revenues and profits increased in each major territory. The UK and mainland Europe proved to be particularly strong and our Industrial Safety businesses benefited from continuing high investment in the oil, gas and petrochemical industries – especially in the Middle East. Many of our products are used to protect or improve the environment which offers us exciting opportunities for growth. In addition, we recognise that we can do more to minimise the impact that our business activities have on the environment and believe we can do this by increasing efficiencies thereby creating further value for shareholders. Examples of the actions we are taking are included in the Business and financial review. Greater activity in Asia Revenues to Asia Pacific and Australasia grew by 7% and continue to represent around 10% of Group sales. Over the medium term, this region offers growth rates in excess of the Group average and, as announced previously, we created Halma “hubs” in Shanghai and Beijing in August 2006 to accelerate business development by our subsidiaries in the region. This is a good example of how the Group can help our businesses to develop more quickly without compromising their autonomy and freedom. We regularly review the opportunities for similar Group initiatives in other regions, markets or functional areas. Product and process innovation driving organic growth We maintained a healthy level of investment in Research & Development (R&D) (4.3% of revenues) and capital expenditure. These investments are critical factors in our ability to sustain growth through increasing innovation in products and processes. Over 70 new products were launched by Halma companies during the year, providing encouragement for our future growth prospects. Some of these products resulted from collaboration amongst Group companies. Increasing investment in talented people Developing and growing businesses already performing at a high level is a challenging task and I would like to thank each employee in every Halma company for their contribution to another successful year for the Group. *See Financial highlights. 06 Halma p.l.c. 2007 We have three sectors... Infrastructure Sensors We make products which detect hazards to protect people and property in public and commercial buildings. Health and Analysis We make components and products used to improve personal and public health. We also develop technologies and products which are used for analysis in safety, environmental and leisure related markets, including Water. Industrial Safety We make products which protect property and people at work. Infrastructure Sensors revenue 2007 £m £155m 44% Health and Analysis revenue 2007 £m £120m 34% Industrial Safety revenue 2007 £m £80m 22% Infrastructure Sensors profit* 2007 £m £28m 41% Health and Analysis profit* 2007 £m £24m 36% Industrial Safety profit* 2007 £m £16m 23% Sub-sectors Fire detection Security sensors Automatic door sensors Elevator safety *See note 1 to the accounts. Sub-sectors Water Fluid technology Photonics Health optics Sub-sectors Gas detection Bursting discs Safety interlocks Asset monitoring ...and one approach Halma p.l.c. 2007 07 As a group we are: > Autonomous and entrepreneurial > Highly cash generative > Financially strong > Successful acquirers of good businesses > Committed to developing our people > Good at sharing opportunities Our businesses have: > Robust growth drivers > Worldwide opportunities > High performance products > Innovative product development > Market leading positions > High barriers to entry > Empowered local management Take a look at what it takes to shape our success... 08 Halma p.l.c. 2007 People in action …it takes ambition Dr Ling Sun Director of Asia Operations for Ocean Optics, Inc. We appointed Dr Ling Sun Director of Asia Operations for Ocean Optics, Inc. to head up a new regional sales office in 2006. Based in Shanghai, Ling’s team provides region-wide sales and technical support for our photonics technologies throughout the dynamic Asian market. Before joining us, she gained a doctorate in Material Sciences from the Tokyo Institute of Technology, and was principal engineer for Ocean Optics products at our Japanese distributor. People in action Halma p.l.c. 2007 09 Seven Halma businesses – Ocean Optics, Crowcon, Hanovia, Keeler, Berson, Netherlocks and Palintest – have set up new direct sales operations in China during 2006/07 using the hub offices as a springboard. Our miniature fibre optic spectrometers are used to test LED lamps in this quality control system manufactured by Huge Winners CNC System Ltd., Shenzhen, China. Springboard for success There are tremendous opportunities for our companies to contribute to China’s rapid economic development. To kick start our subsidiaries’ entry into Chinese markets, during 2006 we set up hub offices in Shanghai and Beijing. From these hubs we offer subsidiaries fully-serviced offices. They are supported by experienced local managers providing administrative, marketing, human resources and legal services. When Ocean Optics set up a new direct sales operation in China in 2006, they quickly established a sales and support network based on the Halma hub office in Shanghai. Now well established with growing sales, they have moved into their own premises. 10 Halma p.l.c. 2007 People in action The Halma Executive Development Programme (HEDP) is as much about personal development as acquiring management skills. Here Halma managers entertain children cared for by the Shisei Gakuen Children’s Charity, Tokyo, Japan. Teamwork in action as our managers on the HEDP scheme learn about group behaviour through practical exercises. …it takes investment in people Jim Ludwig MD of Texecom Limited Jim Ludwig joined our US corporate team in 1998 as a specialist in acquisitions and business development. Four years later, he switched roles and moved into line management as President of Air Products and Controls Inc., a US fire products manufacturer with 33 employees. One of the many Halma executives who have benefited from the Halma Executive Development Programme (HEDP), Jim has recently moved to the UK to head up security sensor specialist Texecom, which has over 300 staff. People in action Halma p.l.c. 2007 11 Improving our people resources Raising the quality of leadership throughout the Group by investment in people is central to our growth strategy. The HEDP has been running successfully for 18 months and, by the end of 2007, over 80 of our senior managers will have completed the three-week residential course. In April 2007 we launched a new training scheme, the Halma Management Development Programme, to extend our commitment to people development across a wider group of employees. Investment in people has greatly improved mobility and career development opportunities for our high flyers. We can consider internal candidates for top jobs more often and our managers have greater opportunities to work in different regions of the world. 12 Halma p.l.c. 2007 People in action Tim Stubbs, Engineering Manager, and Mike Golding, Managing Director, of Fortress Interlocks Limited, celebrate winning the Queen’s Award for Innovation in addition to the “Green” Innovation Award in the 2006 Innovation & Design Excellence Awards. The “Best Small-Scale Innovation” at the 2006 Railway Forum/Modern Railways Innovation Awards went to Radio-Tech Limited for their Rail Temperature Monitor safety system which gives early warning of the risk of track buckling. …it takes innovative people Inder Panesar Director and Brian Back MD of Radio-Tech Limited Inder Panesar and Brian Back are successful, innovative engineers. This was recognised when they won the Halma 2006 Innovation Award. They developed a unique system which remotely monitors the temperature of railway tracks. It has already achieved substantial sales. Radio-Tech is one of our many highly innovative companies and a technology leader in wireless and cellular telemetry data transmission systems. People in action Halma p.l.c. 2007 13 Investment in innovation We invest heavily in R&D to maintain competitive advantage via technological innovation. Continuous innovation is critical to our growth strategy. We know that successful innovation in business processes and products needs more than imaginative ideas. It demands enthusiasm, resources and perseverance to drive a new concept to completion. Successful innovators continue to develop their ideas, use failures to trigger even better ideas and never give up. These employees are vital to our success and we have strategies to support and encourage them. To give innovation a high profile we award annual and monthly innovation prizes, we run innovation and creativity training courses and organise Group-wide innovation workshops. 14 Halma p.l.c. 2007 People in action …it takes collaboration Rob Fish MD of Palmer Environmental Limited and Alain Soulié MD of Hydreka SAS Close collaboration between Rob Fish and Alain Souilé’s companies, together with Radio-Tech, another of our subsidiaries, has resulted in the development of a new, fixed network leak detection system for one of the world’s largest water companies. People in action Halma p.l.c. 2007 15 Following the organisation of our elevator safety products companies into three regional businesses covering Asia, Europe and North America, they now collaborate in all areas of R&D, manufacturing, marketing and sales. This innovative fire detector, which has an integral audible sounder and visible flashing beacon alarm to comply with disability legislation, was developed jointly by two of our subsidiaries. Benefits of collaboration Hydreka successfully met its customers’ demand for a state-of-the-art monitoring system by calling on the technical expertise of both Palmer and Radio-Tech. Working together, the companies developed a unique product combining the benefits of three Group technologies. We encourage our businesses to collaborate and share technology advances and application experience. In many markets where competitors have a narrow area of expertise, collaborative product development and marketing can give us a real competitive advantage. Increasingly, our complementary technologies are being offered to the market as a package backed by unrivalled technical expertise. 16 Halma p.l.c. 2007 People in action Customers ranging from international aerospace agencies to digital camera manufacturers use Labsphere light sources to test and calibrate light-sensitive sensors. Tritech is an industry leader in sensors, tools and video and acoustic surveillance systems for remotely operated and autonomous underwater vehicles. …it takes entrepreneurs Richard Marsh, Marcus Cardew, Alison Trepte, Jonathan Trepte and Dick Wright Vendors of Tritech and System Technologies who have remained with the businesses Beginning life in 1990 as a two-man operation working from a converted house, Tritech’s former owners built the company into an industry leader in acoustic and video equipment for underwater asset monitoring, aided by the expertise of their colleagues at System Technologies. Halma acquired the companies in November 2006. People in action Halma p.l.c. 2007 17 Acquiring entrepreneurs Acquiring a business is not purely a financial exercise. We are interested in intellectual assets more than physical assets and search for successful companies in, or adjacent to, the markets we already operate in. We are always keen to 'acquire' the dynamic entrepreneurs who built the business through leadership, determination, single-minded pursuit of opportunities and calculated risk-taking. We have a highly decentralised, entrepreneurial culture. As a result, owners of acquired companies feel comfortable within the Group and often remain in position after selling their businesses. Over the years, a number of Divisional Chief Executives and Halma Directors have joined the Group through an acquisition. 18 Halma p.l.c. 2007 People in action Vulnerable patients at the Northport Veteran’s Affairs Medical Center, New Jersey, USA, are protected from contact with elevator doors by our infrared safety sensors. “It’s a much safer system. Patients get plenty of advance warning that doors are closing and can take their time,” said Mike Boyle, Supervisor (Electrical), Northport Veteran’s Affairs Medical Center. Our UV system treats pool water at the Germantown Academy in Pennsylvania, USA. According to swimming coach Richard Shoulberg, trainer of over 15 Olympic swimmers, “Previously, many of our athletes were having respiratory problems due to heavily chlorinated water. The switch to UV treatment has been amazing. The athletes stopped needing inhalers as the atmosphere around the pool was much better, with no throat and eye irritations.” …it takes satisfied customers Ray Kamal Vice President of Computrols Inc., New Orleans Ray Kamal has been with Computrols Inc. for almost ten years with responsibility for sales, marketing, production and R&D. Based in New Orleans, USA, Computrols designs, manufactures and services state-of-the-art building automation systems. The company uses our fire detectors in their CSimon Fire System which delivers cutting edge fire protection. Computrols recently installed our fire detectors in a system that protects the Statue of Liberty on Liberty Island, New York City. People in action Halma p.l.c. 2007 19 Excellence in customer support Satisfied customers are essential to our future growth and we have created hundreds of thousands all over the world. Our subsidiary Apollo Fire Detectors provided technical assistance to Computrols so that they could develop control panels that work with our fire detectors. According to Ray Kamal, the companies have developed a strong relationship to ensure that Computrols can offer customers a solution which meets their expectations in this safety critical application. He said, “I’ve been impressed by the fact that Apollo fire detectors are so easy to install and always work straight out of the box. They are delivered on time, defect free. Apollo provides ‘above and beyond’ technical support and their advice has helped to get our system listed to the highest certification possible which was incredibly important to us.” 20 Halma p.l.c. 2007 Business and financial review Group overview Halma protects lives and improves quality of life for people worldwide through innovation in market leading products which make our customers safer, more competitive and more profitable. Business overview Halma is made up of three sectors each comprising autonomous operating companies which mainly manufacture innovative electronic and electrical products for niche markets with global dimensions. We are an international group with businesses in over 20 countries and major operations in Europe, the US, Asia and Africa. You will find a description of our products, the industries in which we operate and trends in our markets in the sector reviews on pages 22 to 27. These sectors are: > Infrastructure Sensors detecting hazards, and protecting people and property in buildings > Health and Analysis improving public and personal health; protecting the environment > Industrial Safety protecting property and people at work Group target >5% >5% 2007 8% 8% 2006 11% 15% ~18% 18.6% 18.7% Key performance indicators Financial key performance indicators (KPIs) used by the Board to monitor progress are listed in the table on the left. Similar indicators are used to review performance in our three sectors. KPIs are calculated on results from continuing operations. We have delivered an impressive performance against our KPI targets. The prior year comparatives for 2006/07 were demanding as, unlike that year, there were no “recovery” situations in the current year to benefit from. Underlying organic profit growth remained healthy and was again driven by top line growth rather than cost reduction. Strong Return on sales, ROCE and ROTIC metrics confirm Halma’s ability to deliver growth without diluting the quality of its returns. Indeed, the increase in ROTIC indicates enhanced value creation for shareholders. R&D investment remained high relative to many of our peers reflecting both increased innovation activity and an overall uplift in the technology level of Group companies due to M&A actions in the past two years. Further discussion of the Group’s financial performance is given in the Financial review later in this Annual report. KPI Organic revenue growth1 Organic profit growth1 Return on sales2 ROCE3 (Return on capital employed) ROTIC3 (Return on total invested capital) >45% 60.1% 56.9% >12% 14.0% 12.8% R&D as a % of revenue4 ~4% Operating cash to operating profit5 100% 4.3% 106% 4.3% 117% 1. Organic growth measures the change in the revenue and profits from continuing Group operations. The effect of acquisitions made during the current or prior financial period has been equalised by subtracting from the current year results a pro-rated contribution based on their revenue and profits at the date of acquisition. 2. Return on sales is defined as adjusted6 profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations. 3. ROCE and ROTIC are non-GAAP measures used by management in measuring the returns achieved from the Group’s asset base. See note 3 to the accounts for details of the calculation basis. 4. Research and development expenditure as a percentage of revenue from continuing operations. 5. Cash generated from continuing operations expressed as a percentage of adjusted6 operating profit from continuing operations. 6. Adjusted to remove the amortisation of acquired intangible assets. This Business and financial review is based on the guidelines for Operating and Financial Reviews published by the Accounting Standards Board. To help shareholders get a clear insight into our business we look at issues affecting the Group as a whole on pages 20 and 21, followed by an analysis of our three principal operating sectors in more detail on pages 22 to 27, and then we summarise the Operating environment, risks and uncertainties, review corporate responsibility and conclude with a Financial review. Business and financial review Halma p.l.c. 2007 21 How we operate We cultivate a highly decentralised operating culture which encourages our businesses to focus on establishing market leadership in their selected niche within a global market. Each subsidiary is led by a management team who enjoy genuine autonomy and the freedom to grow in an entrepreneurial environment. These management teams are chaired by Halma’s Divisional Chief Executives (DCEs) who understand the market needs and can contribute broadly to the individual company’s strategy in technical, operational and commercial areas. These DCEs meet with the Group Chief Executive regularly to review progress against their operating division’s strategic objectives. Through the regular interaction between the Group’s Executive Board members, common challenges and opportunities for Group businesses are identified which sometimes leads to a central initiative. Examples of initiatives underway are sales process improvement, innovation, people development and increasing activity in China via our Halma hubs in Shanghai and Beijing. DCEs are responsible for finding, negotiating, completing and managing acquisitions in their own business sectors. Acquisition costs, including goodwill, are incorporated in the incentive plans of all Executive Board members. When new acquisitions join Halma they invariably retain their name and identity, and vendors often continue to work with us. Elsewhere entrepreneurs who typically find working in a large international organisation too constraining welcome our autonomous culture and decentralised structure which allows them to develop further. Outlook 2006/07 marked another year of good progress for the Group with record revenues and profits. Significant investment continues in R&D, capital expenditure and strengthening channels to market. This combination of delivering strong results whilst increasing investment provides a solid platform from which it is possible for the Group to sustain organic growth above market rates. Good quality prospects for further acquisitions in our target markets exist and acquisitions will continue to play an important role in the Group’s long-term growth. We have clear growth strategies for our markets and we continue to work hard to improve the quality of our execution through active resource allocation and people development. We are well placed to deliver sustained growth and enter the new year in good shape. Strategy and business objectives Our strategy for driving growth and creating shareholder value centres on five key principles: > Operate in specialised global markets offering long-term growth underpinned by robust growth drivers; > Build businesses which lead specialised global markets through innovative products differentiated on performance and quality rather than price alone; > Recruit and develop top quality boards to lead our businesses and nurture an entrepreneurial culture within a framework of rigorous financial discipline; > Acquire companies and intellectual assets that extend our existing activities, enhance our entrepreneurial culture, fit into our decentralised operating structure and meet our demanding financial performance expectations; > Achieve a high Return on capital employed to generate cash efficiently and to fund organic growth, closely targeted acquisitions and sustained dividend growth. Organic growth is the key to our value creation strategy. The “blended” long-term growth rate of our markets is around 5% per year and our aim is to grow faster than our markets. Following a strong year in 2005/06, achieving 8% organic growth in 2006/07 was an excellent result and represents a second year of good progress following low organic growth in the preceding years 2000 to 2005. R&D and innovation play an important role. Strategically, we aim to provide technical resources within each business as close as possible to the customer. Whilst respecting the autonomy of subsidiary companies, we encourage collaboration between Halma companies and see this as a potential competitive advantage that has been under-utilised in the past. During 2006/07, the increased collaboration started to bear fruit with new products launched incorporating technology and know-how from two or more Halma companies. These included fire products, which combined visual and audible alarm modules together with our market leading smoke detectors. Our businesses build competitive advantage and strengthen barriers to entry in many ways including patents, product approvals, technical innovation, product quality, customer service levels and branding. We look for these qualities in the businesses we seek to acquire. We like regulated markets which require suppliers to achieve compliance with demanding product standards but also look for other robust long-term growth drivers such as demographic change. Growth drivers > Safety regulations and legislation > Risk and cost of accidents > Commercial construction (new build and refurbishment) > Population growth, ageing and urbanisation > Rising expectations of health and safety > Capital investment in industrial facilities > Industrialisation of developing world > Energy and water resources markets growth > New technology 22 Halma p.l.c. 2007 Business and financial review Infrastructure Sensors sector review KPI Revenue growth1 Profit growth2 Return on sales3 ROCE4 (Return on capital employed) R&D as a % of revenue5 We make products which detect hazards to protect people and property in public and commercial buildings. Sector overview Infrastructure Sensors, our largest business, contributes 44% of Group revenue (£155 million) and 41% (£28 million) of Group profit†. Our principal products are sensors for fire, security, automatic doors and elevator controls. There are four sub-sectors: Fire detection We make fire and smoke detectors and audible/visual warning devices. We are the second largest manufacturer of point smoke detectors in the world. We make fire products in the UK and US, with sales offices in the US, Europe, Africa, the Middle East and Asia. Group target >5% >5% 2007 17% 16% 2006 12% 2% ~18% 18.1% 18.3% >45% ~4% 64% 4.2% 60% 4.4% Security sensors We have a strong presence in this strategically important and fast growing market. We are the market leaders in the UK and South Africa for security sensors used in public and commercial property*. These products are made in the UK. KPIs are calculated on results from continuing operations. 1. Sector revenue compared with the prior year. 2. Adjusted6 sector profit before finance expense compared with the prior year. 3. Return on sales is defined as adjusted6 sector profit before finance expense and taxation expressed as a percentage of sector revenue. 4. Adjusted6 sector profit before finance expense expressed as a percentage of sector operating net assets. 5. Sector research and development expenditure expressed as a percentage of sector revenue. 6. Adjusted to remove the amortisation of acquired intangible assets. Automatic door sensors We are one of the world’s largest manufacturers of sensors used on automatic doors in public and commercial buildings*. These products are made in China, Belgium and the US. Elevator safety We are the world’s largest manufacturer of elevator/lift door safety sensors*. We also make emergency communication devices, display modules and control panels for elevators. These products are made in the UK, the Czech Republic, New Zealand, the US, China and Singapore. Sector strategy Our strategy in this sector is to become the leading supplier of safety-critical sensor components used in non-residential building monitoring and control systems. We focus on specialist components, not complete installed systems. The global manufacturers of complete building infrastructure systems see us as a strategic partner or specialist supplier of advanced technology components rather than a direct competitor. To support our Elevator safety sales growth, during the past year we organised our companies into three regional businesses covering Asia, Europe and North America. Our strategy is to boost competitiveness by presenting customers with a single, seamless source for our complete range of elevator safety products in each region. As part of a strategy of getting closer to elevator customers than our competitors, we opened new regional sales offices in Delhi, Houston and Toronto adding to the new offices opened in Asia and the Middle East last year. Continuous manufacturing cost reduction remains a key strategic activity within this sector balanced by the need to remain close to our customers. Consequently, we will continue to invest significantly in our Czech and Chinese factories. Strategic achievements † See note 1 to the accounts Strategic directions > Return to organic profit growth > New global strategy for Elevator Safety > Further new sales offices opened in North America and Asia > Launch of first Chinese designed and manufactured > Organic profit growth driven by revenue growth > Increase direct presence further in China and Asia regions > Develop internal technical/commercial collaboration opportunities automatic door sensor product > Complete implementation of new global strategy for Elevator Safety businesses > Add new products and technology organically and via acquisition Business and financial review Halma p.l.c. 2007 23 Market trends A significant trend in the Infrastructure Sensors market sector is rising demand for integrated fire, security, evacuation and access systems. To accommodate this need, we have developed a new technology platform which will be licensed to our fire alarm system partners so that our fire detectors can be specified in buildings with integrated fire and security monitoring. Worldwide demand for fire detectors remains strong. With an estimated growth rate of 18%, China continues to offer the highest revenue growth potential. Europe, where our fire product revenues grew by over 15%, reversed the downward trend of last year due to recovery in the German market. Downward pricing pressure continues in the fire detector market, particularly in the Middle East and Asia. Further investment in our sales channels, coupled with increased spending on R&D and the supply chain, delivered continued growth in these markets and gross margins remained solid. Our ability to innovate and respond rapidly to frequent regulatory changes maintains competitive advantage. In addition to new technical standards, during the past year we accommodated new regulations covering: safe disposal and recycling of waste electrical products (WEEE Directive); restrictions on the use of hazardous substances in electrical products (RoHs Directive); and enhanced electromagnetic compatibility standards (CPD Directive). Our Security sensors sell into a global market worth over £2 billion annually, which continues to grow at 6% per year. Following our acquisition of Texecom in November 2005, we established a strong presence in the UK and South African markets and are making good progress towards gaining the necessary product approvals to sell our products into China and the US. These markets offer us significant growth potential and we will be using expertise in our other Infrastructure Sensors businesses to develop our presence more rapidly. Our internal estimate is a 3% to 4% global growth rate for the automatic door safety market. We have high market shares in Europe and the US where many of our competitors have chosen low prices as their main competitive strategy. Our strategy to maintain our margins and market share by reducing production costs and introducing new market leading products tailored for each region, continued to be successful. We believe that the global market growth rate for new elevators (and elevator services) is in the region of 5% to 6%.