REG - Halma PLC - Final Results <Origin Href="QuoteRef">HLMA.L</Origin> - Part 1
06/09/2014 02:14
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Halma PLC
12 June 2014
HALMA plc PRELIMINARY STATEMENT FOR THE 52 WEEKS TO 29 MARCH 2014 12 JUNE 2014 Record results and continued dividend growth Halma, the leading safety, health and environmental technology group, today announces its preliminary statement for the 52 weeks to 29 March 2014.
Financial Highlights
2014 2013 restated6 Change
Continuing Operations:
Revenue £676.5m £619.2m +9%
Adjusted Profit before Taxation1 £140.2m £128.5m +9%
Statutory Profit before Taxation £138.7m £120.1m +15%
Adjusted Earnings per Share2 28.47p 25.79p +10%
Statutory Earnings per Share 28.14p 24.79p +14%
Total Dividend per Share3 11.17p 10.43p +7%
Return on Sales4 20.7% 20.8%
Return on Total Invested Capital5 16.1% 15.6%
Return on Capital Employed5 76.4% 70.7%
● Growth in continuing operations: revenue up 9%, adjusted1 pre-tax profit up 9%. Organic growth5 at constant currency: revenue up 6%, profit up 5%.
● 7% increase in total dividend; 35th consecutive year of dividend increases of 5% or more.
● Widespread revenue growth: Asia Pacific up 11% including China up 26%, USA up 10%, Europe up 8% and UK up 11%. Organic growth in all regions.
● Revenue and profit growth in all four sectors. Strong growth in Medical supported by prior year acquisitions. Good progress in Process Safety and Infrastructure Safety. Environmental & Analysis showing improved performance, final phase of restructuring on track. Organic constant currency revenue and profit growth in all sectors.
● Acquisition pipeline remains healthy. Three acquisitions and one disposal completed since year end for a net cost of £78m, in addition to one acquisition in April 2013.
● Strong cashflow and significant financial capacity for investment in organic growth and value adding acquisitions. Net debt of £74.5m at year end (2013: £110.3m) and increased borrowing facilities of £360m extended until 2018.
● Simplified management structure in place, capable of scaling up Halma's business model while maintaining our unique operating culture.
Andrew Williams, Chief Executive of Halma, commented:
"Halma has performed strongly, achieving record revenue and profit for the eleventh consecutive year. We achieved revenue and profit growth in all four of our business sectors and in all four major geographic regions even though market conditions were variable. "We expect this varied trading environment to continue, providing both opportunities and challenges including a currency headwind resulting from the increased strength of Sterling. Our ongoing investment in new products, people development and
international expansion will continue to open up new market niches and applications for our businesses. Our proven ability to achieve organic growth and regularly complete good quality acquisitions gives us confidence that Halma will make further progress in the year ahead."
Notes:
1 Adjusted to remove the amortisation of acquired intangible assets, acquisition items, the effects of closure to future benefit accrual of the Defined Benefit pension plans (net of associated costs), and profit or loss on disposal of operations totalling £1.6m (2013: £8.4m). See Note 2 to the Preliminary Statement.
2 Adjusted to remove the amortisation of acquired intangible assets, acquisition items, the effects of closure to future benefit accrual of the Defined Benefit pension plans (net of associated costs), profit or loss on disposal of operations and the associated tax thereon. See Note 6 to the Preliminary Statement.
3 Total dividend paid and proposed per share.
4 Return on Sales is defined as adjusted1 profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.
5 Organic growth rates, Return on Total Invested Capital and Return on Capital Employed are non-GAAP performance measures used by management in measuring the returns achieved from the Group's asset base. See Note 11 to the Preliminary Statement.
6 The Group adopted IAS 19 (revised) in 2013/14, which changed the accounting for Defined Benefit pension plans. The prior year has been restated resulting in a £2.1m reduction in its adjusted profit. The consequent change to the prior year's earnings per share2 is shown in Note 6 to the Preliminary Statement. Results prior to 2012/13 have not been restated.
For further information, please contact:
Halma plcAndrew Williams, Chief ExecutiveKevin Thompson, Finance Director +44 (0)1494 721111
MHP Communications +44 (0)20 3128 8100
Rachel Hirst/Andrew Jaques
A copy of this announcement, together with other information about Halma, may be viewed on its website: www.halma.com.
