Diploma PLC
12 Charterhouse Square
London EC1M 6AX
Telephone: +44 (0)20 7549 5700
Facsimile: +44 (0)20 7549 5715
www.diplomaplc.com
Diploma PLC
Annual Report
and Accounts 2008
D
p
i
l
o
m
a
P
L
C
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
0
8
Section 1
Group Overview
Section 2
Business Review
Other Regulatory Statements
Section 3
Financial Statements
www.diplomaplc.com
Design www.energydesignstudio.com Production Imprima De Bussy Limited 020 7105 0300
1
Diploma PLC Annual Report and Accounts 2008
Group Overview
Financial Highlights
Diploma PLC is an international
group of businesses supplying
specialised technical products
and services
Year ended 30 September
2008
£m
2007
£m
Revenue
172.3
140.7 +22%
Operating profit*
27.3
22.1 +24%
Operating margin*
15.8% 15.7%
Adjusted profit before tax*†
Profit before tax
Free cash flow
27.5
21.8
18.0
23.3 +18%
22.3
-2%
13.2 +36%
Pence
Pence
Adjusted earnings per share*†‡
16.4
14.0 +17%
Basic earnings per share ‡
Total dividends per share ‡
Free cash flow per share ‡
11.8
7.5
15.9
12.7
-7%
5.4 +39%
11.7 +36%
* Before amortisation of acquisition intangible assets
† Before fair value remeasurements
‡ Comparative numbers restated to adjust for the impact of the January 2008 bonus issue
Note: Diploma PLC uses alternative performance measures as key financial indicators to assess the
underlying performance of the Group. These include adjusted profit before tax, adjusted earnings per
share and free cash flow. The narrative on pages 2 to 45 is based on these alternative measures and an
explanation is set out in note 2 to the consolidated financial statements.
2
Diploma PLC Annual Report and Accounts 2008
Group Overview
What makes us different
Our stable revenue growth is achieved
through the focus on essential products
and services funded by customers’
operating, rather than capital budgets
Read more: page 8
Our attractive margins are sustained
through the quality of customer service,
the depth of technical support and
value adding activities
Read more: page 10
In the operating businesses, strong
committed management teams execute
well formulated development strategies
Read more: page 12
3
Diploma PLC Annual Report and Accounts 2008
Group Overview
Over five years, we have delivered profit
growth of 21% p.a. through a combination
of steady organic growth and carefully
selected, value enhancing acquisitions
Read more: page 14
An ungeared balance sheet and
strong cash flow have funded this
growth strategy while providing
healthy dividends
Read more: page 16
4
Diploma PLC Annual Report and Accounts 2008
Group Overview
Chairman’s Statement
Another year of strong earnings
growth and strong free cash
flow demonstrates the resilience
of the Group
The Diploma Group continued to make strong progress during
2008, against a background of a weakening economic
environment. The acquisitions completed towards the end of
the previous year contributed to another year of double digit
growth in earnings and strong cash flow. Organic growth was
also achieved in challenging markets; on a comparable and
constant currency basis, the underlying growth in both revenue
and operating profit was a creditable 3%. These positive results
again highlight the ability of the Group to achieve stable growth
and attractive margins by focusing on markets where the
demand is funded by operating budgets which are less
impacted by economic cycles than capital budgets.
Results
In 2008, Group revenue increased by 22% to £172.3m
(2007: £140.7m) and operating profit, before the amortisation
of acquisition intangible assets, increased by 24% to £27.3m
(2007: £22.1m). Operating margins remained stable at 15.8%
(2007: 15.7%) despite a number of investments in new growth
initiatives during the year.
The results benefited from currency gains to revenue (£4.8m)
and operating profits (£1.0m) on translation of the results of
the overseas businesses, as UK sterling continued to weaken
against the major currencies during the year. Net finance
income reduced by £1.0m to £0.2m (2007: £1.2m) following
the substantial investment in acquisitions at the end of the
previous year.
Adjusted profit before tax increased by 18% to £27.5m
(2007: £23.3m); IFRS profit before tax was £21.8m (2007:
£22.3m) reflecting the impact of amortisation of acquisition
intangible assets and fair value remeasurements
of future obligations to acquire minority interests. Adjusted
earnings per share increased by 17% to 16.4p (2007: 14.0p)
and basic earnings per share were 11.8p (2007: 12.7p).
The underlying strength of the Group is demonstrated by
another year of strong cash flow generation. Free cash flow
increased by 36% to £18.0m (2007: £13.2m) benefiting from
tight control of working capital and lower capital expenditure
of £1.9m (2007: £2.2m). Expenditure on acquisitions during
2008 was more modest than last year at £7.9m (2007: £31.6m).
After returning £6.9m in 2008 (2007: £5.4m) to shareholders in
the form of dividends, cash funds at 30 September 2008
increased by £3.3m to £15.7m (2007: £12.4m).
Dividends
In the Interim Report, the Board indicated that in light of the
increased scale of the Group's activities and the continuing
strong free cash flow it had decided to target dividend cover
towards 2.0, based on adjusted earnings per share. The
Directors are therefore recommending a significant increase
in the final dividend for 2008 of 1.4p to 5.0p (2007: 3.6p).
This increases the total dividend payment for the year by 39%
to 7.5p (2007: 5.4p).
The increased final dividend will be paid on 21 January 2009 to
shareholders on the Register on 28 November 2008. The Board
intends to continue with its policy of growing dividends in line
with adjusted earnings per share, whilst applying the balance
of the cash flow to strengthen the Group's businesses.
Financial and Human Resources
The Group ends the year in a strong financial position and with
the resources in place to tackle the challenges ahead. We have
cash funds of £15.7m, working capital facilities of £5.0m and
committed bank facilities of £20.0m. This strong balance sheet
provides a secure platform to progress our strategy.
Our human resources are equally strong. The energy and
commitment of our people is a critical factor in the success
of our Group and are particularly important in the current
uncertain environment. On behalf of the Board, I would like to
thank our employees for their commitment and efforts during
5
Diploma PLC Annual Report and Accounts 2008
Group Overview
this year. I am confident of their ability to respond to the new
challenges in the coming year, as we will inevitably have to
face tougher trading conditions.
Outlook
The Board remains committed to growing the Group through a
combination of organic growth and by acquisition. The Group
has a strong balance sheet, committed bank facilities and
businesses that consistently generate strong cash flows each
year.
In the current uncertain market and economic conditions, the
Group draws strength from its focus on essential products and
services, funded by customers’ operating rather than capital
budgets. Margins are sustained by the service levels provided
and operating costs are, to a large extent, variable. Cash flow
remains strong through tight management of working capital.
As price expectations of potential target companies become
more realistic there should be good opportunities to make
value-enhancing acquisitions. With acquisition opportunities
adding to modest organic growth, the Board is confident of
making further progress in the year.
John Rennocks
Chairman
17 November 2008
Adjusted PBT (£m)
2004
13.1
2005
17.2
2006
20.4
2007
23.3
2008
27.5
Adjusted EPS (pence)
2004
8.2
2005
10.7
2006
12.6
2007
14.0
2008
16.4
6
Diploma PLC Annual Report and Accounts 2008
Group Overview
Chief Executive’s Review
The Group continues to execute
its strategy and deliver against
Key Performance Indicators
The Group comprises a number of high quality, specialised
businesses supplying technical products and services.
The common characteristics of these businesses are:
• Stable revenue growth, achieved through a focus on essential
products and services, funded by customers' operating rather
than capital budgets.
• Attractive margins, sustained through the quality of customer
service, the depth of technical support and value adding activities.
• Strong committed management teams in the operating
businesses, executing well formulated development strategies.
Over five years, the Group has grown revenues by 17% p.a.
and operating profits, before amortisation of acquisition intangible
assets, by 23% p.a., broadly half through organic growth and half
through acquisitions. An ungeared balance sheet and strong
cashflow have funded this growth strategy, while providing healthy
and progressive dividends.
Strategic Developments
The Group's strategic objective is to build more substantial, broader
based businesses in its chosen sectors through a combination of
organic growth and acquisition. Further progress was made in the
year in executing this strategy in each of the three sectors.
Life Sciences
The strategy in this sector has been to broaden the customer and
geographic scope to reduce dependence on Life Science Research
activities in the UK. The acquisition last year of AMT in Canada and
its subsequent strong growth this year, has significantly advanced
our position in Clinical markets. The earlier acquisition of CBISS,
also provided impetus to the further growth in the year of the
Environmental business. In 2008, the Canadian Healthcare
businesses have grown substantially to account for ca. 50% of
revenues and the Environmental business for ca. 25% of revenues.
Life Sciences research accounted for the balance of 25%, which
compares with 80% five years ago.
The broadening of sector activities has also introduced greater
stability to revenues. Multi-year customer contracts for
consumables and service now underpin some 60% of sector
revenues and long term distribution agreements are in place to
secure quality manufacturer branded products. The smaller
acquisitions of Hitek in February 2008 and Meditech in Canada
(acquired after the year end) have opened up further growth
opportunities in related market segments.
Seals
The core business in this sector is the next day delivery of seals
and seal kits used in the repair and maintenance of heavy mobile
machinery. Through a combination of acquisitions and investment
in broadening the product range and customer base, the sector
businesses have established a leading position in the Seals
Aftermarket in North America. The Aftermarket focus has ensured
relatively stable revenue growth and the increased scale has
secured attractive margins.
Significant growth potential remains in the core business in North
America, but initiatives are also in process to extend the scope of
the business into industrial OEMs and to expand internationally.
The acquisition last year of M Seals contributed in both dimensions;
this year it has achieved significant growth in Sweden and China
and generally in the wind turbine industry. The acquisition of
Snijders Engineering in the Netherlands in June 2008 was a further
important step in the development of an Aftermarket Seals
business in Europe.
Controls
The strategy in the Controls sector is to focus on more specialised,
technology driven segments of the market that have been more
buoyant than the broader industrial economies in which they
operate. The core businesses in this sector have established strong
positions in supplying into industries including Aerospace, Military
& Marine, Motorsport, Automotive Diagnostics and Medical
Equipment.
The acquisition last year of Cabletec, has expanded the products
offered by adding a range of manufactured products including
bonding leads which this year achieved EN4199 and Airbus
ASNE approvals. Advances were also made this year in establishing
stronger positions in the Power Generation and Rail industries.
In Motorsport, a new satellite operation was established in North
Carolina to focus on the US Nascar series and further advances
were made in Asian markets. With 90% of sector revenues still
generated in the UK and Germany, further opportunities to expand
the geographic scope are being pursued.
Key Performance Indicators
The principal metrics used in measuring Group performance over
the longer term are growth in adjusted earnings per share (“EPS”)
and total shareholder return (“TSR”). Adjusted EPS has grown by
an average of 21% p.a. over the last five years; over the same
period TSR has grown by 113% p.a. compared with growth of 64%
in the FTSE 250 index, as shown on page 41 of this Report.
7
Diploma PLC Annual Report and Accounts 2008
Group Overview
The Group also uses four financial key performance indicators
(“KPIs”) as measures in incentive programmes at Group and
operating business levels. Performance against these KPIs is
summarised below, with more detailed definitions and year by year
data, set out within the Business Review on page 23.
Adjusted Profit Before Tax (“PBT”)
In 2008, the Group's adjusted PBT increased by 18% to £27.5m
(2007: £23.3m). This continued the growth trend over the last five
years, during which period adjusted PBT has grown at an average
rate of 21% p.a. This has been under-pinned by an average 23% p.a.
growth in operating profit, before finance income.
Operating Margin
Over the last five years, the Group's operating margin has increased
steadily from ca. 12% to the current year level of 15.8% (2007:
15.7%). Gross margins have on average remained very stable in
each of the Group's sectors. At the same time, acquisitions and
organic growth have added scale to each of the Group's businesses;
the resulting operational leverage underpins the improvement in
operating margins.
Free Cash Flow
The Group is strongly cash generative. Over the last five years, the
Group has generated a robust free cash flow averaging £12.2m p.a.
representing 87% of average adjusted profit after tax. In 2008, this
trend continued with free cash flow increasing by 43% to £18.0m
(2007: £12.6m), representing 92% of adjusted profit after tax.
This performance is before accounting for the one-off proceeds
from the phased sales of surplus land in Stamford, which have
generated an additional £20.4m since 2003.
Return on Trading Capital Employed
Return on Trading Capital Employed (“ROTCE”) is a measure of the
return that the Group makes on the total resources invested in the
businesses. It is calculated as operating profit as a percentage of
trading capital employed, including all goodwill and acquired intangible
assets. A pre-tax threshold of 20% has been set for ROTCE which
is broadly consistent with the Group's post tax IRR measure of 13%
for capital project appraisal. In each of the last five years, ROTCE has
remained above 20%; in 2008, the impact of the recently acquired
businesses has resulted in this measure reducing to 21.0% (2007:
24.2%), but still comfortably above the threshold of 20%.
Bruce Thompson
Chief Executive Officer
17 November 2008
Life Sciences
Seals
Controls
Revenue by Sector (£m)
Life Sciences
Seals
Controls
62.1
42.6
67.6
Operating Profit by Sector (£m)
Life Sciences
Seals
Controls
9.6
6.7
11.0
Revenue by destination
United Kingdom
38%
North America
34%
Continental Europe
23%
Rest of World
5%
8
Diploma PLC Annual Report and Accounts 2008
Group Overview
Stable Revenue Growth
We aim to achieve stable revenue growth by focusing on markets
where the demand is funded by operating budgets which are
less impacted by economic cycles than capital budgets. A high
proportion of our revenues are generated from consumable
products and service contracts and in many cases the products
will be used in repair, maintenance and refurbishment applications,
rather than original equipment manufacture.
Where public sector funding or regulation is involved, year on year
changes in funding may also be less dramatic. This has proved to
be the case in recent years in Healthcare, Rail, Power Generation,
Defence and Environmental industries which have been relatively
insulated from economic cycles.
Our businesses also gain protection through offering specialised
products and services, often used in technically demanding
applications. This defends against customers quickly switching
business to achieve better pricing when markets turn down. Markets
such as Aerospace, Motorsport and Medical equipment, have
proved to be more buoyant than the general industrial economy.
Five Year Revenue Growth
Revenue (£m)
200
150
100
50
0
2004
2005
2006
2007
2008
17% p.a.
total
growth
Our objective is to
grow organically at a
rate higher than GDP
growth – the target
is ca. 5% p.a. over
the economic cycle.
Acquisitions contribute
to the higher growth
rates achieved –
average of 17% p.a.
over five years.
9
Diploma PLC Annual Report and Accounts 2008
Group Overview
Our stable revenue growth
is achieved through the
focus on essential products
and services funded by
customers’ operating,
rather than capital budgets
10 Diploma PLC Annual Report and Accounts 2008
Group Overview
Attractive Margins
Our attractive margins are sustained over time by providing
a range of services to our customers which they value and are
therefore prepared to pay a premium for. Such services fall
broadly into three categories – customer service, technical
support and value adding activities.
Customer service can be for example the delivery of products
held in inventory on a next day basis. Technical support is
often provided by helping customers design the products into
their specific applications. Value adding activities are services
such as kitting or assembly, which the customers would have
to pay someone else to provide, or they would have to invest
in their own resources.
If real value is not provided, margins will erode over
time. The evidence that we are delivering value lies in our
gross margins which in specific product/market segments are
very stable over time. Movements in gross margin principally
arise due to changes in the mix of business or short term
currency movements.
Operating Margin (%)
14.8%
15.1%
15.7%
15.8%
Target
Target
12.2%
2004
2005
2006
2007
2008
Operating margin is
the ratio of adjusted
operating profit to
revenues.
Scale economies and
investment have raised
the sustainable level and
the target has increased
from 12% to 15%.
11 Diploma PLC Annual Report and Accounts 2008
Group Overview
Our attractive margins are
sustained through the quality
of customer service, the
depth of technical support
and value adding activities
12 Diploma PLC Annual Report and Accounts 2008
Group Overview
Strong Committed Management
Our organisational philosophy within Diploma, is to develop
strong, self-standing management teams in the operating
businesses, committed to and rewarded according to the short
and long term success of their businesses. Our small corporate
team focuses on strategy and financial control.
The development of strong managers and management teams
remains a priority for us and is key to the successful implementation
of our strategies. We need to maintain and develop a group of
managers with the potential to manage aggressive growth strategies.
Importantly they must be able to motivate their staff and engender
in them the same commitment.
To achieve this we concentrate on ensuring a challenging
work environment and appropriate reward systems. Balanced
compensation packages are a combination of competitive
salaries, annual bonuses and long term incentive plans targeted at
the individual business level.
The total cadre of ca. 50 senior managers in the operating businesses,
demonstrate a good blend of energy, ambition and experience.
The average age of these managers is 44 and they have an average
length of service within their companies of 10 years. Key statistics
for the broader workforce are summarised below.
Key Employee Statistics
Number of
employees
Males as % of
total
Average length
of service (yrs)
Average staff
turnover
Sick days lost
per person
30 September 2008
976
64%
30 September 2007
926
63%
5.5
5.3
20.4%
21.0%
3.3
2.9
13 Diploma PLC Annual Report and Accounts 2008
Group Overview
In the operating businesses,
strong committed management
teams execute well formulated
development strategies
14 Diploma PLC Annual Report and Accounts 2008
Group Overview
Value Enhancing Acquisitions
To complement our organic growth strategy, we make selective
acquisitions to accelerate growth and take us into new but
related markets. Prospective acquisitions should be sales and
marketing led with strong customer relationships and a secure
supply of quality, differentiated products. They should have
capable management, and the potential for profitable growth
and cash generation.
A competitive advantage we have in making acquisitions is our
flexibility in structuring transactions. In many of our medium
sized acquisitions, where we are extending into new markets or
geographies, we have acquired less than 100% of the business.
In these cases, we have left owner managers with a minority
stake in the business (up to 25%), with put and call options
exercisable over 3-5 year periods. This allows vendors to remain
in the businesses with a large part of the value crystallised, but
still with the potential for future gain. For us, this reduces risk
and gives us additional confidence in the quality of the acquisition.
The Group’s robust balance sheet, supported by strong and
consistent operating cash flow, give us the resources to support
an active acquisition strategy.
Acquisition Overview
2004
2005
2006
2007
Life Sciences
Somagen
CBISS
AMT
2008
Hitek
Meditech
Seals
Controls
HKX
M Seals
Snijders
Engineering
Cabletec
15 Diploma PLC Annual Report and Accounts 2008
Group Overview
Over five years, we have
delivered profit growth of
21% p.a. through a combination
of steady organic growth
and carefully selected, value
enhancing acquisitions
16 Diploma PLC Annual Report and Accounts 2008
Group Overview
Strong Cash Flow
Our operating businesses are strongly cash generative. Once
the businesses have achieved a certain critical mass, they can
generally increase revenues without a significant increase in
working capital. Our businesses are not particularly capital
intensive, with the principal fixed assets being IT systems,
office and warehouse facilities. Significant investments are
made periodically in IT system up-grades and facility expansions,
but annual capital expenditure would typically be lower than the
depreciation charge over the business cycle.
Our threshold for conversion of adjusted profit after tax into free
cash flow is 60%, but over the last five years we have achieved an
average conversion rate well in excess of 80%. In recent years,
this strong cash flow from the operating businesses has been
supplemented by the phased sale of certain surplus land in
Stamford, generating additional funds of ca. £20m over a five
year period.
The total cash flow, after dividend payments and acquisitions, has
left us with a strong, ungeared balance sheet.
This provides the financial resources to fund our growth strategy,
while providing healthy and progressive dividend payments.
Free cash flow* (% of adjusted PAT)
95%
91%
92%
78%
59%
60% threshold
2004
2005
2006
2007
2008
*Excludes Stamford land proceeds
Free cash flow is
after tax, but before
dividends and
acquisitions. Proceeds
from the sale of surplus
land in Stamford have
been excluded.
The target is to convert a
minimum 60% of
adjusted profit after tax
(“PAT”) to free cash flow.
17 Diploma PLC Annual Report and Accounts 2008
Group Overview
An ungeared balance
sheet and strong cash flow
have funded this growth
strategy while providing
healthy dividends
18 Diploma PLC Annual Report and Accounts 2008
Group Overview
Directors and Advisors
Our experienced Board
focuses on strategy,
financial control
and risk management.
* Member of the Remuneration Committee
† Member of the Audit Committee
‡ Member of the Nomination Committee
1. I Henderson (52)
Chief Operating Officer
Joined the Board as a Director in 1998.
He was previously a Director of
Glenchewton plc and ANC Holdings Limited.
2. NP Lingwood ACA (49)
Group Finance Director
and Company Secretary
Joined the Company in June 2001
and appointed Group Finance Director
on 3 July 2001. Prior to joining Diploma,
he was Group Financial Controller of
Unigate PLC, having previously qualified
with Price Waterhouse, London.
2
1
3
5
4
6
19 Diploma PLC Annual Report and Accounts 2008
Group Overview
3. BM Thompson (53)
Chief Executive Officer
Joined the Board in 1994 and appointed
Chief Executive Officer in 1996. He started
his career in the automotive industry, first
as a design engineer and then in marketing.
Prior to joining Diploma, he was Director of
Arthur D Little Inc’s Technology Management
Practice in the United States.
5. JL Rennocks FCA (63) *†‡
Non-Executive Chairman
Joined the Board in July 2002. He is
Chairman of Nestor Healthcare plc and
Intelligent Energy plc, Deputy Chairman of
Inmarsat plc and a non-Executive Director of
Babcock International Group plc. He has
previously been Executive Director Finance
at Corus Group Plc and Finance Director of
PowerGen Plc and Smith & Nephew plc.
4. IM Grice (55) *†‡
Non-Executive
Joined the Board in January 2007. He is
Chairman of Pims Group Limited and a
non-Executive Director of John Graham
Holdings Limited. He was Group Chief
Executive of Alfred McAlpine plc until
February 2008.
6. JW Matthews FCA (64) *†‡
Non-Executive
Joined the Board in 2003. He is Chairman
of Regus Group plc and a non-Executive
Director of Minerva plc and SDL plc. He has
previously been Chairman of Crest Nicholson
plc and was a Managing Director of County
NatWest and Deputy Chairman/Deputy
Chief Executive of Beazer plc.
Investment Bankers:
Lazard
50 Stratton Street
London W1J 8LL
Corporate Stockbrokers:
Panmure Gordon & Co
Moorgate Hall, 155 Moorgate
London EC2N 6XB
Solicitors:
Ashurst
Broadwalk House
5 Appold Street
London EC2A 2HA
Auditors:
Deloitte and Touche LLP
Stonecutter Court
1 Stonecutter Street
London EC4A 4TR
Bankers:
Royal Bank of Scotland
62-63 Threadneedle Street
London EC2R 8LA
20 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Section 2
Regulatory Statements
Business Review
Strategy and Performance
Sector Review: Life Sciences
Sector Review: Seals
Sector Review: Controls
Finance Review
Risk and Uncertainties
Corporate and Social Responsibility
Other Regulatory Statements
Directors’ Report
Corporate Governance
Remuneration Report
21
24
26
28
30
32
35
36
37
41
Core Strategic
Themes
Focus on growth
market segments
Strong customer
relationships
underpinned by
full service offering
Secure supply of
quality differentiated
products
Motivated and
committed
management teams
Efficient and responsive
operations and
information systems
Carefully selected
acquisitions to
accelerate growth
21 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Strategy and Performance
In Controls, the businesses have achieved
stronger growth than the general industrial
economies in which they operate, by
focusing on more buoyant markets
including Defence, Aerospace, Motorsport,
Rail, Power and Medical Equipment.
The acquisition of Cabletec has further
extended the sector activities in the
Aerospace and Rail markets.
Strong customer relationships
underpinned by full service offering
Sales and marketing are the main drivers
for each of the businesses. With a
background in specialised distribution it
is natural to start with the needs of key
customers and then to design the business
models to respond to these requirements
in terms of products, service offerings and
operational responsiveness.
A key priority for our businesses is to build
strong customer relationships within our
selected product and market segments.
Such customer relationships are made
more robust and resilient through our
delivery of a full service offering. Such
services fall broadly into three categories
– customer service, technical support and
value added activities.
Customer service can be, for example, the
delivery of products held in inventory on a
next day basis. Technical support is often
provided by helping customers design the
product into their specific applications.
Value adding activities are services such as
kitting or assembly, which the customers
would have to pay someone else to
provide, or they would have to invest in
their own resources.
Ultimately, customers will always demand
competitive product performance, pricing
and responsive delivery. However, the
broader service offering builds stronger
links with the customers at many levels,
making switching more difficult.
As an example of the strength of customer
relationships and following the acquisition
of AMT, ca. 60% of sector revenues in Life
Sciences are generated from multi-year
customer contracts for consumables and
services.
Group Strategy
The Group comprises a number of high
quality, specialised businesses supplying
technical products and services and
operating in the three broad industry
sectors of Life Sciences, Seals and
Controls. The businesses aim to achieve
stable revenue growth through the focus
on essential products and services funded
by customers’ operating, rather than capital
budgets. Attractive margins are sustained
through the quality of customer service,
depth of technical support and value adding
activities. The Group’s strategic objective
is to build more substantial, broader based
businesses in the chosen sectors through
a combination of organic growth and
acquisition.
There are a number of core themes which
underpin the strategies of the Group and
its operating businesses:
Focus on growth market segments
Our businesses are encouraged not to
settle for growth at the sector average or
to be driven unquestioningly by business
cycles. The challenge is to identify and
focus on the more attractive market
segments where more rapid or consistent
growth is achievable. This can be achieved
by either organic growth initiatives, or
acquisition, or a combination of both.
In Life Sciences, growth in the original
core Research market in the UK has
slowed as the major Pharmaceutical
and Biotechnology companies have
restructured their laboratory operations
and focused on cost control. In response
we have developed new businesses in the
growing Environmental and Clinical markets
and have broadened the geographic
scope. In 2008, the Canadian Healthcare
and Environmental businesses together
contributed ca. 75% of sector revenues
and more than 60% of revenues were
generated outside the UK.