** We calculate the annual value of the elevator markets that we serve at £180 million. The Middle East, India and China offer the highest growth rates for elevator safety sensors. Price competition is prevalent; severe in China, but moderate in Europe and the US. New European legislation called “Safety Norm EN-81”, designed to improve elevator safety and accessibility for people with disabilities, boosted European demand for our products in the building modernisation market. Sector performance Our Fire detector businesses produced record revenues and profits. In 2006/07, organic revenue and profit growth was more than double market growth rates thereby increasing market share while improving profitability. More than 10 significant new fire products were introduced and we obtained 450 new product approvals for global markets. Despite strong revenue growth, profit growth from security sensor products suffered from currency volatility as well as high investment in new markets and product development. Even with strong price competition in the automatic door sensor market, both revenues and profits grew significantly. We maintained our high market shares in Europe and the US and defended our good profit margins partly by cutting production costs through increased investment in our Chinese manufacturing capacity. However, we also benefited from launching innovative, market leading products, such as the 4Safe sensor which prevents people from being trapped or injured in automatic, revolving or swing doors. New legislation boosted sales of 4Safe in Germany. Last year we began to increase our direct presence in key developing elevator markets and this year both revenue and profit moved ahead. We countered a slight dip in margins in the past year with new, lower cost products and by cutting production costs. Revenues from offices set up in Dubai and Mumbai have grown very successfully, whilst progress in new regional offices in China has been more varied. ROCE for the sector as a whole continues to be excellent. Sector outlook With our Fire detector and Automatic door sensor businesses achieving solid organic profit growth on increased revenues, a flow of new products aimed at diversification and market expansion is planned to drive growth. Continued strengthening of senior management and IT investment in our Security sensor and Elevator safety businesses is well underway to improve the potential for profit growth in these businesses in the future. Sources of information: * Internal market analysis including confidential market sources ** Freedonia “Industry Study 2016 – World Elevators” and elevator manufacturers’ websites Geographic regions Main growth drivers Belgium Brazil China Czech Republic France Germany Italy Hong Kong India Japan New Zealand Singapore South Africa Spain United Arab Emirates UK USA > Safety regulations and legislation > Risk and cost of accidents > Commercial construction (new build and refurbishment) > Population growth, ageing and urbanisation > Rising expectations of health and safety > Capital investment in industrial facilities > Industrialisation of developing world > Energy and water resources markets growth > New technology 24 Halma p.l.c. 2007 Business and financial review Health and Analysis sector review We make components and products used to improve personal and public health. We also develop technologies and products which are used for analysis in safety, environmental and leisure related markets, including Water. KPI Group target 2007 Revenue growth1 Profit growth2 Return on sales3 ROCE4 (Return on capital employed) R&D as a % of revenue5 2006 (restated)* 18% 52% >5% >5% 9% 7% ~18% 20.4% 20.7% >45% ~4% 75% 5.3% 79% 4.9% Sector overview Health and Analysis contributed 34% (£120 million) of Group revenue and 36% (£24 million) of Group profit†. There are four principal sub-sectors: Water We estimate that we are the world leaders in monitoring and finding leaks in underground water pipelines and among the world leaders in UV technology for disinfecting and treating water. We manufacture our water products in the UK, The Netherlands, France and the US. Fluid technology We make critical components such as pumps, probes, valves, connectors and tubing used by scientific, environmental and medical diagnostic instrument manufacturers for demanding fluid handling applications. These products are made in the US and UK. Photonics We have market leading technologies and products which generate, measure and condition light and analyse the interaction of light with substances. We have manufacturing sites in the US, Germany and The Netherlands. * restated to reflect the reclassification of Radio-Tech Limited to the Industrial Safety sector. KPIs are calculated on results from continuing operations. Health optics We make handheld devices used to assess eye health, diagnose disease and assist with eye surgery. Our ophthalmic products are made in the UK and the US. 1. Sector revenue compared with the prior year. 2. Adjusted6 sector profit before finance expense compared with the prior year. 3. Return on sales is defined as adjusted6 sector profit before finance expense and taxation expressed as a percentage of sector revenue. 4. Adjusted6 sector profit before finance expense expressed as a percentage of sector operating net assets. 5. Sector research and development expenditure expressed as a percentage of sector revenue. 6. Adjusted to remove the amortisation of acquired intangible assets. Sector strategy In Water management we aim to be the technology leaders and offer water utilities worldwide new solutions to their water supply problems. Our Water UV treatment growth strategy is to unlock new regulated markets via further product validations, and to adapt existing product lines for new applications. We aim to grow our Fluid technology business by broadening our product range and our presence outside of our traditional US stronghold both via organic growth and acquisitions. Geographic expansion and innovative product development are our twin organic growth strategies for Photonics. The Mikropack and Labsphere acquisitions completed this year added complementary light generation and measurement technologies. We will seek further photonics acquisitions which we can grow rapidly using our well-established sales channels. In Health optics, higher R&D investment is resulting in an increased rate of new product introduction. This will enable us to grow market share in developed countries whilst we build sales channels in the developing world for the longer term. Strategic achievements > Organic revenue and profit growth despite strong adverse currency movement > Mikropack, Baldwin Environmental and Labsphere acquisitions > Five companies establish new presence in China via Halma hubs > Increased rate of R&D to 5.3% of revenue > Over 40 new products launched † See note 1 to the accounts Strategic directions > Organic revenue and profit growth > Develop business in China and Asia region > Establish local manufacturing in major export territories > Increase technical collaboration > Target further acquisitions Business and financial review Halma p.l.c. 2007 25 Market trends Confidential market research values the US market for UV water treatment plant at £120 million annually which our internal estimates suggest equates to the rest of the world’s combined markets. Market growth is estimated to be over 15%, driven by increasing health regulation and an expanding industrial customer base including semiconductors, aquaculture and leisure pools. Regulation plays an increasingly important role in developing regional water markets. The US Environmental Protection Agency recently issued guidance* that will accelerate adoption of UV treatment for controlling water-borne diseases in drinking water. EU expansion is driving demand; new member states must adopt EU health and safety regulations. Using internal data, we estimate that the global market for water pipework monitoring and leak location equipment is worth over £45 million annually. We estimate the market has grown by 7% per year for the past four years and we anticipate similar growth as a minimum for the next five years. In Fluid technology, there has been greater consolidation within the clinical diagnostic instrumentation market than in previous years due to M&A activity. We are broadening our product offering into the medical and environmental instrumentation segments which are also growing fast. For example, China plans to invest £87 billion between 2006 and 2010 on environmental protection projects**. Photonics continues to offer us exciting organic and acquisition growth prospects. We are global leaders in the miniature spectrometer market niche which we estimate to be worth £70 million annually and growing at 15% per year. The use of photonic methods is increasing rapidly in a vast range of end markets. The advantages of optical sensors over traditional methods can include lower cost, greater sensitivity, in-situ measurement capability (particularly in hazardous environments), immunity from electromagnetic interference, repeatability and stability. Over 60% of Halma companies use optical technologies. Growth drivers for our Health optics products include rising demand for eye care due to demographic changes in the developed world plus increasing access to health services in developing countries. We estimate*** that the health optics market is growing in developing countries by 5% annually and 2% to 3% worldwide. New ophthalmic products undergo lengthy clinical trials and rigorous medical product regulation which is a disincentive to market entrants. Digital and video imaging technology for examining the eye continues to evolve and a disruptive technology could emerge to change the market dynamics in the medium term. We continue to monitor this closely and have established relationships with some of the leading digital imaging companies where our products can be complementary to their technology. Sector performance In our Water businesses we consolidated the strong recovery achieved in 2005/06. Although progress in the US market remained patchy, revenues in European markets rose sharply. Fluid technology revenues increased although profits were flat due to increased investment in new products as well as in sales and distribution. Revenues and profits from Photonics products grew to record levels. A new photonics sales and technical support office was opened in Shanghai and European activities were strengthened by the Mikropack acquisition. In Health optics our strong brand positioning and a healthy stream of new and enhanced products delivered record revenues and profit. The increased rate of investment in R&D (now 5.3% of revenue) is an important element in maintaining the excellent operating returns in this sector. Sector outlook New product innovation and technical collaboration are increasingly important organic growth drivers. Geographic expansion into developed and developing regions offers further organic growth opportunities and we hope to benefit from the higher investment in 2006/07 in the coming year. Increased acquisition search resources are identifying opportunities which can strengthen our technology and market presence. This combination of organic and acquisitive growth prospects should lead to further progress during 2007/08. Sources of information: * EPA – Long-Term 2 Enhanced Surface Water Treatment Rule ** Chinese official Xinhua News Agency *** Discussions with competitors, company country visits, confidential market reports Geographic regions Main growth drivers Australia China France Germany The Netherlands UK USA > Safety regulations and legislation > Risk and cost of accidents > Commercial construction (new build and refurbishment) > Population growth, ageing and urbanisation > Rising expectations of health and safety > Capital investment in industrial facilities > Industrialisation of developing world > Energy and water resources markets growth > New technology 26 Halma p.l.c. 2007 Business and financial review Industrial Safety sector review We make products which protect property and people at work KPI Group target 2007 Revenue growth1 Profit growth2 Return on sales3 ROCE4 (Return on capital employed) R&D as a % of revenue5 2006 (restated)* 20% 34% >5% >5% 15% 19% ~18% 20.0% 19.4% >45% ~4% 75% 2.9% 76% 3.2% * restated to reflect the reclassification of Radio-Tech Limited from the Health and Analysis sector. KPIs are calculated on results from continuing operations. 1. Sector revenue compared with the prior year. 2. Adjusted6 sector profit before finance expense compared with the prior year. 3. Return on sales is defined as adjusted6 sector profit before finance expense and taxation expressed as a percentage of sector revenue. 4. Adjusted6 sector profit before finance expense expressed as a percentage of sector operating net assets. 5. Sector research and development expenditure expressed as a percentage of sector revenue. 6. Adjusted to remove the amortisation of acquired intangible assets. Sector overview Industrial Safety contributed 22% of Group revenue (£80 million) and 23% of Group profit† (£16 million). Following recent acquisitions, we created a new Asset monitoring sub-sector. Gas detection We make portable instruments and fixed systems which detect flammable and hazardous gases. We make our gas detectors in the UK where we have a market leading position. Bursting discs We make “one time use” pressure relief devices to protect large vessels and pipework in process industries. We are UK market leaders and, based on our own estimates, number four in the world market. Our bursting discs are made in the UK and the US. Safety interlocks We make specialised mechanical, electrical and electromechanical locks which ensure that critical processes operate safely and prevent accidents. We have significant market strength in petrochemicals, oil and gas, and significant geographic market share in Western Europe and Australasia. We manufacture interlocks in the UK, The Netherlands, France, Tunisia and Australia. Asset monitoring We make products which monitor the condition of physical assets above ground, below ground and underwater using innovative sensor and communications technologies. This sub-sector was created following the acquisitions of Radio- Tech in 2005 and, most recently Tritech/System Technologies in November 2006. Underwater applications include monitoring of oil pipelines and telecommunications cables as well as vessel and harbour security. Applications on dry land include systems for monitoring railway tracks and structures such as bridges. Our asset monitoring products are made in the UK. Sector strategy We choose to operate in global industrial safety market niches which demand innovative, robust technologies to protect against critical safety hazards where the cost of the protecting product is relatively small compared with the cost of an accident. Competitive advantage can be gained through technical innovation and superior customer service and technical support. Strong global competition in gas detectors means that we must have a dual strategy of constant cost reduction and a regular stream of new products. In the next year we plan to start manufacturing in China and are already using R&D resources in India to accelerate the rate of product development. Strategic achievements † See note 1 to the accounts Strategic directions > Strong organic revenue and profit growth > New Asset monitoring sub-sector created through > Organic profit growth driven by revenue growth > Expand gas detector R&D and manufacture in India Tritech acquisition and China > Strengthened Gas detection presence in China and India > Introduced new wireless communication technology for use by our Water businesses in the Health and Analysis sector > Develop more new products for the oil and gas industry > Accelerate new product development cycles > Introduce wireless communication technologies into other Halma businesses Business and financial review Halma p.l.c. 2007 27 Our Bursting disc companies continue to develop their distribution network to improve market share. Capital investment in plant, improved processes, product rationalisation and outsourcing of component supplies have cut production costs and increased competitiveness by reducing lead times. Our strong position in the global market for Safety interlocks dictates that we not only have to protect our position through new products and market leading customer service but also find ways to broaden our market opportunity. For example we are adding safety interlock capability to adjacent product categories like the new eGard product which marries safety interlocking with machine control. In Asset monitoring we see a significant opportunity in satisfying the growing worldwide demand for remote monitoring of expensive or safety critical physical assets – particularly those in hazardous or remote locations. Market trends Our internal assessment of the global market for gas detection products is £500 million; we forecast an average annual growth rate of 3% to 4%. The demand for gas detection products remains robust in the developed industrial countries. The gradual adoption of Western safety standards in the fast-growing Asian economies will drive additional demand in these markets. Our internal data suggest that the market for bursting discs is growing at 3% to 4%. Substantial continued investment by our customers in lower cost labour markets, and the transfer of US and European safety standards is leading us to allocate more of our resources into developing regions such as Eastern Europe and Asia. In addition to increasing safety awareness and regulation, the safety interlock market continues to benefit from the trend of increasing capital spending in the oil and gas sector driven by relatively high oil prices and global demand. High-profile accidents at petrochemical processing plants during the past 18 months have impacted on customer behaviour with some oil companies now specifying safety interlocks earlier in the plant design phase. Customer feedback suggests that Chinese authorities are now encouraging Western companies with manufacturing plants in China to adopt the same safety standards as in their home territory. Over the medium term, this will help to improve industrial safety expectations throughout China and drive demand for our products. Rising global demand for closer monitoring of energy usage and for capturing data relating to high value infrastructure assets, offers excellent growth prospects for our Asset monitoring businesses. Our recent acquisition, Tritech, serves an exciting niche in subsea sensors and communication products which help service companies install, inspect and monitor underwater assets. The trend towards deeper water activities in the oil and gas sector will support demand for our underwater acoustic surveillance sensors. Online research indicates that between 2001 and 2005 global deepwater capital investment was £16.5 billion and it is estimated to more than double to £44 billion during 2006 to 2010. Sector performance 2006/07 was a very successful year with organic revenue and profit growth significantly above the market growth rates and a major acquisition completed. Geographically, revenue growth was particularly good in the Middle East where we benefited from major oil and gas projects. Regions such as the UK were also strong where our new Sprint V flue analyser product was adopted by BG Group with a £1.4 million supply contract. We succeeded in integrating our wireless communications technology used in asset monitoring with other sectors in the Group and can see other opportunities for technical collaboration in the future. Relative to our other sectors we invest a slightly lower percentage of revenue in R&D. However, good growth opportunities continue to exist and the Return on sales and ROCE remain at a high level. Sector outlook In the long term, increasing safety regulation, greater concern over the consequences of accidents from company boards and higher safety expectations by workers will continue to drive demand for our Industrial Safety products. We will continue to seek bolt-on acquisitions which will enhance our products and distribution strength in higher growth markets. We have solid positions in each of our chosen markets and by continuing to invest in new products, additional sales offices and our activities in lower cost territories such as Eastern Europe and Asia, we are well placed to continue our track record of healthy organic growth. Geographic regions Main growth drivers Australia China France India Italy Malaysia The Netherlands Singapore Tunisia UK USA > Safety regulations and legislation > Risk and cost of accidents > Commercial construction (new build and refurbishment) > Population growth, ageing and urbanisation > Rising expectations of health and safety > Capital investment in industrial facilities > Industrialisation of developing world > Energy and water resources markets growth > New technology 28 Halma p.l.c. 2007 Business and financial review Operating environment, risks and uncertainties Macro-economic, regulatory and competitive environment We anticipate that the 2007/08 macro-economic environment will be broadly favourable to our growth strategy. In global terms, we see the US, Europe and Asian economies offering good opportunities with Asia having higher growth rates from a lower base. Growth in the more mature economies is important to our overall growth prospects albeit that our products are often used in regulated markets and this affords some protection from the extremes of economic cycles. Safety and environmental legislation is constantly evolving, worldwide, towards increased safeguards and protection. This favours us because it relentlessly drives demand growth in our core markets. Legislative change challenges us to continually refresh our product portfolio whilst regulatory compliance is also a powerful barrier to entry for competitors. Our well developed capacity to innovate, coupled with strong R&D resources, positions our companies for leadership of markets dominated by regulatory control. The markets we operate in are generally highly competitive. Our diversified product portfolio and wide geographic coverage means that competitive product manufacturers are analysed at subsidiary company or operating sector level. We have commented on the competitive environment in the sector reviews. Employee, health and safety and environmental issues Our core values are Innovation, Empowerment, Achievement and Customer Satisfaction. The core values have been selected following extensive surveying of employees across the Group. Our culture is one of openness, integrity and accountability. We encourage our employees to act fairly in their dealings with fellow employees, customers, suppliers and business partners. We recognise that our employees determine our success and therefore have invested in and encouraged their development more this year than ever before, not only with our intranet training facilities and Halma Executive Development Programme, but also through clearer leadership and decisive action. By ensuring that our team has the approach and skills required to succeed we are better placed to meet the challenges of the future. We recognise the necessity of safeguarding the health and safety of our own employees whilst at work and operate so as to provide a safe and comfortable working environment for employees, visitors and the public. Our policy is to manage our activities to avoid causing any unnecessary or unacceptable risks to health and safety and the environment. We have an excellent long-term record for addressing environmental issues that affect our businesses and for developing products that protect the environment and improve safety at work and in public places. Many of our innovative products play a very positive role in monitoring and improving the environment. Our brands lead the world in a number of technologies which help to minimise environmental damage. We support the concept of sustainability and recognise that, in common with all businesses, our activities have an environmental impact. Our strategy is not to have capital- intensive manufacturing processes, so the environmental impact of our operations is relatively low compared to manufacturers in other sectors. We also recognise that we can improve our own environmental performance and so resources are now being deployed to actively reduce our own carbon footprint. More information on these activities is given in the Corporate responsibility section of this review. Halma was designated a member of the FTSE4Good UK index on its establishment in July 2001. Resources, risks and uncertainties The main intangible resources which deliver competitive advantage and which support our strategic objectives are: the patents and trade marks which protect our products; our employees, whose understanding of our technology, customers’ needs and the dynamics of the markets we operate in, enable us to maintain leadership in many markets; and the enviable reputation enjoyed by our brands for superior product quality and market leading customer support. Our businesses build competitive advantage and strengthen barriers to entry in many ways including patents, product approvals, technical innovation, product quality, customer service levels and branding. We look for these qualities in the businesses we seek to acquire. We like regulated markets which require suppliers to achieve compliance with demanding product standards but also look for other long-term growth drivers such as demographic change. We seek to continuously grow our profits, generating a high return for shareholders over the long term. We view risk within the context of this objective as well as in absolute terms. In any business there are inherent risks that are an integral component of its business activities. Our strategy is to operate a continuous process to identify the risks faced by our companies and the Group, to assess each risk’s likelihood of occurring and impact were it to occur, and to ensure that a system of controls is in place to manage or mitigate those risks assessed as significant. Appropriate actions are taken to address any weaknesses. Comprehensive insurance cover is maintained where warranted and cost effective. Our key means of risk control is the choice of the markets in which we operate and the people and methods we use to exploit those market opportunities. We perceive our primary operational risks to emanate from remoteness of operation and the actions and quality of our people. Our choice to operate in the safety products and health-related technology markets, and the depth of market knowledge we have built up within the Group, allows us to adequately evaluate and assess the risks we encounter throughout our operations. Business and financial review Halma p.l.c. 2007 29 We do not place undue reliance on any one Group company nor does any one Group company rely heavily on one customer or transaction. In managing the portfolio of companies within the Group and in managing the transactions in any one company, we seek to spread our risks. We have processes in place to ensure any major transactions are reviewed at the appropriate level, including at Board level if necessary. Another factor limiting risk is that our products are predominantly critical components or instruments which are warranted as fit for the purpose rather than systems or intangible products where satisfactory performance is contingent upon third parties. Our procedures to identify, manage and mitigate the risks within the Group address the following major risk factors: Organic growth and competition The Group is affected by competition in the form of pricing, service, reliability and substitution. There is an ever present risk of losing market share or failing to adapt to market changes. High quality alternative products at low cost will always be a threat. Our focus on improving our rate of innovation is a direct result of assessing these risks and determining how best to concentrate our efforts. Maintaining the high quality of our products is critical. In addition, all businesses analyse revenue and margin by product line on a monthly basis. Through continual innovation and by ensuring that local management are well resourced and free to respond to changing market needs, we feel that the adverse impact of downward price pressure and competition can be mitigated. 