Halma Annual Report 2008

Plain-text annual report

HALMA Making a difference Halma p.l.c. Annual report and accounts 2008 Financial highlights Halma operates in global markets offering long-term growth underpinned by robust growth drivers. Our products help to provide innovative solutions for many of the key issues facing the world today: REVENUE* £400m £300m £200m £100m 99 00 01 02 03 04 05 06 07 08 p15 Contents p19 p23 p27 Demand for energy and water resources Growth in population, ageing and urbanisation Increasing demand for healthcare Rising expectations of health and safety 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 2008 2007 +13% £395.1m £351.1m +11% £72.8m £65.6m +9% £68.0m £62.1m +12% 13.86p 12.42p +10% 12.97p 11.77p 7.55p 7.18p +5% 18.4% 18.7% 14.1% 14.0% 55.8% 60.1% Pro-forma information: (1) Adjusted to remove the amortisation of acquired intangible assets of £4,757,000 (2007: £3,458,000). (2) Adjusted to remove the amortisation of acquired intangible assets. See note 2 to the (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 to the accounts for details. accounts for details. PROFIT* £80m £60m £40m £20m ROTIC** (%) DIVIDENDS*** (pence/share) 15 10 5 8 6 4 2 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 * Revenue and proﬁt include the results of discontinued ** Figures prior to 2005 have not been restated for IFRS. *** Dividends paid and proposed. 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. WACC (weighted average cost of capital). DIRECTORS’ REPORT: BUSINESS REVIEW DIRECTORS’ REPORT: GOVERNANCE FINANCIAL STATEMENTS Who we are What we do Chairman’s statement Chief Executive’s review Strategic review Strategic principles and KPIs Risks and resources Board of Directors and executive team Corporate governance Nomination Committee report Audit Committee report Consolidated income statement Consolidated balance sheet Consolidated statement of recognised income and expense Reconciliation of movements in shareholders’ funds Consolidated cash ﬂow statement Accounting policies 02 04 06 08 11 13 14 36 39 42 43 51 52 53 53 54 55 Sector reviews – Infrastructure Sensors – Health and Analysis – Industrial Safety Financial review Sustainability review Remuneration report Other statutory information Directors’ responsibilities Notes to the accounts Independent Auditors’ report – Group Company balance sheet Notes to the Company accounts Independent Auditors’ report – Company Summary 1999 to 2008 Halma group directory Shareholder information 16 16 20 24 28 32 44 49 50 58 78 79 80 85 86 88 90 Halma p.l.c. Annual report and accounts 2008 1 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Who we are Organisation People We are a highly decentralised organisation with an entrepreneurial and achievement oriented culture. We recruit and develop top quality boards to lead our businesses and offer opportunities for genuine and rapid career development. INVESTMENT IN TRAINING CUMULATIVE % OF SUBSIDIARY DIRECTORS AND MANAGERS WHO HAVE COMPLETED HEDP* OR HMDP** S u b si d i a S u r y b - s e c o m c p A N D r t o a n s i e s A N A L Y S I S sidiary com pa nie s -sectors b u S b u S TURE S E C U R T S A R F N I S O R S N HEALT H HALMA IN DUSTRIA L S A F T Y E Sub-sec t o r s Subsidiary co m p a n i e s 50% 50% 40% 30% 20% 10% Through regular interaction between the Group’s Executive Board members, common challenges and opportunities for Group businesses are identiﬁed. Our ﬂat operating structure provides excellent visibility of individual achievement levels. 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 Divisonal Chief Executives who understand the market needs and can contribute broadly to the individual company’s strategy in technical, operational and commercial areas. 06 07 08 Halma’s success relies on building strong management teams at subsidiary companies. This demands a rigorous approach to both recruitment and people development. We have in-house training programmes for subsidiary directors and managers. These programmes help our people to be more successful in their current roles so that their achievements will create opportunity for further career development. Halma’s Executive Board actively manages the development of individuals among our top 200 subsidiary directors and managers. Almost all Executive Board members and all executive Directors have been appointed through internal promotion. * Halma Executive Development Programme ** Halma Management Development Programme 2 www.halma.com WHERE WE OPERATE Halma is made up of three sectors with operations in over 20 countries. Infrastructure Sensors Health and Analysis Industrial Safety Products Performance Our products provide innovative solutions for many key issues facing the world today. We have a strong track record of sustained value-creation. RESEARCH & DEVELOPMENT EXPENDITURE TOTAL DIVIDENDS PAID AND PROPOSED £20m £15m £10m £5m £28.2m £18.6m +22% £30m £20m £10m I B U S N E S S R E V E W I 04 05 06 07 08 99 00 01 02 03 04 05 06 07 08 The quality and performance of our products are key to our long-term success. We create products where the value to our customers is signiﬁcant relative to cost. Often our products are critical components within the customer’s larger system or process. Many of our products are the world market leading brands in their niche. Much of our intellectual property comes from application know-how built up over many years. Research and development (R&D) plays an important role in ensuring that our products remain competitive. Increasingly Halma companies are sharing technical know-how and collaborating to meet customer needs. Our aim is to deliver growth and high returns, and to create value for shareholders each year. This has resulted in us building a track record of sustained success over more than 30 years. We are highly cash generative and use this cash to sustain organic growth, expand through acquisition and provide a growing dividend to shareholders. We have increased our dividend in each of the past 29 years. Our dividend record is unrivalled on the London Stock Exchange. G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Halma p.l.c. Annual report and accounts 2008 3 HL001_p04-05_AW.qxp:Layout 1 26/6/08 15:41 Page 4 DIRECTORS’ REPORT What we do SECTORS Infrastructure Sensors PROFIT* CONTRIBUTION Detecting hazards and protecting people and property in buildings. £29m 38% Health and Analysis PROFIT* CONTRIBUTION Improving public and personal health; protecting the environment. £28m 37% Industrial Safety Protecting property and people at work. * See note 1 to the accounts PROFIT* CONTRIBUTION £19m 25% sidiary com pa nie s -sectors b u S b u S TURE S E C U R T S A R S u b si d i a S u r y b - s e c o m c p A N D r t o a n s i e s A N A L Y S I S S O R S N HEALT H HALMA IN DUSTRIA L S A F T Y E Sub-sec t o r s Subsidiary co m p a n i e s F N I 4 www.halma.com HL001_p04-05_AW.qxp:Layout 1 26/6/08 15:41 Page 5 SUB-SECTORS FIRE DETECTION SECURITY SENSORS AUTOMATIC DOOR SENSORS ELEVATOR SAFETY We make ﬁre and smoke detectors and audible/visual warning devices. We are the world’s second largest manufacturer of point smoke detectors used in public and commercial property. We have a strong presence in this strategically important and fast growing market. We are market leaders in the UK and South Africa for security sensors used in public and commercial property. We are the world’s largest manufacturer of sensors used on automatic doors in public and commercial buildings. We are the world’s largest manufacturer of elevator/lift door safety sensors. We also make emergency communication devices, displays and control panels for elevators. WATER PHOTONICS HEALTH OPTICS FLUID TECHNOLOGY 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 have market leading technologies and products which generate, measure and condition light and analyse the interaction of light with substances. We make handheld devices used to assess eye health, diagnose disease and assist with eye surgery as well as diagnostic devices for general medical applications. We make critical components such as pumps, probes, valves, connectors and tubing used by scientiﬁc, environmental and medical diagnostic OEMs for demanding applications. I B U S N E S S R E V E W I GAS DETECTION BURSTING DISCS SAFETY INTERLOCKS ASSET MONITORING We make portable instruments and ﬁxed systems which detect ﬂammable and hazardous gases. We make ‘one time use’ pressure relief devices to protect large vessels and pipework in process industries. We make specialised mechanical, electrical and electromechanical locks which ensure that critical processes operate safely. We make products for monitoring physical assets above ground, below ground and under water using innovative sensor and communications technologies. G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Halma p.l.c. Annual report and accounts 2008 5 DIRECTORS’ REPORT Chairman’s statement We enter the new year in good shape, continuing to see organic and acquisitive growth opportunities Halma: what we do and our strategy Our business is to produce products which protect lives and improve the quality of life for people worldwide. We do this through continuous innovation in market-leading products, which meet the increasing demands for improvements to health, safety and the environment. We build strong positions in markets where the demand is global. Our businesses are autonomous and highly entrepreneurial. Strategically we aim to grow proﬁt and revenue in excess of 5% p.a. organically, to have Return on sales in the region of 18% or above and generate post-tax Return on total invested capital of more than 12%. As a result we are highly cash generative and re-invest back into our businesses through people, product and market development, continue to acquire more companies with like characteristics, and strive to give annual dividend growth of 5% or more to our shareholders. The latter we have achieved for 29 consecutive years. Results Once again, we have seen good progress over the last ﬁnancial year. Revenue from continuing operations increased 13% to £395.1m (2007: £351.1m) with underlying organic growth* of 8.0% despite adverse currency effects of 1.4%, i.e. 9.4% at constant currency. Proﬁt before tax and amortisation of acquired intangibles on continuing operations was £72.8m (2007: £65.6m) an increase of 11%, organic growth* was 6.7%; 7.6% at constant currency. Statutory proﬁt before tax increased 9% to £68.0m. The Board is recommending a ﬁnal dividend of 4.55p per share, an increase of 5.1%. Our dividend cover has increased to 1.83 times (2007: 1.74 times). Return on total invested capital* was 14.1% (2007: 14.0%). Acquisitions and disposals During the year we acquired Sonar Research & Development (SRD) for £2.6m which now operates as part of Tritech in the Industrial Safety sector and Riester (manufacturer of small medical and ophthalmic diagnostic devices) for €55m (£40m) in our Health and Analysis sector. In Infrastructure Sensors we concluded a joint venture agreement with a leading Chinese ﬁre detector supplier which will result in an investment of approximately £2.5m in 2008/09. We disposed of Post Glover Lifelink for US$6m (£3m). Market development We expanded our banking facilities in February 2008 with a new ﬁve-year £165m syndicated revolving credit facility, replacing our existing £60m facility on similar attractive terms. This increases our ﬁrepower to acquire more ﬁrst-class companies that ﬁt our strategic direction. We have allocated increased management resource to seek out and evaluate potential opportunities and the pipeline is improving. Progress in China has been solid thanks to the investment we have made in our China hubs which are there to help our subsidiaries set up direct operations. Sales increased by 19% to £9m and the number of Group companies with in-country operations since we established the hubs has increased from 3 to 16. We are now setting up a similar hub in India, which will assist Group companies in developing operations there. These investments are in line with our strategy of devoting more resources to the faster growing economies. Governance At the beginning of the year we announced the appointment of Jane Aikman to the Board. Jane is the Financial Director of Inﬁnis Limited (the UK’s largest purely renewable energy generator) and she brings extensive ﬁnancial and East Asia experience to the Board. Geoff Unwin Chairman 6 www.halma.com RETURN ON TOTAL INVESTED CAPITAL* DIVIDEND INCREASE 14.1% 5% At the end of the year we announced that Keith Roy had given notice that he would retire and resign as a Director with effect from 31 July 2008. Keith’s contribution as an executive Director has been immense. Among the many qualities that Keith demonstrates, his mentoring and people development skills are outstanding. Many managers and directors within the Group owe their strong development to encouragement and advice from Keith. On behalf of the Board I would like to thank him and wish him well in the next stage of his life. In April we appointed Adam Meyers as an executive Director to the Board. He is responsible for the Health Optics and Photonics division within Halma’s Health and Analysis sector. His knowledge of many of our Health and Analysis markets, particularly in the USA, brings an added dimension to the Board. People We owe these results to the quality of people within Halma, to their continued innovation and their dedication to our customers. A sincere thank you to them all. We continue to invest in the development of our people, in particular through our management training programmes. It is encouraging to see an increasing number of internal promotions within the Group, particularly cross-company promotions. Summary Another year of strong progress. We enter the new year in good shape, continuing to see organic and acquisitive growth opportunities and this gives us conﬁdence for the future. Geoff Unwin Chairman * See Financial highlights 2008 CORPORATE RESPONSIBILITY ACHIEVEMENTS What we said What we’ve achieved 1. Measurement and reporting of our carbon footprint Halma’s carbon policy was approved by the Board at the beginning of the year and calls for a 10% reduction in the carbon footprint by 2010. I B U S N E S S R E V E W I 2. Establishment of non-ﬁnancial KPI in respect of the workplace 3. Continuing development of our people 4. Emphasis on business ethics 5. Maintenance of the composition and balance of the Board Halma conducts an annual survey of its employees to assess how well the Group’s values are aligned with its employees and how well the Group communicates its values to employees. The Halma Executive Development Programme has been supplemented with a Management Development Programme aimed at middle-managers and the necessary skills they need in their current and future roles. At the beginning of the year, the Group formally adopted Group-wide policies on human rights and business practices to reinforce the strong ethical culture already prevalent throughout the Group. The Board ﬁlled the non-executive Director vacancy during the year thereby restoring its optimum composition. The Board also identiﬁed an internal successor for a retiring executive Director. G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Halma p.l.c. Annual report and accounts 2008 7 DIRECTORS’ REPORT Chief Executive’s review Record revenue and proﬁt Record revenue and proﬁt We have achieved another year of record revenue and proﬁt, demonstrating the strength of our business model and strategy which has created value consistently for shareholders, customers and employees over nearly four decades. We continue to maintain a healthy balance between short-term performance and investment for sustainable growth in the longer term. The diversity of our products, markets and customer base provides good opportunities for organic and acquisitive growth and our underlying order intake trend remains strong. Good organic growth and strong returns We grew revenues from continuing operations by 13% to £395m (2007: £351m) and proﬁt before amortisation of acquired intangibles by 11% to £72.8m. Organic revenue growth* of 8.0% and organic proﬁt growth* of 6.7% exceeded the 5% p.a. minimum objective for a third consecutive year. Return on sales* of 18.4%, Return on capital employed* of 55.8% and Return on total invested capital* of 14.1% were all strong performances and meet my overall objective to deliver growth without diluting the high quality of returns. Growth in all three sectors All three reporting sectors (Infrastructure Sensors, Health and Analysis and Industrial Safety) achieved organic revenue and proﬁt growth. In Infrastructure Sensors, our Fire Detection business performed very strongly whilst Elevator Safety and Security Sensors ended the year with improved momentum as planned following the major strategic changes implemented in the ﬁrst half of the year. Our Health and Analysis sector made good progress with Labsphere, acquired in February 2007, contributing to another positive year for Photonics. Industrial Safety continued its record of strong organic growth and also beneﬁted from a good performance from Tritech, the subsea asset monitoring business acquired in November 2006. Revenue to all major geographic regions increased with double digit growth in the UK (+13%), Mainland Europe (+18%) and Asia Paciﬁc/Australasia (+21%) – the latter meeting our objective of increasing our rate of revenue growth in Asia. Revenues into the USA grew by 7% despite an OUR VALUES Achievement Empowerment Innovation Customer satisfaction We aim to achieve record performance each year. This is accomplished through the individual and collective achievements of our people. We recognise, reward and celebrate high levels of achievement as this drives continuous improvement and sustained wealth creation. We succeed by empowering our people to lead, make decisions and act with autonomy within a clearly communicated strategic framework. We give clear goals and make people accountable through regular and unambiguous performance feedback. We need to be innovative to be competitive, grow our business and create wealth. We encourage creativity whether it be in product design, manufacturing, selling or administration. We actively seek to recognise and reward innovative behaviour at all levels of our organisation. We are only successful if we help our customers to succeed too. We achieve this by giving customers what they want, every time, and ﬁnding new ways to add value. We aim to be leaders in our chosen sectors through innovative products and excellent service to customers. Andrew Williams Chief Executive 8 www.halma.com 2008 ORGANIC* REVENUE GROWTH 2008 ORGANIC* PROFIT GROWTH 8% 7% adverse currency impact. The geographic diversity of our customer base and, increasingly, our cost base ensured that the overall impact of currency movement on the Group’s revenue and proﬁt was modest. Acquisition activity continues with increased resources Three acquisitions and one disposal were completed during the last year. In December 2007, we bought Riester (a German manufacturer of handheld instruments for the eyecare and general healthcare markets) for £40m, making it the second largest acquisition in our history. Earlier in the year we acquired SRD (£2.6m) to add new technology to our existing subsea Asset Monitoring business and BKKI for £0.3m to establish a stronger platform for our Gas Detection products in China. In January 2008, we sold Post Glover Lifelink Inc for £3m. Our pipeline of acquisition opportunities remains good due to our increased ‘search’ activities and a stable marketplace for high quality small to mid-size technology businesses. We ended the year with net debt of £44m having extended our core borrowing facilities in February 2008 to £165m and leaving us well placed to take any suitable opportunities when they arise. More investment in product and process innovation We launched over 90 new products during the year and increased expenditure on R&D by 22% to £18.6m. This R&D expenditure supports a wide range of activities from leading edge technology to modifying existing products to meet precise customer needs. Increasingly we are seeing opportunities to gain competitive advantage through our manufacturing capabilities. Investment is increasing in manufacturing automation across the Group. Examples include the latest Optical Thin Film coating technology in Photonics and the latest electron beam welding equipment to help our Bursting Disc business sell into new OEM markets. Strategically, this increased automation also simpliﬁes manufacturing processes and opens up the opportunity to replicate operations closer to our customers in other regions. A resilient value-creation strategy Halma has changed a lot in recent years but our core values of Achievement through Empowerment, Innovation and Customer Satisfaction have remained the same. Our value-creation strategy is a ‘twin-track’ approach. As a business ‘investor’, we actively manage a portfolio of businesses, allocating capital and people resources according to where we see the best return. Since April 2005, we have made 11 acquisitions and 9 disposals. As a business ‘developer’, we provide resources and highly relevant expertise to help our high return companies grow on a sustained basis. These resources and expertise include not only our Divisional Chief Executives, who chair the Group companies, but increasingly the knowledge shared between our companies. In addition to ensuring strong ﬁnancial control and good governance, the role of our small Head Ofﬁce is increasingly one of enabling companies to grow faster. Since April 2005, we have created Halma hubs in China, established senior management training programmes, held technology transfer events, increased the opportunities for cross-selling between Group companies and increased capital investment in new manufacturing capability. The consistently high returns achieved by Halma are a direct consequence of selecting a diverse range of businesses which have common characteristics. These include robust market growth 2008 STRATEGIC ACHIEVEMENTS What we said 1. Organic growth to exceed 5% p.a. 2. Targeted acquisitions 3. Build on Chinese hubs and grow revenue in Asia 4. Continued management development 5. Maintain strong new product introduction What we’ve achieved 7% organic proﬁt growth and 8% organic revenue growth driving record results. Riester acquired in December 2007 for €55 million strengthening our Health and Analysis sector. SRD and BKKI bolt-on deals completed to strengthen our Industrial Safety sector. Revenue in Asia increased by 21%. 16 group companies now have a direct presence in China. Our ﬁrst acquisition (BKKI) and a Joint Venture agreement (Fire Detection) in China. Manufacturing hub facility due to be operational in Shanghai mid-2008. Further Halma Executive Development Programmes (HEDP) completed for senior managers. New Halma Management Development Programme (HMDP) introduced for middle management. Over 90 new products launched during 2007/08. R&D expenditure increased by 22% to £18.6m. More new products developed through collaboration between Group companies. Halma p.l.c. Annual report and accounts 2008 9 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Chief Executive’s review (continued) drivers, strong barriers to entry, products which target ‘non-discretionary’ customer spend and untapped international growth opportunities. Our consistent good performance through macro-economic cycles shows the resilience of this integrated ﬁnancial, operating and market drivers strategy. Corporate responsibility and sustainability Halma’s commitment to the environment, safety and health and improving the quality of life for individuals is reﬂected in both the way we do business and the products we create for our customers. Our ‘operational’ commitment is shown in greater detail in the Sustainability review starting on page 32, including the clear objectives we set ourselves in areas ranging from carbon policy to the safety of our employees. We set objectives because they make good business sense. These are regularly reviewed and, where necessary, acted upon by the Board. The positive impact that our products have on society and the environment is signiﬁcant and is a source of satisfaction for employees. Examples include protecting people from hazardous gases at work, providing safe access to public buildings for those with physical disabilities, enabling eye specialists to prevent sight loss or protecting the environment by conserving water through leakage reduction. Stronger talent and succession planning processes We achieve and sustain our high levels of performance because we have talented and hard working teams of people throughout the Group. The quality and depth of talent has improved signiﬁcantly over recent years and I thank everyone who has contributed to another excellent year. We have transformed the way in which we identify, develop and reward people. During the year, a new Halma Management Development Programme was created to support our Executive Development Programme and drive our investment in people development deeper into our organisation. A key beneﬁt of this overall investment has been improved succession planning and increased internal promotions. During the past year, three new Divisional Chief Executives were appointed. All were internal promotions, with each one earned through a strong track record of achievement at Managing Director level. In April 2008, one of our existing DCEs Adam Meyers was promoted to the Halma p.l.c. Board following Keith Roy’s announcement of his intention to retire in July 2008. I congratulate Adam on his well deserved promotion and also wish Keith a long and happy retirement. Keith’s generosity in sharing his experience and developing others is reﬂected in the strength of our Executive team and many of our subsidiary company boards. He leaves with the Group in good shape. Outlook Our businesses are well-positioned to sustain growth in the short and medium term due to their diversity of product range, customer base and geographic footprint as well as the ‘non- discretionary’ spend aspect of our safety-related products. In Infrastructure Sensors, these factors, a focus on commercial rather than residential buildings and a strong bias towards reﬁt/refurbishment rather than new construction, gives us conﬁdence of continued progress in 2008/09. All of our Health and Analysis markets look positive for the coming year and beyond. In addition to good organic growth prospects we are still targeting much of our acquisition search efforts in this sector. Order intake trends have continued to be positive as we move into the next ﬁnancial year. A major contributor to this is in Industrial Safety where many of our customers in the oil and gas market have an ever lengthening pipeline of orders to fulﬁl. Halma continues to deliver strong growth across our businesses and territories. This reﬂects our well-balanced portfolio and our focus on unique and high performance products that promote health and safety where customer investment is often non-discretionary. Our end markets remain robust and our ﬁnancial position is strong. This gives us signiﬁcant headroom to continue investing in innovation and organic growth and making acquisitions as the right opportunities present themselves. Therefore I am conﬁdent that we are well-positioned to make further progress in the current year and beyond. Andrew Williams Chief Executive * See Financial highlights 10 www.halma.com DIRECTORS’ REPORT Strategic review We operate in relatively non-cyclical markets with resilient growth drivers. This enables us to increase shareholder value via organic growth and acquisitions. RETURN ON SALES* REVENUE GROWTH TO ASIA 18.4% 21% MACRO-ECONOMIC, REGULATORY AND COMPETITIVE ENVIRONMENT Our expectation for 2008/09 is that the macro-economic environment will be generally favourable to our growth strategy. We expect a higher risk of instability in the global economy but anticipate that for us any demand reduction in speciﬁc markets will be more than offset by: rising demand in developing regions; extending sales channels and gaining market share in developed regions; and more value-enhancing acquisitions. Increasing environmental and safety legislation in our markets is favourable to us since it creates demand for our products. Global, national and regional product approvals and technical validations are an increasing cost and technical challenge, but also form an increasing barrier to market entrants. While a slowdown in the more mature economies may moderate our rate of organic growth, we have a resilient business mix. Many Halma products sell into highly regulated markets characterised by low sales cyclicality. Demand resilience due to many of our products being driven by ‘non-discretionary’ customer spend, together with the diversity of our product portfolio, geographic market spread and a signiﬁcant contribution from service income, upgrading and replacement products provide protection from unfavourable macro-economic trends. While our markets are competitive, sales are spread across a wide range of industries; our largest single market is ﬁre detection (approximately 15% of revenue) and our largest individual customer constitutes less than 3% of Halma revenue. This wide spread of activity means that competition issues are analysed at subsidiary company or operating sector level and our competitive environment is considered in the Sector reviews on pages 16-27. GROUP STRATEGY AND FORWARD VISION We have a clear vision of how the world is changing. Increased regulation and legislation, long- term demographic trends and generally higher safety, health and environmental expectations are relevant examples. As the world changes, our customers and their needs change too. Within our operating businesses growth strategies tend to have a three to ﬁve-year horizon. However, at Group level, our strategy for acquiring businesses, developing positions in markets and investing in manufacturing resources has a horizon of 10 years or more. We position our businesses in markets which we identify as relatively non-cyclical. We select markets with good prospects of long-term, sustained growth whatever the prevailing macro- economic conditions. Our criteria for choosing markets is that they are underpinned by resilient growth drivers. OUR PRIMARY GROWTH DRIVERS Demand for energy and water resources Worldwide growth in energy and water consumption is relentless. The total world consumption of marketed energy is projected to increase by 57% from 2004 to 20301. Despite the predicted economic slowdown in the USA, Asian economies are forecast to grow by 7.6% in 2008, with the PRC economy expanding by 10%2. As an indicator of rising energy demand, Asian electricity generation is predicted to rise annually by more than 4% from 2004 to 20301. These trends favour our Industrial Safety businesses as investment in oil exploration and power generation continues to rise. Growth in population, ageing and urbanisation While population growth, ageing and urbanisation are sales drivers with a global dimension, their impact on our businesses is different regionally. For example, population growth and urbanisation drives demand for our Infrastructure Sensor products in Asia while the ageing population in the Western World drives demand for health products. By the end of 2008 more than half of the world’s population, 3.3 billion people, will be living in urban areas, rising to almost 5 billion by 20303. The next few decades will see unprecedented urban growth, particularly in the developing world. Urbanisation drives investment in non- residential buildings like shops, ofﬁces, schools and hospitals, the primary market for our infrastructure sensors. 