21st Jun 2005 07:00
Halma PLC21 June 2005 HALMA p.l.c. PRELIMINARY RESULTS FOR THE YEAR TO 2 APRIL 2005 21 JUNE 2005 Halma, the leading safety, health and environmental technology group, todayannounces its preliminary results for the 52 weeks to 2 April 2005.Highlights include: • Pre-tax profits* of £50.4m marginally exceed last year's record level (2004 - 53 week period: £50.3m). On a statutory basis profit before taxation was £44.9m (2004: £36.9m). • Turnover from ongoing operations up 7% at £299.1m (2004: £279.6m), reflecting an increased contribution from the Group's enlarged Optics and Specialist business. • Healthy margins maintained as Halma consistently delivers strong returns, with ROCE** of 62% and ROTIC*** of 13%. • Strong cash generation with two high quality acquisitions made and no gearing at year end (net cash £12m). • Continuation of progressive dividend policy with an increase of 5%. * Before goodwill amortisation of £5.5m (2004: £4.2m) and exceptional items of £nil (2004: £9.1m) ** Return on capital employed is defined as pre-tax profit* expressed as a percentage of net tangible assets (being equity shareholders' funds less intangible assets) *** Return on total invested capital is defined as profit before goodwill amortisation and exceptional items and after taxation of £34.7m (2004: £34.6m) expressed as a percentage of net assets plus goodwill in reserves of £70.9m (2004: £70.9m) and cumulative goodwill amortisation of £18.7m (2004: £13.2m) Commenting on the results, Andrew Williams, Chief Executive of Halma, said: "Our ability to maintain strong returns reflects well on our strategy ofcreating unique, high value products which help our customers become safer, morecompetitive and more profitable. "Actions to reposition the Group for higher growth will continue bothoperationally and structurally. I am looking for greater consistency ofperformance across the Group to deliver the sustained organic growth whichprovides valuable returns for shareholders. Having visited all of Halma'ssubsidiaries during the year, I am confident in our strength and prospects." Geoff Unwin, Chairman of Halma, said: "We have strong market positions and we are highly cash generative. We areaccelerating our own rate of change - particularly on innovation. Overall,despite little fundamental help from our markets, we remain cautiouslyoptimistic for the year ahead." For further information, please contact: Halma p.l.c. +44 (0)1494 721111Andrew Williams, Chief ExecutiveKevin Thompson, Finance Director Hogarth Partnership Limited +44 (0)20 7357 9477Rachel Hirst/Andrew Jaques A copy of this announcement, together with other information about Halma, may beviewed on its website: www.halma.com. A copy of the Annual Report and Accounts will be sent to shareholders on 4 July2005 and will be available to the general public on written request to theCompany's registered office at: Misbourne Court, Rectory Way, Amersham, BucksHP7 0DE. PHOTOGRAPHS High resolution photos of Halma senior management, including Chief ExecutiveAndrew Williams, and images illustrating Halma business activities can bedownloaded from its website: www.halma.com. Click on the 'News' link, then'Image Gallery'. Photo queries: David Waller +44 (0)20 8205 0038, e-mail:[email protected]. NOTE TO EDITORS Halma p.l.c. develops products used worldwide to enhance safety and to minimisehazards. The Group comprises six business groups: • Fire and Gas detection• Water leak detection and UV treatment• Elevator and Door Safety• Bursting discs and sequential locking for Process Safety• High power electrical Resistors• Optics and Specialist technology The key characteristics of Halma's businesses are that they are based onadvanced technology and offer strong growth potential. Each business group is aclear market leader in its specialist field and, in a number of cases, is thedominant world supplier.HALMA p.l.c. Group Results for the 52 weeks to 2 April 2005 Financial Highlights 2005 2004 Change 52 weeks 53 weeksTurnover + 2% £299.1m £292.6mProfit before taxation (1) 0% £50.4m £50.3m Earnings per share (2) 0% 9.42p 9.44pEarnings per share - statutory + 31% 7.97p 6.09pDividend per share + 5% 6.50p 6.19p Return on sales (3) 16.8% 17.2%Return on total invested capital (4) 13.1% 13.7%Return on capital employed (5) 62.4% 52.4% Pro-forma information: 1 Before goodwill amortisation of £5,491,000 (2004: £4,220,000) and exceptional items on disposal of non-core businesses of £nil (2004: £9,149,000). 2 Before goodwill amortisation of 1.45p (2004: 1.07p) and exceptional items of nil (2004: 2.28p) per share. 3 Return on sales is defined as profit(1) before taxation expressed as a percentage of turnover. 4 Return on total invested capital is defined as profit before goodwill amortisation and exceptional items and after taxation of £34,690,000 (2004: £34,557,000) expressed as a percentage of net assets plus goodwill in reserves of £70,931,000 (2004: £70,931,000) and cumulative goodwill amortisation of £18,668,000 (2004: £13,177,000). 5 Return on capital employed is defined as profit(1) before taxation expressed as a percentage of net tangible assets (being equity shareholders' funds less intangible assets). Chairman's Review Geoff Unwin, Chairman of Halma, said: "The Group produced a profit before tax* of £50.4 million, another record profitfor Halma - just. "The year was characterised by significant change within the Group - some of itvisible, some less so. The most visible change was the appointment of AndrewWilliams as CEO at the end of February 2005, having been appointed Deputy CEO inDecember 2004. Andrew succeeded Stephen O'Shea who reaches the normalretirement age for Halma this year, and on behalf of the Board I should like torecord our gratitude to Stephen for all that he has contributed to the Groupduring his career with us. The succession process has gone extremely smoothlyand Andrew is bringing a fresh impetus to our operations - I encourage those ofyou that can, to meet him at our AGM. "Last year I referred to a number of factors that the Board and seniormanagement felt could possibly be holding back our performance. Some of themwere issues that could be quickly addressed e.g. incentives, span of control;others were more