TIDMDPLM
RNS Number : 6209P
Diploma PLC
21 November 2016
DIPLOMA PLC
12 CHARTERHOUSE SQUARE, LONDON EC1M 6AX
TELEPHONE: +44 (0)20 7549 5700
FACSIMILE: +44 (0)20 7549 5715
FOR IMMEDIATE RELEASE
21 November 2016
PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS
FOR THE YEARED 30 SEPTEMBER 2016
"Strong Results and Excellent Free Cash Flow"
Audited Audited
2016 2015
GBPm GBPm
Revenue 382.6 333.8 +15%
Adjusted operating
profit(1) 65.7 60.3 +9%
Adjusted operating
margin(1) 17.2% 18.1%
Adjusted profit
before tax(1),(2) 64.9 59.6 +9%
Profit before tax 54.0 51.8 +4%
Profit for the year 39.1 37.4 +5%
Free cash flow(3) 59.0 40.3 +46%
Pence Pence
Adjusted earnings
per share(1),(2) 41.9 38.2 +10%
Basic earnings per
share 33.9 32.5 +4%
Total dividend per
share 20.0 18.2 +10%
(1) Before acquisition related charges.
(2) Before fair value remeasurement and
gain on disposal of assets.
(3) Before cash payments on acquisitions
and dividends.
Financial Highlights
* Revenue and adjusted operating profit increased by
15% and 9%, respectively.
* Businesses acquired added 8% to Group revenues;
currency movements increased revenues by 4%;
underlying revenue growth of 3%.
* Adjusted operating margins remained broadly in line
with the first half of the year at 17.2% with
continuing transactional currency effects in
Healthcare businesses.
* Adjusted profit before tax and adjusted EPS increased
by 9% to GBP64.9m and 10% to 41.9p, respectively.
* Free cash flow increased by 46% to GBP59.0m, with an
inflow of GBP6.3m from reduced working capital and
proceeds from sale of assets of GBP4.6m.
* Strong balance sheet with net cash funds of GBP10.6m
at end of September.
* Acquisition expenditure of GBP32.7m this year; ca.
GBP90m invested over 3 years in acquiring value
enhancing businesses.
* Total dividend increased by 10% to 20.0p 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
continuing to face tough markets as hospitals
maintain their focus on cost control.
* Seals revenues increased by 1% on an underlying basis
with continued slow growth in North American
Construction and Industrial markets.
* Controls revenues increased by 4% on an underlying
basis with strong performances in Aerospace, Defence
and Motorsport, offsetting weaker Industrial markets.
* Another strong year of acquisitions, with WCIS in
Australia, Cablecraft in the UK and Ascome in France
extending the scope of the Group's Seals and Controls
businesses and opening up new growth opportunities.
Commenting on the results for the year, Bruce
Thompson, Diploma's Chief Executive said:
"Diploma has a strong and resilient business model
with a broad geographic spread of businesses,
supported by a robust balance sheet and consistently
high free cash flow. This model has delivered
a strong result this year benefitting from a good
contribution from acquisitions and boosted by
a currency tailwind in the final quarter.
Despite the current macro-economic uncertainty
in the global environment, the Board remains confident
that the Group will continue to make further progress
in the coming year from a combination of steady
GDP plus organic growth and a strong and successful
acquisition programme."
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:
+44 (0)20 7549
Diploma PLC - 5700
Bruce Thompson, Chief Executive
Officer
Nigel Lingwood, Group Finance
Director
+44 (0)20 7353
Tulchan Communications - 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 incremental 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. 1,600 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.
8% p.a. through a combination of organic growth
and acquisitions. Diploma is a member of the FTSE
250 with a market capitalisation of ca. GBP1bn.
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 YEARED 30 SEPTEMBER 2016
CHAIRMAN'S STATEMENT
The Group achieved a strong performance this year against a
background of political volatility and challenging economic
conditions in a number of our markets. Diploma has a long track
record of consistent delivery and against this difficult market
backdrop our aims and objectives remain unchanged. The Board
remains focused on executing the Group's established strategy which
is designed to deliver strong, double-digit growth in earnings and
shareholder value over the economic cycle.
Faced with a low growth economic environment, the achievement of
the Group's objectives this year has been driven by its success in
executing its acquisition strategy and bringing carefully selected
businesses into the Group, financed by strong cash generation and
supported by a robust balance sheet.
Results
Group revenues increased in 2016 by 15% to GBP382.6m (2015:
GBP333.8m), with acquisitions completed during the year
contributing GBP16.3m and currency movements boosting the revenues
of the overseas businesses when translated into UK sterling by
GBP13.8m, when compared with last year. After adjusting for the
contribution from acquisitions completed both this year and last
year and for currency effects on translation, Group revenues
increased by 3% on an underlying basis. Steady underlying revenue
growth of 4% in both the Life Sciences and Controls Sectors more
than offset a weaker performance from the Seals Sector where
underlying revenues increased by 1%.
Adjusted operating profit increased by 9% to GBP65.7m (2015:
GBP60.3m) and benefited from a contribution of GBP2.4m from
acquisitions completed in the year and GBP2.7m from currency
effects on translation. Adjusted operating margins reduced to 17.2%
(2015: 18.1%) reflecting a further impact on gross margins in the
Canadian and Australian Healthcare businesses from transactional
currency effects because of the weaker Canadian and Australian
dollars. Adjusted profit before tax increased by 9% to GBP64.9m
(2015: GBP59.6m) and adjusted earnings per share ("EPS") increased
by 10% to 41.9p (2015: 38.2p), reflecting a slight decrease in the
effective tax rate.
The Group again generated very strong free cash flow of GBP59.0m
(2015: GBP40.3m) which included a cash inflow of GBP6.3m from
reduced working capital and GBP4.6m of cash realised on the sale of
assets. Capital expenditure reduced this year to GBP3.7m (2015:
GBP4.3m) reflecting lower investment in healthcare field equipment
as Canadian hospitals sought to limit their expenditure this
year.
It was another good year for acquisition activity with
investment of GBP32.7m (2015: GBP37.8m) in new businesses during
the financial year, extending the Group's activities into new
products and geographies in line with our strategic objectives.
The Group's balance sheet remains strong and after investing
GBP32.7m in acquisitions and making distributions to shareholders
of GBP21.0m (2015: GBP19.7m), the Group's net cash funds increased
by GBP7.6m to GBP10.6m at 30 September 2016 (2015: GBP3.0m).
Dividends
The excellent free cash flow, helped by the cash received from
the sale of assets this year, together with a positive acquisition
environment, has led the Board to recommend an increase in the
final dividend of 11% to 13.8p per share (2015: 12.4p). Subject to
shareholder approval at the Annual General Meeting, this dividend
will be paid on 25 January 2017 to shareholders on the register at
2 December 2016.
The total dividend per share for the year will be 20.0p (2015:
18.2p) which represents a 10% increase on 2015. 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
Early in the year, we saw the retirement of Iain Henderson and
Marie-Louise Clayton and the introduction of the Executive
Management Group, which completed the process of developing and
refreshing the Board. The Group is benefitting from the guidance
and support of this strong and experienced team as it pursues the
successful implementation of the Group's growth strategy.
Employees
The energy and commitment of our employees is a critical factor
in the success of our Group. On behalf of the Board I wish to thank
our employees for their commitment and hard work during this year.
I remain confident of their ability to continue to respond to the
new challenges which we will face in the coming year.
Outlook
Diploma has a strong and resilient business model with a broad
geographic spread of businesses, supported by a robust balance
sheet and consistently high free cash flow. This model has
delivered a strong result this year benefitting from a good
contribution from acquisitions and boosted by a currency tailwind
in the final quarter.
Despite the current macro-economic uncertainty in the global
environment, the Board remains confident that the Group will
continue to make further progress in the coming year from a
combination of steady GDP plus organic growth and a strong and
successful acquisition programme.
CHIEF EXECUTIVE'S REVIEW
In 2016, the Group has delivered a strong performance with hard
won underlying organic growth across generally challenging markets,
boosted by a good contribution from acquisitions and a currency
tailwind in the final quarter.
The Group's revenues increased by 15%, with acquisitions
completed during this year and the incremental impact from those
completed last year, contributing 8% to revenue growth. Currency
movements, on translation of the results from overseas businesses
to UK sterling, contributed a further 4% to revenue growth, driven
principally by the weakening of UK sterling in the last quarter of
the year following the UK's Brexit vote on Europe. After adjusting
for acquisitions and currency effects, underlying revenues
increased by 3%.
Adjusted operating margins remained broadly in line with the
first half of the year at 17.2%, continuing to be impacted by
transactional currency effects in the Healthcare businesses and
initial dilution from acquired businesses. The low growth
environment limited the potential for operational leverage, but
tight management of working capital and capital expenditure
contributed to a very strong free cash flow performance.
Sector performance
In Life Sciences, reported revenues increased by 7%, with
underlying revenues increasing by 4% on a constant currency basis.
The Canadian Healthcare businesses faced significant budget
pressures driven by the softer economy. The good growth achieved in
the first half of the year against weak comparatives, reversed in
the second half as comparatives became more challenging. The
Healthcare businesses in Australia and Ireland also experienced
similar economic and budgetary pressures but managed to deliver
good levels of growth through their positioning in growing segments
of the market. The Environmental businesses delivered solid GDP
plus revenue growth and ended the year with an improved order
book.
In Seals, reported revenues increased by 19%, with recent
acquisitions contributing 12% to revenue growth and currency
movements contributing a further 6% to revenue growth. After
adjusting for acquisitions and currency effects, underlying
revenues increased by 1%. In North America, core Aftermarket seal
and gasket revenues were broadly flat. Strengthening of senior
management and new growth initiatives are gaining traction and will
position the businesses to take advantage of any increased activity
and in particular, potential Infrastructure investment following
the US election. Industrial OEM revenues in North America reduced
by 1% against the background of generally slow industrial markets.
The International Seals businesses outside of North America
benefited from the acquisition of WCIS and a full year contribution
from Kubo and delivered a 5% underlying increase in revenues, with
a particularly strong performance from Kentek.
In Controls, reported revenues increased by 16%, with the
acquisitions of Cablecraft and Ascome contributing 11% to revenue
growth and currency movements contributing a further 1%. After
adjusting for acquisitions and currency effects, underlying
revenues increased by 4%, following strong underlying growth in the
second half of the year, against less demanding comparatives. The
Interconnect businesses delivered modest underlying growth with
strong performances in Aerospace, Defence and Motorsport markets
offsetting weaker Industrial markets. The Clarendon specialty
fasteners business is now managed on a stand-alone basis and
delivered strong double-digit growth in sales to aircraft seating
and cabin interior manufacturers and to Motorsport teams. Fluid
Controls delivered solid growth in revenues with an upturn in
refrigeration equipment sales in the second half of the year.
Acquisitions and disposals
The total acquisition expenditure over the last three years has
been ca.GBP90m and these acquisitions contributed 20% of the
Group's revenues in 2016.
During the year, the Group invested ca.GBP33m in acquiring new
businesses, principally the acquisitions of Cablecraft in the
Controls Sector and WCIS in the Seals Sector. Cablecraft is a
leading UK based supplier of cable accessory products which
broadens the Interconnect portfolio and extends the range of
markets served. WCIS is a supplier of gaskets, seals and associated
services which extends the Seals business into the Australasia
region.
At the end of the year, the Vantage Healthcare business in
Canada completed the sale of its Medivators endoscope reprocessor
product line for a gross consideration of GBP2.8m (net
consideration of GBP2.2m after expenses of sale and integration
costs). Vantage has retained its other principal product lines
(ca.60% of Vantage revenues) and is now managed as a division of
the AMT business. AMT and Vantage together now form a strong
Surgical Products business in Canada, with integrated back office
and operational functions. Free cash flow in the year also
benefited from the sale of three small legacy properties for
aggregate proceeds of GBP2.3m.
The Group's strong balance sheet and free cash flow provide the
resources to pursue further acquisition opportunities which will
enhance the Group's earnings growth in future years. The Group's
pipeline for further acquisitions remains encouraging.
Group strategy and corporate objectives
The Group's strategy is designed to generate strong 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.
The Group's principal corporate objectives are to achieve
double-digit growth in adjusted earnings per share ("EPS") over the
business cycle, to generate total shareholder return ("TSR") growth
in the upper quartile of the FTSE 250 and to deliver progressive
dividend growth with two times dividend cover.