In Seals, the businesses have been
traditionally focused on North America
and on the Aftermarket . With a series of
organic investments and acquisitions, we
have extended the business into a broader
range of international markets and into
industrial OEMs. The acquisition of M Seals
in 2007 and Snijders Engineering in 2008
and the investments in Europe and China
have continued this process. In 2008,
40% of sector revenues were generated
in international markets outside North
America and industrial OEMs now account
for ca. 25% of sector revenues.
22 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Secure supply of quality
differentiated products
Given the specialised nature of the
businesses, it is critical that they have a
secure supply of quality, differentiated
products. There are a number of ways that
this can be achieved and each business
uses a blend to develop their product
portfolios:
n
n
n
Quality manufacturer-branded
products supplied on an exclusive
basis, typically secured with long term
distribution agreements.
Own brand products supplied or
manufactured under contract.
Selective in-house manufacturing and
assembly.
The development of strong managers
and management teams remains a
priority for us and is key to the successful
implementation of our strategies. We
need to maintain and develop a group of
managers with the potential to manage
aggressive growth strategies. Importantly
they must be able to motivate their
staff and engender in them the same
commitment.
Carefully selected acquisitions
to accelerate growth
To complement our organic growth
strategy, we make selective acquisitions
to accelerate growth and take us into new,
but related markets. The Group’s ungeared
balance sheet, supported by strong and
consistent operating cash flow, give us the
resources to support an active acquisition
programme.
To achieve this we concentrate on ensuring
a challenging work environment and
appropriate reward systems. Balanced
compensation packages are a combination
of competitive salaries, annual bonuses and
long term incentive plans targeted at the
individual business level.
We have clear criteria which guide our
pro-active acquisition programme and are
derived from the strategic themes above.
Prospective acquisitions should be sales
and marketing led with strong customer
relationships and a secure supply of quality,
differentiated products. They should have
capable management, and the potential for
profitable growth and cash generation.
A competitive advantage we have in
making acquisitions is our flexibility in
structuring transactions. In many of
our medium sized acquisitions, where
we are extending into new markets or
geographies, we have acquired less than
100% of the business. In these cases, we
have left owner managers with a minority
stake in the business (up to 25%), with
put and call options exercisable over 3-5
year periods. This allows vendors to remain
in the businesses with a large part of the
value crystallised, but still with the potential
for future gain. For us, this reduces risk and
gives us additional confidence in the quality
of the acquisition.
Three acquisitions were completed
in August 2007 for a total maximum
consideration of ca. £30m and these have
all contributed significantly to growth in
2008. The two acquisitions completed
in 2008 for £3.9m, Hitek and Snijders
Engineering, were smaller but both open
up new growth opportunities within their
respective sectors.
This is seen as a continuous process
rather than a one-off activity. Over time,
products in the portfolio will become
less competitive and it is important that
the businesses have plans for selective
new product development and for the
introduction of new suppliers.
The ca. 50 managers, who together make
up the senior management cadre in the
operating businesses, demonstrate a good
blend of energy, ambition and experience.
The average age of these managers is 44
and they have an average length of service
within their companies of ten years.
The strong performance by AMT in
2008, exemplifies the power of strong
proprietary products supplied on an
exclusive basis. By contrast, the a1-group
has improved competitiveness by
developing its own range of containment
products which are now manufactured by
reliable sub-contractors. Finally, Cabletec
has had success by developing its own
manufactured products.
Motivated and committed
management teams
The Diploma organisational philosophy is to
develop strong, self-standing management
teams in the operating businesses
committed to, and rewarded according to,
the short and long term success of their
businesses. The small corporate team
focuses on strategy and financial control.
Efficient and responsive operations
and information systems
We continue to make substantial
investments in infrastructure and systems
to give high levels of customer service,
responsiveness and operational efficiency.
This is an important element of the value
added by the Group when transforming
small owner-managed companies
into more substantial broader based
businesses.
Ongoing investment programmes ensure
that our principal businesses are operating
from purpose built or newly expanded
facilities designed for efficient operations
and with the scale to support significant
future growth.
Similarly in the area of information
systems, regular investment ensures
that the businesses are supported by
integrated IT systems designed to give
strong functionality and efficiency and
capable of supporting growth. Over the
past five years, an average of £0.6m p.a.
has been invested in improving the Group’s
information systems; in 2008, investment
of £0.6m was made in IT systems.
23 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Key Performance Indicators
Adjusted PBT (£m)
2004:
13.1
2005:
17.2
2006:
20.4
2007:
23.3
2008:
27.5
Operating Margin
2004:
12.2%
2005:
14.8%
2006:
15.1%
2007:
15.7%
2008:
15.8%
Free Cash Flow* (£m)
2004:
5.6
2005:
11.9
2006:
13.3
2007:
12.6
2008:
18.0
*excluding sale of Stamford land
ROTCE
2004:
21.0%
2005:
22.1%
2006:
23.9%
2007:
24.2%
2008:
21.0%
Key Performance Indicators
The success of the Group strategy in the
longer term is measured in financial terms
by the growth in the two key measures of
adjusted earnings per share (“EPS”) and
total shareholder return (“TSR”). These are
the principal quantitative measures used in
the incentive compensation programmes
for the Executive Directors.
To assess the performance of the Group at
a more detailed level, we use four financial
key performance indicators (“KPIs”) as
described below. These measures are
defined in note 2 to the consolidated
financial statements. As well as being
used to measure the performance at
Group level, the financial KPIs drill down
through the organisation and are used as
the principal quantitative elements in the
short and long term incentive programmes
for senior management of the operating
businesses. Non-financial KPIs are also
used in each of the businesses, but these
are tailored to the particular requirements
and characteristics of each business.
Adjusted PBT
The growth in adjusted profit before tax
(“PBT”) is a key measure of the underlying
performance of the Group over time.
Adjusted PBT removes the distorting
influence of the costs of restructuring or
rationalisation of operations, the profit or
loss on sale of properties, the amortisation
and impairment of acquisition intangible
assets and fair value remeasurements.
Within the operating businesses,
profit growth is measured in terms of
operating profit, before finance income
and amortisation of acquisition intangible
assets.
The Group’s adjusted PBT has grown at
an average rate of 21% p.a. over the last
five years. This has been underpinned by
an average 23% p.a. growth in operating
profit, as defined above.
Operating margin
Operating margin represents operating
profit, before amortisation of acquisition
intangible assets, divided by revenue. It is
an important measure to the Group as it
monitors the success of the businesses
in achieving superior margins by offering
strongly differentiated products and
services, as well as by running their
operations efficiently.
Over the last five years, the Group
operating margin has steadily increased
from ca.12% to 15.8% in 2008.
A number of the acquisitions made in
recent years have had a positive impact
on Group average margins. The most
important driver, however, has been
the operational leverage gained as the
businesses have increased in scale,
leading to increased revenues without
a proportionate increase in operating
costs. This effect has been most visible
in the Seals sector businesses in North
America where major investments have
been made in the IT infrastructure and the
warehousing operations to support the
increasing scale and scope.
Free cash flow
Free cash flow is defined as the cash flow
generated after tax but before acquisitions
and dividends. This measures the success
of the operating businesses and the
Group as a whole, in turning profit into
cash through the careful management of
working capital and capital investments in
the business.
Over the last five years, the Group
has generated a robust free cash flow
averaging £15.4m p.a.; these figures
have been boosted by a total of £20.4m
received since 2003 from the sale of three
phases of the Stamford land. Removing
the Stamford land sale proceeds, free cash
flow has still been an average of £12.2m
p.a. representing 87% of average adjusted
profit after tax over the same period.
Return on trading capital employed
Return on trading capital employed
(“ROTCE”) represents operating profit,
before amortisation of aquisition intangible
assets, as a percentage of trading capital
employed (“TCE”), defined as net assets
less net cash and non-operating assets and
liabilities.
At the Group level, TCE, as defined
in note 2 of the consolidated financial
statements, includes the total cash
invested in acquisitions, including all gross
goodwill and acquired intangible assets,
both capitalised and written off in previous
years. Over the last five years, ROTCE has
remained consistently above 20.0%.
At the operating business level, goodwill
and acquired intangible assets are excluded
from TCE so that management is judged
more narrowly on the return achieved on
capital invested in fixed assets and working
capital. This is because the operating
business management may not have been
directly involved in the price negotiations
for acquisitions completed within their
sectors.
24 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Sector Review: Life Sciences
Sector Definition and Scope
The Life Sciences sector businesses
supply a range of consumables,
instrumentation and related services
to clinical, research and environmental
applications.
The Canadian Healthcare businesses are
Somagen, based in Edmonton, Alberta,
and AMT, based in Kitchener, Ontario.
Somagen supplies a range of consumables
and instruments used in the diagnostic
testing of blood, tissue and other samples
in the 500-600 hospital pathology
laboratories across Canada. AMT supplies
specialty electrosurgery and endoscopy
equipment and consumables for use
in the operating rooms and endoscopy
suites of the same Canadian hospitals. A
large proportion of the revenues for both
Somagen and AMT come from multi-year
customer contracts with hospitals and
buying groups.
Anachem, based in Luton, is a supplier of
pipettes, tips and laboratory automation
products to the Life Sciences Research
market in the UK and Eire. Key customers
are the major Pharmaceutical and
Biotechnology companies, Research
Institutions and Universities. The products
are supported by a comprehensive range
of maintenance, calibration and validation
services.
The a1-envirosciences group (“the
a1-group”) is a supplier to Environmental
testing laboratories and to Health & Safety
engineers. a1-envirotech supplies a range
of specialised instruments for detecting
and measuring specific elements in liquids,
solids and gases. a1-safetech supplies gas
detection devices, as well as a range of
containment enclosures for potent powder
handling. CBISS supplies equipment and
services for the monitoring and control
of environmental emissions. The UK
operations of the a1-group are located in
Luton and Tranmere. In Continental Europe,
the group has locations in Dusseldorf in
Germany and Basel in Switzerland.
Market Drivers
Somagen and AMT supply into the
Canadian Healthcare sector, which is
mostly public sector funded. The principal
demand driver is therefore the level of
healthcare spending by the Canadian
Government.
C$bn
2004
2005
2006
2007 Growth
% p.a
Public sector health
expenditure in
Canada
92.6
99.1 105.7 113.0
6.8%
Over many years, healthcare expenditure
has grown steadily in the range 6-7% p.a.
with annual variations mostly dependant on
the periodic additional tranches of funding
provided by individual provinces. Other
factors which may influence the demand
for Somagen and AMT products and
services are:
n
n
n
Proportion of total healthcare budgets
allocated to diagnostic testing and to
surgical procedures.
Emergence of new tests driven by
focus on specific diseases or allergies.
Increased use of electrosurgical and
endoscopic products in hospitals.
The market for Anachem’s Life Science
Research products is driven principally by
the level of private and public sector funds
allocated to research to identify the causes
of disease and to develop new drugs or
therapies.
£m
2004
2005
2006
2007 Growth
% p.a
UK Government
expenditure on
medical research(1)
Pharmaceutical
R&D expenditure
in the UK(2)
Sources:
(1) HM Treasury
471
475
574
609
9.2%
3,239 3,379 3,949
n/a 10.6%
(2) The Office of National Statistics
In recent years, publicly funded research in
the medical field has grown by an average
of 9% p.a. boosted by a particularly large
reported increase in 2006. Growth was
slower in 2007 and is likely to moderate
further in 2008 and 2009.
In pharmaceutical companies, research
activity was relatively flat over the period
2000 to 2005 as the companies pursued
cost control initiatives and rationalised
research and development activities in the
UK. There was a strong reported increase
of 17% in 2006 Pharmaceutical R&D
expenditure in the UK. More recent data
will be required to confirm whether this
level of expenditure has been sustained.
The a1-group supplies to customers in the
Environmental industry across Europe.
The market demand is largely driven
by Environmental and Health & Safety
regulations. Growth in recent years has
been driven by the need to be compliant
with a range of EU regulations including:
n
n
n
New legislation or regulatory
obligations relating to the environment,
pollutants or potentially hazardous
contaminants.
The growing importance to companies
of protecting the workforce from
contact with potentially hazardous
materials.
Greater use of new technologies
in process control and integrated
pollution control.
The market for Environmental Monitoring
and Instrumentation (EMI) in the UK has
been estimated by a 2006 DTI/ CEED study
to be ca. £190m with an annual growth
rate through to 2015 projected at ca. 3% p.a.
Sector Performance
The Life Science businesses increased
revenues in 2008 by 39% to £62.1m (2007:
£44.7m). Sector revenues benefited from
both an excellent first full year contribution
from AMT and from the strong appreciation
of the Canadian dollar against UK sterling.
On a comparable and constant currency
basis, sector revenues showed underlying
organic growth of 7%.
Operating profits increased by 45% to
£9.6m (2007: £6.6m) with operating
margins increasing to 15.5% (2007:
14.8%). The UK businesses experienced
pressure on margins from the appreciation
of the euro against UK sterling,
restructuring costs and the installation of
new IT systems. The strong combined
performance of the Canadian businesses
however, more than offset these margin
pressures.
Capital expenditure in the sector was
£1.1m, including £0.6m invested in field
equipment for placement by the Canadian
businesses. The balance was invested
in IT upgrades in the two UK businesses
and on refurbishing calibration equipment
in Anachem. Free cash flow before tax of
£9.7m was generated in the sector (2007:
£5.2m).
Somagen achieved good growth in the sale
of Consumables, Reagents and Services
(“CRS”) from the core suppliers which
account for ca. 70% of revenues. Success
was achieved in converting key customers
to newer technology instruments such
as Sebia’s Capillarys system, Phadia’s
Immunocap 250 allergy system, Sakura’s
new automation products and Tosoh’s new
G8 instruments. These new instrument
placements will secure multi-year CRS
contracts with key customers.
Revenue
£62.1m
2007: £44.7m
Operating Profit*
£9.6m
2007: £6.6m
Operating Margin*
15.5%
2007: 14.8%
Free Cash Flow (before tax)
£9.7m
2007: £5.2m
Trading Capital Employed
£47.0m
2007: £41.4m
ROTCE
20.6%
2007: 22.6%
* Before amortisation of acquisition intangible assets
Customers
Clinical
51%
Industrial & environmental
Life Science research
23%
26%
Geography
Canada
United Kingdom and Eire
Continental Europe
Rest of World
10%
2%
49%
39%
Products
Consumables
Service
Instrumentation
59%
14%
27%
25 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
In recent years, Somagen has suffered
from the effects of supplier consolidation
with the acquisition of suppliers including
DSL, Biosite and Blackhawk. In current
market conditions such acquisition
activity has slowed and Somagen has
been successful in adding new suppliers
including Trek, Meridian, BBI-Seracare and
Biolytical. Overall however, Somagen’s
revenues reduced slightly in the year as
the growth in core product lines and new
supplier introductions were not sufficient to
fully offset the supplier losses.
AMT in its first full year as part of
the Group, delivered an exceptional
performance with growth in excess of 30%
compared with the prior year comparable
period. The two principal business
streams, AMT Electrosurgery and AMT
Endoscopy, both contributed strongly to
this performance.
AMT Electrosurgery continued its
penetration of the major hospitals, signing
up multi-year contracts for the supply of its
core proprietary products including smoke
evacuation, reuseable grounding pads and
specialty electrodes. AMT has long term,
exclusive distribution rights in Canada
for these products which are strongly
differentiated and patent protected.
Success was also achieved by focusing
product specialists on increasing sales of
other specialty products in a broader range
of surgical applications.
AMT Endoscopy concentrates on
sales to Gastro-Intestinal (“GI”) and
Endoscopy units which are run separately
within hospitals, with different product
requirements and purchasing processes.
AMT has focused on a small number
of proprietary products supplied on
an exclusive basis, including Argon
Plasma Coagulation (“APC”) and
flexible endoscopic instruments. Having
established strong relationships with
customers, AMT is again sourcing new
innovative products to broaden the product
offering and take a greater share of
customer contract requirements.
Overall, there was a modest increase in
revenues for Anachem, with pipettes
and tips continuing to make progress
and a good first year contribution from
the Hitek calibration services business,
offsetting a further decline in the sales of
instrumentation products.
Operationally, it was a year of significant
change for Anachem, with the business
being formally separated from the a1-group
at the beginning of the year and new IT
systems being implemented concurrently.
This caused some disruption and higher
operating costs for a period, although the
systems have now successfully bedded
down and action has been taken to reduce
the legacy overhead costs. The new ERP
system has significantly enhanced the
company’s marketing capabilities, with
the e-commerce sales content increasing
steadily in the final quarter of the year. The
company is now leaner and in a stronger
position to compete, although the strength
of the euro and the US dollar, relative to UK
sterling, will continue to impact margins.
The a1-group increased revenues by
12%, with strong sales in Continental
Europe compensating for weaker
performance in the UK. Sales of analysers
in Germany increased strongly once again
as the operation took full advantage of
strong customer demand, new product
introductions and competitor weakness.
Sales of sulphur and nitrogen analysers
to the chemical and petrochemical sector
were particularly strong and a new range
of industry-leading AOX analysers, which
measure the levels of halogens in waste
water, also made significant gains.
Further progress was made with the
enclosure products, with sales moving
ahead strongly in Switzerland, France,
Germany and Ireland. The year saw a major
change in the design and manufacture of
these products and the new generation
of enclosures was launched at the key
industry trade exhibition, Analytica. The
early response has been very positive with
two major OEMs already committed to
adopting new designs for the containment
of their instruments and significant
interest from laboratory health and safety
professionals. Switzerland continued to
make progress with specialist stainless
steel enclosures and the business was
successful in achieving initial sales into the
French pharmaceutical sector.
Sales of emissions monitoring equipment
and services in the UK were broadly
flat, with margins generally lower as
the project mix moved to larger, more
complex installations. Order levels slowed
in the second half of the year as less
Energy from Waste incinerators entered
the construction phase. The demand for
alternative electricity generation is high
but local planning resistance has slowed
project approval. Planning applications are
now being switched to focus on Biomass
incinerators and on adding capacity to
already existing sites.
26 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Sector Review: Seals
Sector Definition and Scope
The Seals sector businesses supply
a range of hydraulic seals, gaskets,
cylinders and attachment kits used in
heavy mobile and industrial machinery.
The Hercules Fluid Power Group
comprises Hercules Sealing Products
(“Hercules”), Bulldog Hydraulic & Gaskets
(“Bulldog”) and HKX. The core Hercules
business based in Clearwater, Florida
provides a next day delivery service
throughout the US, for seals, seal kits and
cylinders used in a range of heavy mobile
machinery applications. Hercules in Canada
offers the same range of products from
its two branch operations located in the
provinces of Ontario and Quebec.
Bulldog supplies a range of gasket and
seal kits for heavy duty diesel engines,
transmissions and hydraulic cylinders used
in off road and marine applications. Bulldog
is based in Reno, Nevada, but more than
75% of sales are to international customers
outside the US.
HKX is based near Seattle, Washington
State and supplies hydraulic kits used
in the installation of attachments on
excavators. HKX’s colour coded kit systems
with ‘lego-logic’ instructions, substantially
reduce the time and engineering expertise
required to install attachments.
Outside North America, Hercules has
centred its European operations on the
newly acquired Snijders Engineering
business in the Netherlands. Hercules also
has a Representative Office in Tianjin, close
to Beijing in China.
Fluid Power Equipment (“FPE”) is based
in the UK, with operations in Darlington
and Doncaster, and supplies a range of
seals, seal kits, cylinder parts and sealants
to ram repairers, mobile and heavy plant
operators, mechanical handling and process
control companies.
M Seals is a specialised distributor of
O rings, moulded parts, PTFE products and
shaft seals. Products range from the finest
precision seals for hearing aids to large
heavy duty seals for wind power mills.
M Seals has operations in Espergaerde in
Denmark and Halmstad in Sweden.
trucks, fork lifts and dump trucks) and
refuse collection.
These businesses are focused on the
Aftermarket, with the main customers
being machinery and cylinder repair shops,
engine and transmission re-builders
and tractor parts distributors. Products
are generally used in the repair and
maintenance of equipment after it has
completed its initial warranty period or
lease term, or has been sold on in the
pre-used market.
The principal market drivers are the growth
in the general industrial economies and
in particular heavy construction, although
the Aftermarket focus means that the
businesses are relatively insulated from the
extremes of the economic and business
cycles.
2004
2005
2006
2007 Growth
% p.a.
+3.6% +3.1% +2.9% +2.2%
3.0%
1,023 1,132 1,192 1,161
4.4%
2,223 2,724 2,766 2,626
6.3%
US real GDP
growth(1)
Annual
US construction
spending
$billion(2)
US mobile
hydraulic
shipments
$million(3)
Sources:
(1) Organisation for Economic Co-operation and
Development (OECD)
(2) US Census Bureau
(3) National Fluid Power Association
Hercules and Bulldog benefited from
the strong US economy from mid 2003
to mid 2006. Into 2007 and 2008, the
residential construction sector declined
due to overbuilding of homes and the
sub-prime mortgage crisis. Demand in the
heavy construction sector remained more
resilient with continued state and local
government funding for major road-building
and infrastructure programmes.
In Canada, economic growth has been
fuelled principally by the expansion of the
Oil and Gas industry in Alberta. This growth
has slowed significantly in 2008 with
drilling activity much reduced.
Market Drivers
The core business, representing ca. 50% of
sector revenues, is the next day delivery of
sealing products to the mobile machinery
Aftermarket in North America. Hercules
and Bulldog supply into a broad range of
applications in heavy construction, logging,
mining, agriculture, material handling (lift
The HKX business is driven more strongly
by new equipment sales. HKX attachment
kits are sold mostly with new excavators,
where demand declined significantly in
2007 and further in 2008. Sales growth
for HKX in 2009 will continue to rely
on penetration into new accounts and
increased penetration of attachment kits.
In the UK, FPE supplies principally to ram
(hydraulic cylinder) repairers who serve a
broad range of industrial users including
construction, agriculture and material
handling. Growth has remained sluggish
in these sectors in recent years and this is
forecast to continue as the UK economy
enters recession.
M Seals supplies to industrial OEMs
in Denmark, Sweden and China. Since
applications are quite specialised (for
example wind turbines), sales growth is
dependent on the success of M Seals’
customers in both domestic and export
markets.
Sector Performance
The Seals businesses made further
advances in 2008 and increased
revenues by 18% to £42.6m (2007:
£36.0m), benefiting from the first full
year contribution from M Seals. On a
comparable and constant currency basis,
sector revenues showed underlying organic
growth of 3%.
Operating profits increased by 16% to
£6.7m (2007: £5.8m) with operating
margins slightly decreasing to 15.7%
(2007: 16.1%). The reduced operating
margins reflected investments of £0.4m
made in establishing new operations
in Europe and China and one-off costs
incurred in the closure of the Edmonton
branch office.
Capital expenditure in the sector totalled
£0.5m, including an initial investment in
a new warehouse automation system in
Hercules and seal assembly machinery
at M Seals. Free cash flow before tax of
£6.5m was generated in the year (2007:
£5.6m.
The Hercules Fluid Power Group achieved
revenue growth of 2% in challenging
economic conditions by successfully
adapting its approach to focus on new
products, more buoyant market segments
and international expansion.
In the US domestic market, the core
distribution operations demonstrated their
strength and resilience by maintaining sales
broadly at prior year levels.
Revenue
£42.6m
2007: £36.0m
Operating Profit*
£6.7m
2007: £5.8m
Operating Margin*
15.7%
2007: 16.1%
Free Cash Flow (before tax)
£6.5m
2007: £5.6m
Trading Capital Employed
£30.1m
2007: £26.0m
ROTCE
22.2%
2007: 29.3%
* Before amortisation of acquisition intangible assets
Customers
Heavy construction
Lift trucks & fork lifts
Dump trucks & refuse collection
56%
5%
6%
Industrial and other
33%
Geography
North America
Europe
Rest of World 17%
60%
23%
17%
Products
Seals & seal kits
Gaskets
Cylinders & components
Attachment kits
7%
9%
13%
71%
27 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
The development of new seals and seal
kits continued, with over 1,400 Hercules
and Bulldog products added during the
year. Focus was also re-directed to more
buoyant segments by developing, for
example, a range of customised kits for the
mining industry.
The challenging market conditions
were used to exert further pressure on
competitors through selective aggressive
pricing. In parallel, however, the policy to
“out-service” competitors continued and
protected overall margins. Order fill rates
remained high and on-time delivery targets
were maintained throughout the year.
The recently introduced Seals-on-Demand
service, where small runs of non-stocked
seals are cut to customers’ requirements
within 48 hours, also delivered strong
growth in 2008.
Sales of HKX’s attachment kits for
excavators fell only marginally, which was
a commendable result in a period when
the sales of new heavy mobile equipment
in the US fell by an estimated 15-20%.
A focussed sales plan was successful
in developing both new customers and
achieving greater penetration in existing,
but underdeveloped accounts. Several
of the targeted dealers have now been
converted to using attachment kits either
as their first choice, or to supplement their
existing arrangements. The maintenance
of technical leadership in attachment kits
continued to be a prime objective and 50
new kits were introduced to the market.
In Canada, sales increased against the prior
year, with new products, customer-specific
kits and further penetration of existing
accounts all contributing to the result.
In Western Canada, sales fell as drilling
activity in the Alberta oil patch reduced
substantially and the sales and operational
resources were realigned to give a greater
concentration on the other western
provinces. In September, the Edmonton
branch was closed to fit with this new
approach.
International sales outside North America
grew strongly across all product categories.
Sales of the core seal and cylinder ranges
maintained momentum and significant
gains were made in many South American
countries, the Middle East and Turkey. A
new initiative to test the potential of the
previously untapped markets of South
East Asia, India and Eastern Europe,
produced overall growth in excess of 10%.
The first steps into international markets
for the attachment kit range were also
made in the year. The initial focus was
on South America and the Middle East
where Hercules’ existing agent and dealer
networks are strongest. The early market
responses have been positive and initial
orders have been received from several
dealers in the Middle East.
The acquisition of Snijders Engineering,
a small seals distributor based in the
Netherlands, was completed in June
2008. This acquisition, although small,
is an important step in the development
of the Hercules aftermarket seal brand
in mainland Europe. A General Manager
of Hercules Europe has been appointed,
further key employees added and new
premises selected. Multilingual seal and
seal kit catalogues have been developed
which will contain over 12,000 items
designed specifically for the mobile
machine models used most frequently in
central Europe. The initial development
work is close to completion and the launch
in the Netherlands and Belgium will begin
in early 2009.