long-term, such as resource allocation and the efficiency ofour balance sheet. We are continuing to upgrade the quality of our managementright across the Group and particularly at subsidiary board level. "All aspects of selling have received particular attention and we aredisappointed not to see better progress on the revenue line. However, in commonwith many sectors, we face continuing pressure from price transparency via theinternet and deflationary trends through lower manufacturing costs. Ourresponse is the continual re-design and improvement of our products, allowingmore outsourcing and 'off-shore' production as we re-double our efforts oninnovation. We are having success but it is patchy, we need to do more -faster. "In terms of our sectoral performance (more detail is given in the ChiefExecutive's Review): Resistors continued to have a difficult year and theproblems there are being tackled in new ways and with renewed vigour. Water toohad a tough year. Other sectors held their own or better. "Our two new acquisitions Diba Industries, Inc. and Ocean Optics, Inc. performedextremely well, exceeding our expectations. The results "Profit before tax* was a record £50.4 million (previous year £50.3 million) andearnings per share* were slightly down at 9.42p (previous year 9.44p). On astatutory basis, profit before taxation and earnings per share were £44.9million and 7.97p respectively. These results were produced despite adversecurrency translation impacts and raw material movements of the order of £2.5million. The return on the capital* that our managers control was a clear alltime record for a full year at 62% - a staggering achievement, and return ontotal invested capital* (including all goodwill) was 13.1% - far exceeding ourcost of capital. Net cash at the year-end was £12 million. Turnover edgedahead by 2% to £299 million (previous year £293 million). Excluding discontinuedoperations, sales increased by 7%. "The Board recommend a final dividend of 3.92 pence per share giving an increaseof 5% for the year. "On behalf of the Board, I should like to thank all our employees for theirdedication in producing this record result, and also for their imagination incontinually improving our products and service to our customers. Prospects "We have strong market positions and we are highly cash generative. We areaccelerating our own rate of change - particularly on innovation. "Overall, despite little fundamental help from our markets, we remain cautiouslyoptimistic for the year ahead." * See Financial Highlights Chief Executive's Review Andrew Williams, Chief Executive of Halma, said: Record sales, profits and ROCE, but ..... "The Group delivered record sales, record profits and a ROCE* of 62% despite theheadwind of currency and rising raw material prices - particularly stainlesssteel. It is always pleasing to report such achievements together with a recorddividend payment for shareholders, but there is more to be done if we are toachieve the performance levels we really aspire to. "The Group did do well to compensate for some adverse factors, achieve excellentcash generation and make two high quality acquisitions. However, the underlyinglevel of organic growth was inconsistent with parts of the business failing tomake satisfactory progress, thereby eroding the growth delivered elsewhere. "We take encouragement from our achievements but do not shy away from thechallenges. Setting high standards and expectations of our performance has beena key element of Halma's continuing success in delivering outstanding returns. Strong cash generation and a record dividend "The Group's excellent cash generation and outstanding ROCE* record is notachieved easily but by the disciplined management of our assets at all levels. During the year this enabled us to make £9 million of capital investment in ourexisting operations, pay a record dividend to shareholders for the 26thconsecutive year, make two significant acquisitions and still have £12 millionof net cash available at the year end. Flat sales performance in continuing operations "Sales from continuing operations, excluding acquisitions, increased to allterritories except for the US where turnover fell by 10%. Clearly currency was akey factor, but again, is not the whole story. We must become more active inthe way we build the distribution channels of our businesses, particularly inthe US and other key markets. We have sometimes lacked clarity and speed ofaction in this area in the past and not allocated a significant proportion ofour resources to make it happen. Exciting value-adding acquisitions strengthen Optics and Specialist sector "During the year we acquired Ocean Optics, based in Florida, and DibaIndustries, based in Connecticut, for a total of £22 million. They havesignificantly enhanced our capability in optical sensing and fluid technologyand have performed well since joining the Group. We remain committed to makingsuch high quality acquisitions as they become available in accordance with ourstrategy of focussing more closely on those markets offering the best growthopportunities. "Excluding these acquisitions and costs of holding companies, the Optics andSpecialist sector achieved underlying profit growth of 12%. New productinnovation, improved sales processes and increasing efficiencies inmanufacturing contributed to an excellent result. Elevator and Door safety maintains market leadership "At constant currency, the sector reported marginal increases in both profitsand sales. In the US our voice communications equipment sales fellsignificantly. Since the year end we have merged this business with our USelevator safety products company to benefit from its well-developed saleschannels. "BEA, the door safety business, performed slightly better in the second halfthan flagged at the Interim stage. After rapid growth since acquisition, thiswas encouraging and underpinned a reasonable sector performance overall. Water sector repositioned for new market needs "We have taken actions to position the business for better growth in the future.There were significant changes to senior management and to the product range,which had short-term consequences for operating costs and margins. For example, it was necessary to rationalise