NOTE TO EDITORS
1. Halma develops and markets products used worldwide to protect life and improve the quality of life. The Group comprises four business sectors:
● Process Safety Products which protect assets and people at work.
● Infrastructure Safety Products which detect hazards to protect assets and people in public spaces and commercial buildings.
● Medical Products used to improve personal and public health.
● Environmental & Analysis Products and technologies for analysis in safety, life sciences and environmental markets.
The key characteristics of Halma's businesses are that they are based on specialist technology and application knowledge, offering strong growth potential. Many Group businesses are market leaders in their specialist field.
2. High resolution photos of Halma senior management, including Chief Executive Andrew Williams, and images illustrating Halma business activities can be downloaded from its website: www.halma.com. Click on the 'News & Media' link, then 'Image Library'. Photo queries: David Waller +44 (0)1494 721111, e-mail: dwaller@halmapr.com.
3. You can view or download copies of this announcement and the latest Half Year and Annual Reports from the website at www.halma.com or request free printed copies by contacting halma@halma.com.
4. A copy of the Annual Report and Accounts will be made available to shareholders on 24 June 2014 either by post or online at www.halma.com and will be available to the general public online or on written request to the Company's registered office at Misbourne Court, Rectory Way, Amersham, Bucks HP7 0DE, UK.
5. This announcement contains certain forward-looking statements which have been made by the Directors in good faith using information available up until the date they approved the announcement. Forward-looking statements should be regarded with caution as by their nature such statements involve risk and uncertainties relating to events and circumstances that may occur in the future. Actual results may differ from those expressed in such statements, depending on the outcome of these uncertain future events.
Chairman's Statement
"…a strong dedication to the business model with a large reliance on the autonomy of the operations."
When I was first approached about the opportunity to chair Halma, I have to admit that I knew very little about the Company. That in itself tells you something about the business, as Halma has always been somewhat understated, relying on the natural evolution of its business fundamentals to grow. Halma's ambitions to grow are clearly communicated in its engagement with the investment community. There are no hidden principles guiding the Group, just a strong dedication to the business model with a large
reliance on the autonomy of the operations. This approach is rewarded with shareholders who share the same values as Halma and who reinforce our dedication to our business model through their longer-term investment. Therefore in this, my first report as your Chairman, I am delighted to report another strong performance by Halma achieving record revenue and profit for the eleventh consecutive year.
Structured for sustainable growth
During this last year the Board spent time discussing how the business should be organised to maximise the growth opportunities in our marketplaces. We considered the breadth of management control across the Group and concluded that the time had come to align our Executive Board with the four market sectors that we are engaged in. We continue to believe that it is important to maintain the flat management structure that has played a large part in underpinning the operational excellence and control of the
Group for many years. Halma's growth in recent years has demonstrated that it is possible to replicate the Group's traditional management structure within each sector - after all, our sectors are now roughly the size that Halma was just 10 years ago!
Structuring management and the businesses in this way will broaden our M&A search activity as well as making Halma a more transparent prospect for the owners and management of potential acquisition opportunities. The ability to identify suitable acquisitions is an important part of our long-term business model. I am satisfied that we have maintained, and indeed enhanced, what makes Halma an attractive home for successful businesses.
These changes also mean that additional internal collaboration opportunities are more likely to be pursued. Iplan to report on the additional 'added value' from internal collaboration in next year's annual report.
During the year we created the new role of Group Talent Director reporting to Andrew Williams and with a position on the Executive Board. This will improve the Company's ability to identify talent both internally and externally, ensuring that we have strong teams in all of our businesses coupled with an effective management succession planning culture. I am delighted to welcome Jennifer Ward to Halma who was appointed to this role in March 2014.
Governance
As Chairman of Halma, I am tasked with ensuring that the Board maintains a focused and disciplined approach to governance and I am delighted to say that the task is made easier by the leadership evidenced at all levels of the Group. In saying that, I do acknowledge that we need to improve on our diversity objectives across all of our businesses in the Group and that this will continue to be a focus for both the plc and Executive Boards.
Due to recent changes in their business commitments, Lord Blackwell and Steve Marshall will not be seeking re-election to the Board at the forthcoming AGM. I would like to thank them both for the significant contribution they have made to the Halma Board and also the support that they have provided to me in my first year as Chair.
