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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Halma Plc | LSE:HLMA | London | Ordinary Share | GB0004052071 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -46.00 | -1.71% | 2,644.00 | 2,637.00 | 2,639.00 | 2,706.00 | 2,635.00 | 2,702.00 | 687,271 | 16:35:30 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Electrical Machy, Equip, Nec | 2.03B | 268.8M | 0.7080 | 37.27 | 10.21B |
TIDMHLMA
RNS Number : 7444B
Halma PLC
11 June 2019
11 June 2019
Hot Features
Premium
HALMA plc
FULL YEAR RESULTS 2019
Record revenue and profit for the 16(th) consecutive year
Halma, the global group of life-saving technology companies focused
on growing a safer, cleaner and healthier future, today announces
its full year results for the 12 months to 31 March 2019.
Highlights
Change 2019 2018
Continuing Operations
Revenue +13% GBP1,210.9m GBP1,076.2m
Adjusted Profit before Taxation(1,3) +15% GBP245.7m GBP213.7m
Adjusted Earnings per Share(2,3) +17% 52.74p 45.26p
Statutory Profit before Taxation +20% GBP206.7m GBP171.9m
Statutory Earnings per Share +10% 44.78p 40.69p
Total Dividend per Share(4) +7% 15.71p 14.68p
Return on Sales(5) 20.3% 19.9%
Return on Total Invested Capital(3) 16.1% 15.2%
Net Debt GBP181.7m GBP220.3m
-- Strong growth with Revenue up 13%, Adjusted(1) profit before tax up 15% and statutory profit before tax up 20%.
-- Organic constant currency revenue growth(3) up 10% for the second consecutive year, and organic constant currency(3) Adjusted(1) profit before tax growth of 11%.
-- All four sectors grew revenue and Adjusted(1) profit before tax on an organic constant currency basis(3) , with three out of four sectors delivering double digit increases.
-- Revenue growth in all major regions. Strong performance in the USA and the UK, with good growth in Mainland Europe and a solid performance in Asia Pacific.
-- Increased returns, with Return on Sales(5) of 20.3% and ROTIC(3) of 16.1%. R&D expenditure up 11%, representing 5.2% of revenue.
-- Strong cash generation, with cash conversion of 88%; and a robust balance sheet, supporting sustained investment in organic growth and acquisitions.
-- Four acquisitions and two small asset purchases completed during the financial year.
-- Proposed final dividend up 7%, the 40th consecutive year of dividend per share increases of 5% or more.
Andrew Williams, Group Chief Executive of Halma, commented:
"Halma had a successful year, achieving record revenue and profit,
delivering our 40th consecutive year of dividend per share growth
of 5% or more and making further increased strategic investment
supported by our strong balance sheet. We have a strong purpose,
culture and growth strategy focused on niches in a diverse range
of markets where demand is supported by resilient long-term growth
drivers, offering us both organic and acquisition growth opportunities.
The new financial year has started well, and order intake has
continued to be ahead of both revenue and order intake for the
comparable period last year. We expect to make good progress
in the year ahead."
Notes:
1 Adjusted to remove the amortisation of acquired intangible
assets, acquisition items, significant restructuring costs,
profit or loss on disposal of operations and the effect of
equalising pension benefits for men and women in the defined
benefit pension plans, totalling GBP39.0m (2018: GBP41.8m).
See note 1 to the Results for details.
2 Adjusted to remove the amortisation of acquired intangible
assets, acquisition items, significant restructuring costs,
profit or loss on disposal of operations, the effect of equalising
pension benefits for men and women in the defined benefit
pension plans and the associated taxation thereon. See note
2 to the Results for details.
3 Adjusted(1) Profit before Taxation, Adjusted(1) Earnings per
Share, organic growth rates and Return on Total Invested Capital
(ROTIC) are alternative performance measures used by management.
See notes 1, 2 and 3 to the Results for details.
4 Total dividend paid and proposed per share
5 Return on Sales is defined as adjusted(1) profit before taxation
from continuing operations expressed as a percentage of revenue
from continuing operations.
For further information, please contact:
Halma plc
Andrew Williams, Group Chief
Executive
Marc Ronchetti, Chief Financial +44 (0)1494 721 111
Officer
Charles King, Head of Investor
Relations +44 (0)7776 685948
MHP Communications
Rachel Hirst/Andrew Jaques +44 (0)20 3128 8100
A copy of this announcement, together with other information
about Halma, may be viewed on its website: www.halma.com. The
webcast of the results presentation will be available on the
Halma website later today: www.halma.com
NOTE TO EDITORS
1. Halma is a global group of life-saving technology companies,
focused on creating a safer, cleaner and healthier future for
everyone, every day. Our innovative products and solutions
address many of the key issues facing the world today. The
Group comprises four business sectors:
-- Process Safety Technologies that protect people and assets
at work.
-- Infrastructure Technologies that save lives, protect infrastructure
Safety and enable safe movement in public spaces.
-- Environmental Technologies to improve environmental protection
& Analysis and the security of life-critical resources.
-- Medical Technologies which enhance the quality of
life for patients and improve the quality
of care delivered by healthcare providers.
The key characteristics of Halma's businesses are specialist
technology and application knowledge for markets offering strong
long-term growth potential. Many Group businesses are market
leaders in their specialist fields.
2. 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.
3. 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.
Strategic Review
We have achieved record revenue and profit for the 16th consecutive
year, and double digit-organic constant currency revenue growth
for the second year running. Our strategic investment is wide-ranging,
including creating innovative new technology, products and services,
extending our international reach, strengthening our talent base,
and acquiring strong businesses in, or adjacent to, our existing
markets.
Halma's purpose is to grow a safer, cleaner and healthier future
for everyone, every day. Consequently, we address some of the
world's most fundamental needs and challenges: safety at work
and in public spaces; a cleaner, more sustainable environment;
and improved medical care. These needs are both global and long-term
in nature, and they will continue to gain importance as populations
increase, urbanise and age, and as regulation continues to tighten.
We expect these factors to drive demand for our solutions far
into the future.
We have a clear and focused growth strategy of growing and acquiring
businesses in niche markets with global reach in our chosen market
areas of safety, health and the environment. We also have a simple
financial model, with strong organic growth, high returns and
cash generation allowing us to continuously increase investment
to drive future organic and acquired growth, while providing
progressive dividends for shareholders. We set ourselves challenging
targets, aspiring to double our earnings every five years, while
maintaining modest levels of financial gearing without being
reliant on seeking further equity.
Halma's definitive organisational model and culture have provided
a stable foundation for over 40 years. They are becoming increasingly
important as Halma continues to grow and expand internationally,
and as our businesses constantly evolve and adapt to address
changing market needs. I believe it is crucial that we are clear
on how our purpose, strategy, organisation and culture interact,
and how they continue to be the foundation of our success. A
description is set out in the Annual Report and Accounts 2019
and on www.halma.com, so that all our stakeholders can understand
how our organisation and culture are at the heart of ensuring
that we align our purpose with continued strong performance.
Record revenue and profit with higher returns
Revenue increased by 13% to GBP1,211m (2018: GBP1,076m), including
10% organic constant currency revenue growth for the second consecutive
year. Adjusted(1) profit rose by 15% to GBP245.7m (2018: GBP213.7m)
including 11% organic constant currency growth. Acquisitions
contributed 3% to revenue growth (2% net of disposals) and 3%
to adjusted profit growth (4% net of disposals). There was a
small benefit to revenue and profit from currency in the full
year, with a negative impact in the first half more than offset
by a positive effect in the second half. Statutory profit before
taxation increased by 20% to GBP206.7m (2018: GBP171.9m). Returns remained at a high level. Return on Sales(1) increased to 20.3% (2018: 19.9%), within our target range of 18% - 22%. The post-tax Return on Invested Capital improved to 16.1% (2018: 15.2%), well above our estimated Weighted Average Cost of Capital of 7.9%, with the increase primarily reflecting the strong earnings growth achieved. Strong cash generation and balance sheet to support future investment Cash generation was excellent and resulted in net debt reducing to GBP182m (2018: GBP220m) after spending GBP68m on acquisitions and GBP31m on capital expenditure, as well as paying dividends of GBP57m to shareholders and GBP41m of tax. Gearing (net debt to EBITDA) reduced to 0.63 times from 0.87 times. This is lower than our targeted range of 1-2 times, and therefore our balance sheet has significant capacity to support investment in both organic and acquisitive growth, in line with our strategic objectives. Final dividend to increase by 7% The Board is recommending a 7% increase in the final dividend to 9.60p per share (2018: 8.97p per share). The final dividend for 2019 is subject to approval by shareholders at the AGM on 25 July 2019 and is expected to be paid on 14 August 2019 to shareholders on the register at 12 July 2019. Together with the 6.11p per share interim dividend, this would result in a total dividend for the year of 15.71p (2018: 14.68p), also up 7%, making this the 40th consecutive year of dividend per share growth of 5% or more. Revenue growth in all major regions We delivered revenue growth in all major regions, reflecting the sustainable and global growth opportunities offered by safety, environmental and health markets. Our companies are increasingly leveraging our regional hubs, and collaborating with other companies to develop new products and services and to expand internationally. The USA, Mainland Europe and the UK performed strongly. Our largest region, the USA, achieved the strongest revenue growth of 18%, both on a reported and on an organic constant currency basis. Mainland Europe and the UK grew revenue by 12% and 16% respectively (6% and 11% on an organic constant currency basis). Asia Pacific growth was slower, at 5%, against a strong performance last year which benefited from some large contracts. In our major markets in the region, China grew 8% following 20% growth last year, and Australasia improved by 16%. We continue to see good growth potential in Asia Pacific, by leveraging our growth hubs in the region, and we continue to strengthen our local management teams. In the Rest of the World, performance was mixed. Revenue was broadly flat overall, with a challenging second half following good first half growth. In the larger markets, Africa and Brazil delivered good growth, while Near and Middle East and Canada were broadly flat. Revenue and profit growth in all sectors Revenue and profit increased in all sectors, with three out of four sectors reporting double digit organic revenue and profit growth. Process Safety delivered good growth, although reorganisations in our Industrial Access Control and Safe Storage and Transfer businesses, to improve their competitive position and performance, softened profit growth. Revenue increased 7% to GBP198m (2018: GBP185m), while profit grew 5% to GBP45.5m (2018: GBP43.3m). Organic constant currency growth for revenue and profit was also 7% and 5% respectively, given a minimal currency effect and no acquisitions in the year. Revenue growth was slower in the second half, primarily due to less favourable conditions in the US energy sector. Return on Sales remained strong at 23.0% (2018: 23.5%), with the decline in the year reflecting the reorganisation costs. R&D spend increased by 10% to GBP7.0m (2018: GBP6.3m). The Gas Detection and Industrial Access Control businesses performed strongly, while the performance of Pressure Management was challenged by adverse end market conditions and profit mix, but nonetheless delivered flat revenue. Our Safe Storage and Transfer businesses reported a single-digit decline in revenue during their period of restructuring which included strengthening their leadership and consolidating manufacturing operations. There was strong organic constant currency growth in the USA supported by a major logistics contract for our Industrial Access Control subsector, despite less favourable energy market conditions. The UK also performed well, with good progress in Gas Detection and Industrial Access Control. There was solid progress in Asia Pacific and Mainland Europe, while other regions declined, including in energy related markets in the Middle East. Process Safety will continue to invest in broadening its markets and improving its product innovation and leadership. We expect this to make it less sensitive to changes in its largest market, oil and gas, and deliver more consistent growth in the future. Infrastructure Safety had a very impressive year, with strong organic growth and a significant contribution from acquisitions. Revenue increased by 17% to GBP409m (2018: GBP349m), including 11% organic constant currency growth and a 6% contribution from acquisitions. Profit grew by 21% to GBP88.9m (2018: GBP73.3m), which included 16% organic constant currency growth and a 5% contribution from acquisitions. Return on Sales increased to 21.8% (2018: 21.0%). R&D spend increased by 22% to GBP24.9m (2018: GBP20.4m). The sector's strong performance was broadly-based, with all five subsectors performing well. There was exceptionally strong growth in the USA, partly reflecting a recovery from last year's weaker performance. The sector's Fire businesses were key contributors to this improvement. The Africa, Near and Middle East region also performed strongly, and there were good rates of growth in the UK and Mainland Europe. Growth in Asia Pacific was slower. The Other regions, which accounts for around 3% of sector revenue, saw a decline as larger contracts, which contributed to last year's strong performance, came to an end. Given the widespread growth, and a full year contribution from this year's acquisitions, Infrastructure Safety is expected to make good progress in the coming year. The Environmental & Analysis sector achieved strong organic growth, and also benefited from the acquisition of Mini-Cam in 2018. Revenue grew by 15% to GBP299m (2018: GBP259m) which included organic constant currency growth of 11% and a 3% contribution from acquisitions. Profit increased by 21% to GBP66.4m (2018: GBP55.0m) including organic constant currency growth of 13% and a 7% contribution from acquisitions. There was a benefit from currency to both revenue and profit of just under 1%. Return on Sales improved to 22.2% (2018: 21.2%). R&D spend increased by 8% to GBP19.2m (2018: GBP17.8m). All three subsectors delivered good revenue and profit growth, with a particularly strong contribution from the Environmental Monitoring subsector, which benefited from double-digit organic growth and the acquisition of Mini-Cam. There was impressive revenue growth in the UK and also in the USA, the sector's largest market, which benefited from large Spectroscopy and Photonics projects. Mainland Europe grew well, while Asia Pacific saw more modest growth. Other regions, which account for only 4% of sector revenue, reported a decline. With continued investment to drive collaboration, technology and the extension of its digital and data management capabilities, the Environmental & Analysis sector is expected to make further progress in the year ahead. The Medical sector achieved a good performance, with revenue growing in all subsectors and all major geographic regions. Revenue increased by 8% to GBP306m (2018: GBP284m), including 10% organic constant currency growth. Profit grew by 15% to GBP76.9m (2018: GBP67.1m), including 13% organic constant currency growth. There was a small benefit to revenue and profit from acquisitions. The disposal of Accudynamics in the year had an adverse effect on revenue but benefited profit. Return on Sales increased to 25.1% (2018: 23.6%). R&D spend declined by 3% to GBP11.5m (2018: GBP11.8m) but grew by 2% excluding the effect of the disposal of Accudynamics during the year. The Diagnostics subsector performed very well, after adjusting for the Accudynamics disposal. The Ophthalmology and Sensor Technology subsectors delivered strong growth, the former through continued international expansion, and the latter from further penetration into their core market of location services in acute care facilities in the USA. There was a strong revenue performance in the USA, the sector's largest region, with Mainland Europe and Asia Pacific also delivering good growth. There was solid growth in the UK, with Other regions showing a small decline following a strong increase last year. The Medical sector is expected to make continued progress in the coming year, through increased penetration into developing markets, further product and service development and continued investment in talent. Four acquisitions and one disposal completed Halma's sector-focused organisational model gives us the scalability to continue acquiring small-to-medium-sized businesses to achieve our strategic growth objectives. We are also able to sell and merge businesses relatively easily should specific market dynamics change. This enables us to continue to grow rapidly without becoming significantly more complex. For example, in 2009, Halma had revenue of GBP502m from 38 operating companies, while today we have revenue of over GBP1.2bn from 42 operating companies.
Our core acquisition strategy is to find privately owned businesses
operating in niches which are aligned with our purpose of "Growing
a safer, cleaner, healthier future for everyone, every day".
We focus the majority of our search efforts on our core, or closely
adjacent, market niches although each sector board has the freedom
to find new niches which might have the right product, market
and financial characteristics. In most cases we acquire 100%
of an entity but we also consider minority investments to gain
access to potentially valuable intellectual property if an outright
purchase is not appropriate or possible. Every transaction is
approved by the Group Chief Executive and Chief Financial Officer,
with all deals GBP10m or over requiring Halma plc Board approval.
We entered the year with a healthy acquisition pipeline and this
translated into four acquisitions being completed in the Infrastructure
Safety sector, as well as two small asset purchases in the Medical
sector, for a total initial cash consideration of GBP66.1m. We
made one small disposal in the year, of Accudynamics, as it no
longer had the future growth and returns characteristics we require.
These acquisitions contributed in line with expectations during
the year and we expect good performances from them in the future.
Full details are given in the Financial Review and in the notes
to the Financial Statements.
I am pleased with the number of acquisitions made during the
year and with the high levels of prospecting activity in our
sector M&A teams. Although we did not meet our KPI of acquiring
profit of 5% or more, delivering 3.2% (excluding the effect of
the Accudynamics disposal), this was more than compensated for
by strong organic growth. However, increasing the contribution
from acquisitions will be a focus for improvement. Consequently,
we have increased our capability, with new talent at the Divisional
Chief Executive and Managing Director levels and the addition
of further resources to our sector M&A teams. We have also added
expertise to support minority investments that can bring new
capabilities to Halma without taking 100% ownership. We continue
to build long-term relationships with business owners so that
they see Halma as the right home for their business when they
decide to sell, or as a strong investment partner to help them
grow their businesses, and have a good pipeline for the year
ahead.
Further investment in our Growth Enablers
Our Growth Enablers are resources available to our companies
to help them to grow. Our strong progress in the year was supported
by their further development, for example in the expansion of
the resources in our M&A teams, as discussed above, and the strengthening
of the leadership teams in our international hubs. We also increased
our Innovation and Digital programmes, and set out a new vision
for how Finance & Risk can enable our companies to grow. Our
Strategic Communications team has been active in supporting our
companies in telling their story, thereby better connecting them
with their customers.
This month we are launching a new brand design and website to
better communicate the Halma story to our stakeholders, particularly
how we are accomplishing our purpose through our unique culture.
Talent and culture are critical components of every business'
success. The change we made at the end of 2017 to streamline
our Executive Board, reducing the number of Sector Chief Executive
roles from four to two, has been a great success. It has re-established
the importance of the Divisional Chief Executive (DCE) role,
reduced complexity, shortened lines of communication, improved
decision-making and eased networking across Halma. This has enabled
us to attract stronger talent with greater autonomy and responsibility.
Our DCEs now play a more significant leadership role in Halma
with increased interaction with the Executive Board.
Good progress on executing our strategy
It is over a year since we launched our Halma 4.0 strategy, which
provided our companies with a clear strategic framework including
how to address the diverse challenges and opportunities presented
by the digital age. We have made good progress in developing
our digital growth strategies, although their current contribution
to revenue growth is modest. We expect them to play a more significant
role in the future.
We have three elements to our growth strategy:
* Core growth, for example, through new product
development or the international expansion of
existing companies, remains our main focus. We have
continued to increase investment to support it, with
R&D spend up by 11% to GBP63m (2018: GBP57m).
* Convergence growth helps Halma companies to unlock
value by creating new solutions, and often new
business models, by combining the capabilities and
technologies of more than one Halma company, or by a
Halma company doing the same through an external
partnership. During the year, nine projects involving
over 20 Halma companies went through our Convergence
Accelerator programme and the commercialisation of
some of them will continue in the coming year.
* Edge growth is created from new digital business
opportunities via partnerships with external
companies which have many leading-edge capabilities
that we do not wish to acquire. We have been very
active in building these partnerships, with
discussions initiated by companies across all our
sectors from a number of events in Singapore and
Israel (the latter in collaboration with OurCrowd, an
equity crowdfunding platform). We have also launched
a collaboration with Hitatchi to help us to scale and
execute some of our digital business ideas, with two
Halma companies already participating and further
projects being planned.
We will continue to refine our digital strategy and policies
to create a robust framework for our digital growth. This will
include how we will organise and share data, define its ownership
and comply with regulatory requirements with a structured and
systematic approach.
We are developing key performance indicators to track our Innovation
& Digital progress and will report on these in the coming year.
Outlook
Halma had a successful year, achieving record revenue and profit,
delivering our 40th consecutive year of dividend per share growth
of 5% or more and making further increased strategic investment
supported by our strong balance sheet. We have a strong purpose,
culture and growth strategy focused on niches in a diverse range
of markets where demand is supported by resilient long-term growth
drivers, offering us both organic and acquisition growth opportunities.
The new financial year has started well, and order intake has
continued to be ahead of both revenue and order intake for the
comparable period last year. We expect to make good progress
in the year ahead.
Andrew Williams
Group Chief Executive
(1) See highlights.
Financial Review
Record results
Halma made strong progress in the period, delivering record revenue
and profit for the 16th consecutive year. We continued to execute
well against our growth strategy and our key performance indicators,
leveraging our sustainable financial model and organisational
structure across our global niche markets.
Revenue increased by 12.5% to GBP1,210.9m (2018: GBP1,076.2m),
and adjusted(1) profit was up by 15.0% to GBP245.7m (2018: GBP213.7m),
while statutory profit before taxation increased by 20.2% to
GBP206.7m (2018: GBP171.9m). Cash generation was strong, and
our financial position remains robust, allowing us to continue
to support investment in growth, both organically and by acquisition.
The Board is proposing a further dividend increase of 7%, the
40th consecutive year of dividend per share growth of 5% or more.
The revenue growth of 12.5% included a 10.0% increase in organic
constant currency revenue. Acquisitions contributed 3.1% to growth
(2.1% net of disposals).
The adjusted profit increase of 15.0% included 11.1% organic
constant currency profit growth. Both organic revenue and adjusted
profit growth were substantially ahead of our KPI target of 5%
growth or more, and more than compensated for the rate of growth
from acquisitions, which, at 3.2% (3.6% net of disposals), was
lower than our KPI of 5% growth or more.
There was a small net currency translation impact on revenue
and adjusted profit, with revenue benefiting by 0.4% and adjusted
profit by 0.3%.
