TIDMDPLM
RNS Number : 7482F
Diploma PLC
16 November 2015
DIPLOMA PLC
12 CHARTERHOUSE SQUARE, LONDON EC1M 6AX
TELEPHONE: +44 (0)20 7549 5700
FACSIMILE: +44 (0)20 7549 5715
FOR IMMEDIATE RELEASE
16 November 2015
PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS
FOR THE YEAR ENDED 30 SEPTEMBER 2015
Robust Performance, Acquisition Led Growth
Audited Audited
2015 2014
GBPm GBPm
Revenue 333.8 305.8 +9%
Adjusted operating profit(1) 60.3 56.7 +6%
Adjusted operating margin(1) 18.1% 18.5%
Adjusted profit before
tax(1),(2) 59.6 56.2 +6%
Profit before tax 51.8 49.8 +4%
Profit for the period 37.4 36.1 +4%
Free cash flow(3) 40.3 37.8 +7%
Pence Pence
Adjusted earnings per
share(1),(2) 38.2 36.1 +6%
Basic earnings per share 32.5 31.4 +4%
Total dividend per share 18.2 17.0 +7%
(1) Before acquisition related charges.
(2) Before fair value remeasurements.
(3) Before cash payments on acquisitions and dividends.
Financial Highlights
-- Revenue and adjusted operating profit increased by 9% and 6%, respectively.
-- Businesses acquired added 11% to Group revenues; currency
movements reduced revenues by 3%; underlying revenue growth of
1%.
-- Adjusted operating margins reduced by 40bps to 18.1%
reflecting significant transactional currency effects in Healthcare
businesses and initial dilution from acquired businesses.
-- Adjusted profit before tax and adjusted EPS both increased by
6% to GBP59.6m and 38.2p, respectively.
-- Free cash flow increased by 7% to GBP40.3m, after increase in
capital expenditure to GBP4.3m. Net cash funds of GBP3.0m at the
end of September 2015.
-- Acquisition expenditure of GBP37.8m, over double the amount
spent in the prior year. Acquisition of WCIS (ca. GBP10m) shortly
after year end.
-- Total dividend increased by 7% to 18.2p per share reflecting
strong financial position and confidence in Group's growth
prospects.
Operational Highlights
-- Life Sciences revenues increased by 4% on an underlying basis
despite the Healthcare businesses facing tougher markets as
hospitals increased their focus on cost control.
-- Seals revenues increased by 4% on an underlying basis as
industrial markets slowed in the second half of the year.
-- Controls revenues decreased by 5% on an underlying basis
reflecting softer European industrial markets and strong prior year
comparatives.
-- Acquisitions of TPD in Ireland and the UK, Kubo in
Switzerland and Austria and Swan Seals in the UK extended the scope
of the Group's Healthcare and Seals businesses in Europe, opening
up new growth opportunities.
-- Acquisition of WCIS for ca. GBP10m shortly after the year
end, extends the Group's Seals business into Australia.
Commenting on the results for the year, Bruce Thompson,
Diploma's Chief Executive said:
"The Group's strong and proven business model delivered robust
growth this year, benefitting from a good contribution from
acquisitions and despite adverse exchange rate movements. This
balance is expected to continue into the coming financial year as
the economic headwinds continue to constrain organic growth in the
Group's principal markets in North America and Europe, but
prospects for further acquisitions remain promising.
While the Board remains cautious on the current macroeconomic
backdrop, we remain confident that the Group's resilient business
model with a diverse geographic spread of activities and strong
financial position, together with a more favourable environment for
acquisitions will provide a good platform to deliver further growth
in the coming year."
There will be a presentation of the results to analysts and
investors at 9.00am this morning at Pewterers' Hall, Oat Lane, City
of London, EC2V 7DE. This presentation will be made available as a
webcast from 2.00pm GMT via www.diplomaplc.com
For further information please contact:
Diploma PLC - +44 (0)20 7549 5700
Bruce Thompson, Chief Executive Officer
Nigel Lingwood, Group Finance Director
Tulchan Communications - +44 (0)20 7353 4200
David Allchurch
Martin Robinson
Notes:
1. Diploma PLC uses alternative performance measures as key
financial indicators to assess the underlying performance of the
Group. These include adjusted operating profit, adjusted profit
before tax, adjusted earnings per share, free cash flow and ROATCE.
All references in this Announcement to "underlying" revenues or
operating profits refer to reported results on a constant currency
basis and before any contribution from acquired businesses. The
narrative in this Announcement is based on these alternative
measures and an explanation is set out in note 2 to the
consolidated financial statements in this Preliminary
Announcement.
2. Certain statements contained in this Preliminary Announcement
constitute forward-looking statements. Such forward-looking
statements involve risks, uncertainties and other factors which may
cause the actual results, performance or achievements of Diploma
PLC, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by
such statements. Such risks, uncertainties and other factors
include, among others, exchange rates, general economic conditions
and the business environment.
NOTE TO EDITORS:
Diploma PLC is an international group of businesses supplying
specialised technical products and services to the Life Sciences,
Seals and Controls industries.
Diploma's businesses are focussed on supplying essential
products and services which are funded by the customers' operating
rather than their capital budgets, providing recurring income and
stable revenue growth.
Our businesses then design their individual business models to
closely meet the requirements of their customers, offering a blend
of high quality customer service, deep technical support and value
adding activities. By supplying essential solutions, not just
products, we build strong long term relationships with our
customers and suppliers, which support attractive and sustainable
margins.
Finally we encourage an entrepreneurial culture in our
businesses through our decentralised management structure. We want
our managers to feel that they have the freedom to run their own
businesses, while being able to draw on the support and resources
of a larger group. These essential values ensure that decisions are
made close to the customer and that the businesses are agile and
responsive to changes in the market and the competitive
environment.
The Group employs ca. 1,500 employees and its principal
operating businesses are located in the UK, Northern Europe, North
America and Australia.
Over the last five years, the Group has grown adjusted earnings
per share at an average of ca. 15% p.a. through a combination of
organic growth and acquisitions. Diploma is a member of the FTSE
250 with a market capitalisation of ca. GBP700m.
Further information on Diploma PLC, together with a copy of this
Preliminary Announcement, is available at www.diplomaplc.com
PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS
FOR YEAR ENDED 30 SEPTEMBER 2015
CHAIRMAN'S STATEMENT
I was delighted to be appointed Chairman of your Company in
January of this year, following the retirement of John Rennocks
from the Board. During his ten years as Chairman, John guided the
Company through an extended period of strong and sustained growth
which delivered excellent returns to shareholders. I hope that in
the years ahead I will be able to maintain this performance through
executing the Group's strategy which is designed to deliver strong,
double digit growth in earnings and shareholder value over the
economic cycle.
Shortly after my appointment, in June of this year, the Board
met at the facility of Kubo, our newly acquired Seals business in
Switzerland, to review the Group's strategy and to set targets and
objectives for each of the Group's Sectors to be delivered over the
next three years. After a number of presentations and thorough and
challenging reviews with Executive management, the Board was
unanimous in supporting the Group's existing strategy of building
larger, broader based businesses in our three Sectors. This
strategy aims to generate stable "GDP plus" organic revenue growth
over the business cycle, sustainable attractive margins and strong
cash flow. The Board also confirmed the ambition of accelerating
growth through an active acquisition programme, utilising the
Group's strong cash resources and experienced management to enhance
value.
In September, Iain Henderson informed us of his decision to step
down from the Board at the conclusion of the AGM in January 2016
and after an orderly handover of responsibilities, to retire from
the Company on 31 March 2016. Iain has been a key member of the
Board since 1998 and as Chief Operating Officer since 2005, has
played a significant role in developing and implementing the
strategy of the Group and in particular, the Seals and Controls
Sector businesses. The Board will miss Iain's wise counsel and
robust approach to the day to day operational challenges that face
all businesses. All of us in the Group wish him a long, healthy and
well-earned retirement.
(MORE TO FOLLOW) Dow Jones Newswires
November 16, 2015 02:00 ET (07:00 GMT)
The Board is very supportive of the decision by our CEO, Bruce
Thompson to establish over the coming year, a formal Executive
Management Group ("EMG") which will report to him. The EMG will
comprise the key senior managers of the main business clusters and
certain Group functions. Good progress has already been achieved
with this development and two senior level recruits have recently
joined the Group to strengthen management in key areas. The Board
remains confident that the formation of this EMG over the course of
2016 will provide Diploma PLC with a strong and experienced group
of senior business and financial managers who have the potential to
provide leadership in the coming years.
Results
Group revenues increased in 2015 by 9% to GBP333.8m (2014:
GBP305.8m), with acquisitions completed during the year
contributing GBP24.2m and adverse currency movements reducing the
results of the overseas businesses when translated into UK sterling
by GBP8.1m, when compared with last year. After adjusting for the
contribution from these and prior year acquisitions and for
currency effects on translation, Group revenues increased by 1% on
an underlying basis. Steady underlying revenue growth of ca. 4% in
both the Life Sciences and Seals Sectors more than offset a weaker
performance from the Controls Sector where underlying revenues
declined by 5% against a strong prior year comparative.
Adjusted operating margins remained robust at 18.1% (2014:
18.5%) and adjusted operating profit increased by 6% to GBP60.3m
(2014: GBP56.7m). Gross margins in the Canadian and Australian
Healthcare businesses were again impacted by transactional currency
effects, but this was partly mitigated by a more favourable product
mix and strong control over operating costs. Adjusted profit before
tax increased by 6% to GBP59.6m (2014: GBP56.2m) and adjusted
earnings per share also increased by 6% to 38.2p (2014: 36.1p).
The Group generated strong free cash flow of GBP40.3m (2014:
GBP37.8m), with tighter control over working capital providing
record operating cash flow of GBP62.1m (2014: GBP55.0m). Capital
expenditure increased to GBP4.3m (2014: GBP2.2m) with increased
investment in productive capital represented by facilities,
healthcare field equipment and seal cutting machinery and
tooling.
It was a much stronger year for acquisition activity with the
Group investing GBP37.8m (2014: GBP16.5m) in new businesses during
the financial year, extending the Group's activities into new
products and geographies in line with the Group's strategic
objectives. Shortly after the year end the Group completed the
acquisition of WCIS, an established supplier of sealing products
and services in Australia for a maximum consideration of GBP9.8m.
The WCIS acquisition is another example of how the Group uses
acquisitions to extend and broaden its activities into new markets
and geographies.
The much higher spend on acquisitions in this financial year,
together with distributions of GBP19.7m (2014: GBP18.2m) to
shareholders during the year, contributed to a reduction in net
cash funds of GBP18.3m in the year to GBP3.0m at 30 September 2015
(2014: GBP21.3m).
Dividends
The robust balance sheet and strong free cash flow, together
with a more favourable acquisition environment, has led the Board
to recommend an increase in the final dividend of 7% to 12.4p per
share (2014: 11.6p). Subject to shareholder approval at the Annual
General Meeting, this dividend will be paid on 27 January 2016 to
shareholders on the register at 27 November 2015.
The total dividend per share for the year will be 18.2p (2014:
17.0p) which represents a 7% increase on 2014. The dividend is well
covered by adjusted EPS at 2.1 times, in line with the Board's
objective of targeting towards a two times level of cover.
Governance
We have this year completed the process of developing and
refreshing the Board started by my predecessor in 2013. In February
we strengthened the Board's resources with the appointment of Andy
Smith as a non-Executive Director. Andy brings excellent experience
to the Company having previously held Group HR roles at Severn
Trent PLC and The Boots Company PLC.
I was also pleased that Anne Thorburn accepted our invitation to
join the Board in September. Anne brings to the Company many years
of experience gained from Board level finance roles in listed
international industrial companies. Anne will replace Marie-Louise
Clayton as Chairman of the Audit Committee, when she retires from
the Board this month at the end of her term of office. I wish to
thank Marie-Louise for the support and guidance she has provided to
the Board during the past three years.
I am pleased that with the newly refreshed Board, we have a
strong and experienced team to support and guide the Group as it
pursues the successful implementation of the Group's growth
strategy.
Employees
Since being appointed Chairman earlier this year, I have
endeavoured to visit the Group's businesses and meet our employees
who are so important to the success of the Group. I have been
impressed by the hard work and loyalty that our employees
demonstrate to each of their businesses and I wish to thank them
for their efforts this year to deliver a high level of service as
they strive to meet targets in the face of challenging markets.
Outlook
The Group's strong and proven business model delivered robust
growth this year, benefitting from a good contribution from
acquisitions and despite adverse exchange rate movements. This
balance is expected to continue into the coming financial year as
the economic headwinds continue to constrain organic growth in the
Group's principal markets in North America and Europe, but
prospects for further acquisitions remain promising.
While the Board remains cautious on the current macroeconomic
backdrop, we remain confident that the Group's resilient business
model with a diverse geographic spread of activities and strong
financial position, together with a more favourable environment for
acquisitions will provide a good platform to deliver further growth
in the coming year.
