REG - Halma PLC - Final Results <Origin Href="QuoteRef">HLMA.L</Origin> - Part 3
16/07/2015 10:27
- Part 3: For the preceding part double click ID:nRSK8263Pb
taking on more risks than intended or unexpected financial outcomes- Failure to comply with local laws and regulations in unfamiliar territories, leading to reputational issues and legal or regulatory disputes- Continued international growth increases risk- Missed opportunities due to failure to mobilise resources efficiently - Control is exercised locally in accordance with the Group's policy of autonomous management. We seek to employ local high-quality experts.- The increasing
geographic diversity of operating personnel emphasises the importance the Group places on local knowledge and experience.- The Group's acquisition model ensures
retention of management and staff in acquired businesses, meaning that local expertise is retained.- 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, Sector Vice Presidents and Senior Finance Executives.- Regular visits to the more remote operations 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 trading and/or buying new companies- Inability to deliver on growth strategies- Permanent loss of shareholders' funds - 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 in 2013/14 providing security of funding and sufficient headroom for its current needs.-
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 now closed to new members and future benefit accrual for existing members. - 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.- Although the pension deficit increased in 2014/15, the UK Defined Benefit pension plans were closed 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. Cyber threats show an increasing trend. - 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- Loss of commercially sensitive information- Intended and unintended actions of employees cause disruption - 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 health checks. Comprehensive IT systems monitoring was introduced in 2013/14.- 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.- High levels of integrity are expected from all Group employees. Education and
awareness of cyber threats is an increasing focus.
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 attract sufficient numbers of high-quality businesses to meet our strategic growth target- 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 - The sector restructuring in April 2014 freed up additional resource to dedicate to M&A activities. Such resources remain under constant review.- 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. - Reputational damage arising from inadvertent non-compliance- Diversion of management resources resulting in lost opportunities- 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.- The Group's whistleblowing policy and externally facilitated hotline assist the timely identification of potential problem areas.- Continued
investment in international markets may introduce additional risk while we develop the appropriate commercial infrastructure necessary to build a direct presence.
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 leading to reduced innovation and progress in the business- Unethical actions of staff causing reputational damage to the Group- Acquisition growth limited due to our organisation's and leaders' ability to absorb acquisitions effectively- International growth increasing risk and the 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.- Additional focus on increasing the diversity of our employees
worldwide to better meet our markets' needs and provide sufficient opportunities for advancement as well as clear succession planning.- Considerable time spent
assessing our senior management talent and establishing better processes to improve our talent pipeline has advanced our succession planning and talent quality.
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- Loss of market share resulting from product quality issues - 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
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