Statutory profit before taxation of GBP206.7m is calculated after
charging the amortisation of acquired intangible assets of GBP35.6m
(2018: GBP34.7m), and other items of a net GBP3.4m (2018: GBP7.1m),
which included a charge of GBP2.1m in relation to the equalisation
of pension benefits for men and women in the Group's defined
benefit pension plans (see "Pension update" below). Further detail
on these items is given in note 1.
Revenue and profit growth
Percentage growth
----------------------------------
Organic
growth(2)
2019 2018 Increase Organic at constant
GBPm GBPm GBPm Total growth(2) currency
-------------------- -------- -------- --------- ------ ----------- -------------
Revenue 1,210.9 1,076.2 134.7 12.5% 10.4% 10.0%
Adjusted(1) profit
before taxation 245.7 213.7 32.0 15.0% 11.4% 11.1%
Statutory profit
before taxation 206.7 171.9 34.8 20.2% - -
-------------------- -------- -------- --------- ------ ----------- -------------
Strong revenue and profit growth
Revenue grew by 15.6% in the first half and 9.7% in the second
half. There was a 1.8% negative effect from currency translation
in the first half which reversed in the second half to give a
small benefit of 0.4% for the year. Organic revenue growth at
constant currency was an exceptionally strong 14.2% in the first
half reflecting good performances across all four of our sectors
as well as a benefit from the phasing of the delivery of some
large orders received in the second half of the prior year. As
expected, we also delivered good organic constant currency growth
rate of 6.3% in the second half to give an impressive 10.0% growth
rate for the year as whole.
Adjusted profit growth was 19.4% in the first half and 11.5%
in the second half. As with revenue, the negative effect from
currency translation in the first half reversed in the second
half, giving a small benefit of 0.3% for the year. Organic profit
growth at constant currency was again exceptionally strong at
16.1% in the first half and, at 7.2% in the second half, was
slightly ahead of our expectations at the half year. The first
half/second half split of adjusted profit was 46%/54%, compared
to our typical 45%/55% pattern, reflecting the strong first half
performance and a better risk profile for the year.
Growth in all four sectors
All four sectors delivered revenue and profit growth, both on
a reported and organic constant currency basis. All sectors grew
revenue on an organic constant currency basis in both the first
and the second half.
We delivered double-digit organic constant currency profit growth
in three of our four sectors. Infrastructure Safety was the strongest
performer, with profit growth accelerating in the second half.
Environmental & Analysis and Medical delivered strong growth,
which comprised a slower second half following an exceptionally
good first half. Process Safety achieved mid-single-digit growth,
which included reorganisation costs of GBP1.5m to improve its
competitive position and performance in the future.
Central and growth enabler costs increased, as expected, to GBP22.0m
(2018: GBP15.3m) excluding the one-off charge of GBP2.1m for
equalising pension benefits between men and women. This principally
reflected increased investment to support our companies' growth
over the medium-term, mainly in the digital transformation and
innovation Growth Enablers, as well as in governance and compliance.
We expect a further increase, albeit at a lower rate, in 2019/20,
principally in Growth Enabler costs, and in the medium-term,
these costs are expected to grow no faster than revenue.
Growth in our major regions
All major regions reported revenue growth, with the USA, Mainland
Europe and the UK, performing strongly, with double-digit percentage
increases. Following strong performances in 2018, growth in Asia
Pacific and Africa, Near and Middle East slowed, with Other regions
showing a small decline.
The USA delivered very strong growth of 18.5%, and remains our
largest revenue destination, accounting for 37% of Group revenue,
an increase of two percentage points compared to the prior year.
All sectors performed well, with Infrastructure Safety growing
very strongly and Process Safety and Environmental & Analysis
also delivering excellent growth. Mainland Europe revenue increased
by 12.0%, driven by good performances in Infrastructure Safety
and Environmental & Analysis. The UK also grew well with revenue
increasing by 16.0% and all sectors except Medical, which accounts
for only 7% of UK revenues, growing at a double-digit percentage
rate.
Asia Pacific grew 5.2%, with good growth in Process Safety, Infrastructure
Safety and Medical, while Environmental & Analysis growth was
slower following a strong performance last year. Our largest
markets in the region grew well, with revenue in China increasing
8% against a tough comparative of 20% growth last year, and Australasia
growing 16%. Performance in smaller markets was variable.
In the rest of the world, performance was mixed and revenue was
broadly flat overall. In Africa, Near and Middle East, Infrastructure
Safety grew strongly, but this was offset by declines in the
other three sectors, notably in Environmental & Analysis. Other
regions saw challenging conditions for the Safety sectors, but
growth in Environmental & Analysis and Medical. Of the larger
markets in the rest of the world, Brazil delivered good growth.
Revenue from territories outside the UK/ Mainland Europe/the
USA grew by 3.2%, below our 10% KPI growth target. Delivering
more consistent growth in these regions will be a key focus in
2019/20, even though we achieved 16.0% growth in revenue in the
UK/Mainland Europe/the USA to deliver a strong overall result.
On an organic constant currency basis, the USA was the fastest
growing region, with 18.3% revenue growth with all sectors delivering
double-digit organic revenue growth. Mainland Europe grew revenue
by 6.5%. The UK grew 11.5%, with all sectors except Medical growing
by more than 10%. Asia Pacific growth was 4.5%, while Africa,
Near and Middle East and Other regions had a challenging second
half across the sectors resulting in flat revenue and a decline,
respectively, for the full year.
Geographic revenue growth
2019 2018
------------ ------------- -------- -----------
% organic
growth at
constant
GBPm % of total GBPm % of total Change GBPm % growth currency
-------------- ------------ ------------- -------- ----------- ------------ --------- -------------
United States
of America 443.2 37% 374.0 35% 69.2 18.5% 18.3%
Mainland
Europe 266.3 22% 237.7 22% 28.6 12.0% 6.5%
United
Kingdom 200.9 16% 173.3 16% 27.6 16.0% 11.5%
Asia Pacific 184.0 15% 174.9 16% 9.1 5.2% 4.5%
Africa, Near
and Middle
East 70.8 6% 69.7 7% 1.1 1.5% (0.6)%
Other
countries 45.7 4% 46.6 4% (0.9) (2.1)% (6.1)%
-------------- ------------ ------------- -------- ----------- ------------ --------- ---------------
1,210.9 100% 1,076.2 100% 134.7 12.5% 10.0%
-------------- ------------ ------------- -------- ----------- ------------ --------- ---------------
Increased returns
Halma's Return on Sales has exceeded 16% for 34 consecutive years.
Our KPI target is to deliver Return on Sales in the range of
18-22%. This year Return on Sales increased to 20.3% (2018: 19.9%),
with an improvement in all sectors except Process Safety, where
Return on Sales remained strong at 23.0%, even though there was
a decline of 0.5% due to reorganisation costs.
We successfully achieved our objective of continuing to invest
in our businesses while delivering growth. This enables us to
maintain a high level of Return on Total Invested Capital (ROTIC),
the post-tax return on the Group's total assets including all
historical goodwill. ROTIC improved to 16.1% (2018: 15.2%), once
again well ahead of our KPI target of 12% and substantially in
excess of Halma's Weighted Average Cost of Capital (WACC), estimated
to be 7.9% (2018: 7.7%).
Currency impacts well managed
Halma reports its results in Sterling. Our other key trading
currencies are the US Dollar, Euro and to a lesser extent the
Swiss Franc and Chinese Renminbi. Over 45% of Group revenue is
denominated in US Dollars and approximately 13% in Euros.
The Group has both translational and transactional currency exposure.
Translational exposures are not hedged, while, for transactional
exposures, after matching currency of revenue with currency costs
wherever practical, forward exchange contracts are used to hedge
a proportion (up to 75%) of the remaining forecast net transaction
flows where there is a reasonable certainty of an exposure.
We hedge up to 12 months and, in certain specific circumstances,
up to 24 months forward. At 31 March 2019 approximately 68% of
our next 12 months' currency trading transactions were hedged.
There is a good degree of natural hedging within the Group in
US Dollars but we spend less in Euros than we sell and this year
had a net exposure of approximately EUR35m.
We saw continued volatility in currencies throughout the year
although by year end this had a relatively limited impact on
the Consolidated Income Statement. Sterling strengthened on average
in the first half of the year, giving rise to a negative currency
translation impact of 1.8% on revenue and 2.2% on profit. However,
Sterling was weaker on average in the second half of the year,
and for the year as a whole, currency translation had a small
positive effect of 0.4% on revenue and 0.3% on adjusted profit.
Weighted average rates Exchange rates used
used in to
the Income Statement translate the Balance
Sheet
------ ------------------------- -------------------------
2019 2018 2019 2018
------ ------------ ----------- ------------ -----------
First Full year Full year Year end Year end
half
------ ------ ------------ ----------- ------------ -----------
US$ 1.33 1.31 1.33 1.30 1.41
------ ------------ ----------- ------------ -----------
Euro 1.13 1.14 1.13 1.16 1.14
------ ------ ------------ ----------- ------------ -----------
Based on the current mix of currency denominated revenue and
profit, a 1% movement in the US Dollar relative to Sterling
changes revenue by GBP5.5m and profit by GBP1.1m. Similarly,
a 1% movement in the Euro changes revenue by GBP1.5m and profit
by GBP0.3m.
If currency rates through the 2019/20 year were US Dollar 1.30/Euro
1.16 relative to Sterling, and assuming a constant mix of currency
results, we would expect no material effect on revenue and profit
in 2019/20 compared with 2019. On this basis there would be
a positive effect in the first half of the year, which would
broadly reverse in the second half.
Increased financing cost
The net financing cost in the Income Statement of GBP10.0m was
slightly above the prior year (2018: GBP9.7m). Average net borrowings
were marginally lower this year, despite acquisition expenditure,
but the average cost of financing was higher due to the currency
mix of debt and higher US dollar interest rates (see the 'Average
debt and interest rates' in the table below.
Interest cover (EBITDA as a multiple of net interest expense
as defined by our Revolving Credit Facility) was 33 times (2018:
32 times) which was well in excess of the four times minimum
required in our banking covenants.
The net pension financing charge under IAS 19 is included within
the net financing cost. This year the cost decreased to GBP1.2m
(2018: GBP1.7m), reflecting the reduction in the deficit on
our defined benefit plans.
Group tax rate
The Group has major operating subsidiaries in 10 countries and
the Group's effective tax rate is a blend of these national
tax rates applied to locally generated profits. A significant
proportion (approximately one fifth) of Group profit is generated
and taxed in the UK.
The Group's effective tax rate on adjusted profit was lower
than the prior year at 18.6% (2018: 19.7%) mainly due to the
decrease in the US federal tax rate in addition to some one-off
credits in the year.
For the year to 31 March 2020 we currently anticipate (based
on the forecast mix of adjusted profits) a Group effective tax
rate on adjusted profits of approximately 20%, with the increase
compared to this financial year mainly driven by the mix of
adjusted profits, including the full year effect of prior year
acquisitions, and lower interest deductibility relative to profits.
On 2 April 2019, the European Commission published its final
decision that the UK controlled Finance Company Partial Exemption
(FCPE) constituted State Aid. In common with a number of other
UK companies, Halma has benefited from the FCPE, and the total
benefit in 2019 and prior periods is approximately GBP15.4m
in respect of tax and approximately GBP0.6m in respect of interest.
We are currently evaluating whether to appeal the European Commission's
decision and the UK Government may also appeal, and therefore
at present we believe that no provision is required in respect
of this issue, although a cash payment of some, or all of, the
amount due may be required in the next year which we would expect
to be refundable in the event of a successful appeal.
Strong cash generation
Cash generation is an important component of the Halma model,
underpinning further investment in our businesses, supporting
value-enhancing acquisitions and funding an increasing dividend.
Our cash conversion in 2019 was strong. Cash generated from
operations was GBP259.6m (2018: GBP214.4m) and adjusted operating
cash flow was GBP225.2m (2018: GBP190.4m) which represented
88% (2018: 85%) of adjusted operating profit, ahead of our cash
conversion KPI target of 85%.
Operating cash flow summary
2019 2018
GBPm GBPm
--------------------------------------------------------------------------- ----------- -------
Operating profit 217.8 181.2
Net acquisition costs and contingent consideration
fair value adjustments 0.3 7.7
Defined benefit pension charge 2.1 -
Amortisation and impairment of acquisition-related
acquired intangible assets 35.6 34.7
--------------------------------------------------------------------------- ----------- -------
Adjusted operating profit 255.8 223.6
Depreciation and other amortisation 31.3 28.4
Working capital movements (16.3) (24.4)
Capital expenditure net of disposal proceeds (29.7) (20.5)
Additional payments to pension plans (11.4) (10.8)
Other adjustments (4.5) (5.9)
--------------------------------------------------------------------------- ----------- -------
Adjusted operating cash flow 225.2 190.4
--------------------------------------------------------------------------- ----------- -------
Cash conversion % 88% 85%
--------------------------------------------------------------------------- ----------- -------
Non-operating cash flow and reconciliation
to net debt
2019 2018
GBPm GBPm
----------------------------------------------- -------- --------
Adjusted operating cash flow 225.2 190.4
----------------------------------------------- -------- --------
Tax paid (40.6) (41.1)
----------------------------------------------- -------- --------
Acquisition of businesses including cash/debt
acquired and fees (68.1) (117.6)
----------------------------------------------- -------- --------
Disposal of businesses 3.1 -
----------------------------------------------- -------- --------
Net movement in loan notes 0.1 0.2
----------------------------------------------- -------- --------
Net finance costs and arrangement fees (8.3) (7.3)
----------------------------------------------- -------- --------
Dividends paid (57.2) (53.4)
----------------------------------------------- -------- --------
Own shares purchased (3.8) (2.6)
----------------------------------------------- -------- --------
Adjustment for cash outflow on share awards
not settled by own shares (4.9) (3.3)
----------------------------------------------- -------- --------
Effects of foreign exchange (6.9) 10.8
----------------------------------------------- -------- --------
Movement in net debt 38.6 (23.9)
----------------------------------------------- -------- --------
Opening net debt (220.3) (196.4)
----------------------------------------------- -------- --------
Closing net debt (181.7) (220.3)
----------------------------------------------- -------- --------
Net debt to EBITDA
2019 2018
GBPm GBPm
--------------------------------------------------- -------- -------
Adjusted operating profit 225.8 223.7
--------------------------------------------------- -------- -------
Depreciation and amortisation (excluding acquired
intangible assets) 31.3 28.4
--------------------------------------------------- -------- -------
EBITDA 287.2 252.1
--------------------------------------------------- -------- -------
Net debt to EBITDA 0.63 0.87
--------------------------------------------------- -------- -------
A summary of the year's cash flow is shown in the table above.
The largest outflows in the year were in relation to acquisitions,
dividends and taxation paid. Working capital outflow, comprising
changes in inventory, receivables and creditors, totalled GBP16.3m
(2018: GBP24.4m) and debtor days have reduced year-on-year, reflecting
our continuing focus on cash management.
Dividends totalling GBP57.2m (2018: GBP53.4m) were paid to shareholders in the year. Taxation paid was GBP40.6m (2018: GBP41.1m). In the 2019/20 financial year, an acceleration of the payment timetable for UK Corporation Tax payments for larger companies will result in a one-off increase in cash taxation payable of approximately GBP5m. Capital allocation and funding Halma aims to deliver high returns, measured by ROTIC, well in excess of our cost of capital. We invest to deliver the future earnings growth and strong cash returns which underpin this ambition, and our capital allocation priorities are as follows: Investment for organic growth Organic growth is our first priority and is driven by investment in our existing businesses, including through capital expenditure, innovation for digital growth and in new products, international expansion and the development of our people. Value-enhancing acquisitions We supplement organic growth with acquisitions in current and adjacent market niches. This brings new technology, intellectual property and talent into the Group and expands our market reach, keeping Halma well-positioned in growing markets over the long-term. Regular and increasing returns to shareholders We have maintained a progressive dividend policy for over 40 years and this is our preferred route for delivering regular cash returns to shareholders. Increased investment for organic growth All sectors continue to innovate and invest in new products, with R&D spend determined by each individual Halma company. This year R&D expenditure grew by 11.2%, a similar rate to revenue growth. R&D expenditure as a percentage of revenue was 5.2% (2018: 5.2%), well in excess of our KPI target of 4% or more. In the medium term we expect R&D expenditure to continue to increase broadly in line with revenue growth. Under IFRS accounting rules we are required to capitalise certain development projects and amortise the cost over an appropriate period, which we determine as three years. In 2019 we capitalised and acquired GBP11.6m (2018: GBP9.7m), impaired GBP0.7m (2018: GBP0.7m) and amortised GBP8.5m (2018: GBP6.9m). This results in an asset carried on the Consolidated Balance Sheet, after a GBP0.6m gain (2018: GBP1.0m loss) relating to foreign exchange, of GBP33.1m (2018: GBP30.0m). All R&D projects and particularly those requiring capitalisation, are subject to rigorous review and approval processes. Capital expenditure on property, plant, equipment, computer software and other intangible assets was GBP31.3m (2018: GBP22.1m) or GBP29.1m excluding the Awarepoint and Elpas asset purchases made in the year. The expenditure on fixed assets was spread across all four sectors, supporting our operating capability, capacity and growth including investment in IT and systems upgrades. There was increased spend in three of our sectors with reduced spend only in Environmental & Analysis which had the highest spend in the prior year. In addition, we expanded our head office space this year to accommodate the increased investment in Growth Enablers. We anticipate capital expenditure of GBP35m in the coming year, reflecting significant new operating site, plant and equipment and IT investment in Infrastructure Safety and new operating capability in Environmental & Analysis. Value-enhancing acquisitions Acquisitions and disposals are an important part of our growth strategy, as they keep our portfolio focused on growing markets over the medium and long-term. In the year we spent GBP64.5m on four acquisitions (net of cash acquired of GBP5.3m including acquisition costs). In addition, we paid GBP3.6m in contingent consideration for acquisitions made in prior years, giving a total spend of GBP68.1m. We made one disposal, realising GBP3.1m, net of transaction costs. In addition to the four business acquisitions, our Medical division acquired various assets from Awarepoint and Elpas for total consideration of GBP2.6m to expand CenTrak's technology and market reach. In our half year results, we reported on three acquisitions in the Infrastructure Safety sector: LAN Control Systems Limited, a relatively small technologically driven bolt-on for an initial cash consideration of GBP1.0m; Limotec bvba for a cash consideration of EUR9.3m (GBP8.2m), on a cash and debt-free basis; and Navtech Radar Limited for an initial cash consideration of GBP21m on a cash and debt-free basis, with further earn-out considerations, capped at a total of GBP18m in cash, payable dependent on profit growth in each of the three financial years to the end of March 2021. In January 2019, we acquired Business Marketers Group Inc., trading as Rath Communications, a provider of emergency communication systems for areas of refuge in the USA, for a cash consideration of US$42.4m (GBP32.8m), on a cash- and debt-free basis. There was one disposal in the period. In June 2018, the Medical sector sold the Accudynamics Fluid Technology business for US$5.4m (GBP4.2m), resulting in a small loss on disposal of US$1.2m (GBP1.0m). The original US$31.8m consideration on acquisition in December 2010 primarily related to goodwill and customer intangibles, which have now been successfully retained within the Group to strengthen the product offering and market positions of other Halma Diagnostic device businesses. The acquisitions completed in the current and prior year contributed to revenue in 2019 in line with expectations. We expect a good performance from these acquisitions in the coming year and in the long term. Regular and increasing returns for shareholders Adjusted earnings per share increased by 16.5% to 52.74p (2018: 45.26p). Statutory earnings per share increased by 10% to 44.78p (2018: 40.69p), lower than the increase in Adjusted earnings per share largely as a result of the one-off credit last year arising from revisions to US taxation rates. The Board is recommending a 7.0% increase in the final dividend to 9.60p per share (2018: 8.97p per share), which together with the 6.11p per share interim dividend gives a total dividend per share of 15.71p (2018: 14.68p), up 7.0% in total. Dividend cover (the ratio of adjusted profit after tax to dividends paid and proposed) is 3.36 times (2018: 3.08 times). The final dividend for 2019 is subject to approval by shareholders at the AGM on 25 July 2019 and will be paid on 14 August 2019 to shareholders on the register at 12 July 2019. We aim to increase the per share dividend amount each year, while maintaining a prudent level of dividend cover, with approximately 35-40% of the anticipated total dividend being declared as an interim dividend. The Board's determination of recommended annual dividend increases takes into account the medium-term rate of organic constant currency growth and the financial resources required in executing our strategy, including organic investment needs and acquisition opportunities, whilst maintaining moderate debt levels. Funding capacity extended Halma operations are cash generative and the Group has access to competitively priced debt finance providing good liquidity for the Group. Group treasury policy remains conservative and no speculative transactions are undertaken. In October 2018 we extended the GBP550m Revolving Credit Facility, put in place in November 2016, by a further year to 2023. The combination of good cash generation, a healthy balance sheet and committed external financial resources provides us with the capacity we need to invest in organic growth and acquisitions to meet our growth objectives as well as to sustain our progressive dividend policy. At the year end, net debt was GBP181.7m (2018: GBP220.3m), a combination of GBP262.9m of debt and GBP81.2m of cash held around the world to finance local operations. The gearing ratio at year end (net debt to EBITDA) was 0.63 times (2018: 0.87 times). Although we are comfortable operating at this level of gearing, we would increase to two times gearing if the timing of acquisitions required it. Net debt represented 3% (2018: 5%) of the Group's year-end market capitalisation. The Group continues to operate well within its banking covenants with significant headroom under each financial ratio. Pensions update We closed the two UK defined benefit (DB) plans to new members in 2002. In December 2014 we ceased future accrual within these plans with future pension benefits earned within the Group's Defined Contribution (DC) pension arrangements. The Group accounts for post-retirement benefits in accordance with IAS 19 Employee Benefits. The Consolidated Balance Sheet reflects the net deficit on our pension plans at 31 March 2019 based on the market value of assets at that date and the valuation of liabilities using year end AA corporate bond yields. On an IAS 19 basis the deficit on the Group's DB plans at the 2019 year end had decreased to GBP39.2m (2018: GBP53.9m) before the related deferred tax asset. The value of plan assets increased to GBP292.2m (2018: GBP271.7m). In total, over 55% of plan assets are invested in return seeking assets providing a higher expected level of return over the longer term. Plan liabilities increased to GBP331.4m (2018: GBP325.6m) due to the impact of equalisation of guaranteed minimum pension contributions for men and women and an increase in the inflation rate, partly offset by updated member experience data. The plans' actuarial valuation reviews, rather than the accounting basis, determine any cash deficit payments by Halma. In 2019 these contributions amounted to GBP11.7m and following a triennial actuarial valuation of the two UK pension plans, cash contributions
increasing at 7% per annum aimed at eliminating the deficit were
agreed with the trustees, consistent with our expectations.
