REG - Halma PLC - Final Results <Origin Href="QuoteRef">HLMA.L</Origin> - Part 3
06/09/2014 02:14
- Part 3: For the preceding part double click ID:nRSL4050Jb
UV companies have restructured their distribution channels
in the USA. The total cost of these restructuring projects was below £1m in the year.In addition to the reorganisation costs noted above the sector incurred the cost of fully addressing a supplier component quality issue within the water monitoring business.As noted with the Medical sector, if exchange rates remain at current levels we expect an adverse impact on results in 2014/15 due to the relative strength of Sterling in particular in relation to the US Dollar.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 were not repeated. 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. OutlookMarket growth prospects and key drivers for our environmental and analysis product niches remain strong. We anticipate rising global demand in the Environmental & Analysis sector through increased regulation for water supply security and drinking water quality, plus environmental pressures on wastewater discharge. We are uniquely placed to develop systems for remote collection and management of environmental data through our technology portfolio enhanced by
the acquisition of ASL Holdings in 2013.New environmental regulations and stricter enforcement in China should significantly increase demand for our technology in coming years. Growth in India remains more elusive, but we expect to increase market share with new localised products.We have a strong pipeline of Environmental & Analysis acquisition prospects in both developed and emerging markets. 1 See Note 2 to the Preliminary Statement.
Principal Risks and Uncertainties Halma's principal risks and uncertainties are detailed below and are supported by the robust risk management and internal control systems and procedures noted in the Annual Report and Accounts 2014.
Risk description Potential impact Mitigation
Remoteness of operations and globalisationA key operational risk emanates from remoteness of operations from Head Office and the increasing global spread of our businesses. - Weakening of financial, tax, audit and legal control and divergence from overall Group strategy in remote operations, leading to businesses taking on more risks than intended or unexpected financial outcomes - Failure to comply with local laws and regulations in unfamiliar territories, leading to legal or regulatory disputes- Continued international growth increases risk - Control is exercised locally in accordance with the Group's policy of autonomous management. We seek to employ local high-quality experts.- The Group's acquisition
model ensures retention of management and staff in acquired businesses, meaning that local expertise is maintained.- Sector Chief Executives ensure that overall Group
strategy is fulfilled through ongoing review of the businesses. The right balance between autonomy and adherence to the overall objectives of the Group is a key function
of the Sector Chief Executives and Senior Finance Executives. - Regular visits and maintenance of key adviser relationships by senior management, finance staff and
Internal Audit support local control.
CompetitionThe Group faces competition in the form of pricing, service, reliability and substitution. - Loss of market share due to price pressure and changing markets - Reduced financial performance arising from competitive threats - By empowering and resourcing innovation in local operations to respond to changing market needs, the potential adverse impact of downward price pressure and
competition can be mitigated and growth maintained.- We recognise the competitive threat coming from emerging economies and by operating within these economies,
typically using local staff, we are better placed to make fast progress ourselves.- The Group operates in specialised global niche markets offering high barriers-to
-entry.
Economic conditions In times of uncertain economic conditions, businesses face additional or elevated levels of risk. These include market and customer risk, customer default, fraud, supply chain risk and liquidity risk. - Reduced financial performance - Loss of market share - Unforeseen liabilities - Disruption of service to customers - Risks are primarily managed at the operating company level where local knowledge is situated. The financial strength and availability of pooled finances within the
Group mitigates local risks faced by operating companies as does the robust credit management processes in place across the Group.- The Halma Executive Board identifies
any wider trends which require action.- The Group's geographic diversity limits its exposure to economic risk arising in any one territory. The Group does not have
significant operations, cash deposits or sources of funding in economically uncertain regions.
FinancialFundingA key risk is that the Group may run out of cash or not have access to adequate funding. In addition, cash deposits need to be held in a secure form and location. - Constraints on, or inability to, trade and buy new companies- Inability to deliver on growth strategies - Permanent loss of shareholders' funds- Financial capacity increased during the year - The strong cash flow generated by the Group provides financial flexibility.- Cash needs are monitored regularly. In addition to short-term overdraft facilities, the
Group renewed and increased to £360m its five-year revolving credit facility during the year providing security of funding and sufficient headroom for its needs. Debt
levels decreased this year, further increasing the funding available to the Group.- Cash deposits are monitored centrally and spread amongst a number of high credit
-rated banks. Subsidiaries report their cash/indebtedness status to Head Office every week.
