TIDMDPLM
RNS Number : 8820W
Diploma PLC
20 November 2017
DIPLOMA PLC
12 CHARTERHOUSE SQUARE, LONDON EC1M 6AX
TELEPHONE: +44 (0)20 7549 5700
FACSIMILE: +44 (0)20 7549 5715
FOR IMMEDIATE RELEASE
20 November 2017
PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS
FOR THE YEARED 30 SEPTEMBER 2017
"Strong Results with Double-Digit Growth in Revenue and
Earnings"
Audited Audited
2017 2016
GBPm GBPm
Revenue 451.9 382.6 +18%
Adjusted operating
profit(1) 78.2 65.7 +19%
Adjusted operating
margin(1) 17.3% 17.2% +10bps
Adjusted profit
before tax(1),(2) 77.5 64.9 +19%
Profit before tax 66.8 54.0 +24%
Profit for the year 48.2 39.1 +23%
Free cash flow(3) 55.7 59.0 -6%
Pence Pence
Adjusted earnings
per share(1),(2) 49.8 41.9 +19%
Basic earnings per
share 42.0 33.9 +24%
Total dividend per
share 23.0 20.0 +15%
(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 18% and 19%, respectively.
-- Underlying revenues increased by 7%; currency movement
increased revenues by 9% and businesses acquired made a net
contribution of 2%.
-- Adjusted operating margins improved slightly to 17.3% as
transactional currency effects eased in the Healthcare businesses
and margins improved in the acquired businesses.
-- Adjusted profit before tax and adjusted EPS both increased by 19% to GBP77.5m and to 49.8p, respectively.
-- Strong free cash flow of GBP55.7m; cash funds of GBP22.3m at end of September.
-- Total dividend increased by 15% to 23.0p per share reflecting
strong financial position and confidence in Group's growth
prospects.
Operational Highlights
-- In Life Sciences, underlying revenues increased by 4%, with
strong capital revenues as new technology was introduced and
delayed projects were reactivated in the laboratory diagnostic
sectors.
-- In Seals, underlying revenues increased by 4% reflecting an
improving trend in industrial activity in North America. In the
International Seals businesses, strong growth in the UK and
Scandinavia was offset by more challenging conditions in
Switzerland, Russia and Australia.
-- In Controls, underlying revenues increased by 14%, driven by
new project activity, recovery in some end user markets and
targeted investment in sales resources.
-- Acquisition expenditure of GBP20.1m this year; ca. GBP90m
invested over three years in acquiring value enhancing businesses.
Group's return on adjusted trading capital ("ROATCE") improved to
24%.
Commenting on the results for the year, Bruce Thompson,
Diploma's Chief Executive said:
"Diploma reported another strong performance in 2017, delivering
strong double-digit growth in revenue and earnings. All of the
Group's Sectors contributed to this growth with a particularly
strong performance from Controls.
The Group's performance in 2017 provides confidence in the
Group's prospects for solid underlying growth in the year ahead,
which we aim to enhance by unlocking value enhancing acquisition
opportunities. With a proven business model, broad geographic
spread of businesses, robust balance sheet and consistently strong
free cash flow, the Board is confident that further progress will
be made in the next financial year."
There will be a presentation of the results to analysts and
investors at 9.00am this morning at Pewterers' Hall, Oat Lane, City
of London, EC2V 7DE. This presentation will be made available as a
webcast from 2.00pm GMT via www.diplomaplc.com
For further information please contact:
+44 (0)20 7549
Diploma PLC - 5700
Bruce Thompson, Chief Executive
Officer
Nigel Lingwood, Group Finance
Director
+44 (0)20 7353
Tulchan Communications - 4200
Martin Robinson
David Allchurch
Notes:
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 Preliminary Announcement ("Announcement") to
"underlying" revenues or operating profits refer to reported
results on a constant currency basis and before any contribution
from acquired or disposed 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 Announcement.
Certain statements contained in this 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. 1,700 employees and its principal
operating businesses are located in the UK, Northern Europe, North
America and Australia.
Over the last ten years, the Group has grown adjusted earnings
per share at an average of ca. 14% p.a. through a combination of
underlying growth and acquisitions. Diploma is a member of the FTSE
250 with a market capitalisation of ca. GBP1.2bn.
Further information on Diploma PLC can be found at
www.diplomaplc.com
LEI: 213800OG17VYG8FGR19
PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS
FOR YEARED 30 SEPTEMBER 2017
CHAIRMAN'S STATEMENT
The Group reported another strong performance in 2017 and
delivered robust underlying growth in more confident global
economies. The Board remains focused on executing the Group's
established strategy which is designed to deliver strong growth in
earnings and shareholder value over the economic cycle.
The Group has a long track record of consistent delivery against
its key performance metrics by compounding stable "GDP plus"
underlying growth with carefully selected, value enhancing
acquisitions, funded by the Group's free cash flow. This strategy
has been successfully designed and executed under the outstanding
leadership of Bruce Thompson since he became CEO of Diploma PLC in
1996. Over the last 15 years, since emerging from a major
restructuring of the Group led by Bruce, the Group has delivered
strong double-digit growth in earnings, dividends and share price
and has grown market capitalisation from ca. GBP60m to ca. GBP1.2bn
today, without any new equity having been issued.
In September of this year, the Board received notice from Bruce
of his intention to retire as CEO before the end of 30 September
2018. This notice period ensures sufficient time to complete a
thorough search process and a smooth transition of
responsibilities. Bruce will be leaving the Group with a clearly
defined and sustainable strategy, with a substantial runway for
future growth and an experienced senior management team. We all
wish him a long, healthy and well-earned retirement.
Results
Group revenues increased in 2017 by 18% to GBP451.9m (2016:
GBP382.6m), with the Group's results again boosted by currency
effects from translating the results of the overseas businesses,
following the substantial depreciation in UK sterling. After
adjusting for the contribution from acquisitions completed both
this year and last year, net of a small disposal and for these
currency effects on translation, Group revenues increased by 7% on
an underlying basis. The Controls businesses delivered robust
underlying revenue growth of ca. 14% and both the Life Sciences and
Seals businesses reported a 4% growth in underlying revenues.
Adjusted operating profit increased by 19% to GBP78.2m (2016:
GBP65.7m) reflecting the strong growth in revenues and a small
increase of 10bps in adjusted operating margins to 17.3% (2016:
17.2%). Adjusted profit before tax increased by 19% to GBP77.5m
(2016: GBP64.9m) and adjusted earnings per share ("EPS") also
increased by 19% to 49.8p (2016: 41.9p).
The Group's free cash flow remained robust at GBP55.7m (2016:
GBP59.0m) as working capital increased by GBP4.0m to support the
stronger trading environment across the Group. Last year's free
cash flow included an inflow of GBP6.3m from reduced working
capital and GBP4.6m of cash realised on the sale of assets. Capital
expenditure of GBP3.3m (2016: GBP3.7m) remained at a similar level
to last year.
The Group has invested ca. GBP90m over three years in acquiring
value enhancing businesses. However, expenditure on acquisitions
slowed this year to GBP20.1m (2016: GBP32.7m) as some vendors
postponed their exit plans in the face of a more favourable
macroeconomic environment. There are still a number of good quality
businesses in our acquisition pipeline which we are confident of
completing when the vendors are ready to move forward.
The Group's balance sheet remains robust with cash funds at 30
September 2017 of GBP22.3m (2016: GBP10.6m), after investing
GBP20.1m in acquisitions and making distributions to shareholders
of GBP23.5m (2016: GBP21.0m). The Group also has renewed committed
bank facilities of GBP30m with an accordion option to extend these
facilities up to GBP60m.
Dividends
The combination of strong results and free cash flow, supported
by a robust balance sheet has led the Board to recommend an
increase in the final dividend of 16% to 16.0p per share (2016:
13.8p). Subject to shareholder approval at the Annual General
Meeting ("AGM"), this dividend will be paid on 24 January 2018 to
shareholders on the register at 1 December 2017.
The total dividend per share for the year will be 23.0p (2016:
20.0p) which represents a 15% increase on 2016. With underlying
adjusted earnings increasing by 19%, the level of dividend cover
increases slightly to 2.2 times on an adjusted EPS basis, from 2.1
times in recent years.
Governance
The Board's Committees, led by the non-Executive Directors, have
had a productive year. Anne Thorburn led the Audit Committee
through an audit tender process which in September resulted in a
proposal to appoint PricewaterhouseCoopers LLP as Company and Group
auditor from next year. Andy Smith has also led the Remuneration
Committee through a thorough review of the Company's Remuneration
Policy, in advance of the triennial vote by shareholders at the AGM
on 17 January 2018. I have worked closely with Charles Packshaw as
Senior Independent Director and with the Nomination Committee to
commence a search for a new CEO to lead the Group, following the
intended retirement of Bruce Thompson later in 2018.
Employees
Our employees remain our most important asset and their hard
work continues to be a driving force behind our consistent and
strong performance. Diploma is very much a people business and
success is always a team effort. I wish to thank all of our
employees for their support and contribution to the success of the
Group this year.
Outlook
Diploma reported another strong performance in 2017, delivering
strong double-digit growth in revenue and earnings. All of the
Group's Sectors contributed to this growth with a particularly
strong performance from Controls.
The Group's performance in 2017 provides confidence in the
Group's prospects for solid underlying growth in the year ahead,
which we aim to enhance by unlocking value enhancing acquisition
opportunities. With a proven business model, broad geographic
spread of businesses, robust balance sheet and consistently strong
free cash flow, the Board is confident that further progress will
be made in the next financial year.
CHIEF EXECUTIVE'S REVIEW
In 2017, the Group delivered strong double-digit growth in
revenue and earnings with robust underlying growth, a modest net
contribution from acquisitions and further benefiting from the
strong tailwind from the depreciation in UK sterling.
The Group's reported revenues increased by 18%, with currency
movements increasing revenues by 9% and acquisitions contributing a
further 2% to the revenue growth, net of a small prior year
disposal. On an underlying basis, after adjusting for acquisitions
and for currency effects on translation, Group revenues increased
by 7%.
Group adjusted operating margins improved by 10bps to 17.3%,
compared with 17.2% in the prior full year and the first half of
the current year. Management gross margins have reduced overall by
60bps with margin pressures in several businesses from a
combination of the impact on product costs from currency movements
and increases in other margin support costs. These pressures have
been partly mitigated by the stronger gross margins in recent
acquisitions and transactional currency pressures in the Healthcare
businesses have eased during the year. Operating costs as a
percentage of revenue have reduced by 70bps with improved operating
leverage from the increase in revenues and generally tight control
of operating costs.
Working capital as a percentage of revenue was managed down
through the year to 15.0%, although the Group's free cash flow
reduced by 6% to GBP55.7m, reflecting the absence of prior year
proceeds from one-off property sales and the divestment of the
Medivators business.
Sector performance
In Life Sciences, underlying revenues increased by 4% after
adjusting for currency movements, the acquisition of Abacus and the
prior year disposal of the Medivators business. The Healthcare
businesses benefited from stronger capital revenues as new
technology was introduced and delayed projects were reactivated in
the laboratory diagnostic sector. The Environmental businesses
delivered steady growth in instrumentation sales and increasing
service contract revenues.
In Seals, underlying revenues increased by 4% after adjusting
for currency movements and the acquisitions of PSP and Edco. In
North America, the improving trend in industrial activity seen in
the second quarter, following the US election, strengthened further
as the year progressed. In the International Seals businesses,
strong growth in the UK and Scandinavia was offset by more
challenging market conditions in Switzerland, Russia and
Australia.
In Controls, underlying revenues increased by 14% after
adjusting for currency movements and the prior year acquisitions of
Cablecraft and Ascome. The Specialty Fasteners business increased
revenues strongly, driven principally by a ramp-up in demand from
customers in the Civil Aerospace sector. The Interconnect and Fluid
Controls businesses also delivered good growth benefiting from
increased project work and targeted investment in sales
resources.
Acquisitions and disposals
Over the last three years, a total of ca. GBP90m has been
invested in acquisitions which contributed ca. 16% of 2017 Group
revenues.