1 International Energy Outlook 2007, Energy Information Administration (US Government) 2 Asian Development Outlook 2007, Asian Development Bank 3 State of World Population 2007, UNFPA (United Nations) * See Financial highlights Halma p.l.c. Annual report and accounts 2008 11 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Strategic review (continued) Poor water quality and the urgent need to conserve water resource stimulate demand for our water leak location equipment, water quality testing kits and UV water treatment systems. Increasing demand for healthcare Many factors are fuelling the growing worldwide demand for healthcare and our health related products. The USA, the world’s largest healthcare market, is expected to grow at an annual rate of 6.7% from 2007 to 2017. US healthcare spending will rise from 16.3% of GDP in 2007 to 19.5% in 20174. In the developed world population ageing creates rising demand, whereas in the developing world economic development is making healthcare affordable to an increasing number of people. Throughout the world, advances in medical technology enable new medical procedures, stimulating demand for new instruments and equipment. Increasing regulation and rising expectations of health and safety Each year as many as 270 million people suffer occupational accidents and 160 million contract occupational diseases. Approximately two million people die from work-related accidents and diseases annually5. To combat this, governments worldwide introduce increasingly rigorous safety and environmental legislation to provide improved safety and quality of life. Failure to address these risks carries a huge potential cost to our customers. Globalisation also drives demand for safety equipment. Western multinational businesses see the development of transnational safety and health standards as good business practice, effectively exporting high safety standards to the countries they operate in. In time, these practices become integrated into the regulatory frameworks of the ‘host’ countries. This is a process we see evolving in Asia currently. New technology During the past year, Halma companies spent 4.7% of revenue (£18.6m) on R&D and introduced around 90 new products into their market niches. Although we develop leading edge technology in some businesses, for example our Photonics business, most of our R&D is spent on taking proven technology and applying it in new ways using our market leading understanding of the application challenges. Our R&D resources are placed in each of the subsidiary companies to ensure market needs are understood and met efﬁciently. This agility results in products with superior performance and value for customers delivering strong product margins and sustained revenue growth. OUR STRATEGIC PRIORITIES Organic growth Our strategic priorities for 2008/09 are to continue to deliver organic growth and maintain a balance between investment and proﬁtability. The ability to grow and to make additional investments is an important element of our progress over the past three years. Acquisitions We want to accelerate our rate of growth by acquisition. We have invested more resources in our search for acquisitions and to ensure newly acquired businesses are integrated effectively. The characteristics of target businesses and their markets are most important. They have to be a good ﬁt with our operating culture and strategy in addition to being value-enhancing ﬁnancially. Asian business expansion We are seeing continued progress and opportunities in Asia – where revenue grew by 21% this year and represents around 11% of the Group total. The Halma China hubs created in 2006 resulted in 16 Group companies with a presence in the country, up from three originally. Since then we have made small investments in Fire and Gas Detection and are creating a manufacturing hub in Shanghai which will be operational in mid-2008. We are establishing a new Halma India hub in Mumbai which will be operational by the end of 2008. Management development We will continue to strengthen our management. Our increased investment in training has improved the quality and ﬂexibility of our senior management and resulted in greater movement of managers across Group companies. Active management of our people resources is a key factor in our ability to sustain long-term growth. Executive Board responsibilities are adjusted regularly to match our strategic priorities. High rate of innovation Innovation is continually improving from an already high standard. Our emphasis is on both product and process innovation since the latter often results in signiﬁcant competitive advantage for niche businesses. The quality of entries in our monthly and annual innovation awards, together with the high number of new products launched each year, underline this success. 4 Outlook – Healthcare Properties 2008, Grubb & Ellis Company (US) 5 Decent Work, Safe Work, International Labour Ofﬁce 12 www.halma.com Strategic principles KPIs We apply ﬁve strategic principles to create shareholder value. We use ﬁnancial Key Performance Indicators (KPIs) to monitor progress. 1. Operate in specialised global markets offering long-term growth underpinned by robust growth drivers achieving organic growth rates above the blended long-term growth rate of our markets of around 5%. 2. Build businesses which lead specialised global markets through innovative products differentiated on performance and quality rather than price alone. 3. Recruit and develop top quality boards to lead our businesses and nurture an entrepreneurial culture within a framework of rigorous ﬁnancial discipline. 4. 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. 5. Achieve a high Return on capital employed to generate cash efﬁciently to fund organic growth, closely targeted acquisitions and sustained dividend growth. ORGANIC REVENUE GROWTH1 8% >5% 2007 Group target 8% RETURN ON SALES2 18.4% 18.7% ~18% 2007 Group target ORGANIC PROFIT GROWTH1 7% 8% >5% 2007 Group target ROTIC (RETURN ON TOTAL INVESTED CAPITAL)3 14.1% 14.0% >12% 2007 Group target ROCE (RETURN ON CAPITAL EMPLOYED)3 56% 60% >45% 2007 Group target R&D AS A PERCENTAGE OF REVENUE4 4.7% 4.3% >4% 2007 Group target OPERATING CASH TO PROFIT5 104% 106% 100% Group target 2007 Strong organic growth across all sectors for the third consecutive year. High margins with continued investment including costs of Security sub-sector reorganisation. Continued progress driven by strong top line growth. Excellent returns for the Group well in excess of our WACC of 8.4%. High returns at operating company level. Another year of increased investment producing over 90 new products. Good cash conversion after funding working capital and assets for growth. See pages 32 to 35 for non-ﬁnancial KPIs 1. Organic growth measures the change in the revenue and proﬁt from continuing Group operations. The effect of acquisitions made during the current or prior ﬁnancial period has been equalised by subtracting from the current year results a pro-rated contribution based on their revenue and proﬁt 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. ROTIC and ROCE 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 operations expressed as a percentage of adjusted6 proﬁt from continuing operations. 6. Adjusted to remove the amortisation of acquired intangible assets. Halma p.l.c. Annual report and accounts 2008 13 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Strategic review (continued) Risks and resources These are the major risks and uncertainties facing us and what we are doing to identify, manage and mitigate them. 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 the inherent risks that are an integral component of business activities must be identiﬁed, managed and mitigated. 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 employees. Accordingly we invest heavily in identifying, recruiting and training talented people who are able to manage these risks while delivering the excellent results we require. Our choice to operate in the safety products and health-related technology markets, and the depth of market knowledge we have built up within the Group, allows us to adequately evaluate and assess the risks we encounter throughout our operations. We do not place undue reliance on any one Group company nor does any one Group company rely heavily on one customer or transaction. In managing the portfolio of companies within the Group and in managing the transactions in any one company, we seek to spread our risks. We have processes in place to ensure any major transactions are reviewed at the appropriate level, including at Board level if necessary. Another factor limiting risk is that our products are predominantly critical components or instruments which are warranted as ﬁt for the purpose rather than systems or intangible products where satisfactory performance is contingent upon third parties. ORGANIC GROWTH AND COMPETITION The Group faces competition in the form of pricing, service, reliability and substitution. 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 maintain management information systems that provide local management with valuable product and market data. By empowering and resourcing local operations to respond to changing market needs, we have shown that any 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, as is ensuring the new businesses are rapidly integrated into the Group. We aim to pay sensible multiples for businesses whose technology and markets we typically know well. In the past year, we have increased the resource allocated to these activities, focusing on sectors where we see the greatest opportunity. These new resources are targeted to increase the pipeline of opportunities and ensure post-acquisition integration is successfully implemented. R&D New products are critical to our organic growth and underpin our 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, we spread the risk and ensure 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 our continued success. Whilst no single product or process is critical to the Group as a whole, all appropriate actions are taken to protect our intellectual property rights. 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 risk increases as we pursue our strategy of geographic expansion often into regions with different accounting bases and cultures. Therefore the Group ensures that there is adequate local management and ﬁnancial resource in each operational location and regularly reiterates to the subsidiary 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 Group’s pension plans is essential to funding our pension obligations effectively. 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. 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 and transactions are hedged but future currency proﬁts are not hedged. 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, including the need to report any major legal or contractual risks. The Group’s emphasis on excellent ﬁnancial control, the deployment of high quality management resource and strong focus on quality control over products and processes in each operating business helps to protect us from adverse litigation and contractual issues. Each operating company has a health and safety manager responsible for compliance and our performance in this area is excellent. INTANGIBLE RESOURCES ADDRESSING RISK 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. 14 www.halma.com 470 million people live in regions with severe water shortages, predicted to increase to 3 billion by 2025* * International Water Association Alabama, USA Over 3,000 Permalog leak detectors monitor the underground water pipe network in the city of Birmingham, Alabama, USA to help conserve water in this drought-stricken region. Permalog is a state-of-the-art, battery-powered acoustic sensor and data recording device which ﬁts on mains water pipes via magnetic force and periodically sends a ‘no leak’ radio signal or an alarm if a leak is detected. “Our water distribution system consists of almost 4,000 miles of transmission lines. Leaks waste resources and raise costs for the city. The Permalog sensors do a great job at ﬁnding leaks and have become an integral part of our water system.” Geoff Goodwin Director of Water Recovery, Birmingham Water Works Board City water supply Halma’s making a difference DIRECTORS’ REPORT Sector review Infrastructure Sensors We make products which detect hazards to protect people and property in public and commercial buildings. Infrastructure Sensors contributed 42% of Group revenue (£167m) and 38% (£29m) of Group proﬁt*. Our principal products are sensors for ﬁre, security, automatic doors and elevator safety. There are four sub-sectors – see right. WHERE WE OPERATE Belgium Brazil Canada China Czech Republic France Germany India Italy Japan New Zealand Republic of Ireland Singapore South Africa Spain UK United Arab Emirates USA STRATEGIC ACHIEVEMENTS STRATEGIC DIRECTIONS KPIs Sector Performance Group Target GROWTH DRIVERS 16 www.halma.com > Organic revenue and proﬁt growth > Successful reorganisation of Elevator and Security businesses > New sales ofﬁces in Asia, Europe and the USA > New Elevator products factory in Czech Republic > Created joint venture for Fire products in China > Launched over 30 new products > Increase organic proﬁt growth driven by revenue growth > Beneﬁt from reorganisation in Elevator and Security businesses > Increase regional sales and technical support ofﬁces > Introduce more new products from R&D and bolt-on acquisitions > Relentlessly improve manufacturing efﬁciency Revenue growth1 Proﬁt growth1 Return on sales2 ROCE3 R&D4 8% >5% 2% >5% 17.0% ~18% 61% >45% 5.1% >4% > Growth in population, ageing and urbanisation > Increasing regulation and rising expectations of health and safety > New technology 1. Sector revenue and adjusted5 sector proﬁt before ﬁnance expense are compared to the equivalent prior year ﬁgure. 2. Return on sales is deﬁned as adjusted5 proﬁt before ﬁnance expense and taxation expressed as a percentage of sector revenue. 3. Adjusted5 sector proﬁt before ﬁnance expense expressed as a percentage of sector operating net assets. 4. Sector research and development expenditure expressed as a percentage of sector revenue. 5. Adjusted to remove the amortisation of acquired intangible assets. * See note 1 to the accounts FIRE DETECTION SECURITY SENSORS AUTOMATIC DOOR SENSORS ELEVATOR SAFETY Market trends and growth drivers Legislation remains the primary growth driver in the Fire market. There is a continuing global trend towards increasingly rigorous ﬁre safety regulations. In the developing world, ﬁre product standards are often based on North American and European norms, which favour our products. Recent revisions to Chinese ﬁre detector standards are causing several smaller local suppliers to exit the market. Worldwide, demand for ﬁre detectors is steady with an annual estimated growth rate of just under 5%, predicted to continue until at least 2011. Asia is the fastest growing sector with average annual growth of 6.1%.1 In the past year we saw continuing ﬁre market consolidation with more independent manufacturers acquired by multinationals. Customers are moving towards more sophisticated ﬁre detection technologies such as addressable detectors, network systems and video-based smoke detection. We work alongside our customers to ensure we are well placed to meet these needs in the future. Our Security Sensors sell into a global security market with a projected annual growth rate to 2012 of 7.8%2. We see opportunities to increase our market share through better product innovation and customer service levels – particularly outside our traditional strongholds, the UK and South Africa. We estimate the market for Automatic Door sensors is growing by 3% to 4% annually3. However, within this there are geographic and speciﬁc application niches which are growing at a faster rate due to rising safety standards – for example industrial door sensors and access for those with disabilities. Elevators are typically refurbished and upgraded every 15 to 25 years to meet current safety regulations. Worldwide, there is an installed base of 8 million elevators and each year around 400,000 new elevators are installed.4 We expect the global elevator market to continue to grow at 5% to 6% annually, but with wide regional variation in the ratio of more proﬁtable modernisation work to new construction. The US market is an even mix of new build and modernisation, concentrated in large cities, where building ﬁre codes are the main sales drivers. The mature European market is mostly modernisation work with demand strongly driven by the EN815 safety standards which continue to be gradually adopted by individual countries. New construction dominates the Asian elevator market, with the notable exception of Japan. Sector strategy In this sector our principal strategic goal is to be the leading supplier of safety-critical sensor products and supporting technology for infrastructure monitoring in non-residential buildings. We choose safety-critical products because these are ‘non-discretionary’ spend items for non-residential buildings driven by regulatory requirements. Our businesses are positioned as the expert supplier of safety-critical components, not as complete system builders or installers. We aim not to compete with the global businesses that install complete building monitoring systems and position ourselves as an independent supplier to all of them. This demands that we continue to expand our commercial, technical and manufacturing presence internationally. For example, to increase Fire product sales we are strengthening local customer relationships and improving market intelligence. To achieve this, we continue to set up new sales ofﬁces in Europe, the USA and Asia. We also plan to increasingly decentralise product development to accelerate new products designed to meet local standards. To defend our market positions, we regularly review our intellectual property portfolio, ensuring global protection and policing our patented technologies. Halma p.l.c. Annual report and accounts 2008 17 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Sector review (continued) Infrastructure Sensors SECTOR OUTLOOK 18 www.halma.com A continuing strategy is to build competitive advantage through manufacturing excellence. The goal is to achieve advances in both quality and productivity so that our customers get market leading service levels consistently – wherever they are located. In early 2008, we agreed a new manufacturing joint venture for Fire sensors in China to help satisfy increasing demand in Asia. In our Security business, we will continue to invest in new products, processes and people to grasp our international expansion opportunities, particularly into North America and Asia. Strategic partners are in place to assist our aim of being a strong global player, complementing our market leadership in the UK and South Africa. We have obtained new international product approvals, improved our manufacturing platform and rationalised our new product development programmes. We are developing new intruder detection systems based on microwave and infrared sensors and have developed novel wireless communications technology for easier system installation and integration. In addition to strengthening our position as the dominant world supplier of Automatic Door sensors for pedestrian doors, we are introducing novel new products to increase our share of the industrial door market. A major new product to be launched in 2008/09, featuring a laser sensor, will reinforce our technology leadership and drive sales growth in this market. During the past year we completed the implementation of the regional Elevator strategic reorganisation started in late 2006. The creation of product focused manufacturing and R&D resources with a regionally aligned sales organisation is aimed at increasing proﬁts through stronger revenue growth. We believe we can shorten product lifecycles, maintain technological leadership via R&D, cut production costs and extend sales channels thereby maintaining a strong competitive advantage even against low cost competitors. An international ‘in-country’ sales presence is a key differentiator and we now operate 23 elevator sales ofﬁces worldwide. Three new ofﬁces were opened in France, the USA and India during 2007/08 alone. Sector performance Fire sector revenue and proﬁts were at record levels as we continued to gain market share, notably in Europe. Product margins improved due to product design and process innovations. We achieved record sales of Security Sensors despite signiﬁcant internal reorganisation to ensure success in our future global expansion plans. Underlying proﬁtability improved during the second half of the year indicating that the beneﬁts of these strategic changes are starting to emerge as planned. Revenue and proﬁt at our Automatic Door sensor business also set new records. During 2007/08 we achieved strong progress in the USA and China and more modest progress in Europe. Greater penetration of our products into specialist markets such as hospitals and schools contributed to growth. Performance of our Elevator businesses was ﬂat during the ﬁrst half of 2007/08 due to higher investment and overhead costs and showed some improvement during the second half. 1 Conﬁdential market research 2 World Security Equipment, The Freedonia Group Inc. 3 Internal market research and conﬁdential industry sources 4 Freedonia “Industry Study 2016 – World Elevators” and elevator manufacturers’ websites 5 BS EN81-80:2003. Rules for the improvement of safety of existing passenger and goods passenger lifts Our markets in this sector are underpinned by robust regulatory drivers for non-residential buildings generating demand from both modernisation of existing structures and new construction. Therefore, they have proved to be resilient throughout the macro-economic downturns of the past. We expect stable trading conditions to continue in our major market, Europe (61% of sector revenue including the UK), whilst our relative exposure to the US market (only 19% of sector revenue) will mitigate the impact on the sector of any major downturn in that region. New sales channels, investment in worldwide product approvals and new products will create further opportunities in developing regions. The Infrastructure Sensors sector is well placed for continued growth in 2008/09. The proportion of urban dwellers is predicted to rise from 3.2 billion in 2005 to 4.9 billion by 2030, roughly 60% of the world’s population* * World Urbanization Prospects, 2005. United Nations, Department of Economic and Social Affairs, Population Division (2006) Mumbai, India Our safety systems protect elevator passengers at the Hiranandani Estate, a huge complex within the Mumbai conurbation in India. Halma elevator door sensors use up to 154 infrared beams to ensure that passengers entering or exiting lifts are detected and doors held open. “Infrared light curtains are a very positive product for elevator doors, and ensure the safety of passengers as they enter or leave the elevators.” Mr C K Pithawalla Director, Hiranandani Constructions Pvt. Ltd Public building Halma’s making a difference DIRECTORS’ REPORT Sector review (continued) 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. Health and Analysis contributed 34% (£135m) of Group revenue and 37% (£28m) of Group proﬁt*. There are four sub-sectors – see right. WHERE WE OPERATE Australia China France Germany Holland South Korea Switzerland UK USA STRATEGIC ACHIEVEMENTS STRATEGIC DIRECTIONS KPIs Sector Performance Group Target GROWTH DRIVERS > Organic sales and proﬁt growth > Acquisition of Riester extending Health Optics > Successful integration of Labsphere > New sales resources and distributors in export territories > More than 40 new product launches > Inter-company collaboration producing unique new products > Disposal of non-core business, Post Glover Lifelink > Achieve organic proﬁt growth through revenue growth > Acquire businesses with familiar technology in similar markets > Improve the quantity and quality of new product development > Encourage more internal collaboration > Accelerate investment in Asia Revenue growth1 Proﬁt growth1 Return on sales2 ROCE3 R&D4 16% >5% 16% >5% 20.7% ~18% 68% >45% 5.0% >4% > Demand for energy and water resources > Growth in population, ageing and urbanisation > Increasing demand for healthcare > Increasing regulation and rising expectations of health and safety > New technology 1. Sector revenue and adjusted5 sector proﬁt before ﬁnance expense are compared to the equivalent prior year ﬁgure. 2. Return on sales is deﬁned as adjusted5 proﬁt before ﬁnance expense and taxation expressed as a percentage of sector revenue. 3. Adjusted5 sector proﬁt before ﬁnance expense expressed as a percentage of sector operating net assets. 4. Sector research and development expenditure expressed as a percentage of sector revenue. 5. Adjusted to remove the amortisation of acquired intangible assets. 