TreasuryForeign currency risk is the most significant treasury-related risk for the Group. In times of increased volatility this can have a significant impact on performance. The Group is exposed to a lesser extent to other treasury risks such as interest rate risk and liquidity risk. - Volatile financial performance arising from translation of profit from overseas operations or poorly-managed foreign exchange exposures - Deviation from core strategy through the use of speculative or overly complex financial instruments - Financial penalties and reputational damage arising from breach of banking covenants- More of Group profit now earned in non-Sterling currencies. Increased interest rate risk on higher forecast borrowings - The risk has increased because more of the Group's profits are derived from non-Sterling currencies. Currency profits are not hedged. Currency hedging must fit with
the commercial needs of the business and we have in place a hedging strategy to manage Group exposures. This requires the hedging of a substantial proportion of expected
future transactions up to 12 months (and in exceptional cases 24 months) ahead. Longer-term currency trends can only be covered through a wide geographic spread of
operations.- The Group does not use overly complex derivative financial instruments and no speculative treasury transactions are undertaken.- We closely monitor
performance against the financial covenants on our revolving credit facility and operate well within these covenants.
Pension deficitTo meet our pension obligations, we must adequately fund our pension plans. Our UK Defined Benefit pension plans are closed to new members and future benefit accrual for existing members will cease in the coming year. - Excessive consumption of cash, limiting investment in operations- Unexpected variability in the Company's financial results - There is regular dialogue with pension fund trustees and pension strategy is a regular Halma Board agenda item. The Group's strong cash flows and access to adequate
borrowing facilities mean that the pensions risk can be adequately managed.- The Group has maintained additional pension contributions with the overall objective of
paying off the deficit in line with the Actuary's recommendations. We monitor and consider alternative means of reducing our pension risk in light of the best long-term
interest of shareholders.- The UK Defined Benefit plans close to future accrual on 1 December 2014 reducing future risk.
Cyber security/ Information Technology/ Business interruptionGroup and operational management depend on timely and reliable information from our software systems. We seek to ensure continuous availability, security and operation of those information systems. - Delay or impact on decision making through lack of availability of sound data - Reduced service to customers due to poor information handling or interruption of business - Global threats to systems and critical information increase each year - There is substantial redundancy and back-up built into group-wide systems and the spread of business offers good protection from individual events.- We have a small
central resource, Halma IT Services, to assist Group companies with strategic IT needs and to ensure adequate IT security policies are used across the Group.- An IT
security committee was set up in December 2012 comprising Halma plc IT members and selected subsidiary IT managers.- Halma IT has been ISO 27001: 2013 certified for its
information security management systems.- We carry out regular IT audits. Comprehensive IT systems monitoring was introduced in 2013/14.- We carry out cyber risk
briefings and security awareness training for employees. Cyber security is a regular Board agenda item.- We utilise external penetration testing and have completed the
rollout of a centralised IT disaster recovery solution to supplement local processes.- Business continuity plans are well advanced in each business unit.
AcquisitionsThe identification and purchase of businesses which meet our demanding financial and growth criteria are an important part of our strategy for developing the Group, as is ensuring the new businesses are rapidly integrated into the Group. - Failure to deliver expected results resulting from poor acquisition selection - Reduced financial performance arising from failure to integrate acquisitions into the Group - Unforeseen liabilities arising from a failure to understand acquisition targets fully - We acquire businesses whose technology and markets we know well. Sector Chief Executives are responsible for finding and completing acquisitions in their business
sectors, subject to Board approval, supported by central resources to search for opportunities. We employ detailed post-acquisition integration plans.- Thorough due
diligence is performed by a combination of in-house and external experts to ensure that a comprehensive appraisal of the commercial, legal and financial position of every
target is obtained.- Incentives are aligned to encourage acquisitions which are value-enhancing from day one.