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. Therefore we have been increasing the resource allocated to this activity, focusing on sectors where we see the greatest opportunity. There is always a significant potential integration risk, particularly in the purchase of private businesses, and this is an area which is being continually improved. R&D New products have always been critical to the growth of the Group and have underpinned its ability to earn high margins and high returns over the long term. R&D is of necessity a risky activity but by devolving control of product development into the autonomous operating businesses, the Group spreads the risk and ensures that the resource is as close to the customer as possible, giving the maximum chance of success. Protection of our intellectual property is important to the Group’s continued success. Whilst no single product or process is critical to the Group as a whole, all appropriate actions are taken to protect the Group’s intellectual property rights. Financial irregularities and increasing span of control We recognise that the size and remoteness of some operations may not permit full segregation of duties and that Internal and External Audit procedures may not always identify a financial irregularity. This is increasingly the case as we pursue our strategy of geographic expansion often into regions with different accounting bases and cultures. Therefore the Group seeks to ensure there is adequate local management and financial resource and regularly reiterates to the operating company officers their fiduciary responsibilities, ensuring they are adequately trained in financial matters whilst maintaining a culture of openness to promote disclosure. Group companies operate a common set of reporting procedures and accounting policies, disseminated via the Group intranet. Pension deficit Monitoring the funding needs of the pension obligations is essential to controlling the cash the pension plan requires from Halma. Our UK defined benefit pension plans are closed to new members. There is regular dialogue with pension fund trustees and pension strategy is a regular Halma Board agenda item. The Group’s strong cash flows and access to adequate borrowing facilities mean that the pensions risk can be adequately managed. The Group is currently increasing contributions with the overall objective of paying off the deficit in line with the Actuary’s recommendations. Financial and treasury risks The Group does not use complex derivative financial instruments and no speculative treasury transactions are undertaken. Foreign currency risk is the most significant treasury related risk for the Group. Significant currency denominated net assets are hedged but future currency profits are not hedged. Therefore, the Sterling value of overseas profit earned during the year is sensitive to the strength of Sterling, particularly against the US Dollar and the Euro. The Group is exposed to a lesser extent to other treasury risks such as interest rate risk and liquidity risk. These financial risks are discussed more fully in note 26 to the accounts. Laws and regulations Group operations are subject to wide-ranging laws and regulations including employment, environmental and health and safety legislation. There is also exposure to litigation and contractual risk. All Group companies have an employee handbook detailing employment practices and we consider our relations with our employees to be good. Each operating company has a health and safety manager responsible for compliance and our performance in this area is excellent. The Group’s emphasis on excellent financial control, the deployment of high quality management resource and strong focus on quality control over products and processes in each operating business helps to protect us from adverse litigation and contractual issues. 30 Halma p.l.c. 2007 Business and financial review Corporate responsibility A summary of our progress and performance for all areas of corporate responsibility follows. Halma is developing meaningful key performance indicators (KPIs) that reflect the importance the Group places on corporate responsibility and will enable the Board to monitor the Group’s progress in meeting its objectives and responsibilities in these areas. Halma will report against these KPIs next year. The biggest area of emphasis over the past year has been the transformation of the Group’s environmental policy into a Carbon Policy stating actual targeted reductions for the Group to achieve over a set timescale. Halma has an excellent health and safety record and a culture of safety is deeply embedded within the Group. We want to recognise the effort behind this exemplary record and will promote our safety culture more visibly over the coming year. Finally, the increased investment in management training continues to be valuable and we are exploring a number of key metrics to better communicate this to stakeholders. Socially 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. The environment Within Halma, 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. 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. A senior executive in each of our higher-impact business units is responsible for implementing the carbon policy at local level. The Group Finance Director, Kevin Thompson, has principal responsibility for coordinating and monitoring the policy. Regulatory demands upon us vary considerably around the world, so in each of the following areas Halma establishes the core structure to ensure that Group companies fully comply with regulatory requirements while permitting them to tailor the solutions to their particular needs. Keeler scholarship UV and wastewater Dr Srilakshmi Sharma from Bristol Eye Hospital is this year's winner of the highly prestigious Keeler Scholarship for research into ocular inflammatory disease. Worth £20,000, the scholarship is funded by Keeler, Halma’s world leader in high precision optical instruments. It allows the winner to spend up to two years undertaking research into ophthalmology. “I’m very pleased to have won this Scholarship,” she said. “It will be a fantastic experience which will allow me to conduct research at an internationally acclaimed medical ophthalmology clinic.” The Keeler Scholarship is awarded every two years and is designed to advance the science and practice of ophthalmology by enabling the winner to study, research or acquire special skills, knowledge or experience for a minimum period of six months. The award is administered through the Royal College of Ophthalmologists. The development of new UV technologies is a perfect example of an industry investing to meet market demand for an effective, low cost, and environmentally friendly way to disinfect wastewater for reuse. Potential applications for wastewater reuse are extremely wide-ranging and include any instance where water is needed for non-potable use. The most popular and widespread use is for agricultural irrigation, with California and Florida leading the way in the US and a number of Australian states also making significant progress. Other irrigation uses include landscape and recreational applications such as golf courses, parks, and lawns. Founded less than ten years ago Anthem, a town just north of Phoenix, Arizona, now has a population of over 40,000. As part of its rapid expansion the town recently installed three closed chamber medium pressure UV systems from Berson UV-techniek to disinfect its wastewater. This allows the town to not only meet increased demands in its water and wastewater treatment capacity, but also to exceed the output quality standards. Business and financial review Halma p.l.c. 2007 31 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 are developing performance indicators that will assist local management in implementing the policy and developing an EMS. The requirement for an EMS and the related reporting has been rolled out to all UK business units, which represent over 50% of Group production facilities in terms of external turnover. All Group companies are encouraged to undertake ISO 14001, the international environmental standard, accreditation where warranted, and during the year, Radcom (Technologies) Limited and Palmer Environmental Limited both obtained ISO 14001 approval. The requirement to implement an EMS will be extended to the rest of the Group in the medium term. Our impacts 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 effect of our operations is relatively low compared to manufacturers in other sectors. 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 reduce 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 website each year. The data collected for the past three years has enabled the Group to set comprehensive and quantifiable objectives for reducing its environmental impacts in those areas and to set targets for reduction in key areas. The collected data confirms that the main areas of impact on the environment are energy consumption and solid waste disposal. The Group does not operate a fleet of distribution vehicles although we do own a number of company cars. From May 2007, we are implementing a cap on permissible CO2 emissions of all UK company vehicles and will extend this requirement to the rest of the world in the short term. This limit will be reduced annually so as to consistently reduce our vehicles’ environmental impact. Having identified the main areas of impact, we are now committed to their reduction and minimisation. Using the baseline data the total Group carbon emissions for 2006/07 was calculated as being approximately 15,000 tonnes, an average of less than 50 tonnes per £million of revenues. We plan to reduce the Group’s total carbon emissions relative to revenues by 10% by 2010. We are working with AEA, an international environment and energy consultancy, to facilitate this reduction by providing each subsidiary with the means to identify tailored initiatives for energy efficiency. This will be complemented by internal programmes, including the use of our own wireless communications technology to monitor energy usage and use of the Group intranet to allow for inter-company communication, reporting of data and feedback. We expect that this initiative will lead to cost savings for the Group as well as preparing us for compliance with anticipated climate change legislation. The new Carbon Policy can be found on the Halma website. The Group’s environmental performance will continue to be reported in both 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. Green innovation Fortress Interlocks has won the prestigious “Green” Innovation Award at this year’s innovation & Design Excellence Awards (iDEA) against strong competition. The award was for Fortress’ eGard, a unique new product which combines both machine safety and control modules in one flexible unit. The iDEAs, organised by Eureka, New Electronics and Cranfield School of Management, recognised that the innovation behind eGard opens up a new, large market sector for Fortress. The award also recognised that Fortress designed and manufactured eGard along environmental principles taking into account the whole life-cycle of the product. Fortress decided to make the housing from polymer using the same material throughout to make recycling more efficient. Other parts are made of stainless steel. In addition, the housing has no fixings or adhesive; parts are clipped together or ultrasonically welded. This reduces component count and also makes recycling much easier. 32 Halma p.l.c. 2007 Business and financial review Corporate responsibility continued The workplace Halma operates an employment policy with the objective of ensuring equal opportunities and preventing harassment in the workplace. This gives us access to the widest labour market and enables us to secure the best employees for our needs. Halma demonstrated that it is one of the UK’s most admired businesses again this year by another high ranking in Management Today magazine’s annual survey of corporate reputation. The awards are a peer review, distilling the opinions of directors who run many of the UK’s largest companies. This is a revealing survey based on the key elements that make companies succeed. Companies are, in effect, judged by their competitors, and the survey is unique in the UK. Halma was ranked the 55th most admired company out of a list of 239 businesses. The awards are based on a survey by Nottingham Business School of the ten largest UK-based companies in each of 24 different sectors. Respondents rate companies in categories such as quality of management, financial soundness, quality of products, ability to attract, develop and retain talented managers, value as a long-term investment and capacity to innovate. Training 2006/07 was another successful year for 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. 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. HEDP is aimed squarely at employees already serving on subsidiary boards but we also encourage applications from senior managers who can demonstrate they already have equivalent responsibilities and will benefit from the programme. 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 Innovation, Achievement, 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. The first four 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 and promotion of a number of participants and their eagerness to coordinate further sessions to explore topics of particular interest to their programme group. The final week of the programme immerses the participants in an environment related to an emerging market or a market of significant opportunity. Participants have been to China, India, Argentina and Japan and had access to many local businesses and officials as well as local community programmes aimed at improving the quality of life of local children and young adults. Eureka! In April 2007, Halma held a prize draw for its monthly innovation award, Eureka! The lucky winner, Steve Jansen of Texecom was randomly picked from over 150 names who had submitted innovation ideas during the year and won a car to the value of £9,000. Steve is Procurement Manager and entered two innovation ideas over the year that he has put into practice at the company, one for a small circuit board which reduced assembly times of the company’s bell boxes by around 50% and another for the company’s packaging which has also significantly increased the production rate. Eureka! is simply looking for the actual birth of the idea, the creative spark that heralds the start of an original thought process which will bring new benefit to a Group business. A prize is also awarded for the most creative innovation idea submitted during any one month. Business and financial review Halma p.l.c. 2007 33 Innovation Innovation is a critical ingredient for Halma’s growth. Continually refreshing our intellectual property leads to new products and processes and helps us to maintain the strong market positions held by many of our companies. Innovation is not just the responsibility of the R&D department but is integral to all commercial activities within the business. Innovative ideas can range from a novel way to enter a new or remote market to administration process improvements speeding the delivery of products to customers. All employees within the Group have the opportunity to deliver innovative ideas to help their company and the Group achieve the growth objectives. The Group continued the successful Halma Annual Innovation Awards, launched in 2004/05, which recognise the major product and process innovations during the past year. The 2006/07 Gold Award of £20,000 was presented at the annual CEO Conference by Geoff Unwin to Brian Back and Inder Panesar of Radio-Tech for their Rail Temperature Monitor system, a radio telemetry system that enables rail temperatures to be monitored constantly, anywhere on the network, providing early warning of the risk of track buckling. The Silver Award of £10,000 was awarded to Jim Lane, Phil Buchsbaum, Cliff Batchelder, Greg Williamson and Steve Mattessich of Ocean Optics Thin Films Division for the SeaChanger xG Color Engine, a revolutionary colour filter system for spotlights. It can be used to produce dramatic lighting effects in theatres and large venues such as museums and churches. The Bronze Award of £5,000 was awarded to Emmanuel Eubelen, Thierry Jongen, Marc Meyers and Jean-Michel Bechet of BEA for the 4Safe, a new type of safety sensor, specifically designed to prevent anyone from being trapped or injured in automatic revolving or swing doors. Health and safety The Group recognises the necessity of safeguarding the health and safety of our own employees whilst at work and operates so as to provide a safe and comfortable working environment for employees, visitors and the public. The Group’s health and safety policy, which is set out on our website, is to manage our activities to avoid causing any unnecessary or unacceptable risks to health and safety. The policy is understood by all Group companies, and 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 Finance Director may monitor each company’s compliance with this policy. 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 2006/07 or 2005/06, and we achieved a considerable decrease in both serious and minor injuries in comparison with low levels in 2005/06. 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 acceptable 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 directly 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. Queen’s Award In April 2007, following the year end, Fortress Interlocks, one of our UK-based Industrial Safety businesses was awarded a prestigious Queen’s Award for Enterprise: Innovation in recognition of their mGard safety interlock product. This is the 10th Queen’s Award received by one of our companies since the inception of the Queen’s Award scheme. 34 Halma p.l.c. 2007 Business and financial review Financial review A strong performance with widespread growth Record revenue and profit We achieved our highest ever revenue from continuing operations at £354.6 million (2006: £310.8 million), an increase of 14% over the prior year. Profit before tax and amortisation of acquired intangibles at £66.1 million (2006: £58.1 million) on our continuing operations, excluding the disposals made in the prior year, was 14% higher and was also a record. Adjusting for the extra profit which came with acquisitions gives organic growth* of 8.1% in revenue and 7.6% in terms of profit. There was a notable currency headwind through the year and without that organic revenue and profit growth would have been 2.3% and 2.5% higher respectively. See below for more detail on currency impacts. Earnings per share were up 11% on a statutory basis and up 14% on our adjusted* basis. A year of good further progress. As noted above there were disposals last year but none this year and so the comparative figures are for continuing operations only. We have made a minor reclassification within our sector figures, moving our Asset monitoring business into the Industrial Safety sector and details of the change are given in note 1 to the accounts. All sectors grew strongly Infrastructure Sensors and Industrial Safety sectors both grew revenue and profit by more than 15%. The strong performance of Infrastructure Sensors, our largest sector, was underpinned by the higher investment made last year. The Health and Analysis sector grew revenue by 9% and 7% in terms of profit*, well above our target of 5% growth and following on from very strong growth in the previous year. Return on sales* for each sector remained firmly in the 18% to 21% range. Sector performances are discussed further on pages 22 to 27. Revenue to all destinations grew There was widespread geographic growth in revenue. The following table gives revenue from continuing operations by destination. £ million United States of America United Kingdom Mainland Europe Asia Pacific and Australasia Africa, Near and Middle East Other Revenue 98.9 96.5 91.4 35.5 22.3 10.0 354.6 % change 5.1% 16.4% 18.4% 6.6% 51.5% 16.5% 14.1% In the US our Health and Analysis and Industrial Safety businesses showed solid growth with Infrastructure Sensors not yet making as strong progress. In the UK, Africa, Near and Middle East, Infrastructure Sensors performed very well, as it did in Mainland Europe, with the majority of the European increase coming organically. Industrial Safety grew strongly in the UK assisted by the addition of the Tritech business. Growth in the Asia Pacific region was more modest although sales to China grew by 26% from a low base. We are putting far greater resources into this region to capture the opportunity there. Importantly, revenue outside of the US/UK/Mainland Europe grew by a further 20% as we expand our geographic coverage. *See Financial highlights. Kevin Thompson Finance Director Business and financial review Halma p.l.c. 2007 35 A continued trend of strong margins and returns Resumption of strong growth In the year we again achieved very good organic growth and at the same time maintained high returns. An important part of our strategy, reflected in our KPIs (see page 20) is the delivery of excellent returns and the strong cash flow which comes from them. These high returns have been a feature of the Group over many years, but significantly this has once again been coupled with good organic growth in these past two years. ROCE* of 60.1% and ROTIC* of 14.0% Our returns are strong and stable. Return on capital employed (ROCE) was 60.1% (2006: 56.9%) showing the high value we generate from our tangible asset base. Return on total invested capital (ROTIC) increased to 14.0% (2006: 12.8%), this is a post- tax return on the total asset base including all historic goodwill but excluding the pension deficit. See note 3 to the accounts for the full calculation of ROCE and ROTIC. The pattern of ROTIC over the past five years is as follows: ROTIC % 07 06 05 04 03 0 5% 10% 15% 20% Weighted average cost of capital ROTIC has grown recently because we have grown earnings at a faster rate than the underlying capital base. In each year ROTIC has been well in excess of our Weighted average cost of capital (WACC) which has been calculated as currently being 7.7%. A sustained high ROTIC well above our WACC is a central element of our value creation strategy. High Return on sales* at 18.6% Once again we delivered a high Return on sales* figure at 18.6% (2006: 18.7%). We disposed of some businesses last year which generated a slightly lower margin. The Group has operated with a Return on sales* range of 16.2% to 19.8% for more than 20 years. These sustained high margins demonstrate the significant value placed on our products by our customers throughout the economic cycle. Maintaining a strong financial position Good cash flow The Group generated strong cash flow once again with cash generated from operations of £70.3 million. The following table sets out the main components of our cash flows and these are discussed in the sections below. Change in net cash/(debt) £ million Cash generated from operations Acquisition of businesses Disposal of businesses Development costs capitalised Net capital expenditure Dividends paid Taxation paid Issue of shares/purchase of treasury shares Net finance expense Exchange adjustments Net cash brought forward Net (debt)/cash carried forward 2007 70.3 2006 70.2 (27.5) (36.2) – (3.9) (7.3) (25.9) (19.5) 3.6 (0.8) (0.2) (11.2) 3.5 (7.7) 14.6 (2.5) (11.6) (24.5) (16.8) 0.6 (0.4) (1.9) (8.5) 12.0 3.5 The Group finances its operations from retained earnings and has access to third party borrowings when needed. There are no material funds outside the UK where repatriation is restricted. Our treasury policies seek to minimise financial risks and ensure sufficient liquidity. No speculative transactions are undertaken. Foreign currency profits are not hedged but purchase and sale transactions are hedged into the functional currency of the relevant operating company and balance sheet net currency assets are substantially hedged. More earnings enhancing acquisitions We continued to implement our strategy of acquiring successful businesses and helping them grow. In particular, we offer businesses an autonomous environment within which to continue their record of success. We spent £27.5 million on acquisitions in the year of which £8.2 million related to the payment of deferred consideration on acquisitions made in previous years. Acquisitions made in the year have met or exceeded our expectations. 