During 2017, total acquisition spend was ca. GBP20m, of which
ca. GBP15m was invested in the acquisition of Abacus, a long
established supplier of diagnostics instrumentation and consumables
to the Pathology and Life Sciences sectors in Australia and New
Zealand. Abacus adds critical mass to our existing Healthcare
businesses in the region and opens up new growth opportunities.
In addition, two smaller bolt-on acquisitions were completed in
the Seals Sector during the year - PSP in the US and Edco in the
UK. After the year end, a small acquisition was completed in the
Controls Sector of Coast Fabrication Inc ("Coast"), a US specialty
fastener distributor.
Group strategy
The Group's "compounding" strategy is designed to generate
strong growth in earnings and shareholder value over the business
cycle, while building larger, broader-based businesses in the three
Group Sectors of Life Sciences, Seals and Controls.
The businesses target stable "GDP plus" underlying revenue
growth over the business cycle with sustainable attractive margins
and then convert the profit into strong free cash flow by tightly
managing working capital and focused capital investments. The free
cash flow generated then funds healthy growing dividends and
selective value enhancing acquisitions which accelerate growth in
revenues and profit to double-digit levels. The strategy
consistently delivers a return in excess of 20% pre-tax on total
capital invested and steadily increasing shareholder value.
Business model and KPIs
Stable and resilient "GDP plus" underlying 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. 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
underlying revenue growth, sustainable and attractive margins and
organisational health. This year, underlying revenue growth, after
adjusting for currency movements and acquisitions, has been a
robust 7% with the growth rate strengthening in the second half of
the year. Over five years, the average underlying revenue growth
has been 5% p.a. which meets the Group's target of "GDP plus"
growth.
Adjusted operating margins improved this year by 10bps to 17.3%
of revenue, as transactional currency pressures eased during the
year in the Healthcare businesses and improved operating leverage
with tight control of operating costs have offset other pressures
on gross margins. Over five years the average adjusted operating
margin has been ca. 18% against the Group's medium term target of
18-19%.
The agility and responsiveness of the organisation is more
difficult to measure directly, but non-financial KPIs can give an
indication of the organisational health. The number of working days
lost to sickness has consistently been only ca. 1% a year and over
the last five years, the average length of service for all
employees has been ca. 6.5 years (ca. 11 years for the senior
management cadre).
Growth strategy and KPIs
Overall growth is accelerated from underlying "GDP plus" levels
to the corporate target of double-digit growth, through carefully
selected, value enhancing acquisitions which fit the business model
and offer entry into new but related 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 and improve operating margins. 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 of at
least GBP30m p.a. is targeted, though year-on-year spend will vary
with the acquisition environment. This year, the Group invested ca.
GBP20m in acquisitions, bringing the total over three years to ca.
GBP90m. The acquisitions completed over the last three years have
contributed ca. 16% of 2017 revenues.
Strong cash flow funds our growth strategy (and supports
healthy, growing dividends) and tight management of working capital
maximises the conversion of profit to cash flow. This year, working
capital has been managed down to a record low of 15.0% of revenue,
generating free cash flow of GBP55.7m and representing a conversion
rate of 99% of adjusted post tax earnings. Over five years, the
average working capital to revenue ratio has been 16-17% and
average free cash flow has been GBP45m p.a. with an average
conversion ratio of 98%.
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 24.0%.
Executive Management Group
As the Group grows larger and becomes more broadly spread both
geographically and operationally, it is important that we have in
place a strong and broad based executive management team to drive
the next stage of the Group's growth strategy.
The Executive Management Group ("EMG") was established in 2016,
comprising the Executive Directors along with the executive
managers who are responsible for the major business clusters and
key Group functions. The EMG members are a combination of
internally developed managers and experienced senior managers who
have been recruited externally.
The EMG provides the opportunity for its members to broaden
their perspective of the Group's activities in order to reinforce
the key elements of the Group's culture and to identify best
practices which are transferable across the Group. The EMG meets
quarterly through a combination of full group meetings in London
and sub-group meetings held in the major business locations.
The EMG provides 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.
2017 2016
Revenue GBP125.9m GBP109.9m +15%
Adjusted operating profit GBP23.3m GBP19.6m +19%
Adjusted operating margin 18.5% 17.8% +70bps
Free cash flow GBP17.0m GBP19.0m -11%
--------------------------- ----------- ---------- --------
-- Sector revenue growth of 15%; underlying growth of 4% after
adjusting for currency, an acquisition and a disposal
-- In Canada, DHG underlying revenues increased by 6% with
strong capital revenues as projects were reactivated; AMT and
Vantage combined into single Surgical Products business
-- In Australia, underlying revenues increased by 4%; Abacus
acquired in April 2017 and being integrated with DS to form a
larger broader-based business
-- TPD revenues broadly flat in Ireland and the UK with new
suppliers and products replacing suppliers moving to direct supply
model
-- Environmental businesses increased underlying revenues by 3%,
finishing the year with strong order books
Reported revenues of the Life Sciences businesses increased by
15% to GBP125.9m (2016: GBP109.9m). The acquisition of Abacus ALS
("Abacus"), acquired in April 2017, added GBP7.6m or 7% to Sector
revenues, but this was offset by the prior year disposal of the
Medivators business. Currency movements, on translation of the
results from overseas businesses to UK sterling, contributed a
further 11% to Sector revenues. After adjusting for currency, the
acquisition and the disposal, underlying revenues increased by
4%.
Sector adjusted operating margins improved by 70bps benefiting
from a combination of stronger gross margins in Abacus and from
reduced operating costs following the consolidation of the AMT and
Vantage business operations into one facility at the beginning of
the year. Transactional currency pressures on the Healthcare
businesses also eased towards the end of the year, following a
number of years when gross margins were significantly impacted by
the progressive depreciation of the Canadian and Australian dollars
relative to the US dollar and Euro. Operating margins also
strengthened in the Environmental businesses, with an increase in
gross margins and with improved leverage from the increased
revenues. Sector adjusted operating profits increased by 19% to
GBP23.3m (2016: GBP19.6m).
The Life Sciences businesses invested GBP2.0m in new capital
during the year (2016: GBP1.9m) of which GBP1.6m (2016: GBP0.9m)
was spent on acquiring field equipment for both new placements in
hospitals and laboratories and for loan equipment and demonstration
models to support existing placements. The increase in spend on
field equipment was largely driven by the launch of a new series of
flexible endoscopes, together with the addition of a range of rigid
endoscopes under a new supplier agreement. A further GBP0.3m was
invested, in part on the AMT/Vantage facility consolidation and in
part on the general IT infrastructure of the Life Sciences
businesses. Free cash flow reduced to GBP17.0m (2016: GBP19.0m),
reflecting the slightly higher working capital in the Healthcare
businesses; although last year's free cash flow also included
GBP2.2m received on the disposal of the Medivators business.
Healthcare
The DHG group of Healthcare businesses, which account for 84% of
Life Sciences revenues, increased underlying revenues by 4% after
adjusting for currency, the acquisition of Abacus and the disposal
of the Medivators business.
In Canada, underlying revenues increased by 6% against the
background of continuing budget pressures throughout the Provincial
healthcare systems, but with strong capital revenues as new
technology was introduced and delayed projects were reactivated in
the diagnostic laboratory sector.
Somagen's core Clinical Diagnostics business in Canada delivered
an increase of 10% in revenues, with steady growth in consumable
and service revenues boosted by strong growth in capital revenues.
Demand for diagnostic testing remained robust, particularly with
the growth of cancer screening tests and related diagnostics and
capital revenues increased strongly with new technology introduced
in the areas of Allergy, Autoimmunity and Histology. Capital
revenues also benefited from some relaxation in the policy of
regional consolidation of diagnostic laboratories in Quebec despite
the continued drive for cost savings and efficiencies within many
public medical laboratories.
AMT and Vantage were combined into a single, more efficient
Surgical and GI specialty medical device business in Canada
following the disposal of the Medivators business in September last
year. Warehousing, logistics and back office functions have been
integrated within AMT's facility in Kitchener, which has provided
good opportunities for operational leverage from the increased
scale of the combined business. In its core electrosurgery
business, AMT continued to face pricing pressures from the tender
and evaluation processes introduced by shared service organisations
and national group purchasing organisations ("GPOs"). These pricing
pressures will continue to be a factor as the GPOs continue to
consolidate in Canada. However, AMT was able to maintain revenues
by increasing sales of specialised surgical instruments and devices
used in laparoscopic and other minimally invasive surgical
procedures.
Vantage, operating now as a division of AMT, increased revenues
in its core GI/endoscopy product lines and successfully launched a
new series of flexible endoscopes with significantly improved light
imaging performance and higher reliability. Vantage also secured
the exclusive distribution rights for a premium range of rigid and
flexible endoscopes and surgical instrument sets, which give entry
into the Urology and Gynaecology segments and provide further
opportunities for growth in the Surgical products sector.
In Australia, the Healthcare sector in recent years has
experienced similar healthcare 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 DS
businesses have increased revenues by 4% in local currency terms.
BGS increased revenues by 8%, with smoke evacuation programmes in
existing and new accounts continuing to be the principal driver to
growth. DS also delivered modest revenue growth, with strong sales
of Protein Electrophoresis consumables following a number of
capital placements during the prior year.
In April 2017, DHG completed the acquisition of Abacus, a long
established supplier of diagnostics instrumentation and consumables
to the Pathology and Life Sciences sectors in Australia and New
Zealand. Abacus supplies to the large private laboratories that
dominate the Clinical Diagnostic services industry in the region as
well as supplying direct to certain hospitals and to the regional
laboratory service groups that support hospital testing in the
various States. Abacus has particular strengths in Immunology and
Biochemistry testing and also is developing a niche specialty
Patient Simulation business in the Australian market.
Abacus has very complementary clinical diagnostics products to
the DS business and these two businesses are now in the process of
being integrated to form "abacus dx", a larger broader-based
Clinical Diagnostics, Life Science and Patient Simulation business,
supplying to both the public and private pathology laboratories and
to research and educational institutions across Australasia.
The TPD business in Ireland and the UK reported revenues broadly
flat in Euro terms, with business transacted in UK sterling (ca.
40% of revenues) impacted by the weaker currency. TPD continued to
achieve steady growth in supplying clinical chemistry and serology
products used to control quality in Clinical Diagnostics
laboratories. TPD also delivered revenue growth in specialty
medical devices used in digestive health and rapid microbial
testing products used in industrial laboratories. However, revenues
reduced in the water testing and interventional cardiology segments
as certain suppliers moved from specialised distribution to a
direct supply model. TPD is introducing a number of new suppliers
and products to replace these revenues and it is broadening its
service capability beyond diagnostic instrumentation to extend into
the blood services sector. TPD has also established a new Surgical
Products division to bring to market the electrosurgical and smoke
evacuation products similarly supplied by AMT and BGS in Canada and
Australia.
Environmental
The a1-group of Environmental businesses in Europe, which
account for 16% of Life Sciences revenues, saw revenues increase by
9% in UK sterling terms and 3% growth in constant currency
terms.
The a1-envirosciences business based in Germany increased
revenues by 3% in Euro terms against a strong prior year
comparative, which had benefited from a large mercury detector
order. Revenue from high-end trace and elemental analysers used in
the Environmental and Petrochemical industries delivered good
growth, with the second half of the year being particularly strong
in the UK and the Benelux region. Service revenue continued to grow
with the larger installed base and with increasing demand from the
larger customers for faster response times. Demand for containment
enclosures for the safe weighing of hazardous materials remains
robust.
The a1-CBISS business based in the UK, increased revenues by 2%
with continued growth in the installation of continuous emissions
monitoring systems ("CEMS") and increased service contract revenues
from CEMS projects delivered in the last 18 months. The sector
remains buoyant with new Energy from Waste ("EFW") plants playing
an important role in reducing landfill waste. The gas detection
sector has started to see increased demand from Oil & Gas
customers for single-use gas detection tubes after a number of
years of lower activity levels.
