TIDMDPLM
RNS Number : 1222X
Diploma PLC
17 November 2014
DIPLOMA PLC
12 CHARTERHOUSE SQUARE, LONDON EC1M 6AX
TELEPHONE: +44 (0)20 7549 5700
FACSIMILE: +44 (0)20 7549 5715
FOR IMMEDIATE RELEASE
17 November 2014
PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS
FOR THE YEAR ENDED 30 SEPTEMBER 2014
Strong Underlying Performance - Consistent Track Record
Audited Audited
2014 2013
GBPm GBPm
Revenue 305.8 285.5 +7%
Adjusted operating
profit(1) 56.7 54.3 +4%
Adjusted operating
margin(1) 18.5% 19.0%
Adjusted profit
before tax(1),(2) 56.2 54.3 +3%
Profit before tax 49.8 48.5 +3%
Profit for the period 36.1 34.8 +4%
Free cash flow(3) 37.8 31.6 +20%
Pence Pence
Adjusted earnings
per share(1),(2) 36.1 34.8 +4%
Basic earnings per
share 31.4 30.7 +2%
Total dividend per
share 17.0 15.7 +8%
(1) Before acquisition related charges.
(2) Before fair value remeasurements.
(3) Before cash payments on acquisitions
and dividends.
Financial Highlights
-- Underlying revenue and adjusted operating profit both
increased by 8% respectively, after adjusting for currency effects
and acquisitions.
-- Significant strengthening in UK sterling limited growth in
reported revenue and adjusted operating profit to 7% and 4%
respectively.
-- Adjusted operating margins remained robust at 18.5%, despite
transactional currency effects in Canadian and Australian
Healthcare businesses.
-- Adjusted profit before tax and EPS increased by 3% and 4%
respectively to GBP56.2m and 36.1p.
-- Free cash flow increased by 20% to GBP37.8m as Group's
Investment for Growth programme nears completion.
-- Acquisition expenditure of GBP16.5m;net cash of GBP21.3m at the end of year.
-- Total dividend increased by 8% to 17.0p per share reflecting
confidence in Group's growth prospects.
Operational Highlights
-- Strong underlying performance across all three Sectors.
-- Life Sciences revenues increased by 9% on an underlying
basis, with stronger consumable revenues offsetting weaker capital
equipment and service.
-- Seals revenues increased by 7% on an underlying basis
reflecting strong performance from Industrial OEM businesses; good
second half recovery in Aftermarket businesses in the US, following
disruption from severe winter.
-- Controls revenues increased by 8% on an underlying basis with
strong growth in Interconnect, driven by improved markets in the UK
and Germany, particularly Civil Aerospace, Energy and
Motorsport.
-- Acquisition spend increased strongly to GBP16.5m in 2014
financial year, extending the Group's businesses into new product
and market segments.
-- Acquisition of Technopath Distribution ("TPD"), shortly after
the year end, extends the Group Healthcare businesses into Ireland
and the UK and brings acquisition spend to GBP26m in calendar year
2014.
Commenting on the results for the period, Bruce Thompson,
Diploma's Chief Executive said:
"The Diploma businesses have made good progress this year
benefiting from greater confidence in their principal markets with
strong underlying revenue growth in each of the Group's Sectors.
Given the strong comparatives and the uncertain macroeconomic
backdrop, the Board expects growth to trend this year towards our
target "GDP plus" rates.
The Group has a strong and proven business model, together with
a good geographic spread of activities, strong free cash flow and
balance sheet. With an improving acquisition environment and a good
pipeline of opportunities, prospects for acquisition activity in
2015 are encouraging. This provides the Board with confidence that
further progress will be made in the new financial year."
There will be a presentation of the results to analysts and
investors at 9.00am this morning at Butchers' Hall, 87 Bartholomew
Close, City of London, EC1A 7EB. This presentation will be made
available as a webcast from 2.00pm GMT via www.diplomaplc.com
For further information please contact:
+44 (0)20 7549
Diploma PLC - 5700
Bruce Thompson, Chief Executive
Officer
Nigel Lingwood, Group Finance
Director
+44 (0)20 7353
Tulchan Communications - 4200
David Allchurch
Martin Robinson
Notes:
1. Diploma PLC uses alternative performance measures as key
financial indicators to assess the underlying performance of the
Group. These include adjusted operating profit, adjusted profit
before tax, adjusted earnings per share, free cash flow and ROATCE.
All references in this Announcement to "underlying" revenues or
operating profits refer to reported results on a constant currency
basis and before any contribution from acquired businesses. The
narrative in this Announcement is based on these alternative
measures and an explanation is set out in note 2 to the
consolidated financial statements in this Preliminary
Announcement.
2. Certain statements contained in this 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 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. 1,300 employees and its principal
operating businesses are located in the UK, Germany, US, Canada and
Australia.
Over the last five years, the Group has grown adjusted earnings
per share at an average of 20% p.a. through a combination of
organic growth and acquisitions. Diploma is a member of the FTSE
250 with a market capitalisation of ca. GBP800m.
Further information on Diploma PLC can be found at
www.diplomaplc.com
Further information on Diploma PLC, together with a copy of this
Announcement, is available at www.diplomaplc.com
PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS
FOR YEAR ENDED 30 SEPTEMBER 2014
CHAIRMAN'S STATEMENT
Delivering strong returns to shareholders
As previously announced, I will be stepping down from the Board
immediately after the AGM on 21 January 2015. I joined the Board in
2002 and became Chairman in 2004, following the retirement of the
late Christopher Thomas who had previously been Chief Executive and
then Chairman of the Company for over 30 years. His guiding
objective for the Company was to focus on consistently strong cash
flow which would fund the Group's growth strategy and deliver
healthy and growing dividends; this has remained a fundamental
principle of the Board during my Chairmanship of the Company over
the last ten years.
The Group's strong cash flow is generated from businesses which
focus on essential products and services within specialised market
segments and deliver sustainable and attractive margins, through
the quality of customer service, depth of technical support and
value adding activities. It is this business model that has
provided the Group with the resources over ten years to invest ca.
GBP160m of our internally generated cash in value enhancing
acquisitions to support our growth strategy and deliver strong
shareholder value.
The success in pursuing this strategy can be measured against
the Group's two principal corporate objectives of growth in
adjusted earnings per share ("EPS") and total shareholder return
("TSR"). The target for adjusted EPS is to deliver strong
double-digit growth over the business cycle and since 2004 the
Group's adjusted EPS has grown at a compound rate of 16% p.a. The
objective for TSR growth is to deliver upper quartile performance
relative to the FTSE mid-250 Index Group ("FTSE-250") and over the
last ten years, Diploma's TSR has grown at a compound rate of 24%
p.a. compared with median growth of 13% p.a. in the FTSE-250.
I believe that this sustained performance demonstrates the
Board's commitment to a clearly defined and well executed strategy,
robust business model and relentless focus on strong cash
generation. This has helped Diploma develop into a successful and
resilient business capable of delivering strong shareholder value
on a consistent basis and I am confident that it will continue to
do so for many years.
Results
Group revenues increased in 2014 by 7% to GBP305.8m (2013:
GBP285.5m) despite the significant strengthening of UK sterling
against most major currencies in which the Group operates. With ca.
75% of the Group's revenues generated outside the UK, the GBP17.7m
reduction in revenues from currency translation more than offset
the contribution to revenue of GBP15.4m from acquisitions completed
during the year. On an underlying basis, which is after adjusting
for acquisitions and for currency effects on translation, Group
revenues increased by 8% with each of the Group's business Sectors
reporting strong underlying growth during the year.
Adjusted operating margins remained robust at 18.5% (2013:
19.0%) and adjusted operating profit increased by 4% to GBP56.7m
(2013: GBP54.3m). Gross margins in the Canadian and Australian
Healthcare businesses were impacted by transactional currency
effects, but these were partly mitigated by tight control of
operating costs and the benefits arising from the Group's recent
Investment for Growth programme which is now substantially
complete. Adjusted profit before tax increased by 3% to GBP56.2m
(2013: GBP54.3m) and adjusted earnings per share, helped by a lower
effective tax rate, increased by 4% to 36.1p (2013: 34.8p).
The Group generated strong free cash flow of GBP37.8m (2013:
GBP31.6m), despite a larger investment in working capital,
reflecting both much lower capital expenditure of GBP2.2m (2013:
GBP4.6m) and a smaller cash contribution of GBP1.8m (2013: GBP4.7m)
to the Group's Employee Benefit Trust.
With the acquisition environment improving, the Group invested
GBP16.5m (2013: GBP2.2m) in acquisitions during the financial year.
Shortly after the year end, the Group acquired 80% of TPD, which
extends the Healthcare business into Ireland and the UK; this
acquisition has taken the acquisition spend to ca. GBP26m in the
2014 calendar year.
At 30 September 2014 the Group's net cash funds increased by
GBP2.0m to GBP21.3m after distributing GBP18.2m (2013: GBP17.4m) to
shareholders during the year.
Dividends
The strong balance sheet and free cash flow, supported by a good
set of results has led the Board to recommend an increase in the
final dividend of 8% to 11.6p per share (2013: 10.7p). Subject to
shareholder approval at the AGM, this dividend will be paid on 28
January 2015 to shareholders on the register at 28 November
2014.
The total dividend per share for the year will be 17.0p (2013:
15.7p) which represents an 8% increase on 2013. The dividend is
well covered by adjusted EPS at 2.1 times, in line with the Board's
objective of targeting towards a two times level of cover.
Dividends have increased progressively in each of the last 15 years
and represent a total of almost GBP100m of cash distributed to
shareholders over ten years.
Governance
The Board and its Committees have worked effectively throughout
the year, benefiting from a stable year, following a number of
years of changes as we developed and refreshed the Board. The work
of these Committees and the key achievements this year are set out
in the Corporate Governance section of the Annual Report &
Accounts.
I should like to thank all my colleagues on the Board, past and
present, who have always been both supportive and challenging, as
needed. Their wise counsel and experience has made a substantial
contribution to the success of the Group.
Finally, I am delighted that in John Nicholas, the Company has a
highly successful businessman with broad and relevant experience,
who I am confident will chair the Group well on the next stage of
its journey and to further success.
Employees
I have very much appreciated the consistently high levels of
service, performance and hard work that our employees deliver year
after year. I believe that this is largely due to our decentralised
organisational structure which allows our employees to understand
their responsibilities and gives them space to operate efficiently
and effectively. This provides enormous strength to the Diploma
businesses and helps explain the Group's sustained success. I wish
to sincerely thank all our employees for their tremendous hard work
and for all they have achieved during my period with the
Company.
Outlook
The Group's performance this year has benefited from greater
confidence in its principal markets with strong underlying revenue
growth in each of the Group's Sectors. Given the strong
comparatives and the uncertain macroeconomic backdrop, the Board
expects growth to trend this year towards our target "GDP plus"
rates.
The Group has a strong and proven business model, together with
a good geographic spread of activities, strong free cash flow and
balance sheet. With an improving acquisition environment and a good
pipeline of opportunities, prospects for acquisition activity in
2015 are encouraging. This provides the Board with confidence that
further progress will be made in the new financial year.
CHIEF EXECUTIVE'S REVIEW
In 2014, the Group has delivered underlying revenue growth of 8%
(after adjusting for acquisitions and currency effects) with a
strong performance across all three Sectors. Adjusted operating
margins remained robust at 18.5% of revenue. In an improving
environment for acquisitions, GBP16.5m was invested in acquisitions
which contributed GBP15.4m to revenues this year. This addition to
revenues was offset by the adverse translation effect of the
stronger UK sterling which reduced revenues by GBP17.7m. Free cash
flow increased by 20% to GBP37.8m and return on adjusted trading
capital employed ("ROATCE") was maintained at 25.8%.
Business model and growth strategy
The Group's strategy is designed to generate strong,
double-digit growth in earnings and shareholder value over the
business cycle, by building larger, broader-based businesses in the
three Group Sectors of Life Sciences, Seals and Controls.
Our businesses target "GDP plus" levels of organic revenue
growth over the business cycle. Stable and resilient revenue growth
is achieved through our focus on essential products and services
funded by customers' operating rather than capital budgets and
supplied across a range of specialised industry segments. By
supplying essential solutions, not just products, we build strong
long term relationships with our customers and suppliers, which
support sustainable and attractive margins. Finally we encourage an
entrepreneurial culture in our businesses through our decentralised
management structure and these essential values ensure that
decisions are made close to the customer and that the businesses
are agile and responsive to changes in the market and the
competitive environment.
Overall growth is accelerated from the underlying GDP plus
levels to the corporate target of strong, double-digit growth,
through carefully selected, value-enhancing acquisitions which fit
the business model and offer entry into new strategic markets.
Acquisitions are not made just to add revenue and profit, but
rather to bring into the Group successful businesses which have
growth potential, capable management and a good track record of
profitable growth and cash generation. As part of our Acquire,
Build, Grow strategy, we invest in the businesses post acquisition
to build a firm foundation to allow them to move to a new level of
growth. These acquisitions form a critical part of our Sector
growth strategies and are designed to generate a pre-tax return on
investment of at least 20% and hence support our Group objective of
consistently exceeding 20% ROATCE.