36 Halma p.l.c. 2007 Business and financial review Financial review continued The largest acquisitions in the year were of Tritech/System Technologies and Labsphere. We acquired Tritech/System Technologies, who design and manufacture underwater asset monitoring equipment, in November 2006. Their 2005 audited accounts showed annual revenue of £5.4 million and profit of £1.1 million on a combined basis, with further encouraging growth since that time. We paid an initial consideration of £10 million, with a further potential payment of up to £4.5 million conditional on substantial future growth. Labsphere, a world leader in light testing and measurement products, was acquired in February 2007 for a cash consideration of US$14.3 million (£7.2 million). There are no additional payments to make for this acquisition. Labsphere’s unaudited accounts for 2006 show revenues of US$12.5 million (£6.3 million) and operating profit of US$2.4 million (£1.2 million). In the year we also acquired Mikropack, which makes light sources and photonic accessories, for €2.3 million (£1.5 million) and Baldwin Environmental for US$1.1 million (£0.6 million) with a potential further total of £1.9 million payable on the two acquisitions if performance targets are met. All of these acquisitions were immediately earnings enhancing and were generating a rate of return in excess of our WACC at the time of acquisition. We continue to invest considerable resources into identifying further acquisitions in our chosen markets. Capital expenditure at typical levels We spent £10.9 million on property, plant and computer software in the year, a lower figure than the high expenditure last year representing 134% of depreciation/amortisation – a more typical level for the Group. Two surplus properties sold during the year increased disposal proceeds. In 2007/08 we expect to undertake two specific property developments at separate subsidiaries which should add to the underlying rate of capital investment and also produce a small gain on a property disposal. Further 5% dividend increase with cover raised The Board has recommended a further 5% increase in the final dividend up to 4.33p which together with the interim dividend (also 5% higher) will give a total dividend of 7.18p for the year, assuming the final dividend is approved. This will mean a total payout to the shareholders in dividends of £26.7 million in relation to the year ended 31 March 2007. This continues our progressive dividend policy stretching back many years. It also furthers our objective of increasing dividend cover (based on profit from continuing operations before amortisation of acquired intangible assets) towards a figure of around 2.0 over time, by lifting the cover from 1.61 to 1.74 times. Tax rate The effective tax rate on profit from continuing operations (before amortisation of acquired intangible assets) is very similar to last year at 29.8% (2006: 30.1%). Future effective tax rates are more likely to be higher although not significantly so. Pension contributions increased, deficit reduced As indicated last year we have increased the rate of contributions into our defined benefit pension plans which were closed to new entrants in 2003. An additional £3 million was paid into the plans in the year and over the next couple of years we expect the annual cash contributions to continue to increase by a further £2 million so that we can meet our objective of paying off the deficit, as measured on an IAS 19 basis, over a ten-year period. These extra contributions are not insignificant but are not expected to impair our growth opportunities. The pension deficit on an IAS 19 basis reported in the accounts has reduced from £46 million last year to £37 million at year end, before the related deferred tax asset. This decrease arises from an increase in the value of plan assets, helped by the additional contributions, offset by proportionately less of an increase in the present value of plan liabilities due to a higher discount rate being applied. Modest net debt of £7.7 million We finished the year with a modest level of gearing at £7.7 million (2006: £3.5 million net cash). This begins to utilise the £60 million five-year debt facility put in place last year with our well- established banking partners. The Board would be willing to utilise more of this facility if good acquisition and investment opportunities are identified. The Group continues to be able to borrow at competitive rates and therefore currently deems this to be the most effective method of funding our increasing investment. A currency headwind continues There was a currency headwind through the year, particularly in the second half. Approximately one-third of Group revenue is denominated in US Dollars and 15% in Euros with the US Dollar recently showing significant adverse movement relative to Sterling. We translated our US Dollar revenue and profit to Sterling at an average rate of 1.78 in 2005/06 but in 2006/07 this average was 1.89. As a guide, a 1% weakening of the US Dollar relative to Sterling is expected to reduce revenue by approximately £1 million and profit by £0.2 million in a full year. The adverse movement in the South African Rand relative to Sterling in the year also reduced profitability in our Infrastructure Sensors business which has a sizable operation in South Africa. As previously indicated there has been an adverse impact in translating our results into Sterling which we estimate as reducing revenue by 2.3% and profit by 2.5% and most of this impact has fallen in the second half of the year. If current exchange rates prevail, our results will continue to be adversely impacted, particularly in the first half of the current financial year. The impact of currency movements on the Group’s net tangible assets is largely offset by the currency hedging loans we have in place. Amongst the operating sectors it is the Health and Analysis sector which has the biggest trading exposure to the US Dollar both in terms of origin and destination of its business. The Health and Analysis businesses generate 45% of their revenue from the US compared with 21% for Infrastructure Sensors and 16% for Industrial Safety. This gives an indication of the relative impact of US Dollar movement and it is the profitability of the Health and Analysis sector which was hardest hit by the fall in the US Dollar relative to Sterling in 2006/07. Active investment for the future Growing R&D and extending innovation We continue to invest heavily in Research & Development (R&D) and are active in promoting an innovative culture across the Group. Expenditure on R&D in the year was 4.3% of revenue (2006: 4.3% of revenue) and amounted to £15.3 million, 14% up on last year for continuing operations. We do not specifically capture the expenditure on all innovation as it permeates every aspect of our activities but this is an increasing use of existing and new resources. The Sector reviews on pages 22 to 27 show the percentage of revenue spent in each sector on R&D as one of our KPIs. They show that relative to our growing revenue our spend this year is consistent with last year and that the Health and Analysis sector continues to invest the highest percentage at 5.3%. Under International Financial Reporting Standards (IFRS) we are required to capitalise certain development expenditure on the Consolidated balance sheet and also to amortise that asset over an appropriate period. In the year we capitalised £3.9 million of such development expenditure and amortised £1.5 million, giving rise to an asset of £6.1 million in the March 2007 balance sheet. The nature of R&D is that it involves risk and therefore we carefully monitor all costs carried on the balance sheet. The Consolidated income statement was charged with a cost 4% higher than last year. This increasing rate of investment in new, innovative products underpins our future growth. Business and financial review Halma p.l.c. 2007 37 Developing in China We have taken a big step forward in China this year in terms of getting more high quality resource on the ground. The Asia Pacific region contributes only 10% of our total revenue, with China as a small part of this. We see substantial opportunity for many of our products in this region and so the extra investment in China, around £0.5 million more in 2006/07, is an important part of the growth process. Our task in 2007/08 and beyond is accelerating the payback on this investment. Developing our strong control culture and our people We spread our risks in part by operating through a number of closely managed individual businesses. The main risks and uncertainties facing Halma are discussed above in this Business and financial review. We have high quality local teams guiding each business within our overall reporting and control framework. There is significant external review of these operations and one element of that review process, our Internal Audit, has been further enhanced this year by more in-depth visits. Each business has a senior finance executive on site who plays an important part in the control and growth of the business. We continue to actively develop our people and we have now had 13 of our senior finance staff graduate from the Halma Executive Development Programme (HEDP) and are finding them able to make an even broader contribution to the progress of the business. Taking our environmental responsibilities seriously Our impact on the environment is low and we produce many products which themselves have a positive impact. Carbon emissions reduction seems to be important for the future and we are putting in place a variety of actions to both monitor and actively manage our carbon footprint. We are at the early stages of formulating reliable measures and KPIs, but are making good progress and this is discussed more fully on pages 30 and 31. We take a broader view that our impact on the environment is not just in relation to carbon emissions but also water usage, packaging and waste generally, all areas where we have a good record. Not only should we be able to comply with regulations as they develop but also we are focussing our efforts in this area on increasing profitability and genuinely improving our business. Improving further in these areas should deliver greater value for customers and shareholders. Cautionary note The Business and financial 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. In preparing this Business and financial review, the Directors have aimed to comply with the Accounting Standards Board’s 2006 Reporting Statement guidance on Operating and Financial Reviews. However, we are only at the early stages of developing non-financial Key Performance Indicators and so these have not been included in this Annual report. 38 Halma p.l.c. 2007 Consolidated income statement 52 weeks to 31 March 2007 52 weeks to 1 April 2006 Before acquired intangibles amortisation £000 Amortisation of acquired intangibles £000 Notes Before acquired intangibles amortisation and goodwill written off £000 Amortisation of acquired intangibles and goodwill written off £000 Total £000 Total £000 Continuing operations Revenue Operating profit Finance income Finance expense Profit before taxation Taxation Profit for the year from continuing operations Discontinued operations Net profit for the year from discontinued operations Profit for the year attributable to equity shareholders Earnings per ordinary share From continuing operations Basic Diluted From continuing and discontinued operations Basic Diluted Dividends in respect of the year 11 Paid and proposed (£000) Paid and proposed per share 1 4 5 7 354,606 – 354,606 310,768 – 310,768 67,920 7,272 (9,101) 66,091 (3,458) – – (3,458) 1,065 64,462 7,272 (9,101) 62,633 59,960 6,207 (8,027) 58,140 (1,500) – – (1,500) 58,460 6,207 (8,027) 56,640 (18,622) (17,507) 473 (17,034) 10 (19,687) 46,404 (2,393) 44,011 40,633 (1,027) 39,606 – – – 6,739 (5,470) 1,269 46,404 (2,393) 44,011 47,372 (6,497) 40,875 6 1 2 12.50p 11.01p 11.86p 11.77p 11.86p 11.77p 26,740 7.18p 10.73p 10.69p 11.08p 11.03p 25,314 6.83p Consolidated balance sheet Non-current assets Goodwill Other intangible assets Property, plant and equipment Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Borrowings Trade and other payables Tax liabilities Net current assets Non-current liabilities Retirement benefit obligations Trade and other payables Deferred tax liabilities Total liabilities Net assets Capital and reserves Called up share capital Share premium account Treasury shares Capital redemption reserve Translation reserve Other reserves Retained earnings Shareholders’ funds Approved by the Board of Directors on 19 June 2007. E G Unwin Directors K J Thompson Halma p.l.c. 2007 39 Notes 31 March 2007 £000 1 April 2006 £000 12 13 14 20 15 16 17 18 28 19 20 21 22 22 22 22 22 22 129,521 122,038 15,338 49,580 11,178 12,166 50,054 13,803 205,617 198,061 39,134 81,650 22,051 142,835 348,452 29,762 62,590 6,043 98,395 44,440 36,660 77,523 35,826 150,009 348,070 32,308 66,035 7,316 105,659 44,350 37,260 46,019 3,005 3,184 43,449 141,844 206,608 37,312 15,239 (1,664) 185 (4,272) 3,654 5,096 3,216 54,331 159,990 188,080 36,933 10,702 (379) 185 5,944 1,592 156,154 206,608 133,103 188,080 40 Halma p.l.c. 2007 Statement of recognised income and expense Exchange differences on translation of foreign operations Exchange differences recycled from reserves on disposal of operations Actuarial gains/(losses) on defined benefit pension plans Tax on items taken directly to reserves Net loss recognised directly in reserves Profit for the year Total recognised income and expense for the year 52 weeks to 31 March 2007 £000 (10,216) – 7,084 (2,122) (5,254) 44,011 38,757 52 weeks to 1 April 2006 £000 5,826 (26) (10,355) 1,625 (2,930) 40,875 37,945 Reconciliation of movements in shareholders’ funds Shareholders’ funds brought forward Profit for the year Dividends paid Exchange differences on translation of foreign operations Exchange differences recycled from reserves on disposal of operations Actuarial gains/(losses) on defined benefit pension plans Tax on items taken directly to reserves Net proceeds of shares issued Treasury shares purchased Movement in other reserves Total movement in shareholders’ funds Shareholders’ funds carried forward 52 weeks to 31 March 2007 £000 52 weeks to 1 April 2006 £000 188,080 173,259 44,011 (25,922) (10,216) – 7,084 (2,122) 4,916 (1,285) 2,062 18,528 40,875 (24,468) 5,826 (26) (10,355) 1,625 644 (379) 1,079 14,821 206,608 188,080 Consolidated cash flow statement Net cash inflow from operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of computer software Proceeds from sale of property, plant and equipment Development costs capitalised Interest received Acquisition of businesses 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 Repayment of borrowings Net cash used in financing activities Decrease in cash and cash equivalents Cash and cash equivalents brought forward Exchange adjustments Cash and cash equivalents carried forward Halma p.l.c. 2007 41 52 weeks to 31 March 2007 £000 52 weeks to 1 April 2006 £000 50,754 53,362 Notes 25 (10,053) (11,878) (847) 3,609 (3,893) 1,035 (717) 1,032 (2,500) 1,026 25 (27,499) (36,178) – 14,641 (37,648) (34,574) (25,922) (24,468) 4,916 (1,272) (1,894) – 644 – (1,455) (3,050) (24,172) (28,329) 25 25 (11,066) 35,826 (2,709) 22,051 (9,541) 45,348 19 35,826 42 Halma p.l.c. 2007 Accounting policies Basis of accounting The accounts are prepared under 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 1985 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 1 April 2006 and 31 March 2007. The Group accounts have been prepared under the historical cost convention, except as described below under the heading “Financial Instruments”. 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 estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The key areas where estimates have been used and assumptions applied are in impairment testing of goodwill and in assessing the defined benefit pension plan liabilities. Basis of consolidation The Group accounts include the accounts of Halma p.l.c. and its subsidiary companies made up to 31 March 2007, 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. Goodwill Goodwill in respect of acquisitions after 4 April 2004 represents the difference between the cost of an acquisition and the fair value of the net identifiable assets of the business acquired, and is recognised as an intangible asset in the Consolidated balance sheet. Goodwill therefore includes non-identified intangible assets including business processes, 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, this 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. 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 after which time it is retired and written out of the accounts. (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. An acquired intangible asset is amortised through the Consolidated income statement on a straight-line basis over its estimated economic life of between three and ten 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. 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 post-tax discount rate that reflects the current market assessment of the time value of money and the risks specific to the asset concerned. Halma p.l.c. 2007 43 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. 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 Translation reserve within Shareholders’ funds. In the event that an overseas subsidiary is disposed or closed, the profit or loss on disposal or closure will be determined after taking into account the cumulative translation difference held within the Translation reserve attributable to that subsidiary. As permitted by IFRS 1, the Group elected to deem the Translation reserve 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. Financial instruments The Group does not hold or issue derivatives for speculative or trading purposes, but uses forward foreign currency contracts to reduce its exposure to exchange rate movements. Forward currency contracts are measured at cost (usually zero) and subsequently remeasured at fair value. Where a forward currency contract is designated as a hedge against variability in the cash flows of a recognised asset or liability or a highly probable forecasted transaction, the effective part of any gain or loss on the forward contract is recognised in Shareholders’ funds. The cumulative gain or loss is removed from Shareholders’ funds and recognised in the Consolidated income statement at the same time as the hedged transaction. The ineffective part of any gain or loss, or gains or losses on forward currency contracts that are not designated as hedges, are recognised immediately in the Consolidated income statement. The Group uses foreign currency borrowings to hedge its investment in foreign subsidiaries. The effective part of any gain or loss on these currency borrowings is recognised directly in the Translation reserve within Shareholders’ funds. The ineffective portion is recognised immediately 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 sales when the delivery of products or performance of services takes place in accordance with the contracted terms of sale. Provisions A provision is a liability of uncertain timing or amount, and is recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Property, plant and equipment Property, plant and equipment is stated at historic 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 buildings Leasehold properties: more than 50 years unexpired less than 50 years unexpired Plant, machinery and equipment Motor vehicles Short-life tooling 2% 2% Period of lease 8% to 20% 20% 331⁄3% Leases Leases that confer rights and obligations similar to those that attach to owned assets are classified as finance leases. All other leases are classified as operating leases. Assets held under finance leases are included within property, plant and equipment and initially measured at their fair value or, if lower, the present value of the minimum lease payments, and a corresponding liability is recognised within the Consolidated balance sheet as obligations under finance leases. Subsequently the assets are depreciated on a basis consistent with owned assets or over the term of the lease, if shorter. At the inception of the lease, the lease rentals are apportioned between an interest element and a capital element so as to produce a constant periodic rate of interest on the outstanding liability. Subsequently, the interest element is recognised as a charge to the Consolidated income statement and the capital element is applied to reduce the outstanding liability. Operating lease rentals, and any incentives receivable, are charged to the Consolidated income statement on a straight-line basis over the lease term. 44 Halma p.l.c. 2007 Accounting policies continued Pensions The Group makes contributions to various pension plans, covering the majority of its employees. For defined benefit plans, the asset or liability recorded in the balance sheet is the difference between the fair value of the plans’ assets and the present value of the defined obligation at that date. The defined benefit obligation is calculated separately for each plan on an annual basis by independent actuaries using the projected unit credit method. All actuarial gains and losses as at 3 April 2004 were recognised in full in the Consolidated balance sheet at that date. All actuarial gains and losses arising after 4 April 2004 are taken to Shareholders’ funds. 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, with adjustments being made during this period to reflect expected and actual forfeitures and changes to the vesting period itself arising from non-market based performance conditions. The corresponding credit is to Shareholders’ funds. No further awards will be made under the share option plans. (c) Performance share plan On 3 August 2005 the share option plans were replaced by the performance share plan. All awards under this plan are equity-settled and are subject to both market based and non-market based vesting criteria. Their fair value 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. Inventories Inventories and work in progress of subsidiary companies 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. 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 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 profits 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 profits; 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. Bank overdrafts are shown within borrowings in current liabilities in the Consolidated balance sheet. 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 1 Segmental analysis Sector analysis Infrastructure Sensors Health and Analysis Industrial Safety Inter-segmental sales Central companies Continuing operations Discontinued operations (note 6) Net finance expense Amortisation of acquired intangible assets Profit on disposal of operations before tax (note 6) Taxation Revenue/profit for the year Inter-segmental sales are charged at prevailing market prices. Infrastructure Sensors Health and Analysis Industrial Safety Central companies Continuing operations Cash and cash equivalents/borrowings Goodwill Acquired intangible assets Total Group Halma p.l.c. 2007 45 Revenue 2006 (restated)* £000 131,860 109,886 69,415 (393) – 2007 £000 154,830 119,970 79,940 (134) – 2007 £000 27,975 24,445 15,998 – (498) 354,606 310,768 67,920 – – 26,580 – – – – – – – – (1,829) 66,091 (3,458) – Profit 2006 (restated)* £000 24,106 22,770 13,482 – (398) 59,960 1,501 (1,820) 59,641 (1,529) 494 (18,622) (17,731) 354,606 337,348 44,011 40,875 Assets 2006 (restated)* £000 63,542 46,658 30,900 41,980 2007 £000 20,622 19,085 14,978 57,397 Liabilities 2006 (restated)* £000 23,223 17,794 13,052 73,613 2007 £000 64,083 51,526 36,272 37,353 189,234 183,080 112,082 127,682 22,051 35,826 29,762 32,308 129,521 122,038 7,646 7,126 – – – – 348,452 348,070 141,844 159,990 Group revenue/profit before amortisation of acquired intangibles 354,606 337,348 *The comparative figures for 2006 have been restated to reflect the reclassification of Radio-Tech Limited from the Health and Analysis sector to the Industrial Safety sector. Central companies include all of the Group’s land and buildings, deferred taxation, deferred purchase consideration and retirement benefit provisions. 46 Halma p.l.c. 2007 Notes to the accounts continued 1 Segmental analysis continued Infrastructure Sensors Health and Analysis Industrial Safety Central companies Continuing operations Discontinued operations Total Group Capital additions Depreciation and amortisation 2007 £000 4,348 5,750 3,525 1,170 2006 (restated)* £000 5,015 4,834 3,528 1,341 2007 £000 3,529 2,634 2,715 4,255 2006 (restated)* £000 3,111 2,449 2,588 2,468 14,793 14,718 13,133 10,616 – 377 – 727 14,793 15,095 13,133 11,343 *The comparative figures for 2006 have been restated to reflect the reclassification of Radio-Tech Limited from the Health and Analysis sector to the Industrial Safety sector. Capital additions comprise purchases of computer software, property, plant and equipment and capitalised development costs. Central companies include all of the continuing Group’s charge for amortisation of acquired intangible assets. Geographical analysis United Kingdom United States of America Mainland Europe Asia Pacific and Australasia Africa, Near and Middle East Other countries Inter-segmental sales Revenue from continuing operations Discontinued operations (note 6) Group revenue Inter-segmental sales are charged at prevailing market prices. Revenue by destination Revenue by origin 2007 £000 96,556 98,882 91,371 35,484 22,279 10,034 – 2006 £000 82,930 94,043 77,183 33,293 14,709 8,610 2007 £000 199,859 110,894 56,047 18,277 – – 2006 £000 173,168 104,295 45,788 15,455 – – – (30,471) (27,938) 354,606 310,768 354,606 310,768 – 26,580 – 26,580 354,606 337,348 354,606 337,348 1 Segmental analysis continued United Kingdom United States of America Mainland Europe Asia Pacific and Australasia Operating profit from continuing operations before amortisation of acquired intangibles Discontinued operations (note 6) Net finance expense Group profit before amortisation of acquired intangibles Amortisation of acquired intangible assets Profit on disposal of operations before tax (note 6) Taxation Profit for the year United Kingdom United States of America Mainland Europe Asia Pacific and Australasia Continuing operations Discontinued operations Net (debt)/cash Goodwill Acquired intangible assets Total Group Halma p.l.c. 2007 47 2007 £000 32,626 22,258 10,860 2,176 67,920 – (1,829) 66,091 (3,458) – Profit 2006 £000 30,354 20,149 7,632 1,825 59,960 1,501 (1,820) 59,641 (1,529) 494 (18,622) (17,731) 44,011 40,875 Net assets Capital additions 2007 £000 29,592 29,871 13,504 4,185 77,152 – 2006 £000 18,035 22,284 11,597 3,482 55,398 – (7,711) 3,518 129,521 122,038 7,646 7,126 2007 £000 8,986 3,276 2,023 508 2006 £000 9,510 3,050 1,659 499 14,793 14,718 – – – – 377 – – – 206,608 188,080 14,793 15,095 United Kingdom net assets include all of the Group’s retirement benefit provisions and their related deferred tax assets. 48 Halma p.l.c. 2007 Notes to the accounts continued 2 Earnings per ordinary share Basic earnings per ordinary share are calculated using the weighted average of 371,221,629 shares in issue during the year (net of shares purchased by the Company and held as treasury shares) (2006: 369,053,181). Diluted earnings per ordinary share are calculated using the weighted average of 374,036,077 shares (2006: 370,435,138) which includes dilutive potential ordinary shares of 2,814,448 (2006: 1,381,957). Dilutive potential ordinary shares are calculated from those exercisable share options where the exercise price is less than the average price of the Group’s ordinary shares during the year. Earnings from continuing operations excludes the net profit from discontinued operations. Adjusted earnings is calculated as earnings from continuing operations excluding the amortisation of acquired intangible assets after tax. The Directors consider that adjusted earnings represents a more consistent measure of underlying performance. A reconciliation of earnings and the effect on basic earnings per share figures is as follows: Per ordinary share Earnings from continuing and discontinued operations Remove earnings from discontinued operations Earnings from continuing operations Add back amortisation of acquired intangibles (after tax) Adjusted earnings 3 Non-GAAP measures Return on capital employed 2007 £000 44,011 – 44,011 2,393 46,404 2006 £000 40,875 (1,269) 39,606 1,027 40,633 Operating profit from continuing operations before amortisation of acquired intangibles Operating return Computer software costs within intangible assets Capitalised development costs within intangible assets Property, plant and equipment Inventories Trade and other receivables Trade and other payables Tax liabilities Non-current trade and other payables Add back retirement benefit accruals included within payables Add back accrued deferred purchase consideration Capital employed Return on capital employed 2007 pence 11.86 – 11.86 0.64 12.50 2007 £000 67,920 67,920 1,577 6,115 49,580 39,134 81,650 2006 pence 11.08 (0.35) 10.73 0.28 11.01 2006 £000 59,960 59,960 1,213 3,827 50,054 36,660 77,523 (62,590) (66,035) (6,043) (3,005) 3,071 3,559 (7,316) (5,096) 4,763 9,803 113,048 105,396 60.1% 56.9% 3 Non-GAAP measures continued Return on total invested capital Profit from continuing operations before amortisation of acquired intangibles after taxation Return Total shareholders’ funds Add back retirement benefit accruals included within payables 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 Halma p.l.c. 2007 49 2007 £000 46,404 46,404 2006 £000 40,633 40,633 206,608 188,080 3,071 37,260 4,763 46,019 (11,178) (13,803) 5,348 5,441 13,177 70,931 1,890 5,441 13,177 70,931 330,658 316,498 14.0% 12.8% Organic growth Organic growth measures the change in revenue and profit from continuing Group operations. The effect of acquisitions made during the current or prior financial year has been equalised by subtracting from the current year results a pro-rated contribution based on their revenue and profit at the date of acquisition, and has been calculated as follows: Continuing operations Acquired revenue/profit *Before amortisation of acquired intangible assets. 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 Revenue % growth 2007 £000 2006 £000 354,606 310,768 (18,802) – 335,804 310,768 8.1% 2007 £000 66,091 (3,516) 62,575 Profit* before taxation % growth 2006 £000 58,140 – 58,140 7.6% 2007 £000 1,035 6,237 7,272 2007 £000 1,890 7,103 108 9,101 2006 £000 1,027 5,180 6,207 2006 £000 1,456 6,138 433 8,027 50 Halma p.l.c. 2007 Notes to the accounts continued 6 Discontinued operations The discontinued operations reported in 2006 relate to SEAC Limited, Secomak Limited, Marathon Sensors Inc., Cressall Resistors Limited, IPC Resistors Company, IPC Power Resistors Inc., Mosebach Manufacturing Company and Post Glover Resistors Inc., which were sold during the 52 weeks ended 1 April 2006. 7 Profit before taxation Profit before taxation comprises: Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other operating income Net finance expense Profit before taxation Continuing operations £000 354,606 (239,128) 115,478 (8,573) (43,219) 776 (1,829) 62,633 Discontinued operations £000 – – – – – – – – 2007 Total Group £000 354,606 Continuing operations £000 310,768 Discontinued operations £000 2006 Total Group £000 26,580 337,348 (239,128) (207,441) (21,437) (228,878) 115,478 103,327 5,143 108,470 (8,573) (7,072) (43,219) (38,063) 776 (1,829) 62,633 268 (1,820) 56,640 (1,081) (2,590) – – 1,472 (8,153) (40,653) 268 (1,820) 58,112 Included within administrative expenses is the amortisation of acquired intangible assets. Profit before taxation is stated after charging: Depreciation Amortisation Research and development1 Auditors’ remuneration2: Audit services Audit-related regulatory reporting Tax compliance services Tax advice on disposals Other assurance services Operating lease rents: Property Other Continuing operations Total Group 2007 £000 7,636 5,497 2006 £000 7,246 3,370 2007 £000 7,636 5,497 2006 £000 7,892 3,451 11,422 10,951 11,422 11,705 586 14 87 – 20 3,938 394 548 61 44 148 – 3,779 581 586 14 87 – 20 3,938 394 558 61 44 148 – 4,014 617 1 A further £3,893,000 (2006: £2,500,000) of development expenditure has been capitalised in the period. See note 13. 2 A further £nil (2006: £1,000) of non-audit fees paid to the auditors in respect of acquisition advice have been included in cost of investments. In addition, the auditors received £12,000 (2006: £11,000) for their audit of the Halma Group Pension Plan. 8 Employee information The average number of persons employed by the Group (including Directors) was: United Kingdom Overseas Continuing operations 2007 Number 2006 Number 2007 Number Total Group 2006 Number 1,926 1,400 3,326 1,637 1,254 2,891 1,926 1,400 3,326 1,736 1,451 3,187 8 Employee information continued Group employee costs comprise: Wages and salaries Social security costs Other pension costs (note 28) Halma p.l.c. 2007 51 Continuing operations Total Group 2007 £000 76,799 11,221 5,317 93,337 2006 £000 69,829 9,914 4,799 84,542 2007 £000 76,799 11,221 5,317 93,337 2006 £000 76,291 11,170 5,130 92,591 9 Directors’ remuneration Details of Directors’ remuneration are set out on pages 87 to 91 within the Report on remuneration and form part of these financial statements. 