I am delighted to announce that Roy Twite will be joining the Board following the conclusion of the AGM on 24 July 2014. Roy is an executive director at IMI plc and brings very relevant engineering experience to the Halma Board. Stephen Pettit has agreed to the Board's request to remain on the Halma Board up until the 2015 annual general meeting. The Board is in the process of seeking to identify an additional non-executive Director.
Further information on Corporate Governance is set out in the Annual Report and Accounts.
Acquisitions and disposal
The Group concluded only one acquisition this year after acquiring six businesses in the previous year on which we spent £137m. Our acquisition pipeline remains good. The three acquisitions concluded after our financial year end demonstrate that we cannot predict when our efforts will come to fruition although this also gives me comfort that the disciplines and due diligence surrounding acquisitions are not unduly accelerated, but fully performed and considered. As a Board, we evaluate each investment
opportunity on its merits and ensure that each is the right use of our financial resources.
Pensions
During the year, the Board authorised the cessation of future benefit accrual in the two remaining UK Defined Benefit pension plans in operation in the Group. Whilst this provides the Company with a less volatile financial impact in the years ahead, I wanted to let each of the long-serving Group employees affected by this change know that this was not an easy decision to reach. The Board considered the volatility of pension funding and accounting alongside market practice outside Halma, harmonisation of
Group benefits and upcoming changes to National Insurance contributions. We concluded that discontinuance of this benefit, balanced with transitional measures, was in the best interests of shareholders.
Performance and dividend
I would like to thank Andrew Williams, the Executive Board and each of Halma's employees around the world; each has played their part this year in delivering value for shareholders in another chapter in the story of Halma. I am pleased to report that revenue for the year increased by 9% to £677m with adjusted1 profit before tax increasing by 9% to £140m. In a year in which there were fewer acquisitions, this is a commendable performance. The Board's confidence in the Group is reflected in us recommending
a final dividend of 6.82p per share giving a total dividend for the year of 11.17p, an increase of 7%. The final dividend is subject to approval by shareholders at the AGM on 24 July 2014 and will be paid on 20 August 2014 to shareholders on the register at 18 July 2014. This marks the 35th consecutive year of dividend increases of 5% or more.
Summary
2014 has been another successful year for Halma with solid organic growth and positive contributions from recent acquisitions helping to achieve record results for the eleventh successive year. The restructuring of our Executive Board, aligning it more closely with our four sectors, will give us a clearer market focus. I believe this will continue to help us to achieve our longer-term strategic objectives as well as continuing to drive organic growth in the business.
Paul Walker, Chairman1 See Financial Highlights.
Strategic Review Record revenue and profit growthHalma has performed strongly, achieving record revenue and profit for the eleventh consecutive year. We achieved revenue and profit growth in all four of our business sectors demonstrating the benefit of sustained investment in new product innovation and people development. We increased revenue in all major geographic regions, rewarding our commitment to increasing resources in developing countries and reflecting the opportunities for growth in developed
markets.The consistency of Halma's strong performance over a long period is the product of a good strategy together with the creativity, commitment and talent of Halma's employees. Once again, I would like to thank them for their contributions to our continued success.
Good organic revenue and profit growthRevenue from continuing operations increased by 9% to £676.5m (2013: £619.2m). Organic revenue growth was 6% and also 6% at constant currency. Adjusted1 profit from continuing operations increased by 9% to £140.2m (2013 restated1: £128.5m). Organic profit growth was 6% and 5% at constant currency.There were similar rates of organic revenue growth at constant currency in the first-half and second-half years. Profit growth was stronger in the second half as some 'one-off'
reorganisation and quality costs in the first half were not repeated. Product margins remained steady throughout the year reflecting good control of both pricing and manufacturing costs.
High returns and strong cash generationHigh returns were maintained with Return on Sales of 20.7% (2013 restated1: 20.8%) and Return on Capital Employed at the operating level increased to 76% (2013 restated1: 71%). Return on Total Invested Capital (post-tax) rose to 16.1% (2013 restated1: 15.6%).Strong cash generation ensured we ended the period with net debt of £74m (2013: £110m) after spending £17m on capital expenditure, £17m on acquisitions (2013: £148m of which £137m was for businesses acquired in the
year) and paying out £40m and £28m on dividends and tax respectively. In November 2013, we increased and extended our revolving credit facilities up to £360m until November 2018 and we are in an excellent financial position to support our future growth.