On 26 October 2018, the High Court reached a judgment in relation
to Lloyds Banking Group's defined benefit pension schemes which
concluded that the schemes should equalise pension benefits for
men and women as regards Guaranteed Minimum Pension benefits.
The judgement has resulted in a one-off charge of GBP2.1m to
the Income Statement which has been treated as an exceptional
item and so excluded from adjusted profit.
Average debt and interest rates
2019 2018
----------------------------------- ------ ------
Average gross debt (GBPm) 282.6 284.5
Weighted average interest rate on
gross debt 2.47% 2.16%
Average cash balances (GBPm) 80.4 76.5
Weighted average interest rate on
cash 0.50% 0.33%
Average net debt (GBPm) 202.2 208.0
Weighted average interest rate on
net debt 3.26% 2.83%
----------------------------------- ------ ------
New accounting standards
The Group adopted a number of new accounting standards and interpretations
with effect from 1 April 2018, including IFRS 15 'Revenue from
Contracts with Customers' and IFRS 9 'Financial Instruments'.
There has been no material effect on the Group's accounts from
these changes.
Further new standards and interpretations will be adopted for
the Group's financial year commencing 1 April 2019. We do not
expect their adoption to have any material impact on the Group's
financial statements, with the exception of IFRS 16 'Leases',
the most significant effect of which will be to bring the Group's
land and building leases on to the balance sheet. IFRS 16 is expected
to result in a small reduction in net assets of approximately
GBP4m, comprising an increase in assets of approximately GBP45m,
and an increase in liabilities (from the lease liability) of approximately
GBP49m. Due to the varying time left to run-off the leases, we
expect the net effect on the Group's profit and loss account to
be immaterial, and there will be no impact on the Group's cash
flow.
Further details of these new accounting standards and their application
to the Group's accounts can be found in the notes to the financial
statements in the Annual Report and Accounts 2019.
Update on Brexit and USA/China tariff increases
We continue to closely monitor and assess any potential effects
from the UK's exit from the European Union, and from tariff increases
on certain goods by the USA and China. In 2019, approximately
9% of Group revenue came from direct sales between the UK and
Mainland Europe, and approximately 4% between the USA and China.
We have not seen any material effects to date, and consider that
our decentralised model, with businesses in diverse markets and
locations, enables our companies to adapt quickly to changing
trading conditions. We expect that our companies' agility, and
the support we are providing from the centre to help them prepare
for these changes, will help them to mitigate any potential effects,
as well as enabling them to take advantage of opportunities that
arise.
Finance and Risk as a Growth Enabler
We have delivered a strong financial performance this year, and
in my first year as Chief Financial Officer, I am also pleased
with the further development of the Finance and Risk function
within Halma.
During the year, we reset our expectations, to be a team which
not only ensures excellent financial controls and risk management
but also truly enables the Halma 4.0 growth strategy.
We will achieve this through having the best talent, providing
insightful and actionable data, maintaining appropriate risk frameworks
and controls, supporting M&A activity, and ensuring we maximise
the benefits from our external advisors and the use of new technology.
I would like to thank all my colleagues in Finance and Risk for
their hard work which has contributed to another successful year
for Halma.
Marc Ronchetti
Chief Financial Officer
(1) In addition to those figures reported under IFRS Halma uses
alternative performance measures as key performance indicators,
as management believe these measures enable them to better assess
the underlying trading performance of the business by removing
non-trading items that are not closely related to the Group's
trading or operating cash flows. Adjusted profit excludes the
amortisation and impairment of acquired intangible assets; acquisition
items; restructuring costs; profit or loss on disposal of operations;
and the effect of equalisation of benefits for men and women in
the defined benefit pension plans. All of these are included in
the statutory figures. Note 3 to the Accounts gives further details
with the calculation and reconciliation of adjusted figures.
(2) See highlights.
Process Safety Sector Review
Process Safety's technologies protect people and assets at work,
across a range of critical industrial and logistics operations.
Sector progress summary
The sector delivered good revenue and profit growth while investing
for improved performance. Revenue growth was 7%, on both a reported
and organic constant currency basis, with the UK and the USA
performing well, somewhat offset by a decline in the Africa,
Near and Middle East region. With stable gross margins and investments
to strengthen the sector's competitive position and improve performance,
profit increased 5% on both a reported and organic constant currency
basis. Return on Sales remained strong, although there was a
decline as a result of reorganisation costs.
Gas Detection and Industrial Access Control performed strongly.
Pressure Management's profit growth was affected by a combination
of end market conditions and product mix. Safe Storage and Transfer
underwent a reorganisation, including the addition of strong
leadership and the consolidation of manufacturing operations.
These steps position the sector for growth in 2019/20 and beyond.
Early in the year, the sector M&A strategy was reviewed to ensure
better alignment with our purpose and key market growth drivers,
resulting in a redefinition of our subsectors. Subsequently,
we have developed a stronger pipeline of prospects.
Strategy
Process Safety plays an important part in delivering Halma's
purpose of making the world safer and cleaner in critical industrial
operations.
We are investing in Core growth to develop new, differentiated
products that address specific needs in selected industry sectors.
Examples include connected gas detection products that allow
our customers access to safety-critical data, and the launch
of a high temperature H2S detector specifically addressing needs
of Middle Eastern customers in the Oil and Gas industry. We are
expanding into adjacent markets, for example through new pressure
safety units focused on the food, pharmaceutical and industrial
markets.
Partnerships are playing an increasingly important role in our
strategy. In Gas Detection, we are utilising Halma's Convergence
Accelerator and working with external partners to generate revenue
from an early stage venture in China, focused on air quality
and odour monitoring solutions. Industrial Access Control is
augmenting its mechanical and electromechanical products with
software and data solutions to meet the safety and productivity
needs of warehouse operators and factory production lines.
We have invested in our M&A capability to fuel growth into new,
adjacent subsectors which are aligned with Halma's purpose and
have strong long-term growth drivers. Increasingly there is the
potential for digitisation, through technology enhancements to
our existing portfolio, and for international growth, with Asia
as a key focus.
Market trends and growth drivers
Our Process Safety businesses continue to benefit from increasing
health and safety regulation, a growing population and urbanisation.
With an estimated 340 million injuries and 2.3 million fatalities
in the workplace each year, it is likely that health and safety
regulations will continue to tighten. Our ability to find new
applications in adjacent industrial markets is broadening our
growth opportunities, both organically and through acquisition.
Several of our businesses, notably in Pressure Management, operate
in markets driven by the increasing need for energy and other
critical resources. Global energy demand is expected to grow
by over 25% between 2017 and 2040, with developing country demand
expected to increase by 45%. The diversification of energy resources
means we are repurposing our solutions to alternative energy
markets, where we expect good growth: the global renewable energy
market is expected to grow at a compound annual growth rate of
4.9% between 2017 and 2025.
In Gas Detection, the market is expected to grow by over 7% pa
to 2025, driven by ongoing industrialisation, increased regulation,
greater demand for continuous monitoring of harmful substances
to protect worker safety, and the accelerated use of wireless
sensors and connected devices.
Performance
Revenue grew by 7% to GBP198m (2018: GBP185m). Profit grew by
5% to GBP46m (2018: GBP43m). On an organic constant currency
basis, revenue and profit grew by 7% and 5% respectively.
In Industrial Access Control, progress was very strong, particularly
in US logistics. We expect further growth to come from that industry's
focus on safety and productivity. We have also invested in sales
and marketing resources in Asia to accelerate the potential adoption
of our products in the region.
In Gas Detection, we delivered strong growth in China, from both our traditional gas detectors and from a newly developed odour monitoring solution. We made significant investments in product development and people, while maintaining strong returns. Pressure Management delivered revenue similar to last year with a small decline in profit. US oil and gas market conditions were not favourable, particularly in the second half, due to pipeline constraints in the Permian Basin. Safe Storage and Transfer has invested in streamlining operations and leadership to build a stronger platform for growth in this solid market. Return on Sales was 23.0%, a decline from 23.5% in 2018 as a result of reorganisation costs, and Return on Capital Employed remained strong. R&D investment increased by 10.2% to GBP7.0m (2018: GBP6.3m). Outlook Process Safety continues to benefit from its long-term market growth drivers, and diversity of its end markets, and has strengthened the leadership in many of its businesses. Increasing innovation, stronger marketing activity, together with increased strength in leadership, are expected to deliver further progress in the coming year. Infrastructure Safety Sector Review Infrastructure Safety's technologies save lives, protect infrastructure and enable safe movement. Sector progress summary The sector delivered a very strong performance with revenue growing 17% and profit 21%. All subsectors delivered double-digit revenue and profit growth, with progress in all major geographical regions. Together with a small improvement in gross margins, this led to higher Return on Sales even after an increase in R&D investment. The sector made four acquisitions in a productive year for M&A. Navtech Radar has enhanced our People and Vehicle Flow business, building on our radar technology expertise. The Elevator Safety subsector, already benefiting from last year's Microkey acquisition, was further enhanced by the purchase of Rath Communications, which moves it into high growth adjacent markets such as 'area of refuge'. The Fire Detection subsector added Limotec, a leading Belgian fire control panel manufacturer and system seller, together with LAN Controls, a software focused business that enables remote monitoring of fire systems and ensures their correct maintenance. Strategy Infrastructure Safety makes the world a safer place by protecting commercial, industrial and public buildings and spaces. It addresses increasing life safety concerns, more stringent regulatory requirements and accelerating demand for connected infrastructure systems globally both by product and digital innovation, and by acquiring companies with technological expertise, strength in new geographies and a presence in adjacent markets. Our focus is on less cyclical, niche applications, with high barriers to entry. We seek to expand our geographic footprint organically, utilising hubs in Asia Pacific, and through acquisitions, such as the Limotec and Rath Communications acquisitions. Our strategy is supported by relentlessly focusing on talent, both by developing our people and attracting new talent from outside. Our companies make excellent use of the Digital Growth Engines. This includes the Convergence Accelerator programme to drive new business concepts, particularly in connected systems. This will move us up the digital value chain and provide opportunities to deliver value from data. By leveraging the Microkey acquisition, we are providing new connected elevator solutions that bring together insights gained from data generated by the many safety components we supply to elevator manufacturers and maintenance companies. We are also acquiring companies with digital business models and knowhow, such as LAN Controls. Market trends and growth drivers Our Infrastructure Safety markets are driven by an expanding and ageing population, urbanisation and increasing regulation, with increasing demand for digital innovation. According to a recent UN report, the world's urban population is expected to increase by 2.5 billion by 2050. We expect this to drive demand for better infrastructure and transportation safety and security, as more people live in more densely populated areas. These long-term trends are particularly relevant in developing economies. For example, the fire detection market is forecast to grow at 4% pa globally between 2017 and 2022, with a greater increase of 8% pa in India and 5% pa in China. The growth of intelligent building solutions offers further opportunities. The market is expected to more than quadruple by 2027, as digital technology allows building owners to have greater access to data across all building services at a lower cost. Our Fire and Security businesses are well placed to take advantage of this trend, with their fast-developing data, remote monitoring and control capabilities. The elevator maintenance market is faster growing with higher profitability than the OEM elevator market which continues to be highly competitive. Growth is driven by increasing urbanisation and regulation. There are opportunities to enhance efficiency through remote monitoring and preventative maintenance. We also see strong growth opportunities in related niches, such as the 'area of refuge' market we entered with the Rath Communications acquisition. Similar trends are creating new opportunities for our People and Vehicle Flow companies. An example is the greater demand being placed on road infrastructure, where the limited scope to physically expand capacity is driving the demand for Navtech Radar's technology to improve road safety and capacity. Performance Revenue grew by 17% to GBP409m (2018: GBP349m) and profit by 21% to GBP89m (2018: GBP73m). Organic constant currency revenue grew by 11% and profit by 16%. There were strong performances in the UK, Europe, USA and the Africa, Near and Middle East region, with lower growth in Asia Pacific. Acquisitions accounted for 6% of revenue and profit growth. Currency had a positive effect on both revenue and profit growth. Return on Sales improved to 21.8% (2018: 21.0%) and Return on Capital Employed remained above Group targets. R&D investment increased by 22% to GBP24.9m (2018: GBP20.4m). The People and Vehicle Flow business was particularly buoyant in Europe and Asia. This subsector also benefited from the Navtech Radar acquisition. Fire Detection made good progress in all geographies, with double-digit growth in the UK, Europe and Asia Pacific. The addition of LAN Controls brought new connected technology capability. Fire Suppression and Security Sensors both contributed good growth, with Elevator Safety continuing its transition to becoming a partner which makes elevators smarter, simpler and safer. Rath Communications strengthens our position in the USA and provides access to a new niche, the regulation driven 'area of refuge' market. Outlook Our growth drivers of increasing regulation, population growth, urbanisation and digitisation are expected to sustain growing demand for our products and services worldwide. We enter the year with good momentum and a solid M&A pipeline. Environmental & Analysis Sector Review Environmental & Analysis provides technologies that monitor and protect the environment and ensure the quality and availability of life-critical resources. Sector progress summary The sector achieved record results, with strong revenue growth of 15% and profit increasing 21%. Organic constant currency revenue and profit growth were a very good 11% and 13% respectively. There was strong growth in the USA and UK, and good growth in Mainland Europe. Return on Sales increased from 21.2% to 22.2%, as we extended our product and solutions range and invested in markets that benefit from long-term growth drivers. Strategy Our solutions improve the availability and quality of life-critical natural resources such as air, water and food, and improve the environment and wellbeing. Leveraging Halma's Growth Enablers, we focus on developing new market-led solutions and increasing our geographical reach organically and through partnerships, especially in emerging markets. Our R&D effort includes developing new sensors that capture accurate and effective environmental and scientific information. We are enhancing this technology by investing in digital systems that provide real-time and remote management information. We continually seek to attract, develop and promote high quality, talented people and ensure that our teams represent our diverse end markets and are enhanced to match our strategic capability needs. Market trends and growth drivers The Environmental & Analysis sector's long-term growth is sustained by three key drivers: - rising demand for life-critical resources such as air, water and food. - increasing environmental monitoring and regulations. - worldwide population growth, urbanisation and rising standards of living. Population growth continues to outpace the availability of key resources. By 2050, water shortages are expected to affect over 50% of the global population and this will be exacerbated by increasing urbanisation. We expect these trends to drive demand for our water testing and disinfection technologies, and our water network monitoring solutions which help to ensure integrity of networks. Air pollution is a growing health risk in both developing and developed countries. Airborne particulates are a top cause of premature deaths in the EU, contributing to an estimated 391,000 deaths in 2016. Our spectroscopy systems assist in the precise detection of contaminates, while our environmental companies support emissions and air quality monitoring and calibrate pollution
monitoring equipment.
According to the World Health Organisation, one in ten people
fall ill each year from eating contaminated food and 420,000
people die each year as a result. Some of our more recent development
activities are focused on ensuring the quality of the food supply
chain.
Environmental regulations and actions move at a different pace
around the world. Differential rates of growth in governmental
and academic research spend cause the near-term dynamics of regional/market
segments to vary. We continue to invest globally and across our
segments in anticipation of sustained growth over the medium-term,
even if we experience some short-term volatility.
Performance
Revenue grew by 15% to GBP299m (2018: GBP259m) and profit by
21% to GBP66m (2018: GBP55m). At constant currency, organic revenue
growth was 11% and organic profit growth was 13%. Acquisitions
made in the prior year accounted for 3% of revenue growth and
7% of profit growth. Currency had a small positive effect of
1% on both revenue and profit.
Return on Sales improved to 22.2% (2018: 21.2%) as we generated
operating leverage from strong revenue growth and gross margins,
while continuing a focused investment strategy. Return on Capital
Employed was strong.
First half performance was very strong, with growth of 23% in
revenue and 33% in profit. This included a contribution from
Mini-Cam, acquired in late 2017, and delivery of some larger
Photonics projects. There was a more typical performance in the
second half, with good growth of 9% in revenue and 10% in profit.
There was revenue and profit growth in all three subsectors,
with the Environmental subsector contributing strongly due to
a combination of very good organic growth and the Mini-Cam acquisition.
We saw significant progress in the USA, which benefited from
the larger Photonics projects, and also the UK. There was good
growth in Mainland Europe and more moderate growth elsewhere,
which was expected given a particularly strong prior year in
Asia Pacific. We have continued to invest in the quality and
diversity of our teams to allow us to better address the evolving
needs of our markets and customers.
We further increased R&D spending which remains well above the
Group average as a percentage of sales. This is spread across
our core business, as well as developing new Convergence and
Edge opportunities. This included the development and commercialisation
of more digital sensors and solutions in our Water and Environmental
subsectors, which will continue to generate growth in the future.
There was also investment in some internal startups focusing
on digital applications with good growth potential.
Outlook
We will continue to increase investment to drive collaboration,
technology development, and development of digital and data management
capabilities that have begun to demonstrate commercial success
through some new business models.
Our acquisition pipeline is growing as we have improved engagement
with businesses complementary, or adjacent, to our existing portfolio.
We expect to continue to deliver revenue and profit growth, while
maintaining our existing high level of returns, as our solutions
are increasingly focused on the long-term growth drivers in our
markets.
Medical Sector Review
Medical's technologies enhance the quality of life for patients
and improve the quality of care delivered by healthcare providers.
Sector progress summary
The sector achieved record results, with strong growth. Revenue
increased 8% and profit 15% (10% and 13% respectively on an organic
constant currency basis), and there was growth in all major geographies
and all subsectors. Return on Sales increased, even though there
was increased investment in talent and new capabilities, with
further underlying growth in R&D spend.
Strategy
The Medical sector is focused on growing a healthier future by
enhancing the quality of life for patients and improving the
quality of care delivered by providers.
We serve niche applications in global markets. We aim to continue
growing by investing in our existing portfolio and acquiring
additional companies.
Key strategic initiatives to support this growth include:
* increasing collaboration to drive geographic
expansion and product and service innovation, with an
increasing focus on data and digital solutions.
* increasing R&D investment to adapt to quickly
changing market needs and population trends.
* acquiring businesses in both existing and adjacent
market niches.
* recruiting and retaining high-calibre, diversified
talent.
Market trends and growth drivers
The sector's long-term growth is supported by increasing demand
due to worldwide population growth and ageing, increasing life
expectancy, and the greater prevalence of chronic illnesses such
as diabetes, obesity, hypertension and cancer. The development
and availability of new medical diagnostic and surgical technologies
are important market trends, as is the increasing access to healthcare
in developing economies.
The world's population is expected to increase by almost one
billion in the next 30 years, and the number of people aged over
60 is expected to double, increasing the prevalence of significant
health risk factors.
An ageing population is a key driver for our ophthalmology and
hypertension management businesses. Cataract surgery is one of
the most frequent operations carried out worldwide, with more
than 25 million operations annually, creating ongoing demand
for our surgical instruments. In China, about 325 million adults
have high blood pressure, with only one-third treating it.
The market for our critical fluidic components is projected to
grow 6% annually, in part being led by more directed and personalised
diagnostic methods combined with increased testing efficiency.
North America and Europe continue to be our largest markets,
with Asia exhibiting the fastest growth rate.
Healthcare facilities are seeking to improve patient outcomes,
reduce costs and ensure the safety of patients and staff. This
is driving the global market for our real-time location Sensor
Technology business.
The growth of the global medical device market is resulting in
further regulatory tightening, especially in China and Europe.
Our regulatory experience and our niche focus allow us to adjust
to these trends and direct resources towards areas that provide
the best opportunity for sustained growth.
Performance
Revenue grew by 8% to GBP306m (2018: GBP284m). Organic constant
currency revenue growth was 10%. Profit grew to GBP77m (2018:
GBP67m), an increase of 14.8%. This included a 13% organic constant
currency increase. Following a very strong first half with revenue
growth of 10% and profit growth of 22%, as expected we delivered
a more typical rate of growth in the second half, with revenue
up 6% and profit ahead 10%.
Return on Sales improved from 23.6% to 25.1%, due to an improvement
in gross margin and good control of overheads. We continued to
increase our investment in new product development, and in digital
growth engine projects aimed at adding data and services capabilities.
R&D spend declined by 2.6% to GBP11.5m (2018: GBP11.8m) but grew
by 1.7% excluding Accudynamics. Return on Capital Employed remained
strong, and above Group targets.
We saw revenue growth in all subsectors, with Diagnostics performing
very well, benefiting from new OEM customer product launches.