In the UK, FPE achieved 14% growth
with a strong first half performance which
benefited from an additional contribution
from a small seals business acquired in
March 2007. In the second half of the year,
growth was more modest as economic
and market conditions deteriorated. As in
the US, a focus on alternative products
(eg metal parts for cylinders), added value
services (eg Seals-on-Demand) and exports
combined to deliver a creditable result.
M Seals completed its first full year in the
Seals group by delivering good growth
on a like-for-like basis. Sales growth was
modest in the Danish industrial customer
base, but the more recently established
Swedish operation grew strongly as
customers became aware of M Seals’
engineering and service capabilities
and began to award new projects to
the company. During the year, M Seals
consolidated its position as a significant
supplier of specialised seals to the wind
power turbine sector and these seals now
account for almost 10% of total sales.
M Seals includes the two leading European
wind power manufacturers as customers
and further prototype work is underway for
potential customers in China and India.
Although its core strengths lie in the supply
of products to OEMs, M Seals has also
adopted the Hercules range of aftermarket,
hydraulic seals. A Danish catalogue has
been designed and a new web-based
offering is close to completion. M Seals
will launch these products during 2009.
28 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Sector Review: Controls
Sector Definition and Scope
The Controls sector businesses supply
specialised wiring, connectors, fasteners
and control devices used in a range of
technically demanding applications.
The IS-Group has its principal operations
in Swindon, UK from where IS-Rayfast
supplies high performance wiring and
interconnect products for use in a range
of technically demanding applications
including Aerospace, Military & Marine,
Rail and Electronics. Cabletec, based in
Weston-super-Mare, UK, distributes similar
products, but in addition supplies a range
of manufactured products, including flexible
braided products and multi-core cables.
IS-Motorsport and Clarendon supply wiring,
harness components and fasteners into the
Motorsport sector, supplying most of the
Formula 1 teams, as well as other series
in the UK, US and Continental Europe.
The UK operations are located in Swindon
and Leicester, with satellite operations in
the US in Indianapolis and Mooresville.
The IS-Group has also established a
representative office in Beijing, with an
initial focus on the Chinese commercial
aerospace repair and aftermarket sector.
Sommer and Filcon supply a range of high
performance wiring and connectors to
customers in a range of high technology
industries including Defence, Aerospace,
Automotive Diagnostics and Medical
equipment. A range of value adding
activities enhances the customer offering,
including connector assembly, marking of
protective sleeves and prototype quantities
of customised multi-core cables. Sommer
and Filcon have operations in Stuttgart,
Munich and Frankfurt in Germany and Ely
in the UK.
Hawco supplies a range of instrumentation
and control devices used in the sensing,
measurement and control of temperature
and pressure. Applications range from
chilled cabinets for supermarkets, bars
and restaurants to fire detection systems.
Hawco has its operations in the UK, in
Guildford and Bolton.
Market Drivers
With over 90% of sector sales in the UK
and Germany and a wide range of product
applications, the underlying market drivers
are the growth of the UK and German
industrial economies:
2004
2005
2006
2007 Growth
% p.a
UK real GDP
growth (1)
+3.3% +1.8% +2.8% +3.1%
2.7%
UK manufacturing
index (2)
102.2 102.0 103.8 104.5
0.8%
German real
GDP growth (1)
Sources:
+0.6% +1.0% +3.1% +2.6%
1.8%
(1) Organisation for Economic
Co-operation and Development (OECD)
(2) The Office of National Statistics
Over the period 2004 – 2007, real GDP
in the UK has grown at an average rate
of ca. 2.7% p.a. but manufacturing
has remained relatively flat. This trend
has broadly continued in 2008, with
recessionary concerns building as the year
progressed. Over the same period, the
German economy has grown at an average
rate of 1.8% p.a. After a period of modest
recovery in 2006 and 2007, mainly driven
by export performance, growth has slowed
in 2008.
While strongly influenced by the UK
and German economies, the Controls
sector businesses have focused on more
specialised, technology driven market
segments. The IS-Group, Sommer and
Filcon have all benefited in particular from
the more buoyant market conditions in the
defence and aerospace sectors:
2004
2005
2006
2007 Growth
% p.a
German Defence
capital budget
ebillion (1)
UK Defence capital
budget £billion (2)
4.5
4.6
6.0
6.4 13.1%
6.0
6.7
6.7
7.0
5.4%
Commercial
Aerospace
market
growth (3)
Sources:
+11.4% +5.0% +5.0% +4.9%
6.5%
(1) NATO; Federal Ministry of Defence – Germany.
(2) UK Government’s Expenditure Plans 2007/8
(3) Boeing and Airbus market outlook
publications – revenue passenger kilometres
The combined Defence capital budgets
in the UK and Germany have grown at an
average of ca. 8% p.a. Filcon in particular
has positioned itself well to supply major
programmes. The IS-Group and Sommer
focus more on repair, refurbishment and
upgrade programmes as well as supplying
to Tier 2 electronics suppliers. They
typically only supply to OEMs and the Tier
1 suppliers when ex-stock availability and
responsiveness are important.
In the commercial aerospace sector,
again IS-Group, Sommer and Filcon have
benefited from the buoyancy in the overall
market. The market has shown strong
growth since 2003 and this continued in
2008. Both Boeing and Airbus are still
projecting longer term growth of ca. 5%
p.a. in revenue passenger kilometres.
Other specialised, technically driven
markets including Motorsport, Medical,
Rail and Power have remained buoyant
and have shown stronger growth than the
general industrial economies.
Sector Performance
The Controls businesses increased
revenues in 2008 by 13% to £67.6m (2007:
£60.0m). The first full year contribution
from Cabletec and the stronger euro
relative to UK sterling, boosted the overall
sector performance. On a comparable and
constant currency basis, sector revenues
decreased by 1%, against a strong prior
year comparative.
The focus on more buoyant, technically
driven sectors in the UK and Germany
delivered good underlying growth for the
IS-Group and Sommer. These growth
elements only partially offset the impact
of reduced project business at Filcon and
continued challenging market conditions for
Hawco.
Sector operating profits increased by 13%
to £11.0m (2007: £9.7m) with operating
margins broadly unchanged at 16.3%
(2007: 16.2%).
A significant IT upgrade at Sommer and
Filcon was successfully completed during
the year and this project accounted for the
majority of the £0.3m invested in the sector
during 2008. Free cash flow before tax of
£10.7m was generated in the sector (2007:
£9.9m).
The IS-Group delivered another year of
very solid growth across all market sectors
and in all geographic regions; although with
a stronger first half than second half. Sales
to the Aerospace market were buoyant,
with a solid level of background business
and several good sized projects providing
further incremental business.
Revenue
£67.6m
2007: £60.0m
Operating Profit*
£11.0m
2007: £9.7m
Operating Margin*
16.3%
2007: 16.2%
Free Cash Flow (before tax) £10.7m
2007: £9.9m
Trading Capital Employed
£27.3m
2007: £26.3m
ROTCE
40.3%
2007: 46.0%
* Before amortisation of acquisition intangible assets
Customers
Aerospace & defence
30%
Motorsport
Medical & scientific
14%
4%
Electronics & other
35%
Heating, cooling & refrigeration
17%
Geography
United Kingdom and Eire
Continental Europe
55%
41%
Rest of World
4%
Products
Wire & cable
Connectors
Control components
45%
27%
16%
Refrigeration & a/c equipment
12%
29 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
The Ground Defence and Military Marine
sectors also recorded sales close to prior
year levels, although the frequency of
requests to supply products for Urgent
Operational Requirements has fallen back
from the peaks of the past three years.
In the Motorsport sector, the IS-Group
increased its penetration of the core
Formula 1 racing teams in Europe and
consolidated its position as the prime
supplier of harness components and high
performance fasteners. A partnership
arrangement to support the Japanese
teams involved in the top flights of
motorcycle racing, brought further
export gains during the year. In the US,
Motorsport sales continued to grow and
a new satellite operation was opened in
February 2008 at the heart of the NASCAR
racing series in Mooresville, North Carolina.
Sales to the wider industrial market
showed steady growth with sales to the
Power generation industry moving ahead
strongly. There was also further growth
in exports of the core harness component
products, primarily to mainland Europe.
Cabletec made a solid start in its first
year as part of the IS-Group. During
the year, Cabletec became one of
the first companies to gain the newly
introduced EN4199 aerospace approval
for its manufactured bonding leads and
the prestigious Airbus approval standard
(ASNE) was also awarded. Operationally,
sales responsibilities have been clearly
defined and the purchasing and accounting
functions of Cabletec have been merged
within the IS-Group.
In Germany, Sommer delivered solid
sales growth with most of its traditional
harness manufacturing customers showing
consistently positive demand throughout
the year, across a range of sectors. Civil
aerospace sales remained buoyant with
regular demand from manufacturers such
as Eurocopter and Euroavionics.
Military sales were also strong and harness
components were supplied to a range of
German military programmes including
the Leopard II tank and the Fuhrungs
Information System, used in military land
vehicles. Further progress was also made
in the development of highly specialised
connectors and backshells for use on
the solar panels of satellites, with a new
design delivered to EADS-Astrium just prior
to the year end.
The Medical sector maintained a
consistently high level of demand and
Sommer benefited from its location in
Baden-Wurttemberg, a region which
has one of the highest concentrations of
medical equipment manufacturers in the
world. The company is well positioned
to supply this sector with its range of
highly specialised medical grade wires and
tubings.
Filcon experienced lower sales to the
major projects which had contributed to
the strong prior year performance. These
included the Eurofighter Tranche 2 project
and the first phase of the Transrapid
railway line extension in Shanghai, both of
which peaked in the prior year. Filcon will
be well placed to make further sales to
future project phases, although it is unlikely
that the exceptional 2007 levels will be
repeated for these projects.
Filcon continued to service many other
important German military programmes,
including the Tornado upgrade and the
Tiger and NH90 helicopters, as well as
consolidating its position as a key supplier
to MTU, which supplies engines to many
military vehicle programmes throughout
the world. There were also successes
in supplying a customised Motorsport
connector, introduced last year and now
supplied to BMW and other leading
customers. Key initiatives were also
developed to increase the level of non-
project, background business to partly
moderate the peaks and troughs created
by large projects.
The market conditions for Hawco in
the UK remained challenging, with
competitive and pricing pressures bearing
down on UK manufacturing. Against this
background, management worked hard
to mitigate these adverse factors. Sales
to the key refrigeration OEM accounts
held up relatively well and new product
introductions included a range of low
energy LED lights designed for food
counter displays.
Hawco has also rationalised its range of
thermal control products and focussed
on a smaller number of high quality
manufacturing partners who are willing to
support the company and grant exclusive
sales rights, rather than appoint multiple
distributors. This strategy has shown
some early success and Hawco was
recently appointed as the European Master
Distributor for two important US suppliers.
While Hawco still faces many challenges in
an unhelpful market, the company is lean,
focused on quality and service and is in a
good position to compete for business in
2009.
30 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Finance Review
Results for the Year
Revenue and operating profit, before
amortisation of acquisition intangible
assets, increased by 22% and 24%
to £172.3m and £27.3m, respectively.
Operating margins, before amortisation
of acquisition intangible assets, improved
marginally to 15.8% (2007: 15.7%). An
increase in Life Sciences’ margins offset
a small decrease in Seals’ margins, while
Controls’ margins remained broadly
unchanged.
The results benefited from a substantial
contribution to revenue and operating
profit from the businesses acquired in
August last year and from currency gains
on the translation of the results of the
overseas businesses. On an underlying
basis, revenues and operating profits,
before amortisation of acquisition intangible
assets, increased by ca. 3%; this is after
adjusting on a comparable basis for the
contribution of last year’s acquisitions, this
year’s acquisitions and for the currency
benefits to revenue and operating profit of
£4.8m and £1.0m, respectively.
Adjusted profit before tax (which is a
defined alternative performance measure,
as discussed below) increased 18.0%
to £27.5m (2007: £23.3m), after net
finance income, excluding fair value
remeasurements, of £0.2m (2007: £1.2m);
the reduction in finance income reflected
the significant investment made in
acquiring new businesses towards the end
of the previous year. Adjusted earnings per
share increased 17.1% to 16.4p compared
with 14.0p last year.
IFRS profit before tax, which is after
amortisation of acquisition intangible
assets of £2.7m (2007: £1.0m) and fair
value remeasurements of £3.0m (2007:
£Nil), was £21.8m (2007: £22.3m) and
IFRS basic earnings per share were 11.8p
(2007: 12.7p).
Taxation
The Group’s adjusted effective tax charge
represented 29.1% (2007: 30.4%) of
adjusted profit before tax. This reduction
is principally due to the lowering of tax
rates in the United Kingdom, Canada
and Germany; however this benefit was
partly offset by the impact from a larger
proportion of the Group’s operating profits
being earned this year in territories which
have higher tax rates than the United
Kingdom.
Free Cash Flow and Cash Funds
The Group continues to be strongly cash
generative. The Group’s free cash flow,
which is before expenditure on dividends
and business combinations, increased by
£4.8m to £18.0m; this represents 92.3% of
adjusted profit after tax (2007: 77.8%).
Operating cash flow increased by £5.8m
to £28.8m. On a constant currency basis,
there was a £1.3m (2007: £1.1m) increase
in working capital to £28.6m of which £0.4m
was accounted for by stock purchased in
advance of known price increases. At 30
September 2008, Group working capital
remained unchanged at 16.6% of annual
revenue and has consistently remained
below 17.0% in each of the last three
years.
Group tax payments were £8.2m (2007:
£8.0m) and benefited from the recently
acquired businesses remaining on an
annual tax payment basis during the
year; however this will lead to higher tax
payments in 2009, as these businesses
move to quarterly payments. The
Group’s Employee Benefit Trust also took
advantage of a weaker share price during
the year to acquire a further 528,760
shares in the Company at a cost of £0.9m
(2007: £1.3m).
Capital expenditure of £1.9m (2007: £2.2m)
represented 76% of annual depreciation.
Expenditure in 2008 included £0.7m
investment in tooling and warehouse
equipment and £0.6m on acquiring field
equipment for lease in the Life Science
businesses; the balance was spent on
completing prior year IT projects and
on small upgrades to the general IT
infrastructure across the Group.
After spending £7.9m on the acquisition
of businesses, including minority interests,
as described below, the Group’s cash
funds increased by £3.3m to £15.7m
at 30 September 2008 (2007: £12.4m).
The Group also has a £20m committed
revolving bank facility which expires in
November 2010, together with £5m of
working capital facilities. None of these
facilities were utilised at 30 September
2008.
Acquisitions and Minority Interests
During the year the Group acquired two
small businesses in support of broadening
its Life Science and Seals businesses
for £3.9m, in aggregate; a further £3.7m
was paid to the minority shareholders in
Somagen on exercise of options to acquire
11.8% of the outstanding share capital in
that business. Deferred consideration of
£0.3m was paid to the vendors of Cabletec,
which was acquired last year, and a further
£1.1m of deferred consideration will also
be payable after the year end (in December
2008) to the vendors of AMT, which was
acquired in August 2007.
At 30 September 2008 the Group has an
aggregate liability, estimated at £11.2m,
(2007: £11.8m) which is payable between
1 October 2009 and 31 December 2012,
to the vendors of AMT, Somagen and
M Seals who retain minority interests in
the share capital of these businesses.
This liability arises under put/call options
entered into at the time of acquisition
and is based on the Directors’ estimate
of the likely Earnings Before Interest and
Tax (“EBIT”) of these businesses, which
will form the basis of the valuation of the
minority shareholding on exercise of the
option. Based on the strong performance
of these businesses during the year, the
Directors have reassessed the potential
liability at 30 September 2008 to acquire
the remaining outstanding minority
interests. This has led to a charge of £2.3m
being made in the consolidated Income
Statement. An analysis of the movement
in this liability is set out in note 19 to the
consolidated financial statements.
Land at Stamford
The Group continues to retain
approximately 150 acres of farm and
former quarry land in Stamford which
relates to a former business which has
now closed. This land is included in the
consolidated Balance Sheet at £Nil and in
the opinion of the Directors, is unlikely to
be worth more than £0.5m in its present
condition. The Directors anticipate that this
land will continue to be leased to a local
farmer and there is no intention to dispose
of this land in the foreseeable future.
Acquisition Intangible Assets
and Goodwill
There were no additions to acquisition
intangible assets in 2008; however goodwill
increased by £6.2m net, on a constant
currency basis, to £51.6m reflecting the
amount paid for the acquisitions during
the year, in excess of the value of the
net tangible assets. This goodwill largely
comprises the value in each of these
businesses relating to both the product
know-how held by the employees and
to the prospects for sales growth in the
future from both new customers and new
products.
The Directors have carried out an
impairment review of the total Group
goodwill of £51.6m held at 30 September
2008 and are satisfied that none of this
goodwill has been impaired.
31 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
175
150
155
165
160
170
22.4
Pensions
Pension benefits to employees are
provided through defined contribution
schemes at an aggregate cost in 2008
of £0.8m (2007: £0.7m). In addition, in the
UK the Group retains a small number of
legacy defined benefit pension schemes
which are closed to future accrual. At 30
September 2008 the accounting deficit
in these defined benefit schemes had
increased marginally to £1.7m (2007: £1.6m).
While the market value of the underlying
assets in the schemes had fallen by £2.3m
to £12.5m, the margin between the rate
used to discount the liabilities and the
assumed inflation rate had increased on
the previous year by 0.8% to 3.2%. This
increase, together with the Group’s cash
contributions of £0.2m, led to a reduction
in the gross pension liability of £2.2m to
£14.2m (2007: £16.4m)
140.7
2007
130
135
140
145
Acquired
Businesses
There were no new formal actuarial
valuations of the Group’s principal schemes
carried out during the year and therefore
the ongoing funding level of the PLC
and Anachem legacy schemes remained
unchanged at 96% and 91%, respectively.
The aggregate deficit in the defined
benefit schemes, net of deferred tax, at
30 September 2008 was £1.2m (2007:
£1.1m) which equates to 1.1% of total
shareholders’ equity.
Capitalisation and Dividends
At 30 September 2008, the number of
shares in issue were 113.2m, of which
1.3m are held by the Company’s employee
share plan. During the year the Company
undertook a bonus issue of four new
ordinary shares for each ordinary share
held by shareholders; this resulted in the
issue of 90.6m new ordinary shares and
represented the capitalisation of £4.6m of
the Company’s reserves. Shareholders’
funds, which represents the Group’s total
capital, increased by £17.4m to £108.1m
due to the effect of exchange rate
movements, gains on cash flow hedges
and the purchase of minority interests, as
well as earnings retained for the year.
The Group’s trading capital employed,
which is defined in note 2 to the
consolidated financial statements,
increased at 30 September 2008 by
£13.0m to £104.5m (2007: £91.5m),
of which £70.2m (2007: £62.8m) was
accounted for by goodwill and acquisition
intangible assets. The Group return on
trading capital employed decreased to
21.0% (2007: 24.2%) at 30 September
2008. This reflects in part the impact of the
acquisitions completed in late 2007 and in
Rolling Exchange Rates
130
120
110
100
90
80
US$
£
Can$
Sep 03
Sep 04
Sep 05
Sep 06
Sep 07 Sep 08
Euro
US$
Can$
£
Exchange rate (rebased to 100)
Revenue (£m)
4.4
172.3
4.8
22.4
175
170
165
160
155
150
145
140
135
130
140.7
130
120
110
100
90
80
US$
£
Can$
2007
Acquired
Businesses
Foreign
Exchange
Organic
Growth
2008
Sep 03
Sep 04
Sep 05
Sep 06
Sep 07 Sep 08
Euro
US$
Can$
£
Exchange rate (rebased to 100)
part the increase in overseas trading capital
at 30 September 2008, resulting from the
weakening in UK sterling.
172.3
4.4
4.8
During 2008, £6.9m (2007: £5.4m) was
returned to shareholders in the form of
ordinary dividends. In May 2008 the Board
announced that that it intended to move
dividend cover towards 2.0 times, based on
adjusted earnings per share. The Board’s
distribution policy and its overall financial
strategy is to strike a balance between the
interests of shareholders and the interests
of the business, whilst maintaining a strong
Foreign
Exchange
balance sheet.
Organic
Growth
2008
Measuring Financial Performance
The Board uses specific measures when
assessing the performance of the Group
and these are referred to throughout this
Annual Report in the discussion of the
performance of the businesses. These
measures are not defined in IFRS, but are
used by the Board to assess the underlying
operational performance of the Group and
its businesses. As such the Board believes
these performance measures are important
and should be considered alongside
the IFRS measures. The alternative
performance measures, which have been
used in this Annual Report, are described
in note 2 to the consolidated financial
statements.
Reported performance takes into account
all the factors (including those which the
Group cannot influence, principally currency
exchange rates) that have affected the
results of the Group’s business and are
reflected in the consolidated financial
statements prepared in accordance with
International Financial Reporting Standards
(“IFRS”).
International Financial Reporting
Standards (IFRS)
The Group’s consolidated financial
statements have been prepared in
accordance with IFRS. This year the
Group has adopted IFRS 7, Financial
Instruments: Disclosures, which requires
additional disclosures in respect of financial
instruments. These additional disclosures
are given within the section on Risks and
Uncertainties on page 33 and in note 18 to
the consolidated financial statements. The
Group has not been required to adopt any
other new accounting standards during the
year which have had a significant impact on
the consolidated financial statements.
32 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Risks and Uncertainties
Risk Management Process
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 budgetary process.
Each operating business is required
each year to identify and document the
significant strategic, operational and
financial 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 risks and uncertainties which are
currently judged to have the largest
potential impact on the Group’s long
term performance are set out below. It
should be recognised that additional risks
not currently known to management, or
risks that management currently regard
as immaterial, could also have a material
adverse effect on the Group’s financial
condition or the results of operations.
Strategic Risks
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 pressure on margins due to increased
competitive pressures.
To mitigate the effects of such adverse
changes, 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.
In addition, there are a number of
characteristics of the Group’s businesses
which moderate the impact of economic
and business cycles on the Group as a
whole:
n
The Group’s businesses operate in
three different sectors with different
cyclical characteristics and across a
number of geographic markets.
n
n
n
The businesses offer specialised
products and services and this
offers a degree of protection against
customers quickly switching business
to achieve better pricing.
A high proportion of the Group’s sales
comprise consumable products and
service contracts which are purchased
as part of customers’ operating
expenditure, rather than through
capital budgets.
In many cases the products will be
used in repair, maintenance and
refurbishment applications, rather than
original equipment manufacture.
Loss of key supplier(s)
The Group’s businesses ensure that
they have secure long term access to
strong, differentiated product offerings by
combining:
n
n
n
Quality manufacturer-branded
products, mostly sourced under long
term distribution agreements.
Own-brand products, manufactured
under contract.
Selective in-house manufacture and
assembly.
There are risks to the businesses if a
major supplier decides to cancel the
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 establishing another
distributor.
The potential impact on an individual
business may be high where a supplier
represents a significant proportion of the
sales and purchases of the business.
However, the potential impact on the
Group is lower as no one supplier
represents more than 15% of Group
revenue and only four 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 inter-dependence has
been established. There are further actions
planned and implemented by the operating
businesses to control or to mitigate risks:
n
n
n
Where dependence is high, long term,
multi-year exclusive contracts signed
with suppliers.
Where possible, change of control
clauses included in contracts for
protection or compensation in the
event of acquisition.
Collaborative projects and relationships
maintained with individuals at many
levels of the supplier organisation.
n
Regular review meetings and
adherence to contractual terms.
n Regular reviews of inventory levels.
Bundling and kitting of products and
n
provision of added value services.
Periodic research of alternative
suppliers as part of contingency
planning.
n
Loss of major customer(s)
As with any businesses, the loss of one or
more major customers can be a material
risk.
Specific large customers are important
to individual operating businesses and a
high level of effort is expended 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.
The nature of the Group’s businesses,
however, ensures that there is not a high
level of dependence on any individual
customers. No one customer represents
more than 5% of sector revenue or more
than 2% of Group revenue.
Technological change
The Group’s businesses operate in
specialised markets offering products
which are often technical in nature. As
a result, there is always the risk that a
technological change will make specific
products less competitive or in the worst
case, obsolete. In addition to the write-off
of unsaleable inventory, this can impact
the sales performance of the business if
replacement products are not available.
The Group’s exposure to this risk is
reduced by the spread of businesses and
technologies, as well as by the fact that the
products, though technical, are typically not
subject to very rapid technological change.
The operating businesses monitor the
key technologies to get early warning of
changes in product competitiveness, so
that plans can be developed for changes
in the supplier portfolio as required.
Also, the businesses, with sufficient lead
time, mostly have the opportunity to
change suppliers in the event of a major
technology shift.
Product liability
There is always a risk that products
supplied by a Group business may fail in
service, which could lead to a claim under
product liability.
33 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
To offset this risk, technically qualified
personnel and control systems are in
place to ensure products meet quality
requirements. The businesses, in their
Terms and Conditions of sale with
customers, will typically mirror the Terms
and Conditions of sale from their suppliers.
In this way the liability can be limited and
subrogated to the supplier. In addition, this
avoids the need for businesses to maintain
material warranty provisions in their
financial statements.
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 potentially
damages if the claim succeeds and the
supplier fails to meet its liabilities for
whatever reason. To mitigate this risk,
the Group has established Group-wide
product liability insurance which provides
worldwide umbrella insurance cover of
£10m (ca.US$20m) in all sectors.
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.
Contractual terms such as notice periods
and non-compete clauses can mitigate the
risk in the short term. However, the 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 of
key managers in the operating businesses
to mitigate this risk:
n
n
n
n
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 incentive plans targeted
at the individual business level.
Giving the freedom, encouragement,
financial resources and strategic
support for managers to pursue
ambitious growth plans.
Operational Risks
Major damage to premises
The Group businesses mostly operate from
combined office/warehouse facilities which
are dedicated to the business and not
shared with other Group businesses. Major
damage to the facility from fire, malicious
damage or natural disaster would impact
the business for a period until the damage
is repaired or alternative facilities have
been established.