our range of instrumentswhich measure flow and pressure in water networks to meet more precisely thegrowing demand for these products worldwide. This resulted in additional costsassociated with stock write downs, field service replacements, and adjustmentsto product design and selling resources. In addition, there was no repeat of amajor US leak detection contract this year following last year's success in LasVegas. However, we continue with our investment in the US for leak detection,UV treatment and water quality. Our water business is now in better shape tomeet the opportunities presented by this long-term growth market. Resistors struggle against impact of currency and raw material prices "As indicated at the half year, the margins on our Resistor business came underintense pressure from stainless steel price increases. In the second half, wehad some success in mitigating these increases although in certain cases long-term contract terms proved difficult to renegotiate. We have recognised for some time that our Resistors business has been struggling against rising raw materialprices, currency and tough market conditions. Since the year end, more vigorousaction is being taken and already we have consolidated two of our manufacturingoperations based near Cincinnati, Ohio. Fire and Gas delivers solid result in changing market "We responded positively to the major M&A activity in the global Fire and Gasmarket. New product developments and industry leading customer service levelshelped us to compete with US based rivals who benefited from a weaker dollarwhen selling into export markets. Whilst the market is undergoing a period ofsignificant consolidation we continue to find, and exploit, new opportunities. Process Safety introduces new products for new applications "A number of products were launched targeting new applications for our safetyinterlock products. The roll out was more gradual than expected in some cases,but the year ended with greater momentum than it started, particularly in theoil and petrochemical market. Overall, the sector continues to deliver asatisfactory return on sales and excellent ROCE. Talented people and excellent products "During the year, I visited all of Halma's principal subsidiaries and saw howhard our people are working towards our goal of higher growth. Halma has atalented workforce that creates, builds and sells excellent products covering ahuge range of applications. Improving the timing of new product introductionsis an area we need to improve continually and, although great strides have beenmade recently, a further improvement will have a significant impact on ourorganic growth prospects. "It is encouraging to see the increasing commitment of our businesses towardsexceeding the expectation of customers. Our innovation often makes a bigdifference to our customers' success and quicker new product introduction isanother way in which we can exceed their expectation for our mutual benefit. Stephen O'Shea's retirement "I would also like to record my thanks to Stephen O'Shea for his generous helpduring the recent handover period and for his contribution to the Group's manysuccesses since he joined us as MD of Apollo Fire Detectors 22 years ago. I amsure you will join me in wishing him a long and happy retirement. A robust strategy although striving for greater growth "Our ability to maintain strong returns reflects well on our strategy ofcreating unique, high value products which protect lives, or improve the qualityof life, for individuals and businesses worldwide. We will continue to investin, and develop, high return technology businesses which operate in niche,'demand driven' global markets with strong barriers to entry. "Actions to reposition the Group for higher growth will continue bothoperationally and structurally. I am looking for greater consistency ofperformance across the Group to deliver the sustained organic growth whichprovides valuable returns for shareholders. Whilst there is still much work tobe done, there are good opportunities available to us and I am very much lookingforward to leading the Group in the year ahead." * See Financial Highlights Finance Director's Review Kevin Thompson, Finance Director of Halma, said: Some underlying organic sales growth with marginal profit growth to a new high "Group turnover was 2% higher than last year at £299 million (2003/04: £293million) and ongoing turnover grew by 5% on a constant currency basis, excludingthe turnover of new businesses at the time of acquisition. Profit before tax*at £50.4 million (2003/04: £50.3 million) was the highest ever made by theGroup, by a small amount. On a statutory basis profit before taxation increasedto £44.9 million (2003/04: £36.9 million). These results were achieved in 52weeks rather than 53 weeks last year. We maintained healthy margins, strongreturns and good cash flow, but we aim for greater improvement. The currency headwind played a notable part in the results this year "Around one-third of Halma's turnover and profits are made in US Dollars and USDollar-related currencies, with around 15% in Euros. The average rate at whichwe translate US Dollars has deteriorated by 9% in the year and even though theEuro translation rate was reasonably stable, the total currency impact reducedturnover by £10 million (3.7%) and profits by £1.6 million (3.2%). Thecommercial effects of currency movements on transactions, which show themselvesfor example in the advantage gained by US competitors, are difficult toquantify, but have a notable adverse impact on our business. "Measured at constant exchange rates, four of our sectors moved ahead in salesand profits, the exceptions being Resistors and Water - these are discussed inthe Chief Executive's Review. "Whilst the adverse currency effect was not as bad as we feared at the Interimstage, it impeded our progress. Our acquisitions exceeded expectations and helped development of the Opticssector "In May 2004 we acquired Diba Industries, Inc. for £8 million and in June 2004we paid an initial consideration of £14 million for Ocean Optics, Inc. In bothcases the purchase price was approximately equal to their turnover at the timeof acquisition, and pro-rata they would have added £17 million to our 