Growth in all major geographic regionsWidespread growth in all major geographic regions once again showed Halma's ability to succeed amid a range of local economic conditions. This reflects both the benefit to us of the diversity of our end markets and also the agility of our operating structure. Each subsidiary company is able to adjust investment priorities quickly as market conditions vary. We have seen the value of this, particularly during recent years when macro-economic circumstances have been
changeable.Revenue from our largest market, the USA, grew by 10% to £214m (2013: £195m) including organic growth at constant currency of 6%. UK revenue improved by 11% to £128m (2013: £116m) while Mainland Europe revenue was up by 8% to £164m (2013: £152m). Constant currency organic revenue growth in these regions was 6% and 5% respectively. Therefore, total revenue from these three developed markets grew by a very healthy 9%, including 6% organic growth at constant currency.We maintained strong growth in
China: revenue was up by 26% to £47m (2013: £37m), which is 7% of the Group. This included a successful first full year for Longer Pump, our first stand-alone acquisition in China. This excellent performance in China contributed to revenue from Asia Pacific increasing by 11% to £112m, including 7% organic growth at constant currency.
Organic revenue and profit growth in all sectors Process Safety grew revenue by 1% to £126.7m (2013: £125.7m) and profit2 by 8% to £34.9m (2013: £32.3m). Excluding the contribution of Tritech, which was sold in August 2012, revenue increased by 5% and profit by 11%. These were also the sector's organic growth rates.Return on Sales improved from 25.7% to 27.5% due to continued strong product margins and good operational management. New product introductions contributed to both this margin expansion and to
revenue growth through diversification into new application niches. Examples included new pressure relief devices for shale gas production and a wide-area gas detection system which incorporates wireless technology developed by one of our Infrastructure Safety businesses. This combination of focused product innovation and a continued increase in Health & Safety regulation globally is delivering sustained success for our Process Safety sector. Excluding the prior year disposal, there was growth in all major
geographic regions except the UK, where revenue declined by 1%. There was double-digit growth from the USA (up 13%) and Asia Pacific (up 12%). Mainland Europe revenue increased by 1%. The sector hub established in Brazil in 2013 is now firmly established and promises to boost Process Safety revenue from this territory in the future.
Infrastructure Safety performed strongly, growing both revenue and profit2 by 7% to £220.3m (2013: £205.3m) and £44.4m (2013 restated: £41.5m) respectively. At constant currency, organic revenue growth was 6% and profit growth was 5% demonstrating the resilience of demand for our products which is underpinned by increasing Health & Safety regulation.Return on Sales remained strong at 20.2% (2013 restated: 20.2%) due to successful new product launches and an effective balance between investment and cost
control to maintain strong product margins. We continue to achieve good growth for our wireless smoke detectors into the home automation market in the USA, while a new safety sensor for automatic swing doors is increasing our market share with global pedestrian door OEMs.Revenue increased in all major geographic regions, including 12% growth in Mainland Europe. Healthy mid-single digit growth in the UK, USA and Asia Pacific reflected the global reach of our products, whether selling into major multinational
OEMs or through local distribution partners. Our strategy of increasing investment in locally based sales and technical resources continues to pay dividends.
Our Medical sector grew revenue by 20% to £163.2m (2013: £136.1m) and profit2 by 16% to £41.8m (2013: £35.9m), including a sizeable contribution from acquisitions completed in the prior financial year. Organic revenue growth at constant currency was 7% and organic profit growth was 1%.Return on Sales remained strong at 25.6%, albeit slightly below last year's record 26.4%. A combination of minor factors contributed to this, including the full-year effect of the new medical device tax in the USA and the
acquisitions made in the prior year having lower returns than the sector average. Typically, we increase investment in newly acquired businesses during the first couple of years of ownership to build management strength, international sales resources and new product development capability. In the medium term, this not only increases revenue, but also drives up profitability.There was strong revenue growth in all geographic regions. Asia Pacific growth of 52% benefited from a good first year's performance
from Longer Pump in China and strong organic growth of 22% (constant currency). Our focus on new medical product registrations is slowly paying dividends and is enabling us to build stronger market positions in key developing territories in Asia and South America. Elsewhere, organic revenue growth (constant currency) from the UK was up 8%, Mainland Europe grew by 6% and the USA increased 3%.