10 Taxation Current tax UK corporation tax at 30% (2006: 30%) 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/(credit) Tax on profit from continuing operations Tax on profit from discontinued operations Total tax charge recognised in the Consolidated income statement Reconciliation of the effective tax rate: Profit before tax – continuing operations Profit before tax – discontinued operations Tax at the UK corporation tax rate of 30% (2006: 30%) Overseas tax rate differences Items not subject to tax Adjustments in respect of prior years Effective tax rate 2007 £000 8,651 9,154 69 2006 £000 9,246 8,271 133 17,874 17,650 622 126 748 (558) (58) (616) 18,622 17,034 – 697 18,622 17,731 62,633 – 62,633 18,790 1,141 56,640 1,966 58,606 17,582 1,116 (1,504) (1,042) 195 18,622 29.7% 75 17,731 30.3% 52 Halma p.l.c. 2007 Notes to the accounts continued 11 Ordinary dividends Amounts recognised as distributions to shareholders in the year Final dividend for the year to 1 April 2006 (2 April 2005) Interim dividend for the year to 31 March 2007 (1 April 2006) Dividends declared in respect of the year Interim dividend for the year to 31 March 2007 (1 April 2006) Proposed final dividend for the year to 31 March 2007 (1 April 2006) Per ordinary share 2007 pence 2006 pence 2007 £000 2006 £000 4.12 2.85 6.97 2.85 4.33 7.18 3.92 2.71 6.63 2.71 4.12 6.83 15,308 10,614 25,922 10,614 16,126 26,740 14,462 10,006 24,468 10,006 15,308 25,314 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. 12 Goodwill Cost At beginning of year Additions (note 24) Disposals Exchange adjustments At end of year Provision for impairment At beginning and end of year Net book amount 2007 £000 2006 £000 122,038 13,955 – (6,472) 99,276 23,195 (5,358) 4,925 129,521 122,038 – – 129,521 122,038 Goodwill is allocated at acquisition to the business units that are expected to benefit from that acquisition. The carrying value of goodwill has been allocated as follows: Infrastructure Sensors Health and Analysis Industrial Safety 2007 £000 68,172 41,464 19,885 2006 (restated)* £000 69,833 37,467 14,738 129,521 122,038 *The comparative figures for 2006 have been restated to reflect the reclassification of Radio-Tech Limited from the Health and Analysis sector to the Industrial Safety sector. Goodwill values have been tested for impairment by comparing them against the value in use of the relevant cash generating units. The value in use calculations were based on projected post-tax cash flows, derived from the latest budget approved by the Board, discounted at 8% per annum to calculate their net present value. 13 Other intangible assets Acquired intangibles £000 Development costs £000 Computer software £000 5,376 3,254 3,521 20,442 Halma p.l.c. 2007 53 Total £000 9,949 7,711 (523) 3,217 (158) 246 4,262 4,740 (184) (1,240) (386) 27,634 5,132 6 (284) 3,451 (140) 111 8,276 114 5,497 (164) (1,240) (187) 16 (394) 717 (158) 86 213 847 (184) – (122) 4,275 6 (238) 481 (140) 57 2,308 114 511 (164) – (71) 2,698 12,296 1,577 1,213 15,338 12,166 1,319 7,695 (129) – – 121 9,006 4,049 – – – (172) 353 – (46) – – 2,500 – 39 7,915 – 3,893 – (1,240) (92) – – 1,529 1,441 – 44 1,880 – 3,458 – – (101) 5,237 7,646 7,126 – 10 4,088 – 1,528 – (1,240) (15) 4,361 6,115 3,827 12,883 10,476 2,637 2,142 Cost At 2 April 2005 Assets of businesses acquired Assets of businesses sold Additions at cost Disposals Exchange adjustments At 1 April 2006 Assets of businesses acquired Additions at cost Disposals Retirements Exchange adjustments At 31 March 2007 Accumulated amortisation At 2 April 2005 Assets of businesses acquired Assets of businesses sold Charge for the year Disposals Exchange adjustments At 1 April 2006 Assets of businesses acquired Charge for the year Disposals Retirements Exchange adjustments At 31 March 2007 Net book amounts At 31 March 2007 At 1 April 2006 54 Halma p.l.c. 2007 Notes to the accounts continued 14 Property, plant and equipment Land and buildings Freehold properties £000 Long leases £000 Short leases £000 Plant, equipment and vehicles £000 Cost At 2 April 2005 Assets of businesses acquired Assets of businesses sold Additions at cost Disposals Exchange adjustments At 1 April 2006 Assets of businesses acquired Additions at cost Disposals Exchange adjustments At 31 March 2007 Accumulated depreciation At 2 April 2005 Assets of businesses acquired Assets of businesses sold Charge for the year Disposals Exchange adjustments At 1 April 2006 Assets of businesses acquired Charge for the year Disposals Exchange adjustments At 31 March 2007 Net book amounts At 31 March 2007 At 1 April 2006 3,583 71,586 102,669 27,681 1,684 2,741 410 (264) 179 (450) 577 28,133 1,554 248 (3,243) (750) 25,942 – – 73 – 18 23 (241) 767 (62) 84 1,775 3,312 – 64 (262) (19) 1,558 5,038 509 1,674 – (54) 439 (365) 102 5,160 31 445 (558) (139) 4,939 – – 68 – 14 591 – 45 (150) (15) 471 – 378 (11) (96) 18 (91) 261 (56) 48 1,854 – 306 (10) (63) Total £000 98,115 5,929 (8,071) 11,878 (7,208) 2,557 103,200 5,040 10,053 (12,645) (2,979) 66,009 5,496 (7,566) 10,859 (6,696) 1,878 69,980 3,486 9,363 (9,129) (2,114) 43,110 4,762 (5,024) 7,124 (5,599) 1,168 45,541 3,137 6,840 (8,652) (1,274) 50,331 4,780 (5,169) 7,892 (6,020) 1,332 53,146 3,168 7,636 (9,370) (1,491) 2,087 45,592 53,089 21,003 22,973 1,087 1,184 1,496 1,458 25,994 24,439 49,580 50,054 15 Inventories Raw materials and consumables Work in progress Finished goods and goods for resale 16 Trade and other receivables Falling due within one year: Trade receivables Other receivables Prepayments and accrued income Halma p.l.c. 2007 55 2007 £000 19,270 7,094 12,770 39,134 2006 £000 18,538 5,379 12,743 36,660 2007 £000 2006 £000 74,788 70,076 1,875 4,987 2,664 4,783 81,650 77,523 Trade receivables are stated net of provisions for estimated irrecoverable amounts of £1,034,000 (2006: £1,051,000). This provision has been determined by reference to previous default experience. 17 Borrowings Falling due within one year: Unsecured bank loans and overdrafts Information on interest rates charged on borrowings and repayment dates 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 deferred purchase consideration Other payables Accruals and deferred income 19 Trade and other payables: falling due after one year Provision for deferred purchase consideration Other payables 2007 £000 2006 £000 29,762 32,308 2007 £000 2006 £000 34,677 33,529 4,016 2,867 4,283 16,747 62,590 2007 £000 692 2,313 3,005 3,748 8,391 3,857 16,510 66,035 2006 £000 1,412 3,684 5,096 56 Halma p.l.c. 2007 Notes to the accounts continued 20 Deferred taxation An analysis of Group deferred taxation is as follows: Employee benefits Acquired intangible assets Accelerated capital allowances Short-term timing differences Goodwill timing differences Net deferred taxation asset This has been recognised in the Consolidated balance sheet as follows: Non-current deferred taxation assets Non-current deferred taxation liabilities Net deferred taxation asset Movement in deferred taxation asset: At beginning of year (Charge)/credit to Consolidated income statement: UK Overseas (Charge)/credit to Shareholders’ funds Acquired Disposed Exchange adjustments At end of year 2007 £000 2006 £000 11,178 13,803 (2,255) (3,067) 3,799 (1,661) 7,994 2007 £000 11,178 (3,184) 7,994 (2,122) (3,369) 3,836 (1,561) 10,587 2006 £000 13,803 (3,216) 10,587 2007 £000 2006 £000 10,587 10,038 (414) (334) (1,396) (536) – 87 1,387 (771) 1,663 (2,159) 477 (48) 7,994 10,587 No provision is made for taxation which might become payable if profits retained by overseas subsidiary companies are distributed as dividends unless there is an intention to distribute such profits. At 31 March 2007 the Group had unused capital tax losses of £1,793,000 (2006: £1,927,000) for which no deferred tax asset has been recognised. None of these losses has an expiry date. In accordance with International Accounting Standard 12 “Income Taxes”, the accounts do not reflect the impact of the reduction in the main rate of UK Corporation Tax announced in the Finance Bill 2007, as at the date of approval of the accounts it had not been substantively enacted. The effect of adjusting for this change would be a reduction in the tax charge in the Consolidated profit and loss account of £146,000, an increase in the tax charge taken to reserves through the Statement of recognised income and expense of £745,000, and a reduction in the net deferred tax asset in the Consolidated balance sheet of £599,000. 21 Share capital Ordinary shares of 10p each Authorised Issued and fully paid 2007 £000 2006 £000 2007 £000 2006 £000 43,656 43,656 37,312 36,933 The number of ordinary shares in issue at 31 March 2007 was 373,116,492 (2006: 369,330,680). 21 Share capital continued Changes during the year in the issued ordinary share capital were as follows: At 1 April 2006 Share options exercised At 31 March 2007 Halma p.l.c. 2007 57 Issued and fully paid £000 36,933 379 37,312 The total consideration received in cash in respect of share options exercised amounted to £4,916,000. At 31 March 2007 options in respect of 10,508,823 (2006: 15,199,515) ordinary shares remained outstanding. Further details of these are given in note 23 to the accounts. 22 Reserves At 2 April 2005 Profit for the year Share options exercised Foreign exchange translation differences Exchange differences recycled from reserves on disposal of operations Dividends paid Actuarial losses on defined benefit pension schemes Share-based payments Treasury shares purchased Tax on items taken directly to reserves At 1 April 2006 Profit for the year Share options exercised Foreign exchange translation differences Dividends paid Actuarial gains on defined benefit pension schemes Share-based payments Treasury shares purchased Tax on items taken directly to reserves Share premium account £000 10,111 – 591 – – – – – – – 10,702 – 4,537 – – – – – – Treasury shares £000 – – – – – – – – (379) – (379) – – – – – – (1,285) – Capital redemption reserve £000 185 – – – – – – – – – Translation reserve £000 144 – – 5,826 (26) – – – – – Other reserves £000 Retained earnings £000 513 125,426 – – – – – – 1,079 – – 40,875 – – – (24,468) (10,355) – – 1,625 185 5,944 1,592 133,103 – – – – – – – – – – (10,216) – – – – – – – – – – 2,062 – – 44,011 – – (25,922) 7,084 – – (2,122) At 31 March 2007 15,239 (1,664) 185 (4,272) 3,654 156,154 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 31 March 2007 the number of treasury shares held was 805,635 (2006: 200,000) and their market value was £1,774,441 (2006: £375,500). The capital redemption reserve was created on repurchase and cancellation of the Company’s own shares. The translation reserve is used to record differences arising from the retranslation of the financial statements of foreign operations. The other reserve represents the provision being established in respect of the value of the equity-settled share option plans and performance share plan. 58 Halma p.l.c. 2007 Notes to the accounts continued 23 Share-based payments The total cost recognised in the Consolidated income statement in respect of equity-settled share-based payment schemes was as follows: Share incentive plan Share option plans Performance share plan 2007 £000 270 363 974 2006 £000 375 447 296 1,607 1,118 Share incentive plan Shares awarded under this scheme 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 scheme are recognised in the Consolidated income statement over the three-year vesting period. Share option plans The Group has issued options to acquire ordinary shares in the Company under three share option plans, approved by shareholders in 1990, 1997 and 2000. These share option plans provide 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, for the 1990 Plan, the growth in the Retail Price Index, for the 1997 Plan, the growth in the Retail Price Index plus 2% per annum and, for the 2000 Plan, 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, for the 1990 and 1997 Plans, all but the top quarter of companies which were within the FTSE 100 at the date of grant of any option and for the 2000 Plan, 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 ten years from the date of grant. No further awards will be made under the Company share option plans. Options in respect of 50,500 ordinary shares remained outstanding at 31 March 2007 under the 1990 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 10,300 11,400 24,000 4,800 Option price Five years from Seven years from 122.50p 101.50p 120.0p – 129.0p 120.0p 2004 2000 2001 2002 Options in respect of 1,591,900 ordinary shares remained outstanding at 31 March 2007 under the 1997 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 Option price Five years from Seven years from 144,400 105,500 267,200 264,000 275,000 535,800 122.5p – 138.5p 101.5p – 123.5p 120.0p – 136.0p 122.5p – 133.0p 101.5p – 123.5p 120.0p – 136.0p 2002 2003 2004 2000 2001 2002 Halma p.l.c. 2007 59 23 Share-based payments continued Options in respect of 8,866,423 ordinary shares remained outstanding at 31 March 2007 under the 2000 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 Option price Five years from Seven years from 619,250 634,400 491,164 853,590 2,015,528 753,399 645,900 519,000 712,166 773,600 848,426 111.0p 163.5p 144.33p 134.0p 142.25p 145.67p – 157.92p 2003 2004 2005 2006 2007 2008 111.0p 163.5p 144.33p 134.0p 142.25p 2005 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 Granted during the year Lapsed during the year Outstanding at end of year Exercisable at end of year 2007 2006 Number of Weighted average option price share options Number of Weighted average option price share options 15,199,515 134.62p 16,980,339 134.24p (3,785,812) 129.84p (529,761) 121.56p – – 496,707 145.67p (962,180) 133.04p (1,747,770) 136.62p 10,451,523 136.50p 15,199,515 3,103,904 136.74p 1,300,629 134.62p 123.29p The weighted average share price at the date of exercise for share options exercised during the year was 201.49p. The options outstanding at 31 March 2007 had exercise prices from 101.5p to 163.5p and a weighted average remaining contractual life of five years. 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 A 4% 25% 4 4.1% 4.3% – 4.9% 145.67 142.25 – 157.92 24.70 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. 60 Halma p.l.c. 2007 Notes to the accounts continued 23 Share-based payments continued Performance share plan The performance share plan was approved by shareholders on 3 August 2005 and replaced the share option plans from which no further grants will 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, for 2006/07, the FTSE 250 excluding financial companies and, for 2005/06, the Engineering and Machinery sector, 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 2007 Number of shares awarded 2006 Number of shares awarded 1,735,252 – 1,689,658 1,932,060 (4,921) (15,403) (58,681) (181,405) 3,361,308 1,735,252 – – 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) 2007 20% 3 2006 25% 3 199.00 148.42 nil 66% 131.34 nil 46% 68.27 The expected volatility was determined by calculating the historic volatility of the Group’s share price over the previous three years. 24 Acquisitions Non-current assets Intangible assets Property, plant and equipment Current assets Inventories Receivables Deferred tax Cash and cash equivalents Total assets Current liabilities Payables Deferred tax Total liabilities Net assets of businesses acquired Cash consideration, including costs Deferred purchase consideration Total consideration Goodwill arising on current year acquisitions Goodwill arising on prior year acquisitions Goodwill arising on acquisition Halma p.l.c. 2007 61 Book value £000 Fair value adjustments £000 279 2,497 3,342 3,186 59 2,098 11,461 (2,894) – (2,894) 8,567 3,869 (625) (998) (9) (59) – 2,178 (383) (536) (919) 1,259 Total £000 4,148 1,872 2,344 3,177 – 2,098 13,639 (3,277) (536) (3,813) 9,826 21,382 2,973 24,355 14,529 (574) 13,955 The goodwill on current year acquisitions arose on the following acquisitions: Company Mikropack GmbH Baldwin Environmental Tritech Holdings Limited Date of acquisition April 2006 September 2006 November 2006 Swift (943) Limited (t/a System Technologies) November 2006 Country of incorporation Germany Principal activity Health and Analysis Initial consideration D2,250,000 USA Health and Analysis $1,100,000 United Kingdom United Kingdom Industrial Safety £8,000,000 Industrial Safety £2,000,000 Labsphere, Inc. February 2007 USA Health and Analysis $14,300,000 Together these acquisitions contributed £6,307,000 of revenue and £1,731,000 of profit before tax and amortisation of acquired intangible assets to the Group results for the year ended 31 March 2007. Additional purchase consideration of up to D2,250,000, £4,500,000 and $700,000 is payable in respect of Mikropack, Tritech/System Technologies and Baldwin Environmental respectively, and has been provided at the estimated amount payable. The amount payable is dependent upon the profit growth of the businesses as follows: Mikropack – over the financial year ending March 2007; Tritech/System Technologies – over each of the two years ending November 2008; Baldwin Environmental – over each of the three years ending March 2009. The adjustments to goodwill relating to prior years’ acquisitions comprise revisions to the estimate of deferred purchase consideration payable. Adjustments were made to the book value of the net assets of the companies acquired to reflect their provisional fair value to the Group. Other previously unrecognised assets and liabilities at acquisition were included and accounting policies were aligned with the Group where appropriate. 62 Halma p.l.c. 2007 Notes to the accounts continued 25 Notes to the consolidated cash flow statement Reconciliation of profit from operations to net cash inflow from operating activities Profit from continuing operations before taxation Profit from discontinued operations before taxation Depreciation and amortisation of computer software Amortisation of capitalised development costs Amortisation of acquired intangible assets Share-based payment expense in excess of amounts paid Additional payments to pension scheme (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 in receivables Increase in payables Cash generated from operations Taxation paid Net cash inflow from operating activities 2007 £000 2006 £000 64,462 58,460 – 8,147 1,528 3,458 1,317 (4,233) (314) 74,365 (1,648) (3,673) 1,215 70,259 1,472 8,373 1,441 1,529 742 (1,357) 174 70,834 647 (6,225) 4,921 70,177 (19,505) (16,815) 50,754 53,362 The cash outflow of £27,499,000 on the acquisition of businesses includes cash acquired of £2,098,000 and the payment of £8,217,000 of deferred purchase consideration which arose from acquisitions made in earlier years, and where provision was made in prior years’ financial statements. Reconciliation of net cash flow to movement in net cash/(debt) Decrease in cash and cash equivalents Cash outflow from borrowings Exchange adjustments Net cash brought forward Net (debt)/cash carried forward Analysis of net cash/(debt) Cash and cash equivalents Bank loans 2007 £000 2006 £000 (9,541) 3,050 (1,995) (8,486) 12,004 3,518 (11,066) – (163) (11,229) 3,518 (7,711) Exchange At 1 April 2006 £000 Cash flow £000 adjustments At 31 March 2007 £000 £000 35,826 (11,066) (2,709) 22,051 (32,308) – 3,518 (11,066) 2,546 (163) (29,762) (7,711) Halma p.l.c. 2007 63 26 Financial instruments Policy The Group does not use complex derivative financial instruments. No trading or speculative transactions in financial instruments are undertaken. Where it 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. Policies have remained unchanged since the beginning of the financial year. Foreign currency risk The Group 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 are hedged at the date of invoicing by means of matched borrowings and forward currency contracts. Significant purchases are hedged by means of forward currency contracts. The Group which is based in the UK and reports in Sterling, has a significant investment in overseas operations in the USA and Europe, with further investments in Australia, New Zealand, Malaysia, Singapore, China, India and Africa. 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. The Group does not hedge future currency profits, so the Sterling value of overseas profits earned during the year is sensitive to the strength of Sterling, particularly against the US Dollar and the Euro. Finance and interest rate risk The Group does not have significant exposure to interest rate fluctuations. Where bank borrowings are used to finance operations they tend to be short-term with floating interest rates. Borrowings used to manage foreign currency risk 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. Liquidity risk 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 The table below shows the Group’s net foreign currency monetary assets and liabilities. These are the assets and liabilities of Group companies which are not denominated in the functional currency of the company involved. They comprise cash and overdrafts, and certain debtors and creditors. 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. As at year end these exposures were as follows: 2007 Functional currency of operation Sterling US Dollar Euro Other Total Sterling £000 – (8) 175 224 391 US Dollar £000 839 – (5) 1,038 1,872 Net foreign currency monetary assets/(liabilities) Euro £000 678 (9) – (43) 626 Other £000 84 – 187 343 614 Total £000 1,601 (17) 357 1,562 3,503 64 Halma p.l.c. 2007 Notes to the accounts continued 26 Financial instruments continued 2006 Functional currency of operation Sterling US Dollar Euro Other Total Net foreign currency monetary assets/(liabilities) Sterling £000 – (93) (24) 6 US Dollar £000 2,151 – 212 246 Euro £000 1,213 1 – 46 (111) 2,609 1,260 Other £000 140 (2) (33) 302 407 Total £000 3,504 (94) 155 600 4,165 The amounts shown in the tables above take into account the effect of any forward currency contracts entered into to manage these currency exposures. Interest rate risk profile The Group’s financial assets which are subject to interest rate fluctuations comprise interest bearing cash equivalents which totalled £5,901,000 at 31 March 2007 (2006: £11,501,000). These comprised Sterling denominated deposits of £5,780,000 (2006: £11,386,000), and Euro and other currency deposits of £121,000 (2006: £115,000) which are placed on local money markets and earn interest at market rates. Cash balances of £16,150,000 (2006: £24,325,000) earn interest at local market rates. The financial liabilities which are subject to interest rate fluctuations are bank loans, bank overdrafts and certain unsecured loans, which totalled £29,762,000 at 31 March 2007 (2006: £32,308,000). All are subject to floating rates of interest. These comprise US Dollar denominated bank loans of £16,327,000 (2006: £18,497,000) which bear interest with reference to the US Dollar LIBOR rates, and Euro denominated bank loans of £13,435,000 (2006: £13,811,000) which bear interest with reference to the Euro LIBOR rates. Maturity of financial liabilities With the exception of the deferred purchase consideration and other payables due after one year, all of the Group’s financial liabilities mature in one year or less or on demand. The total of deferred purchase consideration due after one year includes £603,000 (2006: £1,346,000) due between one and two years, with the balance of £89,000 (2006: £66,000) due between two and five years. Other creditors due after more than one year include £1,017,000 (2006: £1,220,000) due between one and two years, £1,296,000 (2006: £2,279,000) due between two and five years, with the balance of £nil (2006: £185,000) due after more than five years. Borrowing facilities The Group’s principal source of short-term liquidity is through “on demand” bank overdrafts which are, by definition, uncommitted. These facilities are generally reviewed on an annual or ongoing basis and hence the facilities expire within one year or less. The Group also has committed borrowing facilities which are used for the purpose of providing longer-term financing and for managing foreign currency risk. In September 2005 the Group entered into a £60 million, five-year unsecured revolving credit facility with a small syndicate of its principal bankers. The Group’s undrawn committed facilities available at 31 March 2007 were £43,503,000, of which £13,265,000 mature within one year and £30,238,000 between three and four years. Fair values of financial assets and financial liabilities As at 31 March 2007 there was no significant difference between the book value and fair value (as determined by market value) of the Group’s financial assets and liabilities. Hedging As explained above, the Group’s policy is to hedge significant sales and purchases denominated in foreign currency using forward currency contracts. The gains and losses on these instruments are recognised upon recognition of the underlying exposure. The amounts of unrecognised gains or losses on instruments used for hedging at 31 March 2007 and 1 April 2006 are not significant. With the exception of currency exposures, the disclosures in this note exclude short-term receivables and payables. Halma p.l.c. 2007 65 27 Commitments Capital commitments Capital expenditure authorised and contracted at 31 March 2007 but not provided in these accounts amounts to £1,076,000 (2006: £2,187,000). Commitments under operating leases Annual 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 2007 £000 3,879 8,054 1,475 2006 £000 3,947 8,075 2,767 13,408 14,789 2007 £000 289 320 – 609 Other 2006 £000 492 522 3 1,017 28 Retirement benefits Group companies operate both defined benefit and defined contribution pension plans. 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. Full actuarial valuations of the defined benefit plans are carried out every three years. The Halma Group Pension Plan was last assessed as at 1 December 2005, and the Apollo Pension and Life Assurance Plan as at 1 April 2006, using the projected unit method. At those dates the market value of the plan assets were £71.5 million for the Halma Group Pension Plan and £13.8 million for the Apollo Pension and Life Assurance Plan. The actuarial value of these assets represented 60% and 59% respectively of the benefits that had accrued to members after allowing for expected future increases in earnings. These shortfalls are being addressed by increased company contributions. Defined contribution schemes The amount charged to the Consolidated income statement in respect of defined contribution schemes was £1,592,000 (2006: £1,685,000). 