2004/05turnover. Up to a further £14 million is payable for Ocean Optics, with themaximum reached if it doubles its profit in the two years post acquisition. Inthe first year, it met its target. "Both are high-return businesses and have developed well since acquisition,contributing to the ongoing development of our Optics and Specialist sectorwhich started with the disposal of three non-core businesses last year. Withinthe Optics and Specialist sector we also report holding company costs whichincreased this year, in part due to the cost of management changes. Healthy margins and high returns continue shareholder value creation "Return on sales* at 16.8% was slightly below last year's figures of 17.2%. High and consistent margins are a feature of the Group and all sectors exceptResistors and Water maintained their return on sales. The benefit to Groupmargins from the disposals mentioned above was eliminated this year by theimpact of those two sector performances. One important factor which affectedthe Resistors sector in particular, was the increase in stainless steel pricesthis year taking £0.9 million from Group profit. "A key indicator used internally in managing our businesses is Return on CapitalEmployed (ROCE*) and we have therefore published its progress over many years. It demonstrates the effectiveness of our managers in utilising the tangibleassets under their direct control. At 62% for the Group this year, ROCE* ishigh even for Halma reflecting the good management of resource at operatingcompany level. "We recognise the value to shareholders in reporting Return on Total InvestedCapital (ROTIC*) and so this year we are also reporting that figure. We arereporting a post-tax ROTIC* which includes goodwill going back over the years.ROTIC* recognises that businesses must use both retained earnings and debtwisely to give shareholders good returns. This year's ROTIC* of 13.1%, is far inexcess of our weighted average cost of capital, continuing the trend establishedover many years. Our strong cash flow funded increased dividends with no year end net debt "Halma has a history of good cash generation and this year was no exception. Operating cash flow net of capital expenditure as a percentage of operatingprofit was 101%. We finished the year with net cash of £12 million. As notedbelow we do carry loans to hedge our currency assets but overall we arecurrently ungeared. "These strong cash flows will finance another record dividend. The Boardrecommends a final dividend of 3.92p per share, giving a dividend for the fullyear of 6.5p, 5% up on last year. We have continued our progressive dividendpolicy, dividends having increased every year for more than 25 years. "As the dividend increase is above the earnings increase, dividend cover hasreduced a little. Our task is to deliver the earnings growth in the comingyears so that we can raise that cover again. If approved, this final dividendwill be paid on 24 August 2005 to shareholders on the register at the close ofbusiness on 22 July 2005. Treasury, tax and pensions continue on a prudent path "Our operating companies hedge their trading transactions back into their localreporting currency. Our policy is to hedge our US Dollar and Euro netinvestment in overseas operations through currency denominated loans, but not tohedge the effects of currency movements on the translation of overseas earningsinto Sterling. The philosophy behind our treasury activities is one of riskmanagement and control; no speculative transactions are undertaken. "As anticipated, the effective tax rate on profits* was in line with last yearat 31.2%. Depending on the precise mix of profits earned in various taxjurisdictions, we expect the effective rate going forward to be broadly similarbut perhaps a little higher. "Pending the introduction of International Financial Reporting Standards (IFRS)next year, we have continued to adopt the transitional provisions of FRS 17(Retirement Benefits). Under FRS 17, the net pension deficit has remained at£29 million net of the related deferred tax. The increase in the market valueof scheme assets has been offset by higher calculated liabilities in part due tolower discount rates. New cash going into the main (defined benefit) pensionscheme is being invested in fixed interest securities so that over time theprofile of assets is more closely matched with the scheme's liabilities, thescheme having been closed to new members several years ago. Internal audit builds on a history of sound Group controls "A critical feature of Halma is the entrepreneurial and autonomous nature of ouroperating companies. To underpin that approach we install high-quality financeexecutives in each business to monitor and assist development. "Responsibility and accountability of local management has always been paramountbut this has been further emphasised over the past year with strengthened localaccounts sign-off and by widespread use of relevant financial warning signsacross the Group. "We have further enhanced our internal review procedures this year, continuingto use senior finance staff to review other operating businesses but adding morerigorous feedback and follow-up. Together with the independent reporting routeto the Audit Committee introduced in 2003/04, I can now confirm that ourinternal audit function is fully established. IFRS preparations are well advanced "For 2005/06 the Group is required to prepare its consolidated accounts inaccordance with International Financial Reporting Standard (IFRS). Halma'sInterim Report and Annual Report and Accounts for 2005/06 will therefore containfinancial statements for 2005/06 and comparatives for 2004/05 prepared underIFRS. There will be some presentational differences, but in summary the impacton trading results is not expected to be material and net assets will be reducedmainly by the inclusion in the Balance Sheet of the pension deficit noted above. Cash flows and the underlying economics of the business remain unchanged. "In a little more detail, the main effects of IFRS on Halma are as follows: since Research and Development is an important part of our business (we spend 4%of sales on R&D) we will recognise this asset by capitalising appropriate costs,although we anticipate expensing