Performance against objectives and KPIs
The Group's principal corporate objectives relate to growth in
adjusted earnings per share ("EPS") and total shareholder return
("TSR"). Growth in the year in adjusted EPS has been 4% and growth
in TSR has been 8%. Over a five year period, compound growth rates
for adjusted EPS and TSR have been 20% p.a. and 36% p.a.
respectively.
Underpinning the principal corporate objectives are a set of
further objectives, with related key performance indicators
("KPIs") which are used to measure performance at the Group level,
but also to drill down through the operating businesses. The first
of these next level objectives is to generate stable "GDP plus"
levels of underlying revenue growth over the business cycle.
This year, after adjusting for translational currency effects
and acquisitions, the Group increased revenues by 8% on an
underlying basis, with strong performance across all three Sectors.
Life Sciences benefited from strong consumable and service revenues
across the businesses, offsetting weaker capital equipment revenues
and delivered 9% underlying revenue growth. In Seals, underlying
revenues grew by 7%, reflecting a more favourable performance in
the Aftermarket businesses and continuing good growth in the
Industrial OEM businesses. Controls returned to growth this year
with good demand across its market sectors and particularly strong
performances from the Civil Aerospace, Motorsport and Energy
markets; underlying revenue growth of 8% was achieved.
The objective for adjusted operating margins is to maintain
stable attractive margins which reflect the focus on specialised
segments, strongly differentiated products and customer focused
solutions, combined with efficiently run operations. This year,
adjusted operating margins were 18.5% which is comfortably within
the five year average range of 18-19%.
Gross margins in the Group's Healthcare businesses came under
increasing pressure during the year from the transactional currency
effects of the strong depreciation of the Canadian and Australian
dollars. However, the impact on Group operating margins was limited
by tight control of operating costs in the Healthcare businesses.
More broadly, the Group's Investment for Growth programme, started
in 2012 and now nearing completion, has started to deliver the
benefits we had expected. As revenues have increased, operational
leverage has reduced operating costs as a percentage of revenue and
these benefits have offset the impact of acquisitions joining the
Group with lower initial operating margins.
To achieve the Group's objective of strong double digit growth,
acquisition spend at the level of ca. GBP25m p.a. is targeted. The
level of spend this year of GBP16.5m is below this target level but
is close to the five year average of ca. GBP16m p.a. and is well
ahead of the prior year spend of only GBP2m. After the financial
year end in early October 2014, a further acquisition was completed
of 80% of Technopath Distribution and this has taken the
acquisition spend to ca. GBP26m in the 2014 calendar year.
The Group continues to focus strongly on free cash flow, which
funds the growth strategy and allows the Company to provide healthy
dividends to shareholders. In 2014, free cash flow was GBP37.8m,
compared with a five year average of GBP31m p.a. and was equivalent
to a conversion rate of over 90% of adjusted after tax earnings.
Now that the Investment for Growth programme is approaching
completion, capital expenditure is trending back to more normal
levels and the principal determinant of free cash flow conversion
is now the effective management of working capital. The KPI used to
measure and monitor this performance is working capital as a
percentage of revenue; in 2014 this increased to 17.2% compared
with both the target and the five year average level of 16-17%.
Return on adjusted trading capital employed or ROATCE is the
final indicator of the overall performance of the Group and very
importantly of its success in creating value for shareholders.
ROATCE is measured as the pre-tax return on total Group investment
excluding net cash, but including all goodwill and acquired
intangible assets. ROATCE has exceeded the 20% target in each of
the last five years and this year was 25.8%.
Acquisitions
Acquisitions are an integral part of the Group's strategy,
designed to accelerate growth and to facilitate entry into related
strategic markets. Despite sustained and increasing resources
focused on identifying and completing value-enhancing acquisitions,
acquisition spend does ebb and flow over time. The acquisition
environment has improved this year after a period when the
uncertainty over future economic prospects had made vendors very
cautious, resulting in lengthening transaction processes and
delayed completions. During the year, a number of acquisitions have
been completed which are natural extensions of the Group's existing
businesses and which have extended the scope of the businesses into
new products and market segments and geographies.
In Life Sciences, DHG extended its business in Australia with
the acquisition of Chemzyme, which has now been integrated into
DHG's principal operations in Melbourne. During the year DHG also
acquired the remaining 20% minority shareholdings in DSL and
shortly after the year end, acquired 80% of Technopath Distribution
("TPD"), an established supplier to the Biotechnology, Clinical
Laboratory and Medical markets in Ireland and the UK. The
acquisition of TPD represents an important first step in extending
the scope of DHG's business into the markets of Ireland and the UK,
as well as adding important new products and suppliers.
In Seals, the Group acquired 80% of Kentek, a specialised filter
distributor which adds a new product line and extends the reach of
the Seals activities into the new markets of Finland, Russia and
the Baltic States. During the year, two smaller acquisitions were
completed in the UK, AB Seals and Ramsay Services, which will be
managed by FPE Seals and M Seals respectively. RT Dygert also
acquired the remaining 49% in the HPS Industrial OEM seal business
in Seattle.
In Controls, the fastener business was strengthened through the
acquisition of SFC, a UK fastener distributor which has a strong
fit with Clarendon and brings specialist technical and design
skills as well as added value assembly expertise. During the year,
Filcon also acquired the goodwill and assets of Sacee, a supplier
of specialist connectors to the Satellite sector in France; Sacee's
operations have been integrated into Filcon in Munich.
With an improving acquisition environment, a good pipeline of
opportunities and additional corporate development resources in
place, prospects for acquisition activity in 2015 are
encouraging.
SECTOR DEVELOPMENTS
LIFE SCIENCES
The Life Sciences Sector businesses supply a range of
consumables, instrumentation and related services to the healthcare
and environmental industries.
2014 2013
Revenue GBP91.4m GBP93.2m
Adjusted operating profit GBP19.7m GBP20.9m
Adjusted operating margin 21.6% 22.4%
Free cash flow GBP14.9m GBP14.1m
--------------------------- --------- ---------
-- Underlying Sector revenue growth of 9%
-- In DHG Canada, strong consumable revenues offset weaker
capital equipment and service revenues
-- ERP project well advanced - Somagen completed, Vantage in process and AMT to follow in 2015
-- DHG Australia building critical mass under single leadership
and with consolidated operations; Chemzyme acquired and
integrated
-- Acquisition of TPD after year end extends DHG into Ireland
and the UK and adds new products and suppliers
-- Strong growth in Environmental businesses with stable operating margins
Reported revenues of the Life Sciences businesses decreased by
2% to GBP91.4m (2013: GBP93.2m) because of the translational
currency impact from the significant weakening in the Canadian and
Australian dollars relative to UK sterling. On a constant currency
basis, underlying revenues increased by 9%. Similarly on a reported
basis, adjusted operating profit decreased in UK sterling terms by
6% to GBP19.7m (2013: GBP20.9m), but increased by 8% on a constant
currency basis.
Gross margins in the Healthcare businesses were significantly
impacted by the strong depreciation of the Canadian and Australian
dollars against the US dollar and the Euro, which are the
currencies in which their products are mostly purchased; the impact
was increasingly felt as the year progressed, with existing hedging
contracts being replaced by less favourable contracts. These
transactional currency effects were partly mitigated by an
increased proportion of higher margin consumable product revenues
this year and by price concessions negotiated with suppliers.
However, Sector gross margins still reduced by 190bps in the first
half and by 300bps in the second half, compared to the prior year
comparable periods. The impact of these reduced gross margins was
limited by tight management of operating costs and the benefits
from prior year investments and adjusted operating margins
decreased by only 80bps to 21.6% (2013: 22.4%).
Capital expenditure in the Sector was GBP1.2m (2013: GBP2.8m),
which included GBP0.7m invested in field equipment for placement in
hospitals and clinics by the Healthcare businesses and GBP0.3m
invested in the new ERP systems in Somagen and Vantage as part of
the Group's broader Investment for Growth programme. Somagen
completed the installation of its new ERP system in February 2014
and the implementation at Vantage is well underway, with plans to
go live in the first half of the new financial year. The
implementation of the new ERP system in AMT will be completed in
the second half of 2015. Free cash flow increased by 6% to GBP14.9m
(2013: GBP14.1m), reflecting lower capital expenditure and tax
payments, offset in part by higher investment in working
capital.
Healthcare
Revenues from the DHG group of Healthcare businesses, which
account for 80% of Sector revenues, increased by 8% after adjusting
for translational currency effects and for the initial contribution
from a small business acquired in Australia.
The Canadian Healthcare businesses increased revenues by 6% in
local currency, with very strong consumable revenues more than
offsetting weaker capital and service revenues. Somagen was the
strongest performer with increased consumable revenues across its
key suppliers and boosted by the supply of testing kits used in the
roll-out of colorectal cancer screening programmes across three
Provinces. Capital equipment sales have been at a somewhat reduced
level this year, but good progress has been made in establishing
Somagen in the HbA1c diabetes testing market with best in class
technology and as a key player in the Autoimmunity market. Somagen
has also been successful in adding new suppliers and products in
specialised market segments including quality control products used
in calibrating and monitoring clinical diagnostic instrumentation,
automated testing of urines and sterile fluids and specialised
immunoassay technology to assess the progression of diseases by
tracking specific proteins and antibodies. These efforts have
contributed to Somagen entering the new financial year with a good
backlog of capital equipment orders and good prospects for sales of
new instrumentation.
AMT's core electrosurgery business, led by the new Penevac 1
product (combined electrode and smoke evacuation device), continued
to deliver strong double digit growth in volume terms, though
growth in value terms has been constrained by keener pricing in
certain central buying group tenders. Though these tenders can put
pressure on the pricing of core products such as the Penevac and
the Megapad grounding pad, success generally results in higher unit
volumes for these core products, as well as the opportunity to
achieve preferred status for a broader range of products. AMT also
made further progress in its Minimally Invasive ("MI") Surgery
division, consolidating its position in the supply of specialised
surgical instruments and devices used in laparoscopic and other MI
Surgery procedures. Good advances have been made with core product
lines, ranging from surgical instruments used in standard
laparoscopic procedures, to leading edge interventional radiology
and oncology products for use in the treatment of cancer and cancer
related conditions.
Vantage continued to generate strong growth in revenues from
consumable products and service which this year accounted for ca.
80% of Vantage revenues (2013: ca. 65%). In particular there were
strong performances from the sale of argon plasma probes, from the
specialty chemicals used in endoscope reprocessors and from tubing
sets for endoscopes as well as from other endoscopic accessories
including specialist retrieval devices. Capital equipment revenues
were significantly reduced compared with the prior year, when
Vantage had an exceptionally strong year for sales of endoscope
reprocessors and argon plasma coagulation units. Vantage's supplier
of endoscopes has this year launched its new 600 series endoscope
range, offering significant benefits in terms of image quality and
handling ability. Vantage has been trialling the new endoscopes
with target customers in the second half of the year and the
response has been positive which should give momentum to capital
sales in the new financial year.
In Australia and New Zealand, revenues from DSL and BGS
increased by 19% in local currency. BGS generated strong growth by
penetrating the existing market for smoke evacuation products, as
well as creating new demand for these products. BGS also continued
to deliver steady growth in electrosurgical grounding pads and
laparoscopic electrodes. DSL has continued to generate good growth
in its consumable products, and service business, but had a softer
year for capital sales. Encouraging progress was made, however, in
developing opportunities in HbA1c diabetes testing, haemoglobin
testing and autoimmunity. Following the integration last year of
operations and back office functions in Melbourne, DSL and BGS are
successfully operating as distinct sales and marketing businesses,
benefitting from a single leadership group and shared operations
and back office systems in Melbourne - giving the efficiencies and
critical mass of a shared services group.
During the year, DHG acquired the remaining 20% minority
shareholdings in DSL and in July 2014, DHG acquired the assets and
goodwill of Chemzyme Australia, a small distributor of enzymatic
cleaning products supplied to the sterilising departments in all
hospitals in Australia and New Zealand. Chemzyme has been
integrated successfully into DHG's operations in Melbourne. The
principal supplier to Chemzyme has signed a new 10 year exclusive
distribution agreement with DHG in Australia as well as extending
its agreement with Vantage in Canada.
Shortly after the year end, in early October 2014, DHG acquired
80% of Technopath Distribution ("TPD"), an established supplier to
the Biotechnology, Clinical Laboratory and Medical markets in
Ireland and the UK. The principal owner managers of the business
will remain as Directors of TPD and retain a 20% minority
shareholding with put and call options to allow the Group to
acquire the shares over a period of up to five years. TPD employs
ca. 40 staff at its principal location in Ballina, County Tipperary
and shares certain key suppliers with the DHG business in Canada.
The acquisition of TPD represents an important first step in
extending the scope of the Group's Healthcare businesses into the
markets of Ireland and the UK, as well as adding important new
products and suppliers.
Environmental
Revenues from the Environmental businesses, which account for
20% of Sector revenues, increased by 14% in constant currency
terms. The a1-envirosciences business based in Germany increased
revenues by 8%, generating good sales of analytical instruments in
both the UK and Germany, while increasing the penetration of its
laboratory enclosure systems across Europe. The business has also
enjoyed an increase in service revenues following an investment in
engineering staff last year. During the year, the business's
largest supplier of analytical instruments extended its exclusive
distribution arrangements with a1-envirosciences to include
France.