The Ophthalmology and Sensor Technology subsectors also delivered
strong growth; the former through continued international expansion
and growth in core products and the latter from greater penetration
into its core market of real-time location services, particularly
in acute care facilities.
There were revenue increases in all major regions, with strong
growth in the USA, our largest geographic market. We also saw
good growth in the UK, Mainland Europe and Asia Pacific.
We made two small asset acquisitions for CenTrak, adding new
technology and improved distribution capabilities in the USA
and Mainland Europe. We sold Accudynamics, one of our Diagnostics
businesses.
We have continued to improve the calibre and diversity of our
leadership talent at both our operating company and sector management
levels, to support delivery in our core markets as well as adding
new capability for growth in adjacent niches.
Outlook
Strong demographic trends, and continued advances in diagnostic
and surgical techniques are driving demand for our products and
services. Through increased penetration into developing markets,
continued new product and service development and investment
in our talent, we expect to continue to outperform the market.
The pressure to reduce healthcare costs coupled with changing
payor systems and outcome measures provide ongoing challenges.
Our acquisition pipeline is improving as we continue to assess
targets adjacent to, and within, our existing niches. The combination
of acquisitions and continued organic revenue and profit growth
momentum positions us well for continued progress.
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
2019.
1. Cyber
Risk Owner: Inken Braunschmidt
Gross risk level: High
Change: Increased
Risk appetite: Averse
Growth enablers
* Digital Growth Engines
* Finance & Risk
* International Expansion
* Talent and Culture
Risk and impact
* Loss of digital intellectual property/data or ability
to operate systems due to internal failure or
external attack. There is resulting loss of
information or ability to continue operations, and
therefore financial and reputational damage. The
increase in this risk reflects the growing threat
from cyber crime around the world.
How do we manage the risk?
* Clear ownership of cyber risk, with Board level
expertise. IT function reports into Chief Innovation
& Digital Officer.
* Development of digital framework, including digital
growth and cyber risks.
* Minimum required IT controls defined. All companies
certify compliance every six months. Any gaps are
tracked until addressed.
* Monthly cyber KRI/KPI reporting in place across the
Group.
* Regular online IT awareness training for all
employees using computers.
* Disaster recovery and back-up plans in place,
required to be tested regularly.
* Regular reviews by Group IT and Internal Audit.
2. Organic Growth
Risk Owner: Andrew Williams
Gross risk level: High
Change: No change
Risk appetite: Open
Growth enablers
* International Expansion
* Talent & Culture
* Digital Growth Engines
* Innovation Network
* Strategic Communications
* Finance & Risk
Risk and impact
* Failing to deliver desired organic growth, resulting
in missed expected strategic growth targets and
erosion of shareholder value.
How do we manage the risk?
* Clear Group strategy to achieve organic growth
targets, supported by detailed company strategies and
seven Halma growth enablers with Executive Board
owners.
* Sector management ensure that the Group strategy is
fulfilled through ongoing review and chairing of
companies.
* Continued investment in R&D and innovation with KPIs
monitored at Board level.
* Regional hubs, for example in China and India,
support local growth strategic initiatives for all
companies.
* Agile business model and culture of innovation to
take advantage of new growth opportunities as they
arise.
* Regular monitoring of financial performance at all
levels, including by the Board.
* Remuneration of company executives and above is based
on profit growth.
3. Making and Integrating Acquisitions
Risk Owner: Andrew Williams
Gross risk level: High
Change: Increased
Risk appetite: Open
Growth enablers
* Talent & Culture
* Mergers & Acquisitions
* Finance & Risk
* International Expansion
* Strategic Communications
Risk and impact
* Missing our strategic growth target for acquisitions
due to insufficient acquisitions being identified or
poor due diligence or poor integration, resulting in
erosion of shareholder value. The increase in this
risk reflects the current competitive market and also
the need to acquire more to achieve our target as
Halma continues to grow.
How do we manage the risk?
* Acquisition of companies in existing or adjacent
markets that are well known.
* Dedicated M&A Directors with Group Chief Executive,
Chief Financial Officer and plc Board scrutiny and
approval of all acquisitions.
* Regular reporting of the acquisition pipeline to the
Executive and plc Board.
* Careful due diligence by experienced staff who bring
in specialist expertise as required.
* Valuation model used for all acquisitions to ensure
price paid is appropriate.
* Integration checklist covering control and compliance
areas used to ensure consistent high quality and
efficient integration into Halma.
* Clarity of strategy and agile business model to take
advantage of new growth opportunities as they arise.
4. Talent and Diversity
Risk Owner: Jennifer Ward
Gross risk level: Medium
Change: No change
Risk appetite: Open
Growth enablers
* Talent & Culture
* Digital Growth Engines
* Innovation Network
* Strategic Communications
* International Expansion
Risk and impact
* Not having the right talent and diversity at all
levels of the organisation to deliver our strategy,
resulting in reduced financial performance.
How do we manage the risk?
* Comprehensive recruitment processes to recruit the
best and brightest talent.
* Development of talent and diversity across companies,
including through development programmes, to create
competitive advantage and motivated leaders to
deliver the strategy.
* Succession planning process to identify and develop
future leaders.
* Future leaders programme to develop graduates.
* Ongoing focus to increase employee diversity at all
levels worldwide. Diversity metrics are monitored by
the Boards.
* Senior management reward structure is aligned with
the strategic priorities of the companies, sectors
and Group.
5. Innovation
Risk Owner: Inken Braunschmidt
Gross risk level: High
Change: Increased
Risk appetite: Seeking
Growth enablers
* Talent & Culture
* Digital Growth Engines
* Innovation Network
* Strategic Communications
* Mergers & Acquisitions
Risk and impact
* Failing to innovate to create new high-quality
products to meet customer needs or failure to
adequately protect intellectual property, resulting
in a loss of market share and poor financial
performance. The increasing speed of innovation and
potential for disruption has increased this risk.
How do we manage the risk?
* Product development is devolved to the companies who
are closest to the customer, with support and
guidance provided by sector management.
* Chief Innovation & Digital Officer promotes and
accelerates innovation by companies, with support
from sector management.
* Digital strategy in place relating to innovation,
with a consistent language for growth and innovation.
(Implementation is via four growth engines: 1. Growth
sprints, 2. Convergence Accelerator, 3. Digital Edge
Hub, 4. Innovation Hot Spots).
* Active collaboration of ideas and best practices
between companies.
* Head Office approval of all large R&D projects to
ensure alignment with strategy.
* Halma Innovation Awards reward and encourage
innovation.
* Companies are encouraged to develop and protect
intellectual property.
6. Competition
Risk Owner: Andrew Williams
Gross risk level: Medium
Change: Increased
Risk appetite: Open
Growth enablers
* International Expansion
* Talent & Culture
* Digital Growth Engines
* Innovation Network
* Mergers & Acquisitions
Risk and impact
* Failing to adapt to market and technological changes,
either through organic or M&A activity, resulting in
reduced financial performance. Just as our innovation
risk has increased, the threat of disruption from
competitors has increased.
How do we manage the risk?
* Focus on niche markets with high barriers to entry
and seek to achieve strong market positions.
* Halma's decentralised business model enables
operational resources to be closer to customers, and
companies are empowered to monitor, anticipate and
respond to changing market needs.
* Regular company and sector board meetings which
review markets, competition and product innovation.
* Ongoing discussions with customers and monitoring of
market and technological changes to identify new
opportunities.
* Halma Chief Innovation & Digital Officer provides
leadership and oversight for digital innovation and
arranges Innovation Hotspot visits for Halma leaders
to see disruption examples in action.
7. Economic and Geopolitical Uncertainty
Risk Owner: Andrew Williams
Gross risk level: High
Change: Increased
Risk appetite: Cautious
Growth enablers
* International Expansion
* Finance & Risk
* Talent & Culture
Risk and impact
* Risk of decline in financial performance due to
recession or geopolitical changes and its potential
impact on the carrying value of goodwill. The
increase in risk reflects increased political
uncertainty, including Brexit and USA/China trade
relations.
How do we manage the risk?
* Diverse portfolio of companies across the four
sectors, in multiple countries and in relatively
non-cyclical specialised global niche markets helps
to minimise the impact of any single event operating
in one market.
* Regular monitoring and assessment of potential risks
and opportunities relating to geopolitical or
economic uncertainties. A Brexit Committee is in
place to monitor developments and support companies.
* Identification of any wider trends by the Halma
Executive Board that require action.
* Local companies have the autonomy to rapidly adjust
to changing circumstances.
* Annual assessment of the carrying value of goodwill.
8. Natural Disasters
Risk Owner: Andrew Williams
Gross risk level: Medium
Change: No change
Risk appetite: Cautious
Growth enablers
* Finance & Risk
* Talent & Culture
* Mergers & Acquisitions
* International Expansion
Risk and impact
* Being unable to respond to large scale events or
natural catastrophes such as hurricanes, floods or
fire, resulting in inability of one or more parts of
our business to operate, therefore causing financial
loss and reputational damage.
How do we manage the risk?
* All parts of the Group are required to have business
continuity plans in place which are tailored to
manage the specific risks they are most likely to
face and these are required to be tested
periodically.
* The geographic diversity of companies limits the
impact of any single event and Halma has
manufacturing capability in multiple locations which
provides flexibility.
* Business interruption insurance is in place to limit
any financial loss that may occur.
9. Communications
Risk Owner: Jennifer Ward
Gross risk level: High
Change: No change
Risk appetite: Open
Growth enablers
* Strategic Communications
* Talent & Culture
* Innovation Network
Risk and impact
* Missed opportunities for growth and attainment of our
strategy should we not clearly articulate our value
propositions to potential partners, customers,
employees or acquisition targets.
How do we manage the risk?
* Halma plc Board members for Communications and
Investor Relations.
* Clear brand and communications strategy to enable
clear understanding and alignment with Group
strategy.
* Proactive brand and communications approach to reach
existing and potential audiences to attract and
engage them to drive new growth opportunities.
* Development of pitch books, purpose and strategy
impact stories, product - solution case studies, and
investment collateral that are delivered to the
appropriate targets via direct, indirect, social
media and investor channels.
* Monitoring of external, social and investor media to
gauge sentiment, brand health and protect reputation.
* Periodic employee engagement survey to gain feedback
on the effectiveness of internal communication.
* Communication platform to enable rapid collaboration
and information sharing.
10. Non-compliance with Laws and Regulations
Risk Owner: Marc Ronchetti
Gross risk level: High
Change: No change
Risk appetite: Averse
Growth enablers
* Finance & Risk
* Talent & Culture
* International Expansion
* Strategic Communications
Risk and impact
* Failing to comply with laws and regulations resulting
in damage to reputation and/or fines/penalties.
How do we manage the risk?
* High-quality management resources who implement
controls to monitor and comply with legal
requirements in all countries we operate.
* Companies ensure high product quality and compliance
with legal standards.
* High ethical standards which are captured in Halma's
Code of Conduct. All employees are required to read
and sign up to it.
* Employees across the group perform regular online
compliance training.
* A whistleblowing hotline is in place and available
for use by all employees.
* All parts of the group complete six-monthly control
self-certifications which include legal compliance.
* Completion of a coordinated project to achieve
compliance with GDPR.
11. Financial Controls
Risk Owner: Marc Ronchetti
Gross risk level: Medium
Change: Decreased
Risk appetite: Averse
Growth enablers
* Finance & Risk
* Talent & Culture
* International Expansion
Risk and impact
* Failure in financial controls either on its own or
via a fraud which takes advantage of a weakness,
resulting in financial loss and/or misstated reported
financial results. This risk has reduced following an
update of the minimum expected controls for companies
and a coordinated focus to address the most common
financial control gaps identified.
How do we manage the risk?
* Local directors have legal, as well as operational,
responsibility as they are statutory directors of
their companies. This fits with Halma's decentralised
model to ensure an effective financial control
environment is in place.
* To mirror the decentralised model, Halma Group
Finance prescribes the minimum expected financial
controls to be in place and requires companies to
certify every six months that these controls are
operating effectively. These include segregation of
duties, delegation of authorities and financial
accounts preparation checks.
* Six-monthly peer reviews of reported results for each
company to provide independent challenge. Internal
Audit also performs periodic risk-based reviews.
* A whistleblowing hotline is in place and available
for use by all employees.
12. Treasury Management
Risk Owner: Marc Ronchetti
Gross risk level: Medium
Change: Increased
Risk appetite: Averse
Growth enablers
* Finance & Risk
* International Expansion
Risk and impact
* There is a risk that the Group's cash resources are
inadequate to support its activities. There is an
inadvertent breach of funding terms/covenants or that
there is volatility on the Group's Sterling reported
result due to unhedged exposure to foreign currency
movements. Geopolitical uncertainty has increased the
risk of foreign exchange fluctuations.
How do we manage the risk?
* A long-term Revolving Credit Facility is in place.
* Sources of funding, headroom and liquidity forecasts
are regularly assessed and monitored.
* Funding terms are built into company policies and
requirements, including export controls to sanctioned
countries.
* A Group Treasury Policy includes hedging and there is
regular monitoring of foreign currency exposure at
local company and Group level.
13. Product Failure
Risk Owner: Andrew Williams
Gross risk level: Medium
Change: No change
Risk appetite: Averse
Growth enablers
* Finance & Risk
* Innovation Network
* Talent & Culture
* Strategic Communications
Risk and impact
* A failure in one of our products results in serious
injury, death or damage to property, including due to
non-compliance with product regulations, resulting in
financial loss and reputational damage.
How do we manage the risk?
* Companies have strict product development and testing
procedures in place to ensure quality of products and
compliance with appropriate regulations.
* Rigorous testing of products during development and
also during the manufacturing process.
* Terms and conditions of sale limit liability as much
as practically possible and liability insurance is in
place.
* Product compliance with regulations is checked as
part of due diligence for any acquisition.
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
in the Strategic Report. In addition, the financial statements
in the Annual Report and Accounts 2019 includes the Group's objectives,
policies and processes for managing its capital, its financial
risk management objectives, details of its financial instruments
and hedging activities, and its exposure to currency and liquidity
risks. The Directors believe the Group is well placed to manage
its business risks successfully. The Group's forecasts and projections,
taking account of reasonably possible changes in trading performance,
show that the Group should be able to operate within the level
of its current committed facilities, which includes a GBP550m
Revolving Credit Facility running until November 2023 of which
GBP476m remains undrawn at the date of this report.
The Group contracts with a diverse range of customers and suppliers
across different geographic areas and industries and no one customer
accounts for more than 3% of Group turnover. With the factors
above in mind, the Directors have a reasonable expectation that
the Company and Group have adequate resources to continue in
operational existence for the foreseeable future and continue
to adopt the going concern basis in preparing the annual financial
statements.
Viability Statement
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 principal risks and uncertainties, including
an analysis of the potential impact and mitigating actions, are
set out in the Strategic Report of the Annual Report and Accounts
2019.
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. In drawing its conclusion, the
Board has aligned the period of viability assessment with the
Group's strategic planning process (a three-year period). The
Board believes that this approach provides greater certainty
over forecasting and, therefore, increases reliability in the
modelling and stress testing of the Company's viability. In addition,
a three-year horizon is typically the period over which we review
our external bank facilities and is also the performance period
over which awards granted under Halma's share-based incentive
plan are measured.
In reviewing the Company's viability, the Board has identified
the following factors which they believe support their assessment:
1. The Group operates in diverse and relatively non-cyclical
markets.
2. There is considerable financial capacity under current facilities
and the ability to raise further funds if required.
3. The decentralised nature of our Group ensures that risk is
spread across our businesses and sectors, with limited exposure
to any particular industry, market, geography, customer or supplier.
4. There is a strong culture of local responsibility and accountability
within a robust governance and control framework.
5. An ethical approach to business is set from the top and flows
throughout our business.
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. Scenarios modelled
included increases and decreases in the level of acquisitions,
major events such as litigation or product failure and a significant
increase in pension deficit payments. Combinations of the above
scenarios were also modelled. In each scenario, the effect on
the Group's KPls 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 2022.
Relations with Shareholders and Other Stakeholders
The Board oversees the Company's dialogue with shareholders.
The Group Chief Executive and Chief Financial Officer have regular
contact with investors and analysts. Reports prepared by the
Head of Investor Relations are reviewed by the Board regarding
the Company's dialogue with investors and analysts on financial,
operational, environmental, social and governance matters. The
Chairman is available to meet with shareholders throughout the
year and the Senior Independent Director provides an alternative
channel for shareholders to raise concerns, independent of the
executive management and the Chairman. The Board attends the
AGM which gives individual shareholders the opportunity to engage
directly with the Directors and raise questions about the Company
both formally and informally. The Board's engagement with other
stakeholders is set out in the Annual Report and Accounts 2019.
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 year
to 31 March 2019. Certain parts thereof are not included within
these Results.
Each of the Directors, whose names and functions are listed in
the Annual Report and Accounts 2019, confirm that, to the best
of their knowledge:
- The Company financial statements, which have been prepared
in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS
101 "Reduced Disclosure Framework" and applicable law), give
a true and fair view of the assets, liabilities, financial
position and profit of the Company.
- The Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the European Union, give
a true and fair view of the assets, liabilities, financial
position and profit of the Group.
- The Directors' Report includes a fair review of the development
and performance of the business and the position of the Group
and Company, together with a description of the principal risks
and uncertainties that it faces.
This responsibility statement was approved by the Board of Directors
on 11 June 2019 and is signed on its behalf by:
Andrew Williams Marc Ronchetti
Group Chief Executive Chief Financial Officer
Results for the year to 31 March 2019
Consolidated Income Statement
Year ended 31 March Year ended 31 March
2019 2018
------------------------------------ ------------------------------------
Adjustments* Adjustments*
Before (note Before (note
adjustments* 1) Total adjustments* 1) Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ----- ------------- ------------ ------- ------------- ------------ -------
Continuing operations
Revenue 1 1,210.9 - 1,210.9 1,076.2 - 1,076.2
--------------------------- ----- ------------- ------------ ------- ------------- ------------ -------
Operating profit 255.8 (38.0) 217.8 223.6 (42.4) 181.2
Share of results of
associate (0.1) - (0.1) (0.2) - (0.2)
(Loss)/profit on disposal
of operations 10 - (1.0) (1.0) - 0.6 0.6
Finance income 4 0.5 - 0.5 0.3 - 0.3
Finance expense 5 (10.5) - (10.5) (10.0) - (10.0)
--------------------------- ----- ------------- ------------ ------- ------------- ------------ -------
Profit before taxation 245.7 (39.0) 206.7 213.7 (41.8) 171.9
Taxation 6 (45.7) 8.8 (36.9) (42.1) 24.4 (17.7)
--------------------------- ----- ------------- ------------ ------- ------------- ------------ -------
Profit for the year
attributable to equity
shareholders 1 200.0 (30.2) 169.8 171.6 (17.4) 154.2
--------------------------- ----- ------------- ------------ ------- ------------- ------------ -------
Earnings per share 2
From continuing operations
Basic and diluted 52.74p 44.78p 45.26p 40.69p
Dividends in respect
of the year 7
Paid and proposed (GBPm) 59.6 55.7
Paid and proposed per
share 15.71p 14.68p
--------------------------- ----- ------------- ------------ ------- ------------- ------------ -------
* Adjustments include the amortisation of acquired intangible assets; acquisition items; significant restructuring costs; profit or loss on disposal of operations; the effect of equalisation of pension benefits for men and women in the defined benefit plans; and the associated taxation thereon. Note 3 provides more information on alternative performance measures.
Consolidated Statement of Comprehensive Income and Expenditure
Year ended Year ended
31 March 31 March
2019 2018
Notes GBPm GBPm
----------------------------------------------------- ----- ---------- ----------
Profit for the year 169.8 154.2
----------------------------------------------------- ----- ---------- ----------
Items that will not be reclassified subsequently
to the Consolidated Income Statement:
Actuarial gains on defined benefit pension plans 6.5 11.8
Tax relating to components of other comprehensive
income that will not be reclassified 6 (1.6) (2.4)
Items that may be reclassified subsequently to
the Consolidated Income Statement:
Effective portion of changes in fair value of
cash flow hedges - (0.1)
Exchange gains / (losses) on translation of foreign
operations and net investment hedge 32.5 (62.9)
Exchange gains on translation of foreign operations
recycled on disposal (0.3) -
Other comprehensive income/(expense) for the year 37.1 (53.6)
----------------------------------------------------- ----- ---------- ----------
Total comprehensive income for the year attributable
to equity shareholders 206.9 100.6
----------------------------------------------------- ----- ---------- ----------
The exchange gain of GBP32.5m (2018: loss of GBP62.9m) includes losses of GBP7.9m (2018: gains of GBP13.3m) which relate to net investment hedges.