CHIEF EXECUTIVE'S REVIEW
In 2015, the Group has delivered a robust performance with a
good contribution from acquisitions completed during the last
eighteen months. The Group's revenues increased by 9% with the
acquired businesses adding 11% to revenues, but with adverse
currency movements reducing revenues by 3% on translation to UK
sterling. After adjusting for acquisitions and currency, underlying
revenues increased by 1%. Adjusted operating margins decreased by
40bps to 18.1% of revenue, reflecting transactional currency
effects in the Healthcare businesses and initial dilution from the
acquired businesses. Free cash flow increased by 7% to GBP40.3m and
return on adjusted trading capital employed ("ROATCE") remained
comfortably above the 20% threshold at 23.9%.
Business Model and Growth Strategy
The Group's strategy is designed to generate strong, double
digit growth in earnings and shareholder value over the business
cycle, by building larger, broader-based businesses in the three
Group Sectors of Life Sciences, Seals and Controls.
Our businesses target "GDP plus" levels of organic revenue
growth over the business cycle. Stable and resilient revenue growth
is achieved through our focus on essential products and services
funded by customers' operating rather than capital budgets and
supplied across a range of specialised industry segments. By
supplying essential solutions, not just products, we build strong
long term relationships with our customers and suppliers, which
support sustainable and attractive margins. Finally we encourage an
entrepreneurial culture in our businesses through our decentralised
management structure and these essential values ensure that
decisions are made close to the customer and that the businesses
are agile and responsive to changes in the market and the
competitive environment.
Overall growth is accelerated from the underlying GDP plus
levels to the corporate target of strong, double digit growth,
through carefully selected, value-enhancing acquisitions which fit
the business model and offer entry into new strategic markets.
Acquisitions are not made just to add revenue and profit, but
rather to bring into the Group successful businesses which have
growth potential, capable management and a good track record of
profitable growth and cash generation. As part of our Acquire,
Build, Grow strategy, we invest in the businesses post acquisition
to build a firm foundation to allow them to move to a new level of
growth. These acquisitions form a critical part of our Sector
growth strategies and are designed to generate a pre-tax return on
investment of at least 20% and hence support our Group objective of
consistently exceeding 20% return on adjusted trading capital
employed ("ROATCE").
Performance against objectives and KPIs
The Group's principal corporate objectives relate to growth in
adjusted earnings per share ("EPS") and total shareholder return
("TSR"). The compound growth in adjusted EPS has been 15% p.a. over
the last five years; this year the growth in adjusted EPS has been
at the more modest level of 6%. Over the last five years, the
compound growth in TSR has been 22% p.a.; this year, TSR has
performed in line with the FTSE 250 median performance after a
number of years of very strong growth.
(MORE TO FOLLOW) Dow Jones Newswires
November 16, 2015 02:00 ET (07:00 GMT)
Underpinning the principal corporate objectives are a set of
further objectives, with related key performance indicators
("KPIs") which are used to measure performance at the Group level,
but also to drill down through the operating businesses. The first
of these next level objectives is to generate stable "GDP plus"
levels of underlying organic revenue growthover the business cycle.
This year, challenging markets within the three Sectors meant that
organic growth has been hard won. In Life Sciences, underlying
revenues increased by 4% despite the pressure on budgets throughout
the Healthcare system driven by the tougher economic environments
in Canada and Australia. In Seals, underlying revenues increased by
4% as trading activity in North America slowed in the second half
of the year, impacted indirectly by cutbacks in the Oil & Gas
sector and lower demand for natural resources. Controls revenues
decreased by 5% on an underlying basis, reflecting softer European
industrial markets and strong prior year comparatives.
The objective for adjusted operating margins is to maintain
stable attractive margins which reflect the focus on specialised
segments, strongly differentiated products and customer focused
solutions, combined with efficiently run operations. This year,
adjusted operating margins were 18.1% which is at the lower end of
the five year average range of 18-19%. As always there were a
number of moving parts, with margins negatively impacted by the
reduced gross margins in the Healthcare businesses, initial
dilution from acquired businesses and one-off facility
restructuring costs in the US. However, the impact on Group
operating margins was limited to 40bps by sector mix and by tight
control of operating costs across the businesses.
The Group continues to focus strongly on free cash flow, which
funds the growth strategy and gives the resources to provide
healthy dividends to shareholders. In 2015, free cash flow was
GBP40.3m, compared with a five year average of GBP33m p.a. and was
equivalent to a conversion rate of over 90% of adjusted after tax
earnings.
The principal determinant of free cash flow conversion is the
effective management of working capital and the KPI used to measure
and monitor this performance is working capital as a percentage of
revenue. In 2015 this KPI remained stable at 17.0% comparing well
with the five year average level of 16-17% which is also the longer
term target.
ROATCE is the final indicator of the overall performance of the
Group and very importantly of its success in creating value for
shareholders. ROATCE is measured as the pre-tax return on total
Group investment excluding net cash, but including all goodwill and
acquired intangible assets. ROATCE has comfortably exceeded the 20%
target in each of the last five years and this year was 23.9%.
Acquisitions
Acquisitions are an integral part of the Group's strategy,
designed to accelerate growth and to facilitate entry into related
strategic markets. To achieve the Group's objective of strong
double digit growth, acquisition spend at the level of GBP25-30m
p.a. is targeted. This year, the Group continued to benefit from a
positive acquisition environment and invested GBP37.8m in
acquisitions, which was well above the target annual level and was
more than double the level of expenditure in the prior year.
The acquisitions which have been completed are natural
extensions of the Group's existing businesses and have extended the
scope of the businesses into new product and market segments and
geographies. In Life Sciences, DHG acquired 80% of Technopath
Distribution ("TPD"), an established supplier to the Biotechnology,
Clinical Laboratory and Medical markets in Ireland and the UK. The
acquisition of TPD represents an important first step in extending
the scope of DHG's business into the markets of Ireland and the UK.
In addition, TPD brings important new products and suppliers to the
DHG group in the areas of rapid hygiene testing in Food, Dairy and
Pharmaceutical industries, as well as Digestive Health.
In Seals, the Group acquired Kubo, a leading supplier of seals,
'O' rings, gaskets and moulded rubber parts serving a diverse base
of industrial customers in Switzerland and Austria. In the UK, FPE
Seals acquired Swan Seals, a small specialised supplier of machined
seals based in Aberdeen and serving customers' operational
requirements. The Group also acquired a further 10% shareholding in
Kentek, taking our ownership to 90% with the balance held by the
Managing Director of the business. In October 2015 shortly after
the year end, the Group acquired WCIS, a supplier of gaskets, seals
and associated products and services, with operations in Australia
and New Caledonia.
Management development
Iain Henderson, our Chief Operating Officer ("COO"), decided
during the year that he would like to retire from the Group. Iain
will stand down from the Board at the January 2016 AGM but will
stay fully involved with the Group until the end of March 2016 to
ensure a smooth handover of responsibilities. Iain has worked
alongside me for 17 years at Diploma and he has been a key driver
of the growth and development of the Group over this period. We
will all miss his insightful contributions on strategy, keen
business judgement and dry humour, but at the same time we will all
wish him well in his future endeavours.
Over the last few years, we have strengthened the senior
management team by giving increased responsibility to existing
managers and through selective external recruitment. We are
intending to continue this process over the coming year with the
establishment of a formal Executive Management Group ("EMG")
reporting in to me. We will be retiring Iain's COO shirt and his
responsibilities will be reallocated across this broader leadership
team.
The introduction of the EMG will ensure that we have a strong
and broad based team in place to support the next stage of our
growth strategy. Since the year end, we have made good progress in
building bench strength in this evolving EMG, with the recruitment
of two experienced senior managers to take leadership roles in
North American Industrial Distribution and in our International
Healthcare business.
SECTOR DEVELOPMENTS
LIFE SCIENCES
The Life Sciences Sector businesses supply a range of
consumables, instrumentation and related services to the healthcare
and environmental industries.
2015 2014
Revenue GBP103.1m GBP91.4m
Adjusted operating profit GBP21.0m GBP19.7m
Adjusted operating margin 20.4% 21.6%
Free cash flow GBP15.6m GBP14.9m
--------------------------- ---------- ---------
-- Sector revenue growth of 13%; underlying growth of 4% after
adjusting for currency and TPD acquisition
-- Good revenue growth in DHG's Canadian and Australian
businesses despite pressure on Healthcare budgets; stronger second
half of year as delayed capital equipment orders released
-- Significant pressure on margins from 20-25% depreciation of
Canadian and Australian dollars against US dollar
-- TPD acquisition extends DHG into Ireland and the UK; strong double digit growth in first year
-- Environmental businesses maintained underlying revenues and
finished the year with solid order book
Reported revenues of the Life Sciences businesses increased by
13% to GBP103.1m (2014: GBP91.4m). The acquisitions of TPD in
October 2014 and Chemzyme in July 2014 added GBP13.3m, or 15% to
Sector revenues but this was partly offset by a reduction of ca. 6%
in revenues from the translational currency impact from the
continued weakening in the Canadian and Australian dollars and the
Euro relative to UK sterling. On a constant currency basis,
underlying revenues increased by 4%.
Gross margins in the Healthcare businesses continued to be
impacted significantly by transactional currency effects. During
the financial year, the Canadian and Australian businesses
experienced further depreciation in their domestic currencies of
20% and 25% respectively relative to the US dollar, which is the
principal currency in which these businesses mostly purchase their
products. The TPD business in Ireland and the UK has not been
impacted in the same way by transactional currency effects, but
joined the Group with slightly lower operating margins. Currency
hedging contracts and supplier price concessions have provided some
mitigation, but Healthcare gross margins have reduced by 370bps
compared with the prior year. Environmental gross margins improved
and operating costs as a percentage of revenue reduced across the
Life Sciences businesses; adjusted Sector operating margins
therefore reduced by only 120bps to 20.4% (2014: 21.6%). On a
reported basis, adjusted operating profit increased in UK sterling
terms by 7% to GBP21.0m (2014: GBP19.7m).
Capital expenditure in the Sector increased to GBP2.5m (2014:
GBP1.2m), which included GBP1.9m invested in field equipment for
placement in hospitals and clinics by the Canadian Healthcare
businesses and GBP0.4m invested in IT infrastructure, including
GBP0.1m in a new ERP system in Vantage which completed its
installation in November 2015. Free cash flow increased to GBP15.6m
(2014: GBP14.9m), reflecting a combination of the increased
operating profit and reduced cash flows into working capital,
offset by the increase in capital expenditure.
Healthcare
Revenues from the DHG group of Healthcare businesses increased
by 5% after adjusting for the acquisitions of TPD and Chemzyme and
for translational currency effects.
(MORE TO FOLLOW) Dow Jones Newswires
November 16, 2015 02:00 ET (07:00 GMT)
The Canadian Healthcare businesses increased revenues by 5% in
local currency, with consumable and service revenues accounting for
ca. 90% of revenues. The tougher economic environment in Canada,
caused largely by the falling oil prices and reduced demand for the
country's natural resources, has put greater pressure on budgets
throughout the Healthcare system. There have also been various
initiatives to restructure functions within several Provinces and
regions, which have constrained purchasing and slowed down capital
purchases. In particular there has been a freeze in capital
spending in Quebec, while the Province completes the centralisation
of its Health regions.
Against this background, Somagen achieved good growth in sales
of consumable products across its key suppliers, in particular
HbA1c diabetes testing and electrophoresis, colorectal cancer
screening and assisted reproductive technology (ART). Capital
equipment sales in the first half of the year were slow due to the
reorganisation of testing services in certain Provinces; however a
number of the delayed orders were released in the second half of
the year with sales of histology instrumentation finishing
strongly. Investments have been made during the year in
establishing new suppliers in the areas of quality control products
and automation in microbiology and theranostics, which focuses on
the patient's response to specific biotherapeutic drugs.
AMT's core electrosurgery business has continued to grow unit
volumes with increasing smoke evacuation compliance in existing
accounts and penetration into new accounts. However, tender and
evaluation processes introduced by the Provincial SSOs (shared
services organisations) and the GPOs (general purchasing
organisations) have put pressure on unit prices and constrained
revenue growth. AMT has responded by introducing lower cost product
options alongside premium products to ensure competitive pricing in
major tenders. AMT has continued to make progress in its supply of
specialised surgical instruments and devices used in laparoscopic
and other MI (minimally invasive) Surgery procedures.
Vantage posted a very strong second half to the year and
delivered double digit growth in revenues for the full year. In the
first half of the year, the main consumable product lines performed
to expectation with modest growth in revenues from argon plasma
probes, endoscope reprocessor chemicals and other accessories
including specialist retrieval devices. Capital equipment revenues
however were underperforming due to delayed budget approvals. In
the second half, consumable and service revenues continued to grow
steadily and results were boosted by strong capital equipment sales
as the delayed orders were released and by new CPP (cost per
procedure) placements. By the end of the year, Vantage was able to
deliver double digit growth across all of its principal capital
product lines including endoscopes, reprocessors and argon plasma
units.