20 www.halma.com * See note 1 to the accounts WATER PHOTONICS HEALTH OPTICS FLUID TECHNOLOGY Market trends and growth drivers Demand for Water management products is driven by increasing regulatory control and water shortages due to ﬁnite resources, population growth and climate change. Estimates suggest that the US water industry is growing at 4% to 6%1 per year and at even faster rates elsewhere. However, in absolute terms, the major markets remain in the UK and Europe. Third party patent protection, covering the use of UV to treat drinking water in the USA, ended thereby reopening the US market. Our systems recently achieved NWRI2 validation for wastewater reuse; USEPA3 drinking water validation will follow during 2008/09. System validations are increasingly important, with US validation standards now required by many countries. Our Photonics products sell into highly diverse niche markets. These include biomedical, life sciences, analytical instrumentation, research, education, space, defence, homeland security, semiconductor and industrial applications. At the leading edge of science and technology, our businesses continually spin off new applications and new customers. For example, the widespread change to low-energy lighting, driven by environmental concerns, is creating strong demand for our light measurement products used for quality control, validation and new product development. We maintained global leadership in light integrating spheres (which capture light) and miniature spectrometers (which analyse light). Whilst we are growing internationally, about two-thirds of Photonics sales are in the USA. Growth depends on government science budgets (for education, defence and homeland security) and corporate spending by our OEM customers. However, demand for products used in health analysis is underpinned by regulatory drivers which make these markets relatively resilient and non-cyclical. We anticipate continued growth even in unfavourable economic conditions due to the ﬂexibility of our technology and the diversity of our end markets. Demand for our Health Optics products continues to grow in response to rising incomes and access to healthcare in the developing world, and an ageing population and rising health expectations in the developed countries. We estimate that the health optics market is growing 5% annually in developed economies and 2% to 3% worldwide. Rising international and local product registration requirements add cost to new healthcare product development but also represent an increasingly high barrier to market entrants reinforcing the strong brand strength we have in our chosen markets. The strength of the Euro boosted export growth for both our US and UK based optics companies to record levels. In Fluid Technology, demand remains strong, especially from the fast-growing medical and environmental monitoring markets. We have seen further consolidation of customers and expect this merger and acquisition trend to continue, and believe this offers us further opportunity for growth. Sector strategy To remain the world market leader in Water leak reduction instrumentation, our strategy is to offer water utilities worldwide the most comprehensive range of leakage monitoring equipment available from one source supported by strong local sales and technical resources. This requires continual investment in establishing resources in export markets and in new product development, increasingly in close cooperation with our customers. Our Water UV companies are organised to focus on either municipal or industrial applications. This strategy allows the companies to develop specialist applications experience and deliver enhanced customer service for the precise customer needs in their market segment. Halma p.l.c. Annual report and accounts 2008 21 DIRECTORS’ REPORT Sector review (continued) Health and Analysis SECTOR OUTLOOK 22 www.halma.com In Photonics and Health Optics our primary strategy is to drive organic proﬁt growth by extending our geographical presence in sales, product development and manufacturing. We will also increase exploitation of our proprietary knowledge and patents. R&D spending will continue at above average rates to maintain technology leadership. We will encourage greater inter-company collaboration and seek complementary acquisitions. Our Fluid Technology strategy is to extend our product portfolio and increase sales representation in new markets via organic growth and acquisitions. Sector performance Sales of Water products set new records and delivered good organic proﬁt growth. Growth was particularly high in the UK where new products penetrated new wastewater monitoring markets and we also saw useful progress in Europe. Our Photonics businesses achieved record revenue and proﬁt. The new Chinese photonics facility has contributed to sales growth and is now starting to play a key role in procurement and product development. Our Health Optics companies also achieved record revenue aided by expansion of their worldwide distribution network and record numbers of sales staff in overseas markets. There was growth in all major geographic regions. The recent Riester acquisition will help to increase our footprint outside the USA and UK with the expectation that Europe and the Rest of World revenue will grow as the further contribution from Riester comes through in the coming year. Riester manufacture ‘premium’ handheld instruments for general medical practitioners. These include blood pressure monitors, ear nose and throat instruments, opthalmoscopes and stethoscopes. Good collaboration is already underway between Riester and our existing Health Optics businesses. They can sell Riester’s instruments to their ophthalmology market and also supply ophthalmoscopes for Riester to sell into their general medical market. Geographically, Riester’s strength in South America and other Spanish speaking territories (plus one or two markets in Asia) complements our existing strength in the UK and USA. Riester gives us new distribution into the general medical market which may beneﬁt other businesses in our Health and Analysis sector in the longer term. Record revenue and proﬁt were achieved by our Fluid Technology businesses. This stemmed from continued higher investment in distribution and engineering resources focused on growing market share. Growth came from a strong core business demand plus new customers. 1 American Water Works Association 2 NWRI – U.S. National Water Research Institute (awaiting validation documents) 3 USEPA – U.S. Environmental Protection Agency There are positive, resilient market drivers creating favourable conditions for growth in our Health and Analysis sector. Across this sector increased manufacture, procurement and product development in developing countries will protect margins and enable continued revenue growth. Increasing demand and regulation to raise Water supply efﬁciency and drinking water quality, plus environmental pressures on wastewater usage, will create favourable conditions for our Water businesses. Increased cooperation on international sales distribution and new product development, between our Water businesses, should deliver continued growth during 2008/09. In Photonics, we expect continued rapid growth in developing markets, particularly China. This growth should more than offset any disruption to US government spending caused by the presidential election in November. The overall outlook for Health Optics is for continuing sales and proﬁt growth at market rates. The ﬁrst full year of trading at our recent acquisition, Riester, will boost this sub-sector’s results in 2008/09. We expect demand to stay steady for our Fluid Technology products and look forward to continuing proﬁt growth in the year ahead. New operations are to be established in China and the Czech Republic to strengthen our presence in Asia and Europe. Healthcare spending in OECD countries is increasing rapidly and is projected to triple from US$2.7 trillion in 2002 to US$10 trillion by 2020* * PricewaterhouseCoopers HealthCast 2020: Creating a sustainable future, 2006 Liverpool, UK Halma’s head-mounted ophthalmoscopes with integral power supplies allow doctors to examine the interior of patients’ eyes quickly and efﬁciently at Royal Liverpool University Hospital, UK. Our latest ophthalmoscopes have brighter, whiter LED light sources that illuminate the retina to reveal greater detail and image clarity. “We have used Halma ophthalmoscopes for many years. We see over one hundred patients each morning so they receive heavy use. The new, rechargeable, wireless indirect is a great boon and has proved to be very reliable.” Mr David Wong FRCS FRCOphth, Consultant Ophthalmologist St Paul’s Eye Unit, Royal Liverpool University Hospital Eye clinic Halma’s making a difference DIRECTORS’ REPORT Sector review (continued) Industrial Safety We make products which protect property and people at work. Industrial Safety contributed 24% of Group revenue (£94m) and 25% of Group proﬁt* (£19m). There are four sub-sectors – see right. WHERE WE OPERATE Australia China Germany France Holland India Saudi Arabia Singapore Tunisia UK USA STRATEGIC ACHIEVEMENTS STRATEGIC DIRECTIONS KPIs Sector Performance Group Target GROWTH DRIVERS 24 www.halma.com 2 www.halma.com > Good organic revenue and proﬁt growth > Increased exposure to energy markets drove revenue growth > Established manufacturing in China for Gas Detection products > Acquired SRD to strengthen Asset Monitoring sub-sector > Increase organic proﬁt growth driven by revenue growth > Accelerate new product development, particularly for energy markets > Improve manufacturing operations > Continue expansion into Asia and Eastern Europe > Seek acquisitions to add new products and distribution channels Revenue growth1 Proﬁt growth1 Return on sales2 ROCE3 R&D4 17% >5% 21% >5% 20.6% ~18% 77% >45% 3.6% >4% > Demand for energy and water resources > Increasing regulation and rising expectations of health and safety > New technology 1. Sector revenue and adjusted5 sector proﬁt before ﬁnance expense are compared to the equivalent prior year ﬁgure. 2. Return on sales is deﬁned as adjusted5 proﬁt before ﬁnance expense and taxation expressed as a percentage of sector revenue. 3. Adjusted5 sector proﬁt before ﬁnance expense expressed as a percentage of sector operating net assets. 4. Sector research and development expenditure expressed as a percentage of sector revenue. 5. Adjusted to remove the amortisation of acquired intangible assets. * See note 1 to the accounts GAS DETECTION BURSTING DISCS SAFETY INTERLOCKS ASSET MONITORING Market trends and growth drivers Research published in 2007 suggests that the global market for Gas Detection products was £350m in 2005, estimated to reach £486m in 20121. Demand for gas detection products in the developed world remains robust, supported by a relatively high proportion of aftermarket sales. The adoption of enhanced safety standards in the developing economies will drive additional demand. Internal data suggests Bursting Disc market growth of about 4% annually with higher rates in the developing world2. Market conditions for our Safety Interlock businesses were broadly favourable during 2007/08 with particular buoyancy in the global oil and gas market and in the supply chain supporting the expansion of utilities in China and India. Customers are placing orders earlier in the project cycle to ‘lock in’ supplies and ensure on-time delivery. Industrial safety is not yet fully embedded in Asian legislation but is often driven by engineering best-practice adopted from developed countries. Europe leads the world in worker protection. Signs that the USA is moving towards European industrial safety practice are favourable to us. We estimate that the global market niches for Asset Monitoring that our businesses serve is £150m; we expect to see an average annual growth rate of 8% to 10%2. Rising global demand for closer monitoring of energy usage and for capturing data relating to high value or sensitive infrastructure assets, offers excellent growth prospects. This sub-sector was strengthened by the acquisition of Sonar Research & Development (SRD) in October 2007. SRD has been fully integrated within our existing Tritech subsea technology business. Sector strategy To grow our Gas Detection business against strong global competition we have a dual strategy of a regular stream of new products and relentless cost reduction of existing ones. From our new base in China we will design and manufacture for the local market and source components for our UK manufacturing base. We have set up a design resource in India to accelerate new product development. Our strategy for Bursting Disc growth is to capture signiﬁcant market share in both developed markets and the high growth BRIC3 economies. We have set up new distribution agreements in Russia and South America, and are exploring expansion opportunities in China and India. Market share gains can also be achieved through superior customer service and we have an active capital investment programme to improve our manufacturing capabilities. For Safety Interlocks, we aim to protect our strong market position and drive sales growth by increased investment on new product development and establishing a sales and operational presence in developing markets. Leading edge technological innovation is less critical in the safety interlocking market than the ability to adapt existing technology to solve new problems. Customers will pay premium prices in return for responsive sales and engineering support and reliable deliveries. Halma p.l.c. Annual report and accounts 2008 25 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Sector review (continued) Industrial Safety Our Asset Monitoring business is positioned to satisfy growing worldwide demand for remote monitoring of valuable or safety-critical assets – particularly those in hazardous or remote locations. Our companies work closely with customers to develop solutions based on customer need rather than technological advancement. We will continue to integrate wireless data capture and communications technology, originally developed for water network management, into other Halma sub-sectors. For example, a unique wireless-monitored bursting disc was recently launched. This strategy of inter-company collaboration and technology exchange has the potential to add value to existing and future products across the Group. Sector performance Gas Detection revenue and proﬁt grew above market rates. Revenue grew most strongly in export markets, notably in the USA, Europe, the Middle East and Asia. Our concentration on global expansion of our Bursting Disc sales channels resulted in record revenue and proﬁt with growth rates above the market level. We achieved record revenue and proﬁt from our Safety Interlock businesses with particularly strong growth in Germany and Asia and in those businesses serving the oil and gas markets. Our Asset Monitoring businesses performed well in 2007/08 beneﬁting from a particularly good performance from our subsea business, Tritech, acquired in late 2006. SRD, acquired in October 2007, was successfully integrated into the Tritech group of companies. Frost & Sullivan, World Gas Sensors, Detectors, Analyzers Internal market analysis including conﬁdential market sources 1. 2. 3. BRIC economies – Brazil, Russia, India and China SECTOR OUTLOOK 26 www.halma.com The major demand drivers in our Industrial Safety markets are relatively resilient. There is a worldwide progression towards better protection for industrial workers and increasing safety regulation in all types of workplace. Businesses have to comply with safety legislation even during an economic downturn. Underpinned by relatively non-cyclical demand drivers, our Industrial Safety businesses have the qualities to maintain growth and outperform the market. Our strategy of new product investment, additional sales ofﬁces, and signiﬁcant investment in manufacturing improvements should ensure that we continue to achieve healthy organic growth in 2008/09. Each year there are 270 million work accidents and almost 2.2 million work-related fatalities worldwide, costing US$1,250 billion in lost production* * International Labour Organization, Safety in Numbers, 2003 Shanghai, China Halma interlock safety systems at the Alcoa (Shanghai) Aluminium Products Co Ltd factory in China ensure that workers can only access potentially hazardous aluminium foil production machinery under safe conditions. Our trapped key interlocks ensure safety in industrial environments by forcing machine operators through a sequence of safe actions. “Halma safety interlocks were recommended by Alcoa engineers in Australia. They are easy to use and protect our employees from hazards. I would certainly recommend them to other companies.” Li Hongbing Secure Engineer, Alcoa (Shanghai) Aluminium Products Co Ltd Aluminium plant Halma’s making a difference DIRECTORS’ REPORT Financial review Another strong performance with growth in all three sectors and all territories Another strong performance Proﬁt from continuing operations before amortisation of acquired intangible assets increased by 11% to £72.8m on revenue from continuing operations up 13% to £395.1m. This is the ﬁfth consecutive year we are announcing record results. Organic proﬁt growth* of 6.7% was achieved on organic revenue growth* of 8.0%, exceeding our target of 5% year on year improvement. Organic growth* is calculated before adding in the beneﬁt of acquisitions. Currency translation had a more modest impact than previously expected. At constant currency, revenue and proﬁt growth would have been approximately 1% higher. There was one small disposal in the year so the prior year ﬁgures have been adjusted to give comparability. The trading result of that business, Post Glover Lifelink, and the gain on disposal are disclosed under discontinued operations. Overall another strong performance continuing the pattern of delivering growth across all sectors and territories. All three sectors grew Infrastructure Sensors, still our largest sector, grew revenue by 8% and proﬁt by 2%. Our Health and Analysis sector had another very good year with revenue growth of 16% and proﬁt growth of 16% becoming a higher proportion of Group revenue and proﬁt and closing the gap on Infrastructure Sensors. Industrial Safety had another outstanding year of growth with revenue 17% higher producing proﬁts 21% ahead. All three sectors achieved both organic revenue and organic proﬁt growth. Revenue growth in all territories There was once again widespread growth in revenue. The revenue from continuing operations by destination was as follows: £ million United Kingdom Mainland Europe United States of America Asia Paciﬁc and Australasia Other countries Revenue 109.3 107.9 103.0 42.9 32.0 395.1 % growth 13.1% 18.1% 7.1% 20.8% 1.6% 12.5% Strong UK growth came from our Infrastructure Sensors businesses and from Tritech (in the Industrial Safety sector) acquired part way through the prior ﬁnancial year. Good performances in most sub-sectors drove the increase in Mainland Europe especially by our businesses selling into the oil and gas industries. There was a useful addition coming from the Riester acquisition in Europe with considerable future beneﬁt likely to come from its presence in Spanish speaking territories across the world. Our Photonics businesses performed very well in the USA. Our good revenue growth in the USA would have been even greater if not for a US Dollar that was on average 6% weaker than the prior year relative to Sterling. Sales to Asia Paciﬁc and Australasia grew well supported by a 19% growth in sales to China and 36% growth in sales to India. The China and India growth is from a small base with more infrastructure being put in place by Halma to accelerate future growth by our subsidiary companies. Kevin Thompson Finance Director ADJUSTED* PROFIT BEFORE TAX £80m £60m £40m £20m 04 05 06 07 08 28 www.halma.com ADJUSTED EARNINGS PER SHARE* (pence) 15 10 5 04 05 06 07 08 DIVIDEND PER SHARE (pence) (paid and proposed) 8 6 4 2 04 05 06 07 08 Continued high margins Return on sales* for continuing operations was again at a high level of 18.4% (2007: 18.7%). This metric reﬂects the considerable value we consistently deliver to our customers through our products. We continue to invest in our businesses to give them the capacity they need to take future opportunities. Our KPI target in this area is a Return on sales of around 18% or higher and we aim always to couple that with growth as we have done again this year. The cost of reorganisation in our Security Sensors business slightly reduced the Infrastructure Sensors margin this year as anticipated from 18.1% to 17.0%. Looking back at the performance of the Infrastructure Sensors sector in the years 2000 to 2004 and even in the early to mid-1990s we see its resilience. Taking the results of the companies we owned both now and then we see that during those periods sector revenue and proﬁt grew and the Return on sales remained above 18%. This is a sector which has demonstrated that it is able to make progress in tougher economic conditions. One business sold in the year In January 2008 we sold Post Glover Lifelink, a US business which was no longer core to the Health and Analysis sector, for US$6m (£3m). It had annualised revenue of £3.4m and proﬁt of £0.6m. The gain on sale of £1.7m together with the post-tax trading result is shown on the Consolidated income statement as a discontinued operation. A lower effective tax rate The effective tax rate on proﬁt from continuing operations before amortisation of acquired intangible assets was 29.0% (2007: 29.7%). This reﬂects the mix of geographic locations in which tax is paid. We expect the effective tax rate to reduce a little in the foreseeable future with the beneﬁt of the reduction in the UK rate of corporation tax. Tax paid in the year was below the ﬁgure in the prior year due to the tax deductibility of higher payments into the Group’s pension plans, and also due to the timing of tax payments in advance which are expected to even out in the coming year. Increased ﬁnance cost The net ﬁnance expense in the Consolidated income statement increased from £1.8m to £2.1m. This resulted from a lower net pension ﬁnance charge with a higher cost of ﬁnancing debt. We increased our level of debt at the end of the third quarter of the year with the acquisition of Riester and expect that the debt ﬁnancing cost will therefore be higher in 2008/09. Earnings per share and dividends grow Adjusted earnings per share* were up 12% to 13.86p. Statutory earnings per share were 10% higher at 12.97p, a lower rate of increase due to the additional amortisation of intangible assets associated with the Riester acquisition. The Board has recommended a further 5.1% increase in the ﬁnal dividend which together with a similar increase in the interim dividend gives a total dividend of 7.55p per share, subject to shareholder approval. This is in line with our progressive dividend policy and is the 29th consecutive year of dividend increases of 5% or more. Given the strong earnings growth the dividend cover (calculated on earnings from continuing operations before amortisation of acquired intangible assets) increased to 1.83 times, moving further towards our target of 2 times cover. ROCE* of 55.8% and ROTIC* of 14.1% Strong growth was accompanied by our typical high returns. High returns are an important part of the Halma model with the objective of consistently creating value whilst growing our business. ROCE was 55.8% (2007: 60.1%) and is our measure of the effective use of operating assets. ROTIC is a post-tax return on the total asset base including all historic goodwill relating to ongoing and disposed businesses. This year ROTIC was 14.1% (2007: 14.0%) and this compares very favourably with a Weighted average cost of capital (WACC) for us calculated as currently being 8.4% (2007: 7.7%). See note 3 to the accounts for the deﬁnition of Return on capital employed (ROCE) and Return on total invested capital (ROTIC). Capital structure We ﬁnished the year with net debt of £44.3m (2007: £7.7m) in line with our strategy to use our balance sheet to accelerate business development. The major increase came in the second half following the Riester acquisition. The Group continues to be able to borrow at competitive rates and therefore sees a modest level of borrowing as an effective way of funding the development of the Group. During the year we expanded our ﬁve-year syndicated revolving credit facility from £60m to £165m with a core group of banks and on similar attractive terms. The Group’s good cash generation is used to invest in expanding the business organically and through high quality acquisitions using third party borrowings where needed. There are no material funds outside the UK where repatriation is restricted. Our treasury policies seek to ensure sufﬁcient liquidity whilst minimising risk. No speculative transactions are undertaken. Our strong balance sheet and the new credit facilities give us valuable headroom to take opportunities as they are created and to ﬁnance the continued growth of the Group. * See Financial highlights Halma p.l.c. Annual report and accounts 2008 29 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Financial review (continued) Continued good cash ﬂow generation Cash generated from operations (excluding taxation paid) was £76.0m (2007: £70.3m). The main elements of the Group’s cash ﬂow are set out below: Change in net (debt)/cash £million Cash generated from operations Acquisition of businesses Disposal of businesses Development costs capitalised Net capital expenditure Dividends paid Taxation paid Issue of shares net of treasury shares purchased Net interest paid Exchange adjustments Net (debt)/cash brought forward Net debt carried forward 2008 76.0 (46.5) 2.4 (3.8) (14.9) (27.3) (17.6) 0.2 (1.8) (3.3) (36.6) (7.7) (44.3) 2007 70.3 (27.5) – (3.9) (7.3) (25.9) (19.5) 3.6 (0.8) (0.2) (11.2) 3.5 (7.7) Cash generated from operations was 104% (2007: 106%) of adjusted proﬁt*. The investment in working capital increased in the year in line with the growth of revenue. There is no signiﬁcant change in the risk proﬁle of the Group. Working capital receives regular attention at local and Group level and this remains an important focus as there are increasing demands placed on our generated cash to fund the investment needed for organic growth, acquisitions, our dividend and pension obligations. Further valuable acquisitions Expenditure on acquisitions in the year was £46.5m (2007: £27.5m). The largest acquisition this year was that of Riester and its associated group companies in December 2007. We paid a consideration of €55m (including a small adjustment relating to the actual net asset value at acquisition). There is no earn out. Riester, which manufactures handheld medical and ophthalmic devices, ﬁts into our Health and Analysis sector. At the time of acquisition Riester was generating proﬁt of £4.6m on revenue of £17m. We undertook a very active integration process immediately on acquisition to bring the business in line with Group reporting standards and also to quickly deliver the beneﬁts of collaboration with our related Group companies. The acquisition is immediately earnings enhancing. At the start of the year we signed an agreement to pay £0.3m for the business of BKKI, a gas detector manufacturer in China. This forms the platform for expansion of our Gas Detection business in Asia. In October 2007 we acquired Sonar Research & Development Limited (SRD) for £2.6m. This has been merged into our subsea asset monitoring business Tritech, part of the Industrial Safety sector. During the year we increased our resources and capacity for acquisition search, due diligence and integration and together with our expanded credit facilities we hope to make further progress on acquisitions in the coming years. Increased capital expenditure Expenditure on property, plant and computer software was £15.7m in the year, above the ﬁgure of £10.9m last year. Much of the increase was due to investment in property for two Group companies as noted last year – both building projects have been completed successfully. Capital expenditure represents 172% of depreciation, historically a high ﬁgure. We expect capital expenditure excluding property to continue at a relatively high level for the coming year at least as we make further investments, in particular in our Photonics businesses, to increase capacity in line with growing demand. Pension contributions increased At year end the pension deﬁcit on an IAS 19 basis for our deﬁned beneﬁt plans was £36.0m before the related deferred tax asset, a little lower than the previous year end ﬁgure of £37.3m. The movement is due to a combination of factors, the main ones being the increased pension contributions, the use of conservative assumptions in line with common practice, a reduction in the value of equity investments and an increase in the discount rate resulting in a reduction in the value of liabilities. As indicated last year we increased further the extra contributions into the deﬁned beneﬁt plans, which were closed to new entrants in 2003, up to £6m per year. We anticipate making extra contributions of this level at least for the foreseeable future as we work toward our objective of eliminating the deﬁcit as measured on an IAS 19 basis, over a 10-year period. These extra contributions are not an insigniﬁcant use of our cash but are not expected to impair our opportunities for further growth. 