Consolidated Balance Sheet
31 March 31 March
2019 2018
GBPm GBPm
--------------------------------- -------- --------
Non-current assets
Goodwill 694.0 632.1
Other intangible assets 245.2 234.6
Property, plant and equipment 112.4 103.7
Interest in associate 3.9 4.0
Deferred tax asset 42.1 37.0
---------------------------------- -------- --------
1,097.6 1,011.4
--------------------------------- -------- --------
Current assets
Inventories 144.3 128.0
Trade and other receivables 259.6 235.2
Tax receivable 0.2 0.8
Cash and bank balances 81.2 70.7
Derivative financial instruments 0.9 0.7
---------------------------------- -------- --------
486.2 435.4
--------------------------------- -------- --------
Total assets 1,583.8 1,446.8
---------------------------------- -------- --------
Current liabilities
Trade and other payables 164.8 149.6
Borrowings 9.2 1.1
Provisions 25.4 8.8
Tax liabilities 13.4 12.2
Derivative financial instruments 0.3 0.2
---------------------------------- -------- --------
213.1 171.9
--------------------------------- -------- --------
Net current assets 273.1 263.5
---------------------------------- -------- --------
Non-current liabilities
Borrowings 253.7 289.9
Retirement benefit obligations 39.2 53.9
Trade and other payables 11.6 12.6
Provisions 10.9 23.1
Deferred tax liabilities 73.9 67.0
---------------------------------- -------- --------
389.3 446.5
--------------------------------- -------- --------
Total liabilities 602.4 618.4
---------------------------------- -------- --------
Net assets 981.4 828.4
================================== ======== ========
Equity
Share capital 38.0 38.0
Share premium account 23.6 23.6
Own shares (4.7) (6.3)
Capital redemption reserve 0.2 0.2
Hedging reserve 0.3 0.3
Translation reserve 119.5 87.3
Other reserves (5.6) (5.9)
Retained earnings 810.1 691.2
---------------------------------- -------- --------
Total equity 981.4 828.4
---------------------------------- -------- --------
Consolidated Statement of Changes in Equity
Share Capital
Share premium Own redemption Hedging Translation Other Retained
capital account shares reserve reserve reserve reserves earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------------- -------- ---------- ------------- -------- ----------- -------- --------- ------
At 31 March
2018 38.0 23.6 (6.3) 0.2 0.3 87.3 (5.9) 691.2 828.4
Impact of
changes
in
Accounting
policies:
IFRS 9 - - - - - - - 0.1 0.1
IFRS 15 - - - - - - - (0.2) (0.2)
-------------- ------------- -------- ---------- ------------- -------- ----------- -------- --------- ------
Restated
balance
at
31 March 2018 38.0 23.6 (6.3) 0.2 0.3 87.3 (5.9) 691.1 828.3
Profit for the
year - - - - - - - 169.8 169.8 Other comprehensive income and expense: Exchange differences on translation of foreign operations - - - - - 32.5 - - 32.5 Exchange gains on translation of foreign operations recycled on disposal - - - - - (0.3) - - (0.3) Actuarial gains on defined benefit pension plans - - - - - - - 6.5 6.5 Effective portion of changes in fair value of cash flow hedges - - - - - - - - - Tax relating to components of other comprehensive income - - - - - - - (1.6) (1.6) -------------- ------------- -------- ---------- ------------- -------- ----------- -------- --------- ------ Total other comprehensive income and expense - - - - - 32.2 - 4.9 37.1 Dividends paid - - - - - - - (57.2) (57.2) Share-based payment charge - - - - - - 9.7 - 9.7 Deferred tax on share-based payment transactions - - - - - - 0.9 - 0.9 Excess tax deductions related to share-based payments on exercised awards - - - - - - - 1.5 1.5 Purchase of Own shares - - (3.8) - - - - - (3.8) Performance share plan awards vested - - 5.4 - - - (10.3) - (4.9) -------------- ------------- -------- ---------- ------------- -------- ----------- -------- --------- ------ At 31 March 2019 38.0 23.6 (4.7) 0.2 0.3 119.5 (5.6) 810.1 981.4 -------------- ------------- -------- ---------- ------------- -------- ----------- -------- --------- ------
Own shares are ordinary shares in Halma plc purchased by the Company and held to fulfil the Company's obligations under the Group's share plans. At 31 March 2019 the number of treasury shares held was nil (2018: 3,990) and the number of shares held by the Employee Benefit Trust was 370,354 (2018: 631,991). The market value of Own shares was GBP6.2m (2018: GBP7.5m).
The Translation reserve is used to record the difference arising from the retranslation of the financial statements of foreign operations. The Hedging reserve is used to record the portion of the cumulative net change in fair value of cash flow hedging instruments that are deemed to be an effective hedge.
The Capital redemption reserve was created on repurchase and cancellation of the Company's own shares. The Other reserves represent the provision for the value of the Group's equity-settled share plans.
Share Capital
Share premium Own redemption Hedging Translation Other Retained
capital account shares reserve reserve reserve reserves earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- -------- -------- ------- ----------- -------- ----------- --------- --------- ------
At 2 April 2017 38.0 23.6 (7.3) 0.2 0.4 150.2 (6.4) 579.9 778.6
Profit for the year - - - - - - - 154.2 154.2
Other comprehensive
income and expense:
Exchange differences
on translation of
foreign operations - - - - - (62.9) - - (62.9)
Actuarial gains
on defined benefit
pension plans - - - - - - - 11.8 11.8
Effective portion
of changes in fair
value of cash flow
hedges - - - - (0.1) - - - (0.1)
Tax relating to
components of other
comprehensive income - - - - - - - (2.4) (2.4)
----------------------- -------- -------- ------- ----------- -------- ----------- --------- --------- ------
Total other
comprehensive
income and expense - - - - (0.1) (62.9) - 9.4 (53.6)
Dividends paid - - - - - - - (53.4) (53.4)
Share-based payment
charge - - - - - - 7.9 - 7.9
Deferred tax on
share-based payment
transactions - - - - - - (0.5) - (0.5)
Excess tax deductions
related to share-based
payments on exercised
awards - - - - - - - 1.1 1.1
Purchase of Own
shares - - (2.6) - - - - - (2.6)
Performance share
plan awards vested - - 3.6 - - - (6.9) - (3.3)
----------------------- -------- -------- ------- ----------- -------- ----------- --------- --------- ------
At 31 March 2018 38.0 23.6 (6.3) 0.2 0.3 87.3 (5.9) 691.2 828.4
----------------------- -------- -------- ------- ----------- -------- ----------- --------- --------- ------
Consolidated Cash Flow Statement
Year ended Year ended
31 March 31 March
2019 2018
Notes GBPm GBPm
---------------------------------------------------- ----- ---------- ----------
Net cash inflow from operating activities 9 219.0 173.3
---------------------------------------------------- ----- ---------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment (26.4) (20.2)
Purchase of computer software (2.4) (1.9)
Purchase of other intangibles (2.5) (0.1)
Proceeds from sale of property, plant and equipment
and capitalised development costs 1.6 1.7
Development costs capitalised (10.8) (9.4)
Interest received 0.4 0.2
Acquisition of businesses, net of cash acquired 8 (67.0) (111.7)
Disposal of business 10 3.1 -
---------------------------------------------------- ----- ---------- ----------
Net cash used in investing activities (104.0) (141.4)
---------------------------------------------------- ----- ---------- ----------
Cash flows from financing activities
Dividends paid (57.2) (53.4)
Purchase of Own shares (3.8) (2.6)
Interest paid (8.2) (7.2)
Loan arrangement fee paid (0.5) (0.4)
Proceeds from bank borrowings 9 66.4 119.2
Repayment of bank borrowings 9 (110.3) (81.4)
---------------------------------------------------- ----- ---------- ----------
Net cash used in financing activities (113.6) (25.8)
---------------------------------------------------- ----- ---------- ----------
Increase in cash and cash equivalents 9 1.4 6.1
Cash and cash equivalents brought forward 69.7 65.6
Exchange adjustments 1.0 (2.0)
---------------------------------------------------- ----- ---------- ----------
Cash and cash equivalents carried forward 72.1 69.7
---------------------------------------------------- ----- ---------- ----------
Year ended Year ended
31 March 31 March
2019 2018
Notes GBPm GBPm
---------------------------------------------------- ----- ---------- ----------
Reconciliation of net cash flow to movement in
net debt
Increase in cash and cash equivalents 1.4 6.1
Net cash outflow/(inflow) from repayment/(drawdown)
of bank borrowings 9 43.9 (37.8)
Net debt acquired 9 - (3.1)
Loan notes repaid in respect of acquisitions 9 0.1 0.2
Exchange adjustments (6.8) 10.7
---------------------------------------------------- ----- ---------- ----------
38.6 (23.9)
Net debt brought forward (220.3) (196.4)
---------------------------------------------------- ----- ---------- ----------
Net debt carried forward (181.7) (220.3)
---------------------------------------------------- ----- ---------- ----------
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 2006 that are applicable to companies reporting under IFRS. The financial statements have also been prepared in accordance with IFRS and IFRS Interpretations Committee (IFRS IC) interpretations issued and effective at the time of preparing these accounts.
The principal Group accounting policies are explained below and have been applied consistently throughout the years ended 31 March 2019 and 31 March 2018, other than those noted below.
The financial information set out in these Results does not constitute the Group's statutory accounts for the years ended 31 March 2019 and 31 March 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's Annual General Meeting. The auditor's reports on the 2018 and the 2019 accounts were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
The Group accounts have been prepared under the historical cost convention, except as described below under the heading 'Derivative financial instruments and hedge accounting' and under the heading 'Business combinations and goodwill'.
New Standards and Interpretations applied for the first time in the year ended 31 March 2019
The following Standards and Interpretations applied for the first time, with effect from 1 April 2018, and have been adopted in the preparation of these Group Accounts.
- IFRS 9 'Financial Instruments: Classification and Measurement'. - IFRS 15 'Revenue from Contracts with Customers'. - Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions. - Annual Improvements 2014-2016 Cycle. - IFRIC Interpretation 22: Foreign Currency Transactions and Advance Consideration.
Of the above mentioned new Standards and Interpretations, only the adoption of IFRS 9 and IFRS 15 have affected the Group's results, although not materially. Further information on the impact of the adoption of IFRS 9 and IFRS 15 is given below.
IFRS 9 'Financial Instruments'
For the Group, transition to IFRS 9 was effective from 1 April 2018. IFRS 9 provides a new expected losses impairment model for financial assets, including trade receivables, and includes amendments to classification and measurement of financial instruments. An accounting policy choice is available with regards to applying the new hedge accounting requirements or retaining IAS 39. The Group has elected to retain IAS 39.
The Group completed a transition exercise which was described in the Annual Report and Accounts 2018.
The Group's use of financial instruments is limited to short-term trading balances such as receivables and payables, borrowings and derivatives used for hedging foreign exchange risks. Therefore, the standard impacts the Group's classification of financial instruments and the measurement of impairment of short-term financial assets.
The Group has applied the new standard in accordance with the transition rules. As the impact on the Group's results is not material, totalling GBP0.1m, the Group has elected to apply the limited exemption in IFRS 9 paragraph 7.2.15, relating to transition for classification, measurement and impairment. As a result, the comparatives for the year ended 31 March 2018 have not been restated. The impact of transition has been reflected in the restatement of opening retained earnings as at 1 April 2018, as shown in the Consolidated Statement of Changes in Equity.
(i) Classification
From 1 April 2018, the Group classifies its financial assets in the following measurement categories:
- those that are measured subsequently at fair value (either through other comprehensive income of through profit or loss); and
- those that are measured at amortised cost.
The classification depends on the entity's business model for managing the financial assets and the contractual terms of the cash flows.
Original carrying New carrying
amount amount
under IAS under IFRS
Original classification New classification 39 9
under IAS 39 under IFRS 9 GBPm GBPm
============================ ======================== ===================== ================= ============
Financial assets
Cash and bank balances Loans & receivables Amortised cost 70.7 70.7
Trade and other receivables Loans & receivables Amortised cost 235.2 235.3
Foreign forward exchange Fair value - hedging Fair value - hedging
contracts instrument instrument 0.7 0.7
---------------------------- ------------------------ --------------------- ----------------- ------------
Total financial assets 306.6 306.7
============================================================================= ================= ============
Financial liabilities
Other financial Other financial
Trade and other payables liabilities liabilities 162.2 162.2
Contingent purchase Fair value through Fair value through
consideration profit or loss profit or loss 25.0 25.0
Other financial Other financial
Other provisions liabilities liabilities 6.9 6.9
Other financial Other financial
Bank overdrafts liabilities liabilities 1.0 1.0
Other financial Other financial
Banks loans liabilities liabilities 289.9 289.9
Other financial Other financial
Loan notes liabilities liabilities 0.1 0.1
Foreign forward exchange Fair value - hedging Fair value - hedging
contracts instrument instrument 0.2 0.2
---------------------------- ------------------------ --------------------- ----------------- ------------
Total financial liabilities 485.3 485.3
============================================================================= ================= ============
In respect of financial hedges, on initial application of IFRS 9, an entity may choose, as its accounting policy, to continue to apply the hedge accounting requirements of IAS 39 instead of the hedge accounting requirements of IFRS 9. The Group has elected to apply the IAS 39 hedge accounting requirements, and therefore hedging instruments are not considered under IFRS 9.
(ii) Impairment
From 1 April 2018, the Group assesses on a forward-looking basis the expected credit losses associated with its trade and other receivables carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk.
The Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. In order to estimate expected lifetime losses, the Group categorises its customers into groups with similar risk profiles and determines the historic rates of impairment for each of those categories of customer. The Group then adjusts the risk profile for each group of customers by using forward looking information, such as the government risk of default for the country in which those customers are located, and determines an overall probability of impairment for the total trade and other receivables at the balance sheet date.
IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 sets out the requirements for recognising revenue from contracts with customers. The standard requires entities to apportion revenue earned from contracts to individual promises, or performance obligations, on a stand-alone selling price basis, based on a five-step model.
The Group completed a transition exercise which was described in the Annual Report and Accounts 2018. Based on the work undertaken, most of the Group's companies are unaffected, but have implemented process changes to comply with IFRS 15 now and in the future. A small number of the Group's companies have individually material adjustments to their balance sheets through acceleration or deferral of revenue on the opening balance sheet. In Environmental & Analysis, revenue was deferred in one company relating to warranties that were service in nature and in another company, where revenues related to data hosting services is now recognised over time based on a straight-line method. Revenue was accelerated in one company due to unbundling of distinct performance obligations and the recognition of revenue on one of those performance obligations earlier than under previous IFRS. In Process Safety, revenue was deferred in one company relating to warranties that were service in nature. These are not material to the Group as a whole as at 1 April 2018, resulting in a net credit of GBP0.2m to net assets, with a corresponding debit to retained earnings as analysed below.
1 April
All figures in GBPm 2018
================================================ =======
Retained earnings
Warranties of a service nature (0.3)
Deferral of data hosting revenues (0.3)
Separation of performance obligations 0.5
Corporation tax (0.1)
------------------------------------------------ -------
Total impact at 1 April 2018 (0.2)
================================================ =======
Current assets
Inventory (1.8)
Trade and other receivables 1.7
Current liabilities
Trade and other payables - contract liabilities (0.2)
Corporation tax 0.1
------------------------------------------------ -------
Total impact at 1 April 2018 (0.2)
================================================ =======
As stated in the Annual Report and Accounts 2018, the Group originally intended to apply a fully retrospective approach to transition. However, as the net impact of transition to the opening balance sheet was not material, the adjustment on transition has been reflected in the restatement of opening retained earnings, as at 1 April 2018, as shown in the Consolidated Statement of Changes in Equity. The net movement in the Consolidated Income Statement for the year ended 31 March 2018 was GBP0.1m and also immaterial.
As the modified retrospective approach has been taken on transition, as described above, the comparatives for the year ended 31 March 2018 have not been restated.
Given the impact of implementing the new accounting policy under IFRS 15 is not materially different to the financial performance and position under the IFRS that previously applied, there has been no presentation of the current year financial statements under the previous IFRS. There is also no significant impact on any earnings per share measures disclosed.
The Group's revenue recognition policy under IFRS 15 is set out below.
New Standards and Interpretations not yet applied
At the date of authorisation of these financial statements, the following Standards and Interpretations that are potentially relevant to the Group, and which have not been applied in these financial statements, were in issue but not yet effective (and in some cases had not yet been adopted by the EU):
- IFRS 16 'Leases' - effective for accounting periods beginning on or after 1 January 2019.
- IFRIC Interpretation 23 Uncertainty over income tax treatments - effective for accounting periods beginning on or after 1 January 2019.
- Amendments to IAS 19: Employee Benefits - effective for accounting periods beginning on or after 1 January 2019.
- Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures - effective for accounting periods beginning on or after 1 January 2019.
- Annual improvements 2015 - 2017 Cycle.
The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group except for IFRS 16 'Leases'.
IFRS 16 'Leases'
IFRS 16 is applicable for annual reporting periods commencing 1 January 2019, so for the Group, transition to IFRS 16 has taken effect from 1 April 2019. The half year results for the period ending 30 September 2019 will be IFRS 16 compliant with the first Annual Report published in accordance with IFRS 16 being for the year ending 31 March 2020.
IFRS 16 replaces existing lease guidance including:
- IAS 17 Leases - IFRIC 4 Determining whether an arrangement contains a lease - SIC 15 Operating leases - Incentives - SIC 27 Evaluating the substance of transactions involving the legal form of a lease
IFRS 16 provides a single on-balance sheet accounting model for lessees which recognises a right of use asset, representing its right to use the underlying asset, and lease liability, representing its obligations to make payment in respect of the use of the underlying asset. The distinction between finance and operating leases for lessees is removed. Lessor accounting remains similar to the existing standard with no significant impact expected.
During the year, the Group carried out an exercise to model the impact of adopting IFRS 16 on a representative sample of leases. From this exercise we have elected to adopt the modified retrospective approach (revalued assets) which has been applied upon transition.
The Group will apply the exemptions available in respect of leases which are less than 12 months long and those which have been classified as leases of low-value items. In addition, the Group will also apply the following practical expedients:
- allowing IFRS 16 to be applied to all contracts previously assessed as containing a lease under IAS 17 and IFRIC 4 without reassessing whether such contracts meet the definition of a lease under IFRS 16;
- to use hindsight in determining judgements for leases previously treated as operating leases, for example, such as the term of the lease where there is a termination clause; and
- to exclude direct costs from the Right of Use asset at the date of initial application.
Having carried out an exercise to identify all leases across the Group, including assessing whether there are any embedded leases, we have identified approximately 300 leases, of which c.80% are for land and buildings and the rest for vehicles and office equipment. The Group has used an interim solution to estimate the value of leases that will come on balance sheet and we're currently implementing a permanent leased asset solution that will be used to account for leases in future. Based on the results of the interim solution it is estimated that the adoption of IFRS 16 has increased the carrying value of property, plant and equipment at 1 April 2019 by approximately GBP45m, liabilities by approximately GBP49m and retained earnings has decreased by approximately GBP4m. In addition, existing lease accruals and prepayments at 31 March 2019 under the current accounting have been released to retained earnings.
Under the new standard, the existing operating lease expense previously recorded in operating costs will be replaced by a depreciation charge, which for 2019 is expected to be lower than the previous operating expense by approximately GBP2m, and a separate financing expense of approximately GBP2m, which will be recorded in interest expense. Consequently, Operating profit and EBITDA is estimated to increase for FY19/20 by GBP2m and GBP14m respectively.
There will be no net cash flow impact arising from the new standard, however, the profile of expenses related to leasing arrangements will change. Operating lease expenses will be replaced by the recognition of depreciation of the right-of-use asset and interest charges on lease liabilities. Whilst this will impact individual companies depending on where they are in the life of their lease, the portfolio effect of the Group's leases means that the net impact of this is minimal for 2019.
As the operating lease expense and depreciation and interest charges broadly offset, the impact on EPS and ROTIC is minimal. The impact of the net lease liability has a positive impact on ROTIC through improving total equity, but this is not large enough to significantly move the metric. ROCE, which is a before interest measure, at 31 March 2019 is impacted positively by approximately one percentage point.
Net debt to EBITDA is expected to increase by approximately 0.1 times compared to the previous accounting standard.
Use of Alternative performance measures (APMs)
In the reporting of the financial information, the Group uses certain measures that are not required under IFRS, the Generally Accepted Accounting Principles (GAAP) under which the Group reports. The Directors believe that Return on Total Invested Capital (ROTIC), Return on Capital Employed (ROCE), Organic growth at constant currency, adjusted profit and earnings per share measures and adjusted operating cash flow provide additional and more consistent measures of underlying performance to shareholders by removing non-trading items that are not closely related to the Group's trading or operating cash flows. These and other alternative performance measures are used by the Directors for internal performance analysis and incentive compensation arrangements for employees. The terms ROTIC, ROCE, organic growth at constant currency and 'Adjusted' are not defined terms under IFRS and may therefore not be comparable with similarly titled measures reported by other companies. They are not intended to be a substitute for, or superior to, GAAP measures.
The principal items which are included in adjusting items are set out below in the Group's accounting policy and in note 1. The term 'adjusted' refers to the relevant measure being reported for continuing operations excluding adjusting items.
Definitions of the Group's material alternative performance measures along with reconciliation to their IFRS equivalent measure are included in note 3.
Key accounting policies
Below we set out our key accounting policies, with a list of all other accounting policies thereafter.
Going concern
The Directors believe, at the time of approving the financial statements, that the Group is well placed to manage its business risks successfully. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current committed facilities, which includes a GBP550m Revolving Credit Facility running until November 2023 of which GBP475.6m remains undrawn at the date of this report. With this in mind, the Directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing these financial statements.
Pensions
The Group makes contributions to various pension plans.
For defined benefit plans, the asset or liability recorded in the Consolidated Balance Sheet is the difference between the fair value of the plan's 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 other comprehensive income.
Current and past service costs, along with the impact of any settlements or curtailments, are charged to the Consolidated Income Statement. The net interest expense on pension plans' liabilities and the expected return on the plans' assets is recognised within finance expense in the Consolidated Income Statement.
Contributions to defined contribution plans are charged to the Consolidated Income Statement when they fall due.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group measures goodwill at the acquisition date as:
- the fair value of the consideration transferred; plus - the recognised amount of any non-controlling interests in the acquiree; plus - the fair value of the existing equity interest in the acquiree; less
- the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Any contingent consideration payable may be accounted for as either:
a) Consideration transferred, which is recognised at fair value at the acquisition date. If the contingent purchase consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent purchase consideration are recognised in the Consolidated Income Statement; or
b) Remuneration, which is expensed in the Income Statement over the associated period of service. An indicator of such treatment includes when payments to employees of the acquired company are contingent on a post-acquisition event, but may be automatically forfeited on termination of employment.