Environmental & Analysis achieved a pleasing full-year performance after a disappointing prior year and some reorganisation in the first half. Revenue increased by 9% to £166.5m (2013: £152.4m) and profit2 grew by 4% to £31.7m (2013: £30.4m). At constant currency, organic revenue growth was 5% and profit was up 2%.Return on Sales was 19.1% (2013: 19.9%) which represented a useful improvement from 18.2% at the end of the first half. The consolidation of our two optical coating business facilities has gone to
plan with a newly expanded facility now operational in Florida and product lines being transferred from Colorado. In addition, our main photonics business, Ocean Optics, has spun-off a new Halma subsidiary in China while our water UV companies have restructured their distribution channels in the USA. The total cost of these restructuring projects was below £1m in the year.Revenue grew by 53% in the UK, dominated by large sales of flow/pressure data loggers to UK water utilities as part of their preparation
for the deregulation of the UK commercial water market in 2017. There was mid-single digit growth in Mainland Europe and the USA whilst revenue from Asia Pacific declined by 5% as major contracts for certain water and photonics businesses last year came to an end. Restructuring completed during the year and additional senior management changes made shortly after year end should improve the consistency of this sector's performance in the medium term.
Executive Board changes enhance the scalability of Halma's business modelIn April 2014, Halma's Executive Board was reorganised to be more clearly aligned with our four reporting sectors and provide a management structure which gives each sector the potential to become as large as the whole of Halma today. Each of our four sectors is now led by a Sector Chief Executive (SCE), each of whom has already proven successful in delivering both organic and acquisition growth as a Halma Divisional Chief Executive
(DCE). As each sector grows, the SCEs will appoint Sector Vice Presidents to chair small groups of companies in much the same way as Halma DCEs did successfully for many years in the past.Halma's long track record of success is built on careful selection of markets and product niches complemented by an unstinting commitment to improve the quality of management. This need to have a strong talent pipeline to support future growth is an ever-increasing challenge and, with that in mind, we recruited Jennifer
Ward to the Halma Executive Board as Group Talent Director. Jennifer will lead the development of a more rigorous approach to identifying, assessing, developing and attracting diverse management talent working in a partnership with the SCEs.This new management structure will result in clearer growth strategies for each sector, clarifying the investment, collaboration and acquisition priorities. As Group CEO, I will maintain a close relationship with both the SCEs and our individual operating subsidiaries
through their regular reporting, meetings and my ongoing programme of company visits. I am confident that we have a management structure which is capable of scaling up Halma's successful business model over the next decade (or more) while maintaining our unique operating culture.
Three acquisitions completed recently; pipeline is goodFollowing a very busy 2012/13, when Halma spent £137m on six businesses (excluding net cash acquired of £5m), we completed one acquisition this financial year. Talentum, a flame detector manufacturer, was acquired by our Infrastructure Safety sector in April 2013 for £3m (excluding net cash acquired). Despite a quiet year, we remain confident about acquisition prospects, having come close to completing a number of additional deals during the year.
Although the current M&A market is more competitive than it has been for the past few years, we are still finding high quality companies in good markets at sensible prices. To support this confidence, we have completed three acquisitions since the period end:- Plasticspritzerei AG was acquired in May 2014 for a net cash consideration of CHF4.8m (£3.2m). Plasticspritzerei manufactures plastic components including critical parts for Medicel's ophthalmic products and joins our Medical sector. -
Advanced Electronics Limited (Advanced) was acquired in May 2014 for an initial cash consideration of £14.1m. Advanced manufactures networked fire detection and control systems and joins our Infrastructure Safety sector. - Rohrback Cosasco Systems Inc. (RCS) was acquired in May 2014 for a cash consideration of $108m (£64.7m) excluding cash acquired. RCS is a world leader in the design, manufacture and sale of pipeline corrosion monitoring products and systems and is a strong addition to our Process
Safety sector.We made one disposal following the year end, selling our US-based elevator control panel manufacturing business, Monitor Elevator Products Inc., to another industry player, Innovation Industries for $6m (£3.6m). Halma will record a gain before tax of approximately £1m on this transaction in 2014/15. The net spend on the acquisitions and disposal in May 2014 was £78.4m.