The a1-CBISS business based in the UK experienced another strong
year of trading, with revenues growing by 20%. There was further
strong growth in sales of CEMS (continuous emissions monitoring
systems) equipment for both alternative energy and conventional
electricity generating stations, though more demanding tender
requirements had an impact on gross margins. a1-CBISS also
benefited from its strong positioning in preventative and emergency
maintenance services and as a specialised technical distributor of
a range of essential products for the gas detection and air quality
sectors.
SEALS
The Seals Sector businesses supply a range of hydraulic seals,
gaskets, filters, cylinders, components and kits used in heavy
mobile machinery and specialised industrial equipment.
2014 2013
Revenue GBP119.8m GBP106.1m
Adjusted operating profit GBP21.7m GBP19.5m
Adjusted operating margin 18.1% 18.4%
Free cash flow GBP16.4m GBP15.9m
--------------------------- ---------- ----------
-- Underlying Sector revenue growth of 7%
-- Good growth in HFPG Aftermarket Seals business in North
America despite disruption from severe winter weather
-- Unified European Aftermarket Seals group taking shape,
centred on FPE Seals - AB Seals added during the year
-- Kentek acquisition brings new geographic markets and adds filter products
-- Continuing strong growth in the Industrial OEM Seals businesses in the US and Europe
-- M Seals acquired Ramsay Services in the UK and All Seals is
opening a new branch operation in Houston, Texas
The Seals businesses increased revenues by 13% to GBP119.8m
(2013: GBP106.1m) which included part year contributions from
Kentek, acquired in January 2014 and two smaller bolt-on
acquisitions in the UK. After adjusting for the additional
contribution from these acquisitions and for the impact from
currency translation, underlying revenues increased by 7%. The
acquisition of Kentek and the continued development of the FPE
Seals and M Seals businesses, through organic growth and bolt-on
acquisitions, have increased the European region's share of total
Seals revenues from ca. 15% in 2013 to ca. 25% in 2014.
Adjusted operating profits increased by 11% to GBP21.7m (2013:
GBP19.5m), but with Kentek joining the Group with lower initial
operating margins, adjusted operating margins reduced by 30bps to
18.1% (2013: 18.4%). Across the Seals businesses, gross margins
continued to be resilient, underpinned by essential product
availability and added value technical service. Operating margins
in the HFPG and FPE Seals businesses improved as they benefited
from prior year investment in people, facilities and equipment.
Free cash flow increased by GBP0.5m to GBP16.4m (2013:
GBP15.9m), as increased working capital, particularly in the US
businesses, reduced the contribution from higher operating profits.
Capital expenditure decreased to GBP0.5m (2013: GBP0.9m) following
the completion last year of the Investment for Growth programme. In
HKX, GBP0.3m was invested in new automated tube-bending equipment
and on expanding the facility to manage higher growth in this
business. Further investment was also made in the Clearwater
facility in vertical storage carousels to deliver increased
efficiencies in inventory handling.
Aftermarket
The Aftermarket businesses, which now account for ca. 60% of
Sector revenues, reported a 21% increase in overall revenues. After
adjusting for currency translation and the acquisitions of Kentek
and AB Seals, underlying revenues increased by 5%.
In the US, Hercules Bulldog grew domestic sales by a robust 6%,
despite the disruption caused to general infrastructure projects
and heavy construction activities by the severe winter conditions
across much of the US which extended through to the end of May.
Sales to smaller sub-distributors and OEM cylinder manufacturers
increased strongly compared to the prior year and the US business
continued to develop its electronic trading capabilities. The level
of sales processed online increased by 26% and now accounts for ca.
20% of Hercules Bulldog revenues in the US. The seal machining
centres in Hercules Bulldog also continued to deliver good growth,
with strong demand from repair shop customers looking to source
hard-to-find and outsized seals within 24 hours. Capacity will be
further expanded with a fourth machine which is on order for
delivery in 2015. Revenues from exports outside the US, which
account for 25% of Hercules Bulldog sales, decreased by 5% with
reduced demand in Mexico, Central America and Saudi Arabia
impacting performance, particularly in the first half of the
year.
The Hercules Canada businesses in Ontario and Quebec delivered
growth at a similar level to the US, supported by strong sales to
OEM cylinder manufacturers. The first half of the year was more
challenging as the Canadian economy adjusted to the downturn in
demand for natural resources, but the businesses continued to be
successful in winning key orders as confidence returned in the
second half. The operation in Barrie, Ontario successfully
completed its move to a new, custom built facility in October 2013,
providing Hercules Canada with a first class platform for future
growth.
HKX had an excellent year and resumed its upward momentum after
a pause in 2013 following several periods of exceptional growth.
Revenues increased by 14% with strong demand from the core
excavator dealers and from specialist installers linked to the
equipment OEM's. During 2014, the new emissions regulations for
heavy mobile equipment continued to be implemented, with the
machines fitted with Tier 4 Interim technology beginning to be
phased out and replaced by Tier 4 Final technology equipment. With
OEM engineering resources focused on this technology transition,
more excavators were delivered to dealers without attachments which
provided increased demand for HKX's attachment kits. In 2014, HKX
also successfully introduced new products and a quality enhancement
programme. It also invested in improved automated tube-bending
equipment and re-engineered process flows in its expanded facility
in the US.
In the European region, plans to create a more substantial,
unified European Seals Aftermarket group continued to take shape in
2014. These Aftermarket activities are now centred on FPE Seals
with its operations in the UK and the Netherlands. FPE Seals
delivered strong organic revenue growth of 11% in the year against
the background of a positive economic environment in the UK,
although Continental Europe remains challenging. There was
continued success in expanding sales of hydraulic cylinder metal
parts and the seal machining centre, installed at the Doncaster
operation in late 2013, also contributed to the positive overall
result. FPE Seals acquired AB Seals in February 2014, a small
addition to its UK operations which is based in Gravesend, Kent and
strengthens the FPE Seals coverage of the important South East
region of the UK.
Outside the core, directly-served markets in the Americas and
Europe, the principal products sold by the Aftermarket businesses
are the Bulldog branded seal and gasket kits. With effect from
October 2014, FPE Seals will take over responsibility, from
Hercules Bulldog, for the sales of these Bulldog products to the
Middle East and Africa creating a unified EMEA Aftermarket sales
region. Hercules Bulldog will retain responsibility for Bulldog
sales in the Americas.
In January 2014, the Group completed the acquisition of 80% of
Kentek Oy, a specialised distributor of filters and related
products, used in heavy mobile machinery and industrial equipment
applications. Kentek is based in Finland with operations in Russia
and the Baltic States and the acquisition extends the reach of the
Seals activities into these new markets. Kentek has solid,
long-term relationships with its key suppliers and customers in
each of its territories and has performed well and in line with
expectations since acquisition. The business has managed the
inevitable pressures exerted on the Russian economy and the
international supply chain by sanctions imposed following the
conflicts in Ukraine and Crimea.
Industrial OEM
The Industrial OEM businesses, which account for ca. 40% of
Sector revenues, reported a 3% increase in revenues. After
adjusting for currency and the small acquisition of Ramsay
Services, underlying revenue growth was 8%.
In North America, the Industrial OEM businesses (RT Dygert, J
Royal and All Seals) all performed well in a generally positive
industrial economy. As in the prior year, the Industrial OEM
businesses continued with initiatives to move up the value chain,
by procuring higher level technical approvals to meet the more
stringent demands of customers. The businesses have continued to
gain expertise in the approval processes and in qualifying new
products for new and existing OEM customers.
RT Dygert delivered another year of solid growth, increasing
revenues by 5% and benefiting from its investment in the
development of regulatory-compliant elastomer compounds to
penetrate the pharmaceutical, water and petrochemical industries.
Solid gains were also made in the supply of parts to catalogue
houses and these gains more than offset a small reduction in demand
from the traditional mid-West cylinder producers. In July 2014, RT
Dygert acquired the outstanding 49% shareholding in the HPS
business in Seattle, taking its ownership to 100%. HPS delivered
strong growth in 2014 benefitting from demand for its heavy duty
and harsh environment seals for specialist construction
equipment.
All Seals delivered a strong performance in 2014, increasing
revenues by 11%, as the investment in people and equipment in prior
periods came through in the results. All Seals reported good gains
in the Water, Oil and Gas and Medical sectors with the introduction
of new, higher specification products and the addition of new
customers. The Seals Sector's first water-jet gasket cutting
machine became fully operational during the year, supporting the
growing demand for rapid turnaround custom gaskets and contributing
to the overall positive revenue growth. In November 2014, All Seals
will open a branch operation in Houston, Texas to serve the large
Texas Oil and Gas sector.
J Royal delivered 16% revenue growth in 2014, benefiting from
the significant investments made last year in management and sales
resources. Development lead times can be lengthy for new product
introductions as OEM customers, prior to ordering production-level
quantities, require the completion of stringent quality control
processes. In 2014, J Royal saw the results of its efforts in the
successful introduction of many new products to existing OEM
customers. J Royal also benefited from exceptionally strong demand
from the Water sector and filter manufacturers and was also
successful in penetrating new, smaller customer accounts across the
Eastern US, as its expanded sales team began to win new
business.
In Europe, M Seals had a mixed year in its different markets,
but increased overall revenues by 8%, helped by the contribution
from the acquisition of Ramsay Services. Revenues in the
long-established Danish territory were flat as the Danish markets
hovered between contraction and growth in the year. The Swedish
operation continued to deliver double digit growth and the business
is now expanding out of its southern base with the addition of a
dedicated sales person for the important industrial region around
Stockholm. Sales of large bearing seals to Chinese wind power
customers were subdued for a second year as the Chinese wind power
industry struggled to regain its earlier momentum. In December
2013, our European Industrial OEM activities were expanded through
the acquisition of Ramsay Services, located in Gateshead in the UK.
Ramsay is a small, specialist distributor of O--rings and holds the
AS9120 accreditation for the aerospace sector, as well as having
valuable expertise in the UK Oil and Gas sector. M Seals has taken
full responsibility for the Ramsay operation and the business has
performed well since acquisition.
CONTROLS
The Controls Sector businesses supply specialised wiring,
connectors, fasteners and control devices used in a range of
technically demanding applications.
2014 2013
Revenue GBP94.6m GBP86.2m
Adjusted operating profit GBP15.3m GBP13.9m
Adjusted operating margin 16.2% 16.1%
Free cash flow GBP11.4m GBP10.8m
--------------------------- ---------- ---------
-- Underlying Sector revenue growth of 8%
-- Strong growth in Interconnect, driven by improved markets in
the UK and Germany, particularly Civil Aerospace, Energy and
Motorsport
-- Acquisition of SFC strengthened the fasteners business and
added design skills and added-value assembly expertise
-- Sacee acquisition extended Filcon's business into Satellite sector in France
-- In Fluid Controls, significant gains made by Hawco in Food & Beverage sector
-- Relocation of Hawco's offices, consolidation of warehouse
facilities and extension of new ERP system into Abbeychart
The Controls businesses increased revenues by 10% to GBP94.6m
(2013: GBP86.2m), including part year contributions from Specialty
Fasteners and Components ("SFC"), acquired in June 2014 and Sacee,
a small connector distributor acquired in October 2013. After
adjusting for the contribution from these acquisitions and for the
impact of currency translation, underlying revenues increased by
8%.
Adjusted operating profits increased by 10% to GBP15.3m (2013:
GBP13.9m) and adjusted operating margins held steady at 16.2%
(2013: 16.1%). Overall gross margins in the Controls businesses
remained resilient with their focus on specialised markets and
added value opportunities. The benefits from investment programmes
completed last year also enabled the businesses to gain some
operational leverage which offset the impact from the lower initial
operating margin of SFC.
Free cash flow increased by GBP0.6m to GBP11.4m (2013:
GBP10.8m), with working capital increasing to take advantage of
opportunities within existing markets and this investment more than
offset the contribution from increased operating profits. Capital
expenditure reduced by GBP0.4m to GBP0.5m (2013: GBP0.9m) following
completion last year of the new IS-Rayfast facility and Hawco's
investment in a new ERP system, as part of the Group's broader
Investment for Growth programme. The IS-Group invested GBP0.2m in
upgrading its IT infrastructure by replacing older servers and
adding further functionality to its existing manufacturing systems
at IS-Cabletec. Hawco invested GBP0.2m in the relocation of its
sales and administrative offices and extending the new ERP system
into the Abbeychart business.
Interconnect
The Interconnect businesses, which account for ca. 70% of Sector
revenues, increased revenues by 10% in UK sterling terms. After
adjusting for acquisitions and currency translation effects,
underlying revenues increased by 8%, reflecting good demand across
the market sectors and particularly strong performances from the
Civil Aerospace, Energy and Motorsport markets.
Aerospace and Defence accounts for ca. 40% of Interconnect
revenues and in 2014, revenues increased by 5%, with Civil
Aerospace maintaining strong positive momentum while the Military
segments appeared to be stabilising. In Civil Aerospace, the supply
of fasteners to the premium aircraft seating industry continued to
grow, with Clarendon extending production line-side support to key
customers and exploiting further opportunities to export to
sub-contract manufacturers. There was also steady demand for the
full range of electrical harnessing and protection products. In
Military Aerospace, by contrast, the reduced annual production rate
of Eurofighter aircraft continued to have an impact on sales of
specialist connectors and bonding leads.