In Australia and New Zealand, the economies have faced similar
challenges to those experienced in Canada and Healthcare budgets
have come under the same pressures. Against this background,
revenues from DSL and BGS increased by a creditable 11% in local
currency terms (7% growth after adjusting for the acquisition of
Chemzyme). BGS continued to grow revenues strongly, with smoke
evacuation programmes in existing and new accounts providing the
main driver for growth and with steady growth in sales of
electrosurgical grounding pads and laparoscopic electrodes. DSL
consumable and service revenues trended in line with expectations
and delivered modest growth, but capital equipment sales were
slower due to budget pressures and delayed projects. DSL and BGS
operate as distinct sales and marketing businesses, benefiting from
a single leadership group and shared operations and back office
systems in Melbourne, giving the efficiencies and critical mass of
a shared services group. The Chemzyme business, acquired in July
2014, was fully integrated into DHG's Melbourne operations during
the year.
In early October 2014, DHG acquired 80% of TPD, an established
supplier to the Biotechnology, Clinical Laboratory and Medical
markets in Ireland and the UK. The acquisition of TPD represents an
important first step in extending the scope of the Group's
Healthcare businesses into these new markets in Europe. In
addition, TPD brings important new products and suppliers to the
DHG group in the areas of rapid hygiene testing in Food, Dairy and
Pharmaceutical industries as well as Digestive Health. TPD has
performed very well since acquisition, delivering strong double
digit revenue growth on a like-for-like basis.
Environmental
Revenues from the Environmental businesses in Europe increased
by 1% in constant currency terms. The a1-envirosciences business
based in Germany increased revenues by 6% in Euro terms and ended
the year with an encouraging book-to bill ratio. There was strong
demand for high-end elemental analysers supplied to Petrochemical
industry customers and Environmental laboratories. There was also
considerable customer interest in the range of recently introduced
mercury analysers for fuel analysis.
The a1-CBISS business based in the UK saw revenues reduce by 4%
against a very strong prior year comparative. Reduced revenues from
CEMS (continuous emissions monitoring systems) were against very
strong comparatives (20% growth in 2014) and the sector remains
buoyant with new Biomass and Energy from Waste plants forming an
important part of the UK's energy portfolio with the reduction in
coal fired power stations. A solid order book is carried into the
new fiscal year including the completion of a large order from Drax
related to the conversion of its plant to biofuels. The gas
detection sector had a strong first half but was then impacted by
the slowdown in sales to Oil & Gas customers. Across both
Environmental businesses, there was strong double digit growth in
revenues from Service programmes, which now represent ca. 35% of
combined revenues.
SEALS
The Seals Sector businesses supply a range of seals, gaskets,
filters, cylinders, components and kits used in heavy mobile
machinery and specialised industrial equipment.
2015 2014
Revenue GBP139.6m GBP119.8m
Adjusted operating profit GBP24.8m GBP21.7m
Adjusted operating margin 17.8% 18.1%
Free cash flow GBP17.8m GBP16.4m
--------------------------- ---------- ----------
-- Sector revenue growth of 17%; underlying growth of 4% after
adjusting for currency and acquisitions
-- In North America, slower trading activity in second half,
impacted indirectly by cutbacks in Oil & Gas and Mining
industries
-- Continued investment in e-commerce and seal machining
centres; Bulldog operations relocated to Tampa; new branch
operation in Houston
-- In Europe, strong underlying growth despite challenging
economic background; new purpose built FPE Seals facility
established as core Aftermarket hub in Europe
-- EMEA Seals now 34% of Sector revenues following acquisitions of Kentek, Kubo and Swan Seals
-- Acquisition of WCIS after year end broadens product range and
extends Seals activities into Australasia
Reported revenues of the Seals businesses increased by 17% to
GBP139.6m (2014: GBP119.8m). These revenues included contributions
from Kubo (acquired in March 2015), Kentek (acquired in January
2014) and four smaller bolt-on acquisitions in the UK completed
during the last 18 months. After adjusting for these acquisitions
and for currency translation, underlying revenues increased by
4%.
Good progress has been made during the year in establishing a
more substantial presence outside North America through a
combination of organic growth and acquisition. The businesses based
in the EMEA region contributed GBP47.3m to Seals revenues in the
year (2014: GBP29.9m) and now account for 34% of Sector revenues.
In October 2015, shortly after the year end, the acquisition was
completed of WCIS, a supplier of gaskets, seals and associated
products and services with operations in Australia and New
Caledonia.
Across the Seals businesses, gross margins continued to be
resilient, underpinned by the business model of superior product
availability and added value technical services. Adjusted operating
margins reduced by 30bps to 17.8% (2014: 18.1%) as Kubo joined the
Group with lower initial operating margins and there were several
one-off costs in the reorganisation of facilities in the US,
including the relocation of the Bulldog facility, which added
incremental costs of ca. GBP0.8m. Adjusted operating profits
increased by 14% to GBP24.8m (2014: GBP21.7m).
Free cash flow increased by GBP1.4m to GBP17.8m (2014:
GBP16.4m), benefiting from the increase in operating profit and
tight control of working capital. Capital expenditure increased to
GBP1.5m (2014: GBP0.5m), which included GBP0.4m expenditure on
leasehold improvements for the new Bulldog facility and further
investment of GBP0.6m in seal manufacturing equipment and new
vertical storage carousels. In Europe, Kubo invested GBP0.2m in
additional gasket cutting equipment in Switzerland and Austria. FPE
Seals also completed the move to a new leasehold facility, which
was constructed to our specifications and then sold and leased back
shortly before the year end.
Aftermarket
The Aftermarket businesses, which account for ca. 55% of Sector
revenues, reported a 4% increase in overall revenues. After
adjusting for currency translation and the acquisitions of Kentek,
AB Seals and Swan Seals, underlying revenues increased by 2%.
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In the US, Hercules Bulldog grew domestic sales by 1% on a
like-for-like basis, as a generally solid performance in most
territories was offset by substantial declines in the
resource-dependent States including Texas, Oklahoma, Pennsylvania,
Colorado and Montana. Further progress was made in electronic
trading and the number of sales orders processed online now
accounts for 21% of Hercules Bulldog orders in the US. The seal
machining centres also continued to deliver good growth, with a
fourth machine added during the year. Revenues from exports outside
the US, which account for 15% of Hercules Bulldog sales, increased
by 2% with good growth rates in Mexico and Central America more
than offsetting reductions in other South American markets. In
September 2015, the Bulldog gasket manufacturing and kit assembly
operations in Reno were relocated to a new facility in Tampa, close
to the core Hercules Clearwater site. The new facility has improved
international port and air carrier links and is expected to deliver
ca. GBP0.2m p.a. in annual cost savings.
Hercules Canada increased revenues by 10% in local currency
terms, with solid sales to the traditional mobile equipment repair
sector boosted by the installation of an additional seal making
machine. There were also increased sales to Canadian cylinder
manufacturers, serving US equipment OEM customers and benefiting
from the weak Canadian dollar. Hercules Canada has its principal
distribution centres in Ontario and Quebec and has limited direct
exposure to the depressed Oil & Gas sector in Western
Canada.
HKX's revenues decreased by ca. 20% from its record performance
in 2014, when there was strong demand from rental fleets for new
excavators and OEM engineering resources were focused on the
transition to new Tier 4 Final emissions regulations. In 2015, the
higher pricing of the new Tier 4 Final machines has dampened demand
for new excavators and excavator OEMs have been supplying a higher
proportion with factory-fitted attachment kits. HKX has also been
negatively impacted by the downturn in the Oil & Gas and Mining
industries in Western Canada. HKX has responded by targeting sales
of attachment kits for used machines and introducing lower cost,
entry level kits which are upgradeable as required to provide a
fuller range of capabilities. HKX has trimmed its operating costs
to match the reduced revenues and still maintains a healthy
operating profit margin.
In Europe, FPE Seals increased reported revenues by ca. 50% with
solid underlying growth boosted by the transfer from Hercules
Bulldog to FPE Seals of responsibility for the sale of Bulldog
products in the wider EMEA region. FPE Seals also benefited from
two small acquisitions which provide it with excellent geographical
coverage of the UK. AB Seals in Kent was acquired in February 2014
and Swan Seals, a small specialised supplier of machined seals
based in Aberdeen, was acquired in July 2015. During the year, FPE
Seals relocated its principal operations in the UK to a new,
purpose-built 34,000 square foot building in Darlington, which
consolidates smaller less efficient facilities and will be the core
Seals Aftermarket hub for further expansion into the EMEA
region.
Kentek has faced significant economic and political challenges
since its acquisition in January 2014, with the Russian economy
(and those of Finland and the Baltic States) significantly impacted
by lower Oil & Gas prices, the downturn in Mining industries
and the sanctions imposed following the conflicts in Ukraine and
the Crimea. Kentek has responded well to these challenges and
delivered a strong increase in underlying revenues in 2015. Diploma
acquired a further 10% shareholding in Kentek, taking our ownership
to 90% and with the continuing 10% minority shareholder now
appointed as Managing Director. In Russia, the Saint Petersburg
operation now acts as the sole Russian corporate entity and the
sales team has been reorganised to focus on specific geographical
territories and market sectors.
Industrial OEM
The Industrial OEM businesses, which account for ca. 45% of
Sector revenues, reported a 35% increase in revenues. After
adjusting for currency translation and the acquisitions of Kubo,
Ramsay Services and Maxwell Seals, underlying revenue growth was
6%.
In North America, the Industrial OEM businesses delivered
underlying revenue growth of 6% in an economy that showed signs of
flattening off in the second half of the year. RT Dygert delivered
another year of solid growth in its core industrial customer base
as it continued to benefit from its development of
regulatory-compliant elastomer compounds for the Pharmaceutical and
Water industries and for fuel dispensing applications. During the
year, RT Dygert also successfully launched a new online Webstore
which acts as a B2B portal for existing distribution customers. In
July 2014, RT Dygert acquired the outstanding 49% shareholding in
the HPS business in Seattle. The HPS back office and logistics
processes have been successfully integrated into RT Dygert and the
business delivered another record sales year.
All Seals delivered more modest growth in 2015, as demand
flattened out in the Water, Military Aerospace and Industrial
sectors. All Seals opened a small branch operation in Houston in
November 2014 and while sales to the Oil & Gas sector
increased, further gains were held back by the downturn in this
sector. J Royal delivered another year of excellent growth in 2015
with strong demand from its water meter and gas boiler customers
more than offsetting lower sales to manufacturers of swimming pool
equipment. J Royal continued to strengthen its operations by
closing its Rhode Island facility and relocating key development
resources to its main facility in North Carolina.
In Europe, the expanded M Seals group reported increased
revenues of 4%, with solid underlying growth boosted by the bolt-on
acquisition in the UK of Ramsay Services in December 2013. There
was solid organic growth in Denmark with steady demand from the
traditional pump and valve manufacturers and from wind turbine
customers and the Swedish operation delivered another year of
strong double digit growth. The Chinese operation also saw a
rebound in revenues after a softer prior year, as confidence
returned to the Wind Power sector in China. In the UK, M Seals
delivered a solid performance despite the slowdown in the Oil &
Gas sector in which the acquired companies had traditionally
specialised.
In March 2015, the Group completed the acquisition of Kubo, a
leading supplier of seals, O-rings, gaskets and moulded rubber
parts to a diverse base of industrial customers in Switzerland and
Austria. The Swiss franc strengthened during the year following its
de-coupling from the Euro and this has made it more difficult for
Swiss OEMs to export their products. However, most of Kubo's
purchases are from outside Switzerland allowing price reductions to
customers without impacting margins. The trading environment for
Kubo in Switzerland is now stabilising although growth has been
constrained. The Austrian operation was not impacted by the
currency issue and performed well during the year. In August 2015,
the previous owner of Kubo stepped down as planned and a new
Managing Director with significant industrial experience has been
appointed.
CONTROLS
The Controls Sector businesses supply specialised wiring,
connectors, fasteners and control devices used in a range of
technically demanding applications.
2015 2014
Revenue GBP91.1m GBP94.6m
Adjusted operating profit GBP14.5m GBP15.3m
Adjusted operating margin 15.9% 16.2%
Free cash flow GBP11.4m GBP11.4m
--------------------------- ---------- ----------
-- Sector revenue reduced by 4%; underlying reduction of 5%
after adjusting for currency and acquisitions
-- Interconnect businesses faced challenging industrial markets
in the UK and Continental Europe and strong comparatives in Civil
Aerospace and Motorsport
-- Continued growth in specialised segments in Germany,
including the Energy and Space satellite sectors
-- In Specialty Fasteners, lineside supply projects for aircraft
seat manufacturer constrained business this year but will deliver
longer term revenue growth; excellent performance from SFC in first
full year
-- Fluid Controls businesses repositioned towards growing
segments of the Food & Beverage market in the UK, with smaller
more energy efficient products
Reported revenues of the Controls businesses decreased by 4% to
GBP91.1m (2014: GBP94.6m), after including a full year contribution
from SFC, acquired in July 2014. After adjusting for this
acquisition and for currency translation, underlying revenues
decreased by 5%.
Overall gross margins remained resilient in the Controls
businesses due to their focus on specialised markets and added
value services. However, operating costs as a percentage of revenue
increased due to reverse operating leverage and adjusted operating
margins reduced by 30bps to 15.9% (2014: 16.2%). Adjusted operating
profits decreased by 5% to GBP14.5m (2014: GBP15.3m).