Creating growth through strategic investmentOur strategy is to sustain consistent rates of organic growth by focusing on three areas of investment: innovation, people development and international expansion.We are strongly cash generative and our medium-term organic growth rate determines our ability to fund the acquisition of new businesses and increase dividends each year. These cash resources are supplemented by income from disposals and external financing facilities, although our strategy is always to
maintain a strong balance sheet with modest levels of debt. In the longer term, our ability to shift our portfolio mix also ensures that we can change our exposure to particular end markets as economic circumstances evolve.
Increased investment in innovationHalma businesses build market leadership, gain market share and create opportunities in new markets through innovation of products and processes. This innovation comes from leveraging the deep market knowledge and application know-how residing within each Halma business. There is a significant benefit to be gained from Halma companies collaborating and sharing know-how with their sister companies. We are building a culture which encourages these behaviours in a variety of
ways including diverse company representation at Halma training programmes and holding a biennial Halma Innovation and Technology Exposition (HITE). Network groups focused on functional areas such as manufacturing, HR and IT also foster regular benchmarking and drive continuous improvement.In May 2013, we held our third HITE event in Florida, USA. HITE brings together senior managers from all Halma companies and acts as a catalyst for collaboration and sharing know-how thereby increasing subsidiaries' rates
of innovation and competitive advantage. Plans are already underway for HITE 2015 which will be held during April 2015 in Barcelona, Spain and, once again, we intend to invite institutional investors and analysts to join us.Innovation is formally recognised in Halma through the annual Halma Innovation Award which includes a first prize of £20,000 for the winning employees.The Halma Innovation Award 2014 was won by a collaboration between two of our US-based Environmental & Analysis sector businesses, Avo
Photonics and Aquionics. Avo's expertise in electro-optics and Aquionics' knowledge of UV light disinfection of water were combined to develop PearlSenseT. This is the first product to use UV LED lamps instead of mercury-based lamps to monitor the effectiveness of UV disinfection systems in real-time. Compared to older technology, PearlSenseT offers customers a smaller device footprint, a more robust design, lower operating costs and, through the elimination of mercury, an environmentally friendly
solution.Both runners-up prizes were won by teams from Oseco, which manufactures pressure relief devices for safety-critical processes. Their winning innovations were a new pressure safety system for shale gas production and a high pressure, high temperature bursting disk used in chemical manufacturing. Both of these products provide a level of technical performance and reliability way beyond that achieved by the competition, creating two new market niches for Oseco's business.During the year, R&D
expenditure grew by 5% to £32.1m (2013: £30.5m excluding disposal). There was higher R&D investment in all sectors.In April 2013, we introduced a programme to encourage our companies to increase R&D resources in China in order to develop more products for the local market. Subsequently, 10 Halma businesses have been granted a subsidy to support the cost of engineers in China and we expect the first new products to be launched in 2014. This is another good example of how being in Halma can accelerate the
growth and development of individual businesses.
People developmentA key component of Halma's success is to build and develop company management teams who thrive on the opportunity to devise their own growth strategy and take management action as market needs dictate. Each Halma company board manages their own R&D, manufacturing, sales, marketing and financial control resources.Halma's Executive Board ensures that, collectively, the subsidiary companies' strategic plans, financial goals and incentive programmes are aligned with Halma's, supported by a
relentless commitment to attract and develop high quality talent. We continue to offer a range of training for employees including the Halma Executive Development Programmes (HEDP and HEDP+), Halma Management Development Programmes (HMDP and HMDP+) and Halma Certificate in Applied Technology (HCAT). All programme content is continuously reviewed and upgraded as the needs of our business evolve. During 2013/14, 104 employees attended these Halma run programmes and many more attended locally organised in
-house training or externally run programmes. In recent years, Executive Board members have attended Advanced Management Programmes at Harvard, Wharton, INSEAD and IESE Business Schools.The Halma Graduate Development Programme (HGDP) continues to go from strength to strength and our first intake of graduates are securing their first permanent jobs with Halma companies. Of the nine graduates who joined this first programme in 2012, seven are still with us and all have proved that they have the potential to
make a significant contribution to Halma's future success. The HGDP 2013 group is also showing high potential and we are close to completing recruitment into the HGDP 2014 programme.We believe that Halma is an attractive employer for new graduates, offering them the chance to work in different functional roles, diverse markets, gain international experience and demonstrate their potential for significant early career progression. We aim to use HGDP to increase the depth and quality of talent coming through
our management ranks. We believe it will also contribute to increasing the diversity of our senior management at subsidiary company and Group levels.