The broader Defence markets in the UK remained subdued but the
businesses were still able to deliver modest growth over the prior
year. While no new major defence projects were initiated, there
were signs that activity levels were higher at several specialist
military harness contractors. IS-Rayfast also leveraged its
excellent stocking profile to provide a rapid turnaround to support
projects including the Astute 6 submarine build and modest upgrades
to Hawk and Jaguar aircraft. There was continuing demand for
IS-Cabletec's cable protection products and an additional braiding
machine was added during the year to meet increased production
requirements. In Germany, Filcon's traditionally strong sales of
specialist connectors to the larger legacy military radio and
engine projects were softer in 2014. As with the UK, however,
IS-Sommer saw improved, general demand from German military harness
sub-contractors.
Sales to specialised Industrial markets (ca. 25% of Interconnect
revenues) were positive with revenues growing by 11%. In the UK,
there was good, across-the-board demand for specialist tubing and
for added value services such as re-spooling wire onto compact
spools for repair and refurbishment customers. In Germany, there
was also a strong performance in the Industrial markets, despite
the uncertain manufacturing environment in the Eurozone countries.
IS-Sommer continued to win business through an invigorated field
sales team, again supported by superior stocking and value added
services. Sales in the US benefited from the generally positive
manufacturing environment.
Motorsport accounts for ca. 20% of Interconnect revenues and
this sector delivered revenue growth of 21% in 2014. There were
gains in the UK, Germany and the US and across both the harnessing
and fastener product groups. It was a record year for Motorsport
revenues, primarily driven by the changes introduced to the Formula
1 racing series. For the 2014 season, the new 1.6 litre V6 turbo
engine was introduced as well as upgraded Energy Recovery Systems.
These changes required substantial development engineering and
design work and our businesses closely supported the teams and
engine manufacturers to ensure the new technologies were
successfully introduced. Beyond Formula 1, the Formula E series
prepared for the inaugural race and there was continued success in
the US in servicing the Nascar and United Sports Cars series. In
Germany, Filcon continued to grow its sales to VW and Porsche for
the supply of connectors for the VW World Engine and for the Le
Mans and GT car series.
In the Energy market (ca. 10% of Interconnect revenues),
IS-Sommer supplies components used in repair and refurbishment of
low and medium voltage electricity distribution in Germany. In
2014, revenues increased by 13% driven by a higher level of
refurbishment work by its customers and benefiting from development
work carried out in the prior year. Following its acquisition of
Rayquick in late 2012, IS-Sommer secured its appointment as one of
only two German Master Distributors for its key energy products
supplier and reaped the sales benefits during this year. In the UK,
the businesses are focused on a small number of key customers
involved in portable electricity generators, subsea power
transmission cables and the manufacture of batteries. As the market
is concentrated in a small number of key customers, demand can vary
significantly and 2014 was a particularly positive year.
In October 2013, Filcon acquired the assets and goodwill of the
Sacee business which supplies specialist connectors to the
Satellite sector in France; its operations were integrated into
Filcon in Munich. In June 2014, the fastener business was
strengthened by the acquisition of SFC, a UK based distributor of
fasteners and ancillary products to the Aerospace, Industrial and
Motorsport sectors. SFC has a strong fit with Clarendon and brings
a long-standing reputation for technical competence, design skills
and added-value assembly expertise to our rapidly expanding
fastener activities. These acquisitions have strengthened the
Group's position in attractive segments of the Interconnect market
and the performance of both businesses since acquisition has been
good and in line with expectations.
Fluid Controls
The Fluid Controls businesses, which account for ca. 30% of
Sector revenues, increased revenues by 9%. The Hawco business made
significant gains in the core Food and Beverage sector, following a
subdued prior year which had included delayed investments by
customers and a hang-over of surplus catering equipment from the
2012 London Olympics.
In Food Retailing, Hawco has had to respond to significant
structural changes in the industry and now is seeing the benefits
of its repositioning and developmental activities. The trend away
from major out-of-town food retail stores and towards convenience
stores initially dampened demand for Hawco's equipment, but Hawco
is now having good success in both the UK and Europe with its range
of scroll compressors which offer a smaller footprint and greater
efficiency. Hawco is also seeing growing demand for refrigeration
units used in transport applications reflecting the increased use
of home shopping and delivery. Sales into the Brewery sector have
also been buoyed by the introduction of scroll compressors and
other improved products designed to provide 'at source' cooling for
smaller outlets such as cafes and bars. This reduces the need for
cellar cooling space, is more energy efficient and avoids product
waste as the beer is only cooled when needed.
The Abbeychart business faced a mixed environment in its key
markets with Coffee and Catering continuing to perform well, but
with demand from the Vending machine and pure Water applications
weakening. In the Coffee and Catering markets, Abbeychart supplies
to the equipment OEMs and in the traditional hot and cold drinks
Vending market, the primary customers are the equipment operators
that supply ingredients and maintain the machines. There have been
attempts to drive consolidation in the fragmented Vending
operators' market and it may take some time before the results of
this activity are clear. The Hawco Group will continue to realign
the Abbeychart business model and resources to match changes in
end-user tastes and to focus on growth markets where technical
expertise can add value.
FINANCE REVIEW
Results in 2014
Diploma reported a strong performance this year, with both
underlying revenues and adjusted operating profit increasing by 8%
as the businesses benefited from more positive economic conditions
in most of its key markets. Reported revenues and adjusted
operating profits were GBP305.8m and GBP56.7m respectively. Free
cash flow was strong at GBP37.8m of which GBP16.5m was spent on
acquisitions and the Group's return on adjusted trading capital
employed remained strong at 25.8%.
Underlying revenues and adjusted operating profits are after
adjusting for the contribution from businesses acquired during the
year and for the impact on the translation of the results of the
overseas businesses from the significant strengthening of UK
sterling, in most of the major currencies in which the Group
operates.
With ca. 75% of the Group's revenues generated overseas, the
impact on reported results from currency translation has led to a
reduction in revenues and adjusted operating profits of GBP17.7m
and GBP4.1m respectively, on a constant currency basis. These
translational currency effects more than offset contributions from
acquisitions of GBP15.4m in revenue and GBP2.3m in adjusted
operating profit.
The results of the Healthcare businesses, which represent 80% of
Life Sciences revenues, were also impacted by the large
depreciation of the Canadian and Australian dollars against the
currencies in which these businesses purchase their products. This
currency transactional exposure led to a 300 bps reduction in gross
margins in these businesses, despite a substantial amount of this
exposure being hedged through to June 2014 by forward currency
contracts. As these are replaced by contracts which reflect more
current exchange rates, the pressure on Healthcare gross margins
from the weaker Canadian and Australian currencies will continue
well into 2015. Transactional currency exposures in the rest of the
Group's businesses were not material.
The weaker gross margins in the Healthcare businesses were
partly mitigated by a stronger mix of higher margin consumable
revenues in these businesses and by strong control over operating
costs. With resilient gross margins continuing in the Seals and
Controls businesses and operational benefits now coming through
from the Investment for Growth programme, Group adjusted operating
margins reduced by only 50 bps to 18.5%, compared with 19.0%
reported last year.
Investment for Growth programme
The Investment for Growth programme which was initiated in 2012
is now approaching completion. The programme comprised a series of
specific investments and additional management resources designed
to provide the foundation for the next phase of the Group's growth.
Major investments have been made in modern and expanded facilities
and in powerful and efficient new ERP systems.
By the end of the 2014 financial year, GBP5.1m had been invested
across the Group in new facilities and IT infrastructure of which
GBP3.6m was in capital expenditure and GBP1.5m had been expensed.
The remaining investment of ca. GBP0.3m will be spent in 2015 in
completing the implementation of a new ERP system in the Canadian
Healthcare businesses. The benefits resulting from these
investments have started to positively impact in the second half of
2014, delivering greater operating efficiencies and improved
management of working capital as revenues increased.
Investment was also made in additional senior managers at the
Group's Head Office and in the major businesses to strengthen
corporate development resources, adding ca. GBP1.2m to annual
operating costs. Outside the Investment for Growth programme, there
was also further investment within the businesses to strengthen
sales and business development resources and in regional
management. These additional resources were in place at the
beginning of 2014 and gave the strong leadership required to extend
the businesses into new areas and develop acquisition
opportunities.
Adjusted profit before tax, earnings per share and dividends
Adjusted profit before tax increased by 3% to GBP56.2m (2013:
GBP54.3m). There was a net finance expense this year of GBP0.5m
(2013: GBPNil) which included GBP0.4m of bank facility and
commitment fees, following the renewal of the Group's bank
facilities in June 2014. A change in the interest rate used to
calculate the return on the pension scheme assets, required by IAS
19 (revised), led to a net interest charge against profit this year
of GBP0.2m, compared with net interest income of GBP0.2m last year.
Statutory profit before tax was GBP49.8m (2013: GBP48.5m), after
acquisition related charges of GBP6.4m (2013: GBP5.6m) and fair
value remeasurements of the put options held over minority
interests which this year were net GBPNil (2013: GBP0.2m).
The Group's adjusted effective accounting tax charge fell again
in 2014 to 26.3% (2013: 27.3%) of adjusted profit before tax. This
reflected the benefit of a further reduction in effective UK
corporation tax rates to 22.0% (2013: 23.5%), together with the
benefit of current and prior year manufacturing tax relief claims
in the US Seals businesses which led to a lower effective tax rate
in the US of 35% (2013: 37%). The Group's cash tax rate on adjusted
profit before tax fell to 23.1% (2013: 27.3%) as UK tax payments
benefited from the exercise of share awards last year under the
Group's LTIP.
Adjusted earnings per share increased by 4% to 36.1p, compared
with 34.8p last year reflecting the benefit from the lower
effective tax rate this year. IFRS basic earnings per share
increased to 31.4p (2013: 30.7p).
The Board continues to pursue a policy of increasing dividends
to shareholders each year, while targeting towards two times
dividend cover (defined as the ratio of adjusted EPS to total
dividends paid and proposed for the year). Given the strong
underlying performance and encouraging prospects for acquisition
activity in 2015, the Directors have recommended an increase in the
final dividend of 8% to 11.6p per share. This gives a total
dividend per share for the year of 17.0p per share with represents
an 8% increase on the prior year dividend of 15.7p. The dividend
cover moves to 2.1 times from 2.2 times reported last year.
Free cash flow
The Group continues to generate strong free cash flow which in
2014 was GBP37.8m (2013: GBP31.6m), despite funding an increase in
working capital to support the stronger trading environment towards
the end of the year. Free cash flow, which is before expenditure on
acquisitions or returns to shareholders, represented 91% of
adjusted profit after tax (2013: 80%).
The increase in funding of working capital of GBP4.6m (2013:
GBP1.1m) led to a small reduction in operating cash flow of GBP0.9m
to GBP55.0m (2013: GBP55.9m). This increase was driven by increased
inventory of GBP4.6m (2013: GBP0.9m) which reflected a number of
operational priorities, including contingencies held against a
possible longshoreman's dispute in the United States. The higher
level of inventories at the year end led to the Group's KPI metric
of working capital as a proportion of revenue increasing to 17.2%,
compared with 16.7% last year.
Group tax payments reduced by GBP1.8m to GBP13.0m (2013:
GBP14.8m) despite higher profits, primarily because of the tax
relief taken on the exercise of the LTIP share awards in 2013 and
reflecting the benefit of small prior year tax repayments in the US
Seals businesses. On an underlying basis and before the currency
effects of translation, cash tax payments remained in line with
last year at ca. 27% of adjusted profit before tax.
As anticipated last year, capital expenditure reduced to a more
normal level of GBP2.2m (2013: GBP4.6m) as the Group's Investment
for Growth programme reached its final stages. During the year,
GBP0.3m was invested in the ongoing ERP implementation in the
Canadian Healthcare businesses which represents the final project
in this programme. This compares with GBP2.0m of capital invested
in this programme last year.
Outside of the Investment for Growth programme, the Healthcare
businesses in Canada and Australia also reduced their expenditure
on acquiring field equipment to support customer contracts with
hospitals to GBP0.7m (2013: GBP1.7m). Last year this expenditure
included GBP1.0m on funding endoscopy contracts in Vantage
structured on a cost per procedure ("CPP") basis; these contracts
have been delayed, pending the introduction in 2015 of a new series
of endoscopes. In the Seals and Controls Sectors, GBP0.5m was spent
on new tooling and warehouse equipment, including GBP0.1m on
line-side equipment to support a new supply project in IS Group. A
further GBP0.2m was invested in refurbishing the office and
warehouse facilities in Hawco and HKX and GBP0.5m was spent on
upgrading the existing IT hardware and software infrastructure in a
number of the Group's businesses.
The Company paid the PAYE income tax liability of GBP1.8m
arising on the exercise of LTIP share awards, in exchange for
reduced share awards to participants; the comparable payments last
year of GBP4.7m related to the exercise of several awards which had
vested in earlier years under the Company's LTIP.