Free cash flow remained unchanged at GBP11.4m, with reduced cash
flows into working capital and lower capital expenditure offsetting
the impact of lower operating profit. Capital expenditure reduced
to GBP0.3m (2014: GBP0.5m) with the largest expenditure during the
year being ca. GBP0.1m on customised bins for the Specialty
Fasteners business to support production in a major customer
facility.
Interconnect
The Interconnect businesses, which account for ca. 75% of Sector
revenues, reported a revenue decrease of 3% in UK sterling terms;
after adjusting for the acquisition of SFC and for currency
effects, underlying revenues decreased by 5%. The revenue reduction
reflects a combination of weak overall activity levels in UK and
European industrial markets and strong comparatives for the
Specialty Fasteners business in the Motorsport and Civil Aerospace
sectors.
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In the IS-Group businesses in the UK, revenues decreased by 9%,
with challenging industrial markets in the UK and also in the
Eurozone countries which the IS-Group serves as a Master
Distributor for certain key suppliers. Sales direct to industrial
end-users in the UK were generally muted, but the most significant
reductions were in sales to other distributors in the UK and
Continental Europe. Management remains confident that these
revenues were not lost to competitors since the IS-Group companies
are often the single source for several key products. The lower
demand from both broad range catalogue distributors and the
smaller, more specialised distributors suggests that both smaller
and larger OEMs have been impacted by slower order books and some
de-stocking.
In Defence & Aerospace, revenues reduced as several major
projects had been completed in 2014, including the build phase of
the Astute class submarines and there were no major projects to
replace this demand. The IS-Group, because of its experience and
buying power, is also a key supplier to other sub-distributors in
Europe that support military programmes. However, the demand from
these sub-distributors also fell sharply as programmes in other
territories were completed or delayed. Beyond the large equipment
programmes, there are still many successful UK manufacturers
continuing to build highly specialised control and monitoring
sub-systems for defence use. While major programme expenditure may
be lower, the number of more focused projects and operators combine
to produce a sustainable customer base for the IS-Group in the
UK.
In Motorsport, there was reduced demand from Formula 1 ("F1"),
where two teams exited the competition and there were fewer
technological changes than last year, when the new V6 turbo engine
was introduced, along with upgraded energy recovery systems.
However, the growth of supercars for road use, the Formula E series
and the resurgence of high performance motorbikes in Japan have all
provided new growth opportunities. Less conventionally, the growing
sophistication of sensor control systems on racing yachts has
provided the opportunity to supply components to the Americas Cup
teams.
In the Energy industry in the UK, IS-Group serves an attractive
but narrow customer base comprising sub-sea cable manufacturers for
the Oil & Gas industry, specialised manufacturers of portable
generators and manufacturers of batteries for use in UPS
(Uninterrupted Power Supplies) applications. The demand from these
customers has always been somewhat cyclical and in 2015 each
segment was down.
In Germany, IS-Sommer and Filcon reported flat revenues in Euro
terms (9% reduction in UK sterling terms) with a significant
reduction in revenues from general Industrial customers offset by
growth in more specialised sectors. In the Industrial sector,
revenues reduced as industrial output in Germany remained volatile
from one month to the next and exports suffered in the wake of the
Russian sanctions and the slowing Chinese manufacturing sector.
During the year, revenues were also impacted by certain IS-Sommer
customers relocating all or part of their manufacturing to lower
cost regions outside of Germany. In the final quarter, the
industrial economy stabilised somewhat and IS-Sommer also found new
business in the Construction industry to partly offset the downturn
in its more traditional industrial customer base.
In Defence & Aerospace, revenues were broadly flat, although
activity on Military Aerospace projects has picked up pace
following several years of cautious production levels and with the
growing pressure on Germany to upgrade its military capabilities.
Uncertainty over various tank programmes to be built for the US
Army dampened demand from the specialist engine manufacturers, but
the decision to upgrade the electronics on the German Leopard II
tank and to develop the next generation Leopard III tank has now
been confirmed. Filcon also had success in the developing space
satellite niche where it has built a focused portfolio of the
specialised connectors that have been qualified for use on
satellites.
In the Energy sector, IS-Sommer delivered a strong increase in
revenues from products used in the repair and maintenance of the
medium-voltage infrastructure of the Electricity distribution
network. IS-Sommer has been appointed a Master Distributor for
these specialised products by its principal supplier and has
steadily built its reputation with the public authorities and
utilities that are responsible for the local distribution networks.
In the Medical sector, IS-Sommer primarily serves German and Swiss
medical equipment manufacturers and delivered revenues comparable
to the prior year.
The Specialty Fasteners business (Clarendon and SFC) increased
revenues by 16% over the prior year; after adjusting for the
acquisition of SFC, underlying revenues decreased by 7%. Although
overall revenues in Aerospace reduced, this was against a very
strong comparative with record prior year sales in the aircraft
seating segment. This year, customer changes to aircraft seat
designs and delays to build schedules impacted demand. In addition,
Clarendon's deliveries to its largest customer were reduced during
the implementation of a large new lineside supply project. This
project involves the installation of an innovative VMI (vendor
managed inventory) solution that utilises bespoke dispensing racks
that are located within the customer's production cells and
equipped with RFID (radio frequency identification) technology. In
the UK, the company also consolidated its position with the same
customer by extending its supply contract to an additional
manufacturing site. The requirement for aircraft seating remains
exceptionally high with demand continuing to outstrip short term
capacity and Clarendon broadened its business with new customers
across the EMEA region.
In Motorsport, a combination of reduced engine development
budgets, some changes in purchasing practices and a reduction in
the number of F1 teams, all contributed to reduced revenues against
a strong prior year comparative. However, SFC's portfolio of
own-brand fastener products for the wider racing fraternity in the
UK and the US brought increased penetration of several lower-tier
racing series. The lead product is the proprietary "Aerocatch"
bonnet fastener used to secure bodywork panels on high performance
race cars. More broadly, SFC delivered an excellent performance in
the supply of standard and own-brand fastening solutions to a wide
range of smaller, niche UK manufacturers.
Fluid Controls
The Hawco group of Fluid Controls businesses, which account for
ca. 25% of Sector revenues, reported a 6% reduction in revenues.
The greater part of the shortfall was attributable to just two
customers that had been heavily involved in new build programmes
for major food retailers in the prior year. As has been widely
reported, the traditional UK food retailers have reduced
substantially their fit-outs of new stores. In response to this,
Hawco's immediate customers, the commercial refrigeration
manufacturers, have now begun to win new business from the discount
retailers that had previously sourced their refrigeration needs in
Continental Europe. Hawco also continues to leverage its expertise
and access to smaller, more efficient compressors and ancillary
components to penetrate the wider Brewing and Catering sectors. As
pubs continue to expand their food offerings and a greater variety
of convenience foods are served by retailers, there are challenges
to keep drinks and food cool in more confined spaces. Hawco is well
positioned to support these retailers with greenhouse gas
compliant, low energy solutions.
Abbeychart began a measured realignment of its business to match
the significant changes taking place in the UK hot drinks
dispensing market. Key players are repositioning their businesses
from "vending companies" to "coffee specialists", with a broad
range of espresso-type machines being installed in an increasing
number of outlets from garages to top class restaurants. Abbeychart
recently completed an exercise to map the components used in the
broad range of espresso machines to build a portfolio of essential
parts. The change in customer focus from traditional bulk coffee
brewers to users of the newer equipment led to a decline in
revenues during the first half of the year, but sales volumes in
recent months have recovered. There was a further reduction in the
demand for components used in the installation of plumbed water
dispensers in offices which are now favouring individual bottled
water. This was mostly offset by increased revenues from the repair
and rebuilding of bar guns for soft drinks and funnel units used to
dispense more solid slush-type drinks.
FINANCE REVIEW
Results in 2015
Diploma achieved a creditable performance this year with
revenues increasing by 9% to GBP333.8m and adjusted operating
profit increasing by 6% to GBP60.3m, bolstered by good
contributions from acquisitions completed both this year and last
year. Weaker industrial markets, particularly in the second half of
the financial year, led to underlying revenues and adjusted
operating profits increasing by only 1% this year. However free
cash flow was again very strong at GBP40.3m and helped to finance
GBP37.8m of acquisition investment which should provide a good base
for earnings growth in future years.
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Underlying revenues and adjusted operating profits are after
adjusting for the contribution from businesses acquired during the
year and for the impact on the translation of the results of the
overseas businesses from the significant strengthening of UK
sterling, against most of the currencies in which the Group
operates. With ca. 75% of the Group's businesses based overseas,
the impact on headline results from currency translation has led to
a reduction in revenues and adjusted operating profits of GBP8.1m
and GBP1.6m respectively, when compared with last year's exchange
rates. The contributions from acquisitions completed in the year
were GBP24.2m to revenue and GBP3.4m to adjusted operating profit,
before GBP0.3m of internal management charges.
Gross margins in the Healthcare businesses, which represent ca.
25% of Group revenues, continued to be impacted on a transactional
basis by the continuing depreciation of the Canadian and Australian
dollars. These two currencies have now depreciated in excess of 30%
over the past two years against the currencies in which they
purchase their products, predominantly the US dollar. Currency
hedging contracts and supplier price concessions have provided some
mitigation, but transactional currency effects reduced Healthcare
gross margins by 280bps in 2015. With further depreciation of these
two currencies continuing through 2015, the forward currency hedge
contracts are being replaced at more unfavourable exchange rates
which will maintain pressure on Healthcare gross margins well into
2016. Transactional currency exposures in the rest of the Group's
businesses were not significant.
The weaker gross margins in the Healthcare businesses were
largely mitigated by a combination of stronger margin mix of
revenues across the Group's businesses and by operational leverage
from continuing tight control over operating costs. However, with
the businesses acquired during the past two years joining the Group
with initial operating margins which are lower than the Group's
average and with GBP0.8m being incurred on one-off facility
restructuring costs in the US Seals businesses, operating margins
declined by 40bps to 18.1% this year, compared with 18.5% for the
full year in 2014.
Adjusted profit before tax, earnings per share and dividends
Adjusted profit before tax increased by 6% to GBP59.6m (2014:
GBP56.2m). There was a finance expense this year of GBP0.7m (2014:
net GBP0.5m) which included GBP0.3m of interest costs on borrowings
drawn down during the year to help finance acquisitions (2014:
GBPNil). The notional interest expense on the Group's defined
pension liabilities remained unchanged at GBP0.2m and GBP0.2m
(2014: GBP0.4m) was paid on bank facility and commitment fees.
Statutory profit before tax was GBP51.8m (2014: GBP49.8m), after
acquisition related charges of GBP7.4m (2014: GBP6.4m) and fair
value remeasurements of GBP0.4m (2014: GBPNil) in respect of the
put options held over minority interests.
The Group's adjusted effective accounting tax charge in 2015
remained unchanged from the previous year at 26.3% of adjusted
profit before tax. The charge this year benefited from the further
reduction in UK corporation tax rates to 20.5% (2014: 22.0%) and
from lower tax rates applied to some of the businesses acquired
during the past two years; however the effective tax rate in the US
increased slightly this year to 36% (2014: 35%) after the catch up
in prior year manufacturing tax relief claims received last year.
Adjusted earnings per share increased by 6% to 38.2p, compared with
36.1p last year and statutory basic earnings per share increased to
32.5p (2014: 31.4p).
The Board's policy is to increase dividends to shareholders each
year, while targeting towards two times dividend cover (defined as
the ratio of adjusted EPS to total dividends paid and proposed for
the year). A combination of a robust Group balance sheet and
continuing strong free cash flow provides the Directors with
confidence to recommend an increase in the final dividend of 7% to
12.4p per share (2014: 11.6p). This gives a total dividend per
share for the year of 18.2p per share which represents a 7%
increase on the prior year dividend of 17.0p. The dividend remains
2.1 times covered by adjusted EPS as reported last year.
Free cash flow
The Group generated strong free cash flow in 2015 of GBP40.3m
(2014: GBP37.8m), helped by a good contribution from the acquired
businesses and tight control of working capital. Free cash flow
represents cash available to invest in acquisitions or return to
shareholders and represented a cash conversion of adjusted earnings
of 93% (2014: 93%).
The Group's businesses worked hard in the second half of the
year to reduce working capital and the cash outflow into working
capital was reduced from GBP6.8m at 31 March 2015 to GBP1.9m at 30
September 2015; this compared with GBP4.6m in the last financial
year. The efforts to reduce working capital were generally focused
on inventory levels which resulted in no cash outflow.
During the year, the Healthcare group of businesses represented
by DHG reclassified GBP1.2m of inventory as plant and equipment
within fixed tangible assets. These assets comprise instruments
used for demonstration and for lending to hospitals while the
existing instruments are being serviced at DHG service centres. The
combination of this adjustment and reduced cash outflow in working
capital has led to the Group's KPI metric of working capital as a
proportion of revenue reducing to 17.0% at 30 September 2015 from
17.2% reported last year (16.8% when calculated on a comparable
basis).