30 www.halma.com The Board reviews pension strategy in full at each pension fund valuation date and monitors for signiﬁcant changes in between. The next valuation of the main pension plan will be based on ﬁgures as at 1 December 2008 and as part of that process mortality assumptions will be reviewed as will the level of contributions needed to meet our obligations. Currency headwind reduced Currency translation turned out to have less of an adverse impact on Group results than anticipated mid-way through the year. Approximately 30% of Group revenue is denominated in US Dollars with the Euro accounting for around 15% on an annualised basis. Foreign currency proﬁts are not hedged but sales and purchase transactions are hedged into the functional currency of each operating company. Balance sheet net currency assets are substantially hedged using currency loans. We translate revenue and proﬁt at the average exchange rates for the year and translate the year end balance sheet at the year end exchange rates. For our main currencies these rates relative to Sterling were as follows: Exchange rates Average rate Year end rate US Dollar Euro 2008 2.01 1.99 2007 1.89 1.96 2008 1.42 1.26 2007 1.48 1.47 As a guide, 1% movement in the Euro relative to Sterling is expected to change proﬁt by £0.2m and revenue by £0.7m in a full year. In the ﬁrst half of the year there was a 3% adverse currency impact due mainly to the weak US Dollar relative to Sterling. The trend reversed somewhat in the second half so that for the year as a whole revenue and proﬁt were both reduced by approximately 1% due to currency translation. If current exchange rates continue we would expect a beneﬁt to the coming year’s results in terms of translation. R&D investment grows Innovation is one of our core values and one aspect of this is the commitment we make to Research and Development (R&D) for new products. Group expenditure this year increased to £18.6m, 4.7% (2007: 4.3%) of revenue and was 22% higher than last year’s record amount. Expenditure on R&D as a percentage of revenue is one of the KPIs we monitor and report on and, as can be seen in the Sector reviews on pages 16 to 27, both Infrastructure Sensors and Health and Analysis are well clear of our benchmark level of 4% of revenue, with Industrial Safety increasing this year to 3.6% having historically been below 3%. International Financial Reporting Standards (IFRS) require us to capitalise certain development expenditure and amortise this asset over an appropriate period. In 2008 we capitalised £3.8m (2007: £3.9m) of such development expenditure and amortised £2.0m (2007: £1.5m) giving rise to an asset carried on the March 2008 Consolidated balance sheet of £8.2m (2007: £6.1m). R&D is by its nature an activity with some risk, so we monitor closely all costs carried forward. The increased investment in R&D expenditure and the resultant new products are a key part of the growth and resilience of Halma. Spreading risks, developing our people The main risks facing Halma are discussed above in the Strategic and Sector reviews. Risk is spread across our closely managed businesses, each one having its own high quality team including a senior ﬁnance executive. There is a signiﬁcant level of review of the operations at each business; locally, via our Divisional Chief Executives who chair the local boards, by Divisional Finance Directors, and by our Internal Auditors. During the year we have added to our divisional ﬁnance resources, strengthened ﬁnance staff at a number of operating companies and added resource dedicated to acquisition integration. In 2008/09 we will be adding further to our Internal Audit team. For the ﬁrst time we are reporting our progress on the Halma Executive Development Programme (HEDP) as a KPI and note that of the HEDP graduates some 17 have been amongst our senior ﬁnance executives. This careful addition and development of speciﬁc resource, focusing on risk and opportunity, gives us the capacity to grow our business actively whilst retaining the autonomy and accountability central to our business model. Investing in the environment During the year we have invested additional resources across the Group in reducing our impact on the environment. As discussed on pages 32 to 35 we set ourselves an initial target of reducing by 10% the tonnes of CO2 we produce per £m of revenue over the three years to 2010 and progress so far is good. We see the reduction of our impact on the environment as part of relentless business improvement, consistent with our objective of delivering sustainable value to our customers and shareholders. Kevin Thompson Finance Director * See Financial highlights Halma p.l.c. Annual report and accounts 2008 31 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Sustainability review Achievements KPIs We deliver sustainable value to our customers and shareholders. Non-ﬁnancial Key Performance Indicators (KPIs) are used by the Board to monitor progress on Group initiatives; ﬁnancial KPIs are considered on page 13. 1. Halma’s carbon policy was approved by the Board at the beginning of the year and calls for a 10% reduction in the carbon footprint by 2010. 2. Halma conducts an annual survey of its employees to assess how well the Group’s values are aligned with its employees and how well the Group communicates its values to employees. 3. The Halma Executive Development Programme (HEDP) has been supplemented with a Halma Management Development Programme (HMDP) aimed at middle- managers and the necessary skills they need in their current and future roles. CO2 EMISSIONS: TONNES/£M OF REVENUE >10% 42 2007 reduction Group target 40 VALUES ALIGNMENT 7 5 2007 >5 Group target Good progress towards reduced carbon emissions (relative to revenue) made in the policy’s ﬁrst year. Survey of senior managers showed an improvement to seven desired values now present in the Group. SUBSIDIARY DIRECTORS/MANAGERS WHO HAD COMPLETED HEDP/HMDP BY MARCH 2008 50% 26% >50% 2007 Group target Continued commitment to training our people. GOVERNANCE AND COMMITMENT TO CORPORATE RESPONSIBILITY As Halma companies are involved in the manufacture of a wide range of products for the protection and improvement to quality of life for people worldwide, safety is critical to the Group and is a major priority for management. Likewise, the reduction of the Group’s carbon footprint has received elevated attention in the current year in order to meet the Board’s stated objective of a 10% reduction in relative carbon usage in the three years to March 2010. Our core values are Achievement, Innovation, Empowerment and Customer Satisfaction. These core values have been selected following extensive surveying of employees across the Group. Our culture is one of openness, integrity and accountability. We encourage our employees to act fairly in their dealings with fellow employees, customers, suppliers and business partners. We recognise that our employees determine our success and therefore have invested in and encouraged their development more this year than ever before, not only with our intranet training facilities and Halma 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. Halma was designated a member of the FTSE4Good UK index on its establishment in July 2001. A summary of our progress and performance for all areas of corporate responsibility follows. Halma has developed meaningful key performance indicators (KPIs) that reﬂect the importance the Group places on corporate responsibility and enable the Board to monitor the Group’s progress in meeting its objectives and responsibilities in these areas. The biggest area of emphasis over the past two years 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. 32 www.halma.com HALMA AND THE ENVIRONMENT We have an excellent long-term record and a clear strategy for addressing environmental issues that affect our businesses and for developing products that protect the environment and improve safety at work and in public places. Our products Many of our innovative products play a very positive role in monitoring and improving the environment. Halma brands lead the world in a number of technologies which help to minimise environmental damage. Our principal environmental technologies are water leakage detection, gas emissions monitoring, water and efﬂuent analysis, UV water treatment and optical sensing. We tirelessly promote the use of UV water sterilisation which eliminates the need to use dangerous chemicals, as well as products that minimise the waste of clean water. Our commitment to the development of equipment for measuring environmental changes and controlling the damaging impact of industrial activities is long-term. We make safety equipment for use at work, in public places and in transportation systems that contribute to increased personal safety by ensuring safe practice at work, protecting people from ﬁre and making elevators and automatic doors safe and effective. We are the major world supplier in several of these areas. Carbon policy The Group’s policy on carbon is published on our website and has been distributed and explained to all Halma business units. A senior executive in each of our higher-impact business units is responsible for implementing the carbon policy at local level. The Finance Director, Kevin Thompson, has principal responsibility for coordinating and monitoring the policy. Environmental management system We are committed to developing and implementing an environmental management system (EMS) throughout the Group to measure, control and, where practical, reduce our environmental impacts. We have developed performance indicators that assist local management in implementing the policy and ultimately developing an EMS. The requirement for an EMS and the related reporting has been rolled out to all UK business units, which represent over 50% of Group production facilities in terms of external turnover. All Group companies are encouraged to undertake ISO 14001, the international environmental accreditation, where warranted, and since last year Elfab Limited has obtained ISO 14001 approval. The requirement to implement an EMS will be extended to the rest of the Group in the medium term. In terms of revenue, currently 20% of the Group has ISO 14001 approval. Our impact 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 Halma 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 implemented a cap on permissible CO2 emissions of all UK company vehicles and will extend this requirement to the rest of the world in due course. This limit has been reduced in 2008 and will continue to be reduced annually so as to consistently reduce our vehicles’ environmental impact. We have also set a fuel consumption standard for company vehicles in the USA. 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 were calculated as being approximately 15,000 tonnes, an average of approximately 42 tonnes per £million of revenues. We plan to reduce the Group’s total carbon emissions relative to revenues by 10% by 2010, and have made reasonable progress in 2007/08 with total Group carbon emissions of averaging 40 tonnes per £million of revenues. We worked with 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 is 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. This initiative has, and will continue to, lead to cost savings for the Group as well as preparing us for compliance with anticipated climate change legislation. Our carbon policy can be found on the Halma website. The Group’s environmental performance will continue to be reported both in the Annual report and on our website. Halma p.l.c. Annual report and accounts 2008 33 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Sustainability review (continued) The Group participated in the Carbon Disclosure Project for both the current and prior years and is committed to examining the establishment of ‘green’ procurement policies and increasing our use of recycled materials. HALMA AND ITS PEOPLE The Group has a policy of equal opportunities and preventing harassment, which applies in relation to recruitment of all new employees and to the management of existing personnel. This gives us access to the widest labour market and enables us to secure the best employees for our needs. We offer all of our staff training relevant to their roles and we believe that this contributes to an increase in employee motivation and job satisfaction. The culture alignment survey results mentioned below support this trend. Periodically we complete a survey of employees to determine whether our core values are authentic in our organisation. The survey establishes the values individual employees wish to see in our operating culture and to what extent they exist in our existing culture. In 2006, our survey of senior managers showed that ﬁve of the values they wanted to see in our business were actually present. In 2008, our survey of senior managers showed that seven desired values were present in our business. This indicates a healthy level of alignment between the culture we aspire to have and the culture we have today. No survey is capable of capturing all the appropriate sentiments, but our executives, who regularly visit all Group companies, agree that deﬁnite healthy improvements in the Group culture have occurred over recent years. The Group will continue to monitor the survey results to enable us to better support our people bringing these values and strengths to work so that they and we may derive further beneﬁt from them. Disabled employees Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. Employee consultation The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through formal and informal meetings, the Group intranet and the annual ﬁnancial statements. Employee representatives are consulted routinely on a wide range of matters affecting their current and future interests. An employee share plan has been running successfully since 1980. It is open to all UK employees and aligns the interests of all UK employees to those of shareholders. Health and safety The Group manages its activities to avoid causing any unnecessary or unacceptable risks to health and safety. 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’s Finance Director may monitor each company’s compliance with this policy. Major injuries recorded Days lost due to work-related injuries Total recorded injuries to all employees 2008 691 388 2007 652 716 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 2007/08 or 2006/07, and we achieved a considerable decrease in both serious and minor injuries in comparison with low levels in 2006/07. People development 2007/08 saw the continuing success 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. Training Cumulative number of candidates that have completed HEDP Cumulative number of candidates that have completed HMDP 2008 90 104 2007 50 – 34 www.halma.com 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. There are approximately 200 such eligible employees in total. The programme has been developed from a proven course structure and is speciﬁcally and continuously tailored to suit Halma’s needs, aligning the content to the Group’s four core values of Achievement, Innovation, Empowerment and Customer Satisfaction. It focuses strongly on strategic and leadership capabilities and developing personal attributes – commitment, determination and resilience. There is an emphasis on performance management and team development. It includes skill-based elements such as sales and marketing management, project leadership, corporate governance, ﬁnance and innovation, but all are presented in a strategic context. The ﬁrst six programmes have now been completed and the success of the programme can be measured by the enthusiasm of the participants upon their return to their businesses, the achievements of a number of participants and their eagerness to coordinate further sessions to explore topics of particular interest to their programme Group. With the HEDP now a well-established part of Halma’s people development activity, we have established a new programme for subsidiary managers and supervisors – the Halma Management Development Programme (HMDP). During the year ﬁve programmes were completed for a total of 104 employees. Programmes were held in the USA, Europe and Asia. RESPONSIBLE INVESTMENT Investing in Halma shares meets the criteria of many professional and private investors who base their decisions on environmental, ethical and social considerations. The Group is a world leader in several key environmental technologies and has a reputation for honesty and integrity in its relationships with employees, customers, business partners and shareholders. Social conditions can be improved for all through the creation of wealth. Halma creates wealth responsibly allowing our employees, customers, business partners and shareholders to determine where this wealth is best distributed. Halma’s policies reﬂect the core requirements of the Universal Declaration of Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work. We do not tolerate practices which contravene these international standards. Regulatory demands upon us vary considerably around the world, so Halma establishes the core structure to ensure that Group companies fully comply with regulatory requirements while permitting them to tailor the solutions to their particular needs. Ethics The Group culture is one of openness, integrity and accountability. Halma encourages its employees to act fairly in their dealings with fellow employees, customers, suppliers and business partners. We aim to have suppliers of high quality and operate to 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. I B U S N E S S R E V E W I CAUTIONARY NOTE The Business review has been prepared solely to assist shareholders to assess the Board’s strategies and their potential to succeed. It should not be relied on by any other party, for other purposes. Forward-looking statements have been made by the Directors in good faith using information available up until the date that they approved the Report. Forward-looking statements should be regarded with caution because of the inherent uncertainties in economic trends and business risks. In preparing this Business review, the Directors have aimed to comply with the Accounting Standards Board’s 2006 Reporting Statement guidance on Operating and Financial Reviews. G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Halma p.l.c. Annual report and accounts 2008 35 DIRECTORS’ REPORT Board of Directors and executive team Name: Geoff Unwin Title: Chairman Appointment:July 2003 Chairman Name: Andrew Williams Title: Chief Executive Appointment:July 2004 (Board) Name: Kevin Thompson Title: Finance Director Appointment:April 1998 (Board) September 2002 Deputy Chairman April 2002 (Executive Board) January 1995 (Executive Board) Age: 65 Committees: Nomination (Chairman) and Remuneration Skills and experience: Geoff is Chairman of 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. Previously he was Chief Executive of Cap Gemini Ernst & Young until 2002 and Chairman of United Business Media plc from 2002 to 2007. Age: 41 Committees: Nomination Skills and experience: Andrew was appointed Chief Executive of Halma p.l.c. in February 2005. He became a member of the Executive Board in 2002 as Divisional Chief Executive of the Optics and Water Instrumentation Division and was promoted to a Director of Halma’s p.l.c. Board in 2004. He joined Halma in 1994 as Manufacturing Director of Palmer Environmental and became Managing Director of that company in 1997. Andrew is a Chartered Engineer and a production engineering graduate of Birmingham University. Age: 48 Skills and experience: Kevin is Finance Director of Halma. In 1995 he joined the Halma Executive Board as Finance Director, in 1997 became group Finance Director and in 1998 was appointed to the Halma p.l.c. Board. He joined the Group in 1987 as Group Financial Controller and qualiﬁed as a Chartered Accountant with Price Waterhouse. Kevin is an economics and accounting graduate of Bristol University. Name: Richard Stone Title: Non-executive Director and Senior Independent Director Appointment: January 2001 Age: 65 Committees: Nomination, Remuneration (Chairman) and Audit Skills and experience: Richard 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. Previously Richard was a member of the Global Board of PricewaterhouseCoopers and Chairman of Coopers & Lybrand. Name: Adam Meyers Title: Chief Executive-Health Optics and Photonics Division Appointment:April 2008 (Board) April 2003 (Executive Board) Age: 46 Skills and experience: Adam is Chief Executive of the Health Optics and Photonics Division and was promoted to a Director of Halma’s p.l.c. Board in April 2008. He became a member of the Halma Executive Board in 2003 as Divisional Chief Executive of the Fluid Technology Division. He joined Halma in 1996 as President of Bio-Chem Valve and was appointed Assistant Divisional Chief Executive in 2001. Adam is a systems engineering graduate of the University of Pennsylvania and gained his MBA from Harvard Business School. Name: Neil Quinn Title: Chief Executive-Safety Sensors Division Appointment:April 1998 (Board) April 1995 (Executive Board) Age: 58 Skills and experience: Neil was appointed Chief Executive of the newly formed Safety Sensors Division in 2007 having previously been Chief Executive of both the Fire and the Fire & Security Divisions commencing in 1994. He was appointed to the Halma Executive Board in 1995 and to the Halma p.l.c. Board in 1998. He joined the Group as Sales Director of Apollo Fire Detectors in 1987, becoming Managing Director in 1992. Neil has a Material Sciences degree from Shefﬁeld University. 36 www.halma.com Name: Jane Aikman Title: Non-executive Director Appointment: August 2007 Age: 42 Committees: Nomination, Remuneration and Audit Skills and experience: Jane was appointed a non-executive Director of Halma in August 2007. She is Finance Director of Inﬁnis Limited. Jane qualiﬁed as a Chartered Accountant with Ernst & Young and has a degree in civil engineering from Birmingham University. Previously Jane was ﬁnance director of both Wilson Bowden Plc and Pressac plc. She spent three years as an internal audit manager with GEC Alsthom and ﬁve years in East Asia with Asia Pulp and Paper Co Limited. Name: Stephen Pettit Title: Non-executive Director Appointment: September 2003 Age: 57 Committees: Nomination, Remuneration and Audit (Chairman) Skills and experience: Stephen was appointed a non-executive Director of Halma in September 2003. He is chairman of ROK plc and a non-executive director of National Grid plc and BT Group plc – Equality of Access Board. Stephen is an Economics and Politics graduate of Cardiff University, has an MSc from London School of Economics and an MBA from INSEAD. Previously Stephen was an executive director with Cable & Wireless PLC and a divisional chief executive with BP PLC. Name: Keith Roy Title: Director Appointment:April 2001 (Board) April 2000 (Executive Board) Age: 58 Skills and experience: Keith was appointed to the Halma Board in 2001. 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 Assistant Divisional Chief Executive in 1998. In 2000 he was appointed Divisional Chief Executive of the Water Technology Division. Keith is an electronic engineering graduate of both Nottingham University (BSc) and Aston University (MSc). He will retire in July 2008. Name: Carol Chesney Title: Company Secretary Appointment: April 1998 Age: 45 Skills and experience: Carol was appointed Company Secretary of Halma p.l.c. in 1998. She spent three years with English China Clays p.l.c. before joining Halma in 1995 as Group Finance Manager. She is a maths graduate of Randolph-Macon Woman’s College, Virginia and qualiﬁed as a Chartered Accountant with Arthur Andersen. Board of Directors E Geoffrey Unwin Chairman Andrew J Williams Chief Executive Kevin J Thompson Finance Director Neil Quinn Richard A Stone Keith J Roy Stephen R Pettit E Jane Aikman Adam J Meyers Secretary Carol T Chesney Executive Board Andrew J Williams Kevin J Thompson Keith J Roy John S Campbell Elevator Safety Charles E Dubois Fluid Technology Mark Lavelle Process Safety Adam J Meyers Health Optics and Photonics Neil Quinn Safety Sensors Allan Stamper Water and Asset Monitoring Nigel J B Trodd Fire and Gas Nigel J Young Special Projects Key Board of Directors Executive Board I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Halma p.l.c. Annual report and accounts 2008 37 DIRECTORS’ REPORT Board of Directors and executive team (continued) Name: John Campbell Title: Chief Executive – Elevator Safety Division Appointment: April 1998 (Executive Board) Age: 49 Skills and experience: John was appointed Chief Executive of the Elevator Safety Division in 2006 after leading the successful disposal of the Group’s resistor businesses. He joined the Halma Executive Board in 1998 and has also operated Halma businesses in the Safety Interlock, Bursting Disk and Automatic Door Sensor areas. He joined the Group in 1995 as President of IPC Resistors and is an electrical engineering graduate of the University of Toronto. Name: Charles Dubois Title: Chief Executive – Fluid Technology Division Appointment: April 2008 (Executive Board) Age: 42 Skills and experience: Charles was appointed Chief Executive of the Fluid Technology Division in April 2008. In 2007 he became Divisional Managing Director of that Division. He was appointed President of Diba Industries following the company’s acquisition in 2004. Charles joined the Group in 1999 as Vice President Sales and Marketing of Perma Pure LLC. He holds a Bachelor’s degree in physics from the College of the Holy Cross and earned his MBA from the F.W. Olin School of Business at Babson College. Name: Mark Lavelle Title: Chief Executive – Process Safety Division Appointment: April 2007 (Executive Board) Age: 49 Skills and experience: Mark was appointed Chief Executive of the Process Safety Division in 2007. He joined Keeler Instruments in November 2001 as Managing Director and was promoted to Divisional Managing Director in 2006. Mark has a chemistry degree from Cambridge University and an MBA from INSEAD. Name: Allan Stamper Title: Chief Executive – Water and Asset Monitoring Division Appointment: October 2007 (Executive Board) Age: 53 Skills and experience: Allan was appointed Divisional Chief Executive and a member of the Executive Board in October 2007. He joined the Group in 2002 as Managing Director of Crowcon Detection Instruments. Allan is an engineering graduate of both Loughborough University (BSc) and Imperial College (MSc) and has an MBA from Cranﬁeld. Name: Nigel Trodd Title: Chief Executive – Fire and Gas Division Appointment: July 2003 (Executive Board) Age: 50 Skills and experience: Nigel is Chief Executive of the Fire and Gas Division. He joined Halma in July 2003 as Chief Executive of Process Safety Division and a member of the Executive Board. Nigel is a business studies graduate of Thames Valley University and is a member of the Chartered Institute of Marketing. Name: Nigel Young Title: Chief Executive – Special Projects Appointment: April 1994 (Executive Board) Age: 58 Skills and experience: Nigel is Chief Executive – Special Products with responsibility for Group Management Information Systems and Halma People Development Programmes. He was appointed to the Executive Board in 1994 and has served as a Divisional Chief Executive since 1992. Nigel joined Halma as Managing Director of Fortress Interlocks when the company joined the Group in 1987. He has an MBA from Aston University. Key Board of Directors Executive Board 38 www.halma.com DIRECTORS’ REPORT Corporate governance Geoff Unwin Chairman This section of the report deals with how the Board and its committees discharge their duties and how we apply the principles of good governance in the Combined Code on Corporate Governance which is appended to the Listing Rules of the Financial Services Authority and for which the Board is accountable to shareholders. 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. I am pleased with the progress Halma has made to ensure best practice is maintained and we continually seek to improve our practices for the beneﬁt of our shareholders. Succession planning I have always maintained that a key part of my role involves ensuring that the right people are doing the right jobs within the Group and that there is a sufﬁcient cadre of individuals being nurtured throughout the Group to enable effective succession planning. Reviews of management capabilities and potential are performed on a routine basis and I am satisﬁed that sufﬁcient resource within the Group exists and continues to be developed through programmes such as the Halma Executive Development Programme which itself evolves to meet the changing needs of the Group. Where a need for improvement to management resources is identiﬁed, the necessary attention is provided to ensure full strength is attained as soon as practicable. Board appointments Following the annual general meeting in August 2007, Jane Aikman joined the Board as a non-executive Director. As a ﬁnance director of both listed and private companies, Jane’s corporate and international experience complements the Board’s current mix of knowledge and skills. In April 2008 we made another appointment to the Board, Adam Meyers, in contemplation of Keith Roy’s notiﬁcation of intention to retire at the end of July 2008. Adam provides another international dimension to the Board since he is based in the US and we are already beneﬁting from having him around the Board table. Our Board composition is discussed further on page 40, but I wanted to add my own conﬁrmation that I am entirely satisﬁed that our preferred composition of the Board, which is a deviation from the Combined Code, is appropriate to Halma and is one which all of the non-executive Directors support. No shareholder has ever raised this matter with me and, indeed, when I sought shareholders’ support at the 2005 AGM, it was unanimous. Board committees Our committees are a valuable part of the Company’s corporate governance structure. The workload of the committees is far more than the table of scheduled meetings on page 40 would indicate as ad hoc meetings and communications between meetings frequently require considerable amounts of time. As with the Board’s composition, I am equally comfortable that the composition of all of our committees remains appropriate. Board performance The Board evaluates its performance and that of the Remuneration, Audit and Nomination Committees at least annually. Each year, we consult the Board to determine whether an external facilitator would enhance our process. To date, we have concluded that the current, open climate that the Board enjoys ensures a full and frank discussion of all matters, so an external facilitator is unnecessary. For 2007/08 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 January 2008 Board meeting. The Board also met in January 2008, 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 Chief Executive, as appropriate. Shareholder communication I would like to encourage all shareholders to ﬁnd the time to attend our AGM on 31 July 2008. It is an excellent opportunity to meet the Board, the Executive Board and the CEOs of our operating companies, all of whom will be in attendance, and hold them accountable for the Group’s results and their stewardship of your company. Geoff Unwin Chairman I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Halma p.l.c. Annual report and accounts 2008 39 DIRECTORS’ REPORT Corporate governance (continued) 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 recognises that this composition was not achieved prior to Jane Aikman’s appointment on 1 August 2007. From 3 April 2008, the preferred composition is not possible due to Keith Roy’s and Adam Meyers’ directorships overlapping for reasons of succession planning. Prior to permitting this imbalance to occur, the Chairman and non-executive Directors sought assurance from the Chief Executive that he was unaware of any signiﬁcant matters to be brought to the Board’s attention prior to Keith Roy’s retirement on 31 July 2008. After Keith Roy’s retirement, the Board will be restored to its preferred composition. The Board adjudged this composition as the most appropriate structure for the Company providing valuable direct knowledge of operations and a robust debate surrounding the issues facing the Group in the present and future as well as ensuring a good mix of skills and experience. In respect of the Audit Committee composition, the non-compliance related to the period to 1 August 2007 when Jane Aikman was appointed to the Board and the Audit Committee. Jane Aikman succeeded Andrew Walker who retired in March 2007. Application of the principles of good governance The Group is controlled and directed by a Board consisting of a Chairman, four Directors (ﬁve from 3 April 2008 to 31 July 2008) and three other non-executive Directors. Their biographies appear on pages 36 and 37. The Nomination Committee returned to full membership in August 2007 following Jane Aikman’s 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: Total scheduled meetings Geoff Unwin Andrew Williams Kevin Thompson* Neil Quinn Richard Stone Keith Roy Stephen Pettit Jane Aikman** Board Remuneration Committee Audit Committee Nomination Committee 6 6 6 5 6 6 6 6 2 3 3 N/A N/A N/A 3 N/A 3 2 3 N/A N/A N/A N/A 3 N/A 3 2 1 1 1 N/A N/A 1 N/A 1 N/A * Kevin Thompson was attending Harvard Business School’s Advanced Management Program at the time he missed one Board meeting. ** Since her appointment on 1 August 2007, Jane Aikman has missed only one scheduled meeting due to a prior commitment identiﬁed at the time of her appointment. 