International expansion contributing strongly to our growthWe choose to operate in niches within markets which have growth potential in both developed and developing markets. This global opportunity derives from targeting long-term market growth drivers which have worldwide significance. For example, demand for healthcare is driven by ageing population in developed regions and the broader social development and increasing personal healthcare expectations in developing countries.When we buy businesses, they
often have untapped potential for significant international expansion. Frequently, these opportunities are not limited to developing countries as many US-based businesses still need to build a stronger market position in Europe and vice versa. Wherever the growth opportunities are, Halma can provide expertise and an infrastructure to support our companies, either through regional Halma hub offices or collaboration with sister companies. Our strategic objective is for 30% of revenue to come from outside the
UK, Mainland Europe and the USA by 2015. Since setting this goal in 2010, revenue from outside these developed markets has increased from £98m (21% of Group) to £170m (25% of Group), which represents a compound growth rate of 15% p.a. Although this has contributed a third of all revenue growth during the four-year period, a combination of higher than anticipated growth in Europe and the USA and new acquisitions, has made achieving this strategic objective more challenging. However, we remain committed to
investing in international expansion and will review our mid-term objectives once again in 2015.
Delivering corporate responsibility and sustainabilityOur primary market growth drivers mean that Halma companies operate in markets in which their products contribute positively to the wider community. These market characteristics and our commitment to health and safety, the environment and people development are reflected in the values held by our employees and our operating culture. We regularly review our responsibility and sustainability reporting in accordance with best practice. Legislative changes,
particularly concerning the environment and bribery and corruption, have provided an opportunity to review and ensure that our procedures in these important areas are accessible, compliant and firmly embedded within our business.A detailed report on Corporate Responsibility is set out in the Annual Report and Accounts.
OutlookWe achieved growth in all four Halma business sectors and in all major geographic regions even though market conditions were variable. This widespread growth once again demonstrates the agility of our organisation and the benefit of senior management being close to customers and empowered to allocate resources according to market needs.We expect this varied trading environment to continue, providing both opportunities and challenges including a currency headwind resulting from the increased strength
of Sterling. Our ongoing investment in new products, people development and international expansion will also continue to open up new market niches and applications for our businesses. Our proven ability to achieve organic growth and regularly complete good quality acquisitions gives us confidence that Halma will make further progress in the year ahead. Andrew Williams, Chief Executive1 See Financial Highlights.
2 See Note 2 to the Preliminary Statement.
Financial Review Long-term model delivering widespread growthThis is another set of record results with widespread growth in all sectors and all regions. High returns were maintained and good cash generation supported the continuation of our long-term record of dividend increases. Halma's financial position remains strong. Record resultsHalma has increased revenue in 38 of the last 40 years. This year we increased revenue by 9.3% to £676.5m (2013: £619.2m), up £57.3m. Our long-term objective is to achieve
a balance between acquired and organic growth. It was weighted a little more to organic growth in this year. There was minimal net currency translation effect on the results. Acquisition growth came mainly from acquisitions made in 2012/13. Organic revenue growth at constant currency was 5.7%.This is the eleventh consecutive year of record results. Adjusted1 profit increased by 9.1% to £140.2m (2013 restated3: £128.5m). Again there was minimal net currency impact. Organic profit growth at constant currency
was 5.3%.Statutory profit before taxation increased by 15% to £138.7m (2013 restated3: £120.1m). Statutory profit is calculated after charging the amortisation of acquired intangible assets of £17.5m (2013: £14.2m), disposal costs of £0.5m (2013: £8.1m gain on sale of Tritech) and after crediting acquisition transaction items and movements on acquisition contingent consideration including related foreign exchange movements of £12.5m (2013: charge of £2.3m). In addition statutory profit includes a
curtailment gain, net of costs, of £4.0m recorded following the decision to close the two UK Defined Benefit pension plans to future accrual from 1 December 2014. Further information on movements in acquisition contingent consideration and changes to pension plans is provided later on. Revenue growth was 12% in the first half and 7% in the second half, with the first half benefiting more from acquisitions made later in the prior year. Organic revenue growth at constant currency was similar in both periods.