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.
2017 2016
Revenue GBP195.3m GBP166.6m +17%
Adjusted operating profit GBP31.9m GBP28.2m +13%
Adjusted operating margin 16.3% 16.9% -60bps
Free cash flow GBP24.9m GBP24.9m -
--------------------------- ---------- ---------- --------
-- Sector revenue growth of 17%; underlying growth of 4% after
adjusting for currency and acquisitions
-- In North America, Aftermarket underlying revenues increased
by 5% with a good performance in the core Hercules business and a
strong recovery in the HKX business
-- Industrial OEM underlying revenues in North America increased
by 7% with an improving trend through the year following the US
election
-- Senior leadership team established to manage cluster of Industrial OEM businesses in the US
-- International Seals businesses increased underlying revenues
by 1% with performances of the businesses very dependent on local
market conditions
Reported revenues of the Seals businesses increased by 17% to
GBP195.3m (2016: GBP166.6m), with the acquisitions of PSP and Edco
completed during the year contributing GBP2.1m or 1% to Sector
revenues. Currency movements, on translation of the results from
overseas businesses to UK sterling, contributed a further 12% to
Sector revenues. After adjusting for the acquisitions and for
currency effects, underlying revenues increased by 4%.
Adjusted operating margins for the Sector reduced by 60bps to
16.3% (2016: 16.9%). Across the businesses, gross margins reduced
with product margins under pressure from supplier cost increases,
but also reflecting an increase in other margin support costs, such
as freight, discounts and stock adjustments. This reduction in
gross margins was significantly mitigated by a combination of tight
control over operating costs and improved operating leverage
through increased revenues. Adjusted operating profits increased by
13% to GBP31.9m (2016: GBP28.2m).
During the year, GBP1.1m (2016: GBP1.4m) of capital expenditure
was invested in the Seals businesses which included GBP0.6m to fit
out new and expanded facilities in J Royal, Hercules Canada and
Kentek. A further GBP0.2m was spent on new warehouse equipment in
the Industrial OEM businesses, both in the US and in Europe and
GBP0.3m was spent in connection with a major upgrade to the IT
facilities in the Hercules businesses. The free cash flow generated
in this Sector was GBP24.9m, which remained unchanged from last
year with the additional after tax operating cash flow offsetting
an increase in working capital as trading strengthened in the
second half of the year.
North American Seals
The North American Seals businesses, which account for 61% of
Seals revenues, reported revenues up 21% on the prior year,
benefiting from the weakening of UK sterling against the US and
Canadian dollars and from the small bolt-on acquisition of PSP.
After excluding contributions from the acquired businesses and
currency effects, underlying revenues increased by 6%.
The HFPG Aftermarket businesses increased revenues by 5% on a
constant currency basis, driven by a good performance in the core
Hercules Aftermarket Seals business in the US and Canada and a
strong recovery in the HKX attachment kit business.
In the domestic US market, Hercules revenues increased by 5% as
utilisation of heavy mobile machinery increased substantially
compared with the previous year and expenditure levels in the
Construction sector showed steady growth. The additional investment
last year in sales and marketing resources also had a positive
impact on revenues and specific growth initiatives continued to
gain traction, including the focus on national accounts and
specialty distributors. E-commerce continues to deliver strong year
on year growth of ca. 20% p.a. in terms of both revenues and
invoices processed and now accounts for 23% of Hercules US
revenues. Hercules continues to add new products and to expand the
breadth of equipment supported, with the new focus on Bobcat
cylinders and Aerial Lifts gaining good momentum.
In Canada, revenues increased by 5% in local currency terms,
with the strengthening Construction sector driving growth in the
repair market and good growth in the Manufacturing sector,
particularly in Ontario and Quebec. The modest recovery in the Oil
& Gas and Mining sectors has had a positive impact and sales to
hydraulic component and attachment manufacturers have also seen
good growth. In markets outside of North America, Hercules and
Bulldog revenues were broadly flat with limited growth in Mexico
and the Middle East and reduced revenues in South and Central
America.
The HKX attachment kit business returned to growth after two
years of significant revenue reductions, which had reflected the
severely depressed market for new excavators. Revenues increased by
11% with growth particularly strong in sales to Canadian customers,
driven by recovery in the Oil & Gas sector, increased pipeline
construction and strong sales of excavators ahead of new emissions
regulations. New attachment kits have been developed to drive
further growth as well as quick coupler kits with added safety
features. The HKX product line has also been extended into higher
tonnage equipment which has seen good momentum supporting large
scale demolition projects.
The HFPG Industrial OEM businesses in North America (J Royal, RT
Dygert and All Seals) increased revenues by 9% in US dollar terms,
as the improving trend in industrial activity seen in the second
quarter, following the US election, strengthened further as the
year progressed. All three businesses delivered double-digit
revenue increases in the second half of the year with strong demand
from key accounts across a range of specialised industrial
applications in industries including Water, Medical, Oil & Gas,
Appliances and Food Equipment. The businesses continue to provide
high levels of customer service and technical support to service
existing projects while looking for opportunities to deploy higher
specification, regulatory-compliant compounds to target new
projects with higher levels of added-value.
In April 2017, J Royal relocated its operations to a newly
constructed, purpose built facility in Winston Salem, North
Carolina, which was then sold and leased back to the business. At
the same time, the Group acquired PSP, a small bolt-on acquisition
to All Seals based in Denver, Colorado which supplies O-rings and
custom rubber moulded products and has strong customer
relationships in the semi-conductor and pneumatics industries. PSP
adds complementary new products and strengthens the position of the
Industrial OEM Seals business in the Mountain Region of the US.
The Industrial OEM Seal businesses continue to pursue
opportunities to create synergies through joint purchasing and
through leveraging the different product, material and application
skill-sets of the individual businesses. In the second half of the
year, this was developed further by establishing a senior
leadership team to manage this cluster of businesses in North
America. While maintaining the distinct identity of the businesses
and close local contact with customers, key functions including
Sales, Supply Chain, Technical and Finance will be managed
centrally by this team. The team has also initiated a project to
implement a new ERP system across the Industrial OEM Seals
businesses in the US, to replace the disparate legacy IT systems in
the businesses. The new ERP system will be designed to increase
operational efficiency, improve business intelligence and deliver
broader marketing capabilities.
International Seals
The International Seals businesses, which account for 39% of
Seals revenues, reported a 12% increase in UK sterling terms. After
adjusting for currency and the acquisition of Edco, underlying
revenues increased by 1%, but with performances in the individual
businesses very dependent on local market conditions.
The FPE Seals and M Seals businesses, with their principal
operations in the UK, Scandinavia and the Netherlands, together
delivered underlying growth of 11% in revenues on a constant
currency basis. FPE Seals experienced good growth in its core UK
market for Aftermarket hydraulic seals and metal cylinder parts and
benefited from a recovery in demand from the Oil & Gas sector
for sealing products used in Maintenance, Repair and Overhaul
("MRO") operations. FPE Seals also benefited from strong growth in
several export markets.
M Seals delivered good growth in revenues in its core markets,
with particularly strong growth in Sweden, building on its strong
customer relationships to develop a number of major new projects. M
Seals has also extended its activities into the Finnish market for
seals, by investing in a sales resource based in Kentek's facility
and making use of its operational infrastructure. As with FPE
Seals, M Seals has also seen a recovery in demand from the Oil
& Gas sector in the UK and is targeting specialised Industrial
OEMs in other sectors of the market.
In June 2017, the Group completed the acquisition of Edco, a
specialised distributor of O-rings, seals and gaskets based in
Leicester and supplying to UK OEMs and MRO companies operating
within the Oil & Gas and other process industries. Edco's
success has been built on deep technical knowledge, high levels of
customer service and the ability to supply a wide range of products
from stock. Edco is being managed as part of the M Seals group with
good opportunities for cross-selling and improved purchasing
power.
The Kentek business, with principal operations in Finland and
Russia, increased revenues by 4% in Euro terms. The revenues
generated in Russia, which account for ca. 65% of Kentek revenues,
slowed in the second half of the year after strong revenue growth
in Euro terms in the first half. As selling prices for US and
European sourced filters are linked to the Euro in this territory,
the weakening of the Russian Rouble against the Euro as well as
increasing competitive pressures in this market contributed to the
slow down in revenue growth. However, Kentek significantly
increased sales of its own-brand filters in Russia and the Baltics
and achieved good growth in Finland, benefiting from a recovery in
both the Aftermarket and Industrial OEM sectors.
Kubo and WCIS saw combined underlying revenues for the year
reduce by 3%, with a return to modest revenue growth in the second
half of the year after a 9% reduction in the first half. Kubo has
been facing significant challenges in its core industrial market in
Switzerland, where the strong currency has made Swiss industrial
manufacturers less competitive. However, the strengthening of the
Euro through the year has contributed to an increase in industrial
activity in Switzerland. In Austria, Kubo's improved sales focus
has introduced new customer revenues in Pharmaceutical and
Industrial OEMs to replace a large prior year order which was not
repeated this year.
WCIS has core capabilities in gaskets and mechanical seals used
in MRO operations in complex and arduous conditions and has been
significantly impacted by cutbacks in the Mining sector in recent
years. In New Caledonia, WCIS has come under substantial pricing
pressure from cost reduction initiatives in the nickel mining and
processing operations of its major customer and in Australia, it
has also experienced reduced revenues from its core Mining customer
base. WCIS has responded by investing in additional sales resources
to broaden coverage across a wider range of market sectors and
territories and this initiative is starting to gain some traction,
though as yet the revenues are not sufficient to offset fully the
reductions in the Mining customer base.
CONTROLS
The Controls Sector businesses supply specialised wiring,
connectors, fasteners and control devices used in a range of
technically demanding applications.
2017 2016
Revenue GBP130.7m GBP106.1m +23%
Adjusted operating profit GBP23.0m GBP17.9m +28%
Adjusted operating margin 17.6% 16.9% +70bps
Free cash flow GBP18.6m GBP16.4m +13%
--------------------------- ---------- ----------- --------
-- Sector revenue increased by 23%; underlying increase of 14%
after adjusting for currency and acquisitions
-- The Interconnect businesses benefited from increased project
work and delivered strong underlying growth of 8%; Cablecraft has
expanded the range of products supplied and markets served
-- Clarendon increased revenues by over 30%, with growth driven
by increased customer demand in Civil Aerospace and Motorsport
-- Fluid Controls increased revenues by 14% with upturn in
refrigeration equipment sales and increased export sales in Europe
and the US
Reported revenues of the Controls businesses increased by 23% to
GBP130.7m (2016: GBP106.1m). Full year contributions from
Cablecraft and Ascome, acquired in the first half of last year,
added GBP6.4m or 6% to Sector revenues and currency movements
contributed a further 3% to Sector revenues on translation to UK
sterling. On an underlying basis, after adjusting for these
acquisitions and currency effects, underlying revenues increased by
14%, with growth moderating in the second half (though still
double-digit) against stronger prior year comparatives.
Adjusted operating margins increased by 70bps to 17.6% (2016:
16.9%). Gross margins were broadly stable overall, with stronger
margins in the Cablecraft business broadly offsetting the impact of
weaker UK sterling on products purchased by the other Controls
businesses. Operating costs remained tightly controlled across the
businesses and improved leverage from the increased revenue more
than offset increased investment in sales resources. Adjusted
operating profits increased by 28% to GBP23.0m (2016:
GBP17.9m).
Capital expenditure in this Sector remained very modest at
GBP0.2m (2016: GBP0.4m), with GBP0.1m invested in the Clarendon
business to upgrade its Totnes facility to improve operational
efficiency. A further GBP0.1m was invested on general IT
infrastructure across the Controls businesses. Free cash flow
increased strongly to GBP18.6m (2016: GBP16.4m) reflecting stronger
trading, including the additional contribution from Cablecraft and
despite an increase in working capital to support the growth in
trading.