The Group spent GBP16.5m of the free cash flow on acquisitions,
as described below and GBP18.4m (2013: GBP17.6m) on paying
dividends to both Company and minority shareholders.
Acquisitions completed during the year
The Group invested cash of GBP16.5m (2013: GBP2.2m) in
acquisitions during the year, including GBP1.5m on acquiring
outstanding minority interests and GBP0.1m of deferred
consideration.
The largest investment was GBP9.9m in acquiring 80% of Kentek, a
business based in Finland, but with a large proportion of its sales
being carried out across Russia in supplying filters and related
products for a range of heavy mobile machinery. A further GBP5.0m,
was invested in acquiring several small, but strategically
important businesses which extend either the product or geography
of the Group's existing businesses. These acquisitions added
GBP9.0m to the Group's acquired intangible assets which at 30
September 2014 were GBP28.6m, after amortisation of GBP5.6m (2013:
GBP5.6m). Goodwill increased by GBP6.0m to GBP80.2m at 30 September
2014, after making some small fair value adjustments to the assets
acquired.
Goodwill is not amortised, but is assessed each year to
determine whether there has been any impairment in the historic
value of goodwill acquired. This year the assessment has been
carried out at a Sector level rather than a business unit level as
this more accurately reflects the level at which management monitor
the value of goodwill. The exercise to assess whether goodwill has
been impaired which is described in note 10 to the consolidated
financial statements, concluded that there had been no impairment
in the value of goodwill at 30 September 2014.
Shortly after the year end, the DHG business completed the
acquisition of 80% of Technopath Distribution Limited for cash
consideration of GBP9.6m and debt acquired of GBP1.5m. Put/call
options have also been included which allows the Group to acquire
the outstanding minority shares over a period of up to five
years.
Liabilities to minority shareholders
At 30 September 2014, the Group's liability to purchase
outstanding minority shareholdings had increased modestly to
GBP3.5m (2013: GBP2.8m). During the year, the outstanding minority
interests of 20% in DSL and of 49% in HPS (a small subsidiary of
the RT Dygert seals business) were acquired for cash consideration
of GBP1.5m. The acquisition of Kentek in January 2014 included
put/call options over the outstanding 20% of share capital held by
management in this business which were valued at GBP2.3m
At 30 September 2014, the put options over the outstanding
minority interests held in M Seals and Kentek were valued at
GBP3.5m, based on the Directors' latest estimate of the Earnings
before Interest and Tax ("EBIT") of these businesses when these
options are expected to crystallise. The Directors expect to
acquire 10% of the outstanding minority interest in Kentek within
the next six months, with the remaining interest likely be
exercised between the next two and five years.
In addition to the liability to minority shareholders, the Group
also has a liability at 30 September 2014 for deferred
consideration of up to GBP0.5m (2013: GBP0.2m) primarily relating
to acquisitions completed during the year and which, subject to
achievement of performance conditions, will be paid before the end
of the 2015 calendar year. During the year, deferred consideration
of GBP0.1m was paid to the vendor of BGS, the Australian Healthcare
business acquired in 2010 and there remains GBP0.1m which will be
paid shortly.
Return on adjusted trading capital employed and capital
management
A key metric that the Group uses to provide an indication of the
overall profitability of the Group and its success in creating
value for shareholders is the Return on Adjusted Trading Capital
Employed ("ROATCE"). This is a pretax measure which is applied
against the fixed assets and working capital of the Group, together
with all the acquisition related charges and goodwill previously
written off. At 30 September 2014, the Group ROATCE remained
unchanged from last year at 25.8%. Adjusted trading capital
employed is set out in Note 3 to the consolidated financial
statements.
At the Sector level, we have this year amended the basis of the
ROATCE calculation to be consistent with that used to calculate
Group ROATCE. In particular, all previously written off acquisition
related charges and goodwill is now included in each Sector's
trading capital employed for the purposes of calculating Sector
ROATCE. The comparative ROATCE's for 2013 have been restated on a
similar basis.
The Group continues to maintain a strong balance sheet with net
cash funds increasing by GBP2.0m to GBP21.3m at 30 September 2014.
Surplus cash funds are generally repatriated to the UK, unless they
are required locally to meet certain commitments, including
acquisitions.
On 28 June 2014, the Group renewed its existing revolving
multi-currency credit facility at GBP25m, with an option for the
Group to extend this facility to GBP50m, subject to market pricing.
This facility, which is generally utilised to meet any shortfall in
cash to fund acquisitions, is committed until June 2017 and was
renewed on more favourable terms than the previous facility.
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 2014 of GBP1.7m (2013: GBP1.5m).
The Group also maintains a small legacy defined benefit pension
scheme in the UK which has been closed to new entrants and further
accruals for many years. The latest triennial actuarial valuation
was carried out as at 30 September 2013 and the funding deficit
remained unchanged at GBP2.7m, with strong equity returns in 2013
offsetting the large reduction in bond yields since the last
valuation was completed in 2010. The Group continues to make
regular cash contributions to the scheme at an annual rate of
GBP0.3m, as agreed with the actuary, with the objective of
eliminating the funding deficit over eight years. The Group
continues to look for opportunities to provide sufficient security
to the Trustees in order to limit any requirement to increase the
existing cash contribution to the scheme.
On an accounting basis, a further reduction of ca. 0.5% in bond
yields since last year was again offset by stronger equity returns
and the accounting deficit improved to GBP4.3m at 30 September 2014
(2013: GBP4.7m). Scheme assets which are largely represented by
equities, increased by GBP1.6m to GBP24.9m while pension
liabilities increased by GBP1.2m to GBP29.2m.
PRINCIPAL RISKS AND UNCERTAINTIES
Risk assessment and evaluation is an integral part of the
Group's annual planning cycle and market specific risks are
evaluated as part of the annual budgeting process.
Each operating business is required each year to identify and
document the significant strategic, operational and financial and
accounting risks facing the business. For each significant risk, a
number of scenarios are mapped out and an assessment is made of the
likelihood and impact of each risk scenario.
Finally, plans and processes are established which are designed
to control each risk and minimise its potential impact. The risk
assessments from each of the operating businesses are reviewed with
the Executive Directors and a consolidated risk assessment is
reviewed by the Board.
The principal risks and uncertainties which are currently judged
to have the largest potential impact on the Group's long term
performance are set out below. There have been no significant
changes to these risks and uncertainties, or their potential impact
on the Group, since last year.
Risk: Strategic
Downturn in major markets
Adverse changes in the major markets in which the businesses
operate can have a significant impact on performance. The effects
will either be seen in terms of slowing revenue growth, due to
reduced or delayed demand for products and services, or margin
pressures due to increased competition.
A number of characteristics of the Group's businesses moderate
the impact of economic and business cycles on the Group as a
whole:
-- The Group's businesses operate in three different Sectors
with different cyclical characteristics and across a number of
geographic markets.
-- The businesses offer specialised products and services; this
offers a degree of protection against customers quickly switching
business to achieve a better price.
-- A high proportion of the Group's revenues comprise consumable
products which are purchased as part of customers' operating
expenditure, rather than through capital budgets.
-- In many cases the products are used in repair, maintenance
and refurbishment applications, rather than original equipment
manufacture.
Mitigation
The businesses identify key market drivers and monitor the
trends and forecasts, as well as maintaining close relationships
with key customers who may give an early warning of slowing
demand.
Changes to cost levels and inventories can then be made in a
measured way to mitigate the effects.
Significant global events are closely monitored to determine any
potential impact on key markets.
Loss of key supplier(s)
For manufacturer--branded products, there are risks to the
business if a major supplier decides to cancel a distribution
agreement or if the supplier is acquired by a company which has its
own distribution channels in the relevant market. There is also the
risk of a supplier taking away exclusivity and either setting up
direct operations or appointing another distributor.
In times of rapid economic expansion in activity, such as after
a global recession, there is also a risk that the lead times to
supply key product can become very long. Currently no single
supplier represents more than 10% of Group revenue and only five
single suppliers represent more than 2% each of Group revenue.
Relationships with suppliers have normally been built up over
many years and a strong degree of interdependence has been
established. The average length of the principal supplier
relationships in each of the Sectors is over ten years.
The strength of the relationship with each supplier and the
volume of activity generally ensures continuity of supply, when
there is shortage of product.
Mitigation
Actions to mitigate the risks include:
-- Long term, multi--year exclusive contracts signed with
suppliers with change of control clauses, where possible, included
in contracts for protection or compensation in the event of
acquisition.
-- Collaborative projects undertaken and relationships
maintained with individuals at many levels of the supplier
organisation, together with regular review meetings and adherence
to contractual terms.
-- Regular review of inventory levels.
-- Bundling and kitting of products and provision of added value services.
-- Periodic research of alternative suppliers as part of contingency planning.
Loss of major customer(s)
The loss of one or more major customers can be a material
risk.
The nature of the Group's businesses is such that there is not a
high level of dependence on any individual customers and no single
customer represents more than 5% of Sector revenue or more than 2%
of Group revenue.
Mitigation
Specific large customers are important to individual operating
businesses and a high level of effort is invested in ensuring that
these customers are retained and encouraged not to switch to
another supplier.
In addition to providing high levels of customer service, close
integration is established where possible with customers' systems
and processes.
Product liability
There is a risk that products supplied by a Group business may
fail in service, which could lead to a claim under product
liability. The businesses, in their Terms and Conditions of sale
with customers, will typically mirror the Terms and Conditions of
purchase from the suppliers. In this way the liability can be
limited and subrogated to the supplier.
However, if a legal claim is made it will typically draw in our
business as a party to the claim and the business may be exposed to
legal costs and potential damages if the claim succeeds and the
supplier 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.
Mitigation
Technically qualified personnel and control systems are in place
to ensure products meet quality requirements. The Group's
businesses are required to undertake product risk assessments and
comprehensive Supplier Quality Assurance assessments. The Group has
also established Group--wide product liability insurance which
provides worldwide umbrella insurance cover of GBP20m in all
Sectors.
The Group's businesses may also elect not to supply products if
they are not fully confident that the products will meet the
demands of the operating environment.
The Group's businesses continue to invest in new testing
equipment; employees have also undergone product liability training
during the year and are regularly reviewed to demonstrate
compliance with Group policies and procedures relating to product
liability.
Loss of key personnel
The success of the Group is built upon strong, self--standing
management teams in the operating businesses, committed to the
success of their respective businesses. As a result, the loss of
key personnel can have a significant impact on performance, at
least for a time.
Mitigation
Contractual terms such as notice periods and non--compete
clauses can mitigate the risk in the short term. However, more
successful initiatives focus on ensuring a challenging work
environment with appropriate reward systems. The Group places very
high importance on planning the development, motivation and reward
for key managers in the operating businesses including:
-- Ensuring a challenging working environment where managers
feel they have control over, and responsibility for their
businesses.
-- Establishing management development programmes to 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.
Risk: Operational
Major damage to premises
The Group's businesses mostly operate from combined
office/warehouse facilities which are dedicated to each business
and not shared with other Group businesses.
Major damage to the facilities from fire, malicious damage or
natural disaster would impact a business for a period until the
damage is repaired or alternative facilities have been established.
However, the Group has not suffered any major damage to premises in
recent years and in Clearwater, Florida there has been no
significant hurricane activity for at least the last five
years.
Mitigation
The business where the risk is greatest is Hercules in
Clearwater, Florida which is most at risk from an environmental
disaster caused by a hurricane or tornado. The building structure
has been designed to withstand 150mph winds, electricity generators
have been installed on site and a specific disaster plan has been
drawn up and is regularly reviewed.
Contingency plans include:
-- Backup power generators.
-- Materials on hand to secure the facility.
-- Communications rerouted to other branches or interim locations.
-- IT recovery plan using backup server in separate location.
-- Regular building inspection and weather monitoring.
-- Plans to drop--ship product from suppliers direct to customers.
The other businesses have also developed plans in the event of
incidents, including fire and security alarms and regular fire
drills. Insurance policies are also in place including property,
contents and business interruption cover which would mitigate the
financial impact.
However, the priority in such an event is to become fully
operational as quickly as possible so as to minimise disruption to
customers. Plans to ensure a quick and orderly recovery have been
developed by the businesses and are periodically reviewed.
Loss of Information Technology ("IT") systems
Computer systems are critical to the businesses since their
success is built on high levels of customer service and quick
response. A complete failure of IT systems, with the loss of
trading and other records, would be more damaging to the businesses
than major physical damage to facilities.
Mitigation
Business interruption insurance cover is held across the Group
and contingency plans have been drawn up in all businesses. The
recovery plans differ by individual business, but will include some
or all of the following elements:
-- Full data backups as a matter of routine are automatically
taken on a regular basis each week and stored online.
-- Backup servers identified and communication reroute options identified.
-- Service contracts with IT providers with access to replacement servers.
-- Uninterruptible power sources and backup generators where required.
-- Virus checkers and firewalls.
Risk: Financial and Accounting
The Group's activities expose it to a variety of financial and
accounting risks, including foreign currency, liquidity, interest
rate and credit. The policies for managing these financial risks,
as well as the management of capital risks, are set out in the
consolidated financial statements which will be published on 5
December 2014. The principal financial and accounting risks are
summarised below. The Group's overall management of the financial
risks is carried out by a central treasury team under policies and
procedures which are reviewed and approved by the Board.