Laws and regulations Group operations are subject to wide-ranging laws and regulations including business conduct, employment, environmental and health and safety legislation. There is also exposure to product litigation and contractual risk. The laws and regulations we are exposed to as our businesses expand around the world increase each year. - Diversion of management resources creating opportunity costs - Penalties arising from breach of laws and regulations- Loss of revenue and profit associated with contractual disputes - The Group's emphasis on excellent internal controls, high ethical standards, the deployment of high-quality management resources and the strong focus on quality
control over products and processes in each operating business help to protect us from product failure, litigation and contractual issues.- Each operating company has a
health and safety manager responsible for compliance and our performance in this area is good. Health and Safety policies, guidance and monthly reporting requirements are
updated to reflect changing reporting and governance requirements and to enhance compliance. Our well-established policies on bribery and corruption have been maintained
during the year to ensure continued compliance with best practice internally, via the Group Code of Conduct and externally, via appropriate clauses included in third
-party agreements.- We carry comprehensive insurance against all standard categories of insurable risk. Contract review and approval processes mitigate exposure to
contractual liability.
Succession planning and staff qualityGroup performance is dependent on having high-quality leaders at all levels and an organisation allowing us to continue to grow through acquisition as well as driving organic growth. - Failure to recruit and to retain key staff could lead to reduced innovation and progress in the business - Unethical actions of staff could cause reputational damage to the Group- Acquisition growth can be limited by our organisation's and our leaders' ability to absorb acquisitions effectively- International growth increases risk and need for high-quality local talent - Group development programmes enhance the skills of executives and middle managers needed in their current and future roles.- Comprehensive recruitment and ongoing
evaluation processes assist high-quality hiring and development.- The Group regularly surveys staff to assess the alignment of individuals with Group values.- The
appointment of a Group Talent Director underpins our identification and development of Group executives.
Research & Development and Intellectual Property strategyNew products are critical to our organic growth and underpin our ability to earn high margins and high returns over the long term.Protection of our intellectual property builds competitive advantage by strengthening barriers-to-entry. Our intangible resources include patents, product approvals, technological know-how, branding and our workforce. - Loss of market share resulting from product obsolescence and failure to innovate to meet customer needs- Loss of market share resulting from a failure to protect key intellectual property - By devolving control of product development to the autonomous operating businesses, we both spread risk and ensure that the people best placed to service the
customers' needs are driving innovation.- New product development best practice is shared between Group companies and return on investment of past and future innovation
projects is tracked monthly. This ensures that the collective experience and expertise of the Group can be utilised to maximum effect.- Large R&D projects, especially
those which are capitalised, require Head Office approval, ensuring that the Group's significant projects are aligned to overall strategy.- Workforce quality and
retention is a central objective. This focus ensures that intangible resources stay and grow within the business.- Operating businesses are actively encouraged to
develop and protect know-how in local jurisdictions.- Innovation is encouraged and fostered throughout the Group, inter alia, via the Halma Innovation Awards.
Going Concern Statement
The Group's business activities, together with the main trends and factors likely to affect its future development, performance and position, and the financial position of the Group, its cash flows, liquidity position and borrowing facilities, are set out herein.The Group has considerable financial resources (including a £360m five-year revolving credit facility, of which £255m was undrawn at 29 March 2014) together with contracts with a diverse range of customers and suppliers across different geographic
areas and industries. No one customer accounts for more than 2% of Group turnover. The Directors have considered the Group's potential exposure to the Eurozone crisis and have concluded that this is minimal due to the fact that less than 5% of sales arise in areas experiencing macro-economic uncertainty and the Group does not maintain significant banking or other business relationships in these areas. As a consequence, the Directors believe that the Group is well placed to manage its business risks
successfully.After conducting a formal review of the Group's financial resources, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.
Responsibility Statement of the Directors
on the Annual Report and Accounts The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for the 52 weeks to 29 March 2014. Certain parts thereof are not included within this Preliminary Statement. We confirm that to the best of our
knowledge:
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