66 Halma p.l.c. 2007 Notes to the accounts continued 28 Retirement benefits continued Defined benefit schemes The assumptions used to calculate scheme liabilities are: Rate of increase in salaries Rate of increase of pensions in payment (pre-April 1997) Rate of increase of pensions in payment (post-April 1997) Discount rate Inflation assumption 2007 4.25% 3.00% 3.00% 5.25% 3.00% 2006 4.25% 2.75% 2.75% 5.00% 2.75% Mortality assumption – Halma pensioners PA 92 medium cohort Mortality assumption – Halma non-pensioners PA 92 medium cohort PA 92 medium cohort plus one year PA 92 medium cohort plus one year 2005 4.25% 2.75% 2.75% 5.40% 2.75% PA 92 PA 92 less 3 years Mortality assumption – Apollo pensioners Mortality assumption – Apollo non-pensioners PA 92 medium cohort plus one year PA 92 medium cohort plus one year PA 92 (C=2010) PA 92 (C=2010) PA 92 (C=2020) PA 92 (C=2020) If assumed life expectancies had been one year greater in the defined benefit plans, the gross deficit would have increased by approximately £3.5 million. The expected rates of return and the net deficit in the plans were: Equities Bonds Property Total fair value of assets Present value of scheme liabilities Net deficit Expected rate of return % 7.50 5.00 6.00 Expected rate of return % 7.25 4.75 5.75 2007 Fair value £000 77,229 27,457 3,655 108,341 (145,601) (37,260) 2006 Fair value £000 70,447 22,071 3,043 95,561 (141,580) (46,019) The fair value of plan assets includes £1,445,721 of Halma p.l.c. 10p ordinary shares (2006: £2,358,891) and a receivable of £3,071,000 (2006: £4,763,000) in respect of pension plan liabilities that Halma p.l.c. has assumed on discontinued UK operations. The equivalent liability is included in the Consolidated and Company balance sheets within trade and other payables/other creditors. Halma p.l.c. 2007 67 28 Retirement benefits continued The amount charged/(credited) to the Consolidated income statement in respect of the schemes was as follows: Current service cost (administrative expenses) Curtailment gain (profit on disposal of operations) Expected return on pension plan assets Interest on plan liabilities Net finance cost Total charge 2007 £000 2,859 2006 £000 2,741 – (577) (6,237) (5,180) 7,103 866 6,138 958 3,725 3,122 The amount credited to the Statement of recognised income and expense in respect of the actuarial gains of the plans was £7,084,000 (2006: £10,355,000 loss). The movements in plan assets, liabilities and the net deficit are as follows: At beginning of year Current service cost Contributions paid Curtailment gain Net finance cost Actuarial gain/(loss) Fair value of Present value of plan liabilities plan assets £000 £000 2007 Net deficit £000 Fair value of Present value of plan liabilities plan assets £000 £000 2006 Net deficit £000 95,561 (141,580) (46,019) 72,069 (112,914) (40,845) – (2,859) – (2,741) 7,092 – 6,237 1,143 – – (7,103) 5,941 – (2,859) 7,092 – (866) 7,084 (1,692) 4,098 – 5,180 10,009 4,205 – 577 (6,138) (2,741) 4,098 577 (958) (20,364) (10,355) – 4,205 Movement on receivable from principal employer (1,692) At end of year 108,341 (145,601) (37,260) 95,561 (141,580) (46,019) History of experience adjustments: Present value of defined benefit obligations (145,601) (141,580) (112,914) (102,196) (90,545) 2007 £000 2006 £000 2005 £000 2004 £000 2003 £000 Fair value of plan assets Deficit in the plan Experience adjustments on plan liabilities: Amount Percentage of plan liabilities Experience adjustments on plan assets: Amounts Percentage of plan assets 108,341 95,561 72,069 61,427 46,574 (37,260) (46,019) (40,845) (40,769) (43,971) 273 – 1,321 1% 536 – 11,271 12% 52 – 2,821 4% – – (3,260) (4)% 7,717 13% (17,042) (37)% Amounts disclosed for 2005 and earlier are under UK GAAP as it is not practicable to restate these amounts prior to the date of transition to IFRS. 68 Halma p.l.c. 2007 Independent Auditors’ report to the members of Halma p.l.c. We have audited the Group financial statements of Halma p.l.c. for the 52 weeks to 31 March 2007 which comprise the Consolidated income statement, the Consolidated balance sheet, the Consolidated cash flow statement, the Statement of recognised income and expense and the Reconciliation of movements in shareholders’ funds together with the statement of Accounting policies and the related notes numbered 1 to 28. These Group financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the part of the Directors’ Report on remuneration that is described as having been audited. We have reported separately on the parent Company financial statements of Halma p.l.c. for the 52 weeks to 31 March 2007. This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. 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 The Directors’ responsibilities for preparing the Annual report, the Directors’ Report on remuneration and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union are set out in the Statement of Directors’ responsibilities. Our responsibility is to audit the Group financial statements and the part of the Directors’ Report on remuneration described as having been audited in accordance with relevant United Kingdom legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and article 4 of the IAS Regulation and whether the part of the Directors’ Report on remuneration described as having been audited has been properly prepared in accordance with the Companies Act 1985. We also report to you whether, in our opinion, the information given in the Report of the Directors is consistent with the Group financial statements. The information given in the Report of the Directors includes that specific information presented in the Operating and Financial review that is cross referred from the Business review section of the Report of the Directors. In addition we report to you if in our opinion we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions with the Company and other members of the Group is not disclosed. We review whether the Corporate governance statement reflects the Company’s compliance with the nine provisions of the 2004 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the Report of the Directors and the other information contained in the Annual report for the above period as described in the contents section including the unaudited part of the Directors’ Report on remuneration and consider whether it is consistent with the audited Group financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any further information outside the Annual report. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements and the part of the Directors’ Report on remuneration to be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the Group financial statements and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements and the part of the Directors’ Report on remuneration to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the Group financial statements and the part of the Directors’ Report on remuneration to be audited. Opinion In our opinion: – the Group financial statements give a true and fair view, in accordance with International Financial Reporting Standards as adopted for use in the European Union, of the state of the Group’s affairs as at 31 March 2007 and of its profit for the 52 week period then ended; – the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and article 4 of the IAS Regulations; – the part of the Directors’ Report on remuneration described as having been audited has been properly prepared in accordance with the Companies Act 1985; and – the information given in the Report of the Directors is consistent with the Group financial statements. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Reading, UK 19 June 2007 Company balance sheet Fixed assets Tangible assets Investments Current assets Debtors Current taxation receivable Short-term deposits Creditors: amounts falling due within one year Borrowings Creditors Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called up share capital Share premium account Treasury shares Capital redemption reserve Other reserves Profit and loss account Equity shareholders’ funds Approved by the Board of Directors on 19 June 2007. E G Unwin Directors K J Thompson Halma p.l.c. 2007 69 Notes 31 March 2007 £000 1 April 2006 £000 C3 C4 2,388 115,023 117,411 4,115 102,566 106,681 C5 134,200 115,242 630 5,409 307 11,386 140,239 126,935 42,070 71,564 44,814 61,383 113,634 106,197 26,605 20,738 144,016 127,419 2,719 72 4,507 – 141,225 122,912 37,312 15,239 (1,664) 185 1,611 36,933 10,702 (379) 185 569 88,542 74,902 141,225 122,912 C6 C7 C8 C9 C11 C12 C12 C12 C12 C12 C13 70 Halma p.l.c. 2007 Notes to the Company accounts C1 Accounting policies Basis of accounting The separate Company accounts are presented as required by the Companies Act 1985 and have been prepared on the historical cost basis and comply with applicable United Kingdom Accounting Standards. The principal Company accounting policies have been applied consistently throughout the current and preceding year and are described below. 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. Exchange differences on foreign currency borrowings which are taken out for the purpose of hedging the Company’s investments in overseas subsidiary companies are taken to reserves. Share-based payments Equity-settled share-based payments are provided to employees under the Company’s share incentive plan, share option plans and performance share plan. The Company recognises a compensation cost in respect of these schemes that is based on the fair value of the awards. For equity-settled schemes, the fair value is determined at the date of the grant and is not subsequently remeasured unless the conditions on which the award was granted are modified. The fair value at the date of the grant is calculated using appropriate option pricing models and the cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions or non-market performance conditions. As permitted by Financial Reporting Standard (FRS) 20 “Share- based payment”, the Company applied FRS 20 retrospectively only to equity-settled awards that were granted on or after 7 November 2002 which had not vested at 3 April 2005. 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 buildings Leasehold properties: more than 50 years unexpired less than 50 years unexpired Plant and equipment Motor vehicles 2% 2% Period of lease 8% to 20% 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 FRS 17 the Company accounts for its contributions to the plan as if it was a defined contribution plan. Deferred taxation The Company provides for taxation deferred because of timing differences between profits as computed for taxation purposes and profits as stated in the accounts, on an undiscounted basis. Deferred taxation 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 reasonably certain. Halma p.l.c. 2007 71 C2 Profit before taxation As permitted by Section 230 of the Companies Act 1985, the Profit and loss account of Halma p.l.c. is not presented as part of these accounts. Auditors’ remuneration for audit services to the Company was £79,000 (2006: £91,000). Total employee costs (including Directors) were: Wages and salaries Social security costs Other pension costs Number of employees 2007 £000 2,694 386 398 3,478 2007 Number 30 Details of Directors’ remuneration are set out on pages 87 to 91 within the Report on remuneration and form part of these financial statements. C3 Fixed assets – tangible assets Cost At 1 April 2006 Additions at cost Disposals At 31 March 2007 Accumulated depreciation At 1 April 2006 Charge for the year Disposals At 31 March 2007 Net book amounts At 31 March 2007 At 1 April 2006 C4 Investments Shares in Group companies Land and buildings Freehold properties £000 Short leases £000 Plant equipment and vehicles £000 3,994 – (1,944) 2,050 576 33 (197) 412 1,638 3,418 167 – – 167 74 1 – 75 92 93 1,426 292 (116) 1,602 822 225 (103) 944 658 604 2006 £000 3,068 417 550 4,035 2006 Number 27 Total £000 5,587 292 (2,060) 3,819 1,472 259 (300) 1,431 2,388 4,115 At cost less amounts written off at beginning of year Additions Disposals At cost less amounts written off at end of year Additions in the year relate to the acquisitions of Tritech International Limited and Swift (943) Limited. 2007 £000 102,566 12,457 – 2006 £000 48,967 54,649 (1,050) 115,023 102,566 72 Halma p.l.c. 2007 Notes to the Company accounts continued C4 Investments continued Details of principal subsidiary companies are set out on pages 92 and 93. All these subsidiaries are wholly owned and, apart from the following, are subsidiaries of Halma p.l.c. and are incorporated in Great Britain where they principally operate. Name of company Country of incorporation Name of company Country of incorporation Fortress Systems Pty. Limited Australia Air Products and Controls Inc.* HF Sécurité S.A.S.* Hydreka S.A.S.* France Aquionics Inc.* France B.E.A. Inc.* S.E.R.V. Trayvou Interverrouillage S.A.S.* France Bio-Chem Fluidics Inc.* Apollo Gesellschaft für Meldetechnologie mbH* Germany Diba Industries, Inc.* Mikropack GmbH Germany Electronic Micro Systems Inc.* Berson Milieutechniek B.V.* The Netherlands Janus Elevator Products Inc.* Netherlocks Safety Systems B.V.* The Netherlands Labsphere Inc.* Bureau D’Electronique Appliquée S.A.* Belgium Ocean Optics, Inc.* TL Jones Limited* New Zealand Oklahoma Safety Equipment Co. Inc.* E-Motive Display Pte Limited* Singapore Perma Pure LLC* Halma Holdings Inc.* USA Volk Optical Inc.* USA USA USA USA USA USA USA USA USA USA USA USA *Interests held by subsidiary companies. C5 Debtors Amounts due from Group companies Deferred taxation (note C10) Other debtors Prepayments and accrued income C6 Borrowings Falling due within one year: Bank loans Overdrafts 2007 £000 2006 £000 131,576 112,179 – 29 2,595 64 385 2,614 134,200 115,242 2007 £000 2006 £000 29,762 12,308 42,070 32,308 12,506 44,814 The bank loans at 31 March 2007 and 1 April 2006 mature within one year. The facility under which they are drawn expires within two to five years (2006: within two to five years) and at 31 March 2007 £30,238,000 (2006: £27,692,000) remained committed and undrawn. The bank overdrafts at 31 March 2007 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. C7 Creditors 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 one year Deferred purchase consideration Other creditors These liabilities fall due as follows: Within two to five years After more than five years C9 Provisions for liabilities and charges Deferred taxation (note C10) C10 Deferred taxation Movement in deferred taxation liability/(asset): At beginning of year Charge/(credit) to profit and loss account Credit to reserves At end of year Deferred taxation comprises short-term timing differences. Halma p.l.c. 2007 73 2007 £000 640 2006 £000 704 62,194 51,371 1,369 4,021 3,340 1,174 3,602 4,532 71,564 61,383 2007 £000 569 2,150 2,719 2,719 – 2,719 2007 £000 72 72 2007 £000 (64) 423 (287) 72 2006 £000 1,061 3,446 4,507 4,322 185 4,507 2006 £000 – – 2006 £000 (52) (12) – (64) 74 Halma p.l.c. 2007 Notes to the Company accounts continued C11 Called up share capital Ordinary shares of 10p each Authorised Issued and fully paid 2007 £000 2006 £000 2007 £000 2006 £000 43,656 43,656 37,312 36,933 The number of ordinary shares in issue at 31 March 2007 was 373,116,492 (2006: 369,330,680). Changes during the year in the issued ordinary share capital were as follows: At 1 April 2006 Share options exercised At 31 March 2007 Issued and fully paid £000 36,933 379 37,312 The total consideration received in cash in respect of share options exercised amounted to £4,916,000. 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. C12 Reserves At 1 April 2006 Profit transferred to reserves Share options exercised Movement in other reserves Treasury shares purchased Exchange adjustments At 31 March 2007 Share premium account £000 10,702 – 4,537 – – – Treasury shares £000 (379) – – – (1,285) – Capital redemption reserve £000 185 – – – – – Other reserves £000 569 – – 1,042 – – 15,239 (1,664) 185 1,611 Profit and loss account £000 74,902 10,456 – – – 3,184 88,542 Treasury shares are the Company’s own shares purchased and held to fulfil its obligations under the performance share plan. 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. C13 Reconciliation of movement in equity shareholders’ funds At beginning of year Profit/(loss) after taxation Dividends paid Exchange adjustments Net proceeds of shares issued Treasury shares purchased Movement in other reserves At end of year 2007 £000 2006 £000 122,912 151,594 36,378 (2,161) (25,922) (24,468) 3,184 4,916 (1,285) 1,042 (2,761) 644 (379) 443 141,225 122,912 Independent Auditors’ report to the members of Halma p.l.c. Halma p.l.c. 2007 75 We have audited the parent Company financial statements of Halma p.l.c. for the 52 weeks to 31 March 2007 which comprise the Balance sheet together with the statement of Accounting policies and the related notes numbered C1 to C13. These parent Company financial statements have been prepared under the accounting policies set out therein. We have reported separately on the Group financial statements of Halma p.l.c. for the 52 weeks to 31 March 2007 and on the information in the Directors’ Report on remuneration that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. 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. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent Company financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the parent Company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent Company financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the parent Company financial statements. Opinion In our opinion: – the parent Company financial statements give a true and fair view in accordance with United Kingdom Generally Accepted Accounting Practice of the state of affairs of the Company as at 31 March 2007; – the parent Company financial statements have been properly prepared in accordance with the Companies Act 1985; and – the information given in the Report of the Directors is consistent with the parent Company financial statements. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Reading, UK 19 June 2007 Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual report the Directors’ Report on remuneration and the parent Company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ responsibilities. Our responsibility is to audit the parent Company financial statements and the part of the Directors’ Report on remuneration to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the parent Company financial statements give a true and fair view, in accordance with the relevant financial reporting framework, and whether the parent Company financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the Report of the Directors is consistent with the parent Company financial statements. In addition we also report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed. We read the other information contained in the Annual report as described in the contents section and consider whether it is consistent with the audited parent Company financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent Company financial statements. Our responsibilities do not extend to any further information outside the Annual report. 76 Halma p.l.c. 2007 Summary 1998 to 2007 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 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 Ordinary share price at financial year end Market capitalisation at financial year end Notes: 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. From continuing and discontinued operations. 3. Adjusted to remove amortisation of goodwill and acquired intangible assets. IFRS figures include results of discontinued operations up to the date of their sale or closure but exclude profit on sale or closure. 4. Return on sales is defined as profit before taxation, goodwill/acquired intangible asset amortisation and exceptional items expressed as a percentage of revenue. 5. Return on capital employed is defined in note 3 to the accounts. 6. UK GAAP figures prior to 2000/01 have not been restated for the adoption of FRS 19 (Deferred Taxation). UK GAAP 1997/98 £000 213,777 126,863 42,391 98,249 2,784 22,639 2,861 6.87p 8.26p 17.8% 19.8% 49.5% 20% 124p UK GAAP 1998/99 £000 217,758 134,189 41,823 102,101 7,730 29,894 2,827 7.91p 7.99p (3.3%) 19.2% 45.4% 20% 92p £447.3m £330.6m Halma p.l.c. 2007 77 UK GAAP 1999/00 £000 233,485 150,727 43,751 89,755 14,700 21,900 2,975 6.08p 8.41p 5.3% 18.7% 44.7% 20% 95p UK GAAP 2000/01 £000 268,322 181,831 49,698 99,991 7,758 21,484 3,059 8.91p 9.34p 11.1% 18.5% 48.4% 15% 129p 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 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 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 IFRS 2004/05 £000 299,119 218,745 49,912 IFRS 2005/06 £000 337,348 249,055 59,641 IFRS 2006/07 £000 354,606 258,050 66,091 104,417 105,396 113,048 33,344 45,348 3,002 9.38p 9.45p N/A 16.7% 48.8% 5% 161p 32,308 35,826 3,187 11.08p 11.27p 19.3% 17.7% 56.9% 5% 188p 29,762 22,051 3,326 11.86p 12.50p 10.9% 18.6% 60.1% 5% 220p £340.1m £465.7m £598.2m £416.7m £546.5m £593.8m £593.8m £693.4m £821.8m 78 Halma p.l.c. 2007 Management team, Directors and advisers Management team 01 Geoff Unwin (aged 64) is Chairman of the Halma Group and serves on the Nomination Committee (Chairman) and Remuneration Committee. He was appointed Deputy Chairman and Chairman Elect in September 2002 and Chairman in July 2003. He is also Chairman of United Business Media plc, Liberata plc and Taptu Limited. He is 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, OmniBus Systems Limited. 02 Andrew Williams (aged 40) is Chief Executive of the Halma Group. He joined Halma in 1994 as Manufacturing Director of Reten Acoustics (now Palmer Environmental) and became Managing Director of that company in 1997. He became Divisional Chief Executive of the Optics and Water Instrumentation Division and a member of the Executive Board in 2002. He was appointed Deputy Chief Executive in 2004 and Group Chief Executive in February 2005. Andrew is a Chartered Engineer and a production engineering graduate of Birmingham University. 03 Kevin Thompson (aged 47) is Finance Director of the Halma Group. He joined the Group in 1987 as Group Financial Controller and in 1995 was appointed to the Executive Board as Finance Director. In 1997 he became Group Finance Director and in 1998 was appointed to the Halma p.l.c. Board. An economics and accounting graduate of Bristol University, Kevin qualified as a Chartered Accountant with Price Waterhouse. 04 Stephen Pettit (aged 56) was appointed a non-executive Director of Halma in September 2003 and serves on the Audit Committee (Chairman), Remuneration Committee and Nomination Committee. He is Chairman of Rok plc and a non-executive Director of National Grid plc, National Air Traffic Services and BT Group plc – Equality of Access Board. 05 Carol Chesney (aged 44) is Company Secretary of Halma p.l.c. She spent three years with English China Clays p.l.c. before joining Halma in 1995 as Group Finance Manager. Carol was appointed Company Secretary in 1998. She is a maths graduate of Randolph-Macon Woman’s College, Virginia and qualified as a Chartered Accountant with Arthur Andersen. 06 Richard Stone (aged 64) was appointed a non-executive Director of Halma in January 2001. He serves on the Audit Committee, Remuneration Committee (Chairman) and the Nomination Committee and is the Senior Independent Director. He is Chairman of Drambuie Limited and CSW Group Limited, a non-executive Director of Gartmore Global Trust p.l.c., Trust Union Finance (1991) plc, Engandscot Limited, TR Property Investment Trust plc and Candover Investments plc. 07 Neil Quinn (aged 57) is Chief Executive of the Safety Sensors Division. He joined the Group as Sales Director of Apollo Fire Detectors in 1987, becoming Managing Director in 1992. In 1994 he was appointed Chief Executive of the Fire Detection Division and was appointed to the Halma p.l.c. Board in 1998. He is a material science graduate from Sheffield University. 08 Keith Roy (aged 57) is Chief Executive of the Photonics and Gas Technology Division. He joined Halma having been joint owner of Reten Acoustics when Halma acquired it in 1992 and was appointed Managing Director and subsequently Chairman of Palmer Environmental. He became an Assistant Divisional Chief Executive in 1998. In 2000 Keith was appointed Divisional Chief Executive of the Water Technology Division and was appointed to the Halma p.l.c. Board in 2001. He is an electronic engineering graduate of both Nottingham University (BSc) and Aston University (MSc). 09 Andrew Richardson (aged 42) is Chief Executive of the Water and Asset Monitoring Division. He joined Halma in April 2004 and is a member of the Executive Board. Andrew is an engineering graduate of Cambridge University. Prior to joining Halma he was Divisional Managing Director of the Clutch Division for the Automotive Products Group. 01 02 03 04 05 06 07 08 Halma p.l.c. 2007 79 Directors and advisers Board of Directors E Geoffrey Unwin, Chairman Andrew J Williams, Chief Executive Kevin J Thompson BSc FCA Neil Quinn BSc Richard A Stone MA FCA* Keith J Roy MSc Stephen R Pettit MSc* *Non-executive Secretary Carol T Chesney BA FCA Executive Board Andrew J Williams, Chief Executive Kevin J Thompson, Finance Director John S Campbell, Elevator Safety Mark S Lavelle, Process Safety Adam J Meyers, Fluid Technology Neil Quinn, Safety Sensors Andrew J Richardson, Water and Asset Monitoring Keith J Roy, Photonics and Gas Technology Nigel J B Trodd, Fire Nigel J Young, Special Projects Registered Office Misbourne Court, Rectory Way Amersham, Bucks HP7 0DE Telephone: +44 (0)1494 721111 Fax: +44 (0)1494 728032 Website: www.halma.com Registered Number 40932 Auditors Deloitte & Touche LLP Abbots House, Abbey Street Reading, Berks 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 Brokers and Joint Financial Advisers Dresdner Kleinwort Limited PO Box 52715 30 Gresham Street London EC2P 2XY Solicitors CMS Cameron McKenna LLP Mitre House, 160 Aldersgate Street, London EC1A 4DD Registrars Computershare Investor Services PLC, PO Box 82 The Pavilions, Bridgwater Road Bristol BS99 7NH Telephone:+44(0)870 707 1046 10 Mark Lavelle (aged 48) is Chief Executive of the Process Safety Division. He joined Keeler Instruments in November 2001 as Managing Director and was promoted to Assistant Divisional Chief Executive in 2006. In 2007 Mark was promoted to Divisional Chief Executive and is a member of the Executive Board. Prior to joining Halma he held various industrial roles and gained financial/transactional experience with Bank of America in both the UK and the US. Mark has a chemistry degree from Cambridge University and an MBA from INSEAD. 11 Nigel Young (aged 57) is Chief Executive of Special Projects with responsibility for Group IT and the Halma Executive Development Programme. He joined Halma as Managing Director of Fortress Interlocks when the company joined the Group in 1987. Nigel was appointed Assistant Divisional Chief Executive in 1990 and was promoted to Divisional Chief Executive in 1992. He was appointed to the Executive Board in 1994. He has an MBA from Aston University. 12 Adam Meyers (aged 45) is Chief Executive of the Fluid Technology Division. He joined Halma in 1996 as President of Bio-Chem Valve. He was appointed Assistant Divisional Chief Executive in April 2001 and became Divisional Chief Executive of the newly formed Fluid Technology Division and a member of the Executive Board in April 2003. He is a systems engineering graduate of the University of Pennsylvania and gained his MBA from Harvard Business School. 13 John Campbell (aged 48) is Chief Executive of the Elevator Safety Division. He joined the Group in 1995 as President of IPC Resistors and was Chief Executive of the Resistors Division upon its formation in 1998 until the division was sold in February 2006. He is an electrical engineering graduate of the University of Toronto and before joining Halma was a senior sales and marketing executive within the Industrial Power Group of Rolls-Royce p.l.c. 14 Nigel Trodd (aged 49) is Chief Executive of the Fire Division. He joined Halma in July 2003 and is a member of the Executive Board. Prior to joining Halma he was V.P. Europe, Middle East and Africa for Tyco Suppression Systems based in Frankfurt. Nigel is a business studies graduate of Thames Valley University and is a member of the Chartered Institute of Marketing. 09 10 11 12 13 14 80 Halma p.l.c. 2007 Report of the Directors The Directors present their Annual report on the affairs of the Group, together with the Accounts and the Independent Auditors’ reports, for the 52 weeks to 31 March 2007. Activities Halma p.l.c. is a holding company. A list of its principal subsidiary companies and their activities is set out on pages 92 and 93. Results of the period The Consolidated income statement for the 52 weeks to 31 March 2007 is set out on page 38. The Group profit on continuing operations before amortisation of acquired intangible assets and taxation is £66,091,000 (2006: £58,140,000). The profit attributable to equity shareholders amounts to £44,011,000 (2006: £40,875,000). Ordinary dividends The Directors are recommending a final dividend of 4.33p per share and, if approved, this dividend will be paid on 22 August 2007 to ordinary shareholders on the register at the close of business on 20 July 2007. Together with the interim dividend of 2.85p per share already paid, this will make a total of 7.18p (2006: 6.83p) per share for the financial year. Business review A review of activities together with business and future developments, risks and uncertainties and key performance indicators that management use is included on pages 20 to 37 inclusive and forms part of this report. Share capital Details of share capital issued in the financial year are set out in note 21 to the accounts. Allotment authority Under the Companies Act 1985 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 £6,332,519.50 (up to 63,325,195 new ordinary shares of 10p each), which is equal to approximately 17% of the issued share capital of the Company (excluding treasury shares) as at 19 June 2007 (the latest practicable date prior to the publication of the notice of meeting). The authority will expire five years after the date of passing of the resolution or, if earlier, 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 19 June 2007 (the latest practicable date prior to the publication of the notice), the Company had 373,239,695 ordinary shares of 10p each in issue and held 805,635 treasury shares, which is equal to approximately 0.2% of the issued share capital of the Company (excluding treasury shares) as at that date. The Companies Act 1985 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 19 June 2007 (the latest practicable date prior to the publication of the notice). The resolution will also modify statutory pre-emption rights to deal with legal, regulatory or practical problems that may arise on a rights or other pre-emptive offer or issue and to permit non pre-emptive issues pursuant to an employee share scheme. 