This year the Group delivered 10% growth in adjusted EPS, with
modest underlying organic growth boosted by a good contribution
from acquisitions completed over the last 18 months and from
translational currency benefits. TSR growth this year has been 36%,
which compares with a 4% increase in the median and a 23% increase
in the upper quartile TSR performance of the FTSE 250 index
(excluding Investment Trusts). Dividends have increased
progressively in each of the last 17 years and this year the
dividend has increased by 10%, covered 2.1 times by adjusted
EPS.
Business model
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.
The key performance indicators ("KPIs") we use to measure the
success of the business model relate to recurring income and stable
revenue growth, sustainable and attractive margins and strong cash
flow.
This year, underlying organic revenue growth has again been hard
won against a background of challenging market conditions across
all three Sectors and across all geographies served. Total revenue
grew by 15%, of which 3% was underlying organic growth, with the
balance coming from acquisitions and translational currency
benefits. This continues a trend over five years of 11% compound
annual revenue growth, with an average of 4% p.a. underlying
organic revenue growth.
Adjusted operating margins this year were 17.2% of revenue,
compared with a five-year average of 18.6% and as always there were
a number of factors impacting the Group's margin. Margins were
negatively impacted again this year by transactional currency
effects in the Healthcare businesses, initial dilution from
acquired businesses and reduced operating leverage in a lower
growth environment. The Group's medium term target for operating
margin, in an improved economic environment, remains 18-19%.
Agility and responsiveness in the businesses ensure close
management of operating costs and working capital and deliver
strong free cash flow. This year, free cash flow was very strong at
GBP59.0m, which represented 124% of adjusted earnings, compared
with an average of 96% over the last five years. The principal
driver of the strong cash flow this year, was the close management
of working capital which was managed back down to 16.6% of revenues
by the year end, compared with a five-year average of 16-17%. In
addition, free cash flow benefited this year from the sale of the
Medivators product line and the sale of certain legacy
properties.
Growth strategy
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 objectives
for return on total investment.
Again we measure the success of the growth strategy with KPIs,
the first of which is acquisition spend. To achieve the Group's
objective of strong double-digit growth, acquisition spend at the
level of ca.GBP30m p.a. is targeted. This year, the Group continued
to benefit from a positive acquisition environment and invested
ca.GBP33m in acquisitions, bringing the average over three years to
ca.GBP30m p.a. The acquisitions completed over the last three years
contributed 20% of 2016 revenues.
The Group's return on total investment measure is the pre-tax
return on adjusted trading capital employed, excluding net cash,
but including all goodwill and acquired intangible assets
("ROATCE"). This is used to measure the overall performance of the
Group and very importantly our success in creating value for
shareholders through our acquisition programme. Over the last five
years, ROATCE has comfortably exceeded the 20% target and this year
was 21.1%.
Management strength
The success of the Group is built upon strong, self-standing
management teams in the operating businesses, making decisions
close to the customer and agile and responsive to changes in the
market and competitive environment. The Group places very high
importance on planning the development, motivation and reward
structures for the ca.90 senior managers which make up the senior
management cadre. This group has an average age of 47 and an
average length of service of 11 years.
Although we place high importance on our decentralised
organisation and the entrepreneurial culture this encourages, we
also recognise that there are significant synergy benefits which
can be achieved through managing clusters of similar businesses.
Typically these synergies come in the form of cross-selling and
joint purchasing between the businesses and shared back-office
functions in finance and administration. There are also best
practices which can be shared within the clusters in areas such as
IT and digital capabilities.
At the beginning of this year, a formal Executive Management
Group ("EMG") was established to ensure that we have a strong and
broad based senior management team in place to support the next
stage of the Group's growth strategy. The members of the EMG are
the senior managers responsible for the major business clusters and
for certain key Group functions. The EMG combines individuals who
have developed internally as well as selective external recruits.
The EMG gives the senior management bench strength to manage a
growing and broadly spread Group, while laying the groundwork for
succession in key Executive positions.
SECTOR DEVELOPMENTS
LIFE SCIENCES
The Life Sciences Sector businesses supply a range of
consumables, instrumentation and related services to the healthcare
and environmental industries.
2016 2015
Revenue GBP109.9m GBP103.1m
Adjusted operating profit GBP19.6m GBP21.0m
Adjusted operating margin 17.8% 20.4%
Free cash flow GBP19.0m GBP15.6m
--------------------------- ---------- ----------
-- Sector revenue growth of 7%; underlying growth of 4% after adjusting for currency
-- In Canada, DHG revenues broadly flat with growth in Surgical
Products offsetting reduced capital spend in Clinical Diagnostics;
Vantage sold Medivators product line for GBP2.8m in September
2016
-- In Australia, strong growth despite similar economic and budget pressures to Canada
-- TPD in Ireland and the UK delivered a second year of good
growth since acquisition; facility investment provides significant
capacity to support DHG's growth in Europe
-- Environmental businesses showed steady growth and ended the year with an improved order book
Reported revenues of the Life Sciences businesses increased by
7% to GBP109.9m (2015: GBP103.1m). Currency movements, on
translation of the results from overseas businesses into UK
sterling, contributed 3% to revenue growth; on a constant currency
basis, underlying revenues increased by 4%.
Gross margins in the Healthcare businesses continued to be
impacted on a transactional basis by the depreciation of the
Canadian and Australian dollars relative to the US dollar. Realised
exchange rates have stabilised in the second half of 2016, but at a
level ca.10% below the average levels in 2015. Local management has
continued to work closely with suppliers and customers to obtain
pricing support but overall Healthcare gross margins reduced by
350bps compared to the prior year. The opportunity to mitigate the
transactional currency effects through operating cost management is
now limited and though Environmental margins have improved
modestly, Sector adjusted operating margins have reduced by 260bps.
Adjusted operating profits reduced by 7% to GBP19.6m (2015:
GBP21.0m).
The Life Sciences businesses invested GBP1.9m in new capital
during 2016 of which GBP0.9m (2015: GBP1.9m) was spent on acquiring
field equipment for placement in hospitals and diagnostic
laboratories. A further GBP0.6m was spent on completing the
refurbishment of the new stand-alone leasehold facility for the TPD
business in Ireland and GBP0.4m was spent on upgrading the general
IT infrastructure of the businesses in Life Sciences. Free cash
flow generated in 2016 increased by GBP3.4m to GBP19.0m of which
GBP2.2m related to the disposal of the Medivators product line and
the balance was due to a reduction in working capital.
Healthcare
The DHG group of Healthcare businesses, which account for 83% of
Life Sciences revenues, increased underlying revenues by 3% in
constant currency terms; on translation to UK sterling, reported
revenues increased by 6%.
In Canada, DHG revenues were broadly flat for the year as
significant budget pressures continued to be felt throughout the
Provincial healthcare systems, driven by the tough economic
environment. Revenue growth achieved in the first half of the year
against weak comparatives was reversed in the second half as
comparatives became more challenging. Reduced revenues in the
Somagen clinical diagnostics business were broadly offset by growth
in revenues in the surgical products businesses and in particular,
strong Vantage results in the GI segment.
Somagen's consumable and service revenues were broadly flat, but
capital revenues for the year reduced by ca.40%. The core clinical
diagnostics business continued to be impacted by the freeze in
capital spending in Quebec while the Province completes both the
creation of integrated Health Centres under its "Bill 10"
legislation and the Optilab reorganisation programme which is
designed to achieve cost savings and efficiencies through
consolidation of Quebec's public medical laboratories. Growth was
also impacted by the introduction of stricter patient testing
criteria in Alberta's colorectal screening programme, increasing
the age threshold for eligibility and thus constraining the number
of patient tests. To counter these headwinds, Somagen has generated
good revenue growth from its successful a1c diabetes testing
programme and has continued to invest in new product introductions
designed to broaden Somagen's product portfolio in new growth
segments.
AMT continued to face pricing pressures in its core
electrosurgery business from the tender and evaluation processes
introduced by Provincial shared services organisations and national
group purchasing organisations. AMT has responded by introducing a
broader product portfolio, providing customers with more options in
major tender awards. AMT has also achieved strong double-digit
growth in the supply of specialised surgical instruments and
devices used in laparoscopic and other minimally invasive surgical
procedures. In particular, strong growth in new surgical segments
has been achieved with products sourced from new suppliers which
have been added in recent years. These revenues have mitigated the
revenue reductions from smoke evacuation products and
electrosurgical accessories.
Vantage delivered good growth across its consumable product
lines including argon plasma probes, endoscope reprocessor
chemicals and other GI endoscopy accessories, including specialised
instruments and devices. Results were also boosted by strong growth
in revenues across all of Vantage's core capital equipment product
lines; this strong performance was against a weak prior year
comparative which was constrained last year by delayed capital
budget approvals.
In late September 2016, Vantage completed the sale of its
Medivators endoscope reprocessor product line to Cantel Medical
Corporation ("Cantel") for a gross consideration of GBP2.8m.
Cantel, through its subsidiary Medivators, had been the supplier of
these products to Vantage and consistent with its global strategy,
had decided to establish a direct operation in Canada to market and
sell the Medivators products alongside other Cantel product lines.
In addition to purchasing the assets and liabilities of the
Medivators product line, Cantel also took on the Vantage facility
lease and a large proportion of the Vantage operational
employees.
Vantage has retained its other principal product lines (ca.60%
of Vantage revenues) and the related key commercial and clinical
staff. From the start of the new financial year, Vantage is now
being managed as a division of AMT, with integrated warehousing,
logistics and back office functions. AMT and Vantage together now
form a single, strong Surgical and GI specialty medical device
business in Canada with the opportunity to gain good operational
leverage from its increased scale.
In Australia, the Healthcare sector has experienced similar
economic and budget pressures to Canada, but has the added capacity
of private Healthcare spending to offset some of the economic
constraints. Against this background, the BGS and DSL businesses
have increased revenues by 15% in local currency terms. BGS
continued to grow surgical product revenues strongly, with smoke
evacuation programmes in existing and new accounts continuing to
provide the main driver for growth. There was also a steady sales
performance in electrosurgical grounding pads, laparoscopic
electrodes and the enzymatic products acquired from Chemzyme as the
product portfolio continues to grow. DSL has also achieved
double-digit revenue growth in its clinical diagnostic products
business, with the growth driven by capital equipment sales, in
particular of capillary electrophoresis instruments used in testing
for multiple myelomas and diabetes. Consumable product sales were
broadly flat, reflecting softer prior year capital equipment sales,
which is the key demand driver for consumable product revenues.
The TPD business is an established supplier to the Healthcare
and Biotechnology markets in Ireland and the UK, acquired by DHG in
October 2014. TPD delivered a second year of good revenue growth
since acquisition, with growth in Healthcare driven by laboratory
quality controls in the clinical diagnostic segment of the hospital
laboratory market. There has also been significant growth in TPD's
sales of specialty medical devices used in the interventional
cardiology and digestive health areas of the hospital market. The
Biotechnology product portfolio delivered good revenue growth in
both consumables and capital equipment, all associated with rapid
microbial identification and used in industrial laboratories across
the Pharmaceutical, Food and Water sectors.
The TPD performance was achieved in a year when it completed a
major facility move, with the accompanying disruption to
operations. In January 2016, TPD consolidated and relocated its
operations into an adjacent leased building, which had been
refurbished and fitted out to meet TPD's requirements at a total
cost of GBP0.8m. This new facility consolidated a number of
fragmented, less efficient operations into a single facility and
provides significant capacity to support DHG's growth ambitions in
Europe.
Environmental
The a1-group of Environmental businesses in Europe, which
account for 17% of Life Sciences Sector revenues, saw revenues
increase by 5% in constant currency terms.
The a1-envirosciences business based in Germany increased
revenues by 13% in Euro terms and ended the year with an improved
order book. The strong growth was driven by demand for containment
enclosures for the safe weighing of hazardous materials,
particularly from Petrochemical and Pharmaceutical industry
customers in Germany. The sales of high end elemental and trace
analysers also continued to grow, with the range of mercury
analysers seeing increasing demand.
The a1-CBISS business based in the UK saw revenues reduce by 1%
with stable revenues from long term service contracts, but
reductions in revenues from continuous emissions monitoring systems
("CEMS'). This sector remains buoyant with new Biomass and Energy
from Waste ("EFW") plants an important part of the UK's energy
portfolio, but competition is increasing in new sites built by
major EPC contractors. a1-CBISS is responding by focusing on
replacement systems and owner-operator sites where its specialist
knowledge and customised software solutions give competitive
advantage. The gas detection sector had a weak first half, as the
slowdown in sales to Oil & Gas customers continued to impact
activity levels, but recovered strongly in the second half.