The businesses have developed plans to
prevent 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 operational as quickly as possible
to minimise disruption to customers. Plans
to ensure a quick and orderly recovery have
been developed by the businesses and are
periodically reviewed.
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 and a specific
disaster plan has been drawn up and is
regularly reviewed. This includes:
n Back-up power generator.
n
Materials on hand to secure the
facility.
Communications re-route to other
branches or interim location.
IT recovery plan using back up server
in separate location.
Regular building inspection and
weather monitoring.
Plans to drop-ship product from
suppliers where needed.
n
n
n
n
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. IT system failure could have a
number of causes including power failure,
fire and viruses.
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:
n
n
Full data back-ups as a matter of
routine.
Back-up tapes stored in fire proof
safes.
n Back-up servers identified.
n
Communication re-route options
identified.
Service contracts with IT providers
with access to replacement servers.
Uninterruptible power sources and
back-up generators where required.
Virus checkers and firewalls.
n
n
n
Disruption by service providers
All the operating businesses use third party
carriers to physically transport products.
Disruption to this service is most critical
in businesses such as Hercules where the
business model requires rapid, often next
day delivery of products. Most businesses
will have a principal carrier that is used, but
they will monitor and maintain accounts
with alternative carriers.
Financial Risks
The Group’s activities expose it to a variety
of financial risks; foreign currency, liquidity,
interest rate and credit. The Group’s overall
management of these risks is carried out
by a central treasury team (Group treasury)
under policies and procedures which are
reviewed and approved by the Board.
Group treasury identifies, evaluates and
where appropriate, hedges financial risks
in close co-operation with the Group’s
operating businesses. The Group treasury
team does not undertake speculative
foreign exchange dealings for which there
is no underlying exposure. The policies for
managing these financial risks are set out
below and further analyses of these risks
are set out in note 18 to the consolidated
financial statements.
Foreign currency risk
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 euro and the Canadian dollar
(translational exposure). During the year
ended 30 September 2008, ca. 50% of the
Group’s sales and operating profits were
earned in currencies other than UK sterling.
In comparison to the prior year, the net
effect of currency translation was to
increase turnover by £4.8m and to increase
operating profit by £1.0m. It is estimated
that a strengthening of UK sterling by
10% against all the currencies in which
the Group does business, would reduce
operating profit, before amortisation of
34 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Risks and Uncertainties continued
acquisition intangible assets and tax, by
approximately £2.0m (7.3%) (2007: £1.4m
(6.3%)) due to currency translation.
The Group has certain investments in
foreign operations whose net assets
are also exposed to foreign currency
translation risk. Currency exposure arising
from the net assets of the Group’s
foreign operations are not hedged. At
30 September 2008, the Group’s non-
UK sterling trading capital employed in
overseas businesses was £75.0m, which
represented 72% of the Group’s trading
capital employed. It is estimated that
a strengthening of UK sterling of 10%
against all the non-sterling capital employed
would reduce shareholders’ funds by
£6.9m (2007: £5.4m).
The Group’s UK businesses are also
exposed to foreign currency risk on
purchases that are denominated in a
currency other than their local currency,
principally US dollars, euro and Japanese
yen (transactional exposure). The Group’s
Canadian businesses are also exposed
to a similar risk as the majority of their
purchases are denominated in US dollars.
The European and Canadian businesses
hedge up to 80% of forecast US dollar
and euro foreign currency exposures
using forward foreign exchange contracts.
The Group classifies its forward foreign
exchange contracts, hedging forecasted
transactions, as cash flow hedges and
states them at fair value.
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 26 to the consolidated
financial statements.
Liquidity risk
Liquidity risk is the risk that the Group will
not be able to meet its financial obligations
as they fall due. The Group’s approach to
managing liquidity is to ensure, as far as
possible, that it will always have sufficient
liquidity to meet its liabilities when due,
under both normal and stressed conditions,
without incurring unacceptable losses or
risking damage to the Group’s reputation.
The Group is highly cash generative and
uses monthly cash flow forecasts to
monitor cash requirements and to optimise
its return on investments. Typically the
Group ensures that it has sufficient cash
on hand to meet foreseeable operational
expenses, but it maintains a £5m overdraft
facility on which interest is payable at UK
Base Rate plus 100 bps. The Group also
has an undrawn committed £20m revolving
bank facility which expires in November
2010. Interest on this facility is payable at
80 bps over LIBOR.
Interest rate risk
Interest rate risk is the risk that changes
in interest rates will affect the Group’s
results. The Group’s interest rate risk arises
primarily from its cash funds. An analysis
of the currency and interest rate profile of
the Group’s funds is shown in note 17 to
the consolidated financial statements. The
Group manages its interest-bearing funds
in a manner designed to maximise interest
income, while at the same time minimising
any risk to these funds. Surplus funds are
deposited with commercial banks that meet
the credit criteria approved by the Board, for
periods of between one to six months at
rates that are generally fixed by reference
to the relevant UK Base Rate, or equivalent
rates. The Group does not undertake any
hedging activity of interest rates.
It is estimated that a reduction of 1% in
interest rates would reduce the Group’s
profit before tax by a maximum of £0.1m
(2007: £0.1m)
Credit risk
Credit risk is the risk of financial loss to
the Group if a customer or counterparty
to a financial instrument fails to meet
its contractual obligations; this arises
principally from the Group’s trade and other
receivables from customers and from cash
balances (including deposits) held with
financial institutions.
Trade receivable exposures are managed
locally in the operating units where they
arise and credit limits are set as deemed
appropriate for the customer. The Group
is exposed to customers ranging from
government backed agencies and large
private wholesalers to small privately
owned businesses and the underlying local
economic risks vary throughout the world.
The Group establishes an allowance for
impairment that represents its estimate of
incurred losses in respect of specific trade
and other receivables where it is deemed
that a receivable may not be recoverable.
When the receivable is deemed
irrecoverable, the allowance account
is written off against the underlying
receivable.
Exposure to financial counterparty credit
risk is controlled by the Group treasury
team in establishing and monitoring
counterparty limits. Centrally managed
funds are invested entirely with
counterparties whose credit rating is ‘A’ or
better.
Capital risk management
The Group’s objectives when managing
capital are to safeguard the Group’s ability
to continue as a going concern in order
to provide returns for shareholders and
benefits for other stakeholders and to
maintain an optimal capital structure.
In order to maintain or adjust the capital
structure the Group may adjust the amount
of dividends paid to shareholders, return
capital to shareholders or issue new
shares.
Accounting Risks
Inventory obsolescence
Working capital management is critical
to success in specialised distribution
businesses as this has a major impact on
cash flow. The principal risk to working
capital, other than credit risk to trade
receivables is in inventory obsolecence and
write-off. Inventory write-offs are controlled
and minimised by active management of
inventory levels based on sales forecasts
and regular cycle counts. Where necessary,
an impairment charge is made to cover
excess stock and potential obsolescence.
Fraud and theft
The Group’s operating businesses are
relatively straight-forward businesses
where a significant incidence of fraud or
theft should become apparent relatively
quickly. The risks are also moderated by
the fact that the products are relatively
specialised industrial products and
therefore not particularly valuable or
attractive on the open market. Finally,
tangible fixed assets are not significant
across the Group and generally comprise IT
and warehouse equipment, where any loss
would be quickly apparent.
As additional security, processes are in
place to further reduce the opportunity for
fraud or theft:
n
Specified signature levels and
responsibilities.
Segregation of responsibilities.
n
n Controls on shipping addresses.
n
Weekly flash reports of cash balances
and regular bank reconciliations.
Regular review of supplier and creditor
ledgers to identify fictitious suppliers.
Group wide policy and procedures for
“whistle-blowing”.
n
n
The Audit Committee carries out an annual
assessment of the fraud risks in the
businesses and discusses these risks with
management.
35 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Corporate and Social Responsibility
The Board takes serious account of the
social, environmental and ethical impacts
of the Group’s activities and monitors
them as part of the annual risk assessment
process. The risk assessments are led
by the Managing Directors of each of the
Group’s operating companies and are then
reviewed by the Board. The Managing
Directors are responsible for complying
with the relevant employment, social
and environmental regulations in the
geographical areas in which they operate.
Employment
Building and developing the skills,
competencies, motivation and teamwork
of employees is recognised by the
Board as being key to achieving the
Group’s business objectives. The stability
and commitment of the employees is
demonstrated by the average length of
service being 5.5 years (2007: 5.3 years). In
addition the number of working days lost to
sickness continues to remain less than 4%
a year. These measures remain consistent
across each of the Group’s sectors.
The Group values the commitment
of its employees and recognises the
importance of communication to good
working relationships. The Group keeps
employees informed on matters relating
to their employment, on business
developments and on financial and
economic factors affecting the Group.
This is achieved through management
briefings, internal announcements, the
Group’s website and by the distribution of
Preliminary and Interim Announcements
and press releases. Copies of the Annual
Report are also made available in the
operating businesses. This communication
programme enables employees to gain
a better understanding of the Group’s
business objectives and their roles in
achieving them.
Both employment policy and practice in
the Group are based on non-discrimination
and equal opportunities. Ability and
aptitude are the determining factors in the
selection, training, career development and
promotion of all employees. The Group
remains supportive of the employment
and advancement of disabled persons.
Applications for employment by disabled
persons are always fully considered,
bearing in mind the respective aptitudes
and abilities of the applicants concerned.
If an employee is, or becomes disabled
during their period of employment, the
Group will, if necessary and to the extent
possible, adapt the work environment to
enable the employee to continue in their
current position or retrain the employee
for duties suited to their abilities following
disablement. At 30 September 2008 the
Group’s employees included ten who were
disabled and three who were on long term
sick leave.
Employment policies throughout the
Group have been established to comply
with relevant legislation and codes of
practice relating to employment, health
and safety and equal opportunities. The
Group provides good quality working
environments and facilities for employees,
and training and development appropriate
to each of their roles.
Health and Safety
The Group places a great deal of
importance on the provision of clean,
healthy and safe working conditions.
In addition to compliance with all local
regulations, the Group promotes working
practices which protect the health and
safety of its employees. Health and Safety
matters are kept under regular review by
local management who report on such
matters to the Chief Operating Officer.
During 2008, 41 employees (2007: 48)
were reported as having suffered minor
injuries at work; none of these injuries
resulted in absence from work for more
than three days. One employee (2007: one)
suffered a serious injury which resulted in
his absence from work for three months.
Health and Safety training is part of the
induction process for new employees.
Specific training is given where relevant,
for example regarding forklift truck
operation and chemical handling, as well as
general fire safety and first aid matters.
Environmental
The Group regards compliance with
relevant environmental laws as an
important part of its responsible approach
to the environment and is committed
to good environmental management
practices throughout its operations. The
Managing Directors appointed by the Board
have responsibility for the environmental
performance of their operating businesses
and each subsidiary is required to
implement initiatives to meet their
responsibilities.
Relationships with suppliers, customers
and other stakeholders
The Group recognises the obligation it
has towards the parties with whom it has
business dealings including customers,
shareholders, employees, suppliers and
advisors. Dealings with these groups
depend upon the honesty and integrity of
the Group’s employees and every effort
is made to ensure that a high standard
of expertise and business principles
is maintained in such dealings. Where
appropriate, training is given to maintain
and to raise standards.
The Group’s policy towards suppliers is
that each operating company is responsible
for negotiating the terms and conditions
under which they trade with their suppliers.
The Group does not have a formal code
that it follows with regard to payments to
suppliers. Group companies agree payment
terms with their suppliers when they enter
into binding purchasing contracts for the
supply of goods and services.
Suppliers are, in that way, made aware of
these terms. Group companies seek to
abide by these payment terms when they
are satisfied that the supplier has provided
the goods or services in accordance with
the agreed terms and conditions. At 30
September 2008 the amount of trade
creditors shown in the Group balance sheet
represents 48 days (2007: 47 days) of
average purchases.
Community impact and involvement
The Group contributes to local worthwhile
causes and charities and ensures that the
Group’s operations cause minimal negative
impact within the community.
In common with all companies, the Group
has limited resources and the amount of
money available for charitable purposes
varies over time.
The Group made donations for charitable
purposes during the year which amounted
to £20,452 (2007: £15,285). No political
donations were made.
36 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Directors’ Report
For the year ended 30 September 2008
The Directors present their report and the audited financial
statements for the year ended 30 September 2008.
Principal Activities
The principal activity of the Group is the supply of specialised
technical products and services. A description and review of the
activities of the Group during the financial year and an indication of
future developments is set out in the Business Review on pages 21
to 35; the Business Review incorporates the requirements of the
Companies Act.
Results and Dividends
The profit for the financial year attributable to shareholders was
£13.3m (2007: £14.3m). The Directors recommend a final dividend
of 5.0p per ordinary share (2007: 3.6p), to be paid, if approved, on
21 January 2009. This, together with the interim dividend of 2.5p per
ordinary share paid on 18 June 2008, amounts to 7.5p for the year
(2007: 5.4p).
Share Capital
On 21 January 2008 the Company undertook a bonus issue of four
new ordinary shares of 5 pence each for each ordinary share held by
shareholders of the Company. The bonus issue resulted in the issue
of 90,591,644 new ordinary shares, representing the capitalisation
of £4.4m of the Company’s retained earnings, together with £0.2m
which was held in the capital redemption reserve. The current issued
share capital comprises 113,239,555 ordinary share of 5p each with
an aggregate nominal value of £5.7m. As a consequence of this bonus
issue, the comparative earnings and dividends per share included in
this Annual Report have been restated.
Substantial Shareholdings
At 14 November 2008 the Company had been notified, pursuant to
the Financial Service Authority’s Disclosure and Transparency Rules,
of the following notifiable voting rights in its ordinary share capital:
F&C Asset Management plc
Insight Investments Limited
Lincoln Vale European Partners Master Fund LP
Fidelity International
Legal & General Investment Management Limited
Newton Investment Management Limited
Slater Investments Limited
IG International Management Limited
UBS Global Asset Management Life Limited
Percentage of
ordinary share
capital
9.19
5.52
5.05
5.00
4.74
4.39
3.57
3.20
3.00
As far as the Directors are aware there were no other notifiable
interests.
Directors
The persons currently serving as Directors of the Company are
shown on pages 18 and 19. JL Rennocks and BM Thompson
retire from the Board by rotation at the Annual General Meeting on
14 January 2009 and being eligible, offer themselves for re-election.
The Directors’ beneficial interests in the Company’s ordinary share
capital at 30 September 2008 are set out in the Remuneration Report
on page 45.
Directors’ and Officers’ Liability Insurance and Indemnity
The Company has purchased insurance to cover its directors
and officers against the costs of defending themselves in legal
proceedings taken against them in that capacity and in respect of
any damages resulting from those proceedings. The Company also
indemnifies its Directors and officers to the extent permitted by law.
Neither the insurance nor the indemnity provide cover where the
director or officer has acted fraudulently or dishonestly.
Other Statutory Information
An explanation of the Company’s policy on matters relating to
Employment, Health and Safety, Environmental and its relationship
with suppliers, customers and other stakeholders is set out within
the Business Review on page 35 of the Annual Report. The Group’s
use of financial instruments is discussed on page 33.
New Articles of Association
It is intended that a special resolution for adoption of new Articles
of Association of the Company, will be put to shareholders at the
Annual General Meeting.
Company law has undergone substantial change since January
2007 when the staged implementation of the Companies Act 2006
(the “2006 Act”) commenced. The Articles of Association of the
Company in their current form contain certain provisions that no
longer fully reflect both legislation and best practice and accordingly
the Board considers it prudent to replace the Company’s existing
Articles of Association with new Articles that take account of those
developments (the “New Articles”).
A summary of the material changes brought about by the proposed
adoption of the New Articles is set out in an Appendix to the Notice
of Annual General Meeting. Other changes, which are of a minor,
technical or of a clarifying nature have not been noted in the Appendix.
Further amendments to the New Articles may be required in the
coming years as a result of the implementation of the 2006 Act. The
2006 Act represents a major reform of UK companies’ legislation
and is being brought into force in stages, with full implementation
scheduled by October 2009. At this year’s Annual General Meeting
the Company proposes to adopt provisions which reflect changes in
the law brought about by the 2006 Act in respect of, among other
things, electronic communications, notice periods for meetings,
proxy voting and directors’ conflicts of interest. Over the course of
the next year the Company intends to conduct a further review of
the New Articles in order to identify any additional amendments that
might be necessary following the full implementation of the 2006
Act by October 2009. It is the Board’s intention that any further
amendments will be put to shareholders at the 2010 AGM.
A copy of the new Articles of Association will be on display at the
Registered Office of the Company during normal business hours on
any week day, up to and including the date of the Annual General
Meeting, and at that meeting.
Annual General Meeting
The Annual General Meeting will be held at midday on 14 January
2009 in the Brewers’ Hall, Aldermanbury Square, London EC2V 7HR.
The Special Business of the meeting includes a resolution to adopt
new Articles of Association of the Company, as described above, and
to seek authority to allot shares and the disapplication of pre-emption
rights. The Company will also be seeking authority to make market
purchases of shares in the Company up to a maximum of 10% of the
Company’s shares. Further detail of all these proposals will be set
out in the Notice of the Annual General Meeting which is a separate
document which will be sent to all shareholders.
Independent Auditors
The previous auditors, PricewaterhouseCoopers LLP resigned as
auditors to the Company on 22 September 2008, following an audit
tender process. Deloitte & Touche LLP were subsequently appointed
to fill the casual vacancy arising on resignation of the previous
auditors. A resolution to appoint Deloitte & Touche LLP as auditors
and to authorise the Directors to determine their remuneration will
be proposed at the forthcoming Annual General Meeting of the
Company.
By order of the Board
NP Lingwood
Company Secretary
17 November 2008
37 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Corporate Governance
Compliance Statement
The Board recognises the importance of high standards of
corporate governance throughout the Group. The Board is
accountable to the Company’s shareholders for good governance
and this statement sets out how the principles set out in the FRC
Combined Code on Corporate Governance (“the Code”), issued in
June 2006, are applied by the Company. The Board confirms that
the Company has complied with all of the Provisions set out in
Section 1 of the Code, throughout the year.
Directors
The Board
The Board comprises three non-Executive Directors, including
the Chairman, and three Executive Directors, providing a wide
range of skills and experience. The biographical details of the
Board members are set out on pages 18 and 19. The Board has
six scheduled meetings each year and meets more frequently as
required. It met on six occasions during the year under review.
The following table sets out the number of meetings of the
Board and its Standing Committees during the year and individual
attendance by Board members at these meetings:
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
The approval of acquisitions, for the most part, is a matter
reserved for the Board, save that it delegates to the Chief
Executive Officer the responsibility for such activities to a
specified level of authority. Similarly, there are authority levels
covering capital expenditure which can be exercised by the Chief
Executive Officer. Beyond these levels of authority, projects are
referred to the Board for approval.
The Board establishes the remuneration of non-Executive
Directors and the Company’s framework of executive
remuneration and its cost in the light of recommendations made
by the Remuneration Committee.
Other matters reserved to the Board include treasury policies,
internal control, risk management and the appointment or removal
of the Company Secretary. The Company maintains appropriate
insurance cover in respect of legal action against its Directors.
Chairman and Chief Executive
The roles of the Chairman, who is non-Executive, and the Chief
Executive Officer are separate and clearly defined. The Chairman
is also Chairman of Nestor Healthcare plc and Intelligent Energy
plc and has a number of other Board appointments. The Board
is satisfied that the Chairman’s other Board appointments and
commitments do not place constraints on his ability properly to
fulfil his role as Chairman of Diploma PLC.
Number of meetings
during the year
Non-Executive Directors:
JL Rennocks
(Chairman)
JW Matthews
IM Grice
Executive Directors*:
BM Thompson
I Henderson
NP Lingwood
6
6
6
6
6
6
6
8
8
8
8
4
4
4
4
*The Executive Directors attend all the meetings of the Audit Committee;
BM Thompson also attended the meetings of the Nomination and
Remuneration Committees during the year.
The duties of the Board and its Committees are set out clearly
in formal terms of reference which are reviewed regularly and
state the items specifically reserved for decision by the Board.
The Board establishes overall Group strategy, including new
acquisitions and withdrawal from existing activities. It approves
the Group’s commercial strategy and the operating budget and
reviews performance through monthly reports and management
accounts.
1
1
1
1
Board Balance and Independence
The non-Executive Directors are appointed for specified terms,
the details of their respective appointments being as set out in
the Remuneration Report on page 43. Non-Executive Directors
are required to inform the Board of any changes to their other
appointments.
The non-Executive Directors are determined by the Board to
be independent in character and judgement and there are no
relationships or circumstances which could affect, or appear
to affect, a Director’s judgement. JW Matthews is the senior
independent Director.
There are three standing Committees of the Board to which
various matters are delegated. Membership of the Committees
is set out on page 19 and terms of reference are available on
request and are set out on the Company’s website. In order to
ensure that undue reliance is not placed on particular individuals,
the Board has decided that all its independent non-Executive
Directors should serve on all Committees. The Board regularly
reviews the chairmanship of its Committees.
During the year the Chairman has had meetings with the non-
Executive Directors, without the Executive Directors present.
Appointments to the Board
The Board has established a Nomination Committee which leads
the process for Board appointments and makes recommendations
to the Board. The members of the Nomination Committee are
JL Rennocks, who is the Chairman, and the two non-Executive
Directors.
38 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Corporate Governance continued
The Committee would be chaired by the senior independent Director
on any matter concerning the chairmanship of the Company. The
Company Secretary is the Secretary to the Committee.
The Nomination Committee has written terms of reference which
were reviewed and updated during 2005, covering the authority
delegated to it by the Board. These include the following duties:
n
To be responsible for identifying and nominating, for the
approval of the Board, candidates to fill Board vacancies as
and when they arise.
n Before making an appointment, the Committee will evaluate
the balance of skills, knowledge and experience on the Board
and in the light of this evaluation, prepare a description of the
role and capabilities required for a particular appointment.
n
In identifying suitable candidates, the Committee shall
consider candidates on merit and against objective criteria,
taking care that appointees have enough time available to
devote to the position. The Committee may:
–
–
use the services of external advisers to facilitate the
search; and
consider candidates from a wide range of backgrounds,
both internally and externally.
On appointment, Directors undertake an informal induction
process which is designed to develop knowledge and
understanding of the Company’s business, and includes visits to
various Group operating sites.
The Nomination Committee met once during the year under review.
Information and Professional Development
The main Board papers comprising an agenda and formal Board
reports, together with briefing papers on specific matters, are
sent to the Directors in advance of each Board meeting.
The training needs of the Directors are periodically discussed
at meetings with briefings as necessary on various elements of
corporate governance and regulatory issues.
The Company Secretary acts as an advisor to the Board on
matters concerning governance and regulatory issues and he
ensures Board procedures are complied with. All Directors have
access to his advice and a procedure also exists for Directors to
take independent professional advice at the Company’s expense.
No such advice was sought during the year. The appointment
and removal of the Company Secretary and his remuneration are
matters for the Board as a whole.
The Board has decided that because of the relative small size
of the Company and to limit its costs, the role of the Company
Secretary should be combined with that of the Group Finance
Director. This matter is regularly reviewed by the Board.
Performance Evaluation
During the year the Board completed the process of evaluating
its own performance, together with that of its Committees and
individual Directors, including the Chairman. The results of the
evaluation process are summarised for presentation to the Board
and areas for improvement are identified and action taken where
necessary.
Re-election
All Directors must stand for election at the first Annual General
Meeting after they are appointed. The Articles provide that all
Directors will stand for re-election at least every three years.
Remuneration
The Board has established a Remuneration Committee consisting
exclusively of independent non-Executive Directors. The
application of corporate governance principles in relation to the
Directors’ remuneration is described in the Remuneration Report
on page 41.
Accountability and Audit
Financial Reporting
It is a requirement of the Code that the Board should present
a balanced and understandable assessment of the Company’s
position and prospects. This requirement extends to interim and
other price sensitive public reports and to reports to regulators,
as well as to information required to be presented by statutory
requirements.
In this context, reference should be made to the Statement
of Directors’ Responsibilities on page 47, which includes a
statement in compliance with the Code regarding the Group’s
status as a going concern, and to the Reports of the Auditors
on pages 77 and 78, which includes a statement by the auditors
about their reporting responsibilities.
Internal Control
The Board acknowledges that it is responsible for the Group’s
system of internal control and for reviewing its effectiveness.
Such a system is designed to manage rather than eliminate
the risk of failure to achieve business objectives and can only
provide reasonable and not absolute assurance against material
misstatement or loss. Throughout the year, the Group has been
in full compliance with the Combined Code provisions on internal
control.
The Board has established a clear organisational structure with
defined authority levels. The day to day running of the Group’s
business is delegated to the Executive Directors of the Company.
The Executive Directors visit each operating unit on a regular
basis and meet with both operational and finance management
and staff.
Key financial and operational measures are reported on a weekly
and/or monthly basis and are measured against both budget and
interim forecasts which have been approved and reviewed by the
Board. Each operating unit is required to prepare an annual self
assessment report on internal control and these are reviewed by
the Board.
During the year the Board has carried out a review of the
effectiveness of the Group’s systems of internal control. This
review included a risk assessment process on the key financial,
operational and compliance risks to identify, evaluate and manage
significant risks to the Group’s business. The assessments
have been effected at both Group and individual company level.
They included common definitions of risk and ensure, as far
as practicable, that the policies and procedures established by
the Board are appropriate to manage the perceived risks to the
Group. During the year, the risk assessment process revealed no
significant risks of which the Board was not previously aware.
39 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
The risks and uncertainties which are currently judged to have the
largest potential impact on the Group’s long term performance
are set out in the Business Review on pages 21 to 35.
During 2008 the Group maintained its programme of internal audit
reviews at most of its businesses using experienced resources
from within the Group finance department. The Audit Committee
keeps under review the need for an independent internal audit
function in the Group. The Audit Committee believes that the
Group’s system of internal control is appropriate for a group of
the size and nature of Diploma PLC and the Audit Committee’s
current view is that a separate independent internal audit function
is not necessary.