The treasury team identifies, evaluates and where appropriate,
hedges financial risks in close co--operation with the Group's
operating businesses. The treasury team does not undertake
speculative foreign exchange dealings for which there is no
underlying exposure.
The principal accounting risk is that of inventory obsolescence
which is managed by the operating businesses.
Foreign currency - Translational exposure
Foreign currency risk is the risk that changes in currency rates
will affect the Group's results. The Group operates internationally
and is exposed to foreign exchange risk arising from various
currency exposures, primarily with respect to the US dollar, the
Canadian dollar, the Australian dollar and the Euro. The net assets
of the Group's operations outside the UK are also exposed to
foreign currency translation risk.
During the year ended 30 September 2014, ca. 75% of the Group's
revenue and adjusted operating profits were earned in currencies
other than UK sterling. In comparison to the prior year, the net
effect of currency translation was to decrease revenue by GBP17.7m
and decrease adjusted operating profit by GBP4.1m. It is estimated
that a further strengthening of UK sterling by 10% against all the
currencies in which the Group does business, would reduce adjusted
operating profit before tax by approximately GBP4.3m (8%), due to
currency translation.
Currency exposures also arise on the net assets of the Group's
foreign operations. At 30 September 2014 the Group's non--UK
sterling net assets in overseas businesses was GBP144.9m (2013:
GBP132.9m), which represented 77% of the Group's net assets. It is
estimated that a further strengthening of UK sterling of 10%
against all the non--UK sterling net assets would reduce
shareholders' funds by GBP13.2m.
Details of average exchange rates used in the translation of
overseas earnings and of year end exchange rates, used in the
translation of overseas balance sheets, for the principal
currencies used by the Group, are shown in note 15 to the
Preliminary Announcement.
Mitigation
The Group does not hedge translational exposure.
Foreign currency - Transactional exposure
The Group's UK businesses are exposed to foreign currency risk
on those purchases that are denominated in a currency other than
their local currency, principally US dollars, Euro and Japanese
yen. 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.
Mitigation
The Group's businesses may hedge up to 80% of forecast (being a
maximum of eighteen months) foreign currency exposures using
forward foreign exchange contracts.
The Group classifies its forward foreign exchange contracts,
which hedge forecast transactions, as cash flow hedges and states
them at fair value.
Inventory obsolescence
Working capital management is critical to success in specialised
industrial businesses as this has a major impact on cash flow. The
principal risk to working capital is in inventory obsolescence and
write--off.
The charge against operating profit in respect of old or surplus
inventory is ca. GBP1m each year, but inventories are generally not
subject to technological obsolescence.
Mitigation
Inventory write--offs are controlled and minimised by active
management of inventory levels based on sales forecasts and regular
cycle counts.
Where necessary, a provision is made to cover both excess
inventory and potential obsolescence.
RESPONSIBILITY STATEMENT OF THE DIRECTORS
IN RESPECT OF THE ANNUAL REPORT 2014
The responsibility statement below has been prepared in
connection with the Group's full Annual Report & Accounts for
the year ended 30 September 2014. 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
2013.
This responsibility statement was approved by the Board of
Directors on 17 November 2014 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 2014
2014 2013
Note GBPm GBPm
------------------------------ ----- -------- ---------
Revenue 3,4 305.8 285.5
Cost of sales (194.2) (178.6)
------------------------------ ----- -------- ---------
Gross profit 111.6 106.9
Distribution costs (6.4) (6.4)
Administration costs (54.9) (51.8)
------------------------------ ----- -------- ---------
Operating Profit 3 50.3 48.7
Financial expense, net 5 (0.5) (0.2)
------------------------------ ----- -------- ---------
Profit before tax 49.8 48.5
Tax expense 6 (13.7) (13.7)
------------------------------ ----- -------- ---------
Profit for the year 36.1 34.8
------------------------------ ----- -------- ---------
Attributable to:
Shareholders of the Company 35.5 34.5
Minority interests 0.6 0.3
------------------------------ ----- -------- ---------
36.1 34.8
------------------------------ ----- -------- ---------
Earnings per share
Basic and diluted earnings 7 31.4p 30.7p
------------------------------ ----- -------- ---------
Alternative Performance Measures
(note 2) 2014 2013
Note GBPm GBPm
---------------------------------- ----- -------- --------
Operating profit 50.3 48.7
Add: Acquisition related charges 3 6.4 5.6
Adjusted operating profit 3,4 56.7 54.3
Deduct: Net interest expense 5 (0.5) -
----------------------------------- ----- -------- --------
Adjusted profit before tax 56.2 54.3
----------------------------------- ----- -------- --------
Adjusted earnings per share 7 36.1p 34.8p
----------------------------------- ----- -------- --------
CONSOLIDATED STATEMENT OF
INCOME AND OTHER COMPREHENSIVE INCOME
For the year ended 30 September 2014
2014 2013
GBPm GBPm
------------------------------------------------ ------ ------
Profit for the year 36.1 34.8
------------------------------------------------- ------ ------
Items that will not be reclassified
to the Consolidated Income Statement
Actuarial gains in defined benefit pension
scheme 0.3 0.2
Deferred tax on items that will not - -
be reclassified
------------------------------------------------ ------ ------
0.3 0.2
------------------------------------------------ ------ ------
Items that may be reclassified to Consolidated
Income Statement
Exchange rate adjustments on foreign
currency net investments (8.7) (2.5)
Gains on fair value of cash flow hedges 0.4 -
Net changes to fair value of cash flow
transferred to the Consolidated Income
Statement - (0.2)
Deferred tax on items that may be reclassified (0.1) 0.1
------------------------------------------------- ------ ------
(8.4) (2.6)
------------------------------------------------ ------ ------
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 28.0 32.4
------------------------------------------------- ------ ------
Attributable to:
Shareholders of the Company 27.7 32.1
Minority interests 0.3 0.3
------------------------------------------------- ------ ------
28.0 32.4
------------------------------------------------ ------ ------
CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
For the year ended 30 September 2014
Share-holders'
Share Translation Hedging Retained equity Minority Total
capital reserve reserve earnings interests equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ----- ---------- -------------- ---------- ----------- --------------- ------------ ---------
At 1 October
2012 5.7 18.7 0.2 141.2 165.8 1.4 167.2
Total
comprehensive
income - (2.5) (0.2) 34.8 32.1 0.3 32.4
Share-based
payments - - - 0.5 0.5 - 0.5
Minority
interests
acquired - - - - - (0.1) (0.1)
Tax on items
recognised
directly in
equity - - - 0.6 0.6 - 0.6
Purchase of own
shares - - - (4.7) (4.7) - (4.7)
Dividends 14 - - - (17.4) (17.4) (0.2) (17.6)
At 30 September
2013 5.7 16.2 - 155.0 176.9 1.4 178.3
Total
comprehensive
income - (8.7) 0.3 36.1 27.7 0.3 28.0
Share-based
payments - - - 0.7 0.7 - 0.7
Acquisition of
businesses 12 - - - - - 2.3 2.3
Minority
interest
put option 13 - - - (2.3) (2.3) - (2.3)
Minority
interest
acquired - - - 0.9 0.9 (0.9) -
Tax on items
recognised
directly in
equity - - - 0.5 0.5 - 0.5
Notional
purchase
of own shares - - - (1.8) (1.8) - (1.8)
Dividends 14 - - - (18.2) (18.2) (0.2) (18.4)
---------------- ----- ---------- -------------- ---------- ----------- --------------- ------------ ---------
At 30 September
2014 5.7 7.5 0.3 170.9 184.4 2.9 187.3
---------------- ----- ---------- -------------- ---------- ----------- --------------- ------------ ---------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September 2014
2014 2013
Note GBPm GBPm
----------------------------------------- ----- -------- --------
Non-current assets
Goodwill 10 80.2 78.5
Acquisition intangible assets 28.6 26.7
Other intangible assets 0.8 0.8
Investment 11 0.7 0.7
Property, plant and equipment 13.1 13.9
Deferred tax assets 0.9 2.1
------------------------------------------ ----- -------- --------
124.3 122.7
----------------------------------------- ----- -------- --------
Current assets
Inventories 54.1 46.7
Trade and other receivables 46.3 42.8
Cash and cash equivalents 9 21.3 19.3
------------------------------------------ ----- -------- --------
121.7 108.8
----------------------------------------- ----- -------- --------
Current liabilities
Trade and other payables (43.9) (40.0)
Current tax liabilities (2.3) (1.7)
Other liabilities 13 (1.6) (2.0)
(47.8) (43.7)
----------------------------------------- ----- -------- --------
Net current assets 73.9 65.1
------------------------------------------ ----- -------- --------
Total assets less current liabilities 198.2 187.8
Non-current liabilities
Retirement benefit obligations (4.3) (4.7)
Other liabilities 13 (2.4) (1.0)
Deferred tax liabilities (4.2) (3.8)
------------------------------------------ ----- -------- --------
Net assets 187.3 178.3
------------------------------------------ ----- -------- --------
Equity
Share capital 5.7 5.7
Translation reserve 7.5 16.2
Hedging reserve 0.3 -
Retained earnings 170.9 155.0
------------------------------------------ ----- -------- --------
Total shareholders' equity 184.4 176.9
Minority interests 2.9 1.4
------------------------------------------ ----- -------- --------
Total equity 187.3 178.3
------------------------------------------ ----- -------- --------
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2014
2014 2013
Note GBPm GBPm
---------------------------------------- ----- ------- -------
OPERATING PROFIT 50.3 48.7
Acquisition related charges 8 6.4 5.6
Non-cash items 8 2.9 2.7
Increase in working capital 8 (4.6) (1.1)
---------------------------------------- ----- ------- -------
Cash flow from OPERATING activities 55.0 55.9
Interest paid, net (0.3) (0.2)
Tax paid (13.0) (14.8)
---------------------------------------- ----- ------- -------
Net cash from operating activities 41.7 40.9
---------------------------------------- ----- ------- -------
Cash flow from investing activities
Acquisition of businesses (including
expenses) 12 (14.9) (1.2)
Deferred consideration paid 13 (0.1) (0.6)
Purchase of property, plant and
equipment (1.9) (4.1)
Purchase of other intangible assets (0.3) (0.5)
Proceeds from sale of property, 0.1 -
plant and equipment
---------------------------------------- ----- ------- -------
Net cash used in investing activities (17.1) (6.4)
---------------------------------------- ----- ------- -------
Cash flow from financing activities
Acquisition of minority interests 13 (1.5) (0.4)
Dividends paid to shareholders 14 (18.2) (17.4)
Dividends paid to minority interests (0.2) (0.2)
Purchase of own shares - (1.7)
Notional purchase of own shares
on exercise of share options (1.8) (3.0)
Repayment of borrowings 9 - (3.5)
---------------------------------------- ----- ------- -------
Net cash used in financing activities (21.7) (26.2)
---------------------------------------- ----- ------- -------
Net increase in cash and cash
equivalents 2.9 8.3
Cash and cash equivalents at beginning
of year 19.3 11.4
Effect of exchange rates on cash
and cash equivalents (0.9) (0.4)
---------------------------------------- ----- ------- -------
Cash and cash equivalents at end
of year 9 21.3 19.3
---------------------------------------- ----- ------- -------
ALTERNATIVE PERFORMANCE MEASURES (NOTE
2) 2014 2013
GBPm GBPm
---------------------------------------------- ----- -----
Net increase in cash and cash equivalents 2.9 8.3
Add: Dividends paid to shareholders 18.2 17.4
Dividends paid to minority interests 0.2 0.2
Acquisition of businesses and
minority interests 16.4 1.6
Deferred consideration paid 0.1 0.6
Repayment of borrowings - 3.5
--------------------------------------------- ----- -----
FREE CASH FLOW 37.8 31.6
---------------------------------------------- ----- -----
Cash and cash equivalents 21.3 19.3
Borrowings - -
---------------------------------------------- ----- -----
NET CASH 21.3 19.3
---------------------------------------------- ----- -----
1. GENERAL INFORMATION
Diploma PLC is a public limited company registered and domiciled
in England and Wales and listed on the London Stock Exchange. The
address of the registered office is 12 Charterhouse Square, London,
EC1M 6AX. The consolidated financial statements comprise the
Company and its subsidiaries (together referred to as the "Group")
and were authorised by the Directors for publication on 17 November
2014.
These statements are presented in UK sterling, with all values
rounded to the nearest one hundred thousand, except where otherwise
indicated.
The consolidated financial statements, which have been prepared
on a going concern basis, have been prepared in accordance with
International Financial Reporting Standards ("IFRS"), as adopted by
the European Union and in accordance with the Companies Act 2006,
as applicable to companies reporting under IFRS. The accounting
policies have been consistently applied in 2014 and the comparative
period, with the exception of accounting for interest on the assets
in the defined benefit pension scheme.