Revenues from service contracts, across both Environmental
businesses, continue to grow with each capital installation and now
represent a third of the 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.
2016 2015
Revenue GBP166.6m GBP139.6m
Adjusted operating profit GBP28.2m GBP24.8m
Adjusted operating margin 16.9% 17.8%
Free cash flow GBP24.9m GBP17.8m
--------------------------- ----------- ----------
-- Sector revenue growth of 19% with acquisitions contributing
12%; underlying growth of 1% after adjusting for currency and
acquisitions
-- In North America, core Aftermarket seal and gasket revenues broadly flat
-- Strengthening of senior sales and marketing management and
new growth initiatives gaining traction
-- Industrial OEM revenues in North America reduced by 1%
against background of generally slow industrial markets
-- International Seals businesses in EMEA and Australasia now
ca.40% of Sector revenues. Underlying revenues increased by 5%,
with strong performance by Kentek
Reported revenues of the Seals businesses increased by 19% to
GBP166.6m (2015: GBP139.6m). The Seals acquisitions completed
during last year (Kubo and Swan Seals), along with the first year
contribution from the WCIS acquisition (completed in October 2015),
added 12% to Sector revenues. Currency movements, on translation of
the results from overseas businesses to UK sterling, contributed a
further 6% to Sector revenues. After adjusting for these
acquisitions and for currency effects, underlying revenues
increased by 1%.
Continued progress was made during the year in building a more
substantial presence outside North America through a combination of
organic growth and acquisition. The International Seals businesses
based in the EMEA and Australasia regions, contributed GBP68.2m to
Seals revenues in the year (2015: GBP47.3m) and now account for
ca.40% of Sector revenues.
Across the Seals businesses, gross margins continued to be
resilient, underpinned by the business model of superior product
availability and added value technical services. The acquired
businesses joined the Group with strong gross margins but with
higher operating cost ratios and therefore lower initial operating
margins. As a result, adjusted operating margins for the Sector
reduced by 90bps to 16.9% (2015: 17.8%) and adjusted operating
profits increased by 14% to GBP28.2m (2015: GBP24.8m).
During the year, the Seals businesses invested GBP1.4m in the
businesses, including an initial payment of GBP0.5m for the
construction of a new facility for J Royal, close to their existing
location in North Carolina; the total cost is expected to be
ca.GBP2.5m. On completion of this project (scheduled for April
2017), the facility will be sold and leased back to the business. A
further GBP0.5m was invested in new machinery and tooling,
including two new seal cutting machines for the International Seals
businesses and a new crane in WCIS. In addition, GBP0.4m was
invested in IT infrastructure, including a substantial upgrade to
the ERP information systems in Hercules Bulldog. The free cash flow
generated in this Sector, which is after these investments,
increased by over 40% to GBP24.9m reflecting both a full year
contribution from the acquired businesses and a large reduction in
working capital.
North American Seals
The North American Seals businesses, which account for ca.60% of
Seals Sector revenues, saw revenues decrease by 2% on a constant
currency basis against strong prior year comparatives. On
translation to UK sterling, reported revenues increased by 7% due
to the strengthening of the US dollar.
The HFPG Aftermarket businesses reported revenues 3% below last
year in US dollar terms, with the core Hercules Bulldog seal and
gasket revenues broadly flat against the prior year, but with a
substantial reduction in HKX attachment kit revenues in an
excavator market which continued to be depressed for most of the
year.
In the domestic US market, Hercules Bulldog revenues were
constrained by sluggish activity in the Heavy Construction sector,
in particular in the resource dependent States. However, positive
trends have started to develop in the Repair and Distributor
segments and the revenue declines earlier in the year were reversed
by the year end. Sales and marketing resources have been
strengthened and specific growth initiatives continue to gain
traction, including the sale of seal kits to large national rental
fleets and contractors through dedicated buying portals. Additional
business development focus has also been given to government
customers, national accounts and speciality distributors.
Additional new product lines have been introduced, including
lifting slings and aftermarket cylinders for skid-steer equipment.
Online revenues through Webstore continue to increase and now
account for ca.20% of domestic US Aftermarket seal revenues.
In Canada, Hercules revenues increased by 3% in Canadian dollar
terms despite unfavourable market conditions in the Mining,
Quarrying and Oil & Gas sectors. The resulting economic
conditions favour the repair market, which has helped to drive
revenue growth, along with sales of new products added to the 2016
catalogues in the first half of the year. Orders from hydraulic
cylinder manufacturing customers have been relatively flat, mainly
as a result of shifting customer demand, rather than significant
gains or losses of business. In markets outside North America,
Hercules Bulldog export revenues recovered in the second half and
finished the year showing 3% growth. Strong growth in Mexico and
Central America more than offset declines in resource dependent
South American markets.
The HKX attachment kit business experienced a continuing,
significant reduction in revenues reflecting the depressed market
for new excavators in the US and Canada and the surplus of heavy
mobile equipment. The increased proportion of factory installed
kits continues to impede HKX's standard kit sales, but HKX is
responding by marketing lower cost entry level kits which are
upgradeable to provide a more complete range of capabilities. With
equipment rentals and leases growing to 50% of new machine sales,
HKX is also focusing its sales effort on kit programmes to support
the dealer rental and lease operations.
The HFPG Industrial OEM businesses in North America saw revenues
reduce by 1% against a background of generally slow industrial
markets. J Royal delivered another year of solid growth, with good
demand from its water meter and swimming pool equipment customers
offsetting reduced demand from gas boiler, fuel management and
filtration customers. RT Dygert and All Seals, which now share
sales management and product development resources, saw revenues
reduce by 3% against the prior year. RT Dygert generated good GDP
plus levels of growth with its core industrial OEM accounts and
distribution customers. However, these gains were more than offset
by reduced sales to cylinder manufacturers as their businesses lost
share to lower priced offshore suppliers and with reduced sales to
catalogue distributors reflecting the weaker industrial markets.
All Seals generated growth from customers in the Water and Medical
sectors, but this growth was offset by reduced revenues in
Aerospace, Oil & Gas and general Industrial OEMs and
distributors.
The Industrial OEM businesses continue to respond to the overall
low growth environment by maintaining strong relationships with
core industrial equipment customers, ensuring high levels of
customer service in support of existing projects, as well as
offering more specialised material and product specifications to
secure new projects. In particular, the businesses continue to look
for opportunities to deploy higher specification,
regulatory-compliant compounds for industries including
Pharmaceutical, Water and Food equipment and for fuel dispensing
applications.
International Seals
The International Seals businesses in the EMEA and Australasia
regions, now account for ca.40% of Sector revenues and increased
revenues by 5% on an underlying basis, after adjusting for currency
effects and acquisitions.
The FPE Seals business increased revenues by 3% in UK sterling
terms and continued to develop a more substantial, broader-based
Aftermarket Seals business. At the beginning of the year, FPE Seals
became fully operational from its new facility in Darlington in the
UK, which is now the core operational hub for further expansion
across the EMEA region. FPE Seals also has a small operation in the
Netherlands which it has used as an initial pilot for the launch of
the Webstore e-commerce solution. Following the relocation of the
Bulldog operation to Tampa in September 2015, FPE experienced some
product shipment delays in the first half of the year; the back
orders were recovered in the second half to improve full year
revenues. Swan Seals in Aberdeen has been impacted by the low oil
price environment, but again showed some second half improvement in
activity levels.
Kentek increased revenues by 16% in Euro terms and continued to
respond well to the challenging economic conditions in Russia and
Finland, under pressure from lower global demand in the Oil &
Gas and Mining sectors and from the negative impact of economic
sanctions on Russia. Despite these challenges and further weakness
of the Russian rouble, Kentek delivered strong revenue growth in
Russia, with good revenue increases from its newer sales offices.
Kentek also benefited from increased investment by the Russian
government in the Agricultural and Manufacturing sectors and has
won a number of tenders with key Mining customers. In Finland, new
management has given additional structure and impetus to the sales
efforts which have re-established revenue growth. During the
period, Kentek introduced a new own-branded filter range which is
now gaining traction.
M Seals increased revenues by 1% in local currency terms with
strong revenue growth in the core markets of Denmark and Sweden,
where M Seals has built on its strong customer relationships to
develop a number of major new projects. This growth was offset by
reduced revenues from the M Seals operations in the UK which have
been impacted by cut-backs in the Oil & Gas sector,
particularly in the first half of the year. In the second half,
there has been some recovery in demand and M Seals has seen some
initial benefit from increasing sales efforts to specialised
Industrial OEMs in other sectors of the UK market.
Kubo revenues decreased by 2% on a like-for-like basis (Swiss
franc terms, including pre-acquisition revenues) as it faced
challenging market conditions in its core industrial market in
Switzerland. The strong Swiss franc (following its decoupling from
the Euro in 2015) has made Swiss manufacturers less competitive in
export markets and some have relocated production outside
Switzerland. Against this background, Kubo has made progress in
taking market share from competitors through sales initiatives,
technical support and responsiveness. Kubo management has also
focused on improving operational efficiency and expanding value
adding activities. During the year, Kubo invested in a new seal
machining centre to enable the business to respond quickly to
urgent customer requirements for specialised seals, as well as
replacing externally sourced products.
In October 2015, the Group completed the acquisition of WCIS, a
supplier of gaskets, seals and associated products and services
located in Australia and New Caledonia. WCIS has core capabilities
in gaskets and mechanical seals, used in complex and arduous
applications. Since its acquisition, WCIS core customers in the
Mining sector as expected have faced difficult market conditions
and this has held back revenues. However, progress has been made in
Australia in strengthening the team to broaden sales coverage
across a wider range of market sectors. In New Caledonia, WCIS
signed new three-year contracts with its major customer for the
provision of products and services.
CONTROLS
The Controls Sector businesses supply specialised wiring,
connectors, fasteners and control devices used in a range of
technically demanding applications.
2016 2015
Revenue GBP106.1m GBP91.1m
Adjusted operating profit GBP17.9m GBP14.5m
Adjusted operating margin 16.9% 15.9%
Free cash flow GBP16.4m GBP11.4m
--------------------------- ------------ -----------
-- Sector revenue increased by 16%; underlying increase of 4%
after adjusting for currency and acquisitions
-- The Interconnect businesses delivered modest underlying
growth with strong performances in Aerospace, Defence and
Motorsport offsetting weaker Industrial markets
-- Strong double-digit growth in Clarendon sales of specialty
fasteners to aircraft seating and cabin interior manufacturers and
to Motorsport teams
-- Acquisition of Cablecraft broadened the Interconnect product
line and extended range of markets served
-- Fluid Controls delivered solid growth in revenues with upturn
in refrigeration equipment sales in second half
Reported revenues of the Controls businesses increased by 16% to
GBP106.1m (2015: GBP91.1m). The acquisitions of Cablecraft and
Ascome, acquired in the first half of the year, added 11% to Sector
revenues and currency movements contributed a further 1% to Sector
revenues on translation to UK sterling. On an underlying basis,
after adjusting for these acquisitions and currency effects,
underlying revenues increased by 4%, following strong underlying
growth in the second half of the year (9% increase) against less
demanding comparatives.
Adjusted operating margins increased by 100bps to 16.9% (2015:
15.9%). Gross margins strengthened in the IS-Group and Clarendon
businesses, offsetting margin pressure in the Hawco Group, while
operating costs as a percentage of revenue remained broadly stable
across the Controls businesses. The stronger operating margins of
the newly acquired Cablecraft business also contributed to the
improvement in the Sector average. Adjusted operating profits
increased by 23% to GBP17.9m (2015: GBP14.5m).
Capital expenditure in this Sector remained modest at GBP0.4m
(2015: GBP0.3m). The focus on developing Clarendon as a stand-alone
Specialty Fasteners business led to GBP0.2m being invested in
establishing a separate warehouse and offices for this business
within the existing IS-Group facility in Swindon. A further GBP0.1m
was invested in new tooling in Sommer and Cablecraft and GBP0.1m
was spent on the general IT infrastructure across the Controls
businesses. Free cash flow increased strongly to GBP16.4m
reflecting stronger trading, including the additional contribution
from Cablecraft and a modest reduction in working capital.
Interconnect
The Interconnect businesses account for 76% of Sector revenues
and reported a revenue increase of 21% in UK sterling terms. After
adjusting for the Cablecraft and Ascome acquisitions and for
currency effects, underlying revenues increased by 4%.
The IS-Group businesses in the UK and US saw revenues increase
by 2%, with a strong performance in the second half of the year
more than compensating for the revenue decline in the first half.