most of the cost as we go; share-based paymentswill add a new charge against our profits, starting off low but expected toincrease as each new year falls under these rules and as we transition away fromshare options to our proposed performance share plan; goodwill on acquisitionswill be frozen, goodwill amortisation no longer appearing in the Profit and LossAccount; pension costs are likely to be a little more volatile and as mentionedabove, the pension deficit will come onto the Balance Sheet. The new rules onfinancial instruments will have a negligible effect on us. "In late summer, ahead of our half year-end, we will publish a fullquantification, reconciliation and explanation of the impacts on Halma of IFRS. We continue to focus on high returns for our shareholders "This year has seen a fair amount of change, with some repositioning and a lotof investment - there has been associated cost. Our pursuit of positive changeand improvement will continue. Our key objective is to continue creatingwealth for our shareholders through investment in high performance businessesand the generation of strong cash flows." * See Financial Highlights Operating Review Fire and Gas We are world leaders in sensors that detect life-threatening fire and gashazards. Our products warn people of imminent danger and give them time toescape. Now sold in 80 countries, our fire detectors protect people andbuildings from the risk of fire. Our gas detectors safeguard the lives ofindustrial workers by alerting them to the presence of toxic or explosive gases.We also make specialist products for conditioning gas samples. The principalsales channels for fire detectors are distributors and fire alarm installers;gas detector customers range from lone contractors to multinationals. During2004/05 our Fire and Gas sector companies produced 25% of Group turnover and 33%of operating profit**. Our businesses in the Fire and Gas sector achieved record sales during 2004/05,with profits slightly ahead. The fire detector market is a very competitiveenvironment mostly dominated by large multinationals. During 2004/05 there weremany competitor acquisitions and consolidations. Despite such market pressures,we increased market share and remain the second largest maker of commercialgrade fire detectors worldwide. We achieved double-digit fire detector sales growth in Eastern Europe and majorincreases in the Middle East, India and the Far East. This compensated forsubdued sales in Central Europe. A key differentiator for our fire productscompanies is industry-leading customer service. To reinforce this competitiveadvantage, in 2004/05 we set up technical centres in Spain, the US, Ireland,India and China. Increasing regulatory product testing and approval is a major driver in the fireindustry (and a powerful barrier to market entry). Our businesses investconsiderable time in maintaining close relations with approval and regulatoryauthorities. To sell fire detectors on a worldwide basis, we hold 1500 productapprovals. An important recent project has been product development to satisfythe new EU Construction Products Directive. This applies to all 25 member statesfrom June 2005. Continuous product innovation is a key sales growth factor in this sector. Alongside new fire detector ranges, we launched new emergency evacuationproducts, including directional and programmable sounders, and devices to guidepeople out of smoke-filled buildings. Gas detector profits continued to rise, supported by new product launches in theportable and fixed systems markets. Gasman, a single gas detection instrumentand market leader in terms of size, weight and performance, is a key newproduct. Last year's restructuring of our European gas detector sales operationsdelivered improved sales and profits. We strengthened our sales routes in theUS, producing record revenues and an excellent platform for future growth.Pricing pressure, particularly in portable gas detectors, remained strong, butoperational improvements ensured an increase in gross margins. The small-scale power generation market based on fuel cells is nowcommercialised and sales of gas conditioning products are growing. However,most business continues to be for prototyping projects. Within this market, ourhydrogen humidification systems are being extended to handle high pressure fuelcells as developers attempt to produce more efficient, lower cost systems. Thisis a long-term growth opportunity. Water We own world-leading businesses in three water industry sectors: ultravioletlight (UV) water treatment, instruments for monitoring and controlling waterdistribution, and water quality analysis. These markets are global and we makesubstantial sales worldwide. Our principal customers are drinking water supplycompanies, municipal authorities, food manufacturers and the process industries.Based in the UK, the Netherlands, France and the US, during 2004/05 our Watersector companies produced 11% of Group turnover and 5% of operating profit**. While Water sector sales were maintained at a slightly reduced level, profits inthis sector were substantially below the prior year. During 2004/05 we saw significant changes in the market for instruments toconserve water in distribution networks. Our water supply customers facedpressures to cut costs. This created demand for lower margin instruments tomonitor and control water networks in a preventative way, in addition todiagnostic leak location instruments. In response, we restructured the productranges and organisation of several companies in this sector. As part of thisprocess we upgraded a number of products in the field which led to some stockwrite-offs. This involved substantial costs but has produced a much strongerbase for growth. An important contract for leak detection equipment in the cityof El Paso, Texas, was smaller in scale than the very successful Las Vegascontract in the previous year. However, it represented useful progress in amarket where we continue to make a significant investment in anticipation offuture returns. Acquisition of data logging and data transmission businesses inrecent years has led to a 50% increase in sales of these instruments in 2004/05and allowed us to penetrate the fast-growing market for monitoring