For acquisitions between 4 April 2004 (the date from which the financial statements were reported under IFRS) and 2 April 2010, goodwill represents the difference between the cost of the acquisition, including acquisition costs and the fair value of the net identifiable assets acquired. Goodwill is not amortised, but is tested annually for impairment.
Goodwill 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, 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.
Intangible assets
(a) 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. Acquired intangible assets, comprising trademarks, technology and know-how and customer relationships, are amortised through the Consolidated Income Statement on a straight-line basis over their estimated economic lives of between three and twenty years.
(b) 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.
Critical accounting judgements and key sources of estimation uncertainty
The preparation of Group accounts in conformity with IFRS requires the Directors to make judgements, 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 judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The following four areas of critical accounting judgement and key estimation uncertainty have been identified as having significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next financial year:
Critical accounting judgements
Goodwill impairment
Determining whether goodwill is impaired requires an estimation of the value in use of cash generating unit (CGU) groups to which goodwill has been allocated. Management allocates a new acquisition to a CGU group based on which one is expected to benefit most from that business combination. The allocation of goodwill to existing CGUs is generally straightforward and factual, but in some cases, acquisitions do not fit into one of the existing CGU groups and a new group is created. This was the case in the purchase of CenTrak and the creation of the Sensor Technologies grouping.
The value in use calculation involves an estimation of the present value of future cash flows of CGUs. The future cash flows are based on annual budgets, as approved by the Board, to which the management's expectation of market-share and long-term growth rates are applied. The present value is then calculated based on management's estimate of future discount rates. The Board reviews these key assumptions (market-share, long-term growth rates, and discount rates) and the sensitivity analysis around these assumptions.
Intangible assets
IFRS 3 (revised) 'Business Combinations' requires that goodwill arising on the acquisition of subsidiaries is capitalised and included in intangible assets. IFRS 3 (revised) also requires the identification and valuation of other separable intangible assets at acquisition. The assumptions involved in valuing these intangible assets require the use of estimates and judgements.
IAS 38 'Intangible Assets' requires that development costs, arising from the application of research findings or other technical knowledge to a plan or design of a new or substantially improved product, are capitalised, subject to certain criteria being met. Determining the technical feasibility and estimating the future cash flows generated by the products in development requires judgements which may differ from the actual outcome.
The estimates and judgements made in relation to both acquired intangible assets and capitalised development costs, cover identification of relevant assets, future growth rates, expected inflation rates and the discount rate used. Management also make judgements on the useful economic lives of the intangible assets.
Defined benefit pension plan liabilities
Determining the value of the future defined benefit obligation requires judgement in respect of the assumptions used to calculate present values. These include future mortality, discount rate and inflation. Management makes these judgements in consultation with an independent actuary.
Key sources of estimation uncertainty
Contingent consideration
Determining the value of contingent consideration recognised as part of the acquisition of subsidiaries requires assumptions to determine the expected performance of the acquired business and the amount of contingent consideration that will therefore become payable. Initial estimates of expected performance are made by the Directors responsible for completing the acquisition and form a key component of the financial due diligence that takes place prior to completion. Subsequent measurement of contingent consideration is based on the Directors' appraisal of the acquired business' performance in the post-acquisition period and the agreement of final payments, with any required adjustments to the amount payable recognised in the Consolidated Income Statement as required under IFRS 3. Further details are provided in note 8.
Other accounting policies
Basis of consolidation
The Group accounts include the accounts of Halma plc and all of its subsidiary companies made up to 31 March 2019, 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.
Investments in associates
An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but without control or joint control over those policies.
The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the Consolidated Balance Sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group's interest in that associate (which includes any long-term interests that, in substance, form part of the Group's net investment in the associate) are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.
Any excess of the cost of acquisition over the Group's share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any deficiency of the cost of acquisition below the Group's share of the fair values of the identifiable net assets of the associate at the date of acquisition (i.e. discount on acquisition) is credited in profit or loss in the year of acquisition.
Where a Group company transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group's interest in the relevant associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for impairment.
Other intangible assets
(a) 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.
(b) Other intangibles
Other intangibles are amortised through the Consolidated Income Statement on a straight-line basis over their estimated economic lives of between three and five years.
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 fair value less costs to dispose 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 pre-tax 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.
Segmental reporting
An operating segment is a distinguishable component of the Group that is engaged in business activities from which it may earn revenues and incur expenses, and whose operating results are reviewed regularly by the Chief Operating Decision Maker (the Group Chief Executive) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
Reportable segments are operating segments that either meet the thresholds and conditions set out in IFRS 8 or are considered by the Board to be appropriately designated as reportable segments. Segment result represents operating profits and includes an allocation of Head Office expenses. Segment result excludes tax and financing items. Segment assets comprise goodwill, other intangible assets, property, plant and equipment (excluding land and buildings), inventories, trade and other receivables. Segment liabilities comprise trade and other payables, provisions and other payables. Unallocated items represent land and buildings, corporate and deferred taxation balances, defined benefit plan liabilities, contingent purchase consideration, all components of net cash/borrowings and derivative financial instruments.
Inventories
Inventories and work in progress 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.
Revenue
The Group's revenue streams are the sale of goods and services in the specialist safety, health and environmental technologies market. The revenue streams are disaggregated into four sectors, that serve like markets. Those sectors are Process Safety, Infrastructure Safety, Environmental & Analysis and Medical.
Revenue is recognised to depict the transfer of control over promised goods or services to customers in an amount that reflects the amount of consideration specified in a contract with a customer, to which the Group expects to be entitled in exchange for those goods or services.
It is the Group's judgement that in the majority of sales there is no contract until such time as the company performs, at which point the contract becomes the supplier's purchase order governed by the Company's terms and conditions. Where there are Master Supply Arrangements, these are typically framework agreements and do not contain clauses that would result in a contract forming under IFRS 15 until a Purchase Order is issued by the customer.
Revenue represents sales, net of estimates for variable consideration, including rights to returns, and discounts, and excluding value added tax and other sales related taxes. The amount of variable consideration is not considered to be material to the Group as a whole.
Performance obligations are unbundled in each contractual arrangement if they are distinct from one another. There is judgement in identifying distinct performance obligations where the product could be determined to be a system, or where a combination of products and services are provided together. For the majority of the Group's activities the performance obligation is judged to be the component product or service rather than the system or combined products and services. The contract price is allocated to the distinct performance obligations based on the relative standalone selling prices of the goods or services.
The way in which the Group satisfies its performance obligations varies by business and may be on shipment, delivery, as services are rendered or on completion of services depending on the nature of product and service and terms of the contract which govern how control passes to the customer. Revenue is recognised at a point in time or over time as appropriate.
Where the Group offers warranties that are of a service nature, revenue is recognised in relation to these performance obligations over time as the services are rendered. In our judgement we believe the associated performance obligations accrue evenly across the contractual term and therefore revenue is recognised on a pro-rated basis over the length of the service period.
In a small number of instances across the Group, products have been determined to be bespoke in nature, with no alternative use. Where there is also an enforceable right to payment for work completed, the criteria for recognising revenue over time have been deemed to have been met. Revenue is recognised on an input basis. This is not a material part of the Group's business as for the most part, where goods are bespoke in nature, it is the Group's judgement that the product can be broken down to standard component parts with little additional cost and therefore has an alternate use, or there is no enforceable right to payment for work performed. In these cases, the judgement is made that the requirements for recognising revenue over time are not met and revenue is recognised when control of the finished product passes to the customer.
Contract assets and liabilities
A contract asset is recognised when the Group's right to consideration is conditional on something other than the passage of time, for example the completion of future performance obligations under the terms of the contract with the customer.
In some instances, the Group receives payments from customers based on a billing schedule, as established in the contract, which may not match with the pattern of performance under the contract. In this instance, a contract asset or contract liability is recognised depending on the phasing of payment in relation to performance.
Contract assets are recognised within Trade and other receivables and are assessed for impairment on a forward-looking basis using the expected lifetime losses approach, as required by IFRS 9 ('Financial Instruments').
The Group has applied IFRS 15 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 18 and IAS 11. The accounting policy under IAS 18 and IAS 11 is as disclosed in the Annual Report and Accounts 2018. A description of the changes impacting the Group as well as the qualitative impact analysis has been disclosed above under New standards and interpretations applied for the first time.
Adjusting items
When items of income or expense are material and they are relevant to an understanding of the entity's financial performance, they are disclosed separately within the financial statements. Such adjusting items include material costs or reversals arising from acquisitions or disposals of businesses, including acquisition costs, creation or reversals of provisions related to changes in estimates for contingent consideration on acquisition, amortisation of acquired intangible assets, and other significant one-off items that may arise.
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 Total equity, in which case it too is recognised in Total equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, along with any adjustment to tax payable in respect of previous years. Taxable profit differs from net profit 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 profit; and 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 year when the liability is settled, or the asset is realised. Deferred tax assets are only recognised to the extent that recovery is probable.
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 Total equity.
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 to be GBPnil 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.
Derivative financial instruments and hedge accounting
The Group enters into derivative financial instruments to manage its exposure to foreign exchange rate risk using forward exchange contracts.
Derivative financial instruments are classified as fair value through profit and loss (held for trading) unless they are in a designated hedge relationship.
Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in the Consolidated Income Statement, unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in the Consolidated Income Statement depends on the nature of the hedge relationship. The Group designates certain derivatives as hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges), or hedges of net investments in foreign operations.
A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.
Cash flow hedge accounting
The Group designates certain hedging instruments as cash flow hedges.
At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument has been or is expected to be highly effective in offsetting changes in fair values or cash flows of the hedged item.
Note 26 sets out details of the fair values of the derivative instruments used for hedging purposes and the movements in the Hedging reserve in equity.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion as a result of being over hedged is recognised immediately in the Consolidated Income Statement.
Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to the Consolidated Income Statement in the periods when the hedged item is recognised in the Consolidated Income Statement. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability.
Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income at that time is accumulated in equity and is recognised, when the forecast transaction is ultimately recognised, in the Consolidated Income Statement. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in the Consolidated Income Statement.
Net investment hedge accounting
The Group uses foreign currency denominated borrowings as a hedge against the translation exposure on the Group's net investment in overseas companies. Where the hedge is fully effective at hedging, the variability in the net assets of such companies caused by changes in exchange rates and the changes in value of the borrowings are recognised in the Consolidated Statement of Comprehensive Income and accumulated in the Translation reserve. The ineffective part of any change in value caused by changes in exchange rates is recognised in the Consolidated Income Statement.
Employee share plans
Share-based incentives are provided to employees under the Group's share incentive plan, the performance share plan and the executive 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 period of the awards.
(b) Performance share plan
Awards under this plan are partly equity-settled and partly cash-settled. Grants were subject to both market-based and non-market-based vesting criteria. No further grants are made under this plan.
The fair value of the equity-settled portion 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 three-year 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 other reserves within Total equity.
(c) Executive share plan
During the year ended 2 April 2016, Halma plc introduced the Executive Share Plan, in which executive Directors and certain senior employees participate. Grants under this Plan are in the form of Performance Awards or Deferred Share Awards.
Performance Awards are subject to non-market-based vesting criteria, and Deferred Share Awards are subject only to continuing service of the employee. Share awards are equity-settled. The fair value of the awards at the date of grant, which is estimated to be equal to the market 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. The corresponding credit is to other reserves within Total equity.
(d) Cash settled
For cash-settled awards, a liability equal to the portion of the services received is recognised at the current fair value determined at each balance sheet date.
Provisions and contingent liabilities
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of the cash flows.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received, and the amount of the receivable can be measured reliably.
Contingent liabilities are disclosed where a possible obligation dependent on uncertain future events exists as at the end of the reporting period or a present obligation for which payment either cannot be measured or is not considered to be probable is noted. Contingent liabilities are not accrued for and no contingent liability is disclosed where the possibility of payment is considered to be remote.
Deferred government grant income
Government grant income that is linked to capital expenditure is deferred to the Consolidated Balance Sheet and credited to the Consolidated Income Statement over the life of the related asset. In addition, the Group claims research and development expenditure credits arising on qualifying expenditure in its UK-based subsidiaries and shows these 'above the line' in Operating profit. Where the credits arise on expenditure that is capitalised as part of internally generated capitalised development costs, the income is deferred to the Consolidated Balance Sheet and credited to the Consolidated Income Statement over the life of the related asset in line with the policy stated above.
Operating profit
Operating profit is presented net of direct production costs, production overheads, selling costs, distribution costs and administrative expenditure. Operating profit is stated after charging restructuring costs but before the share of results of associates, profit or loss on disposal of operations, finance income and finance costs.
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.
Property, plant and equipment
Property, plant and equipment is stated at historical 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 property 2% -------------------------------------------- --------------- Leasehold properties: Long leases (more than 50 years unexpired) 2% -------------------------------------------- --------------- Short leases (less than 50 years unexpired) Period of lease -------------------------------------------- --------------- Plant, equipment and vehicles 8% to 33.3% -------------------------------------------- ---------------
Leases
Leases that confer rights and obligations similar to those that attach to owned assets are classified as finance leases, of which the Group has none. All other leases are classified as operating leases. Operating lease rentals, and any incentives receivable, are charged to the Consolidated Income Statement on a straight-line basis over the lease term.
Finance income and expenses
The Group recognises Interest income or expense using the effective interest rate method. Finance income and finance costs include:
- Interest payable on loans and borrowings
- Net interest charge on pension plan liabilities
- Amortisation of finance costs
- Interest receivable in respect of cash and cash equivalents
- Unwinding of the discount on provisions
- Fair value movements on derivative financial instruments
1 Segmental analysis and revenue from contracts with customers
Sector analysis and disaggregation of revenue
The Group has four reportable segments (Process Safety, Infrastructure
Safety, Environmental & Analysis and Medical), which are defined by
markets rather than product type. Each segment includes businesses with
similar operating and marketing characteristics. These segments are
consistent with the internal reporting reviewed each month by the Group
Chief Executive.
Nature of goods and services
The following is a description of the principal activities - separated
by reportable segments, which are defined by markets rather than product
type - from which the Group generates its revenue.
Further disaggregation of sector revenue by geography and by the pattern
of revenue recognition depicts how economic factors affect the timing
and uncertainty of the group's revenues.
Process Safety sector generates revenue from providing products that
protect assets and people at work. Products include: specialised interlocks
that control critical processes safely; Instruments that detect flammable
and hazardous gases; and explosion protection and corrosion monitoring
systems. Products are generally sold separately, with contracts less
than one year. Warranties are typically of an assurance nature. Revenue
is typically recognised as control passes on delivery or dispatch.
Payment is typically due within 60 days of invoice, except where a retention
is held for documentation.
Infrastructure Safety sector generates revenue from providing products
that save lives, protect infrastructure and enable safe movement. Products
include: fire detection systems, specialist fire suppression systems
and people and vehicle flow technologies. Products are generally sold
separately, with contracts less than one year. Warranties are typically
of an assurance nature. Revenue is recognised as control passes on delivery
or dispatch.
Payment is typically due within 60 days of invoice.
Environmental & Analysis generates revenue providing products and technologies
for analysis in environmental safety and life sciences markets. Products
include: market-leading opto-electronic technology and sensors, flow
gap measurement instruments and gas conditioning products, and solutions
for environmental data recording, water quality testing, water distribution
network monitoring, and UV water treatment. Products and services are
generally sold separately. Warranties are typically of an assurance
nature, but some companies offer extended warranties. Depending on the
nature of the performance obligation, revenue is recognised as control
passes on delivery, dispatch or as the service is delivered. Contracts
are typically less than one year in length, but some companies have
contracts where certain service related performance obligations are
delivered over a number of years, this results in contract liabilities
where those performance obligations are invoiced ahead of performance.
Payment is typically due within 60 days of invoice.
Medical sector generates revenue from providing products and services
that enhance the quality of life for patients and improve quality of
care delivered by providers. Products include: devices that assess eye
health, assist with eye surgery and primary care applications, critical
fluidic components used by medical diagnostics and OEMs and laboratories,
sensor technologies used in hospitals to track assets and support patient
and staff safety. Products are generally sold separately, and warranties
are typically of an assurance nature. Depending on the nature of the
performance obligation, revenue is recognised as control passes on delivery
or dispatch or as the service is delivered. Contracts are typically
less than one year in length, but a limited number of companies have
contracts where certain service related performance obligations are
delivered over a number of years, this can result in contract liabilities
where those performance obligations are invoiced ahead of performance.
Payment is typically due within 60 days of invoice.
Segment revenue disaggregation (by location of external customer)
Year ended 31 March 2019
Revenue by sector and destination (all continuing
operations)
-------------------------------------------------------------------------------
Africa,
United Near
States Mainland United and Middle Other
of America Europe Kingdom Asia Pacific East countries Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================= =========== ======== ======== ============ =========== ========== =======
Process Safety 61.3 42.1 32.6 29.6 23.2 8.7 197.5
Infrastructure Safety 87.8 131.2 101.4 48.6 28.4 11.2 408.6
Environmental & Analysis 135.2 38.0 53.6 59.7 6.0 6.6 299.1
Medical 159.2 55.0 13.4 46.1 13.2 19.2 306.1
Inter-segmental sales (0.3) - (0.1) - - - (0.4)
------------------------- ----------- -------- -------- ------------ ----------- ---------- -------
Revenue for the year 443.2 266.3 200.9 184.0 70.8 45.7 1,210.9
========================= =========== ======== ======== ============ =========== ========== =======
Year ended 31 March 2018
Revenue by sector and destination (all continuing
operations)
-------------------------------------------------------------------------------------------------------------------
Africa,
United Near and
States Mainland United Middle Other
of America Europe Kingdom Asia Pacific East countries Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
====================== ============= =================== ============= ============== ============= ============== =================
Process Safety 52.1 40.6 29.5 28.1 24.8 9.4 184.5
Infrastructure Safety 66.4 112.2 87.8 46.1 23.9 12.4 348.8
Environmental &
Analysis 110.4 33.6 43.1 58.0 7.8 6.5 259.4
Medical 145.3 51.3 13.0 42.7 13.2 18.3 283.8
Inter-segmental sales (0.2) - (0.1) - - - (0.3)
---------------------- ------------- ------------------- ------------- -------------- ------------- -------------- -----------------
Revenue for the year 374.0 237.7 173.3 174.9 69.7 46.6 1,076.2
====================== ============= =================== ============= ============== ============= ============== =================
Inter-segmental sales are charged at prevailing market prices and have
not been disclosed separately by segment as they are not considered material.
Revenue derived from the rendering of services was GBP69.8m (2018: GBP49.6m).
All revenue was otherwise derived from the sale of products. Year ended 31 March
2019
====================================
Revenue
Revenue recognised
recognised at a point Total
over time in time Revenue
GBPm GBPm GBPm
========================= =========== =========== ==========
Process Safety - 197.5 197.5
Infrastructure Safety 0.9 407.7 408.6
Environmental & Analysis 14.9 284.2 299.1
Medical 6.3 299.8 306.1
Inter-segmental sales - (0.4) (0.4)
------------------------- ----------- ----------- --------
Revenue for the year 22.1 1,188.8 1,210.9
========================= =========== =========== ========
Year ended 31 March 2019
--------------------------------------------------
Revenue
from Revenue
performance from
obligations Revenue performance
entered previously obligations
into and included satisfied
satisfied as in
in the contract previous Total
period liabilities periods Revenue
GBPm GBPm GBPm GBPm
========================= ============ ============ ============ ========
Process Safety 196.7 0.8 - 197.5
Infrastructure Safety 406.2 2.4 - 408.6
Environmental & Analysis 292.1 6.8 0.2 299.1
Medical 296.0 9.8 0.3 306.1
Inter-segmental sales (0.4) - - (0.4)
------------------------- ------------ ------------ ------------ --------
Revenue for the year 1,190.6 19.8 0.5 1,210.9
========================= ============ ============ ============ ========
The Group has unsatisfied (or partially satisfied) performance obligations at the balance sheet date with an aggregate amount of transaction price as follows.
Aggregate transaction price
allocated to
unsatisfied performance obligations
==========================================
31 March 2022 and
2019 2020 2021 beyond
GBPm GBPm GBPm GBPm
========================= ============ ======= ====== ===========
Process Safety 0.1 0.1 - -
Infrastructure Safety 4.7 4.3 0.3 0.1
Environmental & Analysis 16.9 10.1 1.6 5.2
Medical 5.5 3.5 0.9 1.1
Inter-segmental sales - - - -
------------------------- ------------ ------- ------ -----------
Total 27.2 18.0 2.8 6.4
========================= ============ ======= ====== ===========
The remaining transaction price comprises deferred income which is currently
recognised as contract liabilities and committed sales. Time bands represented
above present the expected timing of when the remaining transaction
price will be recognised as revenue.
Segment results
Profit (all continuing
operations)
-------------------------
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
---------------------------------------------------------- ------------ -----------
Segment profit before allocation of adjustments*
Process Safety 45.5 43.3
Infrastructure Safety 88.9 73.3
Environmental & Analysis 66.4 55.0
Medical 76.9 67.1
277.7 238.7
---------------------------------------------------------- ------------ -----------
Segment profit after allocation of adjustments*
Process Safety 41.5 39.4
Infrastructure Safety 79.1 65.1
Environmental & Analysis 60.1 47.7
Medical 60.1 44.7
Segment profit 240.8 196.9
Central administration costs (24.1) (15.3)
Net finance expense (10.0) (9.7)
---------------------------------------------------------- ------------ -----------
Group profit before taxation 206.7 171.9
Taxation (36.9) (17.7)
---------------------------------------------------------- ------------ -----------
Profit for the year 169.8 154.2
---------------------------------------------------------- ------------ -----------
* Adjustments include the amortisation of acquired intangible assets; acquisition items; significant restructuring costs; profit or loss on disposal of operations and the effect of equalisation of pension benefits for men and women in the defined benefit plans. Note 3 provides more information on alternative performance measures.