For the year ended 30 September 2014 the Group adopted
amendments to IAS19 (revised) "Employee Benefits" for the first
time. In accordance with the revised Standard, the Group's
accounting policy has been changed to replace interest on the
defined benefit obligation and expected return on scheme assets
with a single net interest cost, calculated by applying the
discount rate to the net defined benefit liability. This amendment,
which is not material to the Group, has been reflected in the 2014
consolidated financial statements, but not in the comparative
period. IFRS 13 "Fair Value Measurement" became effective during
the year, however this Standard does not materially impact the
Group's consolidated financial statements. There were no other 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 2014.
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
2014 and 2013. Statutory financial statements for the year ended 30
September 2013 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
2014, which were approved by the Directors on 17 November 2014,
will be sent to shareholders on 4 December 2014 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 2014 and 2013. 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 21 January 2015 in the Brewers' Hall, Aldermanbury
Square, London, EC2V 7HR. The Notice of Meeting will be sent out in
a separate Circular to shareholders.
2. ALTERNATIVE PERFORMANCE MEASURES
The Group uses a number of alternative (non-Generally Accepted
Accounting Practice ("non-GAAP")) financial measures which are not
defined within IFRS. The Directors use these measures in order to
assess the underlying operational performance of the Group and as
such, these measures are important and should be considered
alongside the IFRS measures. The following non-GAAP measures are
referred to in this Preliminary Announcement.
2.1 Adjusted operating profit
At the foot of the Consolidated Income Statement, "adjusted
operating profit" is defined as operating profit before
amortisation and impairment of acquisition intangible assets,
acquisition expenses, adjustments to deferred consideration
(collectively, "acquisition related charges"), the costs of
restructuring or rationalisation of operations and the profit or
loss relating to the sale of businesses or property. The Directors
believe that adjusted operating profit is an important measure of
the underlying operational performance of the Group.
2.2 Adjusted profit before tax
At the foot of the Consolidated Income Statement, "adjusted
profit before tax" is separately disclosed, being defined as
adjusted operating profit, after finance expense (before fair value
remeasurements under IAS 39 in respect of future purchases of
minority interests) and before tax. The Directors believe that
adjusted profit before tax is an important measure of the
underlying performance of the Group.
2.3 Adjusted earnings per share
"Adjusted earnings per share" is calculated as the total of
adjusted profit before tax, less income tax costs, but excluding
the tax impact on the items included in the calculation of adjusted
profit and the tax effects of goodwill in overseas jurisdictions,
less profit attributable to minority interests, divided by the
weighted average number of ordinary shares in issue during the
year. The Directors believe that adjusted earnings per share
provides an important measure of the underlying earning capacity of
the Group.
2.4 Free cash flow
At the foot of the Consolidated Cash Flow Statement, "free cash
flow" is reported, being defined as net cash flow from operating
activities, after net capital expenditure on fixed assets and
including proceeds received from business disposals, but before
expenditure on business combinations/investments and dividends paid
to both minority shareholders and the Company's shareholders. The
Directors believe that
free cash flow gives an important measure of the cash flow of
the Group, available for future investment.
2.5 Trading capital employed and ROATCE
In the segment analysis in note 3, "trading capital employed" is
reported, being defined as net assets less cash and cash
equivalents and after adding back: borrowings, retirement benefit
obligations, deferred tax and acquisition liabilities in respect of
future purchases of minority interests and deferred consideration.
Adjusted trading capital employed is reported as being trading
capital employed plus goodwill and acquisition related charges
previously written off (net of deferred tax on acquisition
intangible assets). Return on adjusted trading capital employed
("ROATCE") at the Group and Sector level is defined as the adjusted
operating profit, divided by adjusted trading capital employed and
adjusted for the timing effect of major acquisitions and disposals.
The Directors believe that ROATCE is an important measure of the
underlying performance of the Group.
3. Business Sector Analysis
For management reporting purposes, the Group is organised into
three main business Sectors: Life Sciences, Seals and Controls.
These Sectors form the basis of the primary reporting format
disclosures below. Sector revenue represents revenue from external
customers; there is no inter-Sector revenue. Sector results, assets
and liabilities include items directly attributable to a Sector, as
well as those that can be allocated on a reasonable basis.
Sector assets exclude cash and cash equivalents, deferred tax
assets and corporate assets that cannot be allocated on a
reasonable basis to a business Sector. Sector liabilities exclude
borrowings, retirement benefit obligations, deferred tax
liabilities and corporate liabilities that cannot be allocated on a
reasonable basis to a business Sector. These items are shown
collectively in the following analysis as "unallocated assets" and
"unallocated liabilities", respectively.
Life
Sciences Seals Controls Group
2014 2013 2014 2013 2014 2013 2014 2013
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------- ------- ------- ------- ------- ------- ------- -------
Revenue
- existing businesses 91.3 93.2 106.4 106.1 92.7 86.2 290.4 285.5
- acquisitions 0.1 - 13.4 - 1.9 - 15.4 -
----------------------- ------- ------- ------- ------- ------- ------- ------- -------
Revenue 91.4 93.2 119.8 106.1 94.6 86.2 305.8 285.5
Adjusted operating
profit
- existing businesses 19.6 20.9 19.8 19.5 15.0 13.9 54.4 54.3
- acquisitions 0.1 - 1.9 - 0.3 - 2.3 -
----------------------- ------- ------- ------- ------- ------- ------- ------- -------
Adjusted operating 19.7 20.9 21.7 19.5 15.3 13.9 56.7 54.3
profit
Acquisition related (2.3) (2.8) (3.2) (2.0) (0.9) (0.8) (6.4) (5.6)
charges
------------------------ ------- ------- ------- ------- ------- ------- ------- -------
operating Profit 17.4 18.1 18.5 17.5 14.4 13.1 50.3 48.7
------------------------ ------- ------- ------- ------- ------- ------- ------- -------
Acquisition related charges of GBP6.4m (2013: GBP5.6m) comprises
GBP5.6m (2013: GBP5.6m) of amortisation of acquisition intangible
assets and GBP0.8m of acquisition expenses (2013: negligible).
Life Sciences Seals Controls Group
2014 2013 2014 2013 2014 2013 2014 2013
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Operating assets 29.3 29.0 45.0 38.4 37.2 33.5 111.5 100.9
Investment - - 0.7 0.7 - - 0.7 0.7
Goodwill 44.2 47.3 21.0 16.6 15.0 14.6 80.2 78.5
Acquisition intangible
assets 10.1 12.9 15.8 11.3 2.7 2.5 28.6 26.7
---------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
83.6 89.2 82.5 67.0 54.9 50.6 221.0 206.8
Unallocated assets:
- Deferred tax assets 0.9 2.1
- Cash and cash
equivalents 21.3 19.3
- Corporate assets 2.8 3.3
---------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Total assets 83.6 89.2 82.5 67.0 54.9 50.6 246.0 231.5
---------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Operating liabilities (14.7) (14.7) (14.6) (11.6) (14.9) (13.7) (44.2) (40.0)
Unallocated liabilities:
- Deferred tax liabilities (4.2) (3.8)
- Retirement benefit
obligations (4.3) (4.7)
- Acquisition liabilities (4.0) (3.0)
- Corporate liabilities (2.0) (1.7)
---------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Total liabilities (14.7) (14.7) (14.6) (11.6) (14.9) (13.7) (58.7) (53.2)
---------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Net assets 68.9 74.5 67.9 55.4 40.0 36.9 187.3 178.3
---------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
OTHER SECTOR INFORMATION
Capital expenditure 1.2 2.8 0.5 0.9 0.5 0.9 2.2 4.6
Depreciation and
amortisation 1.3 1.4 0.7 0.7 0.5 0.4 2.5 2.5
---------------------------- ---------- --------- ------- ------- ------- ------- ------- -------
Alternative Performance Life
Measures Sciences Seals Controls Group
(Note 2) 2014 2013 2014 2013 2014 2013 2014 2013
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------- -------
NET ASSETS 68.9 74.5 67.9 55.4 40.0 36.9 187.3 178.3
Add/(deduct):
* Deferred tax, net 3.3 1.7
* Retirement benefit obligations 4.3 4.7
* Acquisition liabilities 4.0 3.0
* Cash and cash equivalents (21.3) (19.3)
------- -------
REPORTED TRADING
CAPITAL EMPLOYED 177.6 168.4
* Historic goodwill and acquisition related charges,
net of deferred tax 22.3 19.1 19.6 17.3 7.7 6.7 49.6 43.1
ADJUSTED TRADING
CAPITAL EMPLOYED 91.2 93.6 87.5 72.7 47.7 43.6 227.2 211.5
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------- -------
ROATCE(1) 21.9% 22.3% 26.0% 27.1% 33.2% 32.0% 25.8% 25.8%
(1) ROATCE is calculated after adjusting
for the timing of acquisitions completed
during in the year.
-------------------------------------------------------------------------------------------------------------- ------- -------
4. GEOGRAPHIC SECTOR ANALYSIS BY ORIGIN
Adjusted Trading
operating Non-current capital Capital
Revenue profit assets(1) employed expenditure
2014 2013 2014 2013 2014 2013 2014 2013 2014 2013
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
United
Kingdom 85.7 74.8 13.8 12.0 23.8 21.3 39.7 34.2 0.5 1.0
Rest of
Europe 53.2 40.1 7.9 6.3 22.0 12.9 32.2 21.7 0.1 0.4
North America(2) 166.9 170.6 35.0 36.0 76.9 85.7 105.7 112.5 1.6 3.2
------------------ -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
305.8 285.5 56.7 54.3 122.7 119.9 177.6 168.4 2.2 4.6
------------------ -------- -------- ------- ------- --------- -------- -------- -------- -------- --------
(1) Non-current assets exclude the investment and deferred tax
assets.
(2) North America includes the Australian Healthcare
businesses.
5. FINANCIAL EXPENSE, NET
2014 2013
GBPm GBPm
-------------------------------------------------------- -------- --------
Interest and similar income
- interest receivable on short term
deposits 0.1 0.1
- interest income on the defined
benefit pension scheme - 0.2
---------------------------------------------------------- -------- --------
0.1 0.3
-------------------------------------------------------- -------- --------
Interest expense and similar charges
- bank facility and commitment fees (0.4) (0.1)
- interest payable on bank and other
borrowings - (0.2)
(0.2) -
* interest expense on the defined benefit pension
scheme
-------------------------------------------------------- -------- --------
(0.6) (0.3)
-------------------------------------------------------- -------- --------
Net interest expense (0.5) --
- fair value remeasurement of put
options (note 13) - (0.2)
---------------------------------------------------------- -------- --------
FINANCIAL EXPENSE, NET (0.5) (0.2)
---------------------------------------------------------- -------- --------
The fair value remeasurement of GBPNil (2013: GBP0.2m) includes
GBP0.1m (2013: GBP0.3m) which relates to the unwinding of the
discount on the liability for future purchases of minority
interests.
As described further in Note 1, the Group has adopted the
amendments set out in IAS19 (revised) 'Employee Benefits' which has
given rise to an interest expense on the defined pension scheme of
GBP0.2m, compared with interest income of GBP0.2m last year. If
this amendment had been adopted last year, the interest income of
GBP0.2m on the defined pension scheme would have been an interest
expense of GBP0.2m. The comparative however has not been restated
as the amount is not material.
6. TAX EXPENSE
2014 2013
GBPm GBPm
----------------------------------------- ------ ------
Current tax
The tax charge is based on the profit
for the year and comprises:
- UK corporation tax 2.6 2.7
- Overseas tax 12.1 12.1
----------------------------------------- ------ ------
14.7 14.8
Adjustments in respect of prior year:
(0.1) -
* UK corporation tax
- Overseas tax (0.4) (0.3)
----------------------------------------- ------ ------
Total current tax 14.2 14.5
----------------------------------------- ------ ------
Deferred tax
The net deferred tax credit based on
the origination and reversal of timing
differences comprises:
- United Kingdom - 0.1
- Overseas (0.5) (0.9)
Total deferred tax (0.5) (0.8)
----------------------------------------- ------ ------
TOTAL TAX ON PROFIT FOR THE YEAR 13.7 13.7
----------------------------------------- ------ ------
The Group earns its profits in the UK and Overseas. The UK
corporation tax rate reduced from 23% to 21% on 31 March 2014;
however as the Group prepares its consolidated financial statements
for the year to 30 September, the effective tax rate for UK
corporation tax in respect of the year ended 30 September 2014 was
22% (2013: 23.5%). The Group's net overseas tax rate is higher than
that in the UK, primarily because the profits earned in the US are
taxed at rates of up to ca. 38%.
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 112,893,129 (2013: 112,454,287) and the
profit for the year attributable to shareholders of GBP35.5m (2013:
GBP34.5m). There were no potentially dilutive shares.