Interconnect
The Interconnect businesses (IS-Group, Filcon and Cablecraft)
account for 59% of Controls revenues and reported a revenue
increase of 25% in UK sterling terms. After adjusting for the
Cablecraft and Ascome acquisitions and for currency effects,
underlying revenues increased by 8%.
The IS-Group continued to implement the business development
programmes initiated last year, designed to position the business
as the European supplier of choice for the full range of
specialised cable harnessing components. Field sales resources have
been realigned to focus on sectors and customer accounts with the
highest growth potential and internal sales processes have been
refocused to more efficiently manage the baseline business. Further
investment has also been made in broadening the product range and
further developing E--commerce capabilities.
The IS-Group UK businesses saw revenues increase by 7% in UK
sterling terms. In Defence and Aerospace, the IS-Group reported a
small increase in revenues, with the stronger growth seen in the
first half of the year offset by slower trading in the second half.
The lower level of activity at UK electrical harness customers
towards the end of the year is partly from a tightening in Defence
spending and partly from certain key customers being in between
projects. In Motorsport, IS-Group increased revenues strongly,
benefiting from regulation changes and the increased level of
competition in races this year in the Formula 1 ("F1") series,
development of new cars in the World Rally Championship ("WRC")
Series and upgrades to the GT500 cars in Japan. The IS-Group also
benefited from good double-digit growth in revenues from the
Industrial sector in the UK and more broadly in Europe, as the
business improved its competitive position under new sales
leadership, following the appointment of a sales director focused
on the EMEA region.
In Germany, IS-Sommer and Filcon reported a 14% increase in
revenues in Euro terms, with modest growth in IS-Sommer boosted by
major project activity in Filcon. In the Aerospace sector,
IS-Sommer delivered good growth with a particularly strong
performance in the Space market, supplying connectors and
backshells to the Meteosat Third Generation ("MTG") and Sentinel
satellites. Solid growth in the Industrial market was driven by the
stronger global economy, which benefited German exporters. Revenues
were held back in the important Energy market where lower Utility
company budgets delayed repair and maintenance of the electricity
network and Motorsport revenues were impacted by the withdrawal of
VW from the WRC Rally Series and Audi from the World Endurance
Championship ("WEC") Series, which includes the Le Mans race.
Revenues in the Medical sector performed strongly with key medical
device manufacturers managing a solid pipeline of projects on the
back of new regulations.
Filcon delivered a very strong performance, increasing revenues
by ca. 30% in Euro terms. There was a full year contribution from
the small Ascome acquisition, but the primary driver of growth came
from major orders secured in the final quarter of the prior year
from key Military Aerospace and Space customers. These sectors have
generally seen increased activity, with projects delivered for the
Tornado aircraft, the RAM missile program and the Orion Mars
capsule. In the Motorsport sector, the increased activity levels
and demand in the F1 series has offset the reduced demand from the
withdrawal by Audi from Le Mans. The Industrial market for
connectors remains competitive and generally more challenging.
Cablecraft is a leading supplier of cable accessory products
used to identify, connect, secure and protect electrical cables and
has made a strong contribution to the Group since its acquisition
in March 2016. Cablecraft has extended the markets served by the
Interconnect businesses and has added attractive ranges of
own-branded and manufactured products. During the year the business
continued to focus on its areas of specialism, including the
development of new own branded identification products, the
promotion of its upgraded Identification Solutions offering and the
specialist sales resources added to support sales growth. Revenues
have increased by 7% on a like-for-like basis, with good growth
generated from the continued focus on end user customers,
especially electrical panel builders and contractors upgrading the
UK rail network. Cablecraft continues to benefit from the move by
customers towards E-commerce, with online sales growing by ca. 30%
in the year.
Specialty Fasteners
The Clarendon Specialty Fasteners business accounts for 18% of
Controls revenues and increased revenues by over 30% compared with
the prior year, with growth driven principally by increased demand
from customers in the Civil Aerospace sector. Revenues increased
strongly with the ramp up of the major business class seating
programme at a key aircraft seating customer which Clarendon
supplies through its automatic inventory replenishment system
("Clarendon AIR"). Clarendon also had success in increasing sales
to a range of other aircraft seating and cabin interiors
manufacturers and their sub-contractors across Europe and
introduced Clarendon AIR to a number of new customer locations.
Good growth was also achieved in Clarendon's other major market
of Motorsport, where Clarendon supplies aerospace-quality fasteners
to the F1 race teams, engine builders and subcontractors and also
supplies the Aerocatch own-brand range of aerodynamic bonnet
latches for high performance sports cars and offshore powerboat
racing. More modest growth has been achieved in the supply of
pre-assembled and captive fasteners and bespoke engineered
solutions to the Defence and general Industrial sectors.
After the year end, in October 2017, Clarendon completed the
acquisition of Coast Fabrication Inc. ("Coast"), a small US
specialty fastener distributor based in Huntington Beach,
California. Coast has a strong reputation in the US Motorsport
industry and also provides a base in the US for supporting
Clarendon's current Aerospace customers as well as expanding its
aircraft interiors business in this large market. A US presence is
also a strategic purchasing priority for Clarendon, giving access
to major fastener suppliers that principally sell to US
entities.
Fluid Controls
The Hawco Group of Fluid Controls businesses (comprising Hawco
and Abbeychart) accounts for 23% of Controls revenues and increased
revenues by 14% against the prior year, in a market that remains
highly competitive and price sensitive.
Hawco reported a good upturn in activity in the UK Refrigeration
Equipment market, as store refurbishment activity in the UK
increased and as the cabinet display manufacturers targeted
opportunities outside the UK. Hawco benefited in particular from
supplying scroll compressors into a significant project with a
major US retailer and demand in the commercial Catering and Home
Delivery market remained robust. In the Contractor market, strong
growth was achieved, as Hawco targeted the independent trade
counters and medium sized contractors who value Hawco's stock
holding, next-day delivery and exclusive supplier relationships.
Revenues from the Industrial OEM market reduced in the second half
of the year, as demand from UK manufacturers softened, but this was
partly offset by an increase in export revenues.
Abbeychart has continued to strengthen its relationship with the
large vending machine operators in Europe and during the year
supplied products to a large project to refresh a range of vending
machines for a major customer in Switzerland. Abbeychart revenues
also benefited from a full year of sales activity for a range of
spare parts for Wurlitzer vending machines and from the
introduction of a catalogue of essential spare parts for the
specialist coffee market, which has offset reduced revenues from
one of its larger coffee OEM customers. Abbeychart has continued to
take market share in the soft drinks market by targeting both the
major and the independent soft drink suppliers, with its bar gun
and pump refurbishment offering.
FINANCE REVIEW
Results in 2017
Diploma delivered another strong performance this year,
increasing revenues by 18% to GBP451.9m and increasing adjusted
operating profit by 19% to GBP78.2m. The Group's reported financial
results benefited from strong underlying growth, particularly in
the Controls businesses, following two years of weaker end markets.
The significant depreciation in UK sterling of ca. 11%, following
the UK's Brexit vote on Europe led to increases in revenues and
adjusted operating profits of GBP34.9m and GBP6.3m respectively on
the translation of the results of the overseas businesses, when
compared with last year's average exchange rates.
The environment for completing acquisitions has been more
challenging over the past twelve months and the contribution from
acquisitions completed both this year and last year, net of a small
disposal last year, was GBP8.5m (2016: GBP26.6m) to revenue and
GBP2.3m (2016: GBP4.2m) to adjusted operating profit.
The stronger growth in underlying revenues of 7% this year
helped compensate for this smaller contribution from acquired
businesses. 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
against the currencies of the Group's overseas businesses.
Adjusted operating margin
The Group's adjusted operating margin improved by 10bps this
year to 17.3% (2016: 17.2%) as transactional currency losses
finally eased in the Group's Healthcare businesses. These
businesses represent 23% of Group revenue and since late in 2013,
their gross margins have been significantly impacted on a
transactional basis by the continuing 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 Canadian and Australian exchange rates have remained more
stable since the early part of this year and after a short period
of weakness during the early Summer, both currencies strengthened
sharply against the US dollar towards the end of the financial
year.
The transactional impact on the Group's adjusted operating
margin from the substantial depreciation in UK sterling has been
limited. The UK businesses (26% of Group revenues) have faced
higher product costs from the depreciation in UK sterling, but they
have generally managed to mitigate these increases by a combination
of selling price increases, support from suppliers and by switching
some key customer accounts into Euro or US dollar invoicing.
The operating margins in those businesses acquired in recent
years have, as anticipated, also made a slightly stronger
contribution to the Group this year reflecting the benefits from
initiatives taken shortly after acquisition.
Adjusted profit before tax, earnings per share and dividends
Adjusted profit before tax increased by 19% to GBP77.5m (2016:
GBP64.9m). The interest expense this year was GBP0.7m (2016:
GBP0.8m) which included a GBP0.2m (2016: GBPNil) arrangement fee
paid on renewal of the bank facility during the year. However
interest costs on borrowings decreased by GBP0.3m to GBP0.1m this
year reflecting a lower level of acquisition activity in 2017,
compared with last year. The notional interest expense on the
Group's defined pension liabilities increased to GBP0.3m (2016:
GBP0.2m) reflecting the larger deficit in the fund this year,
following the actuarial valuation completed as at 30 September
2016.
Statutory profit before tax was GBP66.8m (2016: GBP54.0m), after
acquisition related charges of GBP9.7m (2016: GBP10.3m), which
largely comprises the amortisation of acquisition related
intangible assets and fair value remeasurements. These
remeasurements of GBP1.0m (2016: GBP1.3m) relate to the put options
held over minority interests and the charge this year reflects a
small increase in the liability to acquire these minority interests
and an unwinding of the discount on the liability. Last year's
statutory profit also included a one-off gain of GBP0.7m from the
disposal of the Medivators business in Canada and three small
legacy properties in the UK.
The Group's effective tax charge in 2017 was 80bps above the
previous year at 26.5% (2016: 25.7%) of adjusted profit before tax.
The increase this year is despite a further reduction in the
effective UK corporation tax rate to 19.5% (2016: 20.0%) which was
insufficient to offset the impact from higher tax rates applied to
the businesses acquired in Australia and the US this year.
Adjusted earnings per share ("EPS") increased by 19% to 49.8p,
compared with 41.9p last year and statutory basic EPS increased to
42.0p (2016: 33.9p).
The Board continues to pursue a progressive dividend policy
which aims to increase the dividend each year broadly in line with
the growth in adjusted EPS. In determining the dividend in any one
year in accordance with this policy, the Board also considers a
number of factors which include the strength of the free cash flow
generated by the Group, the future cash commitments and investment
needed to sustain the Group's long term growth strategy and the
target level of dividend cover. The Board continues to target
towards two times dividend cover (defined as the ratio of adjusted
EPS to total dividends paid and proposed for the year) which
provides a prudent buffer.
The ability of the Board to maintain future dividend policy will
be influenced by the principal risks identified on pages 18 to 22
that could adversely impact the performance of the Group.
For 2017, the Board has recommended a final dividend of 16.0p
per share (2016: 13.8p) making the proposed full year dividend
23.0p (2016: 20.0p). This represents a 15% increase in the proposed
full year dividend with dividend cover increasing slightly to 2.2
times (2016: 2.1 times).
Free cash flow
The Group again generated strong free cash flow this year of
GBP55.7m (2016: GBP59.0m). Last year's free cash flow included
exceptional proceeds of GBP4.6m from the sale of the Medivators
business in Canada and legacy properties and from an unusually
large cash inflow of GBP6.3m from reduced working capital. Free
cash flow represents cash available to invest in acquisitions or
return to shareholders. Free cash flow conversion was 99% (2016:
124%) of adjusted earnings.
The Group's operating cash flow increased by GBP2.7m to GBP79.3m
(2016: GBP76.6m) this year, despite a GBP4.0m outflow of cash into
working capital. The generally stronger trading environment this
year, together with some earlier seasonal stock builds in the
Healthcare businesses contributed to a GBP5.1m increase in stock
levels at the year end (2016: GBP1.3m) while the inflow from net
payables reduced to GBP1.1m from GBP7.6m last year.