Adjusted1 profit grew by 9% in the second half, as in the first half, giving a first half/second half profit split of 46%/54%, the same as in the prior year. Higher revenue and profitability in the second half is quite typical for Halma, as is revenue and profit growing very much in line with each other. All four sectors grew both revenue and profit. The Medical sector grew fastest benefiting from prior year acquisitions. The highest rates of underlying organic profit growth came from the two safety
sectors: Process Safety and Infrastructure Safety. Environmental & Analysis delivered profit growth in the full year after a small reduction in the first half, growing profit by 12% in the second half. As anticipated, the costs of reorganisation in our photonics business, charged against adjusted1 profit, was less than £1m. Central administration costs totalling £7.9m (2013: £6.7m) were higher this year due to the costs of the biennial HITE conference as well as increased investment in our graduate
programme and in international expansion.
Revenue and profit growth Percentage growth
2014£m 2013 £m Increase£m Total Organicgrowth2 Organicgrowth2 atconstantcurrency
Revenue 676.5 619.2 57.3 9.3% 5.9% 5.7%
Adjusted1 profit (restated)3 140.2 128.5 11.7 9.1% 5.7% 5.3%
Widespread geographic growthThere was good growth in all regions throughout the year. The USA is our largest sales destination at 32% (2013: 31%) of total revenue. US revenue grew by 10% in the year, with all sectors growing, supported by acquisitions made in the prior year. Mainland Europe showed strong growth of 8% despite a tough economic environment, with Infrastructure Safety growing fastest and with underlying growth in each sector. The UK increased by 11% due in particular to a strong performance by
the water businesses within Environmental & Analysis. Asia Pacific continued to grow well, up 11%, with China up 26% (16% excluding last year's Chinese acquisition) and now accounting for 7% (2013: 6%) of Group revenue. We targeted 30% of Group revenue coming from outside the UK/Mainland Europe/USA by 2015. This year we achieved 25.2% (2013: 25.4%). This KPI sets an important direction for the Group to increase its penetration of global markets. The task has been made tougher as despite having achieved 74%
revenue growth since 2010 in these 'rest of world' territories, the revenue to UK/Mainland Europe/USA has grown by 40%. Over the coming years we will continue to maintain this focus on international expansion.
Geographic revenue growth
2014 2013
£m % of total £m % of total Change£m %growth
United States of America 214.5 32% 195.0 31% 19.5 10%
Mainland Europe 163.7 24% 151.6 25% 12.1 8%
United Kingdom 127.9 19% 115.6 19% 12.3 11%
Asia Pacific 111.6 16% 100.5 16% 11.1 11%
Africa, Near and Middle East 33.0 5% 31.4 5% 1.6 5%
Other countries 25.8 4% 25.1 4% 0.7 3%
676.5 100% 619.2 100% 57.3 9%
High returnsWe aim to operate with a Group Return on Sales in the range of 18-22%. It has been above 16% every year for 29 consecutive years. This year Return on Sales was 20.7% (2013 restated: 20.8%), a reflection of the value customers place on our products and on our good management of costs. Process Safety increased Return on Sales in the year. Medical and Environmental & Analysis saw modest reductions in Return on Sales, although both recorded an increase in profitability in the second half over the
first half, and over the second half of the prior year. The Group's increasing profitability during the year resulted in a second half Return on Sales of 21.9% (2013 second half: 21.4%).Gross Margin (revenue less direct material and direct labour costs) is a key contributor to our profitability and increased to 64.4% (2013: 64.0%). This was a good performance in what continued to be a competitive operating environment with cost and price pressures. Return on Capital Employed2 (ROCE), the pre-tax return on
the Group's operating assets increased to 76.4% (2013 restated: 70.7%) reflecting the efficiency of our 'asset light' operating model. Return on Total Invested Capital2 (ROTIC), the post-tax return on the
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