Audit Committee and Auditors
The Board has established an Audit Committee comprising the
three non-Executive Directors. The Committee is Chaired by
JW Matthews. The Company Secretary is the Secretary to the
Committee.
The main roles and responsibilities of the Committee are set out
in written terms of reference, which were reviewed and updated
during 2005 and which generally encompass those set out in the
Code, which are as follows:
n
n
n
n
n
n
to monitor the integrity of the financial statements of
the Group and any formal announcements relating to the
Group’s financial performance, reviewing significant financial
judgements contained therein;
to review the Group’s internal financial controls and its
internal controls and risk management systems;
to make recommendations to the Board, for it to put to
shareholders for approval in general meeting, in relation to
the appointment, re-appointment and removal of the external
auditors and to approve the terms of engagement of the
external auditors;
to review and monitor the external auditors’ independence
and objectivity and the effectiveness of the audit process
taking into consideration relevant UK professional and
regulatory requirements;
to develop and implement policy on the engagement of the
external auditor to supply non-audit services, taking into
account relevant guidance regarding the provision of non-
audit services by external auditors; and
to report to the Board, identifying any matters in respect of
which it considers that action or improvement is needed and
making recommendations as to the steps to be taken.
In addition, the Audit Committee has an important role to play
through its responsibility for, and oversight of, the auditor
relationship and auditor independence. The Committee recognises
that auditor independence is an essential part of the audit
framework and the assurance it provides.
The Committee normally meets at least five times a year, but met
eight times during the year under review in order to undertake
a review of the audit engagement (described further below).
The external auditors and the Executive Directors generally
attend Audit Committee meetings. In addition, the Committee
periodically meets the external auditors without the Executive
Directors present.
The Audit Committee’s responsibilities are discharged in the
following manner:
n
n
n
at its meetings in May and November, the focus falls on
a review of the Interim Announcement/Report and the
Preliminary Announcement/Annual Report respectively.
On both occasions, the Committee receives reports from
the Group Finance Director and from the external auditors
identifying any accounting or judgemental issues requiring its
attention;
the external auditors present their audit plan at the
September meeting; and
the Committee meets to approve formal Interim
Management Statements which are released to the market
in January and August, in accordance with the Disclosure and
Transparency Rules.
The Committee has also formally reviewed and approved the
arrangements by which Company employees may, in confidence,
raise concerns about possible irregularities in financial reporting or
other matters (so called “whistleblowing” procedures).
As noted above, one of the primary responsibilities of the Audit
Committee is to make recommendations to the Board in relation
to the appointment, reappointment and removal of the external
auditors.
Following the completion of the 2007 Annual Report, the
Committee decided that it was appropriate to review the audit
engagement; the incumbent firm having been auditors to the
Group for a period in excess of ten years.
The Committee invited each of the “Big 4” audit firms (including
the incumbent firm) to propose for the audit of the Group; the
Committee felt that because of the many different geographies in
which the Group operates, it was appropriate to limit the process
to these four audit firms.
As part of the tender process, each firm was given access
to two of the Group’s larger businesses, as well as to the
Executive Directors and senior financial management at the
Group’s corporate head office. Each firm also met separately
with the Chairman of the Audit Committee and the Chairman of
the Company. Each firm was asked to submit an audit tender
document to the Committee which set out their proposed audit
scope, methodology and team. They were also invited to make a
presentation to the Committee, at which the Executive Directors
were also present.
A number of factors were taken into account by the Committee in
assessing the competing audit proposals, including:
n
n
Clarity – the methodology to be used in providing the external
audit service and other services had to be clearly articulated in
the proposal.
Understanding – the proposal had to demonstrate that the
issues that might be of relevance to the audit of the Company
had been understood and factored into the proposal as
appropriate.
n
Value for money – the proposal had to represent, in overall
terms, an effective and cost efficient external audit service.
Based on these factors, the Committee recommended to the
Board the appointment of Deloitte & Touche LLP as auditors to
the Company and the Group for the year ended 30 September
2008.
40 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Corporate Governance continued
On an annual basis, the Committee also assesses annually the
effectiveness of the external audit process. This assessment
covers all aspects of the audit service provided by the Company’s
external auditors. The Committee also reviews annually a report
on the external auditors’ own quality control procedures.
The Committee has also established a set of guidelines covering
the type of non-audit work that can be assigned to auditors.
These relate to further assurance services – where the auditors’
detailed knowledge of the Group’s affairs means that they may
be best placed to carry out such work. This extends to, but is not
restricted to, shareholder and other circulars, regulatory reports,
and on occasions, work in connection with disposals. Work in
connection with acquisitions, including due diligence reviews, is
generally not provided by the auditors, but is put out to tender to
other firms.
Taxation services are not provided by the auditors; a separate firm
is retained to provide tax advice, including any assistance with tax
compliance matters generally.
In other circumstances, proposed assignments are put out
to tender and decisions to award work taken on the basis of
demonstrable competence and cost effectiveness.
The Committee receives an annual report which provides details
of any assignments and related fees carried out by the auditors
in addition to their normal audit work, and these are reviewed
against the above guidelines.
Communications with Shareholders
The Company maintains regular contact with major shareholders
to communicate clearly the Group’s objectives and monitors
movements in significant shareholdings. The Company recognises
the importance of communicating with its shareholders and does
this through its Annual and Interim Reports, Interim Management
Statements and at the Annual General Meeting and through the
processes described below.
Most shareholder contact is with the Chief Executive Officer
and Group Finance Director and presentations are made on the
operating and financial performance of the Group and its longer
term strategy. The slide presentations made to representatives
of the investment community following the announcement of
the Preliminary and Interim results are made available on the
Company’s website at www.diplomaplc.com
The non-Executive Directors are given regular updates as to the
views of institutional shareholders and an independent insight
is sought through research carried out twice a year by the
Company’s advisors.
Through these processes, the Board is kept abreast of key issues.
The opportunity for shareholders to meet the Chairman or Senior
Independent Director, separately from the Executive Directors, is
available on request.
Notice of the Annual General Meeting is sent to shareholders at
least twenty working days prior to the meeting and includes a
separate resolution on each substantially separate issue. In the
absence of a poll being called, proxy votes cast are declared after
each resolution has been dealt with on a show of hands.
The Chief Executive Officer and Company Secretary generally deal
with questions from individual shareholders. All shareholders have
the opportunity to put questions at the Company’s Annual General
Meeting when the Chairman and Chief Executive Officer give a
statement on the Group’s performance during the year, together
with a statement on current trading conditions. The Chairman of
the Board and of the Remuneration and Audit Committees will
normally be available to answer questions at the meeting.
41 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Remuneration Report
This Report is presented to shareholders by the Board and provides information on Directors’ remuneration. This Report complies with the
Directors’ Remuneration Report Regulations 2002 and also sets out how the principles of the FRC Combined Code on Corporate Governance
(“the Code”) issued in June 2006 relating to Directors’ remuneration are applied.
A resolution will be put to shareholders at the Annual General Meeting on 14 January 2009, inviting them to consider and approve this
Report.
Performance
The Board recognises the importance of linking remuneration policies to the performance of the Group and shareholder return.
The graph below shows the total shareholder return for a holding of the Company’s ordinary shares for the five financial years to
30 September 2008. This is compared to the total shareholder return for a hypothetical holding in the FTSE mid-250 index (excluding
investment trusts). This was chosen as the Remuneration Committee (“the Committee”) believes it is the most appropriate index to which
the Company’s performance can be compared and it is the index which is used for the purposes of the Long Term Incentive Plan.
Total shareholder return is the growth in value of a share plus the value of dividends re-invested in the Company’s shares on the day on
which they are paid.
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
212.89
163.72
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Sep-08
Diploma
FTSE 250 (ex Investment Trusts)
The five year total shareholder return figures for Diploma PLC and the FTSE mid-250 index were as follows:
September 2003
September 2008
Diploma
FTSE
mid-250
100
213
100
164
+113%
+64%
42 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Remuneration Report continued
Remuneration Committee
The Committee is governed by formal terms of reference agreed
by the Board and comprises two non-Executive Directors and
the Chairman. The written terms of reference were reviewed
and updated during 2005 and are published on the Company’s
website. The Committee comprised IM Grice who is the
Chairman, JW Matthews and JL Rennocks. The Committee
determines the specific remuneration packages, including
share schemes, of the Executive Directors and also monitors
the remuneration of other senior executives who report to the
Executive Directors. The Chief Executive attends meetings at the
invitation of the Committee to provide guidance as appropriate on
the impact of remuneration policy and advice on the performance
of Executive Directors. The Chief Executive does not attend
meetings when his own position is discussed. Any matter
affecting the Chairman is discussed by the Committee without
the Chairman present.
The Committee met on four occasions during the year.
The Committee received advice from Towers Perrin in July
2008 on matters relating to Directors’ Remuneration. The advice
was summarised in a report which was based on an analysis of
disclosed data for ten comparative PLCs and covered, for the
Executive Directors:
n
n
n
n
basic salaries and annual bonuses;
structure of the Long Term Incentive Plan (“LTIP”);
potential introduction of a Co-Investment Plan; and
pension contributions.
In addition, the report made observations on the level of fees for
the Chairman and non-Executive Directors. The Committee took
the report’s findings into account in establishing remuneration
policies for the 2009 financial year.
Following the report from Towers Perrin during the year, the
Committee is satisfied that the current share incentive scheme,
including grant levels and performance conditions, remains
appropriate to the Company’s current circumstances and
prospects.
Remuneration Policy
This Remuneration Report sets out the Company’s policy on
Directors’ remuneration for 2008 and, so far as practicable, for
subsequent years. In framing this policy the Committee has given
full consideration to the provisions of the Code.
The Company’s policy for Executive Director remuneration is
that total remuneration (basic remuneration plus short term and
long term remuneration) should reward both short and long term
results, delivering competitive rewards for target performance.
The Company’s policy for basic Director remuneration is to pay
competitive market salaries and associated benefits, having
regard to the Directors’ experience, the size and complexity of
the job and any other relevant factors, such as business sector
expertise.
Share ownership is encouraged. Equity based reward
programmes align the interests of Executive Directors with those
of shareholders and the long term success of the Group.
The Committee considers that a successful remuneration policy
needs to be sufficiently flexible to take account of future changes
in the Company’s business environment and in remuneration
practice. Any changes in policy for years after 2008 will be
described in future Remuneration Reports. Any statements in
this Report in relation to remuneration policy for years after 2008
should be considered in this context.
Components of Remuneration
The current elements of remuneration for Executive Directors are
as follows:
Salary and Benefits
The Committee reviews salaries taking account of Group and
personal performance. Account is also taken of the levels of pay
awarded elsewhere in the sector and competitive market practice.
The value of non-salary benefits for Executive Directors is
included in the table of remuneration on page 44 and comprises
life and health insurance and cash payments in lieu of a car. The
value of these benefits is not pensionable, but is assessable to
tax.
Short Term Incentives
The Company operates an annual performance related cash bonus
scheme for Executive Directors. The maximum bonus payment
under this scheme in 2008 is 100% of basic salary for the Chief
Executive Officer and 70% for other Executive Directors. On
target bonus is 60% for the Chief Executive Officer and 40%
for other Executive Directors. The bonus for the Chief Executive
Officer is wholly dependent on the financial performance of the
Group; the bonus for the other Executive Directors is 80% based
on the financial performance of the Group with the remaining
20% subject to achievement of specified personal objectives.
Long Term Incentive Plan (“LTIP”)
The Company operates a Long Term Incentive Plan (“LTIP”) for
Executive Directors. In line with current best practice, the LTIP
provides for annual grants to Executive Directors.
Under the LTIP, Executive Directors are awarded rights to acquire
ordinary shares. Each award made under the LTIP is subject to
performance conditions which will determine how many, if any,
of the shares under the award the participant is entitled to receive
after the three year performance period. The value of awards
which can be made in any year to a participant will normally be
equal to 100% of basic salary. This limit can be increased to a
maximum of 200% in the case of a participant who within the
previous 12 months joined the Group or received a significant
promotion.
In any ten-year period, the number of shares which may be issued
or placed under option under any executive share plan established
by the Company, may not exceed 5% of the issued ordinary
share capital of the Company from time to time. In any ten-year
period the number of shares which may be issued or placed
under option, under any all-employee share plan established by
the Company, may not exceed 10% of the issued ordinary share
capital of the Company, from time to time.
Two performance conditions apply to the awards so that the
vesting of 50% of the award will be linked to earnings per share
(“EPS”) growth and 50% will be linked to Total Shareholder
Return (share price growth and reinvested dividends) (“TSR”),
measured by comparison with the FTSE mid-250 index (excluding
investment trusts).
The first performance condition is that the average annual
compound growth in the Company’s earnings per share (“EPS”)
over the three consecutive financial years, following the year
prior to the grant, must exceed the annual compound growth
rate in the UK Retail Price Index (RPI) plus 3% per annum, over
the same period. At this level of performance, 30% of the award
relating to EPS performance would vest. Full vesting of the award
relating to EPS performance requires that the Company’s average
annual compound growth in EPS exceeds the compound growth
in RPI plus 5% per annum over the period. Between these two
points, an increasing proportion of vesting occurs at RPI plus
43 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
3.5%, RPI plus 4% and RPI plus 4.5%. For the purposes of this
condition, EPS will comprise adjusted EPS as defined in note 2 to
the consolidated financial statements. The definition of adjusted
EPS remains consistent with the definition of EPS approved by
the Remuneration Committee in previous years.
EPS was chosen as the appropriate measure of performance
as it provides an absolute benchmark of the Company’s
performance and is therefore a suitable balance to the relative
TSR performance measurement.
The second performance condition compares the growth of
the Company’s TSR over a three year period to that of the
companies in the FTSE mid-250 index (excluding investment
trusts). The Company’s ranking amongst the comparator
companies determines the percentage of shares which will vest
to a participant. For the participant to receive the full number of
shares awarded, the Company must rank in the top quartile of the
comparator group. Where the Company’s performance is at the
median, 30% of any award is vested. Between these two points,
vesting is on a straight-line basis. Where performance over the
three year period does not reach the median ranking, no shares
are vested, the relevant award lapses and there is no re-testing of
performance.
The TSR performance condition was chosen as the Committee
believes that TSR is an appropriate method of comparing the
performance of the Company to that of its peers. The FTSE
mid-250 index (excluding investment trusts) was chosen as the
comparator group as there are a limited number of companies
which are directly comparable to the Company and the index was
therefore felt to be a suitable yardstick of relative performance.
Subsisting awards may vest before their vesting date in the event
of a change of control of the Company, in accordance with the
rules of the LTIP.
Benefits under the LTIP are not pensionable.
Awards under this LTIP have been made annually by the
Remuneration Committee to BM Thompson, I Henderson and
NP Lingwood, the last award being made on 17 December
2007. Following the end of the relevant performance period, the
number of shares over which an award vests is determined and
a participant may then exercise the award on payment of £1 at
any time within ten years of the date of grant. The performance
period for the awards granted on 7 January 2004, 29 November
2004 and 2 December 2005 ended on 30 September 2006, 2007
and 2008, respectively. The number of shares over which the
2005 awards have vested at 30 September 2008 are set out on
page 44. The outstanding awards will vest on 30 September 2009
and 2010 respectively, subject to the performance conditions set
out above, measured over three year performance periods ending
on 30 September 2009 and 2010.
Pension Arrangements
The Executive Directors receive pension contributions from the
Company which are paid into money-purchase schemes. No
Directors are members of the Group’s defined benefit schemes.
The pension contributions are 20.0% (2007: 20.0%) of base
remuneration, excluding bonuses.
Relative Performance of Remuneration Elements
The Committee’s view is that the performance related elements
of the remuneration package for Executive Directors should be a
significant element of the total. This serves to align the interests
of such Directors with shareholders. Assuming full payment of all
elements, more than 60% of the total remuneration of each of
the Executive Directors would be performance related.
Service Contracts – Executive Directors
The service agreements of the Executive Directors include the
following terms:
Date of Contract
Notice Period
BM Thompson
I Henderson
NP Lingwood
13 July 2000
1 August 2000
3 July 2001
12 months
12 months
12 months
The Executive Directors are subject to rolling contracts and
offer themselves for re-election as Directors at least every
three years in accordance with the Company’s Articles of
Association. Payments on termination for Executive Directors
are restricted to the value of salary and contractual benefits for
the notice period. There is no predetermined special provision
for Executive Directors with regard to compensation in the event
of loss of office. The Remuneration Committee would consider
the circumstances of individual cases of early termination and
determine compensation payments accordingly.
Non-Executive Directors
The fees for the non-Executive Directors are determined by the
Board as a whole, having regard to market practice. Business
expenses are also reimbursed.
The non-Executive Directors do not have contracts of service,
but are appointed pursuant to letters of appointment. Such
appointments are for a one year term and the Company’s policy
is for re-appointment to be on an annual basis. Non-Executive
Directors are not eligible to participate in any incentive plan
or Company pension arrangement and are not entitled to any
payment in compensation for any early termination of their
appointment. They are due for re-appointment to the Board on
the following dates:
IM Grice
JW Matthews
JL Rennocks
Date of Re-appointment
Renewal
24 January 2009
24 July 2009
11 July 2009
Annual
Annual
Annual
All Directors’ appointments are subject to approval of the
shareholders in General Meeting sought on a three yearly basis.
During the year ended 30 September 2008 the non-Executive
Directors received a base fee of £30,000 per annum (2007:
£30,000). The Chairman, who is a non-Executive Director,
received a salary and fees of £60,000 per annum (2007: £60,000)
for his services during the year ended 30 September 2008.
44 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Remuneration Report continued
Total Remuneration of the Directors
The total remuneration of the Directors for the year ended 30 September 2008 is set out below.
IM Grice
I Henderson
NP Lingwood
JW Matthews
JL Rennocks
Lord Stewartby
BM Thompson
Fixed emoluments Performance
based
Other
bonus
benefits
£000
£000
Salary
& fees
£000
30
197
197
30
60
–
329
843
–
11
12
–
–
–
14
37
–
120
120
–
–
–
288
528
2008
Total
£000
30
328
329
30
60
–
631
2007
Total
£000
21
323
324
30
60
8
619
1,408
1,385
Note
1.
IM Grice was appointed to the Board on 24 January 2007; Lord Stewartby retired from the Board on 10 January 2007.
The pension contributions paid on behalf of the Directors are as follows:
BM Thompson
I Henderson
NP Lingwood
2008
£000
66
39
39
2007
£000
62
37
37
144
136
Long Term Incentive Plan
On 17 December 2007 Executive Directors received a share award with a face value of one times salary as set out below. On 30 September
2008 the performance period relating to the award made on 2 December 2005 ended and the LTIP awards vested and became exercisable
by each of the Directors, as set out below.
LTIP shares
held at
LTIP shares
LTIP shares
awarded
during the
vested on
year ended 30 Sept 2008
30 Sept 2007 30 Sept 2008
Number
Number
LTIP shares
(note 1) 30 Sept 2008
Number
lapsed on Share price
on date of
award
Number
BM Thompson
2 December 2005
22 December 2006
17 December 2007
I Henderson
2 December 2005
22 December 2006
17 December 2007
NP Lingwood
2 December 2005
22 December 2006
17 December 2007
212,830
191,925
–
–
–
178,225
188,099
24,731
–
–
–
–
127,550
115,155
–
–
–
106,715
112,729
14,821
–
–
–
–
127,550
115,155
–
–
–
106,715
112,729
14,821
–
–
–
–
137.2p
161.6p
184.6p
137.2p
161.6p
184.6p
137.2p
161.6p
184.6p
Vesting
date
30 Sept 2008
30 Sept 2009
30 Sept 2010
30 Sept 2008
30 Sept 2009
30 Sept 2010
30 Sept 2008
30 Sept 2009
30 Sept 2010
Total
LTIP shares
held at
30 Sept 2008
Number
–
191,925
178,225
–
115,115
106,715
–
115,115
106,715
Note:
1. The awards which vested on 30 September 2008 were calculated in accordance with the performance conditions described on pages 42 and 43. The awards
may be exercised at any time before 2 December 2015 on payment of £1. In aggregate 88.4% of the total LTIP award granted on 2 December 2005 vested
unconditionally and became exercisable.
l
Under the first performance condition, the average annual compound growth rate in the Company’s adjusted EPS (as defined on page 52) over the three
year period ended 30 September 2008 was 15.3% pa; this compares with an annual compound growth rate in RPI +5% over the same period of 7.9% pa.
Accordingly 100% of the shares relating to this award (representing 50% of the total award) vested unconditionally.
Under the second performance condition, the Company’s TSR grew 29.0% over the three year period ended 30 September 2008; this growth gave the
Company a ranking of 54 in the comparator group and put the Company in the 67 percentile. The median TSR was 1.8% and the lower threshold of the
upper quartile was 45.3%. Accordingly 77% of the shares relating to this part of the award vested unconditionally.
l
45 Diploma PLC Annual Report and Accounts 2008
Regulatory Statements
Directors’ Shareholdings
Ordinary shares of 5p each
At
At
17 November 30 September
2008
Number
2008
Number
At
1 October
2007
Number
IM Grice
I Henderson
NP Lingwood
JW Matthews
JL Rennocks
BM Thompson
20,000
20,000
15,000
421,875
421,875
305,000
195,875
195,875
125,000
–
–
–
214,766
214,766
50,000
1,026,940
1,026,940
878,810
Note:
1.
The above table excludes interests in the Company’s Long Term Incentive Plan, disclosed above.
As described above, following the vesting of the LTIP awards the Executive Directors are able to exercise their vested awards to acquire
ordinary shares of 5p each in the Company for an aggregate consideration of £1. The underlying shares are held by the Diploma Employee
Benefit Trust and are transferred to the participant on exercise. Whilst ordinary shares are held within the Diploma Employee Benefit Trust,
the voting rights in respect of those shares are exercisable by the trustees in accordance with their fiduciary duties. At 30 September 2007
and 2008 the number of shares which are the subject of vested LTIP awards and are held by each Director were as follows:
At 30 Sept
2007
Number
Vested LTIP awards
Exercised
Vested
during 2008 during 2008
Number
Number
At 30 Sept
2008
Number
Share price
At 30 Sept
2007
At 30 Sept
2008
Amount
At 30 Sept
2007
£
At 30 Sept
2008
£
BM Thompson
I Henderson
NP Lingwood
118,125
(118,125)
188,099
188,099
70,875
70,875
(70,875)
112,729
112,729
(70,875)
112,729
112,729
220.6p
220.6p
220.6p
152.5p
152.5p
152.5p
260,584
286,851
156,350
171,912
156,350
171,912
Note:
1. On 26 November 2007, each participant exercised their option to acquire shares which had vested at 30 September 2007, for consideration of £1.
The share price at the date of exercise was 176.0p.
2. The share price during the year to 30 September 2008 ranged from 136.0p to 228.0p
The information set out above under the headings Total Remuneration of the Directors and Directors’ Shareholdings has been audited.
All other information provided in the Remuneration Report is not subject to audit.
This Remuneration Report has been approved by the Board and signed on its behalf by:
IM Grice
Chairman of the Remuneration Committee
17 November 2008
46 Diploma PLC Annual Report and Accounts 2008
46 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Financial Statements
For the year ended 30 September 2008
Section 3
Financial Statements
Consolidated Income Statement
Consolidated Balance Sheet
Consolidated Statement of
Recognised Income and Expense
48
49
50
Consolidated Cash Flow Statement
51
Notes to the Consolidated
Financial Statements
Group Accounting Policies
Parent Company Balance Sheet
Notes to the Parent Company
Financial Statements
Independent Auditors’ Reports
Principal Subsidiaries
Financial Calendar and
Shareholder Information
Five Year Record
52
69
75
76
77
79
79
80
47 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Statement of Directors’ Responsibilities for the
Financial Statements
The Directors are responsible for preparing the Annual Report,
including the Group and Parent Company financial statements, in
accordance with applicable law and regulations.
Company law requires the directors to prepare Group and Parent
Company financial statements for each financial year. Under
that law the Directors are required to prepare Group financial
statements in accordance with IFRSs as adopted by the European
Union (“EU”) and have elected to prepare the Parent Company
financial statements in accordance with UK Accounting Standards.
The Group financial statements are required by law and IFRSs
as adopted by the EU, to present fairly the financial position and
the performance of the Group; the Companies Act 1985 provides
in relation to such financial statements, that references in the
relevant part of that Act to financial statements giving a true and
fair view, are references to their achieving a fair presentation.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Each of the Directors confirms that so far as he is aware, there
is no relevant audit information of which the Company’s auditors
are unaware and that he has taken all steps that he ought to have
taken as a director in order to make himself aware of any relevant
audit information and to establish that the Company’s auditors are
aware of that information.
The Directors are satisfied that the Group has adequate resources
to meet its operational needs for the foreseeable future and
accordingly, they continue to adopt the going concern basis in
preparing the financial statements.
In preparing each of the Group and Company financial statements,
the Directors are required to:
Directors’ responsibility statement
The Directors confirm that to the best of their knowledge:
n
Select suitable accounting policies and then apply them
consistently.
n Make judgements and estimates that are reasonable and
prudent.
n
n
n
For the Group financial statements, state whether they have
been prepared in accordance with IFRSs, as adopted by the
EU.
For the Parent Company financial statements, state whether
applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in
the Parent Company financial statements.
Prepare the financial statements on the going concern basis,
unless it is inappropriate to presume that the Group and the
Parent Company will continue in business.
The Directors are responsible for keeping proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the Parent Company and enable them to
ensure that its financial statements comply with the Companies
Act 1985. They have general responsibility for taking such steps
as are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other irregularities.
n
n
The Group consolidated financial statements, prepared in
accordance with IFRSs as adopted by the EU, and the Parent
Company financial statements, prepared in accordance with
UK Accounting Standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Group and Parent Company and the undertakings included in
the consolidation taken as a whole: and
the Annual Report includes a fair review of the development
and performance of the business and the position of the
issuer 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.