Group tax payments increased by GBP2.4m to GBP15.4m (2014:
GBP13.0m) and included GBP0.7m of pre-acquisition tax liabilities
from Kubo and TPD and GBP0.4m of payments relating to prior year
liabilities. On an underlying basis and before the currency effects
of translation, cash tax payments increased by GBP1.3m and
represented ca. 24% of adjusted profit before tax compared with an
underlying rate of ca. 23% last year.
Capital expenditure increased by GBP2.1m to GBP4.3m compared
with GBP2.2m last year. The increase in capital expenditure was
shared equally between the Life Sciences and Seals businesses. In
Life Sciences, Vantage increased its funding of equipment contracts
on a cost per procedure ("CPP") basis to GBP1.0m (2014: GBP0.4m)
following the successful release of a new version of endoscopes. A
further GBP0.9m (2014: GBP0.2m) of field equipment was also
acquired in support of customer contracts with hospitals.
In Seals, GBP0.4m was spent on new seal and gasket cutting
machinery in the HFPG and Kubo businesses and a further GBP0.5m was
invested in completing new vertical carousels in the Hercules
Bulldog facility in Clearwater and in adding new tooling across the
Seals businesses. The relocation of the Bulldog business from Reno
to a new large leasehold facility in Tampa was completed in
September and GBP0.4m was invested in refurbishing and fitting out
this facility. Capital expenditure in the Controls businesses was a
modest GBP0.3m and related to tooling and on line-side equipment to
support a supply project in the Specialty Fasteners business. The
balance of capital expenditure in the year of GBP0.8m was largely
invested in supporting the IT infrastructure across the Group.
In addition to the capital expenditure described above, the
Group also financed the construction of a new purpose built
facility for FPE Seals in Darlington, UK. The construction of the
facility was completed in September 2015 and cost GBP2.9m,
including fitting-out and professional costs. At completion, the
facility was sold to an investment company and leased back on a 15
year full repairing lease. After providing for the potential costs
of disposing of the previous long leasehold facility, no gain or
loss was made on the disposal.
The Company paid the PAYE income tax liability of GBP1.0m (2014:
GBP1.8m) arising on the exercise of LTIP share awards, in exchange
for reduced share awards to participants; the Employee Benefit
Trust also purchased a further 100,000 shares in the Company during
the year at a cost of GBP0.7m in order to have sufficient shares to
meet future LTIP awards.
The Group spent GBP37.8m of the free cash flow on acquisitions,
as described below, and GBP19.9m (2014: GBP18.4m) on paying
dividends to both Company and minority shareholders.
Acquisitions completed during the year
The Group invested a record GBP37.8m in acquired businesses this
year (2014: GBP16.5m), including GBP0.6m on acquiring outstanding
minority interests and GBP0.6m of deferred consideration.
The largest investment was GBP22.9m paid in March 2015 to
acquire Kubo, a leading supplier of seals and related products,
largely based in Switzerland, but with a small business operating
in Austria. A further GBP11.2m was invested in October 2014 to
acquire 80% of Technopath Distribution ("TPD"), an established
supplier of products to the Life Sciences market and based in
Ireland. In July 2015, the Group also acquired Swan Seals for
GBP2.5m, a small Seals Aftermarket business based in Aberdeen to be
managed by FPE Seals in the UK.
These acquisitions added GBP19.8m to the Group's acquired
intangible assets, comprising a valuation of customer and supplier
relationships which will be amortised over periods ranging from
5-10 years. At 30 September 2015, intangible assets were GBP40.2m.
Goodwill increased by GBP13.7m to GBP89.3m at 30 September 2015,
after making fair value adjustments to the assets acquired.
Goodwill is not amortised but is assessed each year at a Sector
level to determine whether there has been any impairment in the
carrying value of goodwill acquired. The exercise to assess whether
goodwill has been impaired is described in Note 10 to the
consolidated financial statements and concluded that there has been
no impairment in the value of goodwill at the year end.
Shortly after the year end, the Group completed the acquisition
of WCIS an established supplier of sealing products and services
for maximum consideration of GBP9.8m.
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Liabilities to minority shareholders
The Group's liability to purchase outstanding minority
shareholdings at 30 September 2015 increased to GBP5.7m (2014:
GBP3.5m), following the purchase of 80% of TPD in October 2014.
This acquisition included put/call options over the outstanding 20%
of share capital which were valued at GBP3.2m. During the year, a
further 10% shareholding in Kentek was acquired from the previous
vendor for consideration of GBP1.4m, of which GBP0.6m was paid
during the year, leaving GBP0.8m to be paid in December 2015. The
remaining 10% minority shareholding in Kentek is held by the
Managing Director of this business.
At 30 September 2015, the put options over the outstanding
minority interests held in M Seals, Kentek and TPD were valued at
GBP5.7m, based on the Directors' latest estimate of the Earnings
before Interest and Tax ("EBIT") of these businesses when these
options crystallise.
In addition to the liability to minority shareholders, the Group
also has a liability at 30 September 2015 for deferred
consideration of up to GBP0.9m (2014: GBP0.5m) which includes
GBP0.8m owing to the former minority shareholder in Kentek.
Return on adjusted trading capital employed and capital
management
A key metric that the Group uses to provide an indication of the
overall profitability of the Group and its success in creating
value for shareholders is the Return on Adjusted Trading Capital
Employed ("ROATCE"). At a Group level, this is a pre-tax measure
which is applied against the fixed and working capital of the
Group, together with all gross intangible assets and goodwill. At
30 September 2015, the Group ROATCE had reduced to 23.9% (2014:
25.8%) which in part reflected the impact of acquiring a freehold
property valued at GBP7.2m, as part of the acquisition of Kubo.
Adjusted trading capital employed is defined in note 3 to the
consolidated financial statements.
The Group continues to maintain a strong balance sheet with net
cash funds of GBP3.0m (2014: GBP21.3m) at 30 September 2015,
comprising bank borrowings of GBP20.0m offset by cash funds of
GBP23.0m. These cash funds were largely utilised shortly after the
year end in completing the purchase of WCIS and in repaying some of
the bank borrowings. Surplus cash funds are generally repatriated
to the UK, unless they are required locally to meet certain
commitments, including acquisitions.
On 11 March 2015, the Group exercised part of the accordion
option within its existing revolving multi-currency credit facility
and increased its committed bank facilities to GBP40m; there
remains a further GBP10m in the accordion option for the Group to
extend this facility to GBP50m, subject to market pricing. These
additional funds were provided at a cost of 50bps and were used to
assist in financing the acquisition of Kubo. These bank facilities
are committed until June 2017 and will continue to be utilised to
meet any shortfall in cash to fund acquisitions.
Employee pension obligations
Pension benefits to existing employees, both in the UK and
overseas, are provided through defined contribution schemes at an
aggregate cost in 2015 of GBP2.1m (2014: GBP1.7m).
The Group also maintains a small closed defined benefit pension
scheme in the UK which at 30 September 2013 had a funding deficit
of GBP2.7m. The next funding actuarial valuation will be carried
out as at 30 September 2016. The Group continues to make regular
cash contributions to the scheme at an annual rate of GBP0.3m, as
agreed with the actuary, with the objective of eliminating the
funding deficit over seven years.
Following the acquisition of Kubo in March 2015, the Group has
also been required to account for Kubo's pension scheme in
accordance with IAS19 (Revised). In accordance with Swiss law, Kubo
is required to provide a contribution based pension for all
employees. The pension liability for these employees is funded by
employer and employee contributions which are managed by a large
multi-employer fund manager, with the underfunding risk insured
with a major global insurance company. Although this scheme is a
contribution based scheme, certain technical factors relating to
the funding of the scheme determines that it must be accounted for
as a defined benefit pension scheme under IAS19 (Revised).
The addition of the Kubo pension scheme this year has led to the
aggregate pension deficit held in the Group's balance sheet at 30
September 2015 increasing to GBP9.8m from GBP4.3m last year. The
actuarial pension deficit under IAS19 (Revised) in the Kubo scheme
is GBP3.7m and the pension deficit in the UK scheme increased by
GBP1.8m to GBP6.1m. The increase in the UK pension deficit arose
because of a further reduction of 30bps in bond yields to 3.8%
since last year, together with weaker equity returns during the
year. The gross aggregate pension liability in respect of these two
schemes at 30 September 2015 is now GBP44.5m which is funded by
GBP34.7m of assets.
PRINCIPAL RISKS AND UNCERTAINTIES
Our principal risks and uncertainties
Set out below are the principal risks and uncertainties
affecting the Group which have been determined by the Board, based
on a robust risk evaluation process, to have the potential to have
the greatest impact on the Group's future viability. These risks
are similar to those reported last year, although with some
movement on the relative ranking of these risks and one new risk
added relating to supplier strategy change.
The risks are each classified as strategic, operational and
financial or accounting. The Group's decentralised operations with
different sectors and geographical spread reduces the impact of
these principal risks.
Strategic risk Relative movement within Group
principal risks
1. Downturn in major markets
Increased
------------------------------------------------------------- --------------------------------------
Mitigation
Risk description & assessment The businesses identify key
market drivers and monitor
Adverse changes in the major markets the trends and forecasts,
in which the businesses operate as well as maintaining close
can have a significant impact on relationships with key customers
performance. The effects will either who may give an early warning
be seen in terms of slowing revenue of slowing demand.
growth, due to reduced or delayed Changes to cost levels and
demand for products and services, inventories can then be made
or margin pressures due to increased in a measured way to mitigate
competition. the effects.
Significant global events
A number of characteristics of the are closely monitored to determine
Group's businesses moderate the any potential impact on key
impact of economic and business markets.
cycles on the Group as a whole:
* The Group's businesses operate in three differing
sectors with different cyclical characteristics and
across a number of geographic markets.
* The businesses offer specialised products and
services; this offers a degree of protection against
customers quickly switching business to achieve a
better price.
* A high proportion of the Group's revenues comprise
consumable products which are purchased as part of
customers' operating expenditure, rather than through
capital budgets.
* In many cases the products are used in repair,
maintenance and refurbishment applications, rather
than original equipment manufacture.
Strategic risk Relative movement within Group
principal risks
2. Loss of key suppliers
Unchanged
---------------------------------------------- ------------------------------------------------------------------
Mitigation
Risk description & assessment
* Long term, multi--year exclusive contracts signed
For manufacturer--branded products, with suppliers with change of control clauses, where
there are risks to the business possible, included in contracts for protection or
if a major supplier decides to cancel compensation in the event of acquisition.
a distribution agreement or if the
supplier is acquired by a company
which has its own distribution channels
in the relevant market. There is * Collaborative projects and relationships maintained
also the risk of a supplier taking with individuals at many levels of the supplier
away exclusivity and either setting organisation, together with regular review meetings
up direct operations or appointing and adherence to contractual terms.
another distributor.
In times of rapid economic expansion
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in activity, such as after a global * Regular review of inventory levels.
recession, there is also a risk
that the lead times to supply key
products can become very long. Currently
no single supplier represents more * Bundling and kitting of products and provision of
than 10% of Group revenue and only added value services.
seven single suppliers represent
more than 2% each of Group revenue.
Relationships with suppliers have * Periodic research of alternative suppliers as part of
normally been built up over many contingency planning.
years and a strong degree of interdependence
has been established. The average
length of the principal supplier
relationships in each of the sectors
is over ten years.
The strength of the relationship
with each supplier and the volume
of activity generally ensures continuity
of supply, when there is shortage
of product.
Strategic risk Relative movement within Group
principal risks
3. Loss of key customer(s)
Unchanged
---------------------------------------------- ------------------------------------------------------------------
Mitigation
Specific large customers are
important to individual operating
businesses and a high level
of effort invested in ensuring
that these customers are retained
and encouraged not to switch
to another supplier. However,
Risk description & assessment although important to individual
operating businesses, loss
The loss of one or more major customers of any single customer does
can be a material risk. not present a material risk
to the Group.
The nature of the Group's businesses
is such that there is not a high In addition to providing high
level of dependence on any individual levels of customer service
customers and no single customer and value added activities,
represents more than 5% of Sector close integration is established
revenue or more than 2% of Group where possible with customers'
revenue. systems and processes.
Strategic risk Relative movement within Group
principal risks
4. Supplier strategy change New
---------------------------------------------- ------------------------------------------------------------------
Mitigation
Risk description & assessment The businesses work very closely
with each of their suppliers
The success of the businesses depends and regularly attend industry
significantly on representing suppliers exhibitions to keep abreast
whose products are recognised in of the latest technology and
the market place as the leading market requirements/trends.
competitive brand. If suppliers The businesses also meet with
fail to support these products with key customers on a regular
new development and technologies, basis to gain insight into
then our businesses will suffer their product requirements
from reduced demand for their products and market developments.
and services.
Each of the Group's businesses supply
established and leading products
and related services to customers
operating in specialised markets.
