13 Principal risks and uncertainties
A number of potential risks and uncertainties exist which could have a material impact on the Group’s performance over the second half of the financial year and could cause actual results to differ materially from expected and historical results.
The Group has in place processes for identifying, evaluating and managing key risks. These risks, together with a description of the approach to mitigating them, are set out on pages 61 to 63 in the 2012 Annual Report, which is available on the Group’s website at www.halma.com.
The principal risks and uncertainties relate to:
- Operational risk
- Organic growth, supplier risk and competition
- Research and Development
- Intangible resources
- Laws and regulations
- Information Technology/Business Interruption
- Financial irregularities and international expansion
- Treasury risks
- Economic conditions
- Pension deficit.
The Directors do not consider that the principal risks and uncertainties have changed since the publication of the 2012 Annual Report. However macro-economic uncertainty continues and movements in foreign exchange rates remain a risk to financial performance.
The macro-economic and political circumstances particularly in the Eurozone, but also globally, continue to generate uncertainty for our business. The Group operates in a broad spread of markets, which substantially limits the risk associated with instability in any given territory. Sales into Greece, Ireland, Italy, Portugal and Spain represented just £12 million in the first half of 2012/13 (4% of total Group sales). The Group does not have any significant operations within these countries. Group sales into Mainland Europe were £73 million (25% of total Group sales).
We mitigate the risk to demand by operating in markets underpinned by regulatory drivers (where customer spending is often non-discretionary), maintaining a diverse product portfolio and targetting continued growth in developing markets. In addition, Halma’s model of autonomy allows local management to change strategy quickly when reacting to variable market conditions.
Although the Group uses forward foreign exchange contracts to mitigate its transactional currency exposure risk, it does not hedge the translation of its currency profits. In the first half year, the US$ was on average 3% stronger and the Euro and Swiss Franc on average 10% weaker relative to Sterling than in the first half of the previous year. The net result was a 2% negative impact on reported profit.