By order of the Board
BM Thompson
Chief Executive Officer
17 November 2008
NP Lingwood
Group Finance Director
48 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Consolidated Income Statement
For the year ended 30 September 2008
For the year ended 30 September 2008
Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Operating profit, before amortisation of acquisition intangible assets
Amortisation of acquisition intangible assets
Operating profit
Finance (expense)/income, net
Profit before tax
Tax expense
Profit for the year
Attributable to:
Shareholders of the Company
Minority interests
Earnings per share
Basic and diluted earnings
All activities, both in the current and previous year, relate to continuing operations.
Alternative Performance Measures (note 2)
Profit before tax
Add: Amortisation of acquisition intangible assets
Fair value remeasurements
Adjusted profit before tax
Adjusted earnings per share
The notes on pages 52 to 74 form part of these financial statements.
Note
3,4
3,4
11
3
6
7
20
2008
£m
172.3
(110.0)
62.3
(4.8)
(32.9)
27.3
(2.7)
24.6
(2.8)
21.8
(7.4)
14.4
13.3
1.1
14.4
2007
£m
140.7
(90.1)
50.6
(4.2)
(25.3)
22.1
(1.0)
21.1
1.2
22.3
(7.5)
14.8
14.3
0.5
14.8
9
11.8p
12.7p
Note
11
6
2008
£m
21.8
2.7
3.0 –
2007
£m
22.3
1.0
27.5
23.3
9
16.4p
14.0p
49 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Consolidated Balance Sheet
As at 30 September 2008
For the year ended 30 September 2008
Non-current assets
Goodwill
Acquisition intangible assets
Other intangible assets
Property, plant and equipment
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Current liabilities
Trade and other payables
Current tax liabilities
Other liabilities
Net current assets
Total assets less current liabilities
Non-current liabilities
Retirement benefit obligations
Other liabilities
Deferred tax liabilities
Net assets
Equity
Share capital
Capital redemption reserve
Translation reserve
Hedging reserve
Retained earnings
Total shareholders’ equity
Minority interests
Total equity
Note
2008
£m
2007
£m
10
11
11
12
13
14
15
17
16
19
51.6
18.6
1.2
11.6
1.3
84.3
31.5
26.7
15.7
73.9
42.7
20.1
1.0
11.7
1.5
77.0
27.4
26.0
12.4
65.8
(26.3)
(3.3)
(1.1)
(27.1)
(3.0)
(4.8)
(30.7)
(34.9)
43.2
30.9
127.5
107.9
23
19
13
(1.7)
(11.2)
(4.6)
(1.6)
(8.7)
(5.1)
110.0
92.5
5.7
–
8.0
0.7
93.7
108.1
1.9
110.0
1.1
0.2
0.6
(0.6)
89.4
90.7
1.8
92.5
20
The consolidated financial statements were approved by the Board of Directors on 17 November 2008 and signed on its behalf by:
BM Thompson
NP Lingwood
Chief Executive Officer
Group Finance Director
The notes on pages 52 to 74 form part of these financial statements.
50 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Consolidated Statement of Recognised Income and Expense
For the year ended 30 September 2008
For the year ended 30 September 2008
2007
£m
(0.1)
(0.6)
2.7
(0.6)
1.4
14.8
16.2
15.8
0.4
16.2
Total
£m
92.9
15.8
0.5
(1.3)
(11.8)
(5.4)
Exchange rate adjustments on foreign currency net investments
Gains/(losses) on fair value of cash flow hedges
Actuarial (losses)/gains on defined benefit pension schemes
Deferred tax on items recognised in equity
Net income recognised directly in equity for the year
Profit for the year
Total recognised income and expense for the year
Attributable to:
Shareholders of the Company
Minority interests
Note
23
13
2008
£m
7.4
1.3
(0.5)
(0.3)
7.9
14.4
22.3
21.1
1.2
22.3
Other changes in shareholders’ equity
Share
capital
£m
Capital
redemption
reserve
£m
Note
Translation
reserve
£m
Hedging
reserve
£m
Retained
earnings
£m
At 1 October 2006
1.1
0.2
0.7
–
90.9
Total recognised income and expense for the year
attributable to shareholders
Share-based payments
Purchase of own shares
Future purchases of minority interests
Dividends
At 30 September 2007
Total recognised income and expense for the year
attributable to shareholders
Bonus issue of shares
Share-based payments
Purchase of own shares
Future purchases of minority interests
Dividends
At 30 September 2008
5
19
8
5
19
8
–
–
–
–
–
1.1
–
4.6
–
–
–
–
5.7
–
–
–
–
–
0.2
–
(0.2)
–
–
–
–
–
The notes on pages 52 to 74 form part of these financial statements.
–
–
–
–
0.6
7.4
–
–
–
–
–
(0.1)
(0.6)
16.5
0.5
(1.3)
(11.8)
(5.4)
–
–
–
–
(0.6)
89.4
90.7
1.3
12.4
–
–
–
–
–
(4.4)
0.5
(0.9)
3.6
(6.9)
21.1
–
0.5
(0.9)
3.6
(6.9)
8.0
0.7
93.7
108.1
51 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Consolidated Cash Flow Statement
For the year ended 30 September 2008
For the year ended 30 September 2008
Cash flows from operating activities
Cash flow from operations
Finance income received, net
Tax paid
Net cash from operating activities
Cash flows from investing activities
Acquisition of subsidiaries (net of cash acquired)
Deferred consideration paid
Proceeds from the sale of property, plant and equipment
Purchase of property, plant and equipment
Purchase of other intangible assets
Net cash used in investing activities
Cash flows from financing activities
Dividends paid to shareholders
Dividends paid to minority interests
Purchase of own shares
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of year
Alternative Performance Measures (note 2)
Net increase/(decrease) in cash and cash equivalents
Add: Dividends paid to shareholders
Dividends paid to minority interests
Acquisition of subsidiaries (net of cash acquired)
Deferred consideration paid
Free cash flow
The notes on pages 52 to 74 form part of these financial statements.
Note
22
21
19
12
11
8
20
17
2008
£m
2007
£m
28.8
–
(8.2)
20.6
(7.6)
(0.3)
0.2
(1.6)
(0.3)
(9.6)
(6.9)
(0.9)
(0.9)
(8.7)
2.3
12.4
1.0
15.7
23.0
1.1
(8.0)
16.1
(31.1)
(0.5)
0.6
(1.6)
(0.6)
(33.2)
(5.4)
(0.3)
(1.3)
(7.0)
(24.1)
36.7
(0.2)
12.4
2008
£m
2.3
6.9
0.9
7.6
0.3
18.0
2007
£m
(24.1)
5.4
0.3
31.1
0.5
13.2
52 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2008
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
2008. 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 have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as
adopted by the European Union, and in accordance with the Companies Act 1985, as applicable to companies reporting under IFRS. The
financial statements of the Parent company, Diploma PLC, have been prepared in accordance with “UK GAAP”, and are set out in a separate
section of the Annual Report on pages 75 to 76.
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 Annual Report.
2.1 Adjusted profit before tax
On the face of the consolidated income statement, “adjusted profit before tax” is separately disclosed, being defined as profit before tax and
before the costs of restructuring or rationalisation of operations, the profit or loss relating to the sale of property, fair value remeasurements
under IAS 32 and IAS 39 in respect of future purchases of minority interests and the amortisation and impairment of acquisition intangible
assets. The Directors believe that adjusted profit before tax is an important measure of the underlying performance of the Group.
2.2 Adjusted earnings per share
“Adjusted earnings per share” is calculated as the total of adjusted profit, 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.
2.3 Free cash flow
On the face 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, but before expenditure on business combinations 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.
2.4 Trading capital employed
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 retirement benefit obligations, deferred tax, amounts in respect of future purchases of minority interests and adjusting
goodwill in respect of the recognition of deferred tax on acquisition intangible assets. Return on trading capital employed is defined as being
adjusted profit before finance income and tax, divided by trading capital employed plus all historic goodwill and as adjusted for the timing
effect of major acquisitions and disposals. Return on trading capital employed at the sector level does not include historic goodwill. The
Directors believe that return on trading capital employed is an important measure of the underlying performance of the Group.
3. Business Segment Analysis
For management reporting purposes, the Group is organised into three main business segments, Life Sciences, Seals and Controls. These
segments form the basis of the primary reporting format disclosures below. The principal activities of each of these segments is described in
the Business Review on pages 21 to 35. Segment revenue represents revenue from external customers; there is no inter-segment revenue.
Segment results, assets and liabilities include items directly attributable to a segment, as well as those that can be allocated on a reasonable
basis.
Life Sciences
Seals
Controls
Revenue – continuing operations
– acquisitions
Revenue
2008
£m
61.2
0.9
62.1
Segment operating profit – continuing operations 9.3
– acquisitions
Segment operating profit
Amortisation of acquisition intangible assets
Operating profit
0.3
9.6
(1.5)
8.1
2007
£m
44.7
–
44.7
6.6
–
6.6
(0.6)
6.0
2008
£m
42.6
–
42.6
6.7
–
6.7
(0.8)
5.9
2007
£m
36.0
–
36.0
5.8
–
5.8
(0.3)
5.5
2008
£m
67.6
–
67.6
11.0
–
11.0
(0.4)
10.6
2007
£m
60.0
–
60.0
9.7
–
9.7
(0.1)
9.6
Total
2008
£m
2007
£m
171.4
140.7
0.9 –
172.3
140.7
27.0
0.3
27.3
(2.7)
24.6
22.1
–
22.1
(1.0)
21.1
53 Diploma PLC Annual Report and Accounts 2008
Financial Statements
3. Business Segment Analysis (continued)
Segment assets exclude cash and cash equivalents, deferred tax assets and corporate assets that cannot be allocated on a reasonable
basis to a business segment. Segment liabilities exclude retirement benefit obligations, deferred tax liabilities and corporate liabilities
that cannot be allocated on a reasonable basis to a business segment. These items are shown collectively in the following analysis as
“unallocated assets” and “unallocated liabilities”, respectively.
Operating assets
Goodwill
Acquisition intangible assets
Unallocated assets:
– Deferred tax assets
– Cash and cash equivalents
– Corporate assets
Total assets
Operating liabilities
Unallocated liabilities:
– Deferred tax liabilities
– Retirement benefit obligations
– Future purchases of minority interests
– Corporate liabilities
Total liabilities
Net assets
Other segment information
Capital expenditure
Depreciation (including software)
Life Sciences
Seals
Controls
Total
2008
£m
21.5
30.6
11.4
63.5
2007
£m
20.8
23.4
12.4
56.6
2008
£m
22.0
8.9
5.3
36.2
2007
£m
18.4
7.4
5.4
31.2
2008
£m
24.5
12.1
1.9
38.5
2007
£m
23.8
11.9
2.3
2008
£m
68.0
51.6
18.6
2007
£m
63.0
42.7
20.1
38.0
138.2
125.8
(12.4)
(11.3)
(4.9)
(4.1)
(10.5)
(11.1)
(27.8)
(26.5)
1.3
15.7
3.0
1.5
12.4
3.1
158.2
142.8
(4.6)
(1.7)
(11.2)
(2.9)
(5.1)
(1.6)
(11.8)
(5.3)
(48.2)
(50.3)
110.0
92.5
1.1
1.3
1.3
0.9
0.5
0.7
0.5
0.6
0.3
0.5
0.4
0.3
1.9
2.5
2.2
1.8
Alternative Performance Measures (note 2)
Life Sciences
Seals
Controls
Total
Net assets
Add/(less):
– Deferred tax, net
– Retirement benefit obligations
– Future purchases of minority interests
– Cash and cash equivalents
– Adjustment to goodwill
Group trading capital employed
Corporate (assets)/liabilities, net
2008
£m
2007
£m
2008
£m
2007
£m
2008
£m
2007
£m
(4.1)
(3.9)
(1.2)
(1.1)
(0.7)
(0.6)
2008
£m
110.0
3.3
1.7
11.2
(15.7)
(6.0)
104.5
(0.1)
Segment trading capital employed
47.0
41.4
30.1
26.0
27.3
26.3
104.4
2007
£m
92.5
3.6
1.6
11.8
(12.4)
(5.6)
91.5
2.2
93.7
54 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2008
4. Geographic Segment Analysis by Origin
Revenue
United Kingdom
Rest of Europe
North America
2008
£m
73.8
33.7
64.8
2007
£m
66.6
25.1
49.0
Operating profit*
2007
2008
£m
£m
8.6
5.7
13.0
8.8
4.3
9.0
2008
£m
51.2
26.8
80.2
2007
£m
55.8
22.5
64.5
2008
£m
29.5
20.7
54.3
2007
£m
26.6
16.4
48.5
*before amortisation of acquisition intangible assets
172.3
140.7
27.3
22.1
158.2
142.8
104.5
91.5
2008
£m
2007
£m
0.7
0.3
0.9
1.9
1.2
0.3
0.7
2.2
Gross assets
Trading capital employed Capital expenditure
5. Group Employee Costs
The key management of the Group are the Executive Directors who have authority and responsibility for planning and controlling all significant
activities of the Group. The Directors’ emoluments and interests in shares of the Company are given in the Remuneration Report on pages
41 to 45. The charge for share-based payments of £0.5m relate to the Group’s share schemes, described in the Remuneration Report. The
fair value of services provided as consideration for part of the grant of the LTIP awards has been based on a predicted future value model
and was £0.2m (2007: £0.2m).
Group staff costs, including Directors’ emoluments, are as follows:
Wages and salaries
Social security costs
Pension costs – defined contribution
Share-based payments
The average number of employees, including Executive Directors, during the year were:
Life Sciences
Seals
Controls
Corporate
Number of employees – average
Number of employees – year end
6. Finance (Expense)/Income, net
Finance income
– interest receivable on short term deposits
– net finance income from defined benefit pension scheme (note 23)
Finance expense
– interest payable on bank borrowings
– fair value remeasurement of put options (note 19)
2008
£m
30.3
2.8
0.8
0.5
34.4
2007
£m
24.0
2.4
0.7
0.5
27.6
2008
Number
2007
Number
344
360
254
9
967
976
293
326
202
9
830
926
2008
£m
2007
£m
1.1
0.1
1.2
–
0.3
0.2
0.5
(0.3) –
(3.0)
(3.3) –
Net finance (expense)/income
(2.8)
1.2
The fair value remeasurement of £3.0m includes £0.7m which relates to the unwinding of the discount on the liability for future purchases of
minority interests.
55 Diploma PLC Annual Report and Accounts 2008
Financial Statements
7. Taxation
Current tax
The tax charge is based on the profit for the year and comprises:
UK corporation tax
Overseas tax
Adjustments in respect of prior year:
UK corporation tax
Overseas tax
Total current tax
Deferred tax
The deferred tax (credit)/charge based on the origination and reversal of timing differences comprises:
United Kingdom
Overseas
Total deferred tax
Total tax on profit for the year
Factors affecting the tax charge for the year:
2008
£m
2007
£m
3.0
5.4
8.4
(0.4)
0.2
(0.2)
8.2
(0.3)
(0.5)
(0.8)
7.4
2.8
4.0
6.8
–
–
–
6.8
0.2
0.5
0.7
7.5
The difference between the total tax charge shown above and the amount calculated by applying the standard rate of UK corporation
tax to the profit before tax is as follows:
Profit before tax
Tax on profit at UK effective corporation tax rate of 29% (2007: 30%)
Effects of:
Higher tax rates on overseas earnings
Adjustments to tax charge in respect of previous periods
Fair value remeasurements
Other permanent differences
Total tax on profit for the year
2008
£m
21.8
6.3
0.7
(0.2)
0.9 –
(0.3)
7.4
2007
£m
22.3
6.7
0.8
–
–
7.5
The Group earns its profits in the UK and overseas. The standard rate for UK corporation tax is currently 28%; however the effective tax rate
for UK corporation tax in respect of the year ended 30 September 2008 was 29% and this rate has been used for tax on profit in the above
reconciliation. The Group’s overseas tax rates are higher than those in the UK, primarily because the profits earned in North America are
taxed at standard rates varying from 32% to 38%.
56 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2008
8. Dividends
Interim dividend, paid in June
Final dividend of the prior year, paid in January
2008
pence
per share
2007
pence
per share
2.5
3.6
6.1
1.8
3.0
4.8
2008
2007
£m
2.8
4.1
6.9
£m
3.4
2.0
5.4
The Directors have proposed a final dividend in respect of the current year of 5.0p (2007: 3.6p) which will be paid in January 2009, subject to
approval of shareholders at the Annual General Meeting on 14 January 2009. The total dividend for the current year, subject to approval of
the final dividend, will be 7.5p (2007: 5.4p).
Shares held by the Diploma Employee Benefit Trust are not eligible for dividends.
A reconciliation of the movement in share capital is set out in note (d), of the Parent Company financial statements on page 76.
9. 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 112,237,586 (2007: 112,473,930) and the profit for the year attributable to shareholders of £13.3m (2007: £14.3m). There
were no potentially dilutive shares. The comparative number of shares in issue has been restated to reflect the bonus issue of shares on
21 January 2008.
Adjusted earnings per share
Adjusted earnings per share, which is defined in note 2, is calculated as follows:
Profit before tax
Tax expense
Minority interests
Earnings for the year attributable to shareholders of the Company
Amortisation of acquisition intangible assets
Fair value remeasurements
Tax effects on goodwill, acquisition intangible assets and fair value remeasurements
Adjusted earnings
10. Goodwill
At 1 October 2006
Acquisitions
Exchange adjustments
At 30 September 2007
Acquisitions (note 21)
Adjustments to prior year goodwill
Exchange adjustments
At 30 September 2008
2008
pence
per share
2007
pence
per share
11.8
2.4
2.7
(0.5)
16.4
12.7
0.9
–
0.4
14.0
2008
£m
21.8
(7.4)
(1.1)
13.3
2.7
3.0 –
(0.6)
18.4
Life Sciences
£m
Seals
£m
Controls
£m
13.8
9.0
0.6
23.4
5.8
(0.2)
1.6
30.6
4.7
2.9
(0.2)
7.4
0.8
–
0.7
8.9
9.5
2.3
0.1
11.9
–
(0.2)
0.4
12.1
2007
£m
22.3
(7.5)
(0.5)
14.3
1.0
0.4
15.7
Total
£m
28.0
14.2
0.5
42.7
6.6
(0.4)
2.7
51.6
57 Diploma PLC Annual Report and Accounts 2008
Financial Statements
10. Goodwill (continued)
Goodwill of £6.6m, which arose on acquisitions completed during the year, is described further in the Business Review on page 30.
The Directors have carried out an impairment review of goodwill held at 30 September 2008 and are satisfied that goodwill has not
been impaired. The key assumptions used for the value in use calculations are those regarding the discount rates and growth rates. The
discount rates used were ca. 16% (2007: ca. 14%), which are pre-tax rates that reflect the current market assessments of the time value
of money and the risks specific to the asset. An increase in the discount rates of up to 3% would be unlikely to lead to an impairment in
the carrying value of goodwill. The growth rates are broadly based on a prudent estimate of industry forecasts. Changes in selling prices
and direct costs are based on past practices and expectations of future changes in the market and inflation.
The cash flow forecasts are derived from the most recent budgets approved by management for the next financial year and are
extrapolated thereafter using a growth rate of between 0% and 3%, depending on the relevant market in which the business operates.
11. Acquisition and Other Intangible Assets
Acquisition
intangible assets
£m
Other
intangible
assets
£m
Cost
At 1 October 2006
Additions
Acquisitions
Exchange adjustments
At 30 September 2007
Additions
Disposals
Exchange adjustments
At 30 September 2008
Amortisation
At 1 October 2006
Charge for the year
At 30 September 2007
Charge for the year
Disposals
Exchange adjustments
At 30 September 2008
Net book value
At 30 September 2008
At 30 September 2007
2.3
–
18.7
0.4
21.4
–
–
1.4
22.8
0.3
1.0
1.3
2.7
–
0.2
4.2
18.6
20.1
0.9
0.6
–
–
1.5
0.3
(0.2)
0.7
2.3
0.3
0.2
0.5
0.3
(0.1)
0.4
1.1
1.2
1.0
Total
£m
3.2
0.6
18.7
0.4
22.9
0.3
(0.2)
2.1
25.1
0.6
1.2
1.8
3.0
(0.1)
0.6
5.3
19.8
21.1
Acquisition intangible assets, which are analysed below, relate to items acquired through business combinations which are amortised over
their useful economic life.
Net book
value
£m
Economic
life
Customer relationships
Supplier relationships
Databases
10.1 5-15 years
7.7 7-10 years
0.8
5-7 years
18.6
The amount in respect of customer relationships was valued using a discounted cash flow model; the databases were valued using a
replacement cost model; the amount in respect of supplier relationships was valued on a relief from royalty method.
Other intangible assets comprise computer software that is separately identifiable from plant and equipment and includes software licences.
58 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2008
12. Property, Plant and Equipment
Freehold
properties
£m
Leasehold
properties
£m
Plant &
equipment
£m
Cost
At 1 October 2006
Additions
Acquisitions
Disposals
Exchange adjustments
At 30 September 2007
Additions
Acquisitions (note 20)
Disposals
Exchange adjustments
At 30 September 2008
Depreciation
At 1 October 2006
Charge for the year
Disposals
Exchange adjustments
At 30 September 2007
Charge for the year
Disposals
Exchange adjustments
At 30 September 2008
Net book value
At 30 September 2008
At 30 September 2007
7.3
–
1.1
–
–
8.4
–
–
(0.1)
0.1
8.4
1.6
0.1
–
–
1.7
0.2
(0.1)
–
1.8
6.6
6.7
0.7
0.1
–
(0.1)
–
0.7
0.2
–
–
0.1
1.0
0.2
0.1
(0.1)
–
0.2
0.1
–
0.2
0.5
0.5
0.5
10.8
1.5
1.5
(1.2)
(0.3)
12.3
1.4
0.1
(0.9)
1.2
14.1
7.5
1.4
(1.0)
(0.1)
7.8
1.9
(0.6)
0.5
9.6
4.5
4.5
Total
£m
18.8
1.6
2.6
(1.3)
(0.3)
21.4
1.6
0.1
(1.0)
1.4
23.5
9.3
1.6
(1.1)
(0.1)
9.7
2.2
(0.7)
0.7
11.9
11.6
11.7
Land included above, but not depreciated, is £2.0m (2007: £2.0m). Capital commitments contracted, but not provided, were £Nil (2007: £Nil).
Freehold properties includes ca.150 acres of land at Stamford (“the Stamford land”) which comprises mostly farm land and former quarry
land. In the Directors’ opinion the current value of this land is £0.5m (net book value: £Nil).
59 Diploma PLC Annual Report and Accounts 2008
Financial Statements
13. Deferred Tax
The movement on deferred tax is as follows:
At 1 October
Credit/(charge) for the year
Acquisitions (note 21)
Accounted for in equity
Exchange adjustments
At 30 September
2008
£m
(3.6)
0.8
0.1
(0.3)
(0.3)
(3.3)
Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the
balances net.
Property, plant and equipment
Goodwill and intangible assets
Retirement benefit obligations
Inventories
Share-based payments
Other temporary differences
Set off of deferred tax
Assets
2008
£m
2007
£m
0.2
0.3
0.5
0.7
0.1
0.5
2.3
(1.0)
1.3
0.2
0.4
0.5
0.5
0.2
0.8
2.6
(1.1)
1.5
Liabilities
Net
2008
£m
(0.5)
(5.1)
–
–
–
–
(5.6)
1.0
(4.6)
2007
£m
(0.6)
(5.6)
–
–
–
–
(6.2)
1.1
(5.1)
2008
£m
(0.3)
(4.8)
0.5
0.7
0.1
0.5
(3.3)
– –
(3.3)
2007
£m
3.4
(0.7)
(5.6)
(0.6)
(0.1)
(3.6)
2007
£m
(0.4)
(5.2)
0.5
0.5
0.2
0.8
(3.6)
(3.6)
No deferred tax has been provided for unremitted earnings of overseas Group companies as the Group controls the dividend policies of its
subsidiaries. Unremitted earnings may be liable to overseas and/or UK taxation (after allowing for double taxation relief) if they were to be
distributed as dividends. The aggregate amount for which deferred tax liabilities have not been recognised in respect of unremitted earnings
was £1.0m (2007: £0.5m).
14. Inventories
Finished goods and goods held for resale
Inventories are stated net of impairment provisions of £3.5m (2007: £3.1m).
15. Trade and Other Receivables
Trade receivables
Less: Impairment provision
Other receivables
Prepayments and accrued income
2008
£m
31.5
2007
£m
27.4
2008
£m
24.9
(0.6)
24.3
1.0
1.4
26.7
2007
£m
25.0
(0.6)
24.4
0.5
1.1
26.0
60 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2008
15. Trade and Other Receivables (continued)
The maximum exposure to credit risk for trade receivables at the reporting date by currencies was:
Sterling
US Dollars
Canadian Dollars
Euro
Other
Trade receivables, before impairment provisions, are analysed as follows:
Not past due
Past due, but not impaired
Past due, but impaired
The ageing of trade receivables classed as past due, but not impaired is as follows:
Up to one month past due
Between one and two months past due
Between two and four months past due
Over four months past due
The movement in the provision for impairment of trade receivables is as follows:
At 1 October
Charged against profit, net
Utilised by write off
Acquired business
16. Trade and Other Payables
Trade payables
Other payables
Other taxes and social security
Accruals and deferred income
2008
£m
11.0
4.5
4.3
3.7
1.4
2007
£m
12.0
3.6
4.4
4.0
1.0
24.9
25.0
2008
£m
19.8
4.5
0.6
24.9
2008
£m
3.0
0.8
0.5
0.2
4.5
2008
£m
0.6
–
–
–
0.6
2008
£m
15.2
1.0
1.7
8.4
26.3
2007
£m
18.8
5.6
0.6
25.0
2007
£m
3.8
1.3
0.3
0.2
5.6
2007
£m
0.7
–
(0.1)
–
0.6
2007
£m
14.6
2.2
1.8
8.5
27.1
61 Diploma PLC Annual Report and Accounts 2008
Financial Statements
16. Trade and Other Payables (continued)
The maximum exposure to foreign currency risk for trade payables at the reporting date by currencies was:
Sterling
US Dollars
Canadian Dollars
Euro
Other
2008
£m
5.4
5.0
0.7
3.8
0.3
2007
£m
5.9
3.3
0.3
4.7
0.4
15.2
14.6
17. Cash and Cash Equivalents
Cash at bank
Short term deposits
Sterling
£m
US$
£m
Can$
£m
Euro
£m
2008
Total Sterling
£m
£m
0.5
1.0
1.5
1.3
4.0
5.3
0.5
6.2
6.7
1.4
0.8
3.7
12.0
2.2
15.7
1.8
2.5
4.3
US$
£m
2.5
0.5
3.0
2007
Total
£m
8.5
3.9
Can$
£m
Euro
£m
2.1
0.5
2.1
0.4
2.5
2.6
12.4
The short term deposits and cash at bank are both interest bearing at rates linked to the UK Base Rate, or equivalent rate.