Operational risk Relative movement within Group
principal risks
5. Product liability
Unchanged
------------------------------------------ -------------------------------------------
Mitigation
Technically qualified personnel
and control systems are in place
to ensure products meet quality
Risk description & assessment requirements. The Group's businesses
are required to undertake Product
There is a risk that products supplied Risk assessments and comprehensive
by a Group business may fail in Supplier Quality Assurance assessments.
service, which could lead to a claim The Group has also established
under product liability. The businesses, Group--wide product liability
in their Terms and Conditions of insurance which provides worldwide
sale with customers, will typically umbrella insurance cover of
mirror the Terms and Conditions GBP20m in all Sectors.
of purchase from the suppliers.
In this way the liability can be The Group's businesses may also
limited and subrogated to the supplier. elect not to supply products
if they are not fully confident
However, if a legal claim is made that the products will meet
it will typically draw in our business the demands of the operating
as a party to the claim and the environment.
business may be exposed to legal
costs and potential damages if the The Group's businesses have
claim succeeds and the supplier undergone further product liability
fails to meet its liabilities for training during the year and
whatever reason. Product liability are continually reviewed to
insurance can be limited in terms demonstrate compliance with
of its scope of insurable events, Group policies and procedures
such as product recall. relating to product liability.
Operational risk Relative movement within Group
principal risks
6. Loss of key personnel
Unchanged
-------------------------------------------- ---------------------------------------------------------------
Mitigation
Contractual terms such as notice
periods and non--compete clauses
can mitigate the risk in the
short term. However, more successful
initiatives focus on ensuring
a challenging work environment
with appropriate reward systems.
The Group places very high importance
on planning the development,
motivation and reward for key
managers in the operating businesses
including:
* Ensuring a challenging working environment where
managers feel they have control over, and
responsibility for their businesses.
* Establishing management development programmes to
Risk description & assessment ensure a broad base of talented managers.
The success of the Group is built
upon strong, self--standing management
teams in the operating businesses, * Offering a balanced and competitive compensation
committed to the success of their package with a combination of salary, annual bonus
respective businesses. As a result, and long term cash incentive plans targeted at the
the loss of key personnel can have individual business level.
a significant impact on performance,
for a limited time period.
The average length of service for * Giving the freedom, encouragement, financial
all personnel in the Group is consistently resources and strategic support for managers to
over six years. pursue ambitious growth plans.
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Financial and accounting risk Relative movement within Group
principal risks
7. Foreign currency risk - Translational
exposure Increased
-------------------------------------------------- -------------------------------------
Mitigation
The Group operates across
a number of diverse geographies,
but does not hedge translational
exposure.
Risk description & assessment
Foreign currency risk is the risk
that changes in currency rates will
affect the Group's results. The
Group operates internationally and
is exposed to foreign exchange risk
arising from various currency exposures,
primarily with respect to the US
dollar, the Canadian dollar, the
Australian dollar and the Euro.
The net assets of the Group's operations
outside the UK are also exposed
to foreign currency translation
risk.
During the year ended 30 September
2015, ca. 75% of the Group's revenue
and adjusted operating profits were
earned in currencies other than
UK sterling. In comparison to the
prior year, the net effect of currency
translation was to decrease revenue
by GBP8.1m and decrease adjusted
operating profit by GBP1.6m. It
is estimated that a further strengthening
of UK sterling by 10% against all
the currencies in which the Group
does business, would reduce adjusted
operating profit before tax by approximately
GBP4.6m (8%), due to currency translation.
Currency exposures also arise from
the net assets of the Group's foreign
operations. At 30 September 2015,
the Group's non--UK sterling trading
capital employed in overseas businesses
was GBP171.4m (2014: GBP137.9m),
which represented 80% of the Group's
trading capital employed. It is
estimated that a further strengthening
of UK sterling of 10% against all
the non--UK sterling capital employed
would reduce shareholders' funds
by GBP15.6m.
Details of average exchange rates
used in the translation of overseas
earnings and of year end exchange
rates used in the translation of
overseas balance sheets, for the
principal currencies used by the
Group, are shown in note 15 to the
attached consolidated financial
statements.
Financial and accounting risk Relative movement within Group
principal risks
8. Foreign currency - Transactional exposure Increased
------------------------------------------------- --------------------------------------
Mitigation
The Group's businesses may hedge
up to 80% of forecast (being
a maximum of eighteen months)
foreign currency exposures using
forward foreign exchange contracts.
The Group finance department
monitors rolling monthly forecasts
of currency exposures.
The Group classifies its forward
foreign exchange contracts,
which hedge forecast transactions,
as cash flow hedges and state
them at fair value at each reporting
period.
Financial and accounting risk Relative movement within Group
principal risks
9. Inventory obsolescence Unchanged
-------------------------------------------- -----------------------------------------
Mitigation
Risk description & assessment Inventory write--offs are controlled
and minimised by active management
Working capital management is critical of inventory levels based on
to success in specialised industrial sales forecasts and regular
businesses as this has a major impact cycle counts.
on cash flow. The principal risk
to working capital is in inventory Where necessary, a provision
obsolescence and write--off. is made to cover both excess
inventory and potential obsolescence.
The charge against operating profit
in respect of old or surplus inventory
in the year was GBP1.5m but inventories
are generally not subject to technological
obsolescence.
RESPONSIBILITY STATEMENT OF THE DIRECTORS
IN RESPECT OF THE ANNUAL REPORT 2015
The responsibility statement below has been prepared in
connection with the Group's full Annual Report & Accounts for
the year ended 30 September 2015. Certain parts thereof are not
included within this Preliminary Announcement.
The Directors confirm that to the best of their knowledge:
-- the Group consolidated financial statements, prepared in
accordance with IFRSs as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and profit of
the Group and the undertakings included in the consolidation taken
as a whole;
-- the Preliminary Announcement includes a fair review of the
development and performance of the business and the position of the
Group and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties faced by the Group; and
-- the Annual Report & Accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Group's performance, business model
and strategy.
The Directors of Diploma PLC and their respective
responsibilities are listed in the Annual Report & Accounts for
2014. Andy Smith and Anne Thorburn were appointed non-Executive
Directors on 9 February and 7 September 2015, respectively. John
Rennocks retired as Chairman and non-Executive Director of the
Company on 21 January 2015.
This responsibility statement was approved by the Board of
Directors on 16 November 2015 and is signed on its behalf by:
BM Thompson NP Lingwood
Chief Executive Officer Group Finance Director
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2015
2015 2014
Note GBPm GBPm
------------------------------ ----- -------- ---------
Revenue 3,4 333.8 305.8
Cost of sales (212.8) (194.2)
------------------------------ ----- -------- ---------
Gross profit 121.0 111.6
Distribution costs (6.8) (6.4)
Administration costs (61.3) (54.9)
------------------------------ ----- -------- ---------
Operating Profit 3 52.9 50.3
Financial expense, net 5 (1.1) (0.5)
------------------------------ ----- -------- ---------
Profit before tax 51.8 49.8
Tax expense 6 (14.4) (13.7)
------------------------------ ----- -------- ---------
Profit for the year 37.4 36.1
------------------------------ ----- -------- ---------
Attributable to:
Shareholders of the Company 36.7 35.5
Minority interests 0.7 0.6
------------------------------ ----- -------- ---------
37.4 36.1
------------------------------ ----- -------- ---------
Earnings per share
Basic and diluted earnings 7 32.5p 31.4p
------------------------------ ----- -------- ---------
Alternative Performance Measures (note
2) 2015 2014
Note GBPm GBPm
---------------------------------------- ----- -------- --------
Operating profit 52.9 50.3
Add: Acquisition related charges 3 7.4 6.4
Adjusted operating profit 3,4 60.3 56.7
Deduct: Net interest expense 5 (0.7) (0.5)
----------------------------------------- ----- -------- --------
Adjusted profit before tax 59.6 56.2
----------------------------------------- ----- -------- --------
Adjusted earnings per share 7 38.2p 36.1p
----------------------------------------- ----- -------- --------
CONSOLIDATED STATEMENT OF
INCOME AND OTHER COMPREHENSIVE INCOME
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For the year ended 30 September 2015
2015 2014
GBPm GBPm
----------------------------------------------------------- -------- ------
Profit for the year 37.4 36.1
------------------------------------------------------------ -------- ------
Items that will not be reclassified to the Consolidated
Income Statement
Actuarial gains in the defined benefit pension scheme (1.9) 0.3
Deferred tax on items that will not be reclassified 0.4 -
----------------------------------------------------------- -------- ------
(1.5) 0.3
----------------------------------------------------------- -------- ------
Items that may be reclassified to Consolidated Income
Statement
Exchange rate adjustments on foreign currency net
investments (8.2) (8.7)
Gains on fair value of cash flow hedges 1.5 0.4
Net changes to fair value of cash flow hedges transferred
to the Consolidated Income Statement (0.3) -
Deferred tax on items that may be reclassified (0.3) (0.1)
------------------------------------------------------------ -------- ------
(7.3) (8.4)
----------------------------------------------------------- -------- ------
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 28.6 28.0
------------------------------------------------------------ -------- ------
Attributable to:
Shareholders of the Company 28.1 27.7
Minority interests 0.5 0.3
------------------------------------------------------------ -------- ------
28.6 28.0
----------------------------------------------------------- -------- ------
CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
For the year ended 30 September 2015
Share-holders'
Share Translation Hedging Retained equity Minority Total
capital reserve reserve earnings interests equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ----- ---------- -------------- ---------- ----------- --------------- ------------ ---------
At 1 October
2013 5.7 16.2 - 155.0 176.9 1.4 178.3
Total
comprehensive
income - (8.7) 0.3 36.1 27.7 0.3 28.0
Share-based
payments - - - 0.7 0.7 - 0.7
Acquisition of
businesses - - - - - 2.3 2.3
Minority
interest put
option 13 - - - (2.3) (2.3) - (2.3)
Minority
interests
acquired - - - 0.9 0.9 (0.9) -
Tax on items
recognised
directly in
equity - - - 0.5 0.5 - 0.5
Notional
purchase of
own shares - - - (1.8) (1.8) - (1.8)
Dividends 14 - - - (18.2) (18.2) (0.2) (18.4)
At 30 September
2014 5.7 7.5 0.3 170.9 184.4 2.9 187.3
Total
comprehensive
income - (8.0) 0.9 35.2 28.1 0.5 28.6
Share-based
payments - - - 0.5 0.5 - 0.5
Acquisition of
businesses 12 - - - - - 3.2 3.2
Minority
interest put
option 13 - - - (3.2) (3.2) - (3.2)
Minority
interest
acquired - - - 1.2 1.2 (1.2) -
Tax on items - - - - - - -
recognised
directly in
equity
Notional
purchase of
own shares - - - (1.7) (1.7) - (1.7)
Dividends 14 - - - (19.7) (19.7) (0.2) (19.9)
---------------- ----- ---------- -------------- ---------- ----------- --------------- ------------ ---------
At 30 September
2015 5.7 (0.5) 1.2 183.2 189.6 5.2 194.8
---------------- ----- ---------- -------------- ---------- ----------- --------------- ------------ ---------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September 2015
2015 2014
Note GBPm GBPm
----------------------------------------- ----- -------- --------
Non-current assets
Goodwill 10 89.3 80.2
Acquisition intangible assets 40.2 28.6
Other intangible assets 1.2 0.8
Investment 11 0.7 0.7
Property, plant and equipment 22.8 13.1
Deferred tax assets 0.4 0.9
------------------------------------------ ----- -------- --------
154.6 124.3
----------------------------------------- ----- -------- --------
Current assets
Inventories 56.6 54.1
Trade and other receivables 51.3 46.3
Cash and cash equivalents 9 23.0 21.3
------------------------------------------ ----- -------- --------
130.9 121.7
----------------------------------------- ----- -------- --------
Current liabilities
Trade and other payables (45.1) (43.9)
Current tax liabilities (2.9) (2.3)
Other liabilities 13 (2.5) (1.6)
(50.5) (47.8)
----------------------------------------- ----- -------- --------
Net current assets 80.4 73.9
------------------------------------------ ----- -------- --------
Total assets less current liabilities 235.0 198.2
Non-current liabilities
Borrowings 9 (20.0) -
Retirement benefit obligations (9.8) (4.3)
Other liabilities 13 (4.1) (2.4)
Deferred tax liabilities (6.3) (4.2)
------------------------------------------ ----- -------- --------
Net assets 194.8 187.3
------------------------------------------ ----- -------- --------
Equity
Share capital 5.7 5.7
Translation reserve (0.5) 7.5
Hedging reserve 1.2 0.3
Retained earnings 183.2 170.9
------------------------------------------ ----- -------- --------
Total shareholders' equity 189.6 184.4
Minority interests 5.2 2.9
------------------------------------------ ----- -------- --------
Total equity 194.8 187.3
------------------------------------------ ----- -------- --------
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2015
2015 2014
Note GBPm GBPm
------------------------------------------------ ----- ------- -------
OPERATING PROFIT 52.9 50.3
Acquisition related charges 8 7.4 6.4
Non-cash items 8 3.7 2.9
Increase in working capital 8 (1.9) (4.6)
------------------------------------------------ ----- ------- -------
Cash flow from OPERATING activities 62.1 55.0
Interest paid, net (0.5) (0.3)
Tax paid (15.4) (13.0)
------------------------------------------------ ----- ------- -------
Net cash from operating activities 46.2 41.7
------------------------------------------------ ----- ------- -------
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Cash flow from investing activities
Acquisition of businesses (including expenses) 12 (36.6) (14.9)
Deferred consideration paid 13 (0.6) (0.1)
Purchase of property, plant and equipment (4.0) (1.9)
Purchase of other intangible assets (0.3) (0.3)
Proceeds from sale of property, plant and
equipment 0.1 0.1
------------------------------------------------ ----- ------- -------
Net cash used in investing activities (41.4) (17.1)
------------------------------------------------ ----- ------- -------
Cash flow from financing activities
Acquisition of minority interests 13 (0.6) (1.5)
Dividends paid to shareholders 14 (19.7) (18.2)
Dividends paid to minority interests (0.2) (0.2)
Purchase of own shares by Employee Benefit (0.7) -
Trust
Notional purchase of own shares on exercise
of share options (1.0) (1.8)
Proceeds of borrowings, net 9 20.0 -
------------------------------------------------ ----- ------- -------
Net cash used in financing activities (2.2) (21.7)
------------------------------------------------ ----- ------- -------
Net increase in cash and cash equivalents 2.6 2.9
Cash and cash equivalents at beginning of
year 21.3 19.3
Effect of exchange rates on cash and cash
equivalents (0.9) (0.9)
------------------------------------------------ ----- ------- -------
Cash and cash equivalents at end of year 9 23.0 21.3
------------------------------------------------ ----- ------- -------
ALTERNATIVE PERFORMANCE MEASURES (NOTE 2) 2015 2014
GBPm GBPm
---------------------------------------------- --- ------- -----
Net increase in cash and cash equivalents 2.6 2.9
Add: Dividends paid to shareholders 14 19.7 18.2
Dividends paid to minority interests 0.2 0.2
Acquisition of businesses 12 36.6 14.9
Acquisition of minority interests 13 0.6 1.5
Deferred consideration paid 13 0.6 0.1
Proceeds of borrowings, net 9 (20.0) -
--------------------------------------------- --- ------- -----
FREE CASH FLOW 40.3 37.8
---------------------------------------------- --- ------- -----
Cash and cash equivalents 23.0 21.3
Borrowings (20.0) -
---------------------------------------------- --- ------- -----
NET CASH 9 3.0 21.3
---------------------------------------------- --- ------- -----
1. GENERAL INFORMATION
Diploma PLC is a public limited company registered and domiciled
in England and Wales and listed on the London Stock Exchange. The
address of the registered office is 12 Charterhouse Square, London,
EC1M 6AX. The consolidated financial statements comprise the
Company and its subsidiaries (together referred to as the "Group")
and were authorised by the Directors for publication on 16 November
2015.