wastewaterand flow. Sales of UV equipment outside of the US market returned to growth. However,delays in closing US contracts led to a decline in total UV equipment sales. Wewon an important contract, phase II of the Houston CrossFlow drinking waterproject. A reorganisation of the US sales operation has started to deliver majorimprovements, with the 2005/06 order book substantially ahead. Outbreaks of water-borne disease create demand for our disinfection technology.Following an outbreak of giardiasis in the Norwegian city of Bergen's drinkingwater supply, we won a significant order. UV sales to the swimming pool sector,where our companies are dominant, continued strongly, benefiting from increasedawareness of health risks from chlorination by-products. Continued investment inproduct approvals has created an excellent foundation for securing futuredrinking water projects. We believe we are the first company with mediumpressure UV technology that complies with the new European testing criteria. UVsales to South East Asia continued to grow because our equipment providessignificant performance advantages and lower capital costs than competingsystems. Further capital investment expanded our UV lamp manufacturing capacityto meet growing demand. Sales and profits at our water testing business reached record levels. Welaunched an innovative new product, called Cool Pool Tester. This transfersadvanced photometric water analysis technology developed for professionallaboratory users into the domestic swimming pool market. Elevator and Door Safety Our businesses in this sector are world leaders in products that protect peopleusing elevators and automatic doors from harm. We make infrared and microwavebased sensors that control the operation of elevator doors and automaticpedestrian and industrial doors. They safeguard users, improve accessibilityfor the disabled and optimise traffic flow. We also make voice communication anddisplay products for elevators. These businesses are based in Belgium, the UK,New Zealand, the US, Singapore and China. The elevator and automatic door markets separate into new construction andbuilding refurbishment, with our sales equally split between the two. Customersin the new-build sector are generally multinational elevator and doormanufacturers. Refurbishment customers tend to be local contractors. During2004/05, this sector produced 21% of Group turnover and 23% of operatingprofit**. Although overall sales and profit in this sector fell slightly, we generatedsignificant sales growth in the core elevator and door product groups,particularly in Asia and Europe. An underlying sector-wide advance in sales andprofit was offset by unfavourable currency movements and a disappointingperformance by our emergency telecoms business. With less than 10% of sales inthis sector in the UK, its headline performance is vulnerable to Sterlingexchange rates. We maintained our market share in automatic door control sensors despite lowerdoor control sales in the US (due to a large refurbishment contract in 2003/04).Record profits were achieved, aided by rising sales in China and also in Japanwhere we now have three sales offices. We won worthwhile new business from the New York City Transit Authority forstation platforms emergency communications systems, most of which will beshipped in 2005/06. However, voice communication equipment sales fellsignificantly. To turn this around, we have merged this telecoms business withour US elevator safety products company to benefit from its strong salesmanagement skills and well developed sales channels. Recent European legislation mandates that elevators must be fitted withemergency voice communication systems. This has created a valuable new market;we estimate that 90,000 new elevators are commissioned every year in the EU. Wehave developed a new elevator telephone system which enables building operatorsto comply fully with the new regulations. We have also opened a new sales officein Italy where an estimated 90% of elevators do not meet EU standards. The more prominent risk in this sector relative to others is the unpredictableimpact of the proposed Chinese currency revaluation. A significant proportion ofour elevator and door products are made in China and a revaluation of the Yuanmay increase production costs and squeeze margins. Given continued global economic development, market prospects for elevator andautomatic door safety products are positive in the long term. The key driversare urbanisation, population growth and accessibility for the disabled. Thesefactors create demand for high rise buildings, requiring elevator controls, andalso large buildings with automatic doors. Demand for our products iscontinually rising due to concern in most countries about public safety. Process Safety Our Process Safety businesses help customers protect their human and capitalassets. We create safe workplaces where employees are safeguarded from injuryand plant is protected from damage. We are world leaders in access controlproducts called trapped-key interlocks. These separate people from hazards, suchas moving machinery, and prevent dangerous operation of industrial equipment. Our second Process Safety specialism is bursting discs. These products minimiseexplosion risks, for example in chemical plants, protecting workers and capitalinvestment, and preventing environmental pollution. Customers for Process Safetyproducts range from one-man businesses to multinational corporations; themarkets are global. Based in the UK, the US, Mainland Europe and Australia, ourProcess Safety companies generated 12% of Group turnover and 13% of operatingprofit** in 2004/05. Overall sectoral performance was in line with the prior year. Bursting discsales moved significantly ahead, benefiting from last year's reorganisation andinvestment. Interlock sales in the US and France were disappointing although inthe UK and the rest of Europe they grew modestly. Our growth strategy in thissector centres on increasing sales of our established technologies into the newmarkets of the developing world, where increased safety awareness and health andsafety legislation is following industrial expansion. We aim to maintain ourposition of niche market leadership in the