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. Electronic communications The Companies Act 2006 (the 2006 Act) has introduced provisions designed to make it easier for companies to use the internet to communicate with shareholders, and so reduce printing and distribution costs. Although it has been possible for some years for the Company to use electronic means to deliver certain documents to our shareholders, the 2006 Act has extended the range of information that can be communicated electronically and relaxed certain requirements for communication by our website. As before, the Company cannot send a shareholder material by e-mail unless the shareholder has agreed to this, and has supplied an electronic address for that purpose. Where, however, a company that complies with the requirements of the 2006 Act wishes to communicate information to its shareholders by making it available on a website, each shareholder who has been invited to accept this form of delivery, and has not objected within 28 days, is deemed to have agreed to it. Halma p.l.c. 2007 81 If special resolution 8 is passed at the annual general meeting, the Company will be able to send shareholders a written request (which must set out the consequences of a failure to respond) to agree to website delivery, and may deem the shareholder to have agreed unless the shareholder objects within 28 days. If a shareholder declines website delivery, that shareholder will continue to receive documents by post in the usual way and the Company will not be permitted to seek that shareholder’s deemed agreement to website delivery for at least 12 months. Those shareholders who do not object to website delivery will no longer receive documents by post. They will, however, receive notification as and when key information is made available on the Company’s website, with details of how to access it. This notification will be given by post (or, if the shareholder has agreed, by e-mail). In addition, shareholders will still have the right, once they have received information electronically, to require the Company to send a hard copy of that information, free of charge, within 21 days, and they may also opt for all information to be sent in hard copy form. The resolution, if passed, will supersede any inconsistent provisions in the Company’s current Articles of Association. The Company also intends to discontinue the practice of mailing the half-yearly financial report to shareholders with effect from November 2007 and will only make it available on its website and on request. Purchase of own shares The Company was authorised at the 2006 annual general meeting to purchase up to 36,000,000 of its own 10p ordinary shares in the market. This authority expires at the end of the 2007 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 37,000,000 ordinary shares, which is approximately 10% of the Company’s issued share capital (excluding treasury shares) as at 19 June 2007 (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 (to the extent statutory requirements are met) be held in treasury for future cancellation, sale for cash or transfer for the purposes of, or pursuant to, an employee share scheme, 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 31 March 2007, 614,000 shares 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 19 June 2007, 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 10,314,962 ordinary shares, or 2.8% of the Company’s issued share capital. If this authority to purchase shares were used in full and the shares cancelled, the proportion of the adjusted issued share capital represented by this figure would be 3.1%. Deeds of indemnity Following amendment of the Company’s Articles of Association at the annual general meeting in 2006, the Company has entered into deeds of indemnity, which are qualifying third party indemnity provisions for the purpose of the Companies Act 1985, with each of the current Directors. 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 31 March 2007 the Company’s trade creditors represented 37 days (2006: 39 days) of its annual purchases. Employees Matters which affect the Group are communicated to employees through formal and informal meetings, internal announcements, the Group intranet, the Group bulletin board on our secure Virtual Private Network (VPN) and regular contact with Directors and Divisional Chief Executives. An employee share scheme is open to all UK employees of the Group following a qualifying period and has been operating since 1980. The Company provides equal employment opportunities to all employees and applicants for employment without regard to ethnic origin, religion, gender, age, disability, sexual orientation or any other reason prohibited by local legislation. Halma gives disabled people the same consideration as other individuals. 82 Halma p.l.c. 2007 Report of the Directors continued Auditors In the case of each of the persons who are Directors of the Company at the date when this report was approved: (cid:129) so far as each of the Directors is aware, there is no relevant audit information (as defined in the Companies Act 1985) of which the Company’s Auditors are unaware; and (cid:129) each of the Directors has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information (as defined) and to establish that the Company’s Auditors are aware of that information. Deloitte & Touche LLP have expressed their willingness to continue in office as Auditors and resolutions to re-appoint them and to authorise the Directors to determine their remuneration will be proposed at the forthcoming annual general meeting. By order of the Board C T Chesney Secretary Misbourne Court Rectory Way Amersham Bucks HP7 0DE 19 June 2007 Directors’ remuneration An ordinary resolution will be proposed at the annual general meeting seeking shareholder approval of the Directors’ Report on remuneration set out on pages 87 to 91. Corporate responsibility The Group’s Corporate responsibility report is set out on pages 30 to 33. Research and development Group companies have continuous research and development programmes established with the objective of the improvement of their product ranges and increasing the profitability of their operations. Donations Group companies made charitable donations amounting to £5,762 (2006: £5,209) during the financial year. There were no political donations (2006: £nil). Directors The Directors of the Company are listed on page 79. Brief biographies are set out on page 78. Andrew Walker resigned as a non-executive Director on 22 March 2007. Directors proposed for re-election Stephen Pettit retires by rotation and being eligible offers himself for re-election. Shareholdings As at 19 June 2007 the Company has been notified of the following major shareholdings of the Company's ordinary shares: Shares Per cent Silchester International Investors Limited Sprucegrove Investment Management Limited Barclays Bank PLC Sanderson Asset Management Limited Legal & General Investment Management Limited 25,829,195 24,361,142 21,914,973 15,083,480 12,824,344 6.94 6.54 5.88 4.05 3.44 Statement of Directors’ responsibilities Halma p.l.c. 2007 83 The Directors are responsible for preparing the Annual report and the financial statements. The Directors are required to prepare financial statements for the Group in accordance with International Financial Reporting Standards (IFRS). Company law requires the Directors to prepare such financial statements in accordance with IFRS, the Companies Act 1985 and Article 4 of the IAS Regulation. International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s “Framework for the preparation and Presentation of Financial Statements” In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. The Directors are also required to: (cid:129) properly select and apply accounting policies; (cid:129) present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and (cid:129) provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a Report of the Directors and Directors’ Report on remuneration which comply with the requirements of the Companies Act 1985. The Directors are responsible for the maintenance and integrity of the Company website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. 84 Halma p.l.c. 2007 Corporate governance The Board is committed to the maintenance of high standards of Corporate governance. 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 on Corporate Governance which is appended to the Listing Rules of the Financial Services Authority and for which the Board is accountable to shareholders. Compliance with the code of best practice Throughout the financial year, the Company complied with the Code provisions set out in Section 1 of the July 2003 FRC Combined Code on Corporate Governance, as amended in June 2006, except in respect of provisions A3.2 and C3.1, which involve the composition of the Board and the Audit Committee and the number of members who are independent non-executive Directors. The Board reaffirmed its decision to maintain the composition of the Board as a Chairman, three independent non-executive Directors and four executive Directors and is currently in the process of recruiting an independent non-executive Director to fill the vacancy arising on Andrew Walker’s resignation. The Board believes this composition is the most appropriate structure for the Company; the Chairman also specifically raised this point with shareholders during the 2005 annual general meeting and received the unanimous support of those present. Once the non-executive Director vacancy is filled, the Company will be able to report compliance with provision C3.1 relating to the composition of the Audit Committee. Application of the principles of good governance The Group is controlled and directed by a Board consisting of a Chairman, four Directors and two other non-executive Directors. Their biographies appear on page 78. The Nomination Committee is currently in the process of recruiting another non-executive Director. This individual is expected to be a member of each of the Audit, Remuneration and Nomination Committees following appointment. 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. Upon appointment and at regular intervals, all Directors are offered appropriate training. Each Director is subject to re-election at least every three years. The Chairman confirms that non-executive Directors standing for re-election continue to be effective and demonstrate commitment to their roles. 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. Board and Committee meeting attendance During the year attendance by Directors at Board and Committee meetings was as follows: Nom- ination Board Committee Committee Committee Remun- eration Audit Total scheduled meetings Geoff Unwin Andrew Williams Kevin Thompson Neil Quinn Richard Stone Keith Roy Stephen Pettit Andrew Walker 6 6 6 6 6 6 6 6 6 3 1* N/A N/A N/A 3 N/A 3 3 3 N/A N/A N/A N/A 2 N/A 3 3 1 1 1 N/A N/A 1 N/A 1 1 *Geoff Unwin was not a member of the Remuneration Committee when two of the three meetings of the Committee were held, but was in attendance. 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 Facilities and Guarantees 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 request from the Company Secretary. Remuneration Committee Richard Stone chairs the Remuneration Committee of which Geoff Unwin and Stephen Pettit are members. Andrew Walker was also a member of the Committee up to the date of his resignation. The Committee makes recommendations to the Board on the framework for executive Directors’ and senior executives’ remuneration based on proposals formulated by the Group Chief Executive. The Committee meets at least twice per year. Further information about the Committee is contained in the Report on remuneration on pages 87 to 91. Audit Committee Stephen Pettit chairs the Audit Committee, succeeding Andrew Walker who resigned in March 2007. Richard Stone is also a member of the Committee. The Committee reviews the interim and annual accounts and the disclosures contained therein, accounting policies and matters of significant judgment, the statement on internal controls, the process of Internal Audit and the Group whistleblowing procedures. The Committee is also responsible for the relationship with the external auditors including terms of engagement, fee levels, approval of the annual audit plan, a review of the findings of the audit and assessing auditor effectiveness and independence. The Chairman, Group Chief Executive, Group Finance Director and representatives from the Auditors attend Committee meetings by invitation in order to provide appropriate advice. The Committee routinely meets with the Auditors without the involvement of the executive Directors; the Committee meets at least three times per year. The Board has designated Richard Stone as the member of the Audit Committee with recent and relevant financial experience. His background is as a senior insolvency practitioner with Coopers & Lybrand (later PricewaterhouseCoopers). Halma p.l.c. 2007 85 Nomination Committee Geoff Unwin chairs the Nomination Committee. Andrew Williams, Richard Stone and Stephen Pettit are also members. Andrew Walker was a member up to the date of his resignation. The Committee makes recommendations to the Board on the appointment of new Directors. 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. As previously noted, the Committee is currently in the process of recruiting a non-executive Director to fill the vacancy created by Andrew Walker’s resignation. Other committees The Share Plans, Bank Facilities and Guarantees and Acquisitions and Disposals Committees’ terms of reference provide that certain Directors and the Company Secretary may form sub-committees to cover administrative matters or to formally enact matters that have already been determined by the Board in principle. Executive Board Control of divisional operating matters is delegated to the Executive Board of which the Group Chief Executive, Group Finance Director and all of the Divisional Chief Executives are members. Biographies of Executive Board members appear on pages 78 and 79. The Group Chief Executive chairs the Executive Board, which meets regularly, thereby ensuring the Board’s strategies are communicated to those overseeing operations. The Executive Board reviews operational activities, trading results, budgets, policy matters, investment opportunities, resource allocation and risk exposures. Any matters arising out of the Executive Board meetings are reported to the Board via the Group Chief Executive’s report to the Board. The Group Chief Executive and Group Finance Director also meet regularly with each Divisional Chief Executive to monitor progress against key objectives and review operational performance. Individual operating company boards, chaired by the appropriate Divisional Chief Executive, manage operating companies. These boards have clearly defined responsibilities for the operation of their businesses, including compliance with legislation and regulations, and for internal reporting. The system of internal control exercised within the Group is described below. Board effectiveness The Board evaluates its performance and that of the Remuneration, Audit and Nomination Committees at least annually. For 2006/07 the evaluation commenced with a self-assessment questionnaire, the results of which were compiled by the Company Secretary and discussed by the Board at the February 2007 Board meeting. The Board also met in February 2007, separate from any scheduled meeting, for a general discussion on Board effectiveness followed by a meeting of the executive Directors with the Chairman, 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 Group Chief Executive, as appropriate. Investor relations In regular meetings with shareholders and analysts the Group Chief Executive and Group 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 with the Company on a regular basis. Major shareholders are also offered the additional opportunity to meet with the Chairman and/or Senior Independent Director. Kevin Thompson spoke at the Credit Suisse European Capital Goods Conference in London in September 2006. He talked about Halma’s business sectors, strategy and track record. He also addressed some of the frequently asked questions about Halma and looked at the Group’s priorities for the current year. In February 2007, Halma hosted a site visit to its BEA subsidiary’s headquarters in Liège, Belgium for analysts and investors. No new trading information is disclosed during such visits. Andrew Williams spoke at the Dresdner Kleinwort Capital Goods Conference in London in March 2007. All shareholders are encouraged to attend the annual general meeting, and major shareholders are also invited to briefings following the interim 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, Interim 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 contains the facility to request e-mail alerts relating to announcements made by the Group. The Financial calendar is set out on page 96. Going concern After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. Internal control The Board of Directors 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. Any system of internal control can provide only reasonable but not absolute assurance against material misstatement or loss. Following publication by the Turnbull Committee of guidance for directors on internal control (“Internal Control: Revised Guidance for Directors on the Combined Code (October 2005)”), 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 current Turnbull guidance. 86 Halma p.l.c. 2007 Corporate governance continued (cid:129) A set of “warning signs” which are specifically relevant to every Halma operating company has been developed and these are reported and monitored each month with actions taken at senior level where required. These warning signs are firmly embedded within the operating processes of each company. As a result, potential risks are highlighted at an earlier stage for corrective action. (cid:129) The Group 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. (cid:129) Cyclical internal audit visits, the depth of which has been increased this year, are carried out by 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 with any significant control failings reported directly to the Audit Committee and a summary of all such visits reported to the Audit Committee regularly. Senior finance staff also carry out financial reviews at each operating company prior to publication of half year and year end figures. (cid:129) The Group Finance Director and Group Chief Executive 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. The Audit Committee established the internal audit function for independent reporting of the outcome of internal control visits to the Audit Committee following its review of internal control activities in 2004. As a result of the assessment of the Group’s internal audit activities carried out last year, new resource has been added and additional training undertaken. 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 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. The Group’s external auditors, Deloitte & Touche 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 schedule was reviewed during the year. This procedure is intended to ensure that the Directors maintain full and effective control over all significant strategic, financial and organisational issues. Central insurance cover is maintained for the Group and its operating companies and its adequacy is subject to annual review by the Board of Directors. Group risk is mitigated by means of an operating structure which spreads the Group 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: (cid:129) a defined organisational structure with an appropriate delegation of authority to operational management; (cid:129) deployment of finance executives in each operating company. Further resource continues to be added in this area; (cid:129) 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; (cid:129) a comprehensive financial reporting system within which actual results are compared with approved budgets and the previous year’s figures on a monthly basis and reviewed at both local and Group level; (cid:129) an investment evaluation procedure to ensure an appropriate level of approval for all capital expenditure; (cid:129) self-certification by operating company management of compliance and control issues, a process which was further strengthened during the year; (cid:129) a robust IT network for Group communication. The processes which the Board has applied in reviewing the effectiveness of the Group’s system of internal control are summarised below. (cid:129) Operating companies carry out a detailed risk assessment each year and identify mitigating actions in place or proposed for each significant risk. A risk register is compiled from this information, against which action is monitored through to resolution. In addition, Divisional Chief Executives carry out an independent risk assessment for each operating company. A review of Group risks is also conducted. (cid:129) 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 Group Chief Executive and Group Finance Director and report progress to the Executive Board. Report on remuneration The following sections of the Report on remuneration have been audited: the table of Directors’ remuneration; pension benefits; Directors’ interests in shares. Remuneration Committee The Remuneration Committee currently consists of the three non-executive Directors, the members being Richard Stone (Chairman of the Committee), Geoff Unwin and Stephen Pettit. During the year, Andrew Walker was also a member up to the date of his resignation and Geoff Unwin rejoined the Committee following an amendment to the Combined Code. No Director takes part in discussions concerning his own remuneration. The Committee, having taken external advice, makes recommendations to the Board on the framework for executive remuneration, based on proposals formulated by the Group Chief Executive, and determines the terms of service and remuneration of executive Directors and senior executives. The Committee’s terms of reference, which are available from the Company Secretary on request, include: (cid:129) determining and agreeing with the Board the policy and framework for the remuneration of the Group Chief Executive, the executive Directors, the Company Secretary and such other members of the executive management as it is designated to consider; (cid:129) 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; (cid:129) 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; (cid:129) 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 Group Chief Executive, the framework of remuneration for subsidiary chief executives and directors and ensures a consistent approach is applied. The Committee appointed Watson Wyatt to advise on various aspects of executive remuneration. They also provided the Company with limited additional advice, regarding the UK defined benefit pension plan, during the year. Remuneration policy The policy on Directors’ remuneration is to provide remuneration packages necessary to attract, retain and motivate Directors of the quality required to run the Group successfully, manage its businesses and align the interests of the Directors with those of the shareholders. In determining such packages, the Committee considers whether members of the executive management of the Group are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the Group. Halma p.l.c. 2007 87 In accordance with rule 12.43A(c) of the Listing Rules of the Financial Services Authority the Board presents its Report on remuneration to the shareholders. The Board confirms that when determining the remuneration policy for executive Directors for 2006/07 full consideration was given to the Combined Code appended to the Listing Rules of the Financial Services Authority. Basic salary and benefits Basic salary levels for each individual are determined with reference to Watson Wyatt market survey data and other relevant data in order to relate remuneration levels to comparable companies. The Group 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 within 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 approval. Basic salary levels are set around the market median, and the Committee ensures that a balance between fixed and variable remuneration is achieved. At targeted levels of growth, the bonus expectation is approximately 60% of salary. Remuneration of subsidiary boards is set at competitive levels to reflect the size, complexity and geographic locations of the relevant businesses. Share plans 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 continually assess and evaluate such incentives adopted a performance share plan following approval at the 2005 annual general meeting. The Plan contains provisions permitting share option grants, restricted share awards and performance share awards. Currently the Committee intend to use the Plan only to award performance shares. The first awards were made in August 2005. Awards, which are made annually, are determined by evaluating the financial and operational performance of the executive Directors and the Divisional Chief Executives and their attainment of certain personal goals. The maximum award is fixed at 140% of salary for executive Directors and 100% of salary for Divisional Chief Executives. The expected level of award is 110% of salary and 80% of salary respectively. Awards vest after three years on a sliding scale, as set out below, subject to the Company’s relative TSR performance against the FTSE 250 excluding financial companies (current year awards), combined with a measure based upon an absolute Return on total invested capital (ROTIC). Awards which do not vest on the third anniversary of their award lapse. The performance share plan is also extended to certain centrally based executives and subsidiary chief executives with maximum awards of 40% of salary. 88 Halma p.l.c. 2007 Report on remuneration continued TSR (percentile) Directors’ remuneration Percentage of award which vests ROTIC (post tax) 9.5% 11.0% 12.5% 14.0% <50% 0.0 16.7 33.3 50.0 50% 16.7 33.3 50.0 75% 50.0 66.7 83.3 100% 50.0 66.7 83.3 66.7 100.0 100.0 The 1990, 1996 and 1999 share option plans all provided for the grant of two categories of option both of which are subject to performance criteria. The exercise criteria for these three plans are noted in note 23 to the accounts. No further grants may be made from the first two of these plans nor does the Company intend to make any further grants from the 1999 Plan now that the performance share plan has been approved by shareholders (2005 annual general meeting). The granting of options was spread over the life of the Plan. The total dilution effect under these various discretionary share plans is less than 5%. Performance related bonus scheme This scheme, which applies to executive Directors and Divisional Chief Executives, is reviewed annually by the Remuneration Committee and approved by the Board. There is no alternative bonus arrangement for Directors and Divisional Chief Executives. During the year the Remuneration Committee carefully assessed existing bonus arrangements and determined that incentive levels are appropriately set. 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 Group Chief Executive and Group Finance Director, bonuses are calculated as above but based on the aggregated profit of the Divisions exceeding a target calculated from the profits of the Divisions for the three preceding financial years. Since 2005/06, executive Directors and Divisional Chief Executives may increase their cash bonus, subject to a 100% of salary cap, by either 10% of salary if the Return on capital employed in their Division (or aggregate thereof) exceeds 45%, or by 15% of salary if accompanied by absolute profit growth in their Division (or aggregate thereof). 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. Salaries and fees £000 Bonus £000 Benefits £000 Pension supple- ment £000 Geoff Unwin 140 Andrew Williams 350 Kevin Thompson 235 Neil Quinn Richard Stone Keith Roy Andrew Walker Stephen Pettit 194 43 169 51 36 – 350 235 30 – 169 – – 16 94 11 14 – 15 – – – 62 61 21 – 15 – – 2007 Total £000 156 856 542 259 43 368 51* 36 2006 Total £000 128 685 460 222 32 339 32 29 1,218 784 150 159 2,311 1,927 Gains on share options Aggregate remuneration *To date of resignation. 247 34 2,558 1,961 The fees paid in relation to Geoff Unwin were paid to Gunwin Limited. Andrew Williams’ benefits include relocation expense reimbursement of £74,000. Executive Directors received pension supplements to compensate them for the fact that their pension 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. 