Adjusted earnings per share
Adjusted earnings per share, which is defined in note 2, is
calculated as follows:
2014 2013 2014 2013
pence pence
per per GBPm GBPm
share share
---------------------------------------- ------- ------- ------- -------
Profit before tax 49.8 48.5
Tax expense (13.7) (13.7)
Minority interests (0.6) (0.3)
---------------------------------------- ------- ------- ------- -------
Earnings for the year attributable
to shareholders of the Company 31.4 30.7 35.5 34.5
Acquisition related charges 5.7 4.9 6.4 5.6
Fair value remeasurement of put
options - 0.2 - 0.2
Tax effects on acquisition related
charges and fair value remeasurements (1.0) (1.0) (1.1) (1.1)
ADJUSTED EARNINGS 36.1 34.8 40.8 39.2
---------------------------------------- ------- ------- ------- -------
8. RECONCILIATION OF CASH FLOW FROM OPERATING ACTIVITIES
2014 2014 2013 2013
GBPm GBPm GBPm GBPm
-------------------------------------- ------ ------ ------ ------
Operating profit 50.3 48.7
Acquisition related charges 6.4 5.6
-------------------------------------- ------ ------ ------ ------
Adjusted operating profit 56.7 54.3
Depreciation or amortisation
of tangible and other intangible
assets 2.5 2.5
Share-based payments expense 0.7 0.5
Cash paid into defined benefit
schemes (0.3) (0.3)
-------------------------------------- ------ ------ ------ ------
Non-cash items 2.9 2.7
-------------------------------------- ------ ------ ------ ------
Operating cash flow before
changes in working capital 59.6 57.0
Increase in inventories (4.6) (0.9)
Increase in trade and other
receivables (3.1) (2.5)
Increase in trade and other
payables 3.1 2.3
-------------------------------------- ------ ------ ------ ------
Increase in working capital (4.6) (1.1)
-------------------------------------- ------ ------ ------ ------
Cash flow from operating activities,
before acquisition expenses 55.0 55.9
-------------------------------------- ------ ------ ------ ------
9. NET CASH
The movement in net cash during the year is as follows:
2014 2013
GBPm GBPm
------------------------------------------- ------- -------
Net increase in cash and cash equivalents 2.9 8.3
Decrease in borrowings - 3.5
------------------------------------------- ------- -------
2.9 11.8
Effect of exchange rates (0.9) (0.4)
------------------------------------------- ------- -------
Movement in net cash 2.0 11.4
Net cash at beginning of year 19.3 7.9
------------------------------------------- ------- -------
NET CASH AT END OF YEAR 21.3 19.3
------------------------------------------- ------- -------
Comprising:
Cash and cash equivalents 21.3 19.3
Borrowings - -
------------------------------------------- ------- -------
NET CASH AT 30 SEPTEMBER 21.3 19.3
------------------------------------------- ------- -------
10. GOODWILL
Life Sciences Seals Controls Total
GBPm GBPm GBPm GBPm
---------------------- -------------- ------ --------- ------
At 1 October 2012 47.6 16.5 15.7 79.8
Transfers 1.9 - (1.9) -
Acquisitions - - 0.5 0.5
Exchange adjustments (2.2) 0.1 0.3 (1.8)
----------------------- -------------- ------ --------- ------
At 30 September 2013 47.3 16.6 14.6 78.5
Acquisitions (note
12) 0.3 5.0 0.7 6.0
Exchange adjustments (3.4) (0.6) (0.3) (4.3)
----------------------- -------------- ------ --------- ------
AT 30 September 2014 44.2 21.0 15.0 80.2
----------------------- -------------- ------ --------- ------
The Group tests goodwill for impairment generally twice a year.
For the purposes of impairment testing, goodwill is allocated to
each of the Group's three operating Sectors. This represents a
change from the prior year and reflects the lowest level within the
Group at which goodwill is monitored by management and better
reflects the Group's strategy of acquiring businesses to drive
synergies across a Sector, rather than in 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 five year strategic plan.
Beyond five years cashflow projections utilise a perpetuity growth
rate of 2%.
The key assumptions used to prepare the cash flow forecasts
relate to gross margins, growth rates and discount rates. The gross
margins are assumed to remain sustainable, which is supported by
historical experience; growth rates generally approximate to the
long term average rates for the markets in which the business
operates, unless there are particular factors relevant to a
business, such as start-ups. The annual growth rates used in the
cash flow forecasts for the next five years represent the budgeted
amounts for 2015 and, thereafter, average growth rates for each
Sector; these annual growth rates then trend down 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. 13% (2013: 13%). This single rate is based on the
characteristics of lower risk, non-technically driven, distribution
businesses operating generally in well developed markets and
geographies and with robust capital structures. As these features
are consistent between each of the Group's Sectors, the Board
considers that it is more appropriate to use a single discount rate
applied to each Sector's cash flow forecasts.
Based on the criteria set out above, no impairment in the value
of goodwill in any of the Sectors was identified.
The Directors have also carried out sensitivity analysis on the
key assumptions noted above to determine whether a "reasonably
possible change" in any of these assumptions would result in an
impairment of goodwill. The analysis indicates that a "reasonably
possible change" would not give rise to an impairment charge to
goodwill in any of the three Sectors. Given the significant
headroom in the Group's impairment calculations, an impairment
would not have arisen had goodwill continued to have been assessed
on a business unit basis.
11. INVESTMENT
2014 2013
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 2014, there was no material difference
between the book value of this investment and its fair value.
12. ACQUISITION of BUSINESSES
On 13 January 2014, the Group acquired 80% of Kentek Oy
("Kentek") for maximum consideration of GBP11.0m (EUR13.3m). The
initial cash paid on acquisition was GBP8.9m (EUR10.7m), with a
further GBP0.8m (EUR1.0m) paid on 14 May 2014 relating to net
assets at acquisition. Deferred consideration of up to GBP1.3m
(EUR1.6m) is also payable depending on the operating profit of
Kentek in the 12 months ending 31 December 2014. The fair value of
the 20% minority interest in Kentek of GBP2.3m has been calculated
based on the net present value of the projected performance of the
business between 2015 and 2018, when the put options become
exercisable.
On 3 June 2014, the Group acquired Speciality Fasteners &
Components Limited ("SFC") for a maximum consideration of GBP2.8m.
The initial cash on acquisition was GBP2.7m and up to a further
GBP0.1m is payable based on the operating profit of the business in
the 12 months ended 31 December 2014.
In addition, during the year the Group made a number of smaller
acquisitions, all of which were paid for in cash, which were as
follows:
17 October 2013 Sacee GBP0.3m (EUR0.3m)
19 December Ramsay Services Limited GBP1.3m
2013 ("Ramsay")
28 February AB Seals Limited GBP0.5m
2014 ("AB Seals")
10 July 2014 Chemzyme Australia GBP0.6m (A$1.2)
31 July 2014 Maxwell Seals GBP0.2m
Acquisition expenses of GBP0.8m were incurred on these
acquisitions, of which GBP0.6m related to the acquisition of
Kentek, including local stamp duty taxation.
From the date of acquisition to 30 September 2014, the newly
acquired Kentek business contributed GBP12.4m to revenue and
GBP1.7m to adjusted operating profit and the other newly acquired
businesses contributed GBP3.0m to revenue and GBP0.6m to adjusted
operating profit. If all of these businesses had been acquired at
the beginning of the financial year, they would have contributed
GBP20.6m to revenue and GBP2.7m to adjusted operating profit, in
aggregate; 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.
Kentek Other Total
---------------- ---------------- ----------------
Book Fair Book Fair Book Fair
value value value value value value
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------- ------- ------- ------- ------- -------
Acquisition intangible
assets - 6.5 - 2.5 - 9.0
Property, plant and equipment 0.2 0.2 0.1 0.1 0.3 0.3
Inventories 2.9 2.7 1.5 1.3 4.4 4.0
Trade and other receivables 1.0 0.9 1.1 1.1 2.1 2.0
Trade and other payables (1.6) (1.6) (1.2) (1.2) (2.8) (2.8)
Deferred tax - (1.2) - (0.5) - (1.7)
---------------------------------- ------- ------- ------- ------- ------- -------
Net assets acquired 2.5 7.5 1.5 3.3 4.0 10.8
Goodwill - 4.3 - 1.7 - 6.0
Minority of share of net
assets (including goodwill) - (2.3) - - - (2.3)
---------------------------------- ------- ------- ------- ------- ------- -------
2.5 9.5 1.5 5.0 4.0 14.5
---------------------------------- ------- ------- ------- ------- ------- -------
Cash paid 9.7 5.6 15.3
Cash acquired (0.4) (0.8) (1.2)
Expenses of acquisition 0.6 0.2 0.8
---------------------------------- ------- ------- ------- ------- ------- -------
Net cash paid, after acquisition
expenses 9.9 5.0 14.9
Deferred consideration
payable 0.2 0.2 0.4
Less: Expenses of acquisition (0.6) (0.2) (0.8)
---------------------------------- ------- ------- ------- ------- ------- -------
Total consideration 9.5 5.0 14.5
---------------------------------- ------- ------- ------- ------- ------- -------
Goodwill arising on these acquisitions of GBP6.0m represents the
product know-how held by employees and the prospect for revenue
growth from new customers. Goodwill and acquisition assets relating
to these acquisitions of GBP0.2m will be allowable for a tax
deduction in future years.
13. OTHER LIABILITIES
2014 2013
GBPm GBPm
----------------------------------- ------ ------
Future purchases of minority
interests 3.5 2.8
Deferred consideration 0.5 0.2
-------------------------------------- ------ ------
4.0 3.0
----------------------------------- ------ ------
Analysed as:
Due within one year 1.6 2.0
Due after one year 2.4 1.0
-------------------------------------- ------ ------
The movement in the liability
for future purchases of minority
interests is as follows:
2014 2013
GBPm GBPm
----------------------------------- ------ ------
At 1 October 2.8 3.2
Acquisition of minority interests (1.6) (0.6)
Put options entered into 2.3 -
during the year
Unwinding of discount 0.1 0.3
Fair value remeasurements (0.1) (0.1)
-------------------------------------- ------ ------
AT 30 SEPTEMBER 3.5 2.8
-------------------------------------- ------ ------
At 30 September 2014, the Group retained put options to acquire
minority interests in Kentek and M Seals which are exercisable
between 2015 and 2022. As described in note 12, put/call options
were recognised during the year at a value of GBP2.3m (EUR2.7m) in
respect of the 20% minority interest in Kentek, acquired on 13
January 2014. On 13 January 2014 and 31 July 2014, the Group
acquired the outstanding minority interests in DSL for an aggregate
of GBP0.9m (A$1.6m). On 31 July 2014 the Group acquired the
outstanding minority interest in HPS for GBP0.7m (US$1.2m),
including deferred consideration of GBP0.1m (US$0.1m).
At 30 September 2014 the estimate of the financial liability to
acquire the outstanding minority shareholdings was reassessed by
the Directors, based on their current estimate of the future
performance of these businesses and to reflect foreign exchange
rates at 30 September 2014. This led to a remeasurement of the fair
value of these put options and the liability was reduced by GBP0.1m
(2013: reduced by GBP0.1m). This reduction was offset by the charge
from unwinding the discount on the liability and in aggregate
GBPNil (2013: GBP0.2m) has been charged to the Consolidated Income
Statement.
At 30 September 2014 deferred consideration of GBP0.5m relates
to GBP0.1m payable to the vendor of SFC, GBP0.1m (A$0.2m) payable
to the vendor of BGS, GBP0.2m (EUR0.2m) payable to the vendor of
Kentek and GBP0.1m (US$0.1m) payable to the vendor of HPS. The
amount payable to the vendor of BGS represents the third and final
instalment of deferred consideration, having paid a second
instalment of deferred consideration of GBP0.1m (A$0.2m) during
this year.
14. DIVIDENDS
2014 2013 2014 2013
pence pence
per per GBPm GBPm
share share
----------------------------- ------- ------- ------- -------
Interim dividend, paid
in June 5.4 5.0 6.1 5.6
Final dividend of the prior
year, paid in January 10.7 10.2 12.1 11.8
----------------------------- ------- ------- ------- -------
16.1 15.2 18.2 17.4
----------------------------- ------- ------- ------- -------
The Directors have proposed a final dividend in respect of the
current year of 11.6p per share (2013: 10.7p) which will be paid on
28 January 2015, subject to approval of shareholders at the Annual
General Meeting on 21 January 2015, to shareholders on the register
on 28 November 2014. The total dividend for the current year,
subject to approval of the final dividend, will be 17.0p per share
(2013: 15.7p).
15. EXCHANGE RATES
The rates used to translate the results of the overseas
businesses are as follows:
Average Closing
2014 2013 2014 2013
------------------------ ----- ----- ----- -----
US dollar (US$) 1.66 1.56 1.62 1.62
Canadian dollar (C$) 1.80 1.59 1.81 1.66
Australian dollar (A$) 1.81 1.58 1.85 1.73
Euro (EUR) 1.23 1.19 1.28 1.20
------------------------ ----- ----- ----- -----
16. SUBSEQUENT EVENTS
On 6 October 2014 the Group completed the acquisition of 80% of
Technopath Distribution Limited ("TPD") for consideration of
GBP11.1m (EUR14.1m), including debt acquired of GBP1.5m (EUR1.9m).
Put and call options have been included in the transaction to allow
the Group to acquire the outstanding 20% of shares over a period of
up to 5 years. The TPD business is based in Ballina, County
Tipperary in Ireland and is an established supplier of products to
the Biotechnology, Clinical Laboratory and Medical markets in
Ireland and the UK.
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 BLBDBGXBBGSS
Diploma (LSE:DPLM)
Historical Stock Chart
From Mar 2024 to Apr 2024
Diploma (LSE:DPLM)
Historical Stock Chart
From Apr 2023 to Apr 2024