In response to the generally low growth environment in its
industrial markets, sales resources were realigned to focus on
sectors and customer accounts with the highest growth potential.
Further business development programmes were also introduced and
contributed to the improving trend in the second half of the year.
Investments have also been made in developing digital media
capabilities and in positioning the IS-Group as the supplier of
choice for the full range of specialist cable harnessing
components.
In Defence, general activity levels in electrical harnessing
customers increased and the IS-Group benefited from specific
programmes, including wiring and harness components supplied to the
Scout/AJAX armoured fighting vehicle programmes and from
communication cables used on submarines. In Aerospace, the IS-Group
again benefited from a generally buoyant market, boosted by
specific projects, including braided assemblies installed on Airbus
A350 fuel pipes.
In Motorsport, activity benefited from additional races in the
Formula 1 race schedule and increased investment from Toro Rosso
and Renault, as well as from the new entrant Haas and the rebranded
Manor Racing team. The IS-Group has also been closely involved with
the 2017 America's Cup series, with products widely specified in
the Test Boats and now also confirmed in the build programmes for
the Race Boats. In the US, strong growth was achieved in its core
Motorsport business, as well as related Industrial markets.
Industrial markets in the UK continued to be challenging with
Energy revenues in particular showing a significant reduction,
driven by the cut-backs in the Oil & Gas industry which have
impacted sales of harness components to sub-sea cable manufacturers
and other Oil & Gas markets. In Continental Europe, a
competitive market saw sales to other sub-distributors reduce
significantly in the first half of the year, but stabilise at this
lower level in the second half of the year.
In Germany, IS-Sommer and Filcon reported a 3% increase in
revenues in local Euro terms. Strong revenue growth in the Energy
and Motorsport markets compensated for a weaker performance in
Aerospace & Defence, while Industrial markets showed modest
growth in line with the general industrial economy in Germany.
In the Energy sector, IS-Sommer has a strong and growing
position in the supply of products used in the repair and
maintenance of the low and medium-voltage electricity network.
Demand for these products has been strong as 2016 has been an
assessment year for the German power network which typically
triggers a cyclical round of investments; weather conditions have
also been favourable. IS-Sommer has increased its share of this
growing market by offering good stock availability, experienced
technical sales support and competitive pricing based on its
purchasing power.
In Motorsport, Filcon achieved strong growth in the supply of
specialist connectors to leading teams in a range of racing series;
Filcon has the distinction of being the preferred supplier to the
World Champions in the Formula 1, Le Mans 24 hour and World Rally
Championship series. Increased activity is being seen in the
Defence and Military Aerospace sector in Germany, where there is
growing pressure on Germany to upgrade its military capabilities.
The increased activity did not translate into firm orders until
later in the year, but both Filcon and IS-Sommer will carry strong
order books into the new financial year.
In February 2016, Filcon completed the acquisition of Ascome, a
small distributor of specialist connectors into the Defence and
Industrial markets in France. This acquisition provides greater
presence for Filcon's operations in France, provides credible
access to the French Defence sector and gives access to new
products and suppliers.
In March 2016, the Group completed the acquisition of
Cablecraft, a leading supplier of cable accessory products which
are used to identify, connect, secure and protect electrical
cables; own-branded and manufactured products account for ca.80% of
revenues. In addition to broadening the Interconnect product
portfolio, the acquisition has also extended the range of markets
served. Cablecraft supplies to wholesalers and distributors serving
electrical contractors in the Construction market and end users in
the Rail industry, including signalling equipment specialists. The
company also supplies to end users in the Industrial sector,
including electric panel builders and contractors providing
installation services to the Energy and Utilities sectors.
The Clarendon specialty fastener and component business
increased revenues by 16% over the prior year. Last year,
Clarendon's deliveries to its key aircraft seating customer were
held back by changes to aircraft seat designs and delays to build
schedules. In addition, Clarendon's deliveries to its largest
customer were reduced during the implementation of a large new
lineside supply project, using the "Clarendon Air" solution. This
year, revenues have increased strongly as deliveries of inventory
were resumed and the customer increased production as its new
business class seating programmes ramped up. Clarendon also had
significant success increasing sales to other aircraft seating and
cabin interiors manufacturers and sub-contractors across Europe and
introducing Clarendon Air to a number of new customers.
Clarendon also delivered strong revenue growth in its sales to
the Motorsport sector. As with the IS-Group, Clarendon benefited
from the increased number of races in Formula 1 as well as the
increased investment from new entrants. In addition, revenues were
boosted in the fourth quarter by increased development expenditure
by teams preparing for design and rule changes planned for the 2017
season. In the Industrial and Defence markets, the business
continues to differentiate itself from competitors through its
range of own-designed and engineered fastening solutions and added
value services.
Fluid Controls
The Hawco Group of Fluid Controls businesses, which account for
24% of Controls sector revenues, reported a 4% growth in revenues
against the prior year.
Hawco has seen an upturn in sales in the second half of the year
across all its markets and, in particular, from Refrigeration
Equipment customers in Continental Europe and Turkey. Hawco has
also benefited from establishing relationships with major air
conditioning and refrigeration contracting groups who value Hawco's
stock holding, next day delivery and exclusive supplier
relationships; the partnering with independent trade counters has
also proved successful. In the Industrial OEM market, Hawco has
seen good success with its range of fire detection products,
cartridge heaters and silicon heater lines.
Abbeychart has seen revenue growth pause in its core coffee
segment, as overstocking at certain customers is being worked
through. However, this is seen as temporary and Abbeychart has
continued to enhance its offering of essential parts to service the
broad range of espresso type machines being installed in an
increasing number of outlets. In the soft drinks market, Abbeychart
has continued to increase revenues and take market share, but in
the water segment, revenues reduced as plumbed water dispensers
continue to lose share against individual bottled water. To offset
this decline, Abbeychart has focused growth initiatives in the
craft brewing and export markets.
FINANCE REVIEW
Results in 2016
Diploma delivered a strong performance this year, with revenues
increasing by 15% to GBP382.6m and adjusted operating profit
increased by 9% to GBP65.7m. The Group's financial results were
characterised by two factors; a strong contribution from businesses
acquired during the past three years and the substantial weakening
in UK sterling in the last quarter of the financial year, following
the UK's Brexit vote on Europe.
The contribution from acquisitions completed both this year and
last year was GBP26.6m to revenue and GBP4.2m to adjusted operating
profit. With ca.75% of the Group's businesses based overseas, the
impact on headline results from currency translation has led to an
increase in revenues and adjusted operating profits of GBP13.8m and
GBP2.7m respectively, when translated at last year's exchange
rates.
Underlying organic growth in all of the Group's markets remained
challenging throughout the year, which led to underlying revenues
increasing by 3% this year. However, in this lower growth
environment the Group focused on maximising free cash flow, which
was again very strong at GBP59.0m. This will provide the resources
to continue to pursue acquisition opportunities which should
provide a good base for further earnings growth in future
years.
Underlying revenues are after adjusting for the contribution
from businesses acquired during the year (and from the incremental
impact from those acquired last year) and for the impact on the
translation of the results of the overseas businesses from the
significant weakening in the UK sterling exchange rate in the last
quarter of the year.
Operating margin
Diploma's Healthcare businesses represent ca.25% of Group
revenues and their gross margins have again been impacted this year
on a transactional basis by the substantial depreciation of the
Canadian and Australian dollars, against the US dollar in
particular which is the currency in which most of their products
are purchased. The depreciation of these two currencies began in
late 2013 and has continued through the past two years, reaching a
low point in mid-January 2016.
In this financial year, currency depreciation led to a 390bps
reduction in the gross margins of the Canadian and Australian
Healthcare businesses compared with last year. This reduction was
partly mitigated by a combination of forward currency hedges,
supplier cost reductions and tight control over operating costs.
However, the ability of the Healthcare businesses to continue to
mitigate this transactional impact on gross margins is now quite
limited.
The Canadian and Australian exchange rates have remained
relatively stable since the early part of this year at more
favourable levels and this provided the businesses with an
opportunity to resume forward currency hedging during the second
half of the year. These hedging contracts should provide some
respite to the currency pressure on gross margins in the new
financial year, although both currencies have begun to weaken again
in November 2016.
Transactional currency exposures in the rest of the Group's
businesses were not significant during the year, despite the impact
on the UK businesses in the last quarter of the year from the
substantial weakening in UK sterling.
The Group's adjusted operating margin remained broadly in line
with the first half of the year at 17.2% (compared with 18.1% last
year), continuing to be impacted by weaker gross margins in the
Healthcare businesses. Group operating margins are also impacted by
acquired businesses which ordinarily join the Group with initial
operating margins which are lower than the Group's operating
margin.
Adjusted profit before tax, earnings per share and dividends
Adjusted profit before tax, which excludes the gain on sale of
assets, increased by 9% to GBP64.9m (2015: GBP59.6m). The finance
expense this year was GBP0.8m (2015: GBP0.7m) which included
GBP0.4m (2015: GBP0.3m) of interest costs on borrowings drawn down
during the year to help finance acquisitions. The notional interest
expense on the Group's defined pension liabilities remained
unchanged at GBP0.2m (2015: GBP0.2m) and GBP0.2m was paid as
facility commitment fees.
Statutory profit before tax was GBP54.0m (2015: GBP51.8m), after
acquisition related charges of GBP10.3m (2015: GBP7.4m), fair value
remeasurements of GBP1.3m (2015: GBP0.4m) and a gain of GBP0.7m
(2015: GBPNil) on disposal of assets. The acquisition related
charges largely comprise the amortisation of acquisition intangible
assets and the fair value remeasurements relate to the put options
held over minority interests. The increase in the charge for
remeasurements reflects the increase in the liability to acquire
these minority interests, all of which are overseas interests, as a
result of the significant depreciation in UK sterling.
The Group's effective tax charge on adjusted profit in 2016 was
60bps below the previous year at 25.7% of adjusted profit before
tax. The charge this year benefited from a further reduction in the
UK corporation tax rate to 20% (2015: 20.5%) and from lower tax
rates applied to the businesses acquired during the past two years;
however the effective tax rate in the US increased to 38% (2015:
36%) because of much lower manufacturing tax credits this year.
Adjusted earnings per share ("EPS") increased by 10% to 41.9p,
compared with 38.2p last year and the statutory basic EPS increased
to 33.9p (2015: 32.5p).
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
particularly strong free cash flow provides the Directors with
confidence to recommend an increase in the final dividend of 11% to
13.8p per share (2015: 12.4p). This gives a total dividend per
share for the year of 20.0p per share which represents a 10%
increase on the prior year dividend of 18.2p. The dividend remains
2.1 times covered by adjusted EPS as reported last year.
Disposal of assets
The Group made a gain of GBP0.7m after tax on the sale of assets
during the year and this is disclosed separately on the face of the
Consolidated Income Statement. The Vantage Healthcare business in
Canada disposed of the Medivators product line for consideration of
GBP2.2m, after both expenses of sale and providing for the costs of
integrating the retained Vantage business with its affiliate
business, AMT based in Kitchener. A gain after tax of GBP0.3m was
realised on this disposal. The Medivators product line accounted
for ca.8% of DHG's total revenues in 2016, but only ca.3% of
operating profits as a substantial part of the business's
infrastructure, including a large proportion of Vantage's
operational employees, were transferred to the purchaser as part of
the transaction. During the year, the Group also sold three small
legacy properties for aggregate proceeds of GBP2.3m which realised
a gain of GBP0.4m after tax.
Free cash flow
The Group generated very strong free cash flow in 2016 which
increased by GBP18.7m to GBP59.0m (2015: GBP40.3m). A reduction in
working capital contributed GBP6.3m to cash resources (2015:
outflow of GBP1.9m) and the proceeds from the sale of assets added
a further GBP4.6m to free cash flow. Free cash flow represents cash
available to invest in acquisitions or return to shareholders and
this year represented a cash conversion of adjusted earnings of
124% (2015: 93%).
The Group's businesses continued to work hard during the second
half of the year to further reduce working capital, particularly in
a low growth economic environment. These efforts to reduce working
capital were again largely focused on improving inventory
procurement processes designed to constrain the growth in
inventories across the Group's businesses.
The Group's KPI metric of working capital as a proportion of
revenue reduced to 16.6% at 30 September 2016, compared with 17.0%
last year; this metric reduces to 15.3% on a constant currency
basis.