18. Financial Instruments
The Group’s principal financial instruments, other than a limited number of forward foreign contracts, comprise cash and short term deposits,
trade and other receivables and trade and other payables and other liabilities. Trade and other receivables and trade and other payables arise
directly from the Group’s day to day operations.
The principal financial risks to which the Group is exposed are those of credit, liquidity, foreign currency and interest rate. An explanation of
each of these risks, how the Group manages these risks and an analysis of sensitivities is set out on page 33 within Risks and Uncertainties.
Further analyses of these risks are included in the consolidated financial statements as follows:
a) Credit risk
The Group’s maximum exposure to credit risk was as follows:
Trade receivables
Other receivables
Cash and cash equivalents
Carrying amount
2008
£m
24.3
1.0
15.7
41.0
2007
£m
24.4
0.5
12.4
37.3
There is no material difference between the carrying amount of the financial assets and their fair value at each reporting date. An analysis of
the ageing and currency of trade receivables and the associated provision for impairment is set out in note 15. An analysis of cash and cash
equivalents is set out in note 17.
62 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2008
18. Financial Instruments (continued)
b) Liquidity risk
The Group has no cash loans or overdrafts at each reporting date.
Trade payables
Other payables
Other liabilities
The maturities of the undiscounted financial liabilities are as follows:
Less than one year
One-two years
Two-five years
Less: Discount
Carrying amount
2008
£m
15.2
1.0
12.3
28.5
17.3
2.1
12.2
31.6
(3.1)
28.5
2007
£m
14.6
2.2
13.5
30.3
20.4
1.2
11.6
33.2
(2.9)
30.3
There is no material difference between the carrying amount of these financial liabilities and their fair value at each reporting date.
c) Currency risk
The Group holds forward foreign exchange contracts to hedge forecast transactional exposure of certain of the Group’s businesses to
movements in the US dollar and euro. These forward foreign exchange contracts are classified as cash flow hedges and are stated at fair
value. The net fair value of forward foreign exchange contracts used as hedges at 30 September 2008 was a £0.2m asset (2007: £1.1m
liability).
d) Interest rate risk
The Group does not undertake any hedging of interest rates. All cash deposits, held in the UK and overseas, are held on a short term basis at
floating rates or overnight rates, based on the relevant UK Base Rate, or equivalent rate.
In February 2008, the Group drew down £2.4m from its revolving bank facility of £20.0m to finance a small acquisition. The loan was repaid
in full in September 2008. The weighted average of the interest paid on the loan, which was by reference to LIBOR, was 6.3%.
An analysis of cash and cash equivalents at the reporting dates is set out in note 17.
e) Fair values
There are no material differences between the carrying value of financial assets and liabilities and their fair value. The basis for determining
fair values are as follows:
– Derivatives
Forward exchange contracts are valued at year end spot rates adjusted for the forward points to the contract’s value date, and gains and
losses taken to equity. No contract’s value date is greater than 18 months from the year end.
– Trade and other receivables/payables
As the majority of receivables/payables have a remaining life of less than one year, the notional amount is deemed to reflect the fair value.
– Other liabilities
The carrying amount represents a discounted value of the expected liability which is deemed to reflect the fair value.
63 Diploma PLC Annual Report and Accounts 2008
Financial Statements
19. Other Liabilities
Future purchases of minority interests
Deferred consideration
At 30 September
Analysed as:
Due within one year
Due after one year
The movement in the liability for future purchases of minority interests is as follows:
At 1 October
(Released)/charged to retained earnings
Unwinding of discount
Fair value remeasurements
At 30 September
2008
£m
11.2
1.1
12.3
1.1
11.2
2008
£m
11.8
(3.6)
0.7
2.3
11.2
2007
£m
11.8
1.7
13.5
4.8
8.7
2007
£m
–
11.8
–
–
11.8
The Group retains put/call options to acquire the outstanding minority shareholdings in Somagen, AMT and M Seals, which are exercisable
between 1 October 2009 and 31 December 2012. Following the acquisition on 3 March 2008 of 11.8% of the ordinary share capital of
Somagen Diagnostics Inc. from the minority shareholders, the liability of £3.6m recognised in the consolidated financial statements at
30 September 2007 has been released to retained earnings.
At 30 September 2008, 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 the businesses and to reflect foreign exchange rates at
30 September 2008. This led to a remeasurement of the fair value of these put options and the liability was increased by £2.3m by a charge
to the consolidated Income Statement.
Deferred consideration of £1.1m is payable to the vendors of AMT, based on the performance of the AMT business in the year ended
30 September 2008. Deferred consideration of £0.3m was paid on 10 April 2008 to the vendors of Cabletec Interconnect Components
Systems Limited (“Cabletec”) in final settlement of their performance payment; unearned deferred consideration of £0.2m was released
against goodwill.
20. Minority Interests
At 1 October 2006
Acquisitions
Share of profit for the year
Accounted for in equity
Dividends paid
At 30 September 2007
Acquisition of minority interest (note 21)
Share of profit for the year
Accounted for in equity
Dividends paid
Exchange adjustments
At 30 September 2008
£m
1.6
0.1
0.5
(0.1)
(0.3)
1.8
(0.3)
1.1
0.1
(0.9)
0.1
1.9
64 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2008
21. Acquisitions
On 5 February 2008, the Group acquired 100% of Hitek Group Limited (“Hitek”), a supplier of calibration services in the United Kingdom.
The consideration, net of cash acquired and acquisition expenses, was £2.5m. On 17 June 2008, the Group acquired 100% of Snijders
Engineering BV (“Snijders”), a supplier of hydraulic seals in the Netherlands. The consideration, net of cash acquired and acquisition
expenses, was £1.4m (€1.8m).
On 3 March 2008, the Group acquired 11.8% of the ordinary share capital of Somagen Diagnostics Inc (“Somagen”) for £3.7m (C$7.3m)
from the minority shareholders of Somagen, pursuant to put/call option agreements entered into at the time of the original acquisition in July
2004. The Group now owns 91.8% of the issued share capital of Somagen.
The consideration for all of the acquisitions set out above was paid in cash and met from the Group’s existing cash resources.
Set out below is an analysis of the net book value and fair value of the net assets acquired and the consideration payable in respect of the
acquisitions completed during the year.
Property, plant and equipment
Deferred tax
Inventories
Trade and other receivables
Trade and other payables
Minority’s share of net assets
Net assets acquired by Group
Goodwill arising on acquisitions completed during the year
Satisfied by:
Cash paid
Cash acquired
Expenses of acquisition
Total consideration
Book value
£m
Fair value
£m
0.1
–
0.8
0.2
(0.1)
1.0
0.1
0.1
0.5
0.2
(0.2)
0.7
0.3
1.0
6.6
7.6
7.4
(0.1)
0.3
7.6
From the date of acquisition to 30 September 2008, these acquired businesses contributed £0.9m to revenue and £0.3m to operating profit.
If the acquisition of the acquired businesses had been made at the beginning of the financial year, the acquired businesses would have
contributed £1.8m to revenue and £0.4m to profit after tax. Profit after tax should not be viewed as indicative of the results of these acquired
operations that would have occurred, if these acquisitions had been made at the beginning of the year.
22. Reconciliation of Cash Flow from Operations
Profit for the year
Depreciation/amortisation of tangible and other intangible assets
Amortisation of acquisition intangible assets
Share-based payments expense
Finance expense/(income)
Tax expense
Operating cash flow before changes in working capital
Increase in inventories
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables
Cash paid into defined benefit schemes
Cash flow from operations
2008
£m
14.4
2.5
2.7
0.5
2.8
7.4
30.3
(1.5)
0.9
(0.7)
(0.2)
28.8
2007
£m
14.8
1.8
1.0
0.5
(1.2)
7.5
24.4
(0.2)
(1.2)
0.3
(0.3)
23.0
65 Diploma PLC Annual Report and Accounts 2008
Financial Statements
23. Retirement Benefit Obligations
The Group maintains several defined benefit schemes, all of which are closed to future accrual and the assets of the schemes are held in
separate trustee administered funds. The schemes are funded in accordance with rates recommended by independent qualified actuaries
on the basis of triennial or shorter period reviews using the projected unit method.
The two principal defined benefit schemes (“the schemes”) are the Diploma Holdings PLC Permanent Staff Pension and Assurance Scheme
(“the PLC Scheme”) and the Anachem Limited Retirement Benefits Scheme (“the Anachem Scheme”).
Pension deficit included in the balance sheet:
2008
£m
2007
£m
Market value of schemes’ assets
Equities
Bonds
Cash
Present value of schemes’ liabilities
At 30 September
Amounts credited to the income statement in respect of defined benefit schemes:
Charged to operating profit
Interest cost
Expected return on schemes’ assets
Credited to finance income (note 6)
Amounts recognised in the consolidated statement of recognised income and expense (“SORIE”):
Experience adjustments on schemes’ assets
Changes in assumptions on schemes’ liabilities
Experience adjustments on schemes’ liabilities
Analysis of movement in the pension deficit:
At 1 October
Amounts credited to profit and loss account
Contributions paid by employer
Actuarial loss/(gain)
At 30 September
9.5
3.0
–
12.5
(14.2)
(1.7)
2008
£m
–
(0.9)
1.1
0.2
0.2
2008
£m
(3.4)
3.0
(0.1)
(0.5)
2008
£m
1.6
(0.2)
(0.2)
0.5
1.7
11.7
3.1
–
14.8
(16.4)
(1.6)
2007
£m
–
(0.9)
1.0
0.1
0.1
2007
£m
0.3
2.3
0.1
2.7
2007
£m
4.7
(0.1)
(0.3)
(2.7)
1.6
66 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2008
23. Retirement Benefit Obligations (continued)
Analysis of the movements in the present value of the schemes’ liabilities:
At 1 October
Interest cost
Actuarial loss/(gain)
Gain on changes in assumptions
Benefits paid
At 30 September
Analysis of the movements in the present value of the schemes’ assets:
At 1 October
Expected return on assets
Actuarial (loss)/gain
Contributions paid by employer
Benefits paid
At 30 September
Principal actuarial assumptions for the schemes at balance sheet dates:
Inflation rate
Expected rate of pension increases
Discount rate
Number of years a current pensioner is expected to live beyond age 65
• Men
• Women
Expected return on schemes’ assets
Analysed as:
Equities
Bonds
Cash
2008
£m
16.4
0.9
0.1
(3.0)
(0.2)
2007
£m
18.0
0.9
(0.1)
(2.3)
(0.1)
14.2
16.4
2008
£m
14.8
1.1
(3.4)
0.2
(0.2)
12.5
2007
£m
13.3
1.0
0.3
0.3
(0.1)
14.8
2008
2007
2006
3.8%
3.8%
7.0%
21.9
24.8
8.0%
5.5%
4.5%
3.4%
3.4%
5.8%
21.9
24.8
8.0%
5.5%
5.0%
3.0%
3.0%
5.0%
20.5
23.4
8.0%
4.6%
4.0%
67 Diploma PLC Annual Report and Accounts 2008
Financial Statements
23. Retirement Benefit Obligations (continued)
Demographic assumptions:
Basic mortality table used:
Year the mortality table was published:
100% of PMA92/PFA92
1999
Allowance for future improvements in longevity:
Year of birth projections, with medium cohort improvements with
Allowance made for members to take a cash lump sum on retirement Members are assumed to take 100% (in PLC) and 50% (in
adjustments to reflect expected scheme experience
Anachem) of their maximum cash sum (based on current
commutation factors)
Sensitivities:
Sensitivity of 2008 pension liabilities to changes in assumptions are as follows:
Assumption
Assumption
Discount rate
Expected rate of pension increase
Life expectancy
Decrease by 0.5%
Increase by 0.5%
Increase by 1 year
Impact on pension liabilities
Estimated
increase
%
9.6
4.2
1.2
Estimated
increase
£m
1.4
0.6
0.2
Cash funding:
Accounting costs do not impact on the incidence or amount of cash contributions for defined benefit plans. Future cash contributions are
determined based upon triennial actuarial valuations.
Date of last formal funding valuation
6 April 2006
PLC
Deficit
Funding level
Funding approach
£317,000
96%
Anachem
5 April 2007
£839,000
91%
Assumes that schemes’ assets will
Assumes that schemes’ assets will
outperform Government bonds by 2.34% pa outperform Government bonds by 2.35% pa
pre-retirement and 0.24% pa post-retirement pre-retirement and NIL% pa post-retirement
Lump sum contributions per annum to
remove the deficit
£42,000
£120,000
Period over which the deficit is expected to be
removed
6 April 2007 – 5 April 2016
1 October 2007 – 30 September 2017
Expected contributions during FY2009
£42,000
£120,000
Current investment strategy
80% Equities/20% Bonds
85% Equities/15% Bonds
Number of deferred members at date of
actuarial valuation
152
187
68 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2008
23. Retirement Benefit Obligations (continued)
History of experience gains and losses
All experience adjustments are recognised directly in equity, net of related tax.
Experience adjustments arising on schemes’ assets:
Amount (£m)
% of schemes’ assets
Changes in assumptions arising on present value of schemes’ liabilities:
Amount (£m)
% of present value of schemes’ liabilities
Experience adjustments arising on present value of schemes’ liabilities:
Amount (£m)
% of present value of schemes’ liabilities
Present value of schemes’ liabilities
Market value of schemes’ assets
Deficit
2008
2007
2006
2005
2004
(3.4)
27%
3.0
21%
(0.1)
1%
(14.2)
12.5
(1.7)
0.3
2%
2.3
14%
0.1
1%
(16.4)
14.8
(1.6)
0.6
5%
(0.6)
3%
(0.6)
3%
(18.0)
13.3
(4.7)
1.1
9%
–
–
(1.7)
11%
(16.1)
11.7
(4.4)
0.3
3%
0.3
2%
0.3
2%
(13.9)
9.8
(4.1)
24. Commitments
At 30 September 2008 the Group has total lease payments under non-cancellable operating leases as follows:
Lease payments due:
Within one year
Within two to five years
After five years
Total payable at 30 September
Operating lease payments made in respect of land and buildings during the year were £1.1m (2007: £0.8m).
25. Audit Fees
During the year the Group received the following services from the auditors:
Land and Buildings
2007
2008
£m
£m
1.1
2.3
0.3
3.7
1.0
2.5
0.3
3.8
2008
£’m
2007
£’m
Fees payable to the auditors for the audit of:
– the Company’s annual report
– the Company’s subsidiaries, pursuant to legislation
Total audit fees
There were no other fees paid to the Group’s auditors.
26. Exchange Rates
The following exchange rates have been used to translate the results of the overseas business:
US Dollar
Canadian Dollar
Euro
0.1
0.1
0.2
Average
Closing
2008
1.97
1.99
1.31
2007
1.98
2.18
1.48
2008
1.78
1.90
1.27
0.1
0.2
0.3
2007
2.04
2.02
1.43
27. Subsequent Event
On 5 November 2008, the Group acquired a small medical diagnostic company in Canada, Meditech Istisharat Canada Inc. (“Meditech”) for
maximum consideration of £1.5m (C$2.9m), including expenses.
69 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Group Accounting Policies
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as
endorsed by the European Union, and in accordance with the Companies Act 1985, as applicable to companies reporting under IFRS. The
accounting policies set out below have been consistently applied in 2008 and the comparative period. There has been no material impact on
the Group’s consolidated financial statements in 2008 from the issue of IFRS, or interpretations to existing Standards, during the year. The
Group has adopted IFRS 7, Financial Instruments: Disclosures at 30 September 2008, however this relates only to additional disclosures in
respect of financial instruments, which are included in this Annual Report.
1.1 Basis of preparation
The consolidated financial statements have been prepared under the historical cost convention, except for derivative financial instruments
which are held at fair value.
1.2 Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its
subsidiaries). Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income
statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those
detailed herein to ensure that the Group financial statements are prepared on a consistent basis. All intra-group transactions, balances,
income and expenses are eliminated in preparing the consolidated financial statements.
Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests
consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since
the date of the combination.
1.3 Revenue recognition
Revenue is measured as the fair value of the consideration received or receivable for goods supplied and services rendered to customers,
after deducting sales allowances and value added taxes. Revenue is recognised when the risk and rewards of ownership transfers to the
customer, which depending on individual customer terms, is at the time of despatch, delivery or upon formal customer acceptance. Provision
is made for returns where appropriate. Service revenue received in advance is deferred and recognised over the period of the contract.
1.4 Employee benefits
The Group operates a number of pension plans, both of the defined contribution and defined benefit type. The defined benefit schemes are
closed to the accrual of future benefits.
(a) Defined contribution pension plans
Contributions to the Group’s defined contribution schemes are recognised as an employee benefit expense when they fall due.
(b) Defined benefit pension plans
The deficit recognised in the balance sheet for the Group’s defined benefit pension schemes is the present value of the defined benefit
obligation at the balance sheet date less the fair value of the scheme assets. The defined benefit obligation is calculated by independent
actuaries using the projected unit cost method and by discounting the estimated future cash flows using interest rates on high quality
corporate bonds. The pension expense for the Group’s defined benefit plans is recognised as follows:
(i)
Within profit before tax:
l Gains and losses arising on settlements and curtailments – where the item that gave rise to the settlement or curtailment is
recognised in operating profit;
l Interest cost on the liabilities of the schemes – calculated by reference to the scheme liabilities and major assumptions, including
the discount rate, at the beginning of the year; and
l Expected return on the assets of the schemes – calculated by reference to the scheme assets and long-term expected rate of
return at the beginning of the year.
(ii) Within the statement of recognised income and expense:
l Actuarial gains and losses arising on the assets and liabilities of the schemes arising from actual experience and any changes in
assumptions at the end of the year.
The Group has adopted a policy of recognising all actuarial gains and losses for all of its defined benefit schemes in the period in which
they occur, outside the income statement, in the SORIE.
(c) Share-based payments
The Executive Directors of the Group receive part of their remuneration in the form of share-based payment transactions, whereby the
Directors render services in exchange for shares in the Company, or rights over shares (“equity-settled” transactions).
Equity-settled transactions are measured at fair value at the date of grant. The fair value determined at the grant date takes account of
the effect of market based measures, such as the Total Shareholder Return (“TSR”) targets upon which vesting of part of the award
is conditional, and is expensed to the profit and loss account on a straight line basis over the vesting period, with a corresponding
credit to equity. The cumulative expense recognised is adjusted to take account of shares forfeited by Executives who leave during the
performance or vesting period and, in the case of non-market related performance conditions, where it becomes unlikely that shares will
vest. For the market based measure, the Directors have used a predicted future value model to determine fair value of the shares at the
date of grant.
The Group operates an Employee Benefit Trust for the granting of shares to Executives. The cost of shares in the Company purchased
by the Employee Benefit Trust are shown as a deduction from equity.
70 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Group Accounting Policies continued
1.5 Foreign currencies
The individual financial statements of each Group entity are prepared in their functional currency, which is the currency of the primary
economic environment in which that entity operates. For the purpose of the consolidated financial statements, the results and financial
position of each entity are translated into UK sterling, which is the presentational currency of the Group.
(a) Reporting foreign currency transactions in functional currency:
Transactions in currencies other than the entity’s functional currency (foreign currencies) are initially recorded at the rates of exchange
prevailing on the dates of the transactions. At each subsequent balance sheet date:
(i)
Foreign currency monetary items are retranslated at the rates prevailing at the balance sheet date. Exchange differences arising on
the settlement or retranslation of monetary items are recognised in the income statement;
(ii) Non-monetary items measured at historical cost in a foreign currency are not retranslated; and
(iii) Non-monetary items measured at fair value in a foreign currency are retranslated using the exchange rates at the date the fair value
was determined. Where a gain or loss on non-monetary items is recognised directly in equity, any exchange component of that gain
or loss is also recognised directly in equity and conversely, where a gain or loss on a non-monetary item is recognised in the income
statement, any exchange component of that gain or loss is also recognised in the income statement.
(b) Translation from functional currency to presentational currency:
When the functional currency of a Group entity is different from the Group’s presentational currency, its results and financial position are
translated into the presentational currency as follows:
(i)
Assets and liabilities are translated using exchange rates prevailing at the balance sheet date;
(ii) Income and expense items are translated at average exchange rates for the year, except where the use of such an average rate
does not approximate the exchange rate at the date of the transaction, in which case the transaction rate is used; and
(iii) All resulting exchange differences are recognised in translation reserves as a separate component of equity; these cumulative
exchange differences are recognised in the income statement in the period in which the foreign operation is disposed of.
(c) Net investment in foreign operations:
Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation are
recognised in the income statement in the separate financial statements of the reporting entity or the foreign operation as appropriate.
In the consolidated Group accounts such exchange differences are initially recognised in translation reserves as a separate component of
equity and subsequently recognised in the income statement on disposal of the net investment.
1.6 Taxation
The tax expense relates to the sum of current tax and deferred tax.
Current tax is based on taxable profit for the year, which differs from profit before taxation as reported in the income statement. Taxable
profit excludes items of income and expense that are taxable (or deductible) in other years and also excludes items that are never taxable
or deductible. The Group’s liability for current tax, including UK corporation tax and overseas tax, is calculated using rates that have been
enacted or substantively enacted at the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method. Deferred tax is recognised on differences between the carrying
amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that
it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Temporary differences arise
primarily from the recognition of the deficit on the Group’s defined benefit pension schemes, the difference between accelerated capital
allowances and depreciation and for short term timing differences where a provision held against receivables or stock is not deductible for
taxation purposes. However, deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from
the initial recognition (other that in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit,
nor the accounting profit.
Deferred tax liabilities are also recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group
is able to control the reversal of the temporary difference and it is possible that the temporary difference will not reverse in the foreseeable
future. No deferred tax is recognised on the unremitted earnings of overseas subsidiaries. If these earnings were remitted, it is unlikely there
would be any significant impact on the tax charge or liability.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled.
Deferred tax is charged or credited to the income statement, except when the item on which the tax or charged is credited or charged
directly to equity, in which case the deferred tax is also dealt with in equity. The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of
the assets to be recovered. Tax assets and liabilities are offset when there is a legally enforceable right to enforce current tax assets against
current tax liabilities and when the deferred income tax relates to the same fiscal authority.
1.7 Property, plant and equipment
Freehold land is carried at cost less accumulated impairment losses. Other items of property, plant and equipment are carried at cost less
accumulated depreciation and accumulated impairment losses. Cost comprises the purchase price plus costs directly incurred in bringing
the asset into use, but excluding interest. All other repairs and maintenance expenditure is charged to the income statement in the period in
which it is incurred.
71 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Freehold land is not depreciated as it has an infinite life. Depreciation on other items of property, plant and equipment begins when the asset
is available for use and is charged to the income statement on a straight-line basis so as to write off the cost, less residual value of the asset,
over its estimated useful life as follows:
Freehold property
Leasehold property
Plant and equipment – plant and machinery
– information technology
(“IT”) and hardware
– fixtures and fittings
between 20 and 50 years
the term of the lease
between 3 and 7 years
between 3 and 5 years
between 5 and 15 years
The depreciation method used, residual values and estimated useful lives are reviewed and changed, if appropriate, at least at each financial
year end. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where
shorter, over the term of the relevant lease. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s
carrying amount is greater than its estimated recoverable amount. Gains and losses arising on disposals are determined by comparing sales
proceeds with carrying amount and are recognised in the income statement.
1.8 Intangible assets
All intangible assets, excluding goodwill arising on a business combination, are stated at their amortised cost or fair value less any provision
for impairment.
(a) Research and development costs
Research expenditure is written off as incurred. Development costs are written off as incurred until it can be demonstrated that the
conditions for capitalisation as described in IAS 38 (Intangible Assets) are met. At which point further costs are capitalised as intangible
assets up until the intangible asset is readily available for production and amortised on a straight-line basis over the asset’s estimated
useful life.
Costs are capitalised as intangible assets unless physical assets, such as tooling, exist when they are classified as property, plant and
equipment.
(b) Computer software costs
Where computer software is not integral to an item of property, plant or equipment its costs are capitalised as other intangible assets.
Amortisation is provided on a straight line basis over its useful economic life which is three years.
(c) Acquired intangible assets – business combinations
Intangible assets that are acquired as a result of a business combination, including, but not limited to, customer lists, supplier lists,
databases, technology and software and patents and that can be separately measured at fair value, on a reliable basis, are separately
recognised on acquisition at the fair value, together with the associated deferred tax liability. Amortisation is charged on a straight line
basis to the income statement over the expected useful economic lives.
(d) Goodwill – business combinations
Goodwill arising on the acquisition of a subsidiary represents the excess of the aggregate of the fair value of the consideration over
the aggregate fair value of the identifiable intangible and tangible assets, net of the aggregate fair value of the liabilities (including
contingencies of businesses acquired at the date of acquisition), and net of any costs directly attributable to the business combination.
Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.
Impairment testing is carried out annually or more frequently if events or changes in circumstances indicate that the carrying value may
be impaired.
Goodwill on acquisitions after 30 September 2004 is not amortised and goodwill arising on acquisitions before the date of transition to
IFRS (which is 1 October 2004), is not amortised after that date. Goodwill existing at the date of transition to IFRS has been retained
at the previous UK GAAP amounts, as the Group has elected not to restate business combinations that occurred before the date of
transition to IFRS.
1.9 Impairment of tangible and intangible assets
An impairment loss is recognised to the extent that the carrying amount of an asset or cash generating unit exceeds its recoverable amount.