The Group's KPI metric of working capital to revenue at 30
September 2017 reduced to a record low of 15.0% (2016: 16.6%)
reflecting much stronger revenues in the previous rolling 12
months, compared with last year.
Group tax payments increased by GBP1.7m to GBP19.3m (2016:
GBP17.6m). On an underlying basis cash tax payments represented ca.
24% (2016: 23%) of adjusted profit before tax which was broadly
unchanged from last year. Underlying tax payments are before
currency effects of translation and exclude payments for
pre-acquisition tax liabilities in acquired businesses.
The Group's tax strategy is to comply with tax laws in all of
the countries in which it operates and to balance its
responsibilities for controlling the tax costs with its
responsibilities to pay tax where it does business. The Group's tax
strategy has been approved by the Board and tax risks are regularly
reviewed by the Audit Committee.
The Group's capital expenditure this year was GBP3.3m, compared
with GBP3.7m last year. This expenditure excludes GBP1.9m (2016:
GBP0.5m) which the Group paid for the construction of a new
expanded facility for J Royal, a Seals business based in the US. On
completion in April 2017, the facility was immediately sold and
leased back to the business. A similar transaction was undertaken
in 2015 in connection with the new FPE Seals facility.
The Life Sciences businesses invested GBP2.0m in new capital
this year (2016: GBP2.2m) most of which was invested in field
equipment in the Healthcare businesses to support placements in
hospitals and diagnostic laboratories. This investment was GBP1.6m
(2016: GBP0.9m) and included demonstration and loan equipment in
connection with new capital equipment released in 2017 and a new
supply agreement for a range of rigid endoscopes in Vantage. A
further GBP0.3m was spent on upgrading the IT infrastructure in
both the Healthcare businesses and the a1-group and GBP0.1m was
spent on refurbishing a new facility in Markham, Canada which is
used to service flexible endoscopes.
The Seals businesses invested GBP1.1m during the year in its
operations with GBP0.5m being spent in the North American Seals
businesses and GBP0.6m in the International Seals businesses.
Across these businesses, GBP0.6m was invested to fit out new and
expanded facilities in J Royal, Hercules Canada and Kentek. A
further GBP0.2m was invested in new warehouse equipment in M Seals
and Kubo and GBP0.3m was spent on upgrading the IT infrastructure
across the Seals Sector. Capital expenditure in the Controls
businesses remained modest at GBP0.2m (2016: GBP0.4m).
The Company paid the PAYE income tax liability of GBP0.7m (2016:
GBP0.3m) on the exercise of LTIP share awards, in exchange for
reduced share awards to participants.
The Group spent GBP20.1m of the free cash flow on acquisitions,
including payment of deferred consideration, as described below and
GBP23.7m (2016: GBP21.4m) on paying dividends to both Company and
minority shareholders.
Acquisitions completed during the year
The Group invested GBP19.5m in acquiring new businesses this
year and paid a further GBP0.6m of deferred consideration on a
business acquired in the prior year. This compares with an
aggregate of GBP32.7m invested last year in acquisitions, minority
shareholdings and deferred consideration. The stronger economies in
the US and Continental Europe contributed to a tougher environment
to make acquisitions as business owners generally remained
confident of increasing profitability in the year ahead.
In April 2017, the Group was successful in completing the
acquisition of Abacus for cash consideration of GBP15.0m, including
debt acquired and expenses. Abacus is a long-established supplier
of clinical diagnostics instrumentation to the Pathology and Life
Sciences sectors in Australia and New Zealand and provides critical
mass to the Group's existing Healthcare businesses in this region.
A further GBP4.5m in aggregate was invested in June 2017 to acquire
Edco, a small hydraulic seal distributor in the UK and in April
2017 to acquire PSP, a small supplier of specialist seals based in
the US.
These acquisitions added GBP10.1m 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 2017, the carrying value of
the Group's acquired intangible assets was GBP54.0m. Goodwill at 30
September 2017 was GBP122.7m and included GBP7.5m relating to those
businesses acquired during the year (including fair value
adjustments to the assets acquired).
Goodwill is not amortised but is assessed each year at a Sector
level to determine whether there has been any impairment in the
carrying value of goodwill acquired. The exercise to assess whether
goodwill has been impaired is described in note 10 to the
consolidated financial statements and concluded that there 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 2017 increased to GBP6.1m (2016:
GBP5.1m) which comprise put options the Group holds over the
outstanding minority interests held in M Seals, Kentek and TPD.
The liabilities for these put options are valued based on the
Directors' latest estimate of the earnings before interest and tax
("EBIT") of these businesses when these options crystallise. The
increase in this liability of GBP1.0m reflects in part a slightly
higher value attributed to these businesses and in part an
unwinding of the discount on the liability. Shortly after the year
end the Group agreed to pay cash of GBP1.0m to acquire a further 5%
shareholding in TPD from the minority shareholder.
In addition to the liability to minority shareholders, the Group
also has a small liability at 30 September 2017 for deferred
consideration of up to GBP0.5m (2016: GBP1.7m) 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, GBP0.6m
was paid as deferred consideration relating to the acquisition of
WCIS completed early in 2016 and a provision of GBP1.0m relating to
the acquisition of Cablecraft was not required and was released to
the Consolidated Income Statement as part of 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, including
goodwill previously written off against retained earnings. At 30
September 2017, the Group ROATCE improved to 24.0% (2016: 21.1%)
which reflects the strong increase in adjusted operating profits
this year. Adjusted trading capital employed is defined in note 3
to the consolidated financial statements.
The Group continues to maintain a strong balance sheet with cash
funds of GBP22.3m at 30 September 2017, compared with net cash
funds of GBP10.6m last year. Surplus cash funds are generally
repatriated to the UK, unless they are required locally to meet
certain commitments, including acquisitions.
On 1 June 2017 the Group renewed its bank facility with a
similar revolving multi-currency credit facility for a further
three years and with an option to extend the facility from three
years up to five years. The facility initially comprises a GBP30m
committed facility, but with an accordion option which allows the
Group to increase the commitment up to a maximum of GBP60m of
borrowings. These new facilities were provided at a cost of 50bps
and with a ratchet margin ranging from 70bps to 115bps over LIBOR
depending on the ratio of EBITDA to net debt. These bank facilities
are primarily used to meet any shortfall in cash to fund
acquisitions.
Employee pension obligations
Pension benefits to existing employees, both in the UK and
overseas, are provided through defined contribution schemes at an
aggregate cost in 2017 of GBP2.8m (2016: GBP2.5m).
The Group maintains a legacy small closed defined benefit
pension scheme in the UK. During the year a formal triennial
funding valuation of this scheme as at 30 September 2016 was
completed. This valuation reported an increase in the funding
deficit of GBP6.5m to GBP9.2m with a 75% funding level which
reflected the impact of bond yields falling to a record low of 1.5%
at the valuation date from 3.6% in the previous funding valuation.
However bond yields have increased slightly since the valuation
date and investment returns have been strong again this year.
This recent improvement in market conditions, together with the
strength of the employer covenant, helped limit the increase in
cash contributions paid by the company to GBP0.5m from 1 October
2017, from GBP0.4m of cash contributions paid this year. This
contribution rate will increase annually by 2% with the objective
of eliminating the deficit within ten years.
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. In Switzerland, Kubo's annual cash contribution to the
pension scheme was GBP0.2m (2016: GBP0.3m).
Both the UK defined benefit scheme and the Kubo contribution
scheme are accounted for in accordance with IAS19 (Revised). At 30
September 2017 the aggregate accounting pension deficit in these
two schemes decreased by GBP7.3m to GBP9.9m reflecting a small
increase in bond yields in both schemes, combined with a strong
increase in the growth assets of the UK scheme compared with last
year. The gross aggregate pension liability in respect of these two
schemes at 30 September 2017 decreased by GBP6.6m to GBP49.5m which
is funded by GBP39.6m of assets.
Potential impact of Brexit
The impact at an operational level on the Group's businesses
from the current uncertainty regarding the process and timing of
the UK's exit from the European Union is likely to be limited as
only 26% 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 limited sales activity being carried out across country
borders.
At a macroeconomic level however, the Group's financial results
have been impacted this year by the substantial depreciation in UK
sterling that followed the Brexit vote. This has resulted in an
increase to the Group's reported revenues, operating profits and
net assets from translating the results of the Group's overseas
businesses into UK sterling. It has also led to stronger inflation
in supplier costs for the Group's UK based businesses which they
have had to manage robustly to maintain gross margins.
The Group's UK businesses closely monitor developments in the
Brexit plans of HM Government and their future investment plans
include contingencies to mitigate the impact on their activities
from a significant disruption in cross border trade between the UK
and Continental Europe.
PRINCIPAL RISKS AND UNCERTAINTIES
Our principal risks and uncertainties
Set out below are the principal risks and uncertainties
affecting the Group which have been determined by the Board, based
on a robust risk evaluation process, to have the potential to have
the greatest impact on the Group's future viability. These risks
are similar to those reported last year, although with some
movement on the relative ranking of these risks. In addition,
following the risk evaluation process carried out this year, a new
principal risk has been added that relates to
'Cybersecurity/Information Technology/Business Interruption'.
The risks are each classified as either strategic, operational,
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
1. Downturn/instability prior year
in major markets Decrease
--------------------------------------------------------------- ---------------------------------------------------------
Risk description & assessment Mitigation
Adverse changes in the The businesses identify
major markets in which key market drivers and
the businesses operate monitor the trends and
can have a significant forecasts, as well as
impact on performance. maintaining close relationships
The effects of these with key customers who
changes can be seen in may give an early warning
terms of slowing revenue of slowing demand.
growth, due to reduced
or delayed demand for Changes to cost levels
products and services, and inventories can then
or margin pressures due be made in a measured
to increased competition. way to mitigate the effects.
A number of characteristics Significant global events
of the Group's businesses are closely monitored
moderate the impact of to determine any potential
economic and business impact on key markets.
cycles on the Group as
a whole:
* The Group's businesses operate in three differing
Sectors with different cyclical characteristics and
across a number of geographic markets.
* The businesses offer specialised products and
services, 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
the customer's operating expenditure, rather than
through capital budgets.
* In many cases the products are used in repair,
maintenance and refurbishment applications, rather
than original equipment manufacturer.
Strategic risk Relative movement to
2. Supplier concentration/loss prior year
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 with suppliers with change
major supplier decides of control clauses, where
to cancel a distribution possible, included in
agreement or if the supplier contracts for protection
is acquired by a company or compensation in the
which has its own distribution event of acquisition.
channels in the relevant
market. There is also Collaborative projects
the risk of a supplier and relationships maintained
taking away exclusivity with individuals at many
and either setting up levels of the supplier
direct operations or organisation, together
appointing another distributor. with regular review meetings
Currently no single supplier and adherence to contractual
represents more than terms.
10% of Group revenue
and only six single suppliers Regular review of inventory
represent more than 2% levels.
each of Group revenue.
Relationships with suppliers Bundling and kitting
have normally been built of products and provision
up over many years and of added value services.
a strong degree of interdependence
has been established. Periodic research of
The average length of alternative suppliers
the principal supplier as part of contingency
relationships in each planning.
of the Sectors is over
ten years. The businesses work very
The strength of the relationship closely with each of
with each supplier and their suppliers and regularly
the volume of activity attend industry exhibitions
generally ensures continuity to keep abreast of the
of supply, when there latest technology and
is shortage of product. market requirements/trends.
The success of the businesses The businesses also meet
depends significantly with key customers on
on representing suppliers a regular basis to gain
whose products are recognised insight into their product
in the marketplace as requirements and market
the leading competitive developments.
brand. If suppliers fail
to support these products
with new development
and technologies, then
our businesses will suffer
from reduced demand for
their products and services.
Strategic risk Relative movement to
3. Customer concentration/loss prior year
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 a high level of effort
The nature of the Group's is invested in ensuring
businesses is such that that these customers
there is not a high level are retained and encouraged
of dependence on any not to switch to another
individual customer and supplier.
no single customer represents
more than 4% of Sector In addition to providing
revenue or more than high levels of customer
2% of Group revenue. service and value added
activities, close integration
is established where
possible with customers'
systems and processes.