40 www.halma.com 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 the website or on request from the Company Secretary. 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 the guidance for directors on internal control (‘Internal Control: Guidance for Directors on the Combined Code’), the Board conﬁrms that there is an ongoing process for identifying, evaluating and managing the signiﬁcant risks faced by the Group, that this has been in place for the year under review and up to the date of approval of the Annual report and accounts. This process has been reviewed by the Board, and the Group accords with the Turnbull guidance. The Group’s external auditors, Deloitte & 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 procedure is intended to ensure that the Directors maintain full and effective control over all signiﬁcant strategic, ﬁnancial and organisational issues. Group risk is mitigated by means of an operating structure which spreads the Group’s activities across a number of autonomous subsidiary companies. Each of these companies operates with a high quality board of directors including a ﬁnance executive. Group companies operate under a system of controls which includes but is not limited to: – a deﬁned organisational structure with an appropriate delegation of authority to operational management which ensures appropriate segregation of key duties; – the identiﬁcation and appraisal of risks both formally, through the annual process of preparing business plans and budgets, through an annual detailed risk assessment carried out at local level and informally through close monitoring of operations; – a comprehensive ﬁnancial reporting system within which actual and forecast results are compared with approved budgets and the previous year’s ﬁgures on a monthly basis and reviewed at both local and Group level; – an investment evaluation procedure to ensure an appropriate level of approval for all capital expenditure; – self-certiﬁcation by operating company management of compliance and control issues; – a prescribed robust structure under which it is appropriate to adopt means of electronic communication and to conduct e-commerce. The processes which the Board has applied in reviewing the effectiveness of the Group’s system of internal control are summarised below. – Operating companies carry out a detailed 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. Group management also compile a summary of signiﬁcant Group risks, documenting existing or planned actions to mitigate, manage or avoid the risk. – Each month the board of each operating company meets, discusses and reports on its operating performance, its opportunities, the risks facing it and the resultant actions. The relevant Divisional Chief Executive chairs this meeting. Divisional Chief Executives meet regularly with the Chief Executive and Finance Director and report progress to the Executive Board. – A set of ‘warning signs’ is reported to Group and divisional management. This report is designed to provide an early warning of potential risks and to direct appropriate action where necessary. – The Chief Executive submits a report to each Halma p.l.c. Board meeting which includes ﬁnancial information, the main features of Group operations and an analysis of the signiﬁcant risks facing the Group at that time. – Cyclical internal control visits 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 and a summary of all such visits reported to the Audit Committee regularly with any signiﬁcant control failings being reported directly to the Audit Committee; senior ﬁnance staff also carry out ﬁnancial reviews at each operating company prior to publication of half year and year end ﬁgures. – The Finance Director and 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. During the year, actions to strengthen the control environment were taken centrally by Group management. The duties and responsibilities of subsidiary management were clariﬁed and documented in a manual circulated to all subsidiary managing directors; further resources were dedicated to identify and investigate potential acquisitions and to ensure a rapid and successful integration following acquisition; and the scope of the Group's IT policies was extended, including a programme of compliance audits which commenced in early 2008. As noted above, a programme of internal control visits is conducted. Following its review of internal control activities in 2004, the Audit Committee established an internal audit function for independent reporting of the outcome of these visits to the Audit Committee. During the year we implemented further improvements to our Internal Audit activities as the result of several benchmarking activities previously conducted. As a result further improvements have been targeted for the coming year to enhance our processes including the appointing of a dedicated Internal Audit manager. 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. Investor relations In regular meetings with shareholders and analysts the Chief Executive and Finance Director communicate the Group’s strategy and results, disclosing such information as is permitted within the guidelines of the Listing Rules. Such meetings ensure that institutional shareholders representing over 50% of the Company’s issued share capital meet with the Company on a regular basis. Major shareholders are also offered the opportunity to meet with the Chairman and/or Senior Independent Director. All shareholders are encouraged to attend the annual general meeting, and major shareholders are also invited to brieﬁngs following the 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 features the facility to request e-mail alerts relating to announcements made by the Group and contains information in Chinese, French, German and Spanish as well as English. The Financial calendar is set out on page 90. 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. I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Halma p.l.c. Annual report and accounts 2008 41 DIRECTORS’ REPORT Nomination committee report Geoff Unwin Chairman of the Nomination Committee Members – Geoff Unwin (Chairman) – Andrew Williams (Chief Executive) – Richard Stone – Stephen Pettit – Jane Aikman Governance The Nomination Committee was in place throughout the ﬁnancial year. It is chaired by the Chairman of the Company who was deemed to be independent upon appointment to the Board. Three of the ﬁve members of the Committee are independent non-executive Directors in accordance with provision A.3.1 of the Combined Code. The Nomination Committee is appointed by the Board from the non- executive Directors of the Group and the Chief Executive. The Nomination Committee’s terms of reference include all matters indicated by the Combined Code. The terms of reference are considered annually by the Nomination Committee and are then referred to the Board for approval. Activities The Committee is responsible for nominating appropriate executive and non-executive candidates for appointment to the Board. During the past year, two such appointments have been made: Jane Aikman as a non- executive Director and Adam Meyers as an executive Director. Responsibilities – regularly reviewing the structure, size and composition (including the skills, knowledge and experience) required of the Board compared to its current position and making recommendations to the Board with regard to any changes; – giving full consideration to succession planning for directors and other senior executives in the course of its work, taking into account the challenges and opportunities facing the company, and what skills and expertise are therefore needed on the Board in the future; and – being responsible for identifying and nominating, for the approval of the Board, candidates to ﬁll Board vacancies as and when they arise. The full terms of reference can be found on the Company’s website or be obtained from the Company Secretary. When the necessity to appoint a Director is identiﬁed, a candidate proﬁle is developed indicating the ideal skills, knowledge and experience required taking into account the Board’s existing composition. External search consultancies are retained when recruiting non-executive Directors and are used to evaluate internal and external candidates for succession planning. The Committee meets at least annually and more frequently during times that a search is being conducted. As noted on page 39, the process of appointments to the Board is paramount in ensuring the Company’s performance is maintained and continually improved upon. The Committee is committed to identifying the right candidates to take Halma forward. On behalf of the Nomination Committee Geoff Unwin Chairman 42 www.halma.com DIRECTORS’ REPORT Audit committee report Stephen Pettit Chairman of the Audit Committee Members – Stephen Pettit (Chairman) – Richard Stone – Jane Aikman The Audit Committee is appointed by the Board from the non-executive Directors of the Group. The Audit Committee’s terms of reference include all matters indicated by the Combined Code. The terms of reference are considered annually by the Audit Committee and are then referred to the Board for approval. Responsibilities – monitoring the integrity of the ﬁnancial statements of the Group and any formal announcements relating to the Group’s ﬁnancial performance and reviewing signiﬁcant ﬁnancial reporting judgments contained therein; – reviewing the Group’s internal ﬁnancial controls and the Group’s internal control and risk management systems including whistleblowing procedures; – monitoring and reviewing the effectiveness of the Group’s internal audit function; – making recommendations to the Board, for a resolution to be put to the shareholders for their approval in general meeting, on the appointment of the external auditors and the approval of the remuneration and terms of engagement of the external auditors; – reviewing and monitoring the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; and – developing and implementing a policy on the engagement of the external auditors to supply non-audit services, taking into account relevant guidance regarding the provision of non-audit services by the external audit ﬁrm. The full terms of reference can be found on the Company’s website or be obtained from the Company Secretary. Governance The Audit Committee was in place throughout the ﬁnancial year with Jane Aikman’s appointment in August 2007 restoring the Committee to three members. All three members are independent non-executive Directors in accordance with provision A.3.1 of the Combined Code. The Chairman, Chief Executive, Finance Director and representatives from the Auditors attend Committee meetings by invitation in order to provide appropriate advice. The Committee routinely meets with the Auditors without the involvement of the executive Directors; the Committee meets at least three times per year. The Board has designated Jane Aikman (formerly Richard Stone) as the member of the Audit Committee with recent and relevant ﬁnancial experience. Her background is as a chartered accountant and ﬁnance director with listed company experience. Activities The Committee not only reviews the ﬁnancial reporting of the Company, but spends a signiﬁcant amount of its time reviewing the effectiveness of the Group’s internal control process. Combined with the Committee’s review of the internal and external audit functions, it is able to obtain sufﬁcient information to discharge its responsibilities. More speciﬁcally, the Committee: – reviewed the March 2008 report and ﬁnancial statements, the September 2007 half-yearly report and the Interim Management Statements issued in August and February. As part of this review the Committee received a report from the external auditors on their audit of the Annual report and ﬁnancial statements; – considered the output from the Group-wide process used to identify, evaluate and mitigate risks; – reviewed the effectiveness of the Group’s internal controls and disclosures made in the annual report and ﬁnancial statements on this matter; – reviewed and agreed the scope of the audit work to be undertaken by the auditors; – agreed the fees to be paid to the external auditors for their audit of the March 2008 ﬁnancial statements; – reviewed its own effectiveness; – undertook an evaluation of the performance of the Internal Audit function; – agreed a programme of work for the company’s Internal Audit function; and – received reports from the Internal Audit Coordinator on the work undertaken by Internal Audit and management responses to proposals made in the audit reports issued by the function during the year. The Group’s policy on external audit sets out the categories of non-audit services which the external auditors will and will not be allowed to provide to the Group, subject to de minimis levels. As a consequence of its satisfaction with the results of the external auditor-related activities outlined above, the Audit Committee has recommended to the Board that the external auditors are re-appointed. The Group’s whistleblowing policy contains arrangements for the Group Internal Audit Coordinator to receive, in conﬁdence, complaints on accounting, risk issues, internal controls, auditing issues and related matters for reporting to the Audit Committee as appropriate. On behalf of the Audit Committee Stephen Pettit Chairman Halma p.l.c. Annual report and accounts 2008 43 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Remuneration report Richard Stone Chairman of the Remuneration Committee Members – Richard Stone (Chairman) – Geoff Unwin – Stephen Pettit – Jane Aikman REMUNERATION COMMITTEE REPORT The Committee makes recommendations to the Board on the framework for executive Directors’ and senior executives’ remuneration based on proposals formulated by the Chief Executive. Responsibilities – determining and agreeing with the Board the policy and framework for the remuneration of the Chief Executive, the executive Directors, the Company Secretary and such other members of the executive management as it is designated to consider; – approving the design of, and determining targets for, any performance related pay plans operated by the Company and agreeing the total annual payments made under such plans; – reviewing the design of all share incentive plans for approval by the Board and shareholders, and determining, each year, whether awards will be made, and if so, the overall amount of such awards, the individual awards to executive Directors and other senior executives and the performance targets to be set; and – determining the policy for, and scope of, pension arrangements for each executive Director and other senior executives. The Committee also monitors and considers, with the Chief Executive, the framework of remuneration for subsidiary chief executives and directors and ensures a consistent approach is applied. The full terms of reference can be found on the Company’s website or be obtained from the Company Secretary. Governance The Remuneration Committee was in place throughout the ﬁnancial year with Jane Aikman’s appointment in August 2007 restoring the Committee to four members. All three non-executive Director members are independent in accordance with provision A.3.1 of the Combined Code. None of the Committee has any personal ﬁnancial interest (other than as shareholders), conﬂicts of interests arising from cross-directorships or day-to-day involvement in running the business. The Committee makes recommendations to the Board. No Director plays a part in any discussion about his or her own remuneration. In determining the Directors’ remuneration for the year, the Committee consulted Andrew Williams (Chief Executive) about his proposals. The Committee also consulted Watson Wyatt Limited to provide advice on structuring executive remuneration packages. Watson Wyatt provides limited independent pension advice to the Company as well. The Committee meets at least twice per year. Activities During the year, the Committee reviewed the Company’s remuneration strategy to ensure it remained appropriate. As a result of this review adjustments will be made in 2008/09 to ensure executives remain appropriately incentivised to meet the Group’s objectives. 44 www.halma.com In addition the Committee has: – agreed the performance targets on the granting of performance shares; – agreed the award of bonuses in respect of 2007/08; – approved the salary uplift on Adam Meyers’ promotion to the Board; and – reviewed the Remuneration report. The Company’s remuneration strategy, policy and details of executive remuneration follow. On behalf of the Remuneration Committee Richard Stone Chairman REPORT ON REMUNERATION STRATEGY AND POLICY Introduction This report has been prepared in accordance with Schedule 7A to the Companies Act 1985. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles relating to directors’ remuneration in the Combined Code. As required by the Act, a resolution to approve the report will be proposed at the Annual General Meeting of the company at which the ﬁnancial statements will be approved. The Act requires the auditors to report to the Company’s members on certain parts of the Directors’ Remuneration report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Companies Act 1985. The report has therefore been divided into separate sections for audited and unaudited information. UNAUDITED INFORMATION Remuneration policy Executive remuneration packages are sensibly designed to attract, retain and motivate executives of the high calibre needed to run the Group successfully, manage its businesses and align the interest of the Directors with those of the shareholders by rewarding them for enhancing value to shareholders. The performance measurement of the executive Directors and key members of senior management and the determination of their annual remuneration package are undertaken by the Committee. There are ﬁve main elements of the remuneration package for executive Directors and senior management: – basic annual salary; – beneﬁts-in-kind; – annual bonus payments which cannot exceed 100% of basic salary; – share plan incentives; and – pension arrangements. The Company’s policy is that a substantial proportion of the remuneration of the executive Directors should be performance-related. As described below, executive Directors may earn annual incentive payments of up to 100% of their basic salary together with the beneﬁts of participation in share plans. Basic salary An executive Director’s basic salary is reviewed by the Committee prior to the beginning of each year and when an individual changes position or responsibility. The Chief Executive is responsible for assessing the performance of each senior executive taking account of the complexity of the operations under their control, their opportunities for advancement with the Group, their remuneration relative to other executives in the Group and their bonus earning potential. He then formulates a remuneration proposal for the Committee’s consideration. In deciding appropriate remuneration levels, the Committee also considers the Group as a whole and relies on objective research conducted by Watson Wyatt which gives up-to-date information on a comparator group of companies. Basic salaries are reviewed in January/February of each year with increases taking effect from 1 April. Executive Directors’ contracts of service which include details of remuneration will be available for inspection at the Annual General Meeting. Beneﬁts-in-kind The executive Directors receive certain beneﬁts-in-kind, principally a car and private medical insurance. Annual bonus payments The Committee establishes the economic value added (EVA) objectives that must be met for each ﬁnancial year if a cash bonus is to be paid. In setting appropriate bonus parameters the Committee has determined that bonuses of approximately 60% of salary are payable on the achievement of targeted levels of growth. The maximum performance- related bonus that can be paid is 100% of basic annual salary. Incentive payments for the year ended 29 March 2008 varied between 15% and 100%. This reﬂects continuing improvement to the company’s organic growth and completion of strategic acquisitions. This performance related bonus plan, which applies to executive Directors and Divisional Chief Executives, is reviewed annually by the Committee and approved by the Board. There is no alternative bonus arrangement for Directors and Divisional Chief Executives. During the year the 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 Chief Executive and 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. In 2007/08, Executive Directors and Divisional Chief Executives increased 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) exceeded 45%, or by 15% of salary if accompanied by absolute proﬁt growth in their Division (or aggregate thereof). For 2008/09, the supplemental cash bonus that can be earned, subject to a 100% of salary cap, is dependent upon attainment of a Return on capital employed of 45% and organic proﬁt growth of at least 4% in their Division (or aggregate thereof). At this level of ROCE, 5% of salary is payable rising to a maximum of 15% of salary at 6% organic growth. 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. 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 Committee has responsibility for supervising the Plan and the grants under its terms. The Committee believes that any incentive compensation awarded should be tied to the interests of the company’s shareholders and that the principal measure of those interests is total shareholder return. In determining the amount to be granted, account is also taken of the relative ﬁnancial and operational success of the different parts of the business for which the executive directors are responsible and the extent to which the personal strategic objectives set by their superior have been met. The Plan contains provisions permitting share option grants, restricted share awards and performance share awards. To date, the Committee have used the Plan only to award performance shares. However, included in the AGM business for the current year is a proposal to add an approved share option section to the performance share plan to make future awards more tax effective for the Company and the participant. The economic and commercial value of the future awards made to participants will be unchanged. Awards made under the new Plan were ﬁrst made in August 2005 and annually thereafter. Chief Executive Finance Director Executive Directors Divisional Chief Executives Managing directors & Divisional ﬁnance directors * expressed as a % of salary Maximum award Actual award permitted* 2007/08* 140% 140% 140% 100% 140% 138% 132% 97% 40% 33% 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, 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. Vesting expectations for awards made range from 45% to 85%. Percentage of award which vests ROTIC (post-tax) 9.5% 11.0% 12.5% 14.0% TSR (percentile) <50% 50% 0.0 16.7 33.3 50.0 16.7 33.3 50.0 66.7 75% 50.0 66.7 83.3 100.0 100% 50.0 66.7 83.3 100.0 ROTIC (Return on total invested capital) 15% 10% 5% 04 05 06 07 08 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 given that the performance share plan was approved by shareholders at the 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%. The Company does not operate any long-term incentive plans other than the share plans described above. Except for the proposed amendment relating to the Performance Share Plan, no signiﬁcant amendments are proposed to be made to the terms and conditions of any entitlement of a Director to share options. Pension arrangements Except as noted below, the executive Directors participate in the appropriate section of the Halma Group Pension Plan. This section is a funded ﬁnal salary occupational pension plan registered with HM Revenue & Customs, which provides a maximum pension of two-thirds of ﬁnal pensionable salary after 25 or more years’ service at normal pension age (60). Up to 5 April 2006, ﬁnal pensionable salary was the greatest salary of the last three complete tax years immediately before retirement or leaving service. From 6 April 2006, ﬁnal pensionable salary is capped at 7.5% of the Lifetime Allowance equating to £120,000 for the year ended 29 March 2008. Halma p.l.c. Annual report and accounts 2008 45 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Remuneration report (continued) 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. Executive Directors receive 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. In April 2006, Kevin Thompson chose to cease entirely future service accrual in the Halma Group Pension Plan in return for the pension supplement on his full salary. TOTAL SHAREHOLDER RETURN (total return indices) 400 300 200 100 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 FTSE 350 ELECTRONIC & ELECTRICAL EQUIPMENT FTSE 250 HALMA Source: Datastream The graph above shows the Company’s total shareholder return performance over the ﬁve years to 29 March 2008 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 113% compared to 187% for the FTSE 250 and 151% 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 114p and the total of dividends paid in the year ended 29 March 2003 was 5.491p per share. The Halma p.l.c. ordinary share price at 29 March 2008 was 191.5p and the total of dividends paid in the year then ended was 7.33p per share. Directors’ contracts It is the Company’s policy that executive directors should have contracts with an indeﬁnite term providing for a maximum of one year’s notice. Kevin Thompson, Neil Quinn, Andrew Williams and Adam Meyers who are proposed for election or re-election at the next annual general meeting have service contracts which provide for a notice period of one year. Geoff Unwin who is proposed for re-election has a service contract which provides for six months’ notice. Jane Aikman who is also proposed for re-election, being a non-executive Director, does not have a service contract. The details of the Directors’ contracts are summarised in the table below: Andrew Williams Kevin Thompson Neil Quinn Keith Roy Adam Meyers Date of contract April 2003 April 2003 April 2003 April 2003 September 1996 Notice period one year one year one year one year* one year * The Company has accepted Keith Roy’s notice of retirement effective 31 July 2008. In the event of early termination, no predetermined compensation is provided for in the Directors’ contracts. Non-executive Directors Unless otherwise indicated, all non-executive Directors have a speciﬁc three-year term of engagement which may be renewed for further three- year terms if both the Director and the Board agree. 