The accounting policies of the reportable segments are the same as the
Group's accounting policies. Acquisition transaction costs, adjustments
to contingent consideration and release of fair value adjustments to
inventory (collectively 'acquisition items') are recognised in the Consolidated
Income Statement. Segment profit, before these acquisition items and
the other adjustments, is disclosed separately above as this is the
measure reported to the Group Chief Executive for the purpose of allocation
of resources and assessment of segment performance. These adjustments
are analysed as follows:
Year ended 31 March 2019
------------ ----------- ------------- ----------- --------------------------------------------
Acquisition items
---------------------------------------
Disposal
Release Total of
of amortisation operations
Amortisation fair value charge Defined and
of acquired Adjustments adjustments and benefit restructuring
intangible Transaction to contingent to acquisition pension (Note
assets costs consideration inventory items charge 10) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------------ ----------- ------------- ----------- ------------ ------- ------------- ------
Process Safety (4.0) - - - (4.0) - - (4.0)
Infrastructure
Safety (6.8) (0.4) - (2.6) (9.8) - - (9.8)
Environmental
& Analysis (9.1) (0.1) 3.0 (0.1) (6.3) - - (6.3)
Medical (15.7) (0.6) 0.5 - (15.8) - (1.0) (16.8)
--------------- ------------ ----------- ------------- ----------- ------------ ------- ------------- ------
Total Segment (35.6) (1.1) 3.5 (2.7) (35.9) - (1.0) (36.9)
Unallocated - - - - - (2.1) - (2.1)
--------------- ------------ ----------- ------------- ----------- ------------ ------- ------------- ------
Total Segment
& Group (35.6) (1.1) 3.5 (2.7) (35.9) (2.1) (1.0) (39.0)
--------------- ------------ ----------- ------------- ----------- ------------ ------- ------------- ------
The transaction costs arose mainly on the acquisitions during the year.
In Infrastructure Safety, they mainly related to LAN Controls Limited
(GBP0.1m), Limotec (GBP0.1m), Navtech (GBP0.4m) and Business Marketers
Group (trading as Rath Communications) (GBP0.1m) and a credit from a
previous acquisition. In Environmental & Analysis, they related to the
acquisition of FluxData in a previous year (GBP0.1m). In Medical, they
mainly related to the acquisition of Visiometrics in a previous year
(GBP0.5m).
The GBP3.5m adjustment to contingent consideration comprised: a credit
of GBP3.0m in Environmental & Analysis arising from decreases in estimates
of the payable for FluxData (GBP2.7m) and Mini-Cam (GBP0.3m); and a
credit of GBP0.5m in Medical arising from a decrease in estimate of
the payable for CasMed NIBP (GBP0.1m) offset by a credit of GBP0.6m
arising from exchange differences on the payable for Visiometrics which
is denominated in Euros.
The GBP2.7m release of fair value adjustments to inventory relates to
Firetrace (GBP1.4m), Limotec (GBP0.3m), Navtech (GBP0.6m) and Rath (GBP0.3m),
and Mini-Cam (GBP0.1m) within Environmental & Analysis. All amounts
have now been released in relation to Firetrace, Limotec, Rath and Mini-Cam.
The GBP2.1m defined benefit pension charge relates to the estimate of
Guaranteed Minimum Pension equalisation for men and women.
Year ended 31 March 2018
------------ ----------- ------------- ----------- -----------------------------------------------
Acquisition items
------------ ---------------------------------------
Release Total Disposal
of amortisation of
Amortisation fair value charge Defined operations
of acquired Adjustments adjustments and benefit and
intangible Transaction to contingent to acquisition pension restructuring
assets costs consideration inventory items charge Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------------ ----------- ------------- ----------- ------------- -------- -------------- ------
Process Safety (3.9) - - - (3.9) - - (3.9)
Infrastructure
Safety (5.2) (0.8) - (2.1) (8.1) - - (8.1)
Environmental
& Analysis (7.1) (0.8) 1.5 (1.0) (7.4) - - (7.4)
Medical (18.5) (1.0) (3.2) (0.3) (23.0) - 0.6 (22.4)
Total Segment
& Group (34.7) (2.6) (1.7) (3.4) (42.4) - 0.6 (41.8)
=============== ============ =========== ============= =========== ============= ======== ============== ======
In the prior year, the transaction costs arose mainly on the acquisitions during the prior year of Setco, S.A. (Setco) (GBP0.1m) and Argus Security S.r.l. and Sterling Safety Systems Limited (together 'Argus') (GBP0.7m) within Infrastructure Safety, Cas Medical Systems Inc's Non-Invasive Blood Pressure Monitoring product line (CasMed NIBP) (GBP0.5m) and Cardios (GBP0.5m) within Medical, and Mini-Cam (GBP0.8m) within Environmental & Analysis.
The GBP1.7m adjustment to contingent consideration comprised: a debit of GBP2.5m in Medical arising from a change in estimate of the payable for CasMed NIBP (GBP0.7m) and Visiometrics (GBP1.8m), offset by a credit of GBP1.5m in Environmental & Analysis arising from a change in estimate of the payable for FluxData. Exchange differences on the payable for Visiometrics which is denominated in Euros, and for Cardios which is denominated in Brazilian Reals, contributed a further debit of GBP0.7m in Medical.
The GBP3.4m release of fair value adjustments to inventory relates to Firetrace (GBP1.4m), Argus (GBP0.6m) and Setco (GBP0.1m) within Infrastructure Safety, Mini-Cam (GBP0.8m) and FluxData (GBP0.2m) within Environmental & Analysis and Cardios (GBP0.3m) within Medical. All amounts have been released in relation to Argus, Setco, Cardios and FluxData.
Information about major customers
No single customer accounts for more than 3% (2018: 2%) of the Group's revenue.
2 Earnings per ordinary share
Basic and diluted earnings per ordinary share are calculated using the weighted average of 379,159,755 shares in issue during the year (net of shares purchased by the Company and held as Own shares) (2018: 378,987,354). There are no dilutive or potentially dilutive ordinary shares.
Adjusted earnings are calculated as earnings from continuing operations excluding the amortisation of acquired intangible assets; acquisition items; restructuring costs; profit or loss on disposal of operations; the effect of equalisation of defined pension benefits for men and women; the associated taxation thereon; and, in the prior year, the effect of the US tax reform measures. The Directors consider that adjusted earnings, which constitute an alternative performance measure, represent a more consistent measure of underlying performance as it excludes amounts not directly linked with trading. A reconciliation of earnings and the effect on basic and diluted earnings per share figures is as follows:
Per ordinary
share
----------------------
Year ended Year ended Year ended Year ended
31 March 31 March 31 March 31 March
2019 2018 2019 2018
GBPm GBPm pence pence
----------------------------------------------- ---------- ---------- ---------- ----------
Earnings from continuing operations 169.8 154.2 44.78 40.69
Amortisation of acquired intangible assets
(after tax) 27.5 26.0 7.25 6.85
Acquisition transaction costs (after tax) 1.0 2.4 0.27 0.65
Adjustments to contingent consideration
(after tax) (2.9) 1.9 (0.75) 0.51
Release of fair value adjustments to inventory
(after tax) 2.1 2.6 0.55 0.69
Defined benefit pension charge (after tax) 1.7 - 0.44 -
Disposal of operations and restructuring
(after tax) 0.8 (0.6) 0.20 (0.19)
Impact of US tax reform measures - (14.9) - (3.94)
----------------------------------------------- ---------- ---------- ---------- ----------
Adjusted earnings 200.0 171.6 52.74 45.26
----------------------------------------------- ---------- ---------- ---------- ----------
3 Alternative performance measures
The Board uses certain alternative performance measures to help it effectively monitor the performance of the Group. The Directors consider that these represent a more consistent measure of underlying performance by removing non-trading items that are not closely related to the Group's trading or operating cash flows. These measures include Return on Total Invested Capital (ROTIC), Return on Capital Employed (ROCE), organic growth at constant currency, Adjusted operating profit and Adjusted operating cash flow.
Note 1 provides further analysis of the adjusting items in reaching adjusted profit measures.
Return on Total Invested Capital
31 March 31 March
2019 2018
GBPm GBPm
------------------------------------------------------ -------- --------
Profit after tax 169.8 154.2
Adjustments(1) 30.2 17.4
------------------------------------------------------ -------- --------
Adjusted profit after tax(1) 200.0 171.6
------------------------------------------------------ -------- --------
Total equity 981.4 828.4
Add back retirement benefit obligations 39.2 53.9
Less associated deferred tax assets (7.0) (9.8)
Cumulative amortisation of acquired intangible assets 235.2 191.0
Historical adjustments to goodwill(2) 89.5 89.5
------------------------------------------------------ -------- --------
Total Invested Capital 1,338.3 1,153.0
------------------------------------------------------ -------- --------
Average Total Invested Capital(3) 1,245.7 1,125.1
------------------------------------------------------ -------- --------
Return on Total Invested Capital (ROTIC)(4) 16.1% 15.2%
------------------------------------------------------ -------- --------
Return on Capital Employed
31 March 31 March
2019 2018
GBPm GBPm
------------------------------------------------------- -------- --------
Profit before tax 206.7 171.9
Adjustments(1) 39.0 41.8
Net finance costs 10.0 9.7
------------------------------------------------------- -------- --------
Adjusted operating profit(1) after share of results of
associates 255.7 223.4
------------------------------------------------------- -------- --------
Computer software costs within intangible assets 5.5 4.7
Capitalised development costs within intangible assets 33.1 29.9
Other intangibles within intangible assets 3.1 0.9
Property, plant and equipment 112.4 103.7
Inventories 144.3 128.0
Trade and other receivables 259.6 235.2
Trade and other payables (164.8) (149.6)
Current provisions (25.4) (8.8)
Net tax liabilities (13.2) (11.4)
Non-current trade and other payables (11.6) (12.6)
Non-current provisions (10.9) (23.1)
Add back contingent purchase consideration 26.8 25.0
======================================================= ======== ========
Capital Employed 358.9 321.9
------------------------------------------------------- -------- --------
Average Capital Employed(3) 340.4 312.1
------------------------------------------------------- -------- --------
Return on Capital Employed (ROCE)(4) 75.1% 71.6%
------------------------------------------------------- -------- --------
1 Adjustments include the amortisation of acquired intangible assets; acquisition items; significant restructuring costs; profit or loss on disposal of operations and the effect of equalisation of defined pension benefits for men and women. Where after-tax measures, these also include the associated taxation on adjusting items and, in the prior year, the effect of the US tax reform measures. Note 1 provides more information on these items.
2 Includes goodwill amortised prior to 3 April 2004 and goodwill taken to reserves.
3 The ROTIC and ROCE measures are expressed as a percentage of the average of the current and prior year's Total Invested Capital and Capital Employed respectively. Using an average as the denominator is considered to be more representative. The 1 April 2017 Total Invested Capital and Capital Employed balances were GBP1,097.1m and GBP302.2m respectively.
4 The ROTIC and ROCE measures are calculated as Adjusted profit after tax divided by Average Total Invested Capital and Adjusted operating profit after share of results of associates divided by Average Capital Employed respectively.
Organic growth at constant currency
Organic growth measures the change in revenue and profit from continuing Group operations. This measure equalises the effect of acquisitions by:
a. removing from the year of acquisition their entire revenue and profit before taxation; and
b. in the following year, removing the revenue and profit for the number of months equivalent to the pre-acquisition period in the prior year.
The results of disposals are removed from the prior period reported revenue and profit before taxation.
Constant currency measures the change in revenue and profit excluding the effects of currency movements. The measure restates the current year's revenue and profit at last year's exchange rates.
Organic growth at constant currency has been calculated for the Group as follows:
Group
Adjusted profit*
Revenue before taxation
-------------------------------- --------------------------------
Year ended Year ended Year ended Year ended
31 March 31 March 31 March 31 March
2019 2018 2019 2018
GBPm GBPm % growth GBPm GBPm % growth
------------------------------------- ---------- ---------- -------- ---------- ---------- --------
Continuing operations 1,210.9 1,076.2 12.5% 245.7 213.7 15.0%
Acquired and disposed revenue/profit (32.0) (8.5) (6.9) 0.6
===================================== ========== ========== ======== ========== ========== ========
Organic growth 1,178.9 1,067.7 10.4% 238.8 214.3 11.4%
Constant currency adjustment (4.2) - (0.7) -
------------------------------------- ---------- ---------- -------- ---------- ---------- --------
Organic growth at constant
currency 1,174.7 1,067.7 10.0% 238.1 214.3 11.1%
------------------------------------- ---------- ---------- -------- ---------- ---------- --------
Sector Organic growth at constant currency
Organic growth at constant currency is calculated for each segment using the same method as described above.
Process Safety
Adjusted*
Revenue segment profit
-------------------------------- ---------------------------------
Year ended Year ended Year ended Year ended
31 March 31 March 31 March 31 March
2019 2018 2019 2018
GBPm GBPm % growth GBPm GBPm % growth
--------------------------- ---------- ---------- -------- ---------- ---------- ---------
Continuing operations 197.5 184.5 7.0% 45.5 43.3 4.9%
Acquisition and currency
adjustments (0.5) - (0.2) -
--------------------------- ---------- ---------- -------- ---------- ---------- ---------
Organic growth at constant
currency 197.0 184.5 6.8% 45.3 43.3 4.5%
--------------------------- ---------- ---------- -------- ---------- ---------- ---------
Infrastructure Safety
Adjusted*
Revenue segment profit
-------------------------------- ---------------------------------
Year ended Year ended Year ended Year ended
31 March 31 March 31 March 31 March
2019 2018 2019 2018
GBPm GBPm % growth GBPm GBPm % growth
------------------------------------- ---------- ---------- -------- ---------- ---------- ---------
Continuing operations 408.6 348.8 17.2% 88.9 73.3 21.4%
Acquisition and currency adjustments (21.8) - (4.2) -
------------------------------------- ---------- ---------- -------- ---------- ---------- ---------
Organic growth at constant
currency 386.8 348.8 10.9% 84.7 73.3 15.6%
------------------------------------- ---------- ---------- -------- ---------- ---------- ---------
Environmental & Analysis Adjusted*
Revenue segment profit
-------------------------------- -----------------------------------
Year ended Year ended Year ended Year ended
31 March 31 March 31 March 31 March
2019 2018 2019 2018
GBPm GBPm % growth GBPm GBPm % growth
------------------------------------- ---------- ---------- -------- ---------- ---------- -----------
Continuing operations 299.1 259.4 15.3% 66.4 55.0 20.7%
Acquisition and currency adjustments (10.3) - (4.3) -
------------------------------------- ---------- ---------- -------- ---------- ---------- -----------
Organic growth at constant
currency 288.8 259.4 11.3% 62.1 55.0 12.9%
------------------------------------- ---------- ---------- -------- ---------- ---------- -----------
Medical Adjusted*
Revenue segment profit
-------------------------------- ---------------------------------
Year ended Year ended Year ended Year ended
31 March 31 March 31 March 31 March
2019 2018 2019 2018
GBPm GBPm % growth GBPm GBPm % growth
------------------------------------- ---------- ---------- -------- ---------- ---------- ---------
Continuing operations 306.1 283.8 7.9% 76.9 67.1 14.8%
Acquisition and disposal and
currency adjustments (3.6) (8.5) (0.5) 0.6
------------------------------------- ---------- ---------- -------- ---------- ---------- ---------
Organic growth at constant
currency 302.5 275.3 9.9% 76.4 67. 7 12.9%
------------------------------------- ---------- ---------- -------- ---------- ---------- ---------
* Adjustments include the amortisation of acquired intangible assets; acquisition items; restructuring costs; profit or loss on disposal of operations; and the effect of equalisation of pension benefits for men and women in the defined benefit plans.
Adjusted operating profit
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
------------------------------------------- ---------- ----------
Operating profit 217.8 181.2
------------------------------------------- ---------- ----------
Add back:
Acquisition items (note 1) 0.3 7.7
Defined benefit pension charge 2.1 -
Amortisation of acquired intangible assets 35.6 34.7
Adjusted operating profit 255.8 223.6
------------------------------------------- ---------- ----------
Adjusted operating cash flow
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
--------------------------------------------------------- ---------- ----------
Net cash from operating activities (note 9) 219.0 173.3
--------------------------------------------------------- ---------- ----------
Add back:
Net acquisition costs 1.2 2.6
Taxes paid 40.6 41.1
Proceeds from sale of property, plant and equipment 1.6 1.7
Share awards vested not settled by Own shares* 4.9 3.3
Less:
Purchase of property, plant and equipment (26.4) (20.2)
Purchase of computer software and other intangibles (4.9) (2.0)
Development costs capitalised (10.8) (9.4)
========================================================= ========== ==========
Adjusted operating cash flow 225.2 190.4
--------------------------------------------------------- ---------- ----------
Cash conversion % (adjusted operating cash flow/adjusted
operating profit) 88% 85%
--------------------------------------------------------- ---------- ----------
* See Consolidated Statement of Changes in Equity
4 Finance income
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
-------------------------------------------------------- ---------- ----------
Interest receivable 0.4 0.2
Fair value movement on derivative financial instruments 0.1 0.1
-------------------------------------------------------- ---------- ----------
0.5 0.3
-------------------------------------------------------- ---------- ----------
5 Finance expense
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
-------------------------------------------------------- ---------- ----------
Interest payable on borrowings 7.6 7.0
Amortisation of finance costs 0.9 1.0
Net interest charge on pension plan liabilities 1.2 1.7
Other interest payable 0.5 0.2
-------------------------------------------------------- ---------- ----------
10.2 9.9
Fair value movement on derivative financial instruments 0.2 -
Unwinding of discount on provisions 0.1 0.1
-------------------------------------------------------- ---------- ----------
10.5 10.0
-------------------------------------------------------- ---------- ----------
6 Taxation
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
--------------------------------------------------------- ---------- ----------
Current tax
UK corporation tax at 19% (2018: 19%) 10.9 9.8
Overseas taxation 33.6 29.1
Adjustments in respect of prior years 0.2 (0.3)
--------------------------------------------------------- ---------- ----------
Total current tax charge 44.7 38.6
--------------------------------------------------------- ---------- ----------
Deferred tax
Origination and reversal of timing differences (7.4) (6.2)
Changes in tax rate - US tax reform measures - (15.0)
Adjustments in respect of prior years (0.4) 0.3
--------------------------------------------------------- ---------- ----------
Total deferred tax credit (7.8) (20.9)
--------------------------------------------------------- ---------- ----------
Total tax charge recognised in the Consolidated Income
Statement 36.9 17.7
--------------------------------------------------------- ---------- ----------
Reconciliation of the effective tax rate:
Profit before tax 206.7 171.9
Tax at the UK corporation tax rate of 19% (2018: 19%) 39.3 32.7
Overseas tax rate differences 9.4 12.8
Effect of US tax reform measures - (15.0)
Effect of intra-group financing (8.7) (7.9)
Tax incentives, exemptions and credits (including patent
box, R&D and High-Tech status) (3.9) (4.6)
Permanent differences 1.0 (0.3)
Adjustments in respect of prior years (0.2) -
--------------------------------------------------------- ---------- ----------
36.9 17.7
--------------------------------------------------------- ---------- ----------
Effective tax rate 17.9% 10.3%
--------------------------------------------------------- ---------- ----------
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
------------------------------------- ---------- ----------
Adjusted* profit before tax 245.7 213.7
Total tax charge on adjusted* profit 45.7 42.1
------------------------------------- ---------- ----------
Effective tax rate 18.6% 19.7%
------------------------------------- ---------- ----------
* Adjustments include the amortisation of acquired intangible assets; acquisition items; significant restructuring costs; and profit or loss on disposal of operations and the effect of equalisation of pension benefits for men and women in the defined benefit plans. Note 3 provides more information on alternative performance measures.
The Group's future Effective Tax Rate (ETR) will mainly depend on the geographic mix of profits and whether there are any changes to tax legislation in the Group's most significant countries of operations.
In addition to the amount charged to the Consolidated Income Statement, the following amounts relating to tax have been recognised directly in the Consolidated Statement of Comprehensive Income and Expenditure:
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
------------------------------- ---------- ----------
Deferred tax
Retirement benefit obligations 1.6 2.4
Short term timing differences - -
1.6 2.4
------------------------------- ---------- ----------
In addition to the amounts charged to the Consolidated Income Statement and the Consolidated Statement of Comprehensive Income and Expenditure, the following amounts relating to tax have been recognised directly in equity:
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
------------------------------------------------------ ---------- ----------
Current tax
Excess tax deductions related to share-based payments
on exercised awards (1.5) 1.1
Deferred tax
Change in estimated excess tax deductions related to
share-based payments (0.9) (0.5)
------------------------------------------------------ ---------- ----------
(2.4) 0.6
------------------------------------------------------ ---------- ----------
7 Dividends
Per ordinary
share
----------------------
Year ended Year ended Year ended Year ended
31 March 31 March 31 March 31 March
2019 2018 2019 2018
pence pence GBPm GBPm
---------------------------------------------------- ---------- ---------- ---------- ----------
Amounts recognised as distributions to shareholders
in the year
Final dividend for the year ended 31 March
2018 (52 weeks to 1 April 2017) 8.97 8.38 34.0 31.7
Interim dividend for the year ended 31 March
2019 (31 March 2018) 6.11 5.71 23.2 21.7
---------------------------------------------------- ---------- ---------- ---------- ----------
15.08 14.09 57.2 53.4
---------------------------------------------------- ---------- ---------- ---------- ----------
Dividends declared in respect of the year
Interim dividend for the year ended 31 March
2019 (31 March 2018) 6.11 5.71 23.2 21.7
Proposed final dividend for the year ended
31 March 2019 (31 March 2018) 9.60 8.97 36.4 34.0
---------------------------------------------------- ---------- ---------- ---------- ----------
15.71 14.68 59.6 55.7
---------------------------------------------------- ---------- ---------- ---------- ----------
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 25 July 2019 and has not been included as a liability in these financial statements.