Group tax payments increased by GBP2.2m to GBP17.6m (2015:
GBP15.4m) and included GBP1.5m of pre-acquisition tax liabilities
relating to Cablecraft and WCIS. On an underlying basis and before
the currency effects of translation, cash tax payments represented
ca.23% of adjusted profit before tax which was unchanged from last
year.
The Group's capital expenditure this year was more modest at
GBP3.7m, compared with GBP4.3m last year. Within this total
expenditure, an initial GBP0.5m was invested by J Royal, a Seals
business based in the US, on the construction of a new expanded
facility, close by their existing facility in North Carolina. The
total construction cost of this facility is expected to be
ca.GBP2.5m on completion in April 2017 when it will be sold and
leased back to the business. Operationally, a further GBP0.9m was
invested by the Seals businesses during the year, including GBP0.5m
on acquiring two new seal cutting machines, a new crane and other
tooling equipment. A scheduled upgrade of the US Seals ERP system
cost GBP0.2m and GBP0.2m was spent on general infrastructure
improvements across the Sector.
In Life Sciences, Vantage saw its expenditure on funding
equipment contracts on a cost per procedure ("CPP") basis reduce to
GBP0.3m (2015: GBP1.0m). The investment in field equipment acquired
in support of customer contracts with hospitals also reduced to
GBP0.6m from GBP0.9m last year as the Canadian hospitals cut back
their expenditure. The completion of the refurbishment of TPD's new
leasehold facility in Ireland cost GBP0.6m and a further GBP0.4m
was invested on general infrastructure improvements across the
Sector, including IT upgrades.
Capital expenditure in the Controls businesses remained very
modest at GBP0.4m and included GBP0.2m on establishing a separate
stand-alone warehouse and offices for Clarendon's developing
specialty fasteners business in the existing IS-Group facility in
Swindon. The remaining GBP0.2m was invested in new tooling and on
upgrading IT infrastructure across the Sector.
The Company paid the PAYE income tax liability of GBP0.3m (2015:
GBP1.0m) on the exercise of LTIP share awards, in exchange for
reduced share awards to participants. No further shares in the
Company were acquired by the Employee Benefit Trust this year,
following last year's GBP0.7m expenditure on the acquisition of
100,000 shares.
The Group spent GBP32.7m of the free cash flow on acquisitions,
as described below and GBP21.4m (2015: GBP19.9m) on paying
dividends to both Company and minority shareholders.
Acquisitions completed during the year
The Group invested a further GBP32.7m in acquiring new
businesses this year (2015: GBP37.8m), including GBP1.9m on
acquiring outstanding minority interests and GBP0.7m of deferred
consideration.
The largest investment this year of GBP21.3m was made in March
2016 to acquire Cablecraft, a leading supplier of cable accessory
products, managed from its principal facility near Dunstable in the
UK. A further GBP8.4m was invested in October 2015 to acquire the
WCIS businesses in Australia and New Caledonia which supply
gaskets, sales and associated products mainly to the Mining
industry. In February 2016, a small connector business based in
France was acquired for GBP0.4m by Filcon, to broaden its access to
the European connector markets.
These acquisitions added GBP18.4m to the Group's acquired
intangible assets, which represents the valuation of customer and
supplier relationships which will be amortised over periods ranging
from five to ten years. At 30 September 2016, the carrying value of
the Group's acquired intangible assets was GBP54.6m. Goodwill
increased by GBP25.9m to GBP115.2m at 30 September 2016; GBP11.8m
related to businesses acquired during the year (including fair
value adjustments to the assets acquired) and GBP14.1m reflected
the impact on overseas goodwill from the depreciation in the UK
sterling exchange rate.
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 was
significant headroom on the valuation of this goodwill, compared
with the carrying value of goodwill at the year end.
Liabilities to minority shareholders
The Group's liability to purchase outstanding minority
shareholdings at 30 September 2016 decreased to GBP5.1m (2015:
GBP5.7m), following the GBP1.9m purchase in July of an outstanding
10% minority shareholding in TPD. However, the liability at the
year end was impacted by the substantial weakening in the UK
sterling exchange rate which increased the UK sterling liability
payable to these minorities which are all based overseas.
At 30 September 2016, there remain put options over the
outstanding minority interests held in M Seals, Kentek and TPD
which were valued at GBP5.1m, based on the Directors' latest
estimate of the Earnings before Interest and Tax of these
businesses when these options crystallise. None of these options
are exercisable within the next year.
In addition to the liability to minority shareholders, the Group
also has a liability at 30 September 2016 for deferred
consideration of up to GBP1.7m (2015: GBP0.9m) which comprises the
amount likely to be paid to the vendors of businesses purchased
during the year, based on the Group's best estimate of the
performance of these businesses next year. During the year, GBP0.7m
was paid as deferred consideration relating to acquisitions
completed in earlier years and GBP0.2m was released and was
included as a deduction from acquisition related charges.
Return on adjusted trading capital employed and capital
management
A key metric that the Group uses to measure 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 2016, the Group ROATCE had reduced to 21.1% (2015: 23.9%)
which largely reflected the mismatch of a stronger average UK
sterling exchange rate used during the year to translate the
operating profit of overseas businesses and the much weaker
exchange rate used to translate the Adjusted TCE of these overseas
businesses at the year end. Adjusted TCE is defined in note 2 to
the consolidated financial statements.
The Group continues to maintain a strong balance sheet with net
cash funds of GBP10.6m (2015: GBP3.0m) at 30 September 2016,
comprising cash funds of GBP20.6m, offset by GBP10.0m of bank
borrowings. Surplus cash funds are generally repatriated to the UK,
unless they are required locally to meet certain commitments,
including acquisitions.
On 7 March 2016, the Group exercised the final part of the
accordion option within its existing revolving multi-currency
credit facilities and increased its committed bank facility by
GBP10.0m to the maximum available of GBP50.0m. These additional
funds were provided at a cost of 30bps and were used to assist in
financing the acquisition of Cablecraft. These bank facilities are
committed until June 2017 and are used to meet any shortfall in
cash to fund acquisitions. These facilities will be reviewed and
extended or renewed at a similar amount during the first half of
the next financial year.
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 2016 of GBP2.5m (2015: GBP2.3m).
The Group maintains a legacy 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 is being
carried out as at 30 September 2016 and the results of this
exercise will be reported in next year's Annual Report. In
Switzerland, local law requires Kubo to provide a contribution
based pension for all employees, which are funded by employer and
employee contributions. This pension plan is managed for Kubo
through a separate multi-employer plan of non-associated Swiss
companies which pools the funding risk between participating
companies.
The Group continues to make regular cash contributions to the UK
scheme at an annual rate of GBP0.3m, as agreed with the scheme
actuary, with the objective of closing the funding deficit over the
next six years. However, given the substantial reduction in bond
yields at 30 September 2016, compared with those used to value the
pension liabilities at the last valuation in 2013, it is very
likely that these cash contributions will have to be increased in
future years to eliminate the funding deficit. In Switzerland,
Kubo's annual cash contribution to the pension scheme is GBP0.3m
(2015: GBP0.2m).
Both the UK defined benefit scheme and the Kubo contribution
scheme are accounted for in accordance with IAS 19 (Revised). At 30
September, the aggregate accounting pension deficit in these two
schemes increased by GBP7.4m to GBP17.2m because of a further
significant reduction of bond yields compared to last year. The
gross aggregate pension liability in respect of these two schemes
at 30 September 2016 increased by GBP11.6m to GBP56.1m which is
funded by GBP38.9m of assets.
Potential impact of Brexit
The outcome of the UK's Brexit vote to leave the European Union
is unlikely to materially impact the Group's businesses at an
operational level as only 25% of the Group's overall revenues are
based in the UK. In addition, these businesses, as well as those
based in Continental Europe, are substantially "in country"
industrial suppliers of goods with very little sales activity being
carried out across country borders.
At a macro-economic level however, the Group's financial results
have already been, and are likely to continue to be, impacted by
the rapid and substantial depreciation in UK sterling that followed
the Brexit vote. This has resulted in gains to the Group's reported
revenues, operating profits and net assets from translating the
results of the Group's overseas businesses into UK sterling.
In addition, it is also likely that the Group's UK based
businesses may be impacted to a lesser degree from substantially
weaker UK sterling; this may have an adverse effect on their
operating margins because of an increase in the cost of their goods
purchased from overseas for sale in the UK.
The Group's UK businesses remain alert to these economic risks
and are already taking action to mitigate the impact on their
operating margins through a combination of seeking supplier cost
reductions, price increases to customers and tight control over
operating costs.
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 in the relative ranking of these risks.
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.
The Board has also considered the risks associated with the UK's
Brexit vote to leave the European Union as explained above in the
Finance Review.
Strategic risk Relative movement to prior
year
Downturn in major markets
Increase
-------------------------------------------------------------- -----------------------------------
Risk description & assessment
Mitigation
Adverse changes in the
major markets in which The businesses identify
the businesses operate key market drivers and
can have a significant monitor the trends and
impact on performance. forecasts, as well as maintaining
This year, a number of close relationships with
geopolitical and economic key customers who may give
factors have caused uncertainty an early warning of slowing
in our principal markets demand.
and caused volatility in Changes to cost levels
the performance of key and inventories can then
economies. The effects be made in a measured way
of these changes can be to mitigate the effects.
seen in terms of slowing Significant global events
revenue growth, due to are closely monitored to
reduced or delayed demand determine any potential
for products and services, impact on key markets.
or margin pressures due
to increased competition.
A number of characteristics
of the Group's businesses
moderate the impact of
economic and business 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, which are often specific to their
application; this offers a degree of protection
against customers quickly switching business to
achieve a better price.
-- A high proportion of the Group's revenues comprises
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 to prior
year
Loss of key suppliers
No change
------------------------------------ ----------------------------------
Risk description & assessment Mitigation
For manufacturer--branded Long term, multi--year
products, there are risks exclusive contracts signed
to the business if a major with suppliers with change
supplier decides to cancel of control clauses, where
a distribution agreement possible, included in contracts
or if the supplier is acquired for protection or compensation
by a company which has in the event of acquisition.
its own distribution channels Collaborative projects
in the relevant market. and relationships maintained
There is also the risk with individuals at many
of a supplier taking away levels of the supplier
exclusivity and either organisation, together
setting up direct operations with regular review meetings
or appointing another distributor. and adherence to contractual
Currently no single supplier terms.
represents more than 10% Regular review of inventory
of Group revenue and only levels.
six single suppliers represent Bundling and kitting of
more than 2% each of Group products and provision
revenue. of added value services.
Relationships with suppliers Periodic research of alternative
have normally been built suppliers as part of contingency
up over many years and planning.
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 to prior
year
Supplier strategy change
No change
--------------------------------- ------------------------------
Risk description & assessment Mitigation
The success of the businesses The businesses work very
depends significantly on closely with each of their
representing suppliers suppliers and regularly
whose products are recognised attend industry exhibitions
in the marketplace as the to keep abreast of the
leading competitive brand. latest technology and market
If suppliers fail to support requirements/trends. The
these products with new businesses also meet with
development and technologies, key customers on a regular
then our businesses will basis to gain insight into
suffer from reduced demand their product requirements
for their products and and market developments.
services.
Each of the Group's businesses
supply established and
leading products and related
services to customers operating
in specialised markets.
--------------------------------- ------------------------------
Strategic risk Relative movement to prior
year
Loss of key customer(s)
No change
--------------------------------- -------------------------------
Risk description & assessment Mitigation
The loss of one or more Specific large customers
major customers can be are important to individual
a material risk. operating businesses and
The nature of the Group's a high level of effort
businesses is such that is invested in ensuring
there is not a high level that these customers are
of dependence on any individual retained and encouraged
customers and no single not to switch to another
customer represents more supplier.
than 5% of Sector revenue In addition to providing
or more than 2% of Group high levels of customer
revenue. service and value added
activities, close integration
is established where possible
with customers' systems
and processes.
--------------------------------- -------------------------------
Operational risk Relative movement to prior
year
Product liability
No change
--------------------------------- ---------------------------------
Risk description & assessment Mitigation
Technically qualified personnel
There is a risk that products and control systems are
supplied by a Group business in place to ensure products
may fail in service, which meet quality requirements.
could lead to a claim under The Group's businesses
product liability. The are required to undertake
businesses, in their terms Product Risk assessments
and conditions of sale and comprehensive Supplier
with customers, will typically Quality Assurance assessments.
mirror the terms and conditions The Group has also established
of purchase from the suppliers. Group--wide product liability
In this way the liability insurance which provides
can be limited and subrogated worldwide umbrella insurance
to the supplier. cover of GBP20m across
However, if a legal claim all Sectors.
is made it will typically The Group's businesses
draw in our business as may also elect not to supply
a party to the claim and products if they are not
the business may be exposed fully confident that the
to legal costs and potential products will meet the
damages if the claim succeeds demands of the operating
and the supplier fails environment.
to meet its liabilities The Group's businesses
for whatever reason. Product have undergone further
liability insurance can product liability training
be limited in terms of during the year and are
its scope of insurable continually reviewed to
events, such as product demonstrate compliance
recall. with Group policies and
procedures relating to
product liability.