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 is 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 and Remuneration Committee member 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 Jane Aikman (appointed August 2007), Audit and Remuneration Committees member £140,000 £43,000 £40,000 £36,000 No fees are payable for membership of the Nomination Committee of which each of the above Directors is a member. AUDITED INFORMATION Aggregate Directors’ remuneration The total amounts for Directors’ remuneration were as follows: 2008 £000 Emoluments Gains on exercise of share options Pension supplements 2,036 244 167 2,447 2007 £000 2,152 247 159 2,558 46 www.halma.com Directors’ remuneration Salaries and fees £000 Bonus Beneﬁts £000 £000 Pension supple- ment £000 2008 Total £000 2007 Total £000 140 375 247 200 43 180 40 24* – 1,249 – 306 182 41 – 180 – – – 709 16 21 12 14 – 15 – – – 78 – 66 64 21 – 16 – – – 156 768 505 276 43 391 40 24 – 156 856 516 258 43 368 36 – 51** 167 2,203 2,284 Geoff Unwin Andrew Williams Kevin Thompson Neil Quinn Richard Stone Keith Roy Stephen Pettit Jane Aikman Andrew Walker * from date of appointment ** up to date of resignation The fees paid in relation to Geoff Unwin were paid to Gunwin Limited. Andrew Williams’ prior year beneﬁts included relocation expense reimbursement of £74,000. Directors’ interests The Directors who held ofﬁce at 29 March 2008 had the following interests in the ordinary shares of the Company: Geoff Unwin Andrew Williams Kevin Thompson Neil Quinn Richard Stone Keith Roy Stephen Pettit Jane Aikman Shares 29.3.08 Shares 31.3.07 38,250 68,250 72,473 106,523 99,609 114,301 69,118 74,118 20,000 20,000 764,057 760,649 2,000 NA 2,000 – At the date of his appointment, Adam Meyers had a beneﬁcial interest in 41,689 ordinary shares of the Company. There are no non-beneﬁcial interests of Directors. There were no changes in Directors' interests from 29 March 2008 to 17 June 2008. Performance share plan The movements in performance share awards during the ﬁnancial year were as follows: Andrew Williams Kevin Thompson Neil Quinn Keith Roy Date of grant As at 31.03.07 Aug 2005 July 2006 July 2007 Aug 2005 July 2006 July 2007 Aug 2005 July 2006 July 2007 Aug 2005 July 2006 July 2007 241,482 246,231 169,792 165,327 141,305 132,446 122,250 114,852 1,333,685 Granted in the year 218,144 141,632 109,695 98,726 568,197 Three-day average share price on grant 148.42p 199.00p 204.67p 148.42p 199.00p 204.67p 148.42p 199.00p 204.67p 148.42p 199.00p 204.67p As at 29.3.08 241,482 246,231 218,144 169,792 165,327 141,632 141,305 132,446 109,695 122,250 114,852 98,726 1,901,882 Performance conditions for the awards made in the ﬁnancial year are set out above. The current vesting expectation for grants made in 2005 is 45%; for grants made in 2006, 85% and for grants made in 2007, 65%. Directors’ share options The movements in share options during the ﬁnancial year were as follows: Andrew Williams Kevin Thompson Neil Quinn Keith Roy As at 31.3.07 443,421 782,602 763,375 497,292 Lapsed (13,200) (21,600) (21,600) (6,800) Exercised (22,300) (30,400) (142,100) (11,800) Share price on exercise 240.00p 236.17p 237.63p 236.80p As at 29.03.08 407,921 730,602 599,675 478,692 2008 Gains on exercise (£) 17,060 34,557 178,973 13,488 2007 Gains on exercise (£) 5,862 67,362 150,247 24,027 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, 28 March 2008, the last trading day preceding the ﬁnancial year end, was 191.5p per share and the range during the year was 181.5p to 246p. Halma p.l.c. Annual report and accounts 2008 47 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Remuneration report (continued) Details of Directors’ options outstanding at 29 March 2008 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 191.5p. 2 Not yet exercisable, will only be exercisable when the performance criteria, set out in note 23 to the accounts, have been met and have an exercise price per share of less than 191.5p. Andrew Williams Kevin Thompson Neil Quinn Keith Roy Status of options (see above) Year of grant 1 2 1 2 1 2 1 2 2004 1998-2005 1998; 2000-2001; 2003-2004 1998-2005 2001; 2003-2004 1998-2005 1998-1999; 2001-2002; 2004 1998-2005 Number of shares 156,162 251,759 359,190 371,412 282,364 317,311 207,144 271,548 Weighted average exercise price (p) per share 142.25 138.78 130.18 137.35 143.56 134.72 135.47 136.36 All options lapse if not exercised within ten years from the date of grant. The Company’s Register of Directors’ Interests, which is open to inspection at the Registered Ofﬁce, contains full details of Directors’ shareholdings and share options. There have been no variations to the terms and conditions or performance criteria for share options during the ﬁnancial year. Directors’ pension entitlements Four Directors are members of the Company’s deﬁned beneﬁt pension plan. The following Directors had accrued entitlements under the plans as follows: Years of pensionable service at 29.3.08 Age at 29.3.08 Accrued pension Increase in the year £000 2007 £000 Accrued pension 2008 £000 40 48 58 57 13 18 20 15 30 87 92 54 5 1 3 3 36 91 98 59 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. Transfer value 31.3.07 £000 Directors’ contri- butions £000 Increase in value net of contri- butions £000 231 924 1,451 866 12 – 12 12 83 231 348 251 Transfer value 29.3.08 £000 326 1,155 1,811 1,129 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. 48 www.halma.com DIRECTORS’ REPORT Other statutory information Activities Halma p.l.c. is a holding company. A list of its principal subsidiary companies and their activities is set out on pages 88 and 89. Ordinary dividends The Directors are recommending a ﬁnal dividend of 4.55p per share and, if approved, this dividend will be paid on 20 August 2008 to ordinary shareholders on the register at the close of business on 18 July 2008. Together with the interim dividend of 3p per share already paid, this will make a total of 7.55p (2007: 7.18p) per share for the ﬁnancial year. Share capital and capital structure Details of share capital issued in the ﬁnancial year are set out in note 21 to the accounts. Details of the authorised and issued share capital, together with details of the movements in the Company’s issued share capital during the year are shown in note 21 to the accounts. The Company has one class of ordinary shares which carry no right to ﬁxed income. Each share carries the right to one vote at general meetings of the Company. There are no other classes of share capital. There are no speciﬁc restrictions on the size of a holding nor on the transfer of shares, with both governed by the general provisions of the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. Shares held in treasury are non-voting and are not eligible for dividends. Details of employee share plans are set out in note 23 to the accounts. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. With regard to the appointment and replacement of directors, the Company is governed by its Articles of Association, the Combined Code, the Companies Acts and related legislation. The Articles themselves may be amended by special resolution of the shareholders. The powers of directors are described in the Matters reserved for the Board, copies of which are available on request, and the Corporate governance statement on page 39. Under its Articles of Association, the Company has authority to issue 436,564,890 ordinary shares of which 374,796,280, including treasury shares, are in issue as at the date of this Report. There are a number of agreements that take effect, alter or terminate upon a change of control of the Company, principally bank loan agreements and employee share plans. The only signiﬁcant agreement, in terms of its likely impact on the business of the Group as a whole, containing such provisions is that governing the £165m revolving credit facility which on change of control, if the majority lenders require, can result in 30 days notice being given to the Company for all amounts outstanding to be immediately due and payable at which time the facility would be cancelled. The Company’s share plans contain provisions as a result of which options and awards may vest and become exercisable on a change of control of the Company in accordance with the rules of the plans. The Directors are not aware of any agreements between the Company and its directors or employees that provide for compensation for loss of ofﬁce or employment that occurs because of a takeover bid. Allotment authority Under the Companies Act 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 £6,176,861 (up to £61,768,610 new ordinary shares of 10p each), which is equal to approximately 14% of the issued share capital of the Company (excluding treasury shares) as at 17 June 2008 (the latest practicable date prior to the publication of the Notice of meeting). In accordance with the Directors’ stated intention to seek annual renewal, the authority will expire at the conclusion of the annual general meeting of the Company in 2009. 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 17 June 2008 (the latest practicable date prior to the publication of the Notice of meeting), the Company had 374,796,280 ordinary shares of 10p each in issue and held 1,563,813 treasury shares, which is equal to approximately 0.4% 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 17 June 2008 (the latest practicable date prior to the publication of the Notice of meeting). The resolution will also modify statutory pre-emption rights to deal with legal, regulatory or practical problems that may arise on a rights or other pre-emptive offer or issue. The authority will expire at the same time as the resolution conferring authority on the Directors to allot shares. The Directors consider this authority necessary in order to give them ﬂexibility to deal with opportunities as they arise, subject to the restrictions contained in the resolution. There are no present plans to issue shares, except under share plans previously approved in general meeting. Directors The Directors of the Company are listed on page 37. Brief biographies are set out on pages 36 and 37. E Jane Aikman was appointed a Director on 1 August 2007 and Adam J Meyers was appointed a Director on 3 April 2008. Having been appointed by the Board since the last annual general meeting, both are proposed for re-election at the 2008 Annual General Meeting. Kevin Thompson, Neil Quinn, Geoff Unwin and Andrew Williams all retire by rotation and, being eligible, offer themselves for re-election. For each Director being re-elected at the Annual General Meeting, the Board conﬁrms that, following formal performance evaluations, each individual’s performance continues to be effective and they continue to demonstrate commitment to their roles. Purchase of own shares The Company was authorised at the 2007 annual general meeting to purchase up to 37,000,000 of its own 10p ordinary shares in the market. This authority expires at the end of the 2008 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 17 June 2008 (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 plan, although in the light of circumstances at the time it may be decided to cancel them immediately on repurchase. The effect of any cancellation would be to reduce the number of shares in issue. For most purposes, while held in treasury shares are treated as if they have been cancelled (for example, they carry no voting rights and do not rank for dividends). Following approval of the performance share plan (PSP) at the 2005 annual general meeting, the Directors made, and intend to continue to make, routine purchases of Halma shares in the market for holding in treasury until required for vesting under the PSP. In the year to 29 March 2008, 774,000 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 17 June 2008, 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 8,050,849 ordinary shares, or 2.1% of the Company’s issued share capital. If this authority to purchase shares were used in full, the proportion of the adjusted issued share capital represented by this ﬁgure would be 2.4%. Halma p.l.c. Annual report and accounts 2008 49 I B U S N E S S R E V E W I G O V E R N A N C E F I N A N C A L I S T A T E M E N T S DIRECTORS’ REPORT Other statutory information (continued) 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. Substitution of Articles of Association The Company’s Articles of Association may be amended by special resolution at a general meeting of shareholders. At the 2008 Annual General Meeting, a special resolution will be put to shareholders proposing substitution of to the existing Articles of Association primarily in order to accommodate the provisions of the new Companies Act 2006. Amendment to performance share plan The Company’s performance share plan does not currently contain the provision to grant tax efﬁcient HM Revenue & Customs (HMRC) approved share options. Therefore, at the 2008 Annual General Meeting a resolution will be put to shareholders proposing an amendment to permit the granting of approved share options subject to approval of the amendment by HMRC. 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 29 March 2008 the Company’s trade creditors represented 31 days (2007: 37 days) of its annual purchases. Donations Group companies made charitable donations amounting to £11,000 (2007: £5,209) during the ﬁnancial year. There were no political donations (2007: £nil). Substantial shareholdings On 17 June 2008, the Company had been notiﬁed, in accordance with chapter 5 of the Disclosure and Transparency Rules, of the following voting rights as a shareholder of the Company. No. of ordinary shares Percentage of voting rights and issued share capital Sprucegrove Investment Management Ltd 22,317,670 Silchester International Investors Ltd 22,147,989 Capital Research and Management Co 19,089,943 Barclays Bank PLC Legal & General Group Plc Sanderson Asset Management Ltd 15,724,354 15,076,072 15,075,762 5.98 5.93 5.11 4.21 4.04 4.04 Auditors Each of the persons who is a Director at the date of approval of this Annual report conﬁrms that: – so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and – the Director has taken all the steps that he/she ought to have taken as a director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This conﬁrmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985. Deloitte & Touche LLP have expressed their willingness to continue in ofﬁce as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. By order of the Board Carol Chesney Company Secretary 17 June 2008 50 www.halma.com Directors’ responsibilities The Directors are responsible for preparing the Annual report, Directors’ Remuneration report and the ﬁnancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare ﬁnancial statements for each ﬁnancial year. The Directors are required by the IAS Regulation to prepare the Group ﬁnancial statements under IFRSs (IFRSs) as adopted by the European Union. The Group ﬁnancial statements are also required by law to be properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. International Accounting Standard 1 requires that IFRS 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 IFRSs. However, Directors are also required to: – properly select and apply accounting policies; – present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and – provide additional disclosures when compliance with the speciﬁc requirements in IFRSs are insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance. The Directors have elected to prepare the parent company ﬁnancial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The parent company ﬁnancial statements are required by law to give a true and fair view of the state of affairs of the Company. In preparing these ﬁnancial statements, the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgments and estimates that are reasonable and prudent; and – state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the ﬁnancial statements. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the ﬁnancial position of the Company and enable them to ensure that the parent company ﬁnancial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Directors’ responsibility statement We conﬁrm to the best of our knowledge: 1. the ﬁnancial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the Company and the undertakings included in the consolidation taken as a whole; and 2. the management report, which is incorporated into the Directors’ report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face. By order of the Board Andrew Williams Chief Executive 17 June 2008 Kevin Thompson Finance Director 17 June 2008 Consolidated income statement 52 weeks to 29 March 2008 52 weeks to 31 March 2007 Before acquired intangibles amortisation £000 Amortisation of acquired intangibles £000 Notes Before acquired intangibles amortisation £000 Amortisation of acquired intangibles £000 Total £000 Total £000 1 395,061 – 395,061 351,119 – 351,119 4 5 7 10 6 1 2 11 74,923 8,159 (10,303) 72,779 (21,101) 51,678 (4,757) – – (4,757) 1,413 70,166 8,159 (10,303) 68,022 (19,688) (3,344) 48,334 67,437 7,272 (9,101) 65,608 (19,518) 46,090 (3,458) – – (3,458) 1,065 (2,393) 63,979 7,272 (9,101) 62,150 (18,453) 43,697 1,950 – 1,950 314 – 314 53,628 (3,344) 50,284 46,404 (2,393) 44,011 13.86p 12.42p 12.97p 12.90p 13.49p 13.42p 28,172 7.55p 11.77p 11.68p 11.86p 11.77p 26,753 7.18p 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 Paid and proposed (£000) Paid and proposed per share I B S S U E S N N E S S R E V E W - I S U B I G E C O N V A E N R N A N C E - R E V O G I F L A I N C A N C A L I S T A T E - M A E N N A T N S I F Halma p.l.c. Annual report and accounts 2008 51 I W E V E R S T N E M - E T A T S 29 March 2008 £000 31 March 2007 £000 Notes 12 13 14 20 15 16 17 18 17 28 19 20 21 22 22 22 22 22 22 161,230 33,252 57,452 10,069 262,003 44,267 99,741 28,118 172,126 434,129 7,035 69,420 8,273 84,728 87,398 65,358 35,957 2,874 6,108 110,297 195,025 239,104 37,446 16,949 (3,292) 185 7,144 5,106 175,566 239,104 129,521 15,338 49,580 11,178 205,617 39,134 81,650 22,051 142,835 348,452 29,762 62,590 6,043 98,395 44,440 – 37,260 3,005 3,184 43,449 141,844 206,608 37,312 15,239 (1,664) 185 (4,272) 3,654 156,154 206,608 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 Borrowings Retirement benefit obligations Trade and other payables Deferred tax liabilities Total liabilities Net assets Capital and reserves 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 17 June 2008. A J Williams Directors K J Thompson 52 www.halma.com Consolidated statement of recognised income and expense Exchange differences on translation of foreign operations Exchange differences transferred to profit on disposal of foreign operations Actuarial (losses)/gains 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 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 transferred to profit on disposal of foreign operations Actuarial (losses)/gains on defined benefit pension plans Tax on items taken directly to reserves Issue of shares Treasury shares purchased Movement in other reserves Total movement in shareholders’ funds Shareholders’ funds carried forward 52 weeks to 29 March 2008 £000 11,352 64 (3,886) 343 7,873 50,284 58,157 52 weeks to 31 March 2007 £000 (10,216) – 7,084 (2,122) (5,254) 44,011 38,757 52 weeks to 29 March 2008 £000 206,608 50,284 (27,329) 11,352 64 (3,886) 343 1,844 (1,628) 1,452 52 weeks to 31 March 2007 £000 188,080 44,011 (25,922) (10,216) – 7,084 (2,122) 4,916 (1,285) 2,062 32,496 18,528 239,104 206,608 Halma p.l.c. Annual report and accounts 2008 53 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S 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 Drawdown of borrowings Net cash from/(used in) financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents brought forward Exchange adjustments Cash and cash equivalents carried forward 52 weeks to 29 March 2008 £000 58,401 52 weeks to 31 March 2007 £000 50,754 Notes 25 (14,787) (952) 831 (3,796) 721 (46,537) 2,405 (62,115) (27,329) 1,844 (1,632) (2,473) 37,796 8,206 4,492 22,051 1,575 28,118 (10,053) (847) 3,609 (3,893) 1,035 (27,499) – (37,648) (25,922) 4,916 (1,272) (1,894) – (24,172) (11,066) 35,826 (2,709) 22,051 25 25 25 54 www.halma.com Accounting policies Basis of accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union (EU) and therefore comply with Article 4 of the EU IAS legislation and with those parts of the Companies Act 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, except as detailed below, have been applied consistently throughout the years ended 31 March 2007 and 29 March 2008. In the current year, the Group adopted IFRS 7 ‘Financial Instruments: Disclosures’ which is effective for annual reporting periods beginning on or after 1 January 2007 and the related amendment to IAS 1 ‘Presentation of Financial Statements’. The impact of these changes has been to expand the disclosures provided in note 26 regarding the Group’s financial instruments and management of capital. In addition, the Group has elected to adopt IAS 23 (revised) ‘Borrowing Costs’ in advance of its effective implementation date. This has had no impact on the Group’s accounting policies. The principal change to the Standard, which was to eliminate the previously available option to expense all borrowing costs as incurred, has no impact on these financial statements because it has always been the Group’s policy to capitalise borrowing costs on qualifying assets. At the date of authorisation of these financial statements, the following Standards and Interpretations in issue have not been applied as they are not yet in effect: IFRS 8 ‘Operating Segments’; IFRIC 11 ‘IFRS 2 – Group and Treasury Share Transactions’; and IFRIC 14 ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’. The Directors anticipate that the adoption of these Standards and Interpretations in future periods will not have a material effect on the Group’s financial statements, except for additional segment disclosures when IFRS 8 comes into effect for periods commencing on or after 1 January 2009. 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 the valuation of acquired intangible assets, 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 29 March 2008, 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, buyer-specific synergies, know-how and workforce-related industry-specific knowledge and technical skills. Negative goodwill arising on acquisitions would be recognised directly in the Consolidated income statement. On closure or disposal of an acquired business, 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. Halma p.l.c. Annual report and accounts 2008 55 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Accounting policies (continued) Impairment of non-current assets All non-current assets are tested for impairment whenever events or circumstances indicate that their carrying value may be impaired. Additionally, goodwill and capitalised development expenditure relating to a product that is not yet in full production are subject to an annual impairment test. An impairment loss is recognised in the Consolidated income statement to the extent that an asset’s carrying value exceeds its recoverable amount, which represents the higher of the asset’s net realisable value and its value in use. An asset’s value in use represents the present value of the future cash flows expected to be derived from the asset or from the cash generating unit to which it relates. The present value is calculated using a discount rate that reflects the current market assessment of the time value of money and the risks specific to the asset concerned. Impairment losses recognised in previous periods for an asset other than goodwill are reversed if there has been a change in the estimates used to determine the asset’s recoverable amount, but only to the extent that the carrying amount of the asset does not exceed its carrying amount had no impairment loss been recognised in previous periods. Impairment losses in respect of goodwill are not reversed. 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 of or closed, the profit or loss on disposal or closure will be determined after taking into account the cumulative translation difference held within the Translation reserve attributable to that subsidiary. As permitted by IFRS 1, the Group has 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 initially recognised at fair value and subsequently remeasured to their fair value at each balance sheet date. The resultant gain or loss is recognised in the Consolidated income statement immediately. 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 revenue 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. 56 www.halma.com 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. Actuarial gains and losses are recognised in full in the period in which they occur, and 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, based on the Group’s estimate of shares that will ultimately vest and adjusted for the effect of non market-based vesting conditions. The corresponding credit is to Shareholders’ funds. No further awards will be made under the share option plans. (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. 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. Halma p.l.c. Annual report and accounts 2008 57 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S 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 Group revenue/profit before amortisation of acquired intangibles 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 Discontinued operations Cash and cash equivalents/borrowings Goodwill Acquired intangible assets Total Group 2008 £000 167,262 134,630 93,731 (562) – 395,061 2,894 – 397,955 – – – Revenue 2007 £000 154,830 116,483 79,940 (134) – 351,119 3,487 – 354,606 – – – 2008 £000 28,504 27,842 19,355 – (778) 74,923 436 (2,144) 73,215 (4,757) 1,669 (19,843) 397,955 354,606 50,284 2008 £000 70,802 63,853 43,719 43,306 221,680 – 28,118 161,230 23,101 Assets 2007 £000 64,083 50,619 36,272 37,353 188,237 907 22,051 129,521 7,646 2008 £000 24,046 23,166 18,423 56,997 122,632 – 72,393 – – Profit 2007 £000 27,975 23,980 15,998 – (516) 67,437 483 (1,829) 66,091 (3,458) – (18,622) 44,011 Liabilities 2007 £000 20,622 18,673 14,978 57,397 111,670 412 29,762 – – 434,129 348,452 195,025 141,844 Central companies include all of the Group’s land and buildings, deferred tax assets and liabilities, deferred purchase consideration and retirement benefit provisions. Infrastructure Sensors Health and Analysis Industrial Safety Central companies Continuing operations Discontinued operations Total Group Capital additions Depreciation and amortisation 2008 £000 5,567 7,005 3,681 3,264 19,517 18 19,535 2007 £000 4,348 5,689 3,525 1,170 14,732 61 14,793 2008 £000 3,777 3,695 3,165 5,188 15,825 55 15,880 2007 £000 3,529 2,579 2,715 4,255 13,078 55 13,133 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. 58 www.halma.com 1 Segmental analysis continued 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. 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 Goodwill Acquired intangible assets Total Group Revenue by destination Revenue by origin 2008 £000 109,253 103,013 107,883 42,859 22,136 9,917 – 395,061 2,894 397,955 2007 £000 2008 £000 96,556 228,090 115,932 96,173 61,709 91,371 19,422 35,481 – 22,027 – 9,511 (30,092) – 351,119 3,487 395,061 2,894 354,606 397,955 2007 £000 199,859 107,407 56,047 18,277 – – (30,471) 351,119 3,487 354,606 2008 £000 37,608 22,710 12,597 2,008 74,923 436 (2,144) 73,215 (4,757) 1,669 (19,843) 50,284 Profit 2007 £000 32,626 21,775 10,860 2,176 67,437 483 (1,829) 66,091 (3,458) – (18,622) 44,011 Net assets Capital additions 2008 £000 32,545 33,206 27,838 5,459 99,048 – (44,275) 161,230 23,101 2007 £000 29,592 29,376 13,504 4,185 76,657 495 (7,711) 129,521 7,646 2008 £000 11,046 5,493 2,296 682 19,517 18 – – – 239,104 206,608 19,535 2007 £000 8,986 3,215 2,023 508 14,732 61 – – – 14,793 United Kingdom net assets include all of the Group’s retirement benefit provisions and their related deferred tax assets. Halma p.l.c. Annual report and accounts 2008 59 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the accounts (continued) 2 Earnings per ordinary share Basic earnings per ordinary share are calculated using the weighted average of 372,769,853 shares in issue during the year (net of shares purchased by the Company and held as treasury shares) (2007: 371,221,629). Diluted earnings per ordinary share are calculated using the weighted average of 374,604,505 shares (2007: 374,036,077) which includes dilutive potential ordinary shares of 1,834,652 (2007: 2,814,448). Dilutive potential ordinary shares are calculated from those exercisable share options where the exercise price is less than the average price of the Company’s ordinary shares during the year. 