REG - Halma PLC - Final Results <Origin Href="QuoteRef">HLMA.L</Origin> - Part 3
14/06/2016 07:06
- Part 3: For the preceding part double click ID:nRSN0651Bb
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 are required to be held in a secure form and location. - Constraints on trading and/or acquiring new companies limiting the Group's growth aspirations.- Availability of additional funding in traditional debt markets.- Permanent loss of shareholders' funds and/or restrictions on dividend payments.- Gearing has 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 in 2013 providing security of funding and sufficient headroom for its current needs.- The
Group increased its funding capacity in 2016 via a US$250m US Private Placement.- Cash deposits are monitored centrally and spread amongst a number of high credit-rated
banks.
TreasuryBreaches of banking/USPP covenants and foreign currency risk are the most significant treasury-related risks 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 earnings from the Group's increasing proportion of overseas operations or poorly-managed foreign exchange exposures.- Deviation from core strategy through the use of speculative or overly complex financial instruments.- Financial penalties, reputational damage and withdrawal of facilities arising from breach of banking/ USPP covenants.- 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 USPP and operate well within these covenants.
Pension deficitTo meet our pension obligations, we must adequately fund our closed UK defined benefit pension plans. - 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. Alternative means of reducing pension risk is evaluated in light of the best long-term interest of
shareholders.
Cyber security/Information Technology/Business interruptionGroup and operational management depend on timely and reliable information from our IT systems to run their businesses. We seek to ensure continuous availability, security and operation of those information systems. Cyber threats continue to show an increasing trend. - Delay or impact on decision making through lack of availability of sound data or disruption in/denial of service.- Reduced service to customers due to poor information handling or interruption of business.- Prevention, detection and containment of global threats to systems and critical information are inadequate.- Loss of commercially sensitive and/or personal information.- Intended and unintended actions of employees cause disruption, including fraud. - There is substantial redundancy and back-up built into Group-wide systems and the spread of business offers good protection from individual events.- A small central
resource, Halma IT Services, assists Group companies with strategic IT needs and ensures adequate IT security policies are used across the Group.- An IT security
committee was set up in December 2012 comprising central and subsidiary IT personnel.- Halma IT has been ISO 27001: 2013 certified for its information security
management systems.- Regular IT health checks are conducted. Comprehensive IT systems monitoring was introduced in 2014.- Cyber risk and security is a regular Board
agenda item addressing the landscape as it evolves.- External penetration testing is utilised and the rollout of a centralised IT disaster recovery solution to
supplement local processes has been completed.- Business continuity plans exist for each business unit and with ongoing testing.- Education/awareness of cyber threats
continues to ensure Group employees protect themselves and Group assets.
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.- Failure to identify new markets in which to expand.- 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 focus on M&A activities supported by the appointment of dedicated sector acquisition personnel.
Such resources remain under constant review.- We acquire small and medium sized businesses whose technology and markets we know well or who operate in adjacent markets.
- Sector Chief Executives are responsible for finding and completing acquisitions in their business sectors, subject to Board approval, supported by sector and central
resources, as necessary. 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, export controls/sanctions, 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. - Unfavourable changes in laws and regulations that restrict the export of our products.- Reputational damage and/or loss 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, fraudulent activities 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.- Comprehensive insurance covers 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' inability to effectively manage acquisition integration.- International growth increasing the need for high-quality local talent. - Group development programmes are under continuous development to ensure they deliver enhanced skills for executives and middle managers as 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 Group Talent Director assists the identification and development of Group executives.- Ongoing 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 senior management talent and establishing better processes to improve the talent pipeline has advanced our succession planning and
talent quality.
Research & Development and Intellectual Property strategyNew, high-quality products are critical to our organic growth and underpin our ability to earn high margins and high returns over the long term. - 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 including the necessity to recall/replace product.- Diversion of resources to address related matters. - Devolving control of product development to the autonomous operating businesses spreads risk and ensures 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 £236m was undrawn at 2 April 2016) 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. 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.
Longer-term Viability
During the year, the Board carried out a robust assessment of the principal risks affecting the Company, including those that would threaten its business model, future performance, solvency or liquidity. The Board has assessed the viability of the Company over a three year period, taking into account the Group's current position and the potential impact of the principal risks and uncertainties. Whilst the Board has no reason to believe that the Group will not be viable over a longer period, it has
determined that three years is an appropriate period, as it is aligned with the Group's strategic planning process and therefore provides greater certainty over forecasting and, therefore, increases reliability in the modelling and stress testing of the Company's viability.In making their assessment, the Board carried out a comprehensive exercise of financial modelling and stress-tested the model with various scenarios based on the principal risks identified in the Group's annual risk assessment process. In
each scenario, the effect on the Group's KPIs and borrowing covenants was considered, along with any mitigating factors.Based on this assessment, the Board confirms that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to 31 March 2019. The full Viability Statement is set out in the Annual Report and Accounts 2016.
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 53 weeks to 2 April 2016. Certain parts thereof are not included within these Results.We confirm
that 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;
2. the Strategic 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 that
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