--------------------------------- ---------------------------------
Operational risk Relative movement to prior
year
Loss of key personnel
No change
--------------------------------------- ----------------------------------------------------------
Risk description & assessment Mitigation
Contractual terms such
The success of the Group as notice periods and non--compete
is built upon strong, self--standing clauses can mitigate the
management teams in the risk in the short term.
operating businesses, committed However, more successful
to the success of their initiatives focus on ensuring
respective businesses. a challenging work environment
As a result, the loss of with appropriate reward
key personnel can have systems. The Group places
an impact on performance, very high importance on
for a limited time period. planning the development,
The average length of service motivation and reward for
of the ca.90 senior managers key managers in the operating
in the Group's 11 years businesses including:
and for all personnel in
the Group is consistently -- Ensuring a challenging working environment where
over six years. managers feel they have control over, and
responsibility for their businesses.
-- Establishing management development programmes to
ensure a broad base of talented managers.
-- Offering a balanced and competitive compensation
package with a combination of salary, annual bonus
and long term cash incentive plans targeted at the
individual business level.
-- Giving the freedom, encouragement, financial
resources and strategic support for managers to
pursue ambitious growth plans.
--------------------------------------- ----------------------------------------------------------
Financial and accounting Relative movement to prior
risk year
Foreign currency risk - Increase
Translational exposure
------------------------------------- ----------------------------------
Risk description & assessment Mitigation
Foreign currency risk is The Group operates across
the risk that changes in a number of diverse geographies,
currency rates will affect but does not hedge translational
the Group's results. The exposure.
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 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 2016, 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 increase
revenue by GBP13.8m and
increase adjusted operating
profit by GBP2.7m. It is
estimated that a 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
GBP4.5m (7%), due to currency
translation.
Currency exposures also
arise from the net assets
of the Group's foreign
operations. At 30 September
2016, the Group's non--UK
sterling trading capital
employed in overseas businesses
was GBP199.0m (2015: GBP171.4m),
which represented 77% of
the Group's trading capital
employed. It is estimated
that a strengthening of
UK sterling of 10% against
all the non--UK sterling
capital employed would
reduce shareholders' funds
by GBP18.1m.
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 16 to the
attached consolidated financial
statements.
------------------------------------- ----------------------------------
Financial and accounting Relative movement to prior
risk year
Foreign currency - Transactional Increase
exposure
------------------------------------ ----------------------------------
Risk description & assessment Mitigation
The Group's businesses
The Group's UK businesses may hedge up to 80% of
are exposed to foreign forecast (being a maximum
currency risk on those of 18 months) foreign currency
purchases that are denominated exposures using forward
in a currency other than foreign exchange contracts.
their local currency, principally The Group finance department
US dollars, Euros and Japanese monitors rolling monthly
Yen. The Group's Canadian forecasts of currency exposures.
and Australian businesses The Group classifies its
are also exposed to a similar forward foreign exchange
risk as the majority of contracts, which hedge
their purchases are denominated forecast transactions,
in US dollars and Euros. as cash flow hedges and
The Group's US businesses state them at fair value
do not have any material at each reporting period.
foreign currency transactional
risk.
------------------------------------ ----------------------------------
Financial and accounting Relative movement to prior
risk year
Inventory obsolescence No change
------------------------------- ---------------------------------
Risk description & assessment Mitigation
Working capital management Inventory write--offs are
is critical to success controlled and minimised
in specialised industrial by active management of
businesses as this has inventory levels based
a major impact on cash on sales forecasts and
flow. The principal risk regular cycle counts.
to working capital is in Where necessary, a provision
inventory obsolescence is made to cover both excess
and write--off. inventory and potential
The charge against operating obsolescence.
profit in respect of old
or surplus inventory in
the year was GBP1.1m but
inventories are generally
not subject to technological
obsolescence.
------------------------------- ---------------------------------
RESPONSIBILITY STATEMENT OF THE DIRECTORS
IN RESPECT OF THE ANNUAL REPORT 2016
The responsibility statement below has been prepared in
connection with the Group's full Annual Report & Accounts for
the year ended 30 September 2016. 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
2015. Iain Henderson and Marie-Louise Clayton retired from the
Board on 20 January 2016 and 16 November 2016, respectively.
This responsibility statement was approved by the Board of
Directors on 21 November 2016 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 2016
2016 2015
Note GBPm GBPm
------------------------------ ----- -------- ---------
Revenue 3,4 382.6 333.8
Cost of sales (245.4) (212.8)
------------------------------ ----- -------- ---------
Gross profit 137.2 121.0
Distribution costs (8.4) (6.8)
Administration costs (73.4) (61.3)
------------------------------ ----- -------- ---------
Operating Profit 3 55.4 52.9
Gain on disposal of assets 13 0.7 -
Financial expense 5 (2.1) (1.1)
------------------------------ ----- -------- ---------
Profit before tax 54.0 51.8
Tax expense 6 (14.9) (14.4)
------------------------------ ----- -------- ---------
Profit for the year 39.1 37.4
------------------------------ ----- -------- ---------
Attributable to:
Shareholders of the Company 38.3 36.7
Minority interests 0.8 0.7
------------------------------ ----- -------- ---------
39.1 37.4
------------------------------ ----- -------- ---------
Earnings per share
Basic and diluted earnings 7 33.9p 32.5p
------------------------------ ----- -------- ---------
Alternative Performance Measures
(note 2) 2016 2015
Note GBPm GBPm
---------------------------------- ----- -------- --------
Operating profit 55.4 52.9
Add: Acquisition related charges 3 10.3 7.4
Adjusted operating profit 3,4 65.7 60.3
Deduct: Interest expense 5 (0.8) (0.7)
----------------------------------- ----- -------- --------
Adjusted profit before tax 64.9 59.6
----------------------------------- ----- -------- --------
Adjusted earnings per share 7 41.9p 38.2p
----------------------------------- ----- -------- --------
CONSOLIDATED STATEMENT OF
INCOME AND OTHER COMPREHENSIVE INCOME
For the year ended 30 September 2016
2016 2015
GBPm GBPm
------------------------------------------------ -------- --------
Profit for the year 39.1 37.4
------------------------------------------------- -------- --------
Items that will not be reclassified
to the Consolidated Income Statement
Actuarial losses in the defined benefit
pension schemes (6.6) (1.9)
Deferred tax on items that will not
be reclassified 1.0 0.4
------------------------------------------------- -------- --------
(5.6) (1.5)
------------------------------------------------ -------- --------
Items that may be reclassified to Consolidated
Income Statement
Exchange rate gains/(losses) on foreign
currency net investments 31.7 (8.2)
Gains on fair value of cash flow hedges 0.2 1.5
Net changes to fair value of cash flow
hedges transferred to the Consolidated
Income Statement (1.5) (0.3)
Deferred tax on items that may be reclassified 0.3 (0.3)
------------------------------------------------- -------- --------
30.7 (7.3)
------------------------------------------------ -------- --------
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 64.2 28.6
------------------------------------------------- -------- --------
Attributable to:
Shareholders of the Company 62.7 28.1
Minority interests 1.5 0.5
------------------------------------------------- -------- --------
64.2 28.6
------------------------------------------------ -------- --------
CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
For the year ended 30 September 2016
Share-holders'
Share Translation Hedging Retained equity Minority Total
capital reserve reserve earnings interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ---------- -------------- ---------- ----------- --------------- ------------ ---------
At 1 October 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 - - - - - 3.2 3.2
Minority interest
put option - - - (3.2) (3.2) - (3.2)
Minority interests
acquired - - - 1.2 1.2 (1.2) -
Notional purchase
of own shares - - - (1.7) (1.7) - (1.7)
Dividends - - - (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
Total comprehensive
income - 31.0 (1.0) 32.7 62.7 1.5 64.2
Share-based payments - - - 0.4 0.4 - 0.4
Minority interest
acquired - - - 2.0 2.0 (2.0) -
Tax on items
recognised
directly in equity - - - 0.1 0.1 - 0.1
Notional purchase
of own shares - - - (0.3) (0.3) - (0.3)
Dividends - - - (21.0) (21.0) (0.4) (21.4)
--------------------- ---------- -------------- ---------- ----------- --------------- ------------ ---------
AT 30 SEPTEMBER
2016 5.7 30.5 0.2 197.1 233.5 4.3 237.8
--------------------- ---------- -------------- ---------- ----------- --------------- ------------ ---------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September 2016
2016 2015
Note GBPm GBPm
----------------------------------------- ----- -------- --------
Non-current assets
Goodwill 10 115.2 89.3
Acquisition intangible assets 54.6 40.2
Other intangible assets 1.0 1.2
Investment 11 0.7 0.7
Property, plant and equipment 23.7 22.8
Deferred tax assets 0.2 0.4
------------------------------------------ ----- -------- --------
195.4 154.6
----------------------------------------- ----- -------- --------
Current assets
Inventories 66.8 56.6
Trade and other receivables 59.9 51.3
Cash and cash equivalents 9 20.6 23.0
------------------------------------------ ----- -------- --------
147.3 130.9
----------------------------------------- ----- -------- --------
Current liabilities
Trade and other payables (60.6) (45.1)
Current tax liabilities (2.7) (2.9)
Other liabilities 14 (1.7) (2.5)
Borrowings 9 (10.0) -
(75.0) (50.5)
----------------------------------------- ----- -------- --------
Net current assets 72.3 80.4
------------------------------------------ ----- -------- --------
Total assets less current liabilities 267.7 235.0
Non-current liabilities
Borrowings 9 - (20.0)
Retirement benefit obligations (17.2) (9.8)
Other liabilities 14 (5.1) (4.1)
Deferred tax liabilities (7.6) (6.3)
------------------------------------------ ----- -------- --------
Net assets 237.8 194.8
------------------------------------------ ----- -------- --------
Equity
Share capital 5.7 5.7
Translation reserve 30.5 (0.5)
Hedging reserve 0.2 1.2
Retained earnings 197.1 183.2
------------------------------------------ ----- -------- --------
Total shareholders' equity 233.5 189.6
Minority interests 4.3 5.2
------------------------------------------ ----- -------- --------
Total equity 237.8 194.8
------------------------------------------ ----- -------- --------
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2016
2016 2015
Note GBPm GBPm
---------------------------------------- ----- ------- -------
OPERATING PROFIT 55.4 52.9
Acquisition related charges 8 10.3 7.4
Non-cash items 8 4.6 3.7
Decrease/(increase) in working
capital 8 6.3 (1.9)
---------------------------------------- ----- ------- -------
Cash flow from OPERATING activities 76.6 62.1
Interest paid (0.6) (0.5)
Tax paid (17.6) (15.4)
---------------------------------------- ----- ------- -------
Net cash from operating activities 58.4 46.2
---------------------------------------- ----- ------- -------
Cash flow from investing activities
Acquisition of businesses (including
expenses) 12 (30.1) (36.6)
Deferred consideration paid 14 (0.7) (0.6)
Proceeds from sale of business
(net of expenses) 13 2.2 -
Purchase of property, plant and
equipment (3.5) (4.0)
Purchase of other intangible assets (0.2) (0.3)
Proceeds from sale of property,
plant and equipment 13 2.4 0.1
---------------------------------------- ----- ------- -------
Net cash used in investing activities (29.9) (41.4)
---------------------------------------- ----- ------- -------
Cash flow from financing activities
Acquisition of minority interests 14 (1.9) (0.6)
Dividends paid to shareholders 15 (21.0) (19.7)
Dividends paid to minority interests (0.4) (0.2)
Purchase of own shares by the
Employee Benefit Trust - (0.7)
Notional purchase of own shares
on exercise of share options (0.3) (1.0)
(Repayment)/proceeds of borrowings,
net 9 (10.0) 20.0
---------------------------------------- ----- ------- -------
Net cash used in financing activities (33.6) (2.2)
---------------------------------------- ----- ------- -------
Net (decrease)/increase in cash
and cash equivalents (5.1) 2.6
Cash and cash equivalents at beginning
of year 23.0 21.3
Effect of exchange rates on cash
and cash equivalents 2.7 (0.9)
---------------------------------------- ----- ------- -------
Cash and cash equivalents at end
of year 9 20.6 23.0
---------------------------------------- ----- ------- -------
ALTERNATIVE PERFORMANCE MEASURES
(NOTE 2) 2016 2015
GBPm GBPm
---------------------------------------------- --- ------- -------
Net (decrease)/increase in cash
and cash equivalents (5.1) 2.6
Add: Dividends paid to shareholders 15 21.0 19.7
Dividends paid to minority
interests 0.4 0.2
Acquisition of businesses (including
expenses) 12 30.1 36.6
Acquisition of minority interests 14 1.9 0.6
Deferred consideration paid 14 0.7 0.6
Repayment/(proceeds) of borrowings,
net 9 10.0 (20.0)
--------------------------------------------- --- ------- -------
FREE CASH FLOW 59.0 40.3
---------------------------------------------- --- ------- -------
Cash and cash equivalents 20.6 23.0
Borrowings (10.0) (20.0)
---------------------------------------------- --- ------- -------
NET CASH 9 10.6 3.0
---------------------------------------------- --- ------- -------
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 21 November
2016.