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: 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 Per ordinary share 2008 £000 50,284 (1,950) 48,334 3,344 51,678 2007 £000 44,011 (314) 43,697 2,393 46,090 2008 pence 13.49 (0.52) 12.97 0.89 13.86 2007 pence 11.86 (0.09) 11.77 0.65 12.42 Operating profit from continuing operations before amortisation of acquired intangibles Operating profit from discontinued operations in prior period 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 2008 £000 74,923 – 74,923 1,911 8,240 57,452 44,267 99,741 (69,420) (8,273) (2,874) 2,087 1,189 134,320 55.8% 2007 £000 67,437 483 67,920 1,577 6,115 49,580 39,134 81,650 (62,590) (6,043) (3,005) 3,071 3,559 113,048 60.1% 60 www.halma.com 3 Non-GAAP measures continued Return on total invested capital Post-tax profit from continuing operations before amortisation of acquired intangibles Post-tax profit from discontinued operations in prior period before amortisation of acquired intangibles 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 2008 £000 51,678 – 51,678 239,104 2,087 35,957 (10,069) 10,112 5,441 13,177 70,931 2007 £000 46,090 314 46,404 206,608 3,071 37,260 (11,178) 5,348 5,441 13,177 70,931 366,740 330,658 14.1% 14.0% 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 2008 £000 395,061 (15,762) 379,299 2007 £000 351,119 – 351,119 Revenue % growth 2008 £000 72,779 (2,794) 8.0% 69,985 Profit* before taxation 2007 £000 65,608 – 65,608 % growth 6.7% 2008 £000 721 7,438 8,159 2008 £000 2,474 7,664 165 10,303 2007 £000 1,035 6,237 7,272 2007 £000 1,890 7,103 108 9,101 Halma p.l.c. Annual report and accounts 2008 61 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the accounts (continued) 6 Discontinued operations The discontinued operations relate to Post Glover Lifelink, Inc. (‘PGL’) which was sold in January 2008. PGL is incorporated in the USA and formed part of the Health and Analysis sector. PGL’s results, which have been included in the Consolidated income statement, were as follows: Revenue Operating expenses Operating profit Taxation Profit from operations after taxation Profit on disposal of operations Exchange differences transferred to profit on disposal of operations Profit on disposal of operations before and after taxation 2008 £000 2,894 (2,458) 436 (155) 281 1,733 (64) 1,669 2007 £000 3,487 (3,004) 483 (169) 314 – – – Net profit from discontinued operations 1,950 314 The profit on disposal of operations includes gross disposal proceeds received and receivable of £3,035,000. The net cash inflow in the year on disposal of operations was £2,405,000. PGL’s net assets at the date of disposal were as follows: Property, plant and equipment Computer software Inventories Receivables Cash and cash equivalents Payables 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 £000 579 16 303 547 80 (520) 1,005 2007 Total Group £000 354,606 (239,128) 115,478 (8,573) (43,219) 776 (1,829) 62,633 Continuing operations £000 395,061 (266,577) 128,484 (9,124) (50,118) 924 (2,144) 68,022 Discontinued operations £000 2,894 (2,082) 812 (102) (274) – – 436 2008 Total Group £000 397,955 (268,659) 129,296 (9,226) (50,392) 924 (2,144) 68,458 Continuing operations £000 351,119 (236,576) 114,543 (8,447) (42,893) 776 (1,829) 62,150 Discontinued operations £000 3,487 (2,552) 935 (126) (326) – – 483 Included within administrative expenses is the amortisation of acquired intangible assets. 62 www.halma.com 7 Profit before taxation (continued) Profit before taxation is stated after charging: Depreciation Amortisation Research and development1 Auditors’ remuneration2: Audit services to the Company Audit services to the Group Operating lease rents: Total audit services pursuant to legislation Other services pursuant to legislation Tax services Other services Property Other Continuing operations Total Group 2008 £000 8,462 7,363 14,839 88 527 615 12 254 16 3,916 473 2007 £000 7,589 5,489 11,365 79 503 582 14 87 20 3,938 394 2008 £000 8,511 7,369 14,886 88 531 619 12 254 16 3,916 473 2007 £000 7,636 5,497 11,422 79 507 586 14 87 20 3,938 394 1. A further £3,796,000 (2007: £3,893,000) of development expenditure has been capitalised in the period. See note 13. 2. A further £20,000 (2007: £nil) 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 (2007: £12,000) 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 Group employee costs comprise: Wages and salaries Social security costs Other pension costs (note 28) Continuing operations 2008 Number 2007 Number 2008 Number Total Group 2007 Number 2,002 1,661 3,663 1,926 1,374 3,300 2,002 1,681 3,683 1,926 1,400 3,326 Continuing operations Total Group 2008 £000 89,698 13,199 5,538 2007 £000 76,154 11,060 5,289 2008 £000 90,199 13,317 6,197 108,435 92,503 109,713 2007 £000 76,799 11,221 5,317 93,337 9 Directors’ remuneration The remuneration of the Directors, who are the key management personnel of the Group, is set out on pages 46 to 48 within the Remuneration report described as being audited and forms part of these financial statements. I B S S U E S N N E S S R E V E W - I S U B I G E C O N V A E N R N A N C E - R E V O G I F L A I N C A N C A L I S T A T E - M A E N N A T N S I F Halma p.l.c. Annual report and accounts 2008 63 I W E V E R S T N E M - E T A T S Notes to the accounts (continued) 10 Taxation Current tax UK corporation tax at 30% (2007: 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 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% (2007: 30%) Overseas tax rate differences Items not subject to tax Adjustments in respect of prior years Effective tax rate on continuing and discontinued operations 11 Ordinary dividends Amounts recognised as distributions to shareholders in the year Final dividend for the year to 31 March 2007 (1 April 2006) Interim dividend for the year to 29 March 2008 (31 March 2007) Dividends declared in respect of the year Interim dividend for the year to 29 March 2008 (31 March 2007) Proposed final dividend for the year to 29 March 2008 (31 March 2007) 2008 £000 2007 £000 8,970 10,046 (74) 18,942 462 284 746 19,688 155 19,843 68,022 2,105 70,127 21,038 633 (2,038) 210 19,843 28.3% 8,651 8,985 69 17,705 622 126 748 18,453 169 18,622 62,150 483 62,633 18,790 1,141 (1,504) 195 18,622 29.7% Per ordinary share 2008 pence 2007 pence 2008 £000 2007 £000 4.33 3.00 7.33 3.00 4.55 7.55 4.12 2.85 6.97 2.85 4.33 7.18 16,139 11,190 27,329 11,190 16,982 28,172 15,308 10,614 25,922 10,614 16,139 26,753 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. 64 www.halma.com 12 Goodwill Cost At beginning of year Additions (note 24) Exchange adjustments At end of year Provision for impairment At beginning and end of year Carrying amounts 2008 £000 2007 £000 129,521 22,695 9,014 161,230 122,038 13,955 (6,472) 129,521 – – 161,230 129,521 Goodwill is allocated at acquisition to the business units that are expected to benefit from that acquisition. The carrying amount of goodwill has been allocated as follows: Infrastructure Sensors Health and Analysis Industrial Safety 2008 £000 74,303 64,289 22,638 2007 £000 68,172 41,464 19,885 161,230 129,521 Goodwill values have been tested for impairment by comparing them against the value in use in perpetuity of the relevant cash generating units. The value in use calculations were based on projected cash flows, derived from the latest budget approved by the Board, with average growth rates of 2.3% used for periods not covered by the budget, discounted at the Group’s estimated weighted average cost of capital of 8.4% per annum to calculate their net present value. The most significant elements of the Group’s consolidated goodwill figure at 29 March 2008 were allocated to: Texecom Limited (£15,795,000) and Bureau D’Electronique Appliquée S.A. (£40,746,000) within the Infrastructure Sensors sector; Ocean Optics, Inc. (£21,704,000) and Rudolf Riester GmbH & Co. KG (£22,492,000) within the Health and Analysis sector; and Tritech International Limited (£7,804,000) within the Industrial Safety sector. 13 Other intangible assets Cost At 1 April 2006 Assets of businesses acquired Additions at cost Disposals Retirements Exchange adjustments At 31 March 2007 Assets of businesses acquired (note 24) Assets of business sold Additions at cost Disposals Retirements Exchange adjustments At 29 March 2008 Acquired intangibles £000 Development costs £000 Computer software £000 9,006 4,049 – – – (172) 12,883 18,472 – – – – 1,858 7,915 – 3,893 – (1,240) (92) 10,476 – – 3,796 – (903) 411 3,521 213 847 (184) – (122) 4,275 130 (60) 952 (23) – 115 Total £000 20,442 4,262 4,740 (184) (1,240) (386) 27,634 18,602 (60) 4,748 (23) (903) 2,384 33,213 13,780 5,389 52,382 Halma p.l.c. Annual report and accounts 2008 65 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the accounts (continued) 13 Other intangible assets continued Accumulated amortisation At 1 April 2006 Assets of businesses acquired Charge for the year Disposals Retirements Exchange adjustments At 31 March 2007 Assets of businesses acquired (note 24) Assets of business sold Charge for the year Disposals Retirements Exchange adjustments At 29 March 2008 Carrying amounts At 29 March 2008 At 31 March 2007 14 Property, plant and equipment Cost At 1 April 2006 Assets of businesses acquired Additions at cost Disposals Exchange adjustments At 31 March 2007 Assets of businesses acquired (note 24) Assets of businesses sold Additions at cost Disposals Exchange adjustments At 29 March 2008 Accumulated depreciation At 1 April 2006 Assets of businesses acquired Charge for the year Disposals Exchange adjustments At 31 March 2007 Assets of businesses acquired (note 24) Assets of businesses sold Charge for the year Disposals Exchange adjustments At 29 March 2008 Carrying amounts At 29 March 2008 At 31 March 2007 66 www.halma.com Acquired intangibles £000 Development costs £000 Computer software £000 1,880 – 3,458 – – (101) 5,237 – – 4,757 – – 118 10,112 4,088 – 1,528 – (1,240) (15) 4,361 – – 1,981 – (903) 101 2,308 114 511 (164) – (71) 2,698 121 (44) 631 (11) – 83 5,540 3,478 Total £000 8,276 114 5,497 (164) (1,240) (187) 12,296 121 (44) 7,369 (11) (903) 302 19,130 23,101 7,646 8,240 6,115 1,911 1,577 33,252 15,338 Land and buildings Freehold properties £000 28,133 1,554 248 (3,243) (750) 25,942 1,315 (624) 3,724 (390) 779 30,746 5,160 31 445 (558) (139) 4,939 130 (190) 490 (134) 99 5,334 Long leases £000 Short leases £000 1,775 – 64 (262) (19) 1,558 17 – 34 – 4 1,613 591 – 45 (150) (15) 471 8 – 53 – 3 535 3,312 – 378 (11) (96) 3,583 – – 886 – 72 4,541 1,854 – 306 (10) (63) 2,087 – – 374 – 31 2,492 Plant, equipment and vehicles £000 69,980 3,486 9,363 (9,129) (2,114) 71,586 3,280 (348) 10,143 (3,200) 1,739 83,200 45,541 3,137 6,840 (8,652) (1,274) 45,592 2,686 (203) 7,594 (2,523) 1,141 54,287 Total £000 103,200 5,040 10,053 (12,645) (2,979) 102,669 4,612 (972) 14,787 (3,590) 2,594 120,100 53,146 3,168 7,636 (9,370) (1,491) 53,089 2,824 (393) 8,511 (2,657) 1,274 62,648 25,412 21,003 1,078 1,087 2,049 1,496 28,913 25,994 57,452 49,580 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 2008 £000 22,412 8,075 13,780 44,267 2007 £000 19,270 7,094 12,770 39,134 2008 £000 2007 £000 89,105 3,282 7,354 99,741 74,788 1,875 4,987 81,650 Trade receivables are stated net of provisions for estimated irrecoverable amounts of £1,204,000 (2007: £1,034,000). This provision has been determined by reference to previous default experience. The ageing of trade receivables was as follows: Not yet due Up to 1 month overdue Up to 2 months overdue Up to 3 months overdue Over 3 months overdue 17 Borrowings Unsecured bank loans: Falling due within one year Falling due after more than one year Total borrowings Information concerning the currency, interest rates and maturity of the Group’s borrowings is given in note 26 to the accounts. 18 Trade and other payables: falling due within one year Trade payables Other taxation and social security Provision for 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 2008 £000 68,597 14,162 3,568 1,239 1,539 89,105 2007 £000 56,551 13,365 2,652 920 1,300 74,788 2008 £000 2007 £000 7,035 65,358 72,393 29,762 – 29,762 2008 £000 40,081 4,838 1,082 3,816 19,603 2007 £000 34,677 4,016 2,867 4,283 16,747 69,420 62,590 2008 £000 107 2,767 2,874 2007 £000 692 2,313 3,005 Halma p.l.c. Annual report and accounts 2008 67 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the accounts (continued) 20 Deferred tax An analysis of Group deferred tax is as follows: Employee benefits Acquired intangible assets Accelerated capital allowances Short-term timing differences Goodwill timing differences Net deferred tax asset This has been recognised in the Consolidated balance sheet as follows: Non-current deferred tax assets Non-current deferred tax liabilities Net deferred tax asset Movement in deferred tax asset: At beginning of year Credit/(charge) to Consolidated income statement: UK Overseas Charge to Shareholders’ funds Acquired Exchange adjustments At end of year 2008 £000 10,069 (7,726) (3,143) 6,929 (2,168) 3,961 2008 £000 10,069 (6,108) 3,961 2008 £000 7,994 85 (831) (226) (2,785) (276) 3,961 2007 £000 11,178 (2,255) (3,067) 3,799 (1,661) 7,994 2007 £000 11,178 (3,184) 7,994 2007 £000 10,587 (414) (334) (1,396) (536) 87 7,994 No provision is made for tax which might become payable if profits retained by overseas subsidiary companies are distributed as dividends unless there is an intention to distribute such profits. The gross undistributed earnings of these subsidiaries at 29 March 2008 was £15,312,000. At 29 March 2008 the Group had unused capital tax losses of £695,000 (2007: £1,793,000) for which no deferred tax asset has been recognised. None of these losses has an expiry date. 21 Share capital Ordinary shares of 10p each The number of ordinary shares in issue at 29 March 2008 was 374,458,498 (2007: 373,116,492). Changes during the year in the issued ordinary share capital were as follows: At 31 March 2007 Share options exercised At 29 March 2008 Authorised Issued and fully paid 2008 £000 43,656 2007 £000 43,656 2008 £000 37,446 2007 £000 37,312 Issued and fully paid £000 37,312 134 37,446 The total consideration received in cash in respect of share options exercised amounted to £1,844,000. At 29 March 2008 options in respect of 8,388,631 (2007: 10,451,523) ordinary shares remained outstanding. Further details of these are given in note 23 to the accounts. At the date of these accounts, the number of ordinary shares in issue was 374,796,280, including treasury shares of 1,563,813. 68 www.halma.com 22 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 equity At 31 March 2007 Profit for the year Share options exercised Foreign exchange translation differences Exchange differences transferred to profit on disposal of foreign operations Dividends paid Actuarial losses on defined benefit pension schemes Share-based payments Treasury shares purchased Tax on items taken directly to equity At 29 March 2008 Share premium account £000 10,702 – 4,537 – – – – – – 15,239 – 1,710 – – – – – – – 16,949 Treasury shares £000 (379) – – – – – – (1,285) – (1,664) – – – – – – – (1,628) – (3,292) Capital redemption reserve £000 185 – – – – – – – – 185 – – – – – – – – – Translation reserve £000 5,944 – – (10,216) – – – – – (4,272) – – 11,352 64 – – – – – Other reserves £000 1,592 – – – – – 2,062 – – 3,654 – – – – – – 1,452 – – Retained earnings £000 133,103 44,011 – – (25,922) 7,084 – – (2,122) 156,154 50,284 – – – (27,329) (3,886) – – 343 185 7,144 5,106 175,566 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 29 March 2008 the number of treasury shares held was 1,563,813 (2007: 805,635) and their market value was £2,994,702 (2007: £1,774,441). 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. 23 Share-based payments The total cost recognised in the Consolidated income statement in respect of equity-settled share-based payment schemes (the ‘employee share plans’) was as follows: Share incentive plan Share option plans Performance share plan 2008 £000 251 204 1,658 2,113 2007 £000 270 363 974 1,607 Share incentive plan Shares awarded under this plan are purchased in the market by the Plan’s trustees at the time of the award and are held in trust until their transfer to qualifying employees, which is conditional upon completion of three years’ service. The costs of providing this plan are recognised in the Consolidated income statement over the three-year vesting period. 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, 1996 and 1999. 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 1996 Plan, the growth in the Retail Price Index plus 2% per annum and, for the 1999 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 1996 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 1999 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 have been made under the Company share option plans since 3 August 2005. Halma p.l.c. Annual report and accounts 2008 69 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the accounts (continued) 23 Share-based payments continued Options in respect of 18,900 ordinary shares remained outstanding at 29 March 2008 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 18,900 Option price 129.0p Seven years from 2002 Options in respect of 1,126,300 ordinary shares remained outstanding at 29 March 2008 under the 1996 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 105,500 246,500 262,900 511,400 Option price 101.5p – 123.5p 120.0p 101.5p – 123.5p 120.0p – 131.0p Five years from Seven years from 2001 2002 2003 2004 Options in respect of 7,243,431 ordinary shares remained outstanding at 29 March 2008 under the 1999 Plan. Subject to the performance restrictions on the exercise of options granted under this Plan, options are exercisable for the periods and at the prices set out below: Number of shares 361,200 443,200 491,164 759,080 1,097,567 741,042 615,900 486,500 688,250 747,350 812,178 Option price 111.0p 163.5p 144.33p 134.0p 142.25p 145.67 – 157.92p 111.0p 163.5p 144.33p 134.0p 142.25p Five years from Seven years from 2003 2004 2005 2006 2007 2008 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 Lapsed during the year Outstanding at end of year Exercisable at end of year Number of share options 10,451,523 (1,342,006) (720,886) 8,388,631 3,779,803 2008 Weighted average option price 136.50p 139.80p 130.21p 2007 Number of share options 15,199,515 (3,785,812) (962,180) Weighted average option price 134.62p 129.84p 133.04p 136.87p 138.96p 10,451,523 3,103,904 136.50p 136.74p The weighted average share price at the date of exercise for share options exercised during the year was 220.30p. The options outstanding at 29 March 2008 had exercise prices from 101.5p to 163.5p and a weighted average remaining contractual life of four 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 4.1% 145.67 24.70 A 4% 25% 4 4.3–4.9% 142.25–157.92 25.71-27.22 2005 B 4% 25% 6 4.9% 142.25 29.25 A 4% 25% 4 3.8% 134.00 22.18 2004 B 4% 25% 6 4.0% 134.00 25.35 The expected volatility was determined by calculating the historic volatility of the Group’s share price over the previous six years. 70 www.halma.com 23 Share-based payments continued Performance share plan The performance share plan was approved by shareholders on 3 August 2005 and replaced the previous share option plans from which no further grants 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 2007/08 and 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 2008 Number of shares awarded 3,361,308 1,379,707 (17,662) (229,659) 2007 Number of shares awarded 1,735,252 1,689,658 (4,921) (58,681) 4,493,694 3,361,308 – – 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) 2008 19% 3 240.67 nil 55% 132.37 2007 20% 3 199.00 nil 66% 131.34 2006 25% 3 148.42 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. Halma p.l.c. Annual report and accounts 2008 71 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the accounts (continued) 24 Acquisitions Non-current assets Intangible assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables 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 Book value £000 Fair value adjustments £000 Total £000 9 1,938 2,940 3,983 295 9,165 (2,177) 26 (2,151) 7,014 18,472 (150) 18,481 1,788 (696) (146) – 2,244 3,837 295 17,480 26,645 (480) (2,811) (3,291) (2,657) (2,785) (5,442) 14,189 21,203 42,780 – 42,780 21,577 1,118 22,695 The values relating to the acquisitions of PP Medizintechnik GmbH and subsidiaries (including the operating company Rudolf Riester GmbH & Co. KG ‘Riester’) included in the table above were: net assets at book value £5,785,000; fair value adjustments £13,467,000; total net assets £19,252,000; total consideration £39,610,000; goodwill arising on acquisition £20,358,000. The goodwill on current year acquisitions arose on the following acquisitions: Company BKKI Sonar Research & Development Ltd PP Medizintechnik GmbH and subsidiaries Date of acquisition September 2007 October 2007 Country of incorporation China United Kingdom Principal activity Industrial Safety Industrial Safety Initial consideration RMB3.8m £2.6m December 2007 Germany Health and Analysis €55m Together these acquisitions contributed £5,225,000 of revenue and £1,150,000 of profit before tax and amortisation of acquired intangible assets to the Group results for the year ended 29 March 2008. If these acquisitions had been held since the start of the financial year, reported revenue would have been £11,700,000 higher and profit before tax and amortisation of acquired intangible assets £2,170,000 higher. it is estimated the Group’s Adjustments were made to the book value of the net assets of the companies acquired to reflect their provisional fair value to the Group. Acquired inventories were valued at the lower of cost and net realisable value adopting Group bases and any liabilities for warranties relating to past trading were recognised. Other previously unrecognised assets and liabilities at acquisition were included and accounting policies were aligned with the Group where appropriate. 72 www.halma.com 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 plans Profit on sale of property, plant and equipment and computer software Operating cash flows before movement in working capital Increase in inventories Increase in receivables Increase in payables Cash generated from operations Taxation paid Net cash inflow from operating activities 2008 £000 2007 £000 70,166 436 9,142 1,981 4,757 1,997 (6,352) (1,186) 80,941 (2,278) (9,605) 6,970 76,028 (17,627) 58,401 63,979 483 8,147 1,528 3,458 1,317 (4,233) (314) 74,365 (1,648) (3,673) 1,215 70,259 (19,505) 50,754 The cash outflow of £46,537,000 on the acquisition of businesses includes cash acquired of £295,000 and the payment of £3,650,000 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) Increase/(decrease) in cash and cash equivalents Cash inflow from borrowings Exchange adjustments Net (debt)/cash brought forward Net debt carried forward Analysis of net debt Cash and cash equivalents Bank loans 2008 £000 2007 £000 4,492 (37,796) (3,260) (36,564) (7,711) (44,275) (11,066) – (163) (11,229) 3,518 (7,711) At 31 March 2007 £000 22,051 (29,762) (7,711) Cash flow £000 4,492 (37,796) (33,304) Exchange adjustments £000 At 29 March 2008 £000 1,575 (4,835) (3,260) 28,118 (72,393) (44,275) The cash inflow from bank loans in 2008 of £37,796,000 included a cash outflow on repayment of borrowings of £54,205,000 and a cash inflow on drawdown of new borrowings of £92,001,000. Halma p.l.c. Annual report and accounts 2008 73 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the accounts (continued) 26 Financial instruments Policy The Group’s treasury policies seek to minimise financial risks and to ensure sufficient liquidity for the Group’s operations and strategic plans. No complex derivative financial instruments are used, and no trading or speculative transactions in financial instruments are undertaken. Where the Group does use financial instruments these are mainly to manage the currency risks arising from normal operations and its financing. Operations are financed mainly through retained profits and, in certain geographical locations, bank borrowings. Foreign currency risk is the most significant aspect for the Group in the area of financial instruments. It is exposed to a lesser extent to other risks such as interest rate risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and these policies are summarised below. Policies have remained unchanged since the beginning of the financial year. Foreign currency risk The Group is exposed to foreign currency risk as a consequence of both trading with foreign companies and owning subsidiaries located in foreign countries. The Group earns a significant proportion of its profit in currencies other than Sterling. This gives rise to translational currency risk, where the Sterling value of profits earned by the Group’s foreign subsidiaries fluctuates with the strength of Sterling relative to their operating (or ‘functional’) currency. The Group does not hedge this risk, so its reported profit is sensitive to the strength of Sterling, particularly against the US Dollar and Euro. The Group also has transactional currency exposures. These arise on sales or purchases by operating companies in currencies other than the companies’ operating (or ‘functional’) currency. Significant sales and purchases are matched where possible and the net exposure hedged by means of forward foreign currency contracts. The Group has a significant investment in overseas operations in the USA and Europe, with further investments in Australia, New Zealand, Malaysia, Singapore, China, India and South 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. Interest rate risk The Group is exposed to interest rate fluctuations on its borrowings and cash deposits. Where bank borrowings are used to finance operations they tend to be short-term with floating interest rates. Borrowings used to provide longer term funding are drawn on the Group’s loan facilities and have fixed interest rates with maturities of not more than one year. Surplus funds are placed on short-term fixed rate deposit or in floating rate deposit accounts. Liquidity risk The main source of long-term funding for the Group is its unsecured revolving credit facility, which was renewed in February 2008 for a further five years with a small syndicate of its principal bankers and extended to £165 million. The Group has a strong cash flow and the funds generated by operating companies are managed regionally based on geographic location. Funds are placed on deposit with secure, highly-rated banks. For short-term working capital purposes, most operating companies utilise local bank overdrafts. These practices allow a balance to be maintained between continuity of funding, security and flexibility. Because of the nature of their use, the facilities are typically ‘on demand’ and as such uncommitted. Overdraft facilities are typically renewed annually. Currency exposures Translational exposures It is estimated, by reference to the Group’s US Dollar and Euro denominated profits, that a one per cent change in the value of the US Dollar relative to Sterling would have had a £225,000 impact on the Group’s reported profit before tax; and a one per cent change in the value of the Euro relative to the Sterling would have had a £160,000 impact on the Group’s profit before tax for the year ended 29 March 2008. Transactional 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: 2008 Functional currency of operation Sterling US Dollar Euro Other Total 2007 Functional currency of operation Sterling US Dollar Euro Other Total Sterling £000 – (7) 411 (37) 367 Sterling £000 – (8) 175 224 391 Net foreign currency monetary assets/(liabilities) US Dollar £000 685 – 192 1,335 2,212 Euro £000 1,637 (10) – 113 1,740 Other £000 (521) – (8) 655 126 Total £000 1,801 (17) 595 2,066 4,445 Net foreign currency monetary assets/(liabilities) US Dollar £000 839 – (5) 1,038 1,872 Euro £000 678 (9) – (43) 626 Other £000 84 – 187 343 614 Total £000 1,601 (17) 357 1,562 3,503 The amounts shown in the tables above take into account the effect of any forward currency contracts entered into to manage these currency exposures. 74 www.halma.com 26 Financial instruments continued Interest rate risk profile The Group’s financial assets which are subject to interest rate fluctuations comprise interest bearing cash equivalents which totalled £3,166,000 at 29 March 2008 (2007: £5,901,000). These comprised Sterling denominated deposits of £2,946,000 (2007: £5,780,000), and Euro and other currency deposits of £220,000 (2007: £121,000) which are placed on local money markets and earn interest at market rates. Cash balances of £24,952,000 (2007: £16,150,000) 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 £72,394,000 at 29 March 2008 (2007: £29,762,000). All bear interest at floating rates or fixed rates where the period of the fix is typically no more than three months. Interest rates are based on LIBOR plus a small margin. These comprise Sterling bank loans of £9,000,000 (2007:£nil) which bear interest with reference to UK LIBOR rates, US Dollar denominated bank loans of £23,116,000 (2007: £16,327,000) which bear interest with reference to the US Dollar LIBOR rates, and Euro denominated bank loans of £40,278,000 (2007: £13,435,000) 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 £67,000 (2007: £603,000) due between one and two years, with the balance of £40,000 (2007: £89,000) due between two and five years. Other creditors due after more than one year include £1,000,000 (2007: £1,017,000) due between one and two years, £1,299,000 (2007: £1,296,000) due between two and five years, with the balance of £468,000 (2007: £nil) due after more than five years. Borrowing facilities The Group’s principal source of long-term funding is its unsecured five-year £165 million revolving credit facility, which expires in February 2013. Short-term operational funding is provided by cash generated from operations and by local bank overdrafts. These overdraft facilities are uncommitted and are generally renewed on an annual or ongoing basis and hence the facilities expire within one year or less. The Group’s indrawn committed facilities available at 29 March 2008 were £105,872,000 of which £6,230,000 mature within one year and £99,642,000 between four and five years. Fair values of financial assets and financial liabilities As at 29 March 2008 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. These instruments are initially recognised at cost, which is typically £nil, and subsequently measured at fair value. Changes in fair value are taken to the Consolidated income statement. The following table details the forward foreign currency contracts outstanding as at the year end, which all mature within one year: US Dollars Euros Other currencies Average Exchange Rate/£ Foreign Currency Contract Value Fair Value 2008 1.98 1.31 – 2007 1.95 1.48 – 2008 ‘000 5,051 10,069 – 2007 ‘000 6,892 9,091 – 2008 £000 2,550 7,680 1,928 12,158 2007 £000 3,527 6,138 1,891 11,556 2008 £000 11 (311) 62 (238) 2007 £000 10 (46) (10) (46) With the exception of currency exposures, the disclosures in this note exclude short-term receivables and payables. Halma p.l.c. Annual report and accounts 2008 75 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the accounts (continued) 27 Commitments Capital commitments Capital expenditure authorised and contracted at 29 March 2008 but not provided in these accounts amounts to £1,469,000 (2007: £1,076,000). 