mature industrial markets throughinnovative new products and new applications. The oil and gas business is an important market where our products safeguardexploration, production and refining operations worldwide. We are the worldleader in valve interlock control systems and satisfy a significant percentageof total world demand. With steady global economic development, demand for oiland gas will continue to rise, with production set to double by 2020. Gasflaring, where gas from oil wells is simply burned, will be outlawed worldwideby 2008 and new infrastructure projects should underwrite long-term marketgrowth. In the general industrial market, sales and profit growth will be achieved byproduct innovation and penetration of new markets. The Chinese process safetymarket is growing, but not as fast as more developed parts of Eastern Europe.Our Salvo safety system is an example of product innovation and entry into acompletely new market. This product ensures that a vehicle cannot leave aloading bay until it is safe to do so, preventing potentially fatal accidents tofork-lift operators. Salvo has generated substantial sales in its first year, ina market sector with significant potential. With double digit profit growth our bursting disc businesses had an excellentyear. Further growth will come from extending sales into high growth markets inEastern Europe and Asia. A slowdown or reverse in global economic development, or slow adoption of healthand safety legislation in Eastern Europe and Asia, could delay progress in thissector, as could a downturn in key markets. However, we believe that prospectsfor steady growth in this sector still exist. With continued global economicdevelopment, and rapid industrial development in the enlarged EU and China, thelonger term market drivers remain. Resistors Our high power resistors are used to dissipate excess electrical energy, controlthe speed of large electric motors, protect electrical power distributionsystems from damage and for electrical safety. The combined engineering and marketing resources of our five businesses in thissector make us the world leader in power resistors. Our customers in this sectorare mainly in power generation, the process industries and transit systemsmanufacture. Large contracts, won via competitive tendering, account for ahigher than average proportion of sales. Based in the US, Canada, Australia andthe UK, our Resistor businesses contributed 9% of Group sales and 3% ofoperating profit** in 2004/05. While overall sales edged 7% ahead in this sector, profits fell back. This waspartly due to a steep rise in stainless steel raw materials costs. We were ableto increase prices, but part of the steel price rise had to be absorbed andmargins suffered. Together with the impact of unfavourable exchange ratemovements, these factors hindered any underlying profit progress. Our long-termgoal of reducing dependency on the US market by increasing the proportion of USexport sales is succeeding. Resistor exports rose by 40% in 2004/05 and non-USsales now contribute 51% of sectoral sales. A major growth target is the development of new markets and products tosafeguard workers and protect capital equipment from damage caused by electricalearth faults. Recognition of the danger posed by earth faults is growing amongheavy electrical users and our products are the most efficient method ofmitigating this hazard. A positive trend is the adoption of this technology inhospitals and data centres. Sales into this market rose 15% in 2004/05 and wesold earth fault protection systems into South East Asia for the first time. During 2004/05 sales of transit resistors, which are used to control braking onlocomotives and trams, generated poor margins. We took action to cut overheadsand increase manufacturing efficiency by consolidating all transit resistorproduction at a single US location. However, a combination of competitivepricing and margin volatility due to unpredictable raw material costs has madethis niche market relatively unattractive. We may consider withdrawing fromtransit resistor production during 2005. A market targeted for growth two years ago, braking resistors on the huge trucksused to transport ore in open-cast mines, is now generating significant sales.We are now the established leader in the replacement aftermarket and we areworking with several truck makers to become the original equipment supplier too. We plan to maintain sales growth in 2005/06, focussing on the launch ofinnovative dynamic braking and electronic ground fault relay products. We willalso aim to grow sales of filter resistors which are used by power companies tocontrol the quality of their electrical supplies. Our primary geographicalgrowth target is Asia, particularly China where we have established a localpartnership. While returns and prospects for Resistors are still good by peer standards, thesector is under particular scrutiny as part of our normal strategic reviews. Optics and Specialist We are world leaders in two areas of optical technology. We make ophthalmicinstruments and special lenses for the medical market. These test eyesight,diagnose ocular disease and enable eye surgery. Our second optical specialism iselectro-optical instruments (spectrometers) mainly used for colour measurementand material analysis. We sell our optical products into global markets andexports are a high proportion of sales. Our other main focus in this sector ison high precision, miniature fluid control products used in analyticalinstrumentation. These fluid technology products are sold primarily to high techinstrument manufacturers. Based in the US and the UK our Optics and Specialistcompanies contributed 22% of Group turnover and 23% of operating profit**. The Optics and Specialist businesses produced excellent results, establishingnew sales and profit records. Overall sectoral profit growth was reduced byincreased corporate management charges which are included as part of this sectorand a lower level of performance from certain Specialist businesses. Our ophthalmic optics companies benefited from market expansion due to globalpopulation growth and produced strong results. Export sales grew significantly;future export growth is targeted on Asia. Ophthalmic