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
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
2016 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 2016.
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
2016 and 2015. Statutory financial statements for the year ended 30
September 2015 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
2016, which were approved by the Directors on 21 November 2016,
will be sent to shareholders on 8 December 2016 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 2016 and 2015. 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 18 January 2017 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")) performance 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 expenses (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" ("EPS") is calculated as the total
of adjusted profit before tax, less income tax costs, but including
the tax impact on the items included in the calculation of adjusted
profit, 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 EPS 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 distribution 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
The Chief Operating Decision Maker ("CODM") for the purposes of
IFRS 8 is the Chief Executive. The financial performance of the
segments is reported to the CODM on a monthly basis and this
information is used to allocate resources on an appropriate
basis.
For management reporting purposes, the Group is organised into
three main reportable 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.
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, acquisition 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
2016 2015 2016 2015 2016 2015 2016 2015
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------- ------- ------- ------- ------- ------- -------- -------
Revenue
- existing businesses 109.9 103.1 159.9 139.6 96.5 91.1 366.3 333.8
- acquisitions - - 6.7 - 9.6 - 16.3 -
----------------------- ------- ------- ------- ------- ------- ------- -------- -------
Revenue 109.9 103.1 166.6 139.6 106.1 91.1 382.6 333.8
Adjusted operating
profit
- existing businesses 19.6 21.0 27.5 24.8 16.2 14.5 63.3 60.3
- acquisitions - - 0.7 - 1.7 - 2.4 -
----------------------- ------- ------- ------- ------- ------- ------- -------- -------
Adjusted operating 19.6 21.0 28.2 24.8 17.9 14.5 65.7 60.3
profit
Acquisition related (2.9) (3.1) (5.0) (3.6) (2.4) (0.7) (10.3) (7.4)
charges
------------------------ ------- ------- ------- ------- ------- ------- -------- -------
operating Profit 16.7 17.9 23.2 21.2 15.5 13.8 55.4 52.9
------------------------ ------- ------- ------- ------- ------- ------- -------- -------
Acquisition related charges of GBP10.3m (2015: GBP7.4m)
comprises GBP9.3m (2015: GBP6.9m) of amortisation of acquisition
intangible assets, GBP1.2m of acquisition expenses (2015: GBP0.5m)
and a credit of GBP0.2m relating to adjustments to deferred
consideration (2015: GBPNil).
Life Sciences Seals Controls Group
2016 2015 2016 2015 2016 2015 2016 2015
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- --------- ------- ------- ------- ------- -------- -------
Operating assets 35.1 31.4 70.3 60.0 44.4 36.0 149.8 127.4
Investment - - 0.7 0.7 - - 0.7 0.7
Goodwill 52.8 44.9 39.1 29.6 23.3 14.8 115.2 89.3
Acquisition intangible
assets 10.6 13.0 30.4 25.4 13.6 1.8 54.6 40.2
---------------------------- ---------- --------- ------- ------- ------- ------- -------- -------
98.5 89.3 140.5 115.7 81.3 52.6 320.3 257.6
Unallocated assets:
- Deferred tax assets 0.2 0.4
- Cash and cash
equivalents 20.6 23.0
- Corporate assets 1.6 4.5
---------------------------- ---------- --------- ------- ------- ------- ------- -------- -------
Total assets 98.5 89.3 140.5 115.7 81.3 52.6 342.7 285.5
---------------------------- ---------- --------- ------- ------- ------- ------- -------- -------
Operating liabilities (17.9) (14.7) (22.9) (16.2) (18.8) (13.5) (59.6) (44.4)
Unallocated liabilities:
- Deferred tax liabilities (7.6) (6.3)
- Retirement benefit
obligations (17.2) (9.8)
- Acquisition liabilities (6.8) (6.6)
- Corporate liabilities (3.7) (3.6)
* Borrowings (10.0) (20.0)
---------------------------- ---------- --------- ------- ------- ------- ------- -------- -------
Total liabilities (17.9) (14.7) (22.9) (16.2) (18.8) (13.5) (104.9) (90.7)
---------------------------- ---------- --------- ------- ------- ------- ------- -------- -------
Net assets 80.6 74.6 117.6 99.5 62.5 39.1 237.8 194.8
---------------------------- ---------- --------- ------- ------- ------- ------- -------- -------
OTHER SECTOR INFORMATION
Capital expenditure 1.9 2.5 1.4 1.5 0.4 0.3 3.7 4.3
Depreciation and
amortisation 2.0 1.7 1.9 1.3 0.6 0.5 4.5 3.5
---------------------------- ---------- --------- ------- ------- ------- ------- -------- -------
Alternative Performance Life
Measures Sciences Seals Controls Group
(Note 2) 2016 2015 2016 2015 2016 2015 2016 2015
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------- ------
NET ASSETS 80.6 74.6 117.6 99.5 62.5 39.1 237.8 194.8
Add/(deduct):
* Deferred tax, net 7.4 5.9
* Retirement benefit obligations 17.2 9.8
* Acquisition liabilities 6.8 6.6
* Net cash funds (10.6) (3.0)
------- ------
REPORTED TRADING
CAPITAL EMPLOYED 258.6 214.1
* Historic goodwill and acquisition related charges,
net of deferred tax 28.0 25.0 22.7 20.2 8.5 8.4 59.2 53.6
ADJUSTED TRADING
CAPITAL EMPLOYED 108.6 99.6 140.3 119.7 71.0 47.5 317.8 267.7
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------- ------
ROATCE(1) 17.7% 21.1% 20.1% 23.7% 28.9% 30.5% 21.1% 23.9%
(1) ROATCE is calculated after adjusting
for the timing of acquisitions and disposals
completed during the year.
-------------------------------------------------------------------------------------------------------------- ------- ------
4. GEOGRAPHIC SECTOR ANALYSIS BY ORIGIN
Adjusted Trading
operating Non-current capital Capital
Revenue profit assets(1) employed expenditure
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
United
Kingdom 97.4 87.7 16.1 14.5 42.3 25.2 59.6 42.7 0.5 0.4
Rest of
Europe(2) 105.6 77.1 15.6 11.7 73.8 57.1 91.8 71.6 1.2 0.5
North America(3) 179.6 169.0 34.0 34.1 78.4 71.2 107.2 99.8 2.0 3.4
------------------ -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
382.6 333.8 65.7 60.3 194.5 153.5 258.6 214.1 3.7 4.3
------------------ -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
(1) Non-current assets exclude the investment and deferred tax
assets.
(2) Rest of Europe includes the Australian Seals businesses.
(3) North America includes the Australian Healthcare
businesses.
5. FINANCIAL EXPENSE
2016 2015
GBPm GBPm
--------------------------------------------------------- -------- --------
Interest expense and similar charges
- bank facility and commitment fees (0.2) (0.2)
- interest payable on bank and other
borrowings (0.4) (0.3)
* notional interest expense on the defined benefit
pension scheme (0.2) (0.2)
----------------------------------------------------------- -------- --------
Interest expense and similar charges (0.8) (0.7)
----------------------------------------------------------- -------- --------
- fair value remeasurement of put
options (note 14) (1.3) (0.4)
----------------------------------------------------------- -------- --------
FINANCIAL EXPENSE (2.1) (1.1)
----------------------------------------------------------- -------- --------
The fair value remeasurement of GBP1.3m (2015: GBP0.4m)
comprises GBP0.5m (2015: GBP0.5m) which relates to an unwinding of
the discount on the liability for future purchases of minority
interests and a movement in the fair value of the put options of
GBP0.8m debit (2015: GBP0.1m credit).
6. TAX EXPENSE
2016 2015
GBPm GBPm
----------------------------------------- ------ ------
Current tax
The tax charge is based on the profit
for the year and comprises:
- UK corporation tax 2.9 2.6
- Overseas tax 13.7 12.5
----------------------------------------- ------ ------
16.6 15.1
Adjustments in respect of prior year:
* UK corporation tax (0.2) (0.1)
- Overseas tax (0.2) 0.4
----------------------------------------- ------ ------
Total current tax 16.2 15.4
----------------------------------------- ------ ------
Deferred tax
The net deferred tax credit based on
the origination and reversal of timing
differences comprises:
- United Kingdom (1.6) (1.0)
- Overseas 0.3 -
Total deferred tax (1.3) (1.0)
----------------------------------------- ------ ------
TOTAL TAX ON PROFIT FOR THE YEAR 14.9 14.4
----------------------------------------- ------ ------
The gain on disposal of assets during the year included a net
credit of GBP0.3m, as described in note 13. This comprised a
GBP0.5m deferred tax credit that was partially offset by a GBP0.2m
current tax charge.
Factors affecting the tax charge for the year:
The difference between the total tax charge calculated by
applying the standard rate of UK corporation tax of 20.0% to the
profit before tax of GBP54.0m and the amount set out above is as
follows:
2016 2015
GBPm GBPm
------------------------------------------ ----- -----
Profit before tax 54.0 51.8
------------------------------------------ ----- -----
Tax on profit at UK effective corporation
tax rate of 20.0% (2015: 20.5%) 10.8 10.6
Effects of:
- change in UK tax rates (0.1) -
- higher tax rates on overseas earnings 4.1 3.7
- adjustments to tax charge in respect
of previous years (0.4) 0.3
- other permanent differences 0.5 (0.2)
------------------------------------------ ----- -----
TOTAL TAX ON PROFIT FOR THE YEAR 14.9 14.4
------------------------------------------ ----- -----
The Group earns its profits in the UK and overseas. The UK
corporation tax rate was unchanged at 20.0%; 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 2016 was also 20.0% (2015: 20.5%) and this
rate has been used for tax on profit in the above reconciliation.
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 2016
have been calculated based on the future UK corporation tax rate of
17.0%, substantively enacted at 30 September 2016.
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 113,058,835 (2015: 113,007,084) and the
profit for the year attributable to shareholders of GBP38.3m (2015:
GBP36.7m). There were no potentially dilutive shares.