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 2008 £000 3,831 9,133 3,469 2007 £000 3,879 8,054 1,475 2008 £000 456 624 – 16,433 13,408 1,080 Other 2007 £000 289 320 – 609 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 £71.5m for the Halma Group Pension Plan and £13.8m 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 £2,016,000 (2007: £1,592,000). 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 Mortality assumption – Halma pensioners 2008 4.75% 3.50% 3.50% 5.85% 3.50% PA 92 medium cohort 2007 4.25% 3.00% 3.00% 5.25% 3.00% PA 92 medium cohort Mortality assumption – Halma non-pensioners PA 92 medium cohort PA 92 medium cohort 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 medium cohort plus one year PA 92 medium cohort plus one year 2006 4.25% 2.75% 2.75% 5.00% 2.75% PA 92 medium cohort plus one year PA 92 medium cohort plus one year PA 92 (C=2010) 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 £3m. 76 www.halma.com 28 Retirement benefits continued The expected rates of return and the net deficit in the plans were: Equities Bonds Property Total fair value of assets Present value of plan liabilities Net deficit Expected rate of return % 7.50 5.85 6.00 2008 Fair value £000 76,753 29,742 3,540 Expected rate of return % 7.50 5.00 6.00 110,035 (145,992) (35,957) 2007 Fair value £000 77,229 27,457 3,655 108,341 (145,601) (37,260) The fair value of plan assets includes £101,525 of Halma p.l.c. 10p ordinary shares (2007: £1,445,721) and a receivable of £2,087,000 (2007: £3,071,000) 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. The amount charged/(credited) to the Consolidated income statement in respect of the schemes was as follows: Current service cost (administrative expenses) Expected return on pension plan assets Interest on plan liabilities Net finance cost Total charge 2008 £000 2,844 (7,438) 7,664 226 2007 £000 2,859 (6,237) 7,103 866 3,070 3,725 The amount charged to the Consolidated statement of recognised income and expense in respect of the actuarial loss of the plans was £3,886,000 (2007: £7,084,000 gain). The movements in plan assets, liabilities and the net deficit are as follows: At beginning of year Current service cost Contributions paid Net finance cost Actuarial (loss)/gain Movement on receivable from principal employer Fair value of plan assets £000 108,341 – 9,243 7,438 (14,003) (984) Present value of plan liabilities £000 (145,601) (2,844) – (7,664) 10,117 – 2008 Net deficit £000 (37,260) (2,844) 9,243 (226) (3,886) (984) Fair value of plan assets £000 95,561 – 7,092 6,237 1,143 (1,692) Present value of plan liabilities £000 (141,580) (2,859) – (7,103) 5,941 – At end of year 110,035 (145,992) (35,957) 108,341 (145,601) 2007 Net deficit £000 (46,019) (2,859) 7,092 (866) 7,084 (1,692) (37,260) History of experience adjustments: Present value of defined benefit obligations Fair value of plan assets Deficit in the plan Experience adjustments on plan liabilities: Amount Percentage of plan liabilities Experience adjustments on plan assets: Amount Percentage of plan assets 2008 £000 (145,992) 110,035 2007 £000 (145,601) 108,341 2006 £000 (141,580) 95,561 2005 £000 (112,914) 72,069 2004 £000 (102,196) 61,427 (35,957) (37,260) (46,019) (40,845) (40,769) – – 12,327 11% 273 – 1,321 1% 536 – 52 – – – 11,271 12% 2,821 4% 7,717 13% The amount disclosed for 2004 is under UK GAAP as it is not practicable to restate amounts prior to the date of transition to IFRS. Halma p.l.c. Annual report and accounts 2008 77 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S 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 29 March 2008 which comprise the Consolidated income statement, the Consolidated balance sheet, the Consolidated statement of recognised income and expense, the Reconciliation of movements in shareholders’ funds, and the Consolidated cash flow statement together with the statement of Accounting policies and the related notes 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 Directors’ Remuneration report 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 29 March 2008. 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’ Remuneration report 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 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 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’ Remuneration report 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 Directors’ Report is consistent with the Group financial statements. 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 is not disclosed. We review whether the Corporate governance statement reflects the Company’s compliance with the nine provisions of the 2006 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 Directors’ Report and the other information contained in the Annual report for the above period as described in the Contents section 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’ Remuneration report 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’ Remuneration report 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’ Remuneration report 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 by the European Union, of the state of the Group’s affairs as at 29 March 2008 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 Regulation; – the part of the Directors’ Remuneration report described as having been audited has been properly prepared in accordance with the Companies Act 1985; and – the information given in the Directors’ Report is consistent with the Group financial statements. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Reading, UK 17 June 2008 78 www.halma.com Company balance sheet Fixed assets Tangible assets Investments Current assets Debtors Current tax receivable Short-term deposits Creditors: amounts falling due within one year Borrowings Creditors Current tax payable Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Borrowings Creditors Provisions for liabilities and charges Net assets Capital and reserves Share capital Share premium account Treasury shares Capital redemption reserve Other reserves Profit and loss account Shareholders’ funds Approved by the Board of Directors on 17 June 2008. A J Williams Directors K J Thompson 29 March 2008 £000 31 March 2007 £000 Notes C3 C4 C5 C6 C7 C6 C8 C9 C11 C12 C12 C12 C12 C12 C13 2,226 121,332 123,558 177,191 – 2,946 180,137 7,277 69,762 67 77,106 103,031 226,589 65,358 2,849 370 158,012 37,446 16,949 (3,292) 185 2,583 104,141 2,388 115,023 117,411 134,200 630 5,409 140,239 42,070 71,564 – 113,634 26,605 144,016 – 2,719 72 141,225 37,312 15,239 (1,664) 185 1,611 88,542 158,012 141,225 Halma p.l.c. Annual report and accounts 2008 79 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the Company accounts C1 Accounting policies Basis of accounting The separate Company financial statements 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 and law. The principal Company accounting policies have been applied consistently throughout the current and preceding years 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 FRS 20 ‘Share-based payment’, the Company has 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 Financial Reporting Standard 17 the Company accounts for its contributions to the plan as if it was a defined contribution plan. Deferred tax The Company provides for tax deferred because of timing differences between profits as computed for taxation purposes and profits as stated in the accounts, on an undiscounted basis. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax assets are only recognised if recovery is considered more likely than not on the basis of all available evidence. 80 www.halma.com C2 Profit for the year 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 £88,000 (2007: £79,000). Total employee costs (including Directors) were: Wages and salaries Social security costs Other pension costs Number of employees 2008 £000 3,095 511 567 4,173 2007 £000 2,694 386 398 3,478 2008 Number 39 2007 Number 30 Details of Directors’ remuneration are set out on pages 46 to 48 within the Remuneration Report and form part of these financial statements. C3 Fixed assets – tangible assets Land and buildings Freehold properties £000 Short leases £000 Plant equipment and vehicles £000 Cost At 31 March 2007 Additions at cost Disposals At 29 March 2008 Accumulated depreciation At 31 March 2007 Charge for the year Disposals At 29 March 2008 Carrying amounts At 29 March 2008 At 31 March 2007 C4 Investments Shares in Group companies At cost less amounts written off at beginning of year Additions At cost less amounts written off at end of year 2,050 – (361) 1,689 412 46 (123) 335 1,354 1,638 167 – – 167 75 1 – 76 91 92 Total £000 3,819 407 (469) 3,757 1,431 306 (206) 1,531 1,602 407 (108) 1,901 944 259 (83) 1,120 781 658 2,226 2,388 2008 £000 115,023 6,309 121,332 2007 £000 102,566 12,457 115,023 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I Additions in the year relate to the acquisition of Sonar Research & Development Limited, together with revisions to the estimate of deferred purchase consideration payable in respect of acquisitions made in prior years. G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G S S T T N N E M E M - E T A T S E T A T S I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F Halma p.l.c. Annual report and accounts 2008 81 Notes to the Company accounts (continued) C4 Investments (continued) Details of principal subsidiary companies are set out on pages 88 and 89. 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 Fortress Systems Pty. Limited HF Sécurité S.A.S.* Hydreka S.A.S.* SERV Trayvou Interverrouillage S.A.S.* Apollo Gesellschaft für Meldetechnologie mbH* Rudolf Riester GmbH & Co. KG* Berson Milieutechniek B.V.* Netherlocks Safety Systems B.V.* Bureau D’Electronique Appliquée S.A.* TL Jones Limited* E-Motive Display Pte Limited* Halma Holdings Inc.* Air Products and Controls Inc.* Aquionics Inc.* B.E.A. Inc.* Bio-Chem Fluidics Inc.* Diba Industries, Inc.* Janus Elevator Products Inc.* Labsphere, Inc.* Ocean Optics, Inc.* Oklahoma Safety Equipment Co. Inc.* Perma Pure LLC* Volk Optical Inc.* * Interests held by subsidiary companies. C5 Debtors Amounts due from Group companies Other debtors Prepayments and accrued income C6 Borrowings Falling due within one year: Unsecured bank loans Overdrafts Falling due after more than one year: Unsecured bank loans Total borrowings Country of incorporation Australia France France France Germany Germany The Netherlands The Netherlands Belgium New Zealand Singapore USA USA USA USA USA USA USA USA USA USA USA USA 2008 £000 173,159 1,313 2,719 2007 £000 131,576 29 2,595 177,191 134,200 2008 £000 2007 £000 – 7,277 7,277 29,762 12,308 42,070 65,358 72,635 – 42,070 The facility under which the bank loans are drawn expires within two to five years (2007: within two to five years) and at 29 March 2008 £99,642,000 (2007: £30,238,000) remained committed and undrawn. The bank overdrafts at 29 March 2008 and 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. 82 www.halma.com C7 Creditors: amounts falling due within one year Trade creditors Amounts owing to Group companies Other taxation and social security Deferred purchase consideration 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 C9 Provisions for liabilities and charges Deferred tax (note C10) 2008 £000 484 63,265 1,314 1,059 1,566 2,074 69,762 2008 £000 – 2,849 2,849 2007 £000 640 62,194 1,369 2,021 2,000 3,340 71,564 2007 £000 569 2,150 2,719 2,849 2,719 2008 £000 370 370 2007 £000 72 72 Halma p.l.c. Annual report and accounts 2008 83 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Notes to the Company accounts (continued) C10 Deferred tax Movement in deferred tax liability/(asset): At beginning of year Charge to profit and loss account Charge/(credit) to reserves At end of year Deferred tax comprises short-term timing differences. C11 Share capital Ordinary shares of 10p each The number of ordinary shares in issue at 29 March 2008 was 374,458,498 (2007: 373,116,492). Changes during the year in the issued ordinary share capital were as follows: At 31 March 2007 Share options exercised At 29 March 2008 2008 £000 72 161 137 370 2007 £000 (64) 423 (287) 72 Authorised Issued and fully paid 2008 £000 43,656 2007 £000 43,656 2008 £000 37,446 2007 £000 37,312 Issued and fully paid £000 37,312 134 37,446 The total consideration received in cash in respect of share options exercised amounted to £1,844,000. 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 31 March 2007 Profit transferred to reserves Issue of shares Movement in other reserves Treasury shares purchased Exchange adjustments At 29 March 2008 Share premium account £000 15,239 – 1,710 – – – 16,949 Treasury shares £000 (1,664) – – – (1,628) – (3,292) Capital redemption reserve £000 185 – – – – – 185 Other reserves £000 1,611 – – 972 – – 2,583 Profit and loss account £000 88,542 21,790 – – – (6,191) 104,141 The capital redemption reserve was created on repurchase and cancellation of the Company’s own shares. The other reserves represent the provision being established in respect of the value of equity-settled share option plans and performance share plan awards made by the Company. Treasury shares are the Company’s own shares purchased and held to fulfil its obligations under the performance share plan. C13 Reconciliation of movement in shareholders’ funds At beginning of year Profit after taxation Dividends paid Exchange adjustments Issue of shares Treasury shares purchased Movement in other reserves At end of year 84 www.halma.com 2008 £000 141,225 49,119 (27,329) (6,191) 1,844 (1,628) 972 158,012 2007 £000 122,912 36,378 (25,922) 3,184 4,916 (1,285) 1,042 141,225 Independent Auditors’ report to the members of Halma p.l.c. We have audited the parent company financial statements of Halma p.l.c. for the 52 weeks to 29 March 2008 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 29 March 2008 and on the information in the Directors’ Remuneration report 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. Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual report, 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 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 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 Directors’ Report is consistent with the parent company financial statements. In addition we 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. 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 29 March 2008; – the parent company financial statements have been properly prepared in accordance with the Companies Act 1985; and – the information given in the Directors’ Report is consistent with the parent company financial statements. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Reading, UK 17 June 2008 Halma p.l.c. Annual report and accounts 2008 85 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Summary 1999 to 2008 Revenue (note 2) Overseas sales (note 2) Profit before taxation, acquired intangibles amortisation and goodwill written off (note 3) Net tangible assets/capital employed Borrowings Cash and cash equivalents Employees (note 2) Earnings per ordinary share (note 2) Adjusted earnings per ordinary share (note 3) Year on year increase/(decrease) in adjusted earnings per ordinary share Return on sales (notes 2 and 4) Return on capital employed (note 5) Year on year increase in dividends per ordinary share Ordinary share price at financial year end Market capitalisation at financial year end Notes: UK GAAP 1998/99 £000 217,758 134,189 41,823 102,101 7,730 29,894 2,827 UK GAAP 1999/00 £000 233,485 150,727 43,751 89,755 14,700 21,900 2,975 7.91p 7.99p (3.3%) 19.2% 45.4% 20% 92p £330.6m 6.08p 8.41p 5.3% 18.7% 44.7% 20% 95p £340.1m 1. The amounts disclosed for periods up to and including 2003/04 are stated on the basis of UK GAAP, as it is not practicable to restate amounts prior to the date of transition to IFRS. 2. Continuing and discontinued operations. 3. Adjusted to remove amortisation of goodwill and acquired intangible assets. IFRS figures include results of discontinued operations up to the date of their sales or closure but exclude profit on sale or closure. 4. Return on sales is defined as profit before taxation, goodwill/acquired intangible asset amortisation 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). 86 www.halma.com UK GAAP 2000/01 £000 268,322 181,831 49,698 UK GAAP 2001/02 £000 267,597 183,259 48,255 UK GAAP 2002/03 £000 267,293 188,161 46,508 UK GAAP 2003/04 £000 292,640 206,102 50,284 UK GAAP 2004/05 £000 299,119 218,745 50,389 99,991 7,758 21,484 3,059 8.91p 9.34p 11.1% 18.5% 48.4% 15% 129p £465.7m 117,515 15,047 45,657 2,859 8.58p 9.10p (2.6%) 18.0% 45.7% 15% 164p £598.2m 86,854 27,667 27,574 2,793 7.76p 8.55p (6.0%) 17.4% 41.7% 10% 114p £416.7m 95,935 26,934 48,482 2,925 6.09p 9.44p 10.4% 17.2% 50.5% 7% 149p £546.5m 80,750 33,344 45,348 3,002 7.97p 9.42p (0.2%) 16.8% 52.1% 5% 161p £593.8m IFRS 2004/05 £000 299,119 218,745 49,912 104,417 33,344 45,348 3,002 9.38p 9.45p N/A 16.7% 48.8% 5% 161p £593.8m IFRS 2005/06 £000 337,348 249,055 59,641 105,396 32,308 35,826 3,187 11.08p 11.27p 19.3% 17.7% 56.9% 5% 188p £693.4m IFRS 2006/07 £000 354,606 258,050 66,091 IFRS 2007/08 £000 397,955 288,701 73,215 113,048 29,762 22,051 3,326 11.86p 12.50p 10.9% 18.6% 60.1 % 5% 220p £821.8m 134,320 72,393 28,118 3,683 13.49p 13.86p 11.5% 18.4% 55.8% 5% 192p £717.7m Halma p.l.c. Annual report and accounts 2008 87 I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F S S T T N N E M E M - E T A T S E T A T S Halma group directory 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 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 Gas detection instruments for personnel and plant safety Diba Industries, Inc. Safety systems for controlling hazardous industrial processes Ultraviolet light equipment for water treatment Ultraviolet light equipment for treating drinking water, waste water and water reuse applications Miniature valves, micro pumps and fluid components for medical, life science and scientific instruments Sensors for automatic doors 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 Halma China hub Ultraviolet light equipment for treating 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 components 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 Infrared safety systems for elevator doors and elevator emergency communications Process safety systems for petrochemical and industrial applications 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 Instrumentation for recording data, and detecting and controlling leakage, in water distribution pipelines Radio telemetry Diagnostic medical devices for ophthalmology, blood pressure measurement and ear, nose and throat diagnostics 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 Elfab Limited E-Motive Display Pte Limited Fire Fighting Enterprises Limited Fortress Interlocks Limited Fortress Systems Pty. Limited Halma Holdings Inc. Halma International Limited Shanghai Representative Office Hanovia Limited HF Sécurité S.A.S. Hydreka S.A.S. Janus Elevator Products Inc. Keeler Limited Klaxon Signals Limited Labsphere, Inc Memco Limited Netherlocks Safety Systems B.V. Ocean Optics, Inc. Oklahoma Safety Equipment Co. Inc. Palintest Limited Palmer Environmental Limited Perma Pure LLC Radcom (Technologies) Limited Radio-Tech Limited Rudolf Riester GmbH & Co.KG SERV Trayvou Interverrouillage S.A.S. Smith Flow Control Limited Texecom Limited TL Jones Limited Tritech International Limited Volk Optical Inc. Volumatic Limited 88 www.halma.com Location Pontiac, Michigan Havant, Hampshire Gütersloh, Germany Erlanger, Kentucky Eindhoven, The Netherlands Boonton, New Jersey Liège, Belgium Kingsbury, London Abingdon, Oxfordshire Danbury, Connecticut North Shields, Tyne & Wear Singapore Hitchin, Hertfordshire Wolverhampton, West Midlands Melbourne, Australia Cincinnati, Ohio Shanghai, China Telephone Contact Peter Stouffer +1 (1)248 332 3900 Danny Burns +44 (0)2392 492412 +49 (0)5241 33060 Falk Blödorn E-mail info@ap-c.com enquiries@apollo-fire.co.uk info@apollo-feuer.de Website www.ap-c.com www.apollo-fire.co.uk www.apollo-feuer.de +1 (1)859 341 0710 +31 (0)40 290 7777 +1 (1)973 263 3001 +32 (0)4361 6565 Kevin Shannon Sjors van Gaalen George Gaydos Philippe van Genechten Tim Whelan +44 (0)20 8200 1200 Warren Rees +44 (0)1235 557700 +1(1)203 744 0773 Chuck Dubois sales@aquionics.com info@bersonuv.com www.aquionics.com www.bersonuv.com info@biochemvalve.com www.biochemfluidics.com www.bea.be info@bea.be sales@castell.com crowcon@crowcon.com salesdept@dibaind.com www.castell.com www.crowcon.com www.dibaind.com Simon Keenan +44 (0)191 293 1234 +65 6776 4111 Chris Stoelhorst Ian Steel +44 (0)845 402 4242 Mike Golding +44 (0)1902 349000 +61 (0)395 87 4099 David Dean Steve Sowell Martin Zhang fortress@fortress.com.au +1 (1)513 772 5501 halmaholdings@halmaholdings.com halmachina@halma.com +86 21 5206 8686 enquiries@elfab.com sales@emotivedisplay.com info@ffeuk.com www.elfab.com www.emotivedisplay.com www.ffeuk.com sales@fortressinterlocks.co.uk www.fortressinterlocks.co.uk www.fortress.com.au www.halmaholdings.com www.halma.cn Slough, Berkshire Craig Howarth +44 (0)1753 515300 sales@hanovia.com www.hanovia.com Cluses, France Lyon, France Hauppauge, New York Windsor, Berkshire Oldham, Lancashire North Sutton, New Hampshire Maidenhead, Berkshire Alphen aan den Rijn, The Netherlands Dunedin, Florida Broken Arrow, Oklahoma Gateshead, Tyne & Wear Cwmbran, South Wales Toms River, New Jersey Romsey, Hampshire Harlow, Essex Jungingen, Germany Paris, France Witham, Essex Haslingden, Lancashire Christchurch, New Zealand Aberdeen, Scotland Mentor, Ohio Coventry, West Midlands Gérard Denis +33 (0)4 50 98 96 71 Alain Soulié +33 (0)4 72 53 11 53 Mike Byrne +1 (1)631 864 3699 +44 (0)1753 857177 Abbas Sotoudeh Barry Coughlan +44 (0)161 287 5555 +1 (1)603 927 4266 Peter Bailey +44 (0)1628 770734 +31 (0)172 471339 Kevin Chittim Albert Buschgens hfsecurite@hfsecurite.com hydreka@hydreka.fr sales@januselevator.com info@keeler.co.uk sales@klaxonsignals.com labsphere@labsphere.com sales@memco.co.uk sales@netherlocks.com www.hfsecurite.com www.hydreka.com www.januselevator.com www.keeler.co.uk www.klaxonsignals.com www.labsphere.com www.memco.co.uk www.netherlocks.com Rob Randelman +1(1)727 733 2447 info@oceanoptics.com www.oceanoptics.com Bryan Sanderlin +1 (1)918 258 5626 David Sidlow +44 (0)191 491 0808 Rob Fish +44 (0)1633 489 479 +1 (1)732 244 0010 Rob Fish +44 (0)1794 528 700 Jeremy Llewellyn +44 (0)1279 635 849 Gerhard Glufke +49 (0)74 77 92 700 Richard Curran info@oseco.com palintest@palintest.com sales@hwm-water.com info@permapure.com sales@radcom.co.uk sales@radio-tech.co.uk info@riester.de www.oseco.com www.palintest.com www.hwm-water.com www.permapure.com www.radcom.co.uk www.radio-tech.co.uk www.riester.de I I B S B S S U S U E S E N S N N N E E S S S S R R E E V V E E W W - I - S I S U U B B I I I W W E E V V E E R R I Stéphane Majerus Mike D’Anzieri +33 (0)1 48 18 15 15 +44 (0)1376 517901 Jim Ludwig +44 (0)1706 234 800 +64 (0)3 349 4456 +44 (0)1224 744111 +1 (1)440 942 6161 Colin Amos +44 (0)247 668 4217 Chris Stoelhorst Richard Marsh Peter Mastores www.servtrayvou.com enquiries@servtrayvou.com sales@smithflowcontrol.com www.smithflowcontrol.com www.texe.com www.tljones.com www.tritech.co.uk www.volk.com www.volumatic.com sales@texe.com info@tljones.com info@tritech.co.uk volk@volk.com info@volumatic.com G E G E C O C N O V N A V E A E N R N R N N A A N N C C E E - R E V O G - R E V O G S S T T N N E M E M - E T A T S E T A T S I I I I F L A I F L N A I N C A C A N N C C A A L L S S T A T A T E T - M E A - M A E N N E N A N T A N S T N I S F I F Halma p.l.c. Annual report and accounts 2008 89 29 November 2007 6 February 2008 14 February 2008 17 June 2008 1 July 2008 31 July 2008 20 August 2008 27 November 2008 February 2009 February 2009 June 2009 Shareholders Number 5,306 695 324 171 85 6,581 % 80.6 10.6 4.9 2.6 1.3 100.0 Shares Number 10,320,228 9,113,994 16,105,411 51,108,746 288,147,901 374,796,280 2008 246 182 192 2008 3.00 4.55* 7.55 2007 240 172 220 2007 2.85 4.33 7.18 2006 194 139 188 2006 2.71 4.12 6.83 2005 170 142 161 2005 2.58 3.92 6.50 % 2.8 2.4 4.3 13.6 76.9 100.0 2004 151 109 149 2004 2.44 3.75 6.19 Shareholder information and advisers Financial calendar 2007/08 Interim results 2007/08 Interim dividend paid Interim management statement 2007/08 Preliminary results 2007/08 Report and accounts issued Annual General Meeting and Interim management statement 2007/08 Final dividend payable 2008/09 Interim results 2008/09 Interim dividend payable Interim management statement 2008/09 Preliminary results Analysis of shareholders at 22 May 2008 Number of shares held 1 – 7,500 7,501 – 25,000 25,001 – 100,000 100,001 – 750,000 750,001 and over Share price London Stock Exchange, pence per 10p share Highest Lowest Year end Dividends Pence per 10p share Interim Final Total * proposed Registered Office Misbourne Court Rectory Way Amersham Bucks HP7 0DE Tel: +44 (0)1494 721111 E-mail: halma@halma.com Website: www.halma.com Registered in England and Wales, No 40932 Registrars Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Tel: +44 (0)870 707 1046 Fax: +44 (0)870 703 6101 E-mail: web.queries@computershare.co.uk Investor Centre website: www.computershare.com/investor 90 www.halma.com HL001_p90_080623.pdf 24/6/08 06:31:10 Investor information Visit our website, www.halma.com, for investor information and Company news. In addition to accessing ﬁnancial data, you can view and download Annual and Interim reports, analyst presentations, ﬁnd contact details for Halma senior executives and subsidiary companies and access links to Halma subsidiary websites. 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. Shareholding information Please contact our registrars directly for all enquiries about your shareholding. Visit their Investor Centre website for online information about your shareholding (you will need your shareholder reference number which can be found on your share certiﬁcate or dividend tax voucher), or telephone the registrars using the dedicated telephone number for Halma shareholders (see below). Dividend reinvestment plan The company operates a dividend reinvestment plan (‘DRIP’) which offers shareholders the opportunity to use their cash dividends to buy new shares in Halma. You can register for the DRIP online by visiting Computershare’s Investor Centre website and selecting ‘Dividend Reinvestment Plan election’ or by requesting an application form direct from Computershare. Electronic communications All shareholder communications, including the company’s Annual report and accounts, are made available on the Halma website. You may opt to receive e-mail notiﬁcation that documents and information are available to view and download. If you would like to sign up for this service, visit the Computershare Investor Centre website, selecting ‘Electronic Shareholder Communications’ and following the registration process. Share dealing facilities A low cost telephone dealing service has been arranged with Stocktrade which provides a simple way for buying or selling Halma shares. Basic commission is 0.5% up to £10,000, reducing to 0.2% thereafter (subject to a minimum commission of £15). For further information please call 0845 601 0995 and quote reference Low Co0198. Annual General Meeting The 114th Annual General Meeting of Halma p.l.c. will be held at The Ballroom, The Berkeley Hotel, Wilton Place, London SW1X 7RL on Thursday, 31 July 2008 at 11.30 am. The Notice convening the meeting is on page 3 of the circular. 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 Advisers Auditors Deloitte & Touche LLP Abbotts 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 Tel: +44 (0)20 7475 7319 Fax: +44 (0)20 7283 4667 E-mail: halma@dkib.com Solicitors CMS Cameron McKenna LLP Mitre House 160 Aldersgate Street London EC1A 4DD Hirst/Andrew Jaques h Partnership Limited Rachel Hogart 2nd Floor Upstr eam No 1 London Bridge London SE1 9BG Tel: +44 (0)20 73 Fax: +44 ( 57 9477 0)20 7357 8533 I S S E N B U S N E S S R E V E W - I S U B I E C N A N G O V E R N A N C E - R E V O G L A C I F I N A N C A L I S T A T E - M A E N N A T N S I F Designed and produced by Black Sun Plc +44 (0)20 7736 0011 I W E V E R S T N E M - E T A T S HALMA Halma p.l.c. Misbourne Court Rectory Way Amersham Bucks HP7 ODE Tel: +44 (0)1494 721111 Fax: +44(0)1494 728032 Web: www.halma.com To view our Annual report and accounts online, please visit: www.halma.com Cert no. SGS-COC-003320

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