These statements are presented in UK sterling, with all values
rounded to the nearest one hundred thousand, except where otherwise
indicated.
The consolidated financial statements, which have been prepared
on a going concern basis, have been prepared in accordance with
International Financial Reporting Standards ("IFRS"), as adopted by
the European Union and in accordance with the Companies Act 2006,
as applicable to companies reporting under IFRS. The accounting
policies have been consistently applied in 2015 and the comparative
period.
There were no new Standards, amendments or interpretations to
existing Standards which have been published and endorsed by the EU
and which have a significant impact on the results, financial
position or presentation of the consolidated financial statements
for the year ended 30 September 2015.
The financial information set out in this Preliminary
Announcement, which has been extracted from the audited
consolidated financial statements, does not constitute the Group's
statutory financial statements for the years ended 30 September
2015 and 2014. Statutory financial statements for the year ended 30
September 2014 have been delivered to the Registrar of Companies
and are available on the website at www.diplomaplc.com The
statutory financial statements for the year ended 30 September
2015, which were approved by the Directors on 16 November 2015,
will be sent to shareholders on 4 December 2015 and delivered to
the Registrar of Companies, following the Company's Annual General
Meeting.
The auditor has reported on the consolidated financial
statements for the years ended 30 September 2015 and 2014. The
reports were unqualified, did not draw attention to any matters by
way of emphasis and did not contain a statement under Section 498
(2) or (3) of the Companies Act 2006.
The Company's Annual General Meeting will be held at 12.00
midday on 20 January 2016 in Brewers Hall, Aldermanbury Square,
London, EC2V 7HR. The Notice of Meeting will be sent out in a
separate Circular to shareholders.
2. ALTERNATIVE PERFORMANCE MEASURES
The Group uses a number of alternative (non-Generally Accepted
Accounting Practice ("non-GAAP")) financial measures which are not
defined within IFRS. The Directors use these measures in order to
assess the underlying operational performance of the Group and as
such, these measures are important and should be considered
alongside the IFRS measures. The following non-GAAP measures are
referred to in this Preliminary Announcement.
2.1 Adjusted operating profit
At the foot of the Consolidated Income Statement, "adjusted
operating profit" is defined as operating profit before
amortisation and impairment of acquisition intangible assets,
acquisition expenses, adjustments to deferred consideration
(collectively, "acquisition related charges"), the costs of a
material restructuring or rationalisation of operations and the
profit or loss relating to the sale of businesses or property. The
Directors believe that adjusted operating profit is an important
measure of the underlying operational performance of the Group.
2.2 Adjusted profit before tax
At the foot of the Consolidated Income Statement, "adjusted
profit before tax" is separately disclosed, being defined as
adjusted operating profit, after finance expense (but before fair
value remeasurements under IAS 39 in respect of future purchases of
minority interests) and before tax. The Directors believe that
adjusted profit before tax is an important measure of the
underlying performance of the Group.
2.3 Adjusted earnings per share
"Adjusted earnings per share" is calculated as the total of
adjusted profit before tax, less income tax costs, but excluding
the tax impact on the items included in the calculation of adjusted
profit and the tax effects of goodwill in overseas jurisdictions,
less profit attributable to minority interests, divided by the
weighted average number of ordinary shares in issue during the
year. The Directors believe that adjusted earnings per share
provides an important measure of the underlying earning capacity of
the Group.
2.4 Free cash flow
At the foot of the Consolidated Cash Flow Statement, "free cash
flow" is reported, being defined as net cash flow from operating
activities, after net capital expenditure on fixed assets and
including proceeds received from business disposals, but before
expenditure on business combinations/investments and dividends paid
to both minority shareholders and the Company's shareholders. The
Directors believe that
free cash flow gives an important measure of the cash flow of
the Group, available for future investment or distributions to
shareholders.
2.5 Trading capital employed and ROATCE
In the segment analysis in note 3, "trading capital employed" is
reported, being defined as net assets less cash and cash
equivalents and after adding back: borrowings, retirement benefit
obligations, deferred tax and acquisition liabilities in respect of
future purchases of minority interests and deferred consideration.
Adjusted trading capital employed is reported as being trading
capital employed plus goodwill and acquisition related charges
previously written off (net of deferred tax on acquisition
intangible assets). Return on adjusted trading capital employed
("ROATCE") at the Group and Sector level is defined as the adjusted
operating profit, divided by adjusted trading capital employed and
adjusted for the timing effect of major acquisitions and disposals.
The Directors believe that ROATCE is an important measure of the
underlying performance of the Group.
3. Business Sector Analysis
For management reporting purposes, the Group is organised into
three main business Sectors: Life Sciences, Seals and Controls.
These Sectors form the basis of the primary reporting format
disclosures below. Sector revenue represents revenue from external
customers; there is no inter-Sector revenue. Sector results, assets
and liabilities include items directly attributable to a Sector, as
well as those that can be allocated on a reasonable basis.
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Sector assets exclude cash and cash equivalents, deferred tax
assets and corporate assets that cannot be allocated on a
reasonable basis to a business Sector. Sector liabilities exclude
borrowings, retirement benefit obligations, deferred tax
liabilities and corporate liabilities that cannot be allocated on a
reasonable basis to a business Sector. These items are shown
collectively in the following analysis as "unallocated assets" and
"unallocated liabilities", respectively.
Life Sciences Seals Controls Group
2015 2014 2015 2014 2015 2014 2015 2014
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- --------- -------- ------- ------- ------- ------- ------- -------
Revenue
- existing businesses 90.2 91.4 128.3 119.8 91.1 94.6 309.6 305.8
- acquisitions 12.9 - 11.3 - - - 24.2 -
------------------------------ --------- -------- ------- ------- ------- ------- ------- -------
Revenue 103.1 91.4 139.6 119.8 91.1 94.6 333.8 305.8
Adjusted operating profit
- existing businesses 19.2 19.7 23.5 21.7 14.5 15.3 57.2 56.7
- acquisitions 1.8 - 1.3 - - - 3.1 -
------------------------------ --------- -------- ------- ------- ------- ------- ------- -------
Adjusted operating profit 21.0 19.7 24.8 21.7 14.5 15.3 60.3 56.7
Acquisition related charges (3.1) (2.3) (3.6) (3.2) (0.7) (0.9) (7.4) (6.4)
------------------------------- --------- -------- ------- ------- ------- ------- ------- -------
operating Profit 17.9 17.4 21.2 18.5 13.8 14.4 52.9 50.3
------------------------------- --------- -------- ------- ------- ------- ------- ------- -------
Acquisition related charges of GBP7.4m (2014: GBP6.4m) comprises
GBP6.9m (2014: GBP5.6m) of amortisation of acquisition intangible
assets and GBP0.5m of acquisition expenses (2014: GBP0.8m).
Life Sciences Seals Controls Group
2015 2014 2015 2014 2015 2014 2015 2014
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Operating assets 31.4 29.3 60.0 45.0 36.0 37.2 127.4 111.5
Investment - - 0.7 0.7 - - 0.7 0.7
Goodwill 44.9 44.2 29.6 21.0 14.8 15.0 89.3 80.2
Acquisition intangible
assets 13.0 10.1 25.4 15.8 1.8 2.7 40.2 28.6
---------------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
89.3 83.6 115.7 82.5 52.6 54.9 257.6 221.0
Unallocated assets:
- Deferred tax assets 0.4 0.9
- Cash and cash equivalents 23.0 21.3
- Corporate assets 4.5 2.8
---------------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Total assets 89.3 83.6 115.7 82.5 52.6 54.9 285.5 246.0
---------------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Operating liabilities (14.7) (14.7) (16.2) (14.6) (13.5) (14.9) (44.4) (44.2)
Unallocated liabilities:
- Deferred tax liabilities (6.3) (4.2)
- Retirement benefit obligations (9.8) (4.3)
- Acquisition liabilities (6.6) (4.0)
- Corporate liabilities (3.6) (2.0)
(20.0) -
* Borrowings
---------------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Total liabilities (14.7) (14.7) (16.2) (14.6) (13.5) (14.9) (90.7) (58.7)
---------------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Net assets 74.6 68.9 99.5 67.9 39.1 40.0 194.8 187.3
---------------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
OTHER SECTOR INFORMATION
Capital expenditure 2.5 1.2 1.5 0.5 0.3 0.5 4.3 2.2
Depreciation and amortisation 1.7 1.3 1.3 0.7 0.5 0.5 3.5 2.5
---------------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Alternative Performance Life
Measures Sciences Seals Controls Group
(Note 2) 2015 2014 2015 2014 2015 2014 2015 2014
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------ -------
NET ASSETS 74.6 68.9 99.5 67.9 39.1 40.0 194.8 187.3
Add/(deduct):
* Deferred tax, net 5.9 3.3
* Retirement benefit obligations 9.8 4.3
* Acquisition liabilities 6.6 4.0
* Net cash funds (3.0) (21.3)
------ -------
REPORTED TRADING CAPITAL
EMPLOYED 214.1 177.6
* Historic goodwill and acquisition related charges,
net of deferred tax 25.0 22.3 20.2 19.6 8.4 7.7 53.6 49.6
ADJUSTED TRADING CAPITAL
EMPLOYED 99.6 91.2 119.7 87.5 47.5 47.7 267.7 227.2
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------ -------
ROATCE(1) 21.1% 21.9% 23.7% 26.0% 30.5% 33.2% 23.9% 25.8%
(1) ROATCE is calculated after adjusting for the timing
of acquisitions completed during in the year.
-------------------------------------------------------------------------------------------------------------- ------ -------
4. GEOGRAPHIC SECTOR ANALYSIS BY ORIGIN
Adjusted Trading
operating Non-current capital Capital
Revenue profit assets(1) employed expenditure
2015 2014 2015 2014 2015 2014 2015 2014 2015 2014
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
United Kingdom 87.7 85.7 14.5 13.8 25.2 23.8 42.7 39.7 0.4 0.5
Rest of Europe 77.1 53.2 11.7 7.9 57.1 22.0 71.6 32.2 0.5 0.1
North America(2) 169.0 166.9 34.1 35.0 71.2 76.9 99.8 105.7 3.4 1.6
------------------ -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
333.8 305.8 60.3 56.7 153.5 122.7 214.1 177.6 4.3 2.2
------------------ -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
(1) Non-current assets exclude the investment and deferred tax
assets.
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(2) North America includes the Australian Healthcare
businesses.