Operational risk Relative movement to
4. Cybersecurity/information prior year
technology/business interruption Increase
--------------------------------------------------------------- ---------------------------------------------------------
Risk description & assessment Mitigation
Group and operating business There is good redundancy
management depend critically and back-up built into
on timely and reliable local IT systems and
information from their the spread of businesses
IT systems to run their with their own stand
businesses. The Group alone IT systems also
seeks to ensure continuous offers good protection
availability, security from individual events.
and operation of those
information systems. A member of the Executive
Management Group maintains
Cyber threats to the responsibility for ensuring
businesses information each business in the
systems have continued Group has a robust cybersecurity
to show an increasing programme and reports
trend this year. twice a year to the main
Any disruption or denial Board on the status of
of service may delay cybersecurity across
or impact decision making the Group. In addition,
through lack of availability education/awareness of
of reliable data. cyber threats continues
to ensure Group employees
Poor information handling protect themselves and
or interruption of business Group assets.
may also lead to reduced
service to customers. Business continuity plans
Unintended actions of exist for each business
employees caused by a with ongoing testing.
cyber-attack may also During September 2017,
lead to disruption, including HFPG successfully deployed
fraud. their business continuity
In North American Seals, plans to mitigate the
HFPG's Aftermarket business impact of Hurricane Irma.
is operated from a single
warehouse based in Tampa,
Florida which continues
to be exposed to hurricanes
during the season from
August to November.
Operational risk Relative movement to
5. Loss of key personnel prior year
No change
--------------------------------------------------------------- ---------------------------------------------------------
Risk description & assessment Mitigation
The success of the Group Contractual terms such
is built upon strong, as notice periods and
self--standing management non--compete clauses
teams in the operating can mitigate the risk
businesses, committed in the short term. However,
to the success of their more successful initiatives
respective businesses. focus on ensuring a challenging
As a result, the loss work environment with
of key personnel can appropriate reward systems.
have an impact on performance, The Group places very
for a limited time period. high importance on planning
The average length of the development, motivation
service of the ca. 90 and reward for key managers
senior managers in the in the operating businesses
Group is 11 years and including:
for all personnel in
the Group is consistently * Ensuring a challenging working environment where
ca. seven 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.
Operational risk Relative movement to
6. Product liability prior year
No change
--------------------------------------------------------------- ---------------------------------------------------------
Risk description & assessment Mitigation
There is a risk that Technically qualified
products supplied by personnel and control
a Group business may systems are in place
fail in service, which to ensure products meet
could lead to a claim quality requirements.
under product liability. The Group's businesses
The businesses, in their are required to undertake
terms and conditions Product Risk assessments
of sale with customers, and comprehensive Supplier
will typically mirror Quality Assurance assessments.
the terms and conditions The Group has also established
of purchase from the Group--wide product liability
suppliers. In this way insurance which provides
the liability can be worldwide umbrella insurance
limited and subrogated cover of GBP30m across
to the supplier. all Sectors.
If a legal claim is made The Group's businesses
it will typically draw have undergone product
in our business as a liability training and
party to the claim and are continually reviewed
the business may be exposed to demonstrate compliance
to legal costs and potential with Group policies and
damages if the claim procedures relating to
succeeds and the supplier product liability.
fails to meet its liabilities
for whatever reason.
Product liability insurance
can be limited in terms
of its scope of insurable
events, such as product
recall.
Financial risk Relative movement to
7. Foreign currency prior year
No change
--------------------------------------------------------------- ---------------------------------------------------------
Risk description & assessment Mitigation
Foreign currency risk The Group operates across
is the risk that currency a number of diverse geographies
rates will affect the but does not hedge translational
Group's results. The exposure of operating
Group is exposed to two profit and net assets.
types of financial risk
caused by currency volatility: The Group's businesses
translational exposure, may hedge up to 80% of
being the effect that forecast (being a maximum
currency movements have of 18 months) foreign
on the Group's financial currency transactional
statements on translating exposures using forward
the results of overseas foreign exchange contracts.
subsidiaries into UK The Group finance department
sterling and transactional monitors rolling monthly
exposure, being the effect forecasts of currency
that currency movements exposures.
have on the results of
operating businesses Details of average exchange
because their revenues rates used in the translation
or product costs are of overseas earnings
denominated in a currency and of year-end exchange
other than their local rates used in the translation
currency. of overseas balance sheets,
for the principal currencies
The Group operates internationally used by the Group, are
and is exposed to translational shown in note 15 to the
foreign exchange risk consolidated financial
arising from various statements.
currency exposures, primarily
with respect to the US
dollar, the Canadian
dollar, the Australian
dollar and the Euro.
The results and net assets
of the Group's operations
outside the UK are also
exposed to foreign currency
translation risk.
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
GBP6.2m (8%), due to
currency translation.
Similarly, a strengthening
of UK sterling by 10%
against all the non-UK
sterling capital employed
would reduce shareholders'
funds by GBP19.1m.
The Group's UK businesses
are exposed to transactional
foreign exchange risk
on those purchases that
are denominated in a
currency other than their
local currency, principally
US dollars and Euros.
The Group's Canadian
and Australian businesses
are also exposed to a
similar risk as the majority
of their purchases are
denominated in US dollars
and Euros. The Group's
US businesses do not
have any material foreign
currency transactional
risk.
Accounting risk Relative movement to
8. Inventory obsolescence prior year
No change
--------------------------------------------------------------- ---------------------------------------------------------
Risk description & assessment Mitigation
Working capital management Inventory write--offs
is critical to success are controlled and minimised
in specialised industrial by active management
businesses as this has of inventory levels based
a major impact on cash on sales forecasts and
flow. The principal risk regular cycle counts.
to working capital is
in inventory obsolescence Where necessary, a provision
and write--off. is made to cover both
The charge against operating excess inventory and
profit in respect of potential obsolescence.
old or surplus inventory
in the year was GBP1.3m
but inventories are generally
not subject to technological
obsolescence.
--------------------------------------------------------------- ---------------------------------------------------------
RESPONSIBILITY STATEMENT OF THE DIRECTORS
IN RESPECT OF THE ANNUAL REPORT 2017
The responsibility statement below has been prepared in
connection with the Group's full Annual Report & Accounts for
the year ended 30 September 2017. 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
2016.
This responsibility statement was approved by the Board of
Directors on 20 November 2017 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 2017
2017 2016
Note GBPm GBPm
------------------------------ ----- -------- ---------
Revenue 3,4 451.9 382.6
Cost of sales (290.8) (245.4)
------------------------------ ----- -------- ---------
Gross profit 161.1 137.2
Distribution costs (10.6) (8.4)
Administration costs (82.0) (73.4)
------------------------------ ----- -------- ---------
Operating Profit 3 68.5 55.4
Gain on disposal of assets - 0.7
Financial expense 5 (1.7) (2.1)
------------------------------ ----- -------- ---------
Profit before tax 66.8 54.0
Tax expense 6 (18.6) (14.9)
------------------------------ ----- -------- ---------
Profit for the year 48.2 39.1
------------------------------ ----- -------- ---------
Attributable to:
Shareholders of the Company 47.5 38.3
Minority interests 0.7 0.8
------------------------------ ----- -------- ---------
48.2 39.1
------------------------------ ----- -------- ---------
Earnings per share
Basic and diluted earnings 7 42.0p 33.9p
------------------------------ ----- -------- ---------
Alternative Performance Measures
(note 2) 2017 2016
Note GBPm GBPm
---------------------------------- ----- -------- --------
Operating profit 68.5 55.4
Add: Acquisition related charges 3 9.7 10.3
Adjusted operating profit 3,4 78.2 65.7
Deduct: Interest expense 5 (0.7) (0.8)
----------------------------------- ----- -------- --------
Adjusted profit before tax 77.5 64.9
----------------------------------- ----- -------- --------
Adjusted earnings per share 7 49.8p 41.9p
----------------------------------- ----- -------- --------
CONSOLIDATED STATEMENT OF
INCOME AND OTHER COMPREHENSIVE INCOME
For the year ended 30 September 2017
2017 2016
GBPm GBPm
------------------------------------------------ -------- --------
Profit for the year 48.2 39.1
------------------------------------------------- -------- --------
Items that will not be reclassified
to the Consolidated Income Statement
Actuarial gains/(losses) in the defined
benefit pension schemes 7.1 (6.6)
Deferred tax on items that will not
be reclassified (1.3) 1.0
------------------------------------------------- -------- --------
5.8 (5.6)
------------------------------------------------ -------- --------
Items that may be reclassified to Consolidated
Income Statement
Exchange rate (losses)/gains on foreign
currency net investments (0.8) 31.7
(Losses)/gains on fair value of cash
flow hedges (1.0) 0.2
Net changes to fair value of cash flow
hedges transferred to the Consolidated
Income Statement (0.2) (1.5)
Deferred tax on items that may be reclassified 0.3 0.3
------------------------------------------------- -------- --------
(1.7) 30.7
------------------------------------------------ -------- --------
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 52.3 64.2
------------------------------------------------- -------- --------
Attributable to:
Shareholders of the Company 51.6 62.7
Minority interests 0.7 1.5
------------------------------------------------- -------- --------
52.3 64.2
------------------------------------------------ -------- --------
CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
For the year ended 30 September 2017
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 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 income
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
Total comprehensive
income - (0.8) (0.9) 53.3 51.6 0.7 52.3
Share-based payments - - - 0.8 0.8 - 0.8
Minority interest - - - - - - -
acquired
Tax on items
recognised
directly in equity - - - 0.3 0.3 - 0.3
Notional purchase
of own shares - - - (0.7) (0.7) - (0.7)
Dividends - - - (23.5) (23.5) (0.2) (23.7)
--------------------- ---------- -------------- ---------- ----------- --------------- ------------ ---------
AT 30 SEPTEMBER
2017 5.7 29.7 (0.7) 227.3 262.0 4.8 266.8
--------------------- ---------- -------------- ---------- ----------- --------------- ------------ ---------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September 2017
2017 2016
Note GBPm GBPm
-------------------------------- ----- -------- --------
Non-current assets
Goodwill 10 122.8 115.2
Acquisition intangible assets 54.0 54.6
Other intangible assets 0.7 1.0
Investment 11 0.7 0.7
Property, plant and equipment 22.6 23.7
Deferred tax assets 0.2 0.2
--------------------------------- ----- -------- --------
201.0 195.4
-------------------------------- ----- -------- --------
Current assets
Inventories 73.2 66.8
Trade and other receivables 68.9 59.9
Cash and cash equivalents 9 22.3 20.6
--------------------------------- ----- -------- --------
164.4 147.3
-------------------------------- ----- -------- --------
Current liabilities
Trade and other payables (69.7) (60.6)
Current tax liabilities 6 (4.0) (2.7)
Other liabilities 13 (2.5) (1.7)
Borrowings 9 - (10.0)
(76.2) (75.0)
-------------------------------- ----- -------- --------
Net current assets 88.2 72.3
--------------------------------- ----- -------- --------
Total assets less current
liabilities 289.2 267.7
Non-current liabilities
Retirement benefit obligations (9.9) (17.2)
Other liabilities 13 (4.1) (5.1)
Deferred tax liabilities (8.4) (7.6)
--------------------------------- ----- -------- --------
Net assets 266.8 237.8
--------------------------------- ----- -------- --------
Equity
Share capital 5.7 5.7
Translation reserve 29.7 30.5
Hedging reserve (0.7) 0.2
Retained earnings 227.3 197.1
--------------------------------- ----- -------- --------
Total shareholders' equity 262.0 233.5
Minority interests 4.8 4.3
--------------------------------- ----- -------- --------
Total equity 266.8 237.8
--------------------------------- ----- -------- --------
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2017
2017 2016
Note GBPm GBPm
---------------------------------------- ----- ------- -------
OPERATING PROFIT 68.5 55.4
Acquisition related charges 8 9.7 10.3
Non-cash items 8 5.1 4.6
(Increase)/decrease in working
capital 8 (4.0) 6.3
---------------------------------------- ----- ------- -------
Cash flow from OPERATING activities 79.3 76.6
Interest paid (0.4) (0.6)
Tax paid (19.3) (17.6)
---------------------------------------- ----- ------- -------
Net cash from operating activities 59.6 58.4
---------------------------------------- ----- ------- -------
Cash flow from investing activities
Acquisition of businesses (including
expenses) 12 (19.5) (30.1)
Deferred consideration paid 13 (0.6) (0.7)
Proceeds from sale of business
(net of expenses) - 2.2
Purchase of property, plant and
equipment (3.1) (3.5)
Purchase of other intangible assets (0.2) (0.2)
Proceeds from sale of property,
plant and equipment 0.1 2.4
---------------------------------------- ----- ------- -------
Net cash used in investing activities (23.3) (29.9)
---------------------------------------- ----- ------- -------
Cash flow from financing activities
Acquisition of minority interests 13 - (1.9)
Dividends paid to shareholders 14 (23.5) (21.0)
Dividends paid to minority interests (0.2) (0.4)
Notional purchase of own shares
on exercise of share options (0.7) (0.3)
Repayment of borrowings, net 9 (10.0) (10.0)
---------------------------------------- ----- ------- -------
Net cash used in financing activities (34.4) (33.6)
---------------------------------------- ----- ------- -------
Net increase/(decrease) in cash
and cash equivalents 1.9 (5.1)
Cash and cash equivalents at beginning
of year 20.6 23.0
Effect of exchange rates on cash
and cash equivalents (0.2) 2.7
---------------------------------------- ----- ------- -------
Cash and cash equivalents at end
of year 9 22.3 20.6
---------------------------------------- ----- ------- -------
ALTERNATIVE PERFORMANCE MEASURES
(NOTE 2) 2017 2016
GBPm GBPm
---------------------------------------------- --- ----- -------
Net increase/(decrease) in cash
and cash equivalents 1.9 (5.1)
Add: Dividends paid to shareholders 14 23.5 21.0
Dividends paid to minority
interests 0.2 0.4
Acquisition of businesses (including
expenses) 12 19.5 30.1
Acquisition of minority interests 13 - 1.9
Deferred consideration paid 13 0.6 0.7
Repayment of borrowings, net 9 10.0 10.0
--------------------------------------------- --- ----- -------
FREE CASH FLOW 55.7 59.0
---------------------------------------------- --- ----- -------
Cash and cash equivalents 22.3 20.6
Borrowings - (10.0)
---------------------------------------------- --- ----- -------
NET CASH 9 22.3 10.6
---------------------------------------------- --- ----- -------
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 20 November
2017. These statements are presented in UK sterling, with all
values rounded to the nearest 100,000, 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
2017 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 2017.
