Halma

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Annual Report and Accounts 2012

Financial KPIs

Strategic focus

Through strategic investment in people development, international expansion and innovation we aim to achieve organic growth in excess of our blended market growth rate of 5%.

Organic revenue growth

KPI definition

Organic revenue growth measures the change in revenue achieved in the current year compared with the prior year from continuing Group operations. The effect of acquisitions and disposals made during the current or prior financial period has been equalised.

Performance

2012 performance
5%
Target
>5%

Organic revenue growth

  • 20125%
  • 201111%
  • 20101%
  • 200911%
  • 20088%

Comments and targets

Comment

Solid organic revenue growth in line with our minimum target. Over the last five years our average rate of annual organic revenue growth has been 7% p.a. which is 2% in excess of our minimum target.

2013 target

The Board has established a long-term minimum organic growth target of 5% p.a. representing the blended long-term average growth rate of our markets. This target remains appropriate given the Group’s achievement of an overall revenue and profit objective of growing by 15% p.a. after acquisition revenue and profit are taken into account.

In order to meet the target of organic growth in excess of 5%, the Group will need to maintain its focus on investment in innovation, people development and geographic expansion in order to ensure the momentum developed over recent years is continued.

The primary factors affecting our ability to meet the target relate to competitive innovations overtaking the Group’s technology and macro-economic factors.

See also

Strategic focus

Through strategic investment in people development, international expansion and innovation we aim to achieve organic growth in excess of our blended market growth rate of 5%.

Organic profit growth

KPI definition

Organic profit growth measures the change in profit achieved in the current year compared with the prior year from continuing Group operations. The effect of acquisitions and disposals made during the current or prior financial period has been equalised.

Performance

2012 performance
5%
Target
>5%

Organic profit growth

  • 20125%
  • 201119%
  • 20109%
  • 20095%
  • 20087%

Comments and targets

Comment

Solid organic profit growth with a strong performance in the Industrial Safety sector. Over the last five years our average rate of annual organic profit growth has been 9% p.a.

2013 target

The Board has established a long-term minimum organic growth target of 5% p.a. representing the blended long-term average growth rate of our markets. This target remains appropriate given the Group’s achievement of an overall revenue and profit objective of growing by 15% p.a. after acquisition revenue and profit are taken into account.

In order to meet the target of organic growth in excess of 5%, the Group will need to maintain its focus on investment in innovation, people development and geographic expansion in order to ensure the momentum developed over recent years is continued.

The primary factors affecting our ability to meet the target relate to competitive innovations overtaking the Group’s technology and macro-economic factors.

See also

Strategic focus

We have maintained high levels of R&D investment and spending on innovation. The successful introduction of new products is a key contributor to the Group’s ability to build competitive advantage and grow organically and internationally.

High rate of innovation

KPI definition

Total research and development expenditure in the financial year (both that expensed and capitalised) as a percentage of revenue from continuing operations.

Performance

2012 performance
4.7%
Target
>4%

R&D as a % of revenue

  • 20124.7%
  • 20115.0%
  • 20104.7%
  • 20095.0%
  • 20084.7%

Comments and targets

Comment

Total spend in the year was £27.4m (2011: £25.7m) exceeding the 4% of revenue target. The highest rate of investment was in the Health and Analysis sector.

2013 target

New products contribute strongly to achieving organic growth, maintaining high returns and building strong market positions. The 4% minimum investment target is appropriate to the mix of product life cycles and technologies within Halma.

The HCAT development programme for engineers in the Group helps drive our technical and process innovation to fuel organic growth.

See also

Strategic focus

We buy companies with business and market characteristics like those of Halma. Acquired businesses have to be a good fit with our operating culture and strategy in addition to being value-enhancing financially.

Acquisitions

Definition

The cash outflow (including repayment of acquired bank loans) disclosed in the Consolidated Cash Flow Statement under Acquisition of businesses (plus any net debt acquired).

Performance

2012 performance
£20m
 
 

Acquisitions £m spent

  • 2012£20m
  • 2011£82m
  • 2010£2m
  • 2009£12m
  • 2008£47m

Comments and targets

Comment

We have substantial financial capacity and facilities in place to comfortably finance acquisitions. We succeeded in buying two excellent companies during the year.

2013 target

2012 ended with sufficient financial capacity to finance further acquisitions, and two further businesses have been acquired early in the new year. Acquisition targets must meet our demanding criteria.

We have a strong pipeline of opportunities and have added further resources to our search activities.

See also

Strategic focus

The Health, Safety and Environmental markets in Asia and other developing regions are evolving quickly and offer us higher rates of growth in the future. We continue to invest in establishing local selling, technical and manufacturing resources to meet this current and future need.