5. FINANCIAL EXPENSE, NET
2015 2014
GBPm GBPm
--------------------------------------------------------- -------- --------
Interest and similar income
- interest receivable on short term deposits - 0.1
Interest expense and similar charges
- bank facility and commitment fees (0.2) (0.4)
- interest payable on bank and other borrowings (0.3) -
* notional interest expense on the defined benefit
pension schemes (0.2) (0.2)
----------------------------------------------------------- -------- --------
(0.7) (0.6)
--------------------------------------------------------- -------- --------
Net interest expense (0.7) (0.5)
- fair value remeasurement of put options (0.4) -
(note 13)
--------------------------------------------------------- -------- --------
FINANCIAL EXPENSE, NET (1.1) (0.5)
----------------------------------------------------------- -------- --------
The fair value remeasurement of GBP0.4m (2014: GBPNil) comprises
GBP0.5m (2014: GBP0.1m) which relates to an unwinding of the
discount on the liability for future purchases of minority
interests, net of a movement in fair value of the put options of
GBP0.1m credit (2014: GBP0.1m credit).
6. TAX EXPENSE
2015 2014
GBPm GBPm
------------------------------------------------------ ------ ------
Current tax
The tax charge is based on the profit for the year
and comprises:
- UK corporation tax 2.6 2.6
- Overseas tax 12.5 12.1
------------------------------------------------------ ------ ------
15.1 14.7
Adjustments in respect of prior year:
* UK corporation tax (0.1) (0.1)
- Overseas tax 0.4 (0.4)
------------------------------------------------------ ------ ------
Total current tax 15.4 14.2
------------------------------------------------------ ------ ------
Deferred tax
The net deferred tax credit based on the origination
and reversal of timing differences comprises:
- United Kingdom (1.0) -
- Overseas - (0.5)
Total deferred tax (1.0) (0.5)
------------------------------------------------------ ------ ------
TOTAL TAX ON PROFIT FOR THE YEAR 14.4 13.7
------------------------------------------------------ ------ ------
The Group earns its profits in the UK and Overseas. The UK
corporation tax rate reduced from 21.0% to 20.0% on 1 April 2015;
however as the Group prepares its consolidated financial statements
for the year to 30 September, the effective tax rate for UK
corporation tax in respect of the year ended 30 September 2015 was
20.5% (2014: 22.0%). The Group's net overseas tax rate is higher
than that in the UK, primarily because the profits earned in the US
are taxed at rates of up to ca. 38%.
The UK deferred tax assets and liabilities at 30 September 2015
have been calculated based on the rate of 20% substantively enacted
at 30 September 2015. On 8 July 2015, HM Government announced a
reduction in the rate of corporation tax to 19% with effect from 1
April 2017 and to 18% with effect from 1 April 2020. The impact of
re-measuring the Group's UK deferred tax assets and liabilities at
these new rates has not been recognised in these consolidated
financial statements as the Finance Bill had not been substantively
enacted at 30 September 2015.
7. EARNINGS PER SHARE
Basic and diluted earnings per share
Basic and diluted earnings per ordinary 5p share are calculated
on the basis of the weighted average number of ordinary shares in
issue during the year of 113,007,084 (2014: 112,893,129) and the
profit for the year attributable to shareholders of GBP36.7m (2014:
GBP35.5m). There were no potentially dilutive shares.
Adjusted earnings per share
Adjusted earnings per share, which is defined in note 2, is
calculated as follows:
2015 2014 2015 2014
pence pence
per share per share GBPm GBPm
---------------------------------------------------- ---------- ---------- ------- -------
Profit before tax 51.8 49.8
Tax expense (14.4) (13.7)
Minority interests (0.7) (0.6)
---------------------------------------------------- ---------- ---------- ------- -------
Earnings for the year attributable to shareholders
of the Company 32.5 31.4 36.7 35.5
Acquisition related charges 6.5 5.7 7.4 6.4
Fair value remeasurement of put options 0.4 - 0.4 -
Tax effects on acquisition related charges
and fair value remeasurements (1.2) (1.0) (1.3) (1.1)
ADJUSTED EARNINGS 38.2 36.1 43.2 40.8
---------------------------------------------------- ---------- ---------- ------- -------
8. RECONCILIATION OF CASH FLOW FROM OPERATING ACTIVITIES
2015 2015 2014 2014
GBPm GBPm GBPm GBPm
------------------------------------------ ------ ------ ------ ------
Operating profit 52.9 50.3
Acquisition related charges 7.4 6.4
------------------------------------------ ------ ------ ------ ------
Adjusted operating profit 60.3 56.7
Depreciation or amortisation of tangible
and other intangible assets 3.5 2.5
Share-based payments expense 0.5 0.7
Cash paid into defined benefit schemes (0.3) (0.3)
------------------------------------------ ------ ------ ------ ------
Non-cash items 3.7 2.9
------------------------------------------ ------ ------ ------ ------
Operating cash flow before changes in
working capital 64.0 59.6
Increase in inventories - (4.6)
Decrease/(increase) in trade and other
receivables 0.2 (3.1)
(Decrease)/increase in trade and other
payables (2.1) 3.1
------------------------------------------ ------ ------ ------ ------
Increase in working capital (1.9) (4.6)
------------------------------------------ ------ ------ ------ ------
Cash flow from operating activities,
before acquisition expenses 62.1 55.0
------------------------------------------ ------ ------ ------ ------
9. NET CASH
The movement in net cash during the year is as follows:
2015 2014
GBPm GBPm
------------------------------------------- ------- -------
Net increase in cash and cash equivalents 2.6 2.9
Increase in borrowings (20.0) -
------------------------------------------- ------- -------
(17.4) 2.9
Effect of exchange rates (0.9) (0.9)
------------------------------------------- ------- -------
Movement in net cash (18.3) 2.0
Net cash at beginning of year 21.3 19.3
------------------------------------------- ------- -------
NET CASH AT END OF YEAR 3.0 21.3
------------------------------------------- ------- -------
Comprising:
Cash and cash equivalents 23.0 21.3
Borrowings (20.0) -
------------------------------------------- ------- -------
NET CASH AT 30 SEPTEMBER 3.0 21.3
------------------------------------------- ------- -------
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The Group has a committed multi-currency GBP40m revolving bank
facility with an accordion option to increase this facility to
GBP50m, subject to market pricing. During the year the Group
exercised part of the accordion option in respect of GBP15m and
increased the committed bank facility to GBP40m. At 30 September
2015, the remaining accordion option available is GBP10m. This bank
facility expires on 23 June 2017. Interest on this facility is
payable between 120 and 170bps over LIBOR, depending on the ratio
of net debt to EBITDA.
10. GOODWILL
Life Sciences Seals Controls Total
GBPm GBPm GBPm GBPm
---------------------------- -------------- ------ --------- ------
At 1 October 2013 47.3 16.6 14.6 78.5
Acquisitions 0.3 5.0 0.7 6.0
Exchange adjustments (3.4) (0.6) (0.3) (4.3)
----------------------------- -------------- ------ --------- ------
At 30 September 2014 44.2 21.0 15.0 80.2
Acquisitions (note 12) 5.6 8.1 - 13.7
Adjustment to acquisitions
in prior year - 0.1 - 0.1
Exchange adjustments (4.9) 0.4 (0.2) (4.7)
----------------------------- -------------- ------ --------- ------
At 30 September 2015 44.9 29.6 14.8 89.3
----------------------------- -------------- ------ --------- ------
The Group tests goodwill for impairment generally twice a year.
For the purposes of impairment testing, goodwill is allocated to
each of the Group's three operating Sectors. This reflects the
lowest level within the Group at which goodwill is monitored by
management and better reflects the Group's strategy of acquiring
businesses to drive synergies across a Sector, rather than within
an individual business. The impairment test requires a "value in
use" valuation to be prepared for each Sector using discounted cash
flow forecasts. The cash flow forecasts are based on a combination
of annual budgets prepared by each business and the Group's
strategic plan. Beyond five years, cash flow projections utilise a
perpetuity growth rate of 2%.
The key assumptions used to prepare the cash flow forecasts
relate to gross margins, revenue growth rates and the discount
rate. The gross margins are assumed to remain sustainable, which is
supported by historical experience; revenue growth rates generally
approximate to the long term average rates for the markets in which
the business operates, unless there are particular factors relevant
to a business, such as start-ups. The annual growth rates used in
the cash flow forecasts for the next five years represent the
budgeted rates for 2016 and thereafter, average growth rates for
each Sector; these annual growth rates then reduce to 2% over the
longer term.
The cash flow forecasts are discounted to determine a current
valuation using a single market derived pre-tax discount rate of
ca.12% (2014: 13%). This single rate is based on the
characteristics of lower risk, non-technically driven, distribution
businesses operating generally in well developed markets and
geographies and with robust capital structures. As these features
are consistent between each of the Group's Sectors the Board
considers that it is more appropriate to use a single discount rate
applied to each Sector's cash flow forecasts.
Based on the criteria set out above, no impairment in the value
of goodwill in any of the Sectors was identified.
The Directors have also carried out sensitivity analysis on the
key assumptions noted above to determine whether a "reasonably
possible adverse change" in any of these assumptions would result
in an impairment of goodwill. The analysis indicates that a
"reasonably possible adverse change" would not give rise to an
impairment charge to goodwill in any of the three Sectors.
11. INVESTMENT
2015 2014
GBPm GBPm
------------ ------ ------
Investment 0.7 0.7
------------ ------ ------
The Group holds a 10% interest in the share capital of Kunshan J
Royal Precision Products Inc. ("JRPP"), a supplier to J Royal. The
Group has no involvement in the day-to-day operations or management
of JRPP. At 30 September 2015, there was no material difference
between the book value of this investment and its fair value.
12. ACQUISITION of BUSINESSES
On 6 October 2014, the Group acquired 80% of Techno-Path
(Distribution) Limited ("TPD") for initial and maximum
consideration of GBP11.0m (EUR14.0m), including net debt at
acquisition of GBP1.4m (EUR1.9m) and before acquisition expenses of
GBP0.2m. The fair value of the 20% minority interest in TPD and the
related put/call option of GBP3.2m (EUR4.1m) has been calculated
based on the net present value of the projected performance of the
business in the financial years 2016 to 2019, when the options
become exercisable.
On 13 March 2015, the Group acquired 100% of Rutin AG, the Swiss
holding company of the Kubo group ("Kubo") of companies based in
Switzerland and Austria for consideration of GBP22.7m (CHF33.1m)
net of cash acquired of GBP4.6m (CHF6.8m) and before acquisition
expenses of GBP0.2m.
On 13 July 2015, the Group acquired 100% of Swan Seals
(Aberdeen) Limited ("Swan") for initial consideration of GBP2.4m
and before acquisition expenses of GBP0.1m.
Set out below is an analysis of the provisional net book values
and fair values relating to these acquisitions.
Kubo TPD Swan Total
---------------- ----------------- ---------------- -----------------
Book Fair Book Fair Book Fair Book Fair
value value value value value value value value
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ------- ------- ------- -------- ------- ------- ------- --------
Acquisition intangible
assets - 11.0 - 7.2 - 1.6 - 19.8
Deferred tax (0.4) (2.8) - (0.9) - (0.3) (0.4) (4.0)
Property, plant and
equipment 4.4 8.5 0.4 0.4 - - 4.8 8.9
Inventories 2.6 2.5 2.1 2.0 0.1 0.1 4.8 4.6
Trade and other receivables 3.3 3.2 1.5 1.5 0.2 0.2 5.0 4.9
Trade and other payables (2.9) (3.1) (1.2) (1.6) (0.2) (0.2) (4.3) (4.9)
Retirement benefit
obligations - (3.7) - - - - - (3.7)
------------------------------- ------- ------- ------- -------- ------- ------- ------- --------
Net assets acquired 7.0 15.6 2.8 8.6 0.1 1.4 9.9 25.6
Goodwill 7.9 7.1 - 5.6 - 1.0 7.9 13.7
Minority of share of
net assets (including
goodwill) - - - (3.2) - - - (3.2)
------------------------------- ------- ------- ------- -------- ------- ------- ------- --------
14.9 22.7 2.8 11.0 0.1 2.4 17.8 36.1
------------------------------- ------- ------- ------- -------- ------- ------- ------- --------
Cash paid 27.3 9.6 2.4 39.3
Debt acquired - 1.5 - 1.5
Cash acquired (4.6) (0.1) - (4.7)
Expenses of acquisition 0.2 0.2 0.1 0.5
------------------------------- ------- ------- ------- -------- ------- ------- ------- --------
Net cash paid, after
acquisition expenses 22.9 11.2 2.5 36.6
Less: Expenses of acquisition (0.2) (0.2) (0.1) (0.5)
------------------------------- ------- ------- ------- -------- ------- ------- ------- --------
Total consideration 22.7 11.0 2.4 36.1
------------------------------- ------- ------- ------- -------- ------- ------- ------- --------
Goodwill of GBP13.7m recognised on these acquisitions represents
the amount paid for future sales growth from both new customers and
new products, operating cost synergies and employee know-how.
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