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
2017 and 2016. Statutory financial statements for the year ended 30
September 2016 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
2017, which were approved by the Directors on 20 November 2017,
will be sent to shareholders on 8 December 2017 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 2017 and 2016. 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 17 January 2018 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 for
internal management reporting in order to assess the operational
performance of the Group on a comparable basis 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 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 IAS39 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
operational 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 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 profitability of the Group.
3. Business Sector Analysis
The Chief Operating Decision Maker ("CODM") for the purposes of
IFRS8 is the Chief Executive Officer. The financial performance of
the Sectors are 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
2017 2016 2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------- ------- ------- ------- ------- ------- ------- --------
Revenue
- existing businesses 118.3 109.9 193.2 166.6 130.7 106.1 442.2 382.6
- acquisitions 7.6 - 2.1 - - - 9.7 -
----------------------- ------- ------- ------- ------- ------- ------- ------- --------
Revenue 125.9 109.9 195.3 166.6 130.7 106.1 451.9 382.6
Adjusted operating
profit
- existing businesses 22.1 19.6 31.5 28.2 23.0 17.9 76.6 65.7
- acquisitions 1.2 - 0.4 - - - 1.6 -
----------------------- ------- ------- ------- ------- ------- ------- ------- --------
Adjusted operating 23.3 19.6 31.9 28.2 23.0 17.9 78.2 65.7
profit
Acquisition related (3.2) (2.9) (5.5) (5.0) (1.0) (2.4) (9.7) (10.3)
charges
------------------------ ------- ------- ------- ------- ------- ------- ------- --------
operating Profit 20.1 16.7 26.4 23.2 22.0 15.5 68.5 55.4
------------------------ ------- ------- ------- ------- ------- ------- ------- --------
Acquisition related charges of GBP9.7m (2016: GBP10.3m)
comprises GBP10.3m (2016: GBP9.3m) of amortisation of acquisition
intangible assets, GBP0.4m of acquisition expenses (2016: GBP1.2m)
and a credit of GBP1.0m relating to adjustments to deferred
consideration (2016: GBP0.2m credit).
Life Sciences Seals Controls Group
2017 2016 2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- --------- ------- ------- ------- ------- ------- --------
Operating assets 42.2 35.1 74.6 70.3 48.1 44.4 164.9 149.8
Investment - - 0.7 0.7 - - 0.7 0.7
Goodwill 59.5 52.8 39.9 39.1 23.4 23.3 122.8 115.2
Acquisition intangible
assets 15.4 10.6 27.0 30.4 11.6 13.6 54.0 54.6
---------------------------- ---------- --------- ------- ------- ------- ------- ------- --------
117.1 98.5 142.2 140.5 83.1 81.3 342.4 320.3
Unallocated assets:
- Deferred tax assets 0.2 0.2
- Cash and cash
equivalents 22.3 20.6
- Corporate assets 0.5 1.6
---------------------------- ---------- --------- ------- ------- ------- ------- ------- --------
Total assets 117.1 98.5 142.2 140.5 83.1 81.3 365.4 342.7
---------------------------- ---------- --------- ------- ------- ------- ------- ------- --------
Operating liabilities (21.3) (17.9) (26.6) (22.9) (21.1) (18.8) (69.0) (59.6)
Unallocated liabilities:
- Deferred tax liabilities (8.4) (7.6)
- Retirement benefit
obligations (9.9) (17.2)
- Acquisition liabilities (6.6) (6.8)
- Corporate liabilities (4.7) (3.7)
* Borrowings - (10.0)
---------------------------- ---------- --------- ------- ------- ------- ------- ------- --------
Total liabilities (21.3) (17.9) (26.6) (22.9) (21.1) (18.8) (98.6) (104.9)
---------------------------- ---------- --------- ------- ------- ------- ------- ------- --------
Net assets 95.8 80.6 115.6 117.6 62.0 62.5 266.8 237.8
---------------------------- ---------- --------- ------- ------- ------- ------- ------- --------
Alternative Performance Life
Measures Sciences Seals Controls Group
(Note 2) 2017 2016 2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------- -------
NET ASSETS 95.8 80.6 115.6 117.6 62.0 62.5 266.8 237.8
Add/(deduct):
* Deferred tax, net 8.2 7.4
* Retirement benefit obligations 9.9 17.2
* Acquisition liabilities 6.6 6.8
* Net cash funds (22.3) (10.6)
------- -------
REPORTED TRADING
CAPITAL EMPLOYED 269.2 258.6
* Historic goodwill and acquisition related charges,
net of deferred tax 28.8 28.0 28.1 22.7 9.4 8.5 66.3 59.2
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------- -------
ADJUSTED TRADING
CAPITAL EMPLOYED 124.6 108.6 143.7 140.3 71.4 71.0 335.5 317.8
Pro-forma adjusted
operating profit(1) 24.6 19.6 32.8 28.2 23.0 19.2 80.4 67.0
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------- -------
ROATCE 19.7% 18.0% 22.8% 20.1% 32.2% 27.0% 24.0% 21.1%
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------- -------
(1) After annualisation of adjusted operating profit
of acquisitions and disposals.
--------------------------------------------------------------------------------------------------------------------------------
OTHER SECTOR INFORMATION Life Sciences Seals Controls Group
2017 2016 2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- -------- ------ ------ ------- ------ ------ ------
Capital expenditure 2.0 1.9 1.1 1.4 0.2 0.4 3.3 3.7
Depreciation and
amortisation 2.2 2.0 1.9 1.9 0.6 0.6 4.7 4.5
-------------------------- --------- -------- ------ ------ ------- ------ ------ ------
4. GEOGRAPHIC SEGMENT ANALYSIS BY ORIGIN
Adjusted Trading
operating Non-current capital Capital
Revenue profit assets(1) employed expenditure
2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
United
Kingdom 118.4 97.4 20.6 16.1 42.3 42.3 60.1 59.6 0.3 0.5
Rest of
Europe 112.8 98.3 17.2 15.0 58.6 62.7 76.9 79.2 0.6 1.0
North America 188.3 165.2 36.3 32.3 70.9 74.0 99.9 101.3 1.9 1.8
Rest of
World 32.4 21.7 4.1 2.3 28.3 15.5 32.3 18.5 0.5 0.4
--------------- -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
451.9 382.6 78.2 65.7 200.1 194.5 269.2 258.6 3.3 3.7
--------------- -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
(1) Non-current assets exclude the investment and deferred tax
assets.
5. FINANCIAL EXPENSE
2017 2016
GBPm GBPm
--------------------------------------------------------- -------- --------
Interest expense and similar charges
- bank facility and commitment fees (0.3) (0.2)
- interest payable on bank and other
borrowings (0.1) (0.4)
* notional interest expense on the defined benefit
pension scheme (0.3) (0.2)
----------------------------------------------------------- -------- --------
Interest expense and similar charges (0.7) (0.8)
----------------------------------------------------------- -------- --------
- fair value remeasurement of put
options (note 13) (1.0) (1.3)
----------------------------------------------------------- -------- --------
FINANCIAL EXPENSE (1.7) (2.1)
----------------------------------------------------------- -------- --------
The fair value remeasurement of GBP1.0m (2016: GBP1.3m)
comprises GBP0.5m (2016: 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
GBP0.5m debit (2016: GBP0.8m debit).
6. TAX EXPENSE
2017 2016
GBPm GBPm
----------------------------------------- ------- ------
Current tax
The tax charge is based on the profit
for the year and comprises:
- UK corporation tax 3.7 2.9
- Overseas tax 17.2 13.7
----------------------------------------- ------- ------
20.9 16.6
Adjustments in respect of prior year:
* UK corporation tax (0.5) (0.2)
- Overseas tax 0.2 (0.2)
----------------------------------------- ------- ------
Total current tax 20.6 16.2
----------------------------------------- ------- ------
Deferred tax
The net deferred tax credit based on
the origination and reversal of timing
differences comprises:
- United Kingdom (1.9) (1.6)
- Overseas (0.1) 0.3
Total deferred tax (2.0) (1.3)
----------------------------------------- ------- ------
TOTAL TAX ON PROFIT FOR THE YEAR 18.6 14.9
----------------------------------------- ------- ------
Factors affecting the tax charge for the year:
The difference between the total tax charge calculated by
applying the effective rate of UK corporation tax of 19.5% to the
profit before tax of GBP66.8m and the amount set out above is as
follows:
2017 2016
GBPm GBPm
------------------------------------------ ----- -----
Profit before tax 66.8 54.0
------------------------------------------ ----- -----
Tax on profit at UK effective corporation
tax rate of 19.5% (2016: 20.0%) 13.0 10.8
Effects of:
- change in UK tax rates - (0.1)
- higher tax rates on overseas earnings 5.3 4.1
- adjustments to current tax charge in
respect of previous years (0.3) (0.4)
- other permanent differences 0.6 0.5
------------------------------------------ ----- -----
TOTAL TAX ON PROFIT FOR THE YEAR 18.6 14.9
------------------------------------------ ----- -----
The Group earns its profits in the UK and overseas. The UK
corporation tax rate was reduced from 20.0% to 19.0% on 1 April
2017. 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 2017 was
19.5% (2016: 20.0%) 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, Canada and Australia are taxed at significantly higher
rates than the UK.