lens sales produced recordprofits, aided by a very successful new product launch. Demand for ophthalmicinstruments was boosted by a new cordless, battery-powered indirectophthalmoscope. A unique product, it continues to sell very well in the US, itstarget market. Close relationships with leading ophthalmologists help us developnew products that compliment medical advances. Our fluid technology companies maintained growth in core markets and in newapplications, delivering record sales. The primary market, life scienceinstrumentation, continues to grow in the high single digit range. We expectthis growth pattern to continue, driven by increased testing and discoveryrequirements due to increases in population, and both pharmaceutical and biotechresearch. During 2004/05 the United States Postal Service completed installationof biological hazard detection equipment containing our components, creating anongoing spares business. The acquisition of Diba Industries in May 2004strengthened our presence in this market. The company continues to perform toexpectations and recently won an important contract to supply a world-leadingmanufacturer of blood analysis instruments, with deliveries starting in 2005/06. Since its acquisition in June 2004, spectrometer manufacturer Ocean Optics hasachieved record sales and profits, exceeding expectations at the time ofacquisition. Strong growth continued in all export markets, including Europe andJapan. This company has maintained its market position of 'disruptiveinnovator', extending the analytical capability of its core product line. During 2004/05 we launched an unrivalled optical colour changing system fortheatrical and entertainment industry lighting based on patented thin filmcoating technology. Significant sales were achieved into research laboratoriesof products based on an advanced analytical technique which uses lasers tovaporise samples for analysis. The product line is now being developed forvolume production to open up this market in 2005/06. Our spectrometers will bebuilt into a forthcoming NASA space project designed to search for signs of lifeon the planet Mars. ** before interest, tax and goodwill amortisation - see Segmental Analysis Preliminary Results for the 52 weeks to 2 April 2005 Consolidated Profit and Loss Account £000 52 weeks to 2 April 2005 53 weeks to 3 April 2004 Before Before goodwill Goodwill goodwill Goodwill amortisation amortisation amortisation amortisation and and and and exceptional exceptional exceptional exceptional items items Total items items Total TurnoverContinuing operations 277,505 - 277,505 279,611 - 279,611Acquisitions 21,614 - 21,614 - - - _______ _______ _______ _______ _______ _______Ongoing operations 299,119 - 299,119 279,611 - 279,611Discontinued operations - - - 13,029 - 13,029 _______ _______ _______ _______ _______ _______ 299,119 - 299,119 292,640 - 292,640 ======= ======= ======= ======= ======= =======Operating profitContinuing operations 45,774 (4,280) 41,494 50,422 (4,209) 46,213Acquisitions 4,570 (1,211) 3,359 - - - _______ _______ _______ _______ _______ _______Ongoing operations 50,344 (5,491) 44,853 50,422 (4,209) 46,213Discontinued operations - - - (370) (11) (381) 50,344 (5,491) 44,853 50,052 (4,220) 45,832 Exceptional itemsLoss on sale of businesses - - - - (3,394) (3,394)Associated goodwill - - - - (5,755) (5,755) Loss on disposal ofdiscontinued operations - - - - (9,149) (9,149) _______ _______ _______ _______ _______ _______ Profit on ordinary activitiesbefore interest and taxation 50,344 (5,491) 44,853 50,052 (13,369) 36,683Interest 45 - 45 232 - 232 _______ _______ _______ _______ _______ _______Profit on ordinaryactivities before taxation 50,389 (5,491) 44,898 50,284 (13,369) 36,915Taxation (note 2) (15,699) 159 (15,540) (15,727) 1,134 (14,593) _______ _______ _______ _______ _______ _______ Profit for the financial year 34,690 (5,332) 29,358 34,557 (12,235) 22,322 _______ _______ _______ _______ _______ _______ Ordinary dividends (note 3) (24,015) (22,725) _______ _______ Profit/(loss) transferredto/(from) reserves 5,343 (403) ======= =======Earnings per ordinary sharebefore goodwill amortisationand exceptional items (note 4) 9.42p 9.44p Earnings per ordinary share (note 4) 7.97p 6.09p Diluted earningsper ordinary share 7.96p 6.09p Consolidated Balance Sheet £000 2 April 2005 3 April 2004 Fixed assetsIntangible assets 94,848 71,425Tangible assets 48,896 47,139 _______ _______ 143,744 118,564 _______ _______Current assetsStocks 35,502 31,208Debtors 69,062 67,080Short-term deposits 35,581 33,898Cash at bank and in hand 9,767 14,584 _______ _______ 149,912 146,770 _______ _______Creditors: amounts falling due within one yearBorrowings 33,344 26,934Creditors 53,399 44,394Current taxation 5,137 5,563Dividends payable 14,457 13,762 _______ _______ 106,337 90,653 _______ _______Net current assets 43,575 56,117 _______ _______Total assets less current liabilities 187,319 174,681Creditors: amounts falling due after one year 5,535 1,254Provisions for liabilities and charges 6,186 6,067 _______ _______ 175,598 167,360 ======= =======Capital and reservesCalled up share capital 36,880 36,677Share premium account 10,111 7,768Capital redemption reserve 185 185Profit and loss account 128,422 122,730 _______ _______Equity shareholders' funds 175,598 167,360 ======= ======= Statement of Total Recognised Gains and Losses £000 52 weeks to 53 weeks to 2 April 2005 3 April 2004Profit for the financial year 29,358 22,322Other recognised gains and lossesExchange adjustments 349 (2,799) _______ _______Recognised gains and losses relating to the year 29,707 19,523 ======= ======= Movements in Equity Shareholders' Funds £000 52 weeks to 53 weeks to 2 April 2005 3 April 2004Profit for the financial year 29,358 22,322Dividends (24,015) (22,725) _______ _______Profit/(loss) transferred to/(from) reserves 5,343 (403)Total other recognised gains and losses 349 (2,799)Net proceeds of shares issued 2,546 1,521Goodwill transferred to the Consolidated Profit and Loss Accountin respect of businesses sold - 5,595 _______ _______Increase in equity shareholders' funds 8,238 3,914 _______ _______Equity shareholders' funds brought forward 167,360 163,446 _______ _______Related Shares:
Halma