International expansion

Definition

Total sales to markets outside the UK, USA and Mainland Europe as a percentage of total revenue from continuing operations.

Performance

2012 performance
24%
Target
30% (by 2015)

Revenue outside the UK, USA and Mainland Europe

  • 201224%
  • 201124%
  • 201021%
  • 200922%
  • 200819%

Comments and targets

Comment

Revenue outside the UK, USA and Mainland Europe was 24% of the Group total with revenue from Asia Pacific and Australasia up by 15%. Revenue from China grew by 25% to £29.5m which is now 4.5 times the level in 2006 when we established our first Halma hubs. Approximately 10% of Halma employees are based in China, and our three new Chinese regional offices are well established.

2013 target

Our aim is for revenue outside the UK, USA and Mainland Europe to be 30% of the Group total by 2015. Halma corporate hubs were established in China and India to assist companies in setting up local operations. More operating companies have established a presence in South America during 2011/12 and this trend should continue in 2012/13.

See also

Strategic focus

We choose to operate in markets which are capable of delivering high returns. The ability to sustain these returns is a product of maintaining strong market and product positions together with excellent management of our operations and assets.

Return on sales

KPI definition

Return on Sales is defined as adjusted profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.

Performance

2012 performance
20.8%
Target
>18%

Return on sales

  • 201220.8%
  • 201120.2%
  • 201018.8%
  • 200917.3%
  • 200818.4%

Comments and targets

Comment

High returns achieved representing a further improvement in performance against the previous year. The high rate of profitability of recent acquisitions was a significant contributor to the increase this year.

2013 target

We aim to achieve a Return on Sales within the 18% to 22% range whilst continuing to deliver profit growth.

See also

Strategic focus

We choose to operate in markets which are capable of delivering high returns. The ability to sustain these returns is a product of maintaining strong market and product positions together with excellent management of our operations and assets.

ROTIC (Return on Total Invested Capital)

KPI definition

ROTIC is defined as the post-tax return from continuing operations before amortisation of acquired intangible assets, acquisition transaction costs, movement on contingent consideration and profit on disposal of operations, as a percentage of adjusted shareholders’ funds.

Performance

2012 performance
16.8%
Target
>12%

ROTIC

  • 201216.8%
  • 201115.5%
  • 201013.6%
  • 200913.1%
  • 200814.1%

Comments and targets

Comment

Record ROTIC achieved. These high returns are in excess of our long-term Weighted Average Cost of Capital (WACC) of 8.0% (2011: 8.5%).

Earnings increased faster than our asset base due to good operational management and acquisitions at sensible values.

2013 target

The target of 12% was set in 2005 when the Group’s ROTIC was 12.1% and WACC was 7.9%. A range of 12% to 17% is considered representative of the Board’s expectations over the long term.

See also

Strategic focus

We choose to operate in markets which are capable of delivering high returns. The ability to sustain these returns is a product of maintaining strong market and product positions together with excellent management of our operations and assets.

ROCE (Return on Capital Employed)

KPI definition

ROCE is defined as the operating profit from continuing operations before amortisation of acquired intangible assets, acquisition transaction costs, movement on contingent consideration and profit on disposal of operations, as a percentage of capital employed.

Performance

2012 performance
75%
Target
>45%

ROCE

  • 201275%
  • 201172%
  • 201061%
  • 200948%
  • 200856%

Comments and targets

Comment

Very high returns above the target level achieved. The significant increase in recent years is due to concerted efforts to improve profitability and sustain high levels of efficiency in our operations.

2013 target

The target of >45% is set in order to ensure the efficient generation of cash at all levels to fund our target level of organic growth, acquisitions and dividend growth without Halma becoming a highly-leveraged group.

See also

Strategic focus

Generating sufficiently high levels of cash provides the Group with freedom to pursue its strategic goals of organic growth, acquisitions and progressive dividends without becoming highly-leveraged.

Cash generation

KPI definition

Cash generated from operations expressed as a percentage of adjusted profit from continuing operations.

Performance

2012 performance
104%
Target
>100%

Operating cash to profit

  • 2012104%
  • 2011108%
  • 2010131%
  • 2009109%
  • 2008104%

Comments and targets

Comment

Cash conversion of 104% was above the target, a strong performance across the Group, in particular in the second half of the year.

2013 target

The goal of cash inflow exceeding 100% is a metric that has relevance at all levels of the organisation and aligns management action with the strategic goals of organic growth, acquisitions and progressive dividends.

See also