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. As of 6 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. Andrew Williams was the highest paid Director in the financial year. Halma p.l.c. 2007 89 Pension benefits Except as noted above and 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 £112,500 for the year ended 31 March 2007. Bonuses and other fluctuating emoluments and benefits in kind are not pensionable nor subject to the pension 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 50 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. Details of the value of individual pension entitlements are shown below. Years of Age at service at 31.3.07 31.3.07 Accrued pension Increase 2006 in the year £000 £000 Accrued pension 2007 £000 39 47 57 56 12 19 19 14 26 78 82 47 3 6 8 6 30 87 92 54 Andrew Williams Kevin Thompson Neil Quinn Keith Roy The accrued pension shown is that which would be paid annually on retirement based on service to the end of the year. The increase in accrued pension during the year is the amount in excess of the increase due to inflation. Increase in transfer value net of contri- butions £000 16 77 140 102 Transfer value 1.4.06 £000 231 924 1,451 866 Transfer Directors’ contri- butions £000 value 1.4.06 £000 205 847 1,301 754 10 – 10 10 Andrew Williams Kevin Thompson Neil Quinn Keith Roy 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. Total shareholder return % 250 200 150 100 50 2002 2003 2004 2005 2006 2007 Halma FTSE 250 FTSE 350 Electronic & Electrical Equipment Source: Datastream total return indices Total shareholder return The graph above shows the Company’s total shareholder return performance over the five years to 31 March 2007 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 166% compared to 218% for the FTSE 250 and 59% 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 164p and the total of dividends paid in the year ended 30 March 2002 was 4.864p per share. The Halma p.l.c. ordinary share price at 31 March 2007 was 220.25p and the total of dividends paid in the year then ended was 6.97p per share. Directors’ interests in shares The beneficial interests of Directors and their families in the ordinary shares of the Company during the financial year were as follows: Geoff Unwin Andrew Williams Kevin Thompson Neil Quinn Richard Stone Keith Roy Stephen Pettit Shares 31.3.07 Shares 1.4.06 38,250 38,250 72,473 36,493 99,609 72,649 69,118 50,052 20,000 20,000 760,649 748,536 2,000 2,000 There are no non-beneficial interests of Directors. There were no changes in Directors’ interests from 31 March 2007 to 19 June 2007. 90 Halma p.l.c. 2007 Report on remuneration continued Performance share plan The movements in performance share awards during the financial year were as follows: Andrew Williams Kevin Thompson Neil Quinn Keith Roy As at 1.4.06 241,482 169,792 141,305 122,250 Granted 246,231 165,327 132,446 114,852 Vested – – – – As at 31.3.07 487,713 335,119 273,751 237,102 Performance conditions for the awards made in the financial year are set out above. The awards in the year were based on the three-day average share price of 199p (2006: 148.42p) on the date of grant. The current expectation is that, on average, over 60% of these awards will vest at the end of the vesting period. Share option plans The movements in share options during the financial year were as follows: Andrew Williams Kevin Thompson Neil Quinn Keith Roy As at 1.4.06 460,921 882,534 Exercised (17,500) Share price on exercise 163.5p (99,932) 127.86p 966,841 (203,466) 540,358 (43,066) 121.0p 139.5p As at 31.3.07 443,421 782,602 763,375 497,292 2007 Gains on exercise (£) 5,862 67,362 150,247 24,027 2006 Gains on exercise (£) – 17,186 10,677 5,836 There were no share plan grants or lapses 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, 30 March 2007, the last trading day preceding the financial year end, was 220.25p per share and the range during the year was 172p to 239.5p. Details of Directors’ options outstanding at 31 March 2007 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 220.25p. 2 Not yet exercisable, will only be exercisable when the performance criteria, set out in note 23, have been met and have an exercise price per share of less than 220.25p. Andrew Williams Kevin Thompson Neil Quinn Keith Roy Status of options (see above) 1 2 1 2 1 2 1 2 Year of grant 2001 1997–2005 1997–1998; 2000–2001; 2003 1997–2005 1999–2001; 2003 1997–2005 1997–1999; 2001–2002 1997–2005 Number of shares 22,300 421,121 295,103 487,499 325,303 438,072 210,907 286,385 Weighted average exercise price (p) per share 163.50 139.56 125.52 137.64 130.03 135.82 134.48 136.20 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. Halma p.l.c. 2007 91 Service contracts It is the Company’s policy that executive Directors have contracts with an indefinite term up to the normal retirement age of 60 and providing for a maximum of one year’s notice. There are no exceptions to this policy. None of the contracts has pre-determined compensation clauses in the event of early termination. The Board and the Remuneration Committee confirm that these contracts are appropriate. 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. 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 and the non-executive Directors receive a basic fee supplemented by additional fees for membership and/or chairmanship of the Audit and Remuneration Committees. The contract in respect of Geoff Unwin’s services provides for termination, by either party, by giving not less than six months’ notice. The fee for Geoff Unwin’s services for 2006/07 was set at £140,000 per annum. In addition there is a contribution of £16,150 towards office costs. The other non-executive Directors do not have service contracts. The Chairman’s and the non-executive Directors’ fees were last reviewed by the Board in April 2006 at which time the revised fee levels were set for three years from 2006/07 as follows: Geoff Unwin (appointed September 2002), Chairman £140,000 Richard Stone (appointed January 2001), Senior Independent Director, Remuneration Committee Chairman and Audit Committee member Stephen Pettit (appointed September 2003), Audit Committee Chairman* and Remuneration Committee member £43,000 £40,000 *From April 2007. No fees are payable for membership of the Nomination Committee of which each of the above Directors is a member. By order of the Board R A Stone, Chairman of the Remuneration Committee Misbourne Court, Rectory Way, Amersham, Bucks HP7 0DE 19 June 2007 92 Halma p.l.c. 2007 Halma Group directory Air Products and Controls Inc. Apollo Fire Detectors Limited Apollo Gesellschaft für Meldetechnologie mbH Aquionics Inc. Berson Milieutechniek B.V. Bio-Chem Fluidics Inc. Bureau D’Electronique Appliquée S.A. Castell Safety International Limited Crowcon Detection Instruments Limited Diba Industries, Inc. Elfab Limited E-Motive Display Pte Limited Fire Fighting Enterprises Limited Fortress Interlocks Limited Fortress Systems Pty. Limited Halma Holdings Inc. Hanovia Limited HF Sécurité S.A.S. Hydreka S.A.S. Janus Elevator Products Inc. Keeler Limited Klaxon Signals Limited Labsphere, Inc. Main products Duct detectors and control relays for smoke control systems Smoke and heat detectors, sounders, beacons and interfaces Smoke and heat detectors, sounders, beacons and interfaces Ultraviolet light equipment for water sterilisation Ultraviolet light equipment for treating drinking water, waste water and process water used in the manufacture of food and drinks Miniature valves, micro pumps and fluid components for medical, life science and scientific instruments Sensors for automatic doors Safety systems for controlling hazardous industrial processes Gas detection instruments for personnel and plant safety Specialised components and complete fluid transfer subassemblies for medical, life science and scientific instruments Pressure sensitive relief devices to protect process plant Electronic displays for providing information to elevator passengers Beam smoke detectors and specialist fire extinguishing systems Safety systems for controlling access to dangerous machines Machinery and process safety systems and high power electrical resistors US holding company Ultraviolet light equipment for treating drinking water and water used in the manufacture of food, drinks, pharmaceuticals and electronic components Safety systems and high security locks Equipment and software for flow analysis of water and sewerage systems and leak detection systems Elevator safety component including fixtures, displays, door systems and emergency communications Ophthalmic instruments for diagnostic assessment of eye conditions Audio/visual warning systems for fire and industrial security Light testing and measurement products and specialised optical coatings Memco Limited Netherlocks Safety Systems B.V. Infrared safety systems for elevator doors and elevator emergency communications Process safety systems for petrochemical and industrial applications Ocean Optics, Inc. Oklahoma Safety Equipment Co. Inc. Palintest Limited Palmer Environmental Limited Perma Pure LLC Post Glover Lifelink Radcom (Technologies) Limited Radio-Tech Limited SERV Trayvou Interverrouillage S.A.S. Smith Flow Control Limited Texecom Limited TL Jones Limited Tritech International Limited Volk Optical Inc. Volumatic Limited Miniature fibre optic spectrometers for consumer electronics, process control, environmental monitoring, life sciences and medical diagnostics Pressure sensitive relief devices to protect process plant Instruments for analysing water and measuring environmental pollution Instrumentation for quantifying, detecting and controlling leakage in underground water pipelines Gas dryers and humidifiers for fuel cell, medical, scientific and industrial use Electrical isolation panels and electrical raceways for hospital, laboratory and industrial facilities Instrumentation for recording data, and detecting and controlling leakage, in water distribution pipelines Radio telemetry Safety systems for controlling access to dangerous machines Process safety systems for petrochemical and industrial applications Security alarm products Infrared safety systems, emergency communications and displays for elevators Underwater equipment for pipeline leak detection, infrastructure maintenance, construction and security Ophthalmic equipment and lenses as aids to diagnosis and surgery Cash handling and security from point of sale to cash centre Halma p.l.c. 2007 93 www.halma.com visit the Halma website and register for e-mail news alerts Location Contact Telephone E-mail Website Pontiac, Michigan Havant, Hampshire Gütersloh, Germany Erlanger, Kentucky Eindhoven, The Netherlands Boonton, New Jersey Peter Stouffer Danny Burns Falk Blödorn Jon McClean Sjors van Gaalen +1 (1)248 332 3900 +44 (0)2392 492412 +49 (0)5241 33060 +1 (1)859 341 0710 +31 (0)40 290 7777 info@ap-c.com enquiries@apollo-fire.co.uk info@apollo-feuer.de sales@aquionics.com sales@bersonuv.com www.ap-c.com www.apollo-fire.co.uk www.apollo-feuer.de www.aquionics.com www.bersonuv.com George Gaydos +1 (1)973 263 3001 info@bio-chemvalve.com www.bio-chemvalve.com Liège, Belgium Kingsbury, London Abingdon, Oxfordshire Danbury, Connecticut Philippe van Genechten +32 (0)4361 6565 Tim Whelan +44 (0)20 8200 1200 +44 (0)1235 557700 +1(1)203 744 0773 Allan Stamper Chuck Dubois Chris Stoelhorst North Shields, Tyne & Wear Simon Keenan +44 (0)191 293 1234 Singapore +65 6776 4111 Warren Rees +44 (0)845 402 4242 Hitchin, Hertfordshire Wolverhampton, Mike Golding +44 (0)1902 499 600 West Midlands Melbourne, Australia Cincinnati, Ohio Slough, Berkshire David Dean Steve Sowell Craig Howarth info@bea.be sales@castell.com crowcon@crowcon.com salesdept@dibaind.com www.beasensors.com www.castell.com www.crowcon.com www.dibaind.com sales@elfab.com www.elfab.com sales@emotivedisplay.com www.emotivedisplay.com.sg www.ffeuk.com sales@fortress-interlocks.co.uk www.fortress-interlocks.co.uk info@ffeuk.com +61 (0)408 11 2200 fortress@fortress.com.au +1 (1)513 772 5501 halmaholdings@halmaholdings.com sales@hanovia.com +44 (0)1753 515300 www.fortress.com.au www.halmaholdings.com www.hanovia.com Cluses, France Lyon, France Gérard Denis +33 (0)4 50 98 96 71 Alain Soulié +33 (0)4 72 53 11 53 hfsecurite@hfsecurite.com hydreka@hydreka.fr www.hfsecurite.com www.hydreka.com Hauppauge, New York Mike Byrne +1 (1)631 864 3699 sales@januselevator.com www.januselevator.com Windsor, Berkshire Oldham, Lancashire North Sutton, New Hampshire Maidenhead, Berkshire Alphen aan den Rijn, The Netherlands Dunedin, Florida +44 (0)1753 857177 Abbas Sotoudeh Barry Coughlan +44 (0)161 287 5555 Kevin Chittim +1 (1)603 927 4266 info@keeler.co.uk sales@klaxonsignals.com labsphere@labsphere.com www.keeler.co.uk www.klaxonsignals.com www.labsphere.com Peter Bailey Albert Buschgens +44 (0)1628 770734 +31 (0)172 471339 sales@memco.co.uk sales@netherlocks.com www.memco.co.uk www.netherlocks.com Rob Randelman +1(1)727 733 2447 info@oceanoptics.com www.oceanoptics.com Broken Arrow, Oklahoma Gateshead, Tyne & Wear Cwmbran, South Wales Joe Ragosta +1 (1)918 258 5626 Chris Welch +44 (0)191 491 0808 Rob Fish +44 (0)1633 489 479 info@oseco.com palintest@palintest.com sales@palmer.co.uk www.oseco.com www.palintest.com www.palmer.co.uk Toms River, New Jersey Erlanger, Kentucky David Leighty Judy Kathman +1 (1)732 244 0010 +1(1)859 283 5900 info@permapure.com www.permapure.com sales@postgloverlifelink.com www.postgloverlifelink.com Romsey, Hampshire Rob Fish +44 (0)1794 528 700 sales@radcom.co.uk www.radcom.co.uk Harlow, Essex Paris, France Witham, Essex Haslingden, Lancashire Christchurch, New Zealand Aberdeen, Scotland Brian Back +44 (0)1279 635 849 Stéphane Majerus +33 (0)1 48 18 15 15 +44 (0)1376 517901 Jim Ludwig +44 (0)1706 234 800 +64 (0)3 349 4456 Chris Stoelhorst Mike D’Anzieri sales@radio-modem.com sales@servtrayvou.com www.radio-modem.com www.servtrayvou.com sales@smithflowcontrol.com www.smithflowcontrol.com www.texe.com www.tljones.com uksales@texe.com info@tljones.com Richard Marsh +44 (0)1224 744 111 sales@tritech.co.uk www.tritech.co.uk Mentor, Ohio Coventry, West Midlands Peter Mastores +1 (1)440 942 6161 Colin Amos +44 (0)247 668 4217 volk@volk.com info@volumatic.com www.volk.com www.volumatic.com 94 Halma p.l.c. 2007 Notice of meeting Notice is hereby given that the one hundred and thirteenth annual general meeting of Halma p.l.c. will be held at The Ballroom, The Berkeley Hotel, Wilton Place, London SW1X 7RL on Wednesday, 1 August 2007 at 11.30 am for the following purposes: To consider, and if thought fit, pass the following ordinary resolutions: 1 To approve the Report of the Directors, the audited part of the Report on remuneration and the accounts for the period of 52 weeks to 31 March 2007. 2 To declare a dividend on the ordinary shares. 3 To approve the Report on remuneration as set out on pages 87 to 91 of the Report and accounts for the 52 weeks to 31 March 2007. 4 To re-elect as a Director Stephen R Pettit* who retires from the Board by rotation and being eligible offers himself for re-election. 5 To re-appoint Deloitte & Touche LLP as Auditors. 6 To authorise the Directors to determine the remuneration of the Auditors. 7 That the Directors be and are hereby generally and unconditionally authorised to exercise all the powers of the Company to allot relevant securities (within the meaning of Section 80 of the Companies Act 1985) up to an aggregate nominal amount of £6,332,519.50 and that this authority shall expire on the earlier of the conclusion of the annual general meeting of the Company to be held in 2012 and the fifth anniversary of the passing of this resolution (unless previously renewed, varied or revoked by the Company), save that the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offer or agreement as if the authority conferred hereby had not expired. To consider, and if thought fit, pass the following special resolutions: 8 That the Company be authorised to use electronic means to convey information to its shareholders and to send or supply documents or information to its shareholders by making them available on a website and that this resolution 8 shall supersede any provision of the Company’s Articles of Association to the extent that it is inconsistent with this resolution. 9 That, subject to the passing of resolution 7 above, the Directors be and are hereby empowered pursuant to Section 95 of the Companies Act 1985 to allot or to make any offer or agreement to allot equity securities of the Company pursuant to the authority contained in resolution 7 above and/or sell equity securities held as treasury shares for cash pursuant to Section 162D of the Companies Act 1985, in each case as if Section 89(1) of the Companies Act 1985 did not apply to any such allotment or sale, provided that such power shall be limited to: (a) any such allotment, offer, agreement and/or sale pursuant to the terms of any share scheme for employees approved by the Company in general meeting; (b) any such allotment, offer, agreement and/or sale in connection with an issue or offer (whether by way of a rights issue, open offer or otherwise) in favour of ordinary shareholders (other than the Company) on a fixed record date where the equity securities attributable to such ordinary shareholders are proportionate (as nearly as may be) to the respective number of ordinary shares held by them on such record date, but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with fractional entitlements, legal or practical problems arising in any overseas territory, the requirements of any regulatory body or stock exchange or any other matter whatsoever; and (c) otherwise than pursuant to sub-paragraph (a) or (b) above, any such allotment, offer, agreement and/or sale up to an aggregate nominal amount of £1,850,000, and shall expire (unless previously renewed, revoked or varied) when the authority contained in resolution 7 above expires, save that the Company may make any offer or agreement before such expiry which would or might require equity securities to be allotted or equity securities held as treasury shares to be sold after such expiry; and the Directors may allot equity securities and/or sell equity securities held as treasury shares in pursuance of any such offer or agreement notwithstanding that the power conferred hereby has expired; words and expressions defined in or for the purposes of Section 89 to 96 inclusive of the Companies Act 1985 shall bear the same meanings in this resolution. 10 That the Company be and is hereby generally and unconditionally authorised to make market purchases (within the meaning of Section 163(3) of the Companies Act 1985) of ordinary shares of 10p each (ordinary shares) provided that: Halma p.l.c. 2007 95 (a) the maximum number of shares hereby authorised to be acquired is 37,000,000 ordinary shares, having an aggregate nominal value of £3,700,000; (b) the maximum price (excluding expenses) which may be paid for each ordinary share is an amount equal to the higher of (i) 105% of the average of the closing mid- market prices for the ordinary shares of the Company (derived from the London Stock Exchange Daily Official List) for the five business days immediately preceding the date of purchase and (ii) the price stipulated by Article 5(1) of the Buy-back and Stabilisation Regulation; and (c) the minimum price per ordinary share (excluding expenses) is its nominal value and the authority hereby conferred shall expire at the conclusion of the Company’s next annual general meeting (except in relation to the purchase of ordinary shares the contract for which was concluded before such date and which would or might be executed wholly or partly after such date), unless such authority is renewed prior to such time. The Directors believe that the proposed resolutions to be put to the meeting are in the best interests of shareholders as a whole and recommend that shareholders vote in favour of all the resolutions, as the Directors intend to do in respect of their own beneficial shareholdings in the Company. By order of the Board C T Chesney Secretary Misbourne Court Rectory Way Amersham Bucks HP7 0DE 2 July 2007 *Denotes membership of the Remuneration, Audit and Nomination Committees of the Board. Notes 1 A shareholder entitled to attend and vote at the meeting is entitled to appoint a proxy or proxies to attend and on a poll, vote on his or her behalf. A proxy need not be a shareholder of the Company. A personalised form of proxy is enclosed. Appointing a proxy will not prevent a shareholder from attending the meeting and voting in person. 2 To appoint a proxy or proxies shareholders must complete: (a) a hardcopy form of proxy, sign it and return it, together with the power of attorney or other authority (if any) in hardcopy under which it is signed, or a hardcopy notarially certified of such authority, to the Company’s registrars, Computershare Investment Services PLC, or (b) a CREST Proxy Instruction (as set out below), in each case so that it is received no later than 11.30 am on 30 July 2007. 3 CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the annual general meeting and any adjournment(s) of the meeting by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members and those CREST members who have appointed any voting service provider(s) should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with CRESTCo Limited’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the Company’s agent (ID 3RA50) by the latest time(s) for receipt of proxy appointments set out in note 2 above. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the Company’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. CREST members and, where applicable, their CREST sponsors or voting service providers should note that CRESTCo Limited does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed any voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as is necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 4 Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, the Company gives notice that only those shareholders included in the register of members of the Company at 6.00 pm on 30 July 2007 will be entitled to attend and to vote at the annual general meeting, and then only in respect of the number of shares registered in their names at that time. Changes to entries on the share register after 6.00 pm on 30 July 2007 will be disregarded in determining the rights of any person to attend or vote at the annual general meeting. 5 Copies of the Directors’ service contracts or appointment letters, and of the Directors’ indemnities, and a summary of any transactions during the past year by the Directors and their family interests in the Company’s shares will be available for inspection during normal business hours on any weekday (excluding Saturdays, Sundays and public holidays) at the registered office of the Company from the date of the above notice until 1 August 2007 and at The Berkeley Hotel from 11.15 am on the day of the meeting until the close of the meeting. 6 Full biographical information on the Director proposed for re-election appears on page 78 of the Annual report and accounts. 7 If you have sold or otherwise transferred all your ordinary shares in the Company, you should immediately send this document, together with the accompanying form of proxy, to the purchaser or transferee or to the stockbroker, bank or other person through whom the sale or transfer was effected for transmission to the purchaser or transferee. 96 Halma p.l.c. 2007 Shareholder information Financial calendar 2006/07 Interim results 2006/07 Interim dividend paid Trading update 2006/07 Preliminary results 2006/07 Report and accounts issued Annual general meeting 5 December 2006 7 February 2007 26 April 2007 19 June 2007 2 July 2007 1 August 2007 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 analyst presentations and find contact details for Halma senior executives and subsidiary companies. E-mail news alert You can subscribe to an e-mail news alert service on our website, www.halma.com, to automatically receive an e-mail when significant announcements are made. 2006/07 Proposed final dividend payable 22 August 2007 Trading update 2006/07 Half-yearly results 2006/07 Interim dividend payable Interim management statement Trading update 2007/08 Preliminary results Analysis of shareholders at 24 May 2007 end October 2007 29 November 2007 February 2008 February 2008 end April 2008 June 2008 Number of shares held 1 – 7,500 7,501 – 25,000 25,001 – 100,000 100,001 – 750,000 750,001 and over Number Shareholders % Shares Number 5,229 735 342 173 72 79.8 11.2 5.2 2.7 10,161,105 9,736,097 17,169,771 51,944,069 1.1 284,207,953 % 2.7 2.6 4.6 13.9 76.2 6,551 100.0 373,218,995 100.0 Shareholding information Please contact our registrars directly for all enquiries about your shareholding. Visit www.computershare.com for online information about your shareholding, (you will need your shareholder reference number which can be found on your share certificate), or telephone Computershare using the dedicated telephone number for Halma shareholders (see below). Computershare Investor Services PLC PO Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH Tel: +44 (0)870 707 1046 Fax: +44 (0)870 703 6101 E-mail: web.queries@computershare.co.uk Investor relations contacts 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: halma@halma.com Share price London Stock Exchange, pence per 10p share Highest Lowest Year-end Dividends Pence per 10p share Interim Final Total *proposed 2007 240 172 220 2006 194 139 188 2007 2.85 4.33* 7.18 2006 2.71 4.12 6.83 2005 170 142 161 2005 2.58 3.92 6.50 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. 2004 151 109 149 Rachel Hirst/Andrew Jaques Hogarth Partnership Limited 2nd Floor Upstream No 1 London Bridge London SE1 9BG 2003 166 97 114 2004 2003 2.44 2.285 3.75 3.527 6.19 5.812 Tel: +44 (0)20 7357 9477 Fax: +44 (0)20 7357 8533 Brokers Dresdner Kleinwort Limited PO Box 52715 30 Gresham Street London EC2P 2XY Tel: +44 (0)20 7475 7319 Fax: +44 (0)20 7283 4667 E-mail: halma@dkib.com Annual general meeting The 113th annual general meeting of Halma p.l.c. will be held at The Ballroom, The Berkeley Hotel, Wilton Place, London SW1X 7RL on Wednesday, 1 August 2007 at 11.30 am. The Notice convening the meeting is on page 94. Performance Financial highlights Chairman’s statement Chief Executive’s strategic review Three sectors... one approach People in action Business and financial review 02 03 04 06 08 20 20 22 22 24 26 – Operating environment, risks and uncertainties 28 30 – Corporate responsibility 34 – Financial review Infrastructure Sensors Health and Analysis Industrial Safety – Group overview – Sector reviews Results 38 Consolidated income statement 39 Consolidated balance sheet Statement of recognised income and expense 40 Reconciliation of movements in shareholders’ funds 40 41 Consolidated cash flow statement 42 Accounting policies 45 Notes to the accounts 68 Independent Auditors’ report – Group 69 Company balance sheet 70 Notes to the Company accounts 75 Independent Auditors’ report – Company 76 Summary 1997 to 2007 Governance Management team, Directors and advisers Report of the Directors Statement of Directors’ responsibilities Corporate governance Report on remuneration Group directory Notice of meeting Shareholder information 78 80 83 84 87 92 94 96 > Record revenue and profit Strong organic growth builds on last year’s progress > Delivering on strategic objectives Balancing short-term achievement with investment for the long-term > Increased people development Training of senior management is a key part of our success > Dividend increase of 5% Progressive dividend policy raising dividend cover towards target > Strong internal control maintained Continuous improvement and additional resources This annual report and accounts is printed on Revive Special Silk, which is composed of 30% de-inked post-consumer waste with the remainder being virgin wood fibre from sustainable sources. The bleaching is a mix of TCF and ECF processes. The paper mill involved in the production supports the growth of responsible forest management and is accredited to ISO 14001 which specifies a process for continuous environmental improvement, and is FSC certified. The printer is ISO 9001:2000, ISO 14001, EMAS and FSC certified. They also hold the Queen’s Award for Enterprise for sustainable development and were the world’s first printer to be Carbon Neutral. If you have finished reading this report and no longer wish to retain it, please pass it on to other interested readers or dispose of it in your recycled paper waste. This annual report is available at: www.halma.com/halmaplc/investors/reports.jsp Designed and produced by Radley Yeldar (London) Halma p.l.c. Misbourne Court Rectory Way Amersham Bucks HP7 0DE Tel: +44 (0)1494 721111 Fax: +44 (0)1494 728032 Web: www.halma.com l H a m a p . l . c . A n n u a l r e p o r t a n d a c c o u n t s 2 0 0 7 Halma p.l.c. Annual report and accounts 2007 We are protecting lives and improving quality of life for people worldwide. Find out what it takes...