The UK deferred tax assets and liabilities at 30 September 2017
have been calculated based on the future UK corporation tax rate of
17.0%, substantively enacted at 30 September 2017.
At 30 September 2017, the Group had outstanding tax liabilities
of GBP4.0m (2016: GBP2.7m) of which GBP1.6m related to UK tax
liabilities and GBP2.4m related to overseas tax liabilities. These
amounts are expected to be paid within the next financial year.
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 113,133,341 (2016: 113,058,835) and the
profit for the year attributable to shareholders of GBP47.5m (2016:
GBP38.3m). There were no potentially dilutive shares.
Adjusted earnings per share
Adjusted earnings per share, which is defined in note 2, is
calculated as follows:
2017 2016 2017 2016
pence pence
per per GBPm GBPm
share share
---------------------------------------- ------- ------- ------- -------
Profit before tax 66.8 54.0
Tax expense (18.6) (14.9)
Minority interests (0.7) (0.8)
---------------------------------------- ------- ------- ------- -------
Earnings for the year attributable
to shareholders of the Company 42.0 33.9 47.5 38.3
Acquisition related charges 8.6 9.1 9.7 10.3
Fair value remeasurement of put
options 0.9 1.1 1.0 1.3
Gain on disposal of assets - (0.6) - (0.7)
Tax effects on acquisition related
charges and fair value remeasurements (1.7) (1.6) (1.9) (1.8)
ADJUSTED EARNINGS 49.8 41.9 56.3 47.4
---------------------------------------- ------- ------- ------- -------
8. RECONCILIATION OF CASH FLOW FROM OPERATING ACTIVITIES
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
------------------------------------------ ------ ------ ------ -----
Operating profit 68.5 55.4
Acquisition related charges (note 3) 9.7 10.3
------------------------------------------ ------ ------ ------ -----
Adjusted operating profit 78.2 65.7
Depreciation or amortisation of tangible
and other intangible assets 4.7 4.5
Share-based payments expense 0.8 0.4
Cash paid into defined benefit schemes (0.4) (0.3)
------------------------------------------ ------ ------ ------ -----
Non-cash items 5.1 4.6
------------------------------------------ ------ ------ ------ -----
Operating cash flow before changes in
working capital 83.3 70.3
Increase in inventories (5.1) (1.3)
Increase in trade and other receivables (6.6) (0.3)
Increase in trade and other payables 7.7 7.9
------------------------------------------ ------ ------ ------ -----
(Increase)/decrease in working capital (4.0) 6.3
------------------------------------------ ------ ------ ------ -----
Cash flow from operating activities,
before acquisition expenses 79.3 76.6
------------------------------------------ ------ ------ ------ -----
9. NET CASH
The movement in net cash during the year is as follows:
2017 2016
GBPm GBPm
------------------------------------- ------- -------
Net increase/(decrease) in cash and
cash equivalents 1.9 (5.1)
Decrease in borrowings 10.0 10.0
------------------------------------- ------- -------
11.9 4.9
Effect of exchange rates (0.2) 2.7
------------------------------------- ------- -------
Movement in net cash 11.7 7.6
Net cash at beginning of year 10.6 3.0
------------------------------------- ------- -------
NET CASH AT OF YEAR 22.3 10.6
------------------------------------- ------- -------
Comprising:
Cash and cash equivalents 22.3 20.6
Borrowings - (10.0)
------------------------------------- ------- -------
NET CASH AT 30 SEPTEMBER 22.3 10.6
------------------------------------- ------- -------
On 1 June 2017, the Group replaced its existing facility that
was due to expire on 23 June 2017 with a similar committed three
year facility for GBP30.0m with an accordion option to increase the
committed facility by a further GBP30.0m up to a maximum of
GBP60.0m and an option to extend the facility up to five years. At
30 September 2017, none of the facility had been drawn down (2016:
GBP10.0m). Interest on this facility is payable between 70 and
115bps over LIBOR, depending on the ratio of net debt to
EBITDA.
10. GOODWILL
Life Sciences Seals Controls Total
GBPm GBPm GBPm GBPm
---------------------- -------------- ------ --------- ------
At 1 October 2015 44.9 29.6 14.8 89.3
Acquisitions - 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
Acquisitions (note
12) 6.1 1.4 - 7.5
Exchange adjustments 0.6 (0.6) 0.1 0.1
----------------------- -------------- ------ --------- ------
AT 30 SEPTEMBER 2017 59.5 39.9 23.4 122.8
----------------------- -------------- ------ --------- ------
The Group tests goodwill for impairment at least once 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 2018 and thereafter, average growth rates for each
Sector; these annual growth rates then reduce to 2% over the longer
term.
The cash flow forecasts are discounted to determine a current
valuation using a single market derived pre-tax discount rate of
ca. 12% (2016: 11%). 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
2017 2016
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 2017, there was no material difference
between the book value of this investment and its fair value.
12. ACQUISITION of BUSINESSES
On 19 April 2017 the Group acquired 100% of Abacus ALS Pty Ltd
based in Brisbane, Australia and its wholly owned subsidiary Abacus
ALS Limited based in Auckland, New Zealand (together "Abacus") for
total cash consideration of GBP14.1m (A$23.3m). This comprised
initial consideration of GBP12.4m (A$20.4m), together with GBP1.7m
(A$2.9m) of deferred consideration based on the performance of the
business for the year ended 30 June 2017. The initial consideration
of GBP13.6m (A$22.5m) was before adjustments relating to working
capital and net debt on completion of GBP1.2m (A$2.1m), but before
acquisition expenses of GBP0.3m (A$0.5m).
On 19 April 2017, the Group acquired 100% of Problem Solving
Products, Inc ("PSP"), based in Colorado US, for total cash
consideration of GBP1.4m (US$1.9m).
On 16 June 2017, the Group acquired 100% of Edco Seal &
Supply Limited ("Edco") based in Leicester, England, for initial
cash consideration of GBP3.2m, which included GBP0.2m of surplus
cash and was before acquisition expenses of GBP0.1m. Maximum
deferred consideration of up to GBP0.7m is payable based on the
performance of Edco for the 12 months ended 30 April 2018, of which
GBP0.4m has been provided at 30 September 2017.
Set out below is an analysis of the net book values and fair
values relating to these acquisitions:
Abacus PSP Edco 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 - 7.8 - 0.8 - 1.5 - 10.1
Deferred tax 0.2 (1.7) - - - (0.3) 0.2 (2.0)
Property, plant
and equipment 1.0 0.9 - - 0.1 0.1 1.1 1.0
Inventories 1.6 1.0 0.2 0.1 0.5 0.4 2.3 1.5
Trade and other
receivables 2.4 2.4 0.3 0.3 1.4 1.4 4.1 4.1
Trade and other
payables (1.8) (1.8) (0.2) (0.2) (0.7) (0.7) (2.7) (2.7)
Net assets acquired 3.4 8.6 0.3 1.0 1.3 2.4 5.0 12.0
Goodwill - 6.1 - 0.4 - 1.0 - 7.5
3.4 14.7 0.3 1.4 1.3 3.4 5.0 19.5
------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Cash paid 14.1 1.4 3.2 18.7
Net debt acquired 0.6 - - 0.6
Cash acquired - - (0.2) (0.2)
Expenses of acquisition 0.3 - 0.1 0.4
------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Net cash paid,
after acquisition
expenses 15.0 1.4 3.1 19.5
Deferred consideration
payable - - 0.4 0.4
Less: expenses
of acquisition (0.3) - (0.1) (0.4)
------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Total consideration 14.7 1.4 3.4 19.5
------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Goodwill of GBP7.5m 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 2017, the newly
acquired Abacus business contributed GBP7.6m to revenue and GBP1.2m
to adjusted operating profit, the newly acquired PSP business
contributed GBP1.0m to revenue and GBP0.2m to adjusted operating
profit and the newly acquired Edco business contributed GBP1.1m to
revenue and GBP0.2m 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
GBP21.6m to revenue and GBP3.8m 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. OTHER LIABILITIES
2017 2016
GBPm GBPm
--------------------------------------- ------- ------
Future purchases of minority
interests 6.1 5.1
Deferred consideration 0.5 1.7
------------------------------------------ ------- ------
6.6 6.8
--------------------------------------- ------- ------
Analysed as:
Due within one year 2.5 1.7
Due after one year 4.1 5.1
------------------------------------------ ------- ------
The movement in the liability for future purchases
of minority interests is as follows:
2017 2016
GBPm GBPm
--------------------------------------- ------- ------
At 1 October 5.1 5.7
Acquisition of minority interests
on exercise of option - (1.9)
Unwinding of discount 0.5 0.5
Fair value remeasurements 0.5 0.8
------------------------------------------ ------- ------
AT 30 SEPTEMBER 6.1 5.1
------------------------------------------ ------- ------
At 30 September 2017, the Group retained put options to acquire
minority interests in TPD, Kentek and M Seals.
The estimate of the financial liability at 30 September 2017 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 2017. This led to a remeasurement of the fair
value of these put options and the liability was increased by
GBP0.5m (2016: GBP0.8m) reflecting a revised estimate of the future
performance of the businesses and by a further GBP0.5m (2016:
GBP0.5m) charge which arises from unwinding the discount on the
liability. In aggregate GBP1.0m (2016: GBP1.3m) has been charged to
the Consolidated Income Statement.
The put options to acquire the remaining minority interest of
10% held in both M Seals and in Kentek are exercisable from
November 2018. Subsequent to the year end, the option to acquire an
outstanding 5% minority interest in TPD has been exercised for cash
consideration of GBP1.0m. The remaining 5% is exercisable within
the next 12 months.
Deferred consideration comprises the following:
2017 2016
GBPm GBPm
----------------- ------ ------
WCIS - 0.6
Cablecraft - 1.0
Ascome 0.1 0.1
Edco 0.4 -
----------------- ------ ------
AT 30 SEPTEMBER 0.5 1.7
----------------- ------ ------
The amounts outstanding at 30 September 2017 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
(A$1.0m) was paid to the vendors of WCIS in respect of the
performance of the business in the year ended 30 September 2016.
The deferred consideration of GBP1.0m relating to Cablecraft was
not required and has been released to the Consolidated Income
Statement as part of acquisition related charges in note 3.
14. DIVIDS
2017 2016
pence pence 2017 2016
per per GBPm GBPm
share share
----------------------------- ------- ------- ------ ------
Interim dividend, paid
in June 7.0 6.2 7.9 7.0
Final dividend of the prior
year, paid in January 13.8 12.4 15.6 14.0
----------------------------- ------- ------- ------ ------
20.8 18.6 23.5 21.0
----------------------------- ------- ------- ------ ------
The Directors have proposed a final dividend in respect of the
current year of 16.0p per share (2016: 13.8p) which will be paid on
24 January 2018, subject to approval of shareholders at the Annual
General Meeting on 17 January 2018. The total dividend for the
current year, subject to approval of the final dividend, will be
23.0p per share (2016: 20.0p).
15. EXCHANGE RATES
The rates used to translate the results of the overseas
businesses are as follows:
Average Closing
2017 2016 2017 2016
------------------------ ----- ----- ----- -----
US dollar (US$) 1.27 1.41 1.34 1.30
Canadian dollar (C$) 1.67 1.87 1.68 1.71
Euro (EUR) 1.15 1.28 1.13 1.16
Swiss franc (CHF) 1.26 1.40 1.30 1.26
Australian dollar (A$) 1.67 1.92 1.71 1.70
------------------------ ----- ----- ----- -----
16. SUBSEQUENT EVENTS
On 16 October 2017, the Group completed the acquisition of 100%
of Coast Fabrication, Inc. ("Coast"), a supplier of specialist
fasteners based in California, US, for initial cash consideration
of GBP1.0m (US$1.3m) and maximum deferred consideration of GBP0.3m
(US$0.4m). A review to determine fair values of the net assets
acquired will be completed during the next financial year.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR LLFEELALDLID
(END) Dow Jones Newswires
November 20, 2017 02:00 ET (07:00 GMT)
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