Adjusted earnings per share
Adjusted earnings per share, which is defined in note 2, is
calculated as follows:
2016 2015 2016 2015
pence pence
per per GBPm GBPm
share share
---------------------------------------- ------- ------- ------- -------
Profit before tax 54.0 51.8
Tax expense (14.9) (14.4)
Minority interests (0.8) (0.7)
---------------------------------------- ------- ------- ------- -------
Earnings for the year attributable
to shareholders of the Company 33.9 32.5 38.3 36.7
Acquisition related charges 9.1 6.5 10.3 7.4
Fair value remeasurement of put
options 1.1 0.4 1.3 0.4
Gain on disposal of assets (0.6) - (0.7) -
Tax effects on acquisition related
charges and fair value remeasurements (1.6) (1.2) (1.8) (1.3)
ADJUSTED EARNINGS 41.9 38.2 47.4 43.2
---------------------------------------- ------- ------- ------- -------
8. RECONCILIATION OF CASH FLOW FROM OPERATING ACTIVITIES
2016 2016 2015 2015
GBPm GBPm GBPm GBPm
-------------------------------------- ------ ----- ------ ------
Operating profit 55.4 52.9
Acquisition related charges 10.3 7.4
-------------------------------------- ------ ----- ------ ------
Adjusted operating profit 65.7 60.3
Depreciation or amortisation
of tangible and other intangible
assets 4.5 3.5
Share-based payments expense 0.4 0.5
Cash paid into defined benefit
schemes (0.3) (0.3)
-------------------------------------- ------ ----- ------ ------
Non-cash items 4.6 3.7
-------------------------------------- ------ ----- ------ ------
Operating cash flow before
changes in working capital 70.3 64.0
Increase in inventories (1.3) -
(Increase)/decrease in trade
and other receivables (0.3) 0.2
Increase/(decrease) in trade
and other payables 7.9 (2.1)
-------------------------------------- ------ ----- ------ ------
Decrease/(increase) in working
capital 6.3 (1.9)
-------------------------------------- ------ ----- ------ ------
Cash flow from operating activities,
before acquisition expenses 76.6 62.1
-------------------------------------- ------ ----- ------ ------
9. NET CASH
The movement in net cash during the year is as follows:
2016 2015
GBPm GBPm
------------------------------------- ------- -------
Net (decrease)/increase in cash and
cash equivalents (5.1) 2.6
Decrease/(increase) in borrowings 10.0 (20.0)
------------------------------------- ------- -------
4.9 (17.4)
Effect of exchange rates 2.7 (0.9)
------------------------------------- ------- -------
Movement in net cash 7.6 (18.3)
Net cash at beginning of year 3.0 21.3
------------------------------------- ------- -------
NET CASH AT OF YEAR 10.6 3.0
------------------------------------- ------- -------
Comprising:
Cash and cash equivalents 20.6 23.0
Borrowings (10.0) (20.0)
------------------------------------- ------- -------
NET CASH AT 30 SEPTEMBER 10.6 3.0
------------------------------------- ------- -------
The Group has a committed multi-currency revolving facility of
GBP50m (2015: GBP40m) which expires on 23 June 2017. On 7 March
2016, the Group exercised an accordion option to increase the
committed bank facility from GBP40m to a maximum facility of
GBP50m. At 30 September 2016, the Group had total borrowings under
this facility of GBP10.0m (2015: GBP20.0m). Interest on this
facility is payable between 120 and 170bps over LIBOR, depending on
the ratio of net debt to EBITDA. The Group will review its bank
facilities during the next financial year.
10. GOODWILL
Life Sciences Seals Controls Total
GBPm GBPm GBPm GBPm
---------------------------- -------------- ------ --------- ------
At 1 October 2014 44.2 21.0 15.0 80.2
Acquisitions 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
Acquisitions (note
12) - 4.0 7.8 11.8
Exchange adjustments 7.9 5.5 0.7 14.1
----------------------------- -------------- ------ --------- ------
AT 30 SEPTEMBER 2016 52.8 39.1 23.3 115.2
----------------------------- -------------- ------ --------- ------
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 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 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 2017 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.11% (2015: 12%). 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
2016 2015
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 2016, there was no material difference
between the book value of this investment and its fair value.
12. ACQUISITION of BUSINESSES
On 12 October 2015, the Group completed the acquisition of 100%
of West Coast Industrial Supplies Pty Limited based in Perth,
Australia and its affiliate company, West Coast Industrial Supplies
New Caledonia SAS based near Noumea in New Caledonia (together
"WCIS") for an aggregate maximum consideration of GBP9.8m
(A$20.5m).
The cash paid on acquisition was GBP7.6m (A$15.8m), after
adjustments to net assets of GBP1.2m (A$2.7m) and including net
debt acquired of GBP0.4m (A$0.8m), but before acquisition expenses
of GBP0.4m (A$0.8m). Maximum deferred consideration of up to
GBP1.0m (A$2.0m) is payable based both on the performance of WCIS
during the year ended 30 September 2016 and on the renewal of
specific customer contracts.
On 24 February 2016, the Group acquired 100% of Ascome SARL,
based in Paris, France, for total consideration of GBP0.7m
(EUR0.8m), including cash acquired of GBP0.3m (EUR0.4m); GBP0.6m
(EUR0.7) was paid on completion and GBP0.1m will be paid in
2017.
On 8 March 2016, the Group acquired 100% of Cablecraft Limited
based in Houghton-Regis, England, together with its trading
subsidiaries Birch Valley Plastics Limited and Krempfast Limited
(together "Cablecraft") for initial consideration of GBP27.2m,
which included the return of GBP6.2m of surplus cash and was before
acquisition expenses of GBP0.7m. A further GBP0.1m was paid based
on the final net assets at completion. Maximum deferred
consideration of up to GBP5.0m is payable based on the performance
of Cablecraft for the 12 months ended 31 March 2017.
Set out below is an analysis of the net book values and fair
values relating to these acquisitions:
WCIS Cablecraft Ascome 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 - 5.2 - 13.0 - 0.2 - 18.4
Deferred tax 0.3 (1.3) - (2.3) - (0.1) 0.3 (3.7)
Property, plant
and equipment 0.5 0.5 0.4 0.4 - - 0.9 0.9
Inventories 1.6 0.5 2.1 1.7 0.1 0.1 3.8 2.3
Trade and other
receivables 1.8 1.8 2.8 2.8 0.2 0.2 4.8 4.8
Trade and other
payables (2.2) (2.2) (1.7) (1.7) (0.1) (0.1) (4.0) (4.0)
Net assets acquired 2.0 4.5 3.6 13.9 0.2 0.3 5.8 18.7
Goodwill - 4.0 - 7.7 - 0.1 - 11.8
2.0 8.5 3.6 21.6 0.2 0.4 5.8 30.5
------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Cash paid 7.6 27.3 0.6 35.5
Debt acquired 0.6 - - 0.6
Cash acquired (0.2) (6.7) (0.3) (7.2)
Expenses of acquisition 0.4 0.7 0.1 1.2
------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Net cash paid,
after acquisition
expenses 8.4 21.3 0.4 30.1
Deferred consideration
payable 0.5 1.0 0.1 1.6
Less: Expenses
of acquisition (0.4) (0.7) (0.1) (1.2)
------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Total consideration 8.5 21.6 0.4 30.5
------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Goodwill of GBP11.8m 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.
From the date of acquisition to 30 September 2016, the newly
acquired WCIS business contributed GBP6.7m to revenue and GBP0.7m
to adjusted operating profit and the newly acquired Cablecraft
business contributed GBP9.2m to revenue and GBP1.7m to adjusted
operating profit and the newly acquired Ascome business contributed
GBP0.4m to revenue and had a negligible contribution to adjusted
operating profit. If these businesses had been acquired at the
beginning of the financial year, they would in aggregate have
contributed on a pro-rata basis GBP23.2m to revenue and GBP3.6m to
adjusted operating profit. However these amounts should not be
viewed as indicative of the results of these businesses that would
have occurred, if these acquisitions had been completed at the
beginning of the year.
13. DISPOSAL OF ASSETS
2016
GBPm
-------------------------------- ------
Gain on disposal of business 0.3
Gain on disposal of properties 0.4
Gain on disposals (net of tax) 0.7
-------------------------------- ------
Gain on disposal of business
On 26 September 2016, Vantage Inc. a business in the Diploma
Healthcare Group sold its endoscope reprocessing business assets
for cash consideration of GBP2.8m (C$5.3m); GBP2.2m net of expenses
of sale. Vantage Inc. remains a continuing operation within the
Diploma Healthcare Group.
The gain has been accounted for as follows:
2016
GBPm
---------------------------------------------- ------
Consideration:
Cash consideration, net of expenses
of sale 2.2
---------------------------------------------- ------
Net assets disposed:
Intangible assets (1.4)
Property, plant and equipment (0.6)
Current assets (1.5)
Current liabilities 1.4
---------------------------------------------- ------
Gain on disposal before tax 0.1
Tax credit on disposal of business 0.2
---------------------------------------------- ------
Gain on disposal of business from continuing
operations 0.3
---------------------------------------------- ------
Gain on disposal of properties
In March 2016, the Group sold freehold properties with a net
book value of GBP2.0m for GBP2.3m, giving rise to a gain before tax
of GBP0.3m. The tax on this disposal was a credit of GBP0.1m
resulting in a total gain of GBP0.4m.
A further GBP0.1m of cash proceeds were received on the disposal
at net book value of operational tangible assets in the normal
course of business.
14. OTHER LIABILITIES
2016 2015
GBPm GBPm
--------------------------------------- ------- ------
Future purchases of minority
interests 5.1 5.7
Deferred consideration 1.7 0.9
------------------------------------------ ------- ------
6.8 6.6
--------------------------------------- ------- ------
Analysed as:
Due within one year 1.7 2.5
Due after one year 5.1 4.1
------------------------------------------ ------- ------
The movement in the liability for future purchases
of minority interests is as follows:
2016 2015
GBPm GBPm
--------------------------------------- ------- ------
At 1 October 5.7 3.5
Acquisition of minority interests
on exercise of option (1.9) (1.4)
Put options entered into
during the year - 3.2
Unwinding of discount 0.5 0.5
Fair value remeasurements 0.8 (0.1)
------------------------------------------ ------- ------
AT 30 SEPTEMBER 5.1 5.7
------------------------------------------ ------- ------
At 30 September 2016, the Group retained put options to acquire
minority interests in TPD, Kentek and M Seals. On 14 July 2016 and
following the exercise of a put option, the Group acquired 10%
minority interest outstanding in TPD for total consideration of
GBP1.9m (EUR2.3m).
At 30 September 2016, the estimate of the financial liability to
acquire the outstanding minority shareholdings was reassessed by
the Directors, based on their current estimate of the future
performance of these businesses and to reflect foreign exchange
rates at 30 September 2016.
This led to a remeasurement of the fair value of these put
options and the liability was increased by GBP0.8m (2015: reduced
by GBP0.1m) related to foreign exchange and a GBP0.5m (2015:
GBP0.5m) charge from unwinding the discount on the liability. In
aggregate GBP1.3m (2015: GBP0.4m) has been charged to the
Consolidated Income Statement.
The put options to acquire the minority interest of 10% held in
TPD are exercisable in November 2017 and November 2019; the put
option to acquire the minority interest of 10% held in M Seals and
the 10% held in Kentek are exercisable in October 2018.
Deferred consideration comprises the following:
2016 2015
GBPm GBPm
----------------- ------ ------
Kentek - 0.8
HPS - 0.1
WCIS 0.6 -
Cablecraft 1.0 -
Ascome 0.1 -
----------------- ------ ------
AT 30 SEPTEMBER 1.7 0.9
----------------- ------ ------
The amounts outstanding at 30 September 2016 are expected to be
paid within the next twelve months and will largely be based on the
performance of these businesses in the period following their
acquisition by the Group.
During the year, outstanding deferred consideration of GBP0.6m
(EUR0.8m) was paid to the vendor of Kentek relating to the purchase
of this minority interest last year. In addition, GBP0.1m (US$0.2m)
was paid to the vendor of HPS in respect of the performance of the
business in the year ended 30 September 2015. The balance of
GBP0.2m was not required and has been deducted from the acquisition
related charges.
15. DIVIDENDS
2016 2015
pence pence 2016 2015
per per GBPm GBPm
share share
----------------------------- ------- ------- ------ ------
Interim dividend, paid
in June 6.2 5.8 7.0 6.6
Final dividend of the prior
year, paid in January 12.4 11.6 14.0 13.1
----------------------------- ------- ------- ------ ------
18.6 17.4 21.0 19.7
----------------------------- ------- ------- ------ ------
The Directors have proposed a final dividend in respect of the
current year of 13.8p per share (2015: 12.4p) which will be paid on
25 January 2017, subject to approval of shareholders at the Annual
General Meeting on 18 January 2017. The total dividend for the
current year, subject to approval of the final dividend, will be
20.0p per share (2015: 18.2p).
16. EXCHANGE RATES
The rates used to translate the results of the overseas
businesses are as follows:
Average Closing
2016 2015 2016 2015
------------------------ ----- ----- ----- -----
US dollar (US$) 1.41 1.54 1.30 1.51
Canadian dollar (C$) 1.87 1.91 1.71 2.03
Euro (EUR) 1.28 1.35 1.16 1.36
Swiss franc (CHF) 1.40 1.48 1.26 1.48
Australian dollar (A$) 1.92 1.99 1.70 2.16
------------------------ ----- ----- ----- -----
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR LLFVRLRLTLIR
(END) Dow Jones Newswires
November 21, 2016 02:00 ET (07:00 GMT)
Diploma (LSE:DPLM)
Historical Stock Chart
From Mar 2024 to Apr 2024
Diploma (LSE:DPLM)
Historical Stock Chart
From Apr 2023 to Apr 2024