8 Acquisitions
In accounting for acquisitions, adjustments are made to the book values of the net assets of the companies acquired to reflect their fair values to the Group. Acquired inventories are valued at fair value adopting Group bases and any liabilities for warranties relating to past trading are recognised. Other previously unrecognised assets and liabilities at acquisition are included and accounting policies are aligned with those of the Group where appropriate.
During the year ended 31 March 2019, the Group made four acquisitions namely:
LAN Controls Limited;
Limotec bvba;
Navtech Radar Limited; and
Business Marketers Group, Inc (trading as Rath Communications).
Below are summaries of the assets acquired and liabilities assumed and the purchase consideration of:
- the total of acquisitions; - LAN Controls Limited, on a stand-alone basis; - Limotec bvba, on a stand-alone basis; - Navtech Radar Limited, on a stand-alone basis; - Business Marketers Group, Inc (trading as Rath Communications), on a stand-alone basis; and - The aggregate adjustments arising on prior year acquisitions.
Due to their contractual dates, the fair value of receivables acquired (shown below) approximate to the gross contractual amounts receivable. The amount of gross contractual receivables not expected to be recovered is immaterial.
There are no material contingent liabilities recognised in accordance with paragraph 23 of IFRS 3 (revised).
The combined fair value adjustments made for the acquisitions above under IFRS 3, excluding acquired intangible assets recognised and deferred taxation thereon, increased the goodwill recognised by GBP2.0m (2018: GBP2.8m increase).
As at the date of approval of the financial statements, the acquisition accounting for all prior year acquisitions is complete. The accounting for all current year acquisitions is provisional; relating to finalisation of the valuation of acquired intangible assets, the initial consideration, which is subject to agreement of certain contractual adjustments, and certain other provisional balances.
a) Total of acquisitions
Total
GBPm
---------------------------------- -----
Non-current assets
Intangible assets 31.2
Property, plant and equipment 1.7
Current assets
Inventories 4.6
Trade and other receivables 4.7
Corporation tax 0.1
Cash and cash equivalents 5.3
---------------------------------- -----
Total assets 47.6
---------------------------------- -----
Current liabilities
Trade and other payables (4.4)
Provisions (0.5)
Corporation tax 0.2
Non-current liabilities
Deferred tax (3.2)
---------------------------------- -----
Total liabilities (7.9)
---------------------------------- -----
Net assets of businesses acquired 39.7
---------------------------------- -----
Initial cash consideration paid 63.0
Additional amounts paid in respect of cash acquired 5.1
Amounts owed to vendors* 1.1
Contingent purchase consideration estimated to be paid in respect
of current year acquisitions 8.3
Contingent purchase consideration adjustment in respect of
prior year acquisitions (0.5)
------------------------------------------------------------------ -----
Total consideration 77.0
------------------------------------------------------------------ -----
Goodwill arising on acquisitions (current year) 37.7
Goodwill arising on acquisitions (prior year) (0.4)
Total goodwill 37.3
------------------------------------------------------------------ -----
* In respect of net tangible asset adjustments and corporation tax relating to share options granted prior to acquisition and other adjustments relating to prior year acquisitions.
Analysis of cash outflow in the Consolidated Cash Flow Statement
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
----------------------------------------------------------------- ---------- ----------
Initial cash consideration paid 63.0 114.2
Cash acquired on acquisitions (5.3) (3.9)
Initial cash consideration adjustment on current year
acquisitions 5.7 0.1
Initial cash consideration adjustment on prior year acquisitions (0.1) 0.2
Contingent consideration paid and loan notes repaid in
cash in relation to prior year acquisitions* 3.7 1.1
----------------------------------------------------------------- ---------- ----------
Net cash outflow relating to acquisitions (per Consolidated
Cash Flow Statement) 67.0 111.7
----------------------------------------------------------------- ---------- ----------
*The GBP3.7m comprises GBP0.1 loan notes and GBP3.6m contingent consideration paid in respect of prior period acquisitions all of which had been provided in the prior period's financial statements.
b) LAN Controls Limited, on a stand-alone basis
Total
GBPm
------------------------------------------------------- -----
Non-current assets
Intangible assets 0.9
Current assets
Trade and other receivables 0.1
Cash and cash equivalents 0.1
------------------------------------------------------- -----
Total assets 1.1
Current liabilities
Trade and other payables (0.1)
Non-current liabilities
Deferred tax (0.2)
------------------------------------------------------- -----
Total liabilities (0.3)
------------------------------------------------------- -----
Net assets of business acquired 0.8
------------------------------------------------------- -----
Initial cash consideration paid 1.0
Contingent purchase consideration estimated to be paid 0.1
======================================================= =====
Total consideration 1.1
------------------------------------------------------- -----
Goodwill arising on acquisition 0.3
------------------------------------------------------- -----
The Group acquired the entire share capital of LAN Controls Limited ('LAN') on 6 September 2018 for an initial cash consideration of GBP1.0m. The maximum contingent consideration payable is GBP0.8m.
The contingent purchase consideration recognised represents the estimated amount payable, based on revenue-based targets, for each of the three annual earnout periods, commencing 6 September 2018.
LAN, located in Nottingham, UK, provides specialist safety services for buildings, with extensive knowledge of a number of safety systems, including CCTV, Fire alarms, Intruder alarms and Access Controls. LAN will be a bolt-on to FFE Limited within the Group's Infrastructure Safety sector.
The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by technology related intangibles of GBP0.9m; with residual goodwill arising of GBP0.3m. The goodwill represents:
a) the technical expertise of the acquired workforce;
b) the opportunity to leverage this expertise across some of Halma's businesses through future technologies; and
c) the ability to exploit the Group's existing customer base.
LAN contributed GBP0.3m of revenue and GBPnil profit after tax for the year ended 31 March 2019.
If this acquisition had been held since the start of the financial year, it is estimated that the Group's reported revenue and profit after tax would have been GBP0.2m and GBPnil higher respectively.
Acquisition costs totalling GBP0.1m were recorded in the Consolidated Income Statement.
The goodwill arising on the acquisition is not expected to be deductible for tax purposes.
c) Limotec bvba, on a stand-alone basis
Total
GBPm
---------------------------------------------------- -----
Non-current assets
Intangible assets 3.5
Property, plant and equipment 1.4
Current assets
Inventories 0.8
Trade and other receivables 1.1
Cash and cash equivalents 2.0
---------------------------------------------------- -----
Total assets 8.8
Current liabilities
Trade and other payables (1.0)
Provisions (0.1)
Corporation tax payable (0.1)
Non-current liabilities
Deferred tax (1.1)
---------------------------------------------------- -----
Total liabilities (2.3)
---------------------------------------------------- -----
Net assets of business acquired 6.5
---------------------------------------------------- -----
Initial cash consideration paid 8.2
Additional amounts paid in respect of cash acquired 1.8
==================================================== =====
Total consideration 10.0
---------------------------------------------------- -----
Goodwill arising on acquisition 3.5
---------------------------------------------------- -----
The Group acquired the entire share capital of Limotec bvba ('Limotec')on 18 October 2018 for an initial cash consideration of EUR9.3m (GBP8.2m), adjustable for cash acquired. The adjustment was determined to be EUR2.1m (GBP1.8m).
Limotec, located in Vichte, Belgium is a leading fire control panel designer and manufacturer and seller of fire safety systems in Belgium. The company will continue to run under its own management team, and will become part of the Group's Infrastructure Safety sector.
The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by customer related intangibles of GBP1.1m; trade name of GBP0.8m and technology related intangibles of GBP1.6m; with residual goodwill arising of GBP3.5m. The goodwill represents:
a) the technical expertise of the acquired workforce;
b) the opportunity to leverage this expertise across some of Halma's businesses through future technologies; and
c) the ability to exploit the Group's existing customer base.
Limotec contributed GBP2.8m of revenue and GBP0.2m of profit after tax for the year ended 31 March 2019.
If this acquisition had been held since the start of the financial year, it is estimated that the Group's reported revenue and profit after tax would have been GBP3.5m higher and GBP0.2m higher respectively.
Acquisition costs totalling GBP0.1m were recorded in the Consolidated Income Statement.
The goodwill arising on the Limotec acquisition is not expected to be deductible for tax purposes.
d) Navtech Radar Limited, on a stand-alone basis
Total
GBPm
------------------------------------------------------- -----
Non-current assets
Intangible assets 12.6
Property, plant and equipment 0.2
Current assets
Inventories 2.1
Trade and other receivables 2.1
Corporation tax 0.1
Cash and cash equivalents 3.2
------------------------------------------------------- -----
Total assets 20.3
------------------------------------------------------- -----
Current liabilities
Trade and other payables (2.7)
Provisions (0.2)
Non-current liabilities
Deferred tax (1.8)
------------------------------------------------------- -----
Total liabilities (4.7)
------------------------------------------------------- -----
Net assets of business acquired 15.6
------------------------------------------------------- -----
Initial cash consideration paid 21.0
Additional amounts paid in respect of cash acquired 3.3
Amounts owed to vendors* 0.6
Contingent purchase consideration estimated to be paid 8.2
======================================================= =====
Total consideration 33.1
------------------------------------------------------- -----
Goodwill arising on acquisition 17.5
------------------------------------------------------- -----
* In respect of net tangible asset adjustments and corporation tax relating to share options granted prior to acquisition.
The Group acquired the entire share capital of Navtech Radar Limited ('Navtech') on 14 November 2018 for an initial cash consideration of GBP21.0m, adjustable for cash acquired, estimated net tangible assets adjustments and tax receivables in respect of share options granted prior to acquisition. The total adjustments were estimated to be GBP3.9m. Maximum contingent purchase consideration payable is GBP18.0m.
The current contingent consideration payable represents the fair value of the estimated amounts payable for each of three annual consecutive earnout periods, commencing 1 April 2018. The earnout in each period is calculated by reference to the relevant earnings for the period compared to the target for the period.
Navtech, located in Wantage, UK, combines radar, cameras and software to improve road safety and provide real-time incident detection, including for tunnels and smart motorways. Navtech also delivers cost-effective real-time perimeter protection for critical infrastructure sites, such as airports, and supplies sensing applications for industrial automation in harsh outdoor environments. Navtech will continue to run under its current management team, and will become part of the Group's Infrastructure Safety sector.
The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by customer related intangibles of GBP5.8m; trade name of GBP1.3m and technology related intangibles of GBP5.5m; with residual goodwill arising of GBP17.5m. The goodwill represents:
a) the technical expertise of the acquired workforce;
b) the opportunity to leverage this expertise across some of Halma's businesses through future technologies; and
c) the ability to exploit the Group's existing customer base.
Navtech contributed GBP2.6m of revenue and GBP0.6m of profit after tax for the year ended 31 March 2019.
If this acquisition had been held since the start of the financial year, it is estimated that the Group's reported revenue and profit after tax would have been GBP4.9m higher and GBP2.1m higher respectively.
Acquisition costs totalling GBP0.4m were recorded in the Consolidated Income Statement.
The goodwill arising on the Navtech acquisition is not expected to be deductible for tax purposes.
e) Business Marketers Group, Inc (trading as Rath Communications), on a stand-alone basis
Total
GBPm
-------------------------------- -----
Non-current assets
Intangible assets 14.2
Property, plant and equipment 0.1
Current assets
Inventories 1.7
Trade and other receivables 1.4
Total assets 17.4
-------------------------------- -----
Current liabilities
Trade and other payables (0.7)
Provisions (0.2)
Non-current liabilities
Deferred tax (0.1)
-------------------------------- -----
Total liabilities (1.0)
-------------------------------- -----
Net assets of business acquired 16.4
-------------------------------- -----
Initial cash consideration paid 32.8
Total consideration 32.8
-------------------------------- -----
Goodwill arising on acquisition 16.4
-------------------------------- -----
The Group acquired the entire share capital of Business Marketers Group, Inc trading as Rath Communications ('Rath'), on 17 January 2019 for an initial cash consideration of US$42.4m (GBP32.8m).
Rath, located in Wisconsin, USA, operates in a number of communications markets, including the provision of two-way communication systems in public and commercial buildings, for areas of refuge where evacuation may not be safe or possible. The company also operates in other market segments including elevator and public safety phones. Rath will become part of the Group's Infrastructure Safety sector, within the Avire business.
The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by customer related intangibles of GBP7.7m; trade name of GBP3.6m and technology related intangibles of GBP2.9m; with residual goodwill arising of GBP16.4m. The goodwill represents:
a) the technical expertise of the acquired workforce;
b) the opportunity to leverage this expertise across some of Halma's businesses through future technologies; and
c) the ability to exploit the Group's existing customer base.
Rath contributed GBP2.9m of revenue and GBP0.9m of profit after tax for the year ended 31 March 2019.
If this acquisition had been held since the start of the financial year, it is estimated that the Group's reported revenue and profit after tax would have been GBP9.5m higher and GBP2.5m higher respectively.
Acquisition costs totalling GBP0.1m were recorded in the Consolidated Income Statement.
The goodwill arising on the acquisition of Rath is expected to be deductible for tax purposes.
f) Adjustments in respect of prior year acquisitions
Total
GBPm
---------------------------------------------------------------- -----
Current liabilities
Trade and other payables 0.1
Corporation tax 0.3
Total liabilities 0.4
---------------------------------------------------------------- -----
Net adjustments to assets of businesses acquired in prior years 0.4
---------------------------------------------------------------- -----
Amounts owed to vendors 0.5
Contingent purchase consideration paid (0.5)
Total adjustments to consideration -
---------------------------------------------------------------- -----
Adjustment to goodwill (0.4)
---------------------------------------------------------------- -----
In finalising the acquisition accounting for the prior year acquisitions of Setco, Cardios and Argus, adjustments were made to the opening balance sheet totalling a net credit to goodwill of GBP0.4m.
The adjustments were not material individually or in aggregate and as such the comparative balance sheet was not restated, instead the adjustments have been made through the current year.
The adjustments related to the release of a tax provision and corresponding indemnity asset in Argus, release of continent consideration and recognition of accruals in Cardios and adjustments to inventory provisions in Setco.
9 Notes to the Consolidated Cash Flow Statement
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
------------------------------------------------------------- ---------- ----------
Reconciliation of profit from operations to net cash
inflow from operating activities:
Profit on continuing operations before finance income
and expense, share of results of associate and loss/profit
on disposal of operations 217.8 181.2
Non-cash movement on hedging instruments (0.1) (0.3)
Depreciation of property, plant and equipment 20.0 18.9
Amortisation of computer software 1.8 1.6
Amortisation of capitalised development costs and other
intangibles 8.8 7.1
Impairment of intangibles 0.7 0.7
Amortisation of acquired intangible assets 35.6 34.7
Share-based payment expense in excess of amounts paid 4.7 4.4
Additional payments to pension plans (11.4) (10.7)
Defined benefit pension charge 2.1 -
Profit on sale of property, plant and equipment and computer
software (0.6) (0.5)
------------------------------------------------------------- ---------- ----------
Operating cash flows before movement in working capital 279.4 237.1
Increase in inventories (9.2) (9.1)
Increase in receivables (15.3) (24.6)
Increase in payables and provisions 8.2 9.3
Revision to estimate of, and exchange differences arising
on, contingent consideration payable (3.5) 1.7
------------------------------------------------------------- ---------- ----------
Cash generated from operations 259.6 214.4
Taxation paid (40.6) (41.1)
------------------------------------------------------------- ---------- ----------
Net cash inflow from operating activities 219.0 173.3
------------------------------------------------------------- ---------- ----------
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
-------------------------------------------- ---------- ----------
Analysis of cash and cash equivalents
Cash and bank balances 81.2 70.7
Overdrafts (included in current borrowings) (9.1) (1.0)
-------------------------------------------- ---------- ----------
Cash and cash equivalents 72.1 69.7
-------------------------------------------- ---------- ----------
Net cash/
31 March (debt) Loan notes Exchange 31 March
2018 Cash flow acquired repaid adjustments 2019
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ -------- ------------- ------------- ---------- ------------ --------
Analysis of net debt
Cash and bank balances 70.7 4.2 5.3 - 1.0 81.2
Overdrafts (1.0) (8.1) - - - (9.1)
------------------------------ -------- ------------- ------------- ---------- ------------ --------
Cash and cash equivalents 69.7 (3.9) 5.3 - 1.0 72.1
Loan notes falling due within one year (0.1) - - - - (0.1) Loan notes falling due after more than one year (176.6) - - 0.1 (2.8) (179.3) Bank loans falling due after more than one year (113.3) 43.9 - - (5.0) (74.4) ------------------------------ -------- ------------- ------------- ---------- ------------ -------- Total net debt (220.3) 40.0 5.3 0.1 (6.8) (181.7) ------------------------------ -------- ------------- ------------- ---------- ------------ --------
The net increase in cash and cash equivalents of GBP1.4m comprised cash outflow of GBP3.9m and cash acquired of GBP5.3m.
The net cash outflow from bank loans of GBP43.9m comprised repayments of GBP110.3m offset by drawdowns of GBP66.4m.
The net cash outflow from loan notes relates to GBP0.1m repayment of existing loan notes issued in relation to the previous acquisition of Advanced Electronics Limited ("Advanced").
Reconciliation of movements of the Group's liabilities from financing activities
Liabilities from financing activities are those for which cash flows were, or will be, classified as cashflows from financing activities in the Consolidated Cash Flow Statement.
Changes Effects
from Acquisition of
31 March financing and disposal Other foreign 31 March
2018 cash flows of subsidiaries changes(1) exchange 2019
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- -------- ----------- ---------------- ----------- --------- --------
Loan notes falling due within
one year 0.1 - - - - 0.1
Overdraft 1.0 - - 8.1 - 9.1
--------------------------------- -------- ----------- ---------------- ----------- --------- --------
Borrowings (current) 1.1 - - 8.1 - 9.2
--------------------------------- -------- ----------- ---------------- ----------- --------- --------
Loan notes falling due after
more than one year 176.6 (0.1) - - 2.8 179.3
Bank loans falling due after
more than one year 113.3 (43.9) - - 5.0 74.4
--------------------------------- -------- ----------- ---------------- ----------- --------- --------
Borrowings (non-current) 289.9 (44.0) - - 7.8 253.7
--------------------------------- -------- ----------- ---------------- ----------- --------- --------
Total liabilities from financing
activities 291.0 (44.0) - 8.1 7.8 262.9
--------------------------------- -------- ----------- ---------------- ----------- --------- --------
Trade and other payables:
falling due within one year 149.6 (8.2) 3.7 17.2 2.5 164.8
--------------------------------- -------- ----------- ---------------- ----------- --------- --------
1 Other changes include movements in overdraft which is treated as cash, interest accruals and other movements in working capital balances.
10 Disposal of operations and restructuring
On 30 June 2018, the Group sold the trade and assets of Accudynamics Inc, part of the Fluid Technology CGU group, for sale proceeds of GBP4.2m less disposal costs of GBP0.3m. GBP3.1m was received during the year, and we expect to receive the remaining GBP0.8m approximately one year after the sale, in accordance with the Asset Sale agreement.
The net assets on disposal were GBP4.4m comprising plant and equipment, inventory and trade receivables and payables, which together with the disposal of related goodwill of GBP0.8m and disposal costs of GBP0.3m, offset by the recycling of foreign exchange gains of GBP0.3m, resulted in a net loss on disposal (before taxation) of GBP1.0m.
In the prior year, on 27 March 2018, Optomed completed a new share offering for EUR5.5m in which the Group did not participate. This diluted our ownership interest to 23.3% from 26.7% realising a gain for the Group which was included as an adjusting item in the Consolidated Income Statement. The share issue was used to fund the acquisition of a digital software company, Commit Oy. Optomed continues to meet the tests for an associate.
11 Events subsequent to end of reporting period
There were no known material non-adjusting events which occurred between the end of the reporting period and prior to the authorisation of these financial statements on 11 June 2019.
12 Related party transactions
Trading transactions
31 March 31 March
2019 2018
GBPm GBPm
--------------------------------------- -------- --------
Associated companies
Transactions with associated companies
Purchases from associated companies 1.3 1.6
Balances with associated companies
Amounts due to associated companies 0.2 0.3
--------------------------------------- -------- --------
Other related parties comprised one company that rents its premises from a pension scheme of which one of the directors is a member. All the transactions above are on an arm's length basis and on standard business terms.
Remuneration of key management personnel
The remuneration of the Directors and Executive Board members, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures'. Further information about the remuneration of individual Directors is provided in the audited part of the Directors' Remuneration Report in the Annual Report and Accounts 2019.
Year ended Year ended
31 March 31 March
2019 2018
GBPm GBPm
--------------------------- ---------- ----------
Wages and salaries 6.8 6.0
Pension costs 0.2 0.1
Share-based payment charge 3.3 3.2
--------------------------- ---------- ----------
10.3 9.3
--------------------------- ---------- ----------
Cautionary note
These Results contain 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.
LEI number: 2138007FRGLUR9KGBT40
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
FR CKKDBFBKDAAD
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