The recoverable amount of an asset or cash-generating unit is the higher of (i) its fair value less costs to sell and (ii) its value in use; its value
in use is the present value of the future cash flows expected to be derived from the asset or cash-generating unit, discounted using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash-generating unit.
Impairment losses are recognised immediately in the income statement.
(a) Impairment of goodwill
Goodwill acquired in a business combination is allocated to a cash-generating unit; cash-generating units for this purpose are the
business entities which represent the lowest level within the Group at which the goodwill is monitored by the Group’s Board of Directors
for internal and management purposes. Cash-generating units to which goodwill has been allocated are tested for impairment annually,
or more frequently when there is an indication that the unit may be impaired.
If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to
reduce the goodwill attributable to the cash-generating unit.
An impairment loss recognised for goodwill is not reversed in a subsequent period.
(b) Impairment of other tangible and intangible assets
At each balance sheet date, the Group reviews the carrying amount of its tangible and intangible assets to determine whether there is
72 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Group Accounting Policies continued
any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is
estimated in order to determine the extent, if any, of the impairment loss. For the purposes of assessing impairment, assets are grouped
at the lowest levels for which there are separately identifiable cash inflows. Where it is not possible to estimate the recoverable amount
of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would
have been determined had no impairment loss been recognised for the asset or cash-generating unit in prior years. A reversal of an
impairment loss for tangible and intangible assets other than goodwill is recognised immediately in the income statement.
1.10 Inventories
Inventories are stated at the lower of cost, (generally calculated on a weighted average cost basis) and net realisable value, after making due
allowance for any obsolete or slow moving inventory. Cost comprises direct materials, duty and freight-in costs.
Net realisable value represents the estimated selling price less all estimated costs of completion and the estimated costs necessary to make
the sale.
1.11 Financial instruments
Financial assets and liabilities are recognised in the Group balance sheet when the Group becomes a party to the contractual provisions of
the instrument.
(a) Trade receivables
Trade receivables are initially measured at fair value, do not carry any interest and are reduced by a charge for impairment for estimated
irrecoverable amounts. Such impairment charges are recognised in the income statement.
(b) Trade payables
Trade payables are non interest-bearing and are initially measured at their fair value.
(c) Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, interest bearing deposits, bank overdrafts and short-term highly liquid investments
with original maturities of three months or less that are readily convertible to a known amount of cash and are subject to an insignificant
risk of changes in value. Bank overdrafts are repayable on demand and form an integral part of the Group’s cash management system.
(d) Put options held by minority interests
On exercise of put options held by minority shareholders in the Group’s subsidiaries, the purchase price of the shares is calculated by
reference to the profitability of the relevant subsidiary at the time of exercise, using a multiple based formula. The net present value of
the estimated future payments under these put options is shown as a financial liability. The corresponding entry is recognised in equity
as a deduction against retained earnings. At the end of each year, the estimate of the financial liability is reassessed and any change
in value is recognised in the income statement, as part of finance income or expense. Where the liability is in a foreign currency, any
change in the value of the liability resulting from changes in exchange rates is recognised in the income statement.
(e) Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments in the form of forward foreign exchange contracts to manage the effects of its
exposures to fluctuations in foreign exchange arising from operational and financial activities. In accordance with its treasury policy, the
Group does not hold or issue derivative financial instruments for trading purposes. The fair value of forward foreign exchange contracts is
their quoted market price at the balance sheet date.
Under IAS39, hedging relationships are categorised by type and must meet strict criteria to qualify for hedge accounting. At the
inception of the transaction the Group documents the relationship between the hedging instrument and the hedged item. The Group
also documents its assessment, both at hedge inception and on an ongoing basis, of whether the financial instruments that are used in
hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The Group uses cash flow
hedges (eg forward foreign exchange currency contracts) to hedge exposure to variability in cash flows of a highly probable forecast
transaction.
In relation to cash flow hedges, to hedge firm commitments which meet the conditions for hedge accounting, the portion of the gain or
loss on the hedging instrument that is determined to be an effective hedge is recognised directly to equity and the ineffective portion is
recognised in net profit or loss. For cash flow hedges that do not result in the recognition of an asset or a liability, the gains or losses that
are recognised in equity are transferred to the income statement in the same year in which the hedged firm commitment affects the net
profit and loss, for example when the future sale actually occurs.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for
hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity
until the hedged transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in
equity is transferred to net profit or loss for the year.
The Group does not use financial instruments to hedge the exposure to changes in the fair value of recognised assets or liabilities that
are attributable to a particular risk and could affect profit or loss (fair value hedges). No financial instruments are used to hedge net
investments in a foreign operation (net investment hedges).
73 Diploma PLC Annual Report and Accounts 2008
Financial Statements
1.12 Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risk and rewards of ownership to the
lessee. Leases include hire purchase contracts which have characteristics similar to finance or operating leases. All other leases are classified
as operating leases.
(a) Finance leases
Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at
the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance
lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a
constant rate of interest on the remaining balance of the liability. Finance charges are charged to the income statement.
(b) Operating leases
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant
lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the
expected lease term.
1.13 Other liabilities
Other liabilities are recognised when the Group has legal or constructive obligation as a result of a past event and it is possible that the
Group will be required to settle that obligation. Other liabilities are measured at the Director’s best estimate of the expenditure required to
settle the obligation at the balance sheet date.
1.14 Dividends
The annual final dividend is not provided for until approved at the Annual General Meeting; interim dividends are charged in the period they
are paid.
1.15 Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a
deduction, net of tax, from the proceeds.
Where any Group company purchases the Company’s equity share capital and holds that share either directly as treasury shares or indirectly
within an ESOP trust, the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted
from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are
subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related
income tax effects, is included in equity attributable to the Company’s equity holders. These shares are used to satisfy share awards granted
to Directors under the Group’s share schemes. The trustee purchases the Company’s shares on the open market using loans made by the
Company or a subsidiary of the Company.
1.16 Accounting standards, interpretations and amendments to published standards not yet effective
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s
accounting periods beginning on or after 1 October 2008 or later periods, but which the Group has not early adopted. The new standards
which are expected to be relevant to the Group’s operations are as follows:
IFRS 8 Operating Segments (effective from 1 October 2009)
This IFRS specifies how an entity should report information about its operating segments in its financial statements.
IFRS 3 Business Combinations (Revised) (effective from 1 October 2009)
This revised standard relates to accounting for acquisitions.
Amendment to IAS 1 Presentation of Financial Statements (effective from 1 October 2009)
This amendment requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a
statement of comprehensive income.
IFRIC 13 Customer Loyalty Programmes (effective from 1 October 2008)
IFRIC 13 addresses accounting by entities that grant loyalty award credits to customers who buy other goods or services.
IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective from 1 October 2009)
IFRIC 14 addresses the accounting by entities where the present value of cash contributions to a defined pension scheme exceed the
IAS 19 deficit.
Management is currently assessing the impact of these IFRS, interpretations and amendments on the Group’s consolidated financial
statements.
2 Critical Accounting Estimates and Judgements
In order to prepare these consolidated financial statements in accordance with the accounting policies set out in note 1 above, management
has used estimates and judgements to establish the amounts at which certain items are recorded. Critical accounting estimates and
judgements are those which have the greatest impact on the financial statements and require the most difficult and subjective judgements
about matters that are inherently uncertain. Estimates are based on factors including historical experience and expectations of future events
that management believe to be reasonable. However given the judgemental nature of such estimates, actual results could be different from
the assumptions used. The critical accounting estimates and judgements are set out below:
2.1 Goodwill impairment
The Directors use their judgement to determine the extent to which goodwill has a value that will benefit the performance of the Group
over future periods. To assist in making this judgement, the Directors undertake an assessment, at least annually, of the carrying value of
the Group’s capitalised goodwill, using discounted cash flow forecasts to derive the “value in use” to the Group of the capitalised goodwill.
74 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Group Accounting Policies continued
This calculation is usually based on projecting future cash flows over a five year period and using a terminal value to incorporate expectations
of growth thereafter. A discount factor is applied to obtain a current value (“value in use”). The “fair value less costs to sell” of an asset is
used if this results in an amount in excess of “value in use”.
Estimated future cash flows for impairment calculations are based on management’s expectations of future volumes and margins based on
plans and best estimates of the productivity of the assets in their current condition. Future cash flows therefore exclude benefits from major
expansion projects requiring future capital expenditure where that expenditure has not been approved at the balance sheet date.
Future cash flows are discounted using discount rates based on the Group’s weighted average cost of capital, adjusted if appropriate for
circumstances specific to the asset being tested. The weighted average cost of capital is impacted by estimates of interest rates, equity
returns and market and country related risks. The Group’s weighted average cost of capital is reviewed on an annual basis.
The projection period is, in the opinion of the Directors, an appropriate period over which to view the future results of the Group’s
businesses for this purpose. Changes to the assumptions and discount rates used in making these forecasts could significantly alter the
Director’s assessment of the carrying value of goodwill.
2.2 Retirement benefits
The Group’s financial statements include the costs and obligations associated with the provision of pension retirement benefits to current
and former employees. It is the Directors’ responsibility to set the assumptions used in determining the key elements of the costs of
meeting such future obligations. These assumptions are set after consultation with the Group’s actuaries and are consistent with those
assumptions used to determine the financing elements related to the Schemes’ assets and liabilities. Whilst the Directors believe that the
assumptions used are appropriate, a change in the assumptions used would affect the Group profit and financial position.
Details of these assumptions, which are based on advice from the Group’s actuaries, are set out in note 23.
2.3 Taxation
The Group operates in a number of tax jurisdictions around the world. Tax regulations generally are complex and in some jurisdictions
agreeing tax liabilities with local tax authorities can take several years. Consequently, at the balance sheet date tax liabilities and assets
are based on management’s best estimate of the future amounts that will be settled. While the Group aims to ensure that the estimates
recorded are accurate, the actual amounts could be different from those expected.
Deferred tax assets mainly represent timing differences that the Group expects to recover at some time in the future and by their nature,
the amounts recorded are therefore dependent on management’s judgement about future events. Account has also been taken of future
forecasts of taxable profit in arriving at the values at which these deferred tax assets are recognised. If these forecast profits do not
materialise or change, or there are changes in tax rates or to the period over which the timing difference might be recognised, then the value
of the deferred tax asset will need to be revised in a future period.
2.4 Current assets
In the course of normal trading activities, judgement is used to establish the net realisable value of various elements of working capital,
principally inventory and trade receivables. Impairment charges are made against obsolete or slow-moving inventories, bad or doubtful debts.
The decision to make an impairment charge is based on the facts available at the time the financial statements are approved and are also
determined by using profiles, based on past practice, applied to certain aged inventory and trade receivables categories. In estimating the
collectability of trade receivables, judgement is required in assessing their likely realisation, including the current creditworthiness of each
customer and related ageing of the past due balances. Specific accounts are assessed in situations where a customer may not be able to
meet its financial obligations due to deterioration of its financial condition, credit ratings or bankruptcy.
2.5 Property, plant and equipment
It is Group policy to depreciate its property, plant and equipment assets, except freehold land, on a straight-line basis over their estimated
useful lives. This applies an appropriate matching of the revenue earned with the delivery of goods and services. A key element of this policy
is the estimate of the useful life applied to each category of property, plant and equipment which, in turn, determines the annual depreciation
charge. Variations in asset lives could impact Group profit through an increase or decrease in the depreciation charge.
2.6 Future purchases of minority interests
The Group’s financial statements include a financial liability for the net present value of the expected amount that it will pay in future years to
acquire the outstanding shares held by minority shareholders in the Group’s subsidiaries. This amount is based on the Directors’ estimate of
the future profitability of the relevant subsidiary and on an assumption of the exchange rates prevailing at the time the payment is made. Any
changes to the estimated profitability of the relevant business and/or changes to the assumption of the relevant exchange rate, will change
the estimate of this financial liability.
75 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Parent Company Balance Sheet
As at 30 September 2008
Fixed assets
Investments
Creditors: amounts falling due within one year
Amounts owed to subsidiary undertakings
Total assets less current liabilities
Capital and reserves
Called up equity share capital
Capital redemption reserve
Profit and loss account
Note
2008
£m
2007
£m
c
70.2
70.2
(43.0)
(44.8)
27.2
25.4
d
5.7
–
21.5
27.2
1.1
0.2
24.1
25.4
The financial statements were approved by the Board of Directors on 17 November 2008 and signed on its behalf by:
BM Thompson
NP Lingwood
Chief Executive Officer
Group Finance Director
The notes on page 76 form part of these financial statements.
Reconciliation of Movements in Shareholders’ Funds
for the year ended 30 September 2008
At 1 October 2007
Retained profit for the year
Bonus issue of shares
Purchase of own shares, net
At 30 September 2008
Share
capital
£m
Capital
redemption
reserve
£m
Profit and
loss
account
£m
1.1
–
4.6
–
5.7
0.2
–
(0.2)
–
–
24.1
2.2
(4.4)
(0.4)
21.5
Total
£m
25.4
2.2
–
(0.4)
27.2
76 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Notes to the Parent Company Financial Statements
a) Accounting Policies
a.1 Basis of accounting
These financial statements have been prepared under the historical cost convention in accordance with the Companies Act 1985 and
applicable UK accounting standards. A summary of the accounting policies of the Parent company (“the Company”) is set out below. As
permitted by section 230 of the Companies Act 1985, no separate profit and loss account is presented for the Company.
a.2 Investments and dividends
Investments are stated at cost less provision for impairment. Dividend income is recognised when received. Dividend distributions are
recognised in the Company’s financial statements in the year in which the dividends are approved by the Company’s shareholders. Interim
dividends are recognised when paid.
a.3 Employment Benefit Trust and Employee Share Schemes
Shares held by the Diploma Employee Benefit Trust (“the Trust”) are stated at cost and accounted for as a deduction from shareholders’
funds in accordance with UITF 38. Shares that are held by the Trust are not eligible for dividends until such time as they vest unconditionally
to the employees.
b) Directors’ Remuneration
No emoluments are paid directly by the Company; information on the Directors’ remuneration and interests in the share capital of the
Company are set out in the Remuneration Report on pages 41 to 45.
c) Investments
Shares in Group undertakings
At 30 September 2008 and 1 October 2007
Details of the principal subsidiaries are set out on page 79.
d) Share Capital
Authorised ordinary shares of 5p each
At 1 October
Increase in authorised ordinary shares
At 30 September
Allotted, issued and fully paid ordinary shares of 5p each
At 1 October
Bonus issue
At 30 September
£m
70.2
2008
Number
2007
Number
2008
£m
2007
£m
35,000,000 35,000,000
100,000,000
–
135,000,000 35,000,000
22,647,911 22,647,911
90,591,644
–
113,239,555 22,647,911
1.7
5.0 –
6.7
1.1
4.6 –
5.7
1.7
1.7
1.1
1.1
On 21 January 2008 the Company undertook a bonus issue of four new ordinary shares of 5 pence for each ordinary share held by
shareholders of the Company. The bonus issue resulted in the issue of 90,591,644 new ordinary shares, representing the capitalisation of
£4.4m of the Company’s retained earnings, together with the £0.2m which was held in the capital redemption reserve.
As a consequence of this bonus issue, the comparative earnings and dividends per share included in this Annual Report have been restated.
During the year, the Diploma Employee Benefit Trust purchased a further 528,760 ordinary shares in the Company for an aggregate amount
of £0.9m. These shares were acquired in connection with potential awards under the Group’s share incentive plans. Pursuant to these plans,
during the year 259,875 shares were transferred from the Trust to participants in connection with vesting of awards under the Long Term
Incentive Plan. In accordance with UITF 38, the purchase cost of own shares has been deducted from shareholders’ funds.
At 30 September 2008 the Trust held 1,281,820(2007: 1,012,935) ordinary shares in the Company representing 1.1% of the called up share
capital. The market value of the shares at 30 September 2008 was £2.0m (2007: £2.2m).
77 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Independent Auditors’ Reports
Independent Auditors’ Report on the Group financial statements to the Members of Diploma PLC
We have audited the Group financial statements of Diploma PLC for the year ended 30 September 2008 which comprise the consolidated
income statement, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of recognised income
and expense, the Group Accounting Policies and the related notes 1 to 27. These Group financial statements have been prepared under the
accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having
been audited.
We have reported separately on the Parent company financial statements of Diploma PLC for the year ended 30 September 2008.
This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the Group financial statements in
accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the
Statement of Directors’ Responsibilities.
Our responsibility is to audit the Group financial statements and the part of the Directors’ Remuneration Report to be audited in accordance
with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial
statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether the
part of the Directors’ Remuneration Report described as being audited has been properly prepared in accordance with the Companies Act
1985. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the Group financial
statements. The information given in the Directors’ Report includes that specific information presented in the Business Review that is cross
referred from the Principal Activities section of the Directors’ Report. In addition we report to you if, in our opinion, we have not received
all the information and explanations we require for our audit, or if information specified by law regarding Director’s remuneration and other
transactions is not disclosed.
We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2006
Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not
required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness
of the Group’s corporate governance procedures or its risk and control procedures.
We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial statements.
The other information comprises only the Directors’ Report, the Financial Highlights, the Chairman’s Statement, the Business Review and
the Corporate Governance Statement. We consider the implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the Group financial statements. Our responsibilities do not extend to any further information outside of the
Annual Report.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It
also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Group financial
statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether
caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information
in the Group financial statements.
Opinion
In our opinion:
n
n
n
n
the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the
Group’s affairs as at 30 September 2008 and of its profit for the year then ended;
the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS
Regulation;
the part of the Directors’ Remuneration Report described as having been audited has been properly prepared in accordance with the
Companies Act 1985; and
the information given in the Directors’ Report is consistent with the Group financial statements.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London
17 November 2008
78 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Independent Auditors’ Reports continued
Independent Auditors’ Report on the Parent Company financial statements to the Members of Diploma PLC
We have audited the Parent company financial statements of Diploma PLC for the year ended 30 September 2008 which comprise the
Parent company balance sheet, the reconciliation of movement in shareholders’ funds and the related notes. These Parent company financial
statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’
Remuneration Report that is described as having been audited.
We have reported separately on the Group financial statements of Diploma PLC for the year ended 30 September 2008.
This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the Parent company financial
statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting
Practice) are set out in the Statement of Directors’ Responsibilities.
Our responsibility is to audit the Parent company financial statements and the part of the Directors’ Remuneration Report to be audited in
accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the Parent company financial statements give a true and fair view and whether the Parent
company financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether
in our opinion the information given in the Directors’ Report is consistent with the Parent company financial statements. The information
given in the Directors’ Report includes that specific information presented in the Business Review that is cross referred from the Principal
Activities section of the Directors’ Report. In addition we report to you if, in our opinion, the Company has not kept proper accounting
records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding
Directors’ remuneration and other transactions is not disclosed.
We read other information contained in the Annual Report and consider whether it is consistent with the audited Parent company financial
statements. The other information comprises only the Directors’ Report, the Financial Highlights, the unaudited part of the Directors’
Remuneration Report, the Chairman’s Statement and the Business Review. We consider the implications for our report if we become aware
of any apparent misstatements or material inconsistencies with the Parent company financial statements. Our responsibilities do not extend
to any further information outside of the Annual Report.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Parent company financial
statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and
judgements made by the Directors in the preparation of the Parent company financial statements, and of whether the accounting policies are
appropriate to the Company’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the Parent company financial statements and the part of the Directors’
Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming
our opinion we also evaluated the overall adequacy of the presentation of information in the Parent company financial statements and the
part of the Directors’ Remuneration Report to be audited.
Opinion
In our opinion:
n
n
n
the Parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting
Practice, of the state of the Company’s affairs as at 30 September 2008 and its profit for the year then ended;
the Parent company financial statements have been properly prepared in accordance with the Companies Act 1985; and
the information given in the Directors’ Report is consistent with the Parent company financial statements.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London
17 November 2008
79 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Principal Subsidiaries
Life Sciences
Anachem Limited
Hitek Limited
a1-Envirosciences Limited
a1-technologies GmbH
a1-safetech AG
Somagen Diagnostics Inc
AMT Vantage Holdings Inc
Seals
Hercules Sealing Products Inc
HKX Inc
Hercules Europe BV (formerly Snijders Engineering BV)
M Seals A/S
FPE Limited
Controls
IS Rayfast Limited
IS Motorport Inc
Clarendon Engineering Supplies Limited
Cabletec Interconnect Components Systems Limited
Sommer GmbH
Filcon GmbH
HA Wainwright (Group) Limited
Other Companies
Diploma Holdings PLC
Diploma Holdings Inc
Group
percentage of
equity capital
Country of
incorporation
or registration
100%
100%
100%
100%
100%
91.8%
75%
100%
100%
100%
90%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
England
England
England
Germany
Switzerland
Canada
Canada
USA
USA
Netherlands
Denmark
England
England
USA
England
England
Germany
Germany
England
England
USA
A full list of subsidiaries will be annexed to the next Annual Return of Diploma PLC filed with the Registrar of Companies.
Financial Calendar and Shareholder Information
Announcements (provisional dates)
Interim Management Statement released
Interim results announced
Interim Management statement released
Preliminary results announced
Annual Report posted to shareholders
Annual General Meeting
Dividends (provisional dates)
Interim announced
Paid
Final announced
Paid (if approved)
14 January 2009
11 May 2009
4 August 2009
16 November 2009
27 November 2009
13 January 2010
11 May 2009
17 June 2009
16 November 2009
20 January 2010
Annual Report: Copies can be obtained from the Company Secretary at the address shown below.
Share Registrar – Computershare Investor Services PLC: The Company’s Registrar is Computershare Investor Services PLC, PO Box 82,
The Pavilions, Bridgwater Road, Bristol BS99 7NH. Telephone: 0870 7020010.
Shareholders’ enquiries: If you have any enquiry about the Company’s business or about something affecting you as a shareholder
(other than questions dealt with by Computershare Investor Services PLC) you are invited to contact the Company Secretary at the
address shown below.
Secretary and Registered Office:
N P Lingwood ACA, 12 Charterhouse Square, London EC1M 6AX. Telephone: 020 7549 5700. Fax: 020 7549 5715.
Registered in England and Wales, number 3899848.
Web site: Diploma’s web site is www.diplomaplc.com
80 Diploma PLC Annual Report and Accounts 2008
Financial Statements
Five Year Record
Revenue
Operating profit
Finance income
Adjusted profit before tax
Amortisation of acquisition intangibles and goodwill
Property profits and restructuring costs, net
Fair value remeasurements
Profit before tax
Taxation
Profit after tax
Capital structure
Equity shareholders’ funds
Minority interest
Add/(less): cash and cash equivalents
Add/(less): retirement benefit obligations
Add/(less): future purchases of minority interests
Add/(less): deferred tax, net
Add/(less): adjustment to goodwill in respect of deferred tax
Trading capital employed
Net increase/(decrease) in cash
Add: dividends paid
acquisition of businesses
Free cash flow
Per ordinary share (pence)
Basic earnings
Adjusted earnings
Dividends
Equity shareholders’ funds
Dividend cover
Ratios
Return on trading capital employed
Operating margin
IFRS
2008
£m
IFRS
2007
£m
IFRS
2006
£m
IFRS
2005
£m
UKGAAP
2004
£m
172.3
140.7
128.2
111.3
100.5
27.3
0.2
27.5
(2.7)
–
(3.0)
21.8
(7.4)
14.4
108.1
1.9
(15.7)
1.7
11.2
3.3
(6.0)
22.1
1.2
23.3
(1.0)
–
–
22.3
(7.5)
14.8
90.7
1.8
(12.4)
1.6
11.8
3.6
(5.6)
104.5
91.5
2.3
7.8
7.9
18.0
11.8
16.4
7.5
95
2.2
%
21.0
15.8
(24.1)
5.7
31.6
13.2
12.7
14.0
5.4
80
2.6
%
24.2
15.7
19.4
1.0
20.4
(0.3)
11.1
–
31.2
(7.0)
24.2
92.9
1.6
(36.7)
4.7
–
(3.4)
–
59.1
11.3
5.0
8.0
24.3
21.1
12.6
4.6
82
2.7
%
23.9
15.1
16.5
0.7
17.2
–
–
–
17.2
(5.0)
12.2
75.4
1.7
(25.7)
4.4
–
(3.1)
–
52.7
7.5
4.1
0.3
11.9
10.5
10.7
4.0
67
2.7
%
22.1
14.8
12.3
0.8
13.1
(0.8)
3.1
–
15.4
(3.3)
12.1
64.0
1.3
(17.9)
–
–
–
–
47.4
(11.3)
3.6
17.3
9.6
10.5
8.2
3.4
57
2.4
%
21.0
12.2
The consolidated financial statements have been prepared in accordance with IFRS except for 2004, which has not been restated in accordance with IFRS.
Notes
1
2 Equity shareholders’ funds represent share capital and reserves.
3 Cash and cash equivalents includes cash at bank and short term deposits less bank overdrafts.
4
Return on trading capital employed represents operating profit, before amortisation of acquisition intangible assets, as a percentage of trading capital employed
(as adjusted for the effect of the timing of major acquisitions and disposals). Trading capital employed is calculated as defined in note 2 to the consolidated
financial statements.
Adjusted earnings per share is calculated in accordance with note 9 to the consolidated financial statements.
Equity shareholders’ funds per share have been calculated by dividing equity shareholders’ funds by the number of ordinary shares in issue at the year end.
5
6
7 Dividend cover is calculated on adjusted earnings as defined in note 2 to the financial statements.
8
On 21 January 2008 the Company undertook a bonus issue of four new ordinary shares of 5 pence each for each ordinary share held by shareholders of the
Company. The comparative amounts stated above have been restated to reflect this bonus issue.
Section 1
Group Overview
Section 2
Business Review
Other Regulatory Statements
Section 3
Financial Statements
www.diplomaplc.com
Design www.energydesignstudio.com Production Imprima De Bussy Limited 020 7105 0300
Diploma PLC
12 Charterhouse Square
London EC1M 6AX
Telephone: +44 (0)20 7549 5700
Facsimile: +44 (0)20 7549 5715
www.diplomaplc.com
Diploma PLC
Annual Report
and Accounts 2008
D
p
i
l
o
m
a
P
L
C
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
0
8