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Diploma PLC
12 Charterhouse Square
London EC1M 6AX
Telephone: +44 (0)20 7549 5700
Fax: +44 (0)20 7549 5715
www.diplomaplc.com
Diploma PLC
Annual Report and Accounts 2009
Diploma PLC is an international group of businesses
supplying specialised technical products and services
Section 1:
Overview
Group at a Glance
Financial Highlights
Chairman’s Statement
Chief Executive’s Review
Directors and Advisors
Section 2:
Business Review
Strategy and Performance
Sector Reviews
Finance Review
Risks and Uncertainties
Corporate and Social Responsibility
Section 3:
Governance
Directors’ Report
Corporate Governance
Remuneration Report
01
02
03
04
08
10
14
20
22
26
27
29
33
Section 4:
Financial Statements
Statement of Directors’ Responsibilities
for the Financial Statements
Consolidated Income Statement
Consolidated Balance Sheet
Consolidated Statement of
Recognised Income and Expense
Consolidated Cash Flow Statement
Notes to the Consolidated
Financial Statements
Group Accounting Policies
Parent Company Balance Sheet
Reconciliation of Movements
in Shareholders’ Funds
Notes to the Parent Company
Financial Statements
Independent Auditors’ Reports
Principal Subsidiaries
Financial Calendar and
Shareholder Information
Five Year Record
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39
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41
42
43
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www.diplomaplc.com
Design www.energydesignstudio.com
Production Imprima Limited 020 7105 0300
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1
Diploma PLC Annual Report and Accounts 2009
Group at a Glance
Sectors
Life Sciences
31%
of revenues
Seals
30%
of revenues
Controls
39%
of revenues
207 employees
358 employees
248 employees
G
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Geography*
Europe
50%
UK & Eire
25%
US
Continental Europe
25%
Canada
What makes us different
North America
44%
Rest of World
6%
19%
25%
* revenue by destination
Resilient
Revenues
We focus on essential
products and services
funded by customers’
operating rather than
capital budgets, giving
stability to revenues
Attractive
Margins
Our attractive margins
are sustained through
the quality of customer
service, the depth of
technical support and
value adding activities
Focused
Management
In the operating
businesses, strong
committed management
teams execute well
formulated development
strategies
Value Enhancing
Acquisitions
Carefully selected, value
enhancing acquisitions
accelerate the organic
growth strategy and take
us into new but related
markets
Strong
Cash Flow
An ungeared balance sheet
and strong cashflow fund
our growth strategy while
providing healthy dividends
c101340pu005_Front 24/11/09 11:39 Page 2
2
Diploma PLC Annual Report and Accounts 2009
Financial Highlights
Year ended 30 September
Continuing Businesses‡
Revenue
Operating profit*
Operating margin*
2009
£m
160.0
25.6
2008
£m
156.2
26.6
16.0%
17.0%
+2%
-4%
Adjusted profit before tax*† 25.5
Profit before tax
Free cash flow
20.5
23.5
26.8
21.1
17.7
-5%
-3%
+33%
Continuing Businesses‡
Pence
Pence
Adjusted earnings
per share*†
Basic earnings per share
Total dividends per share
Free cash flow per share
14.8
10.8
7.8
20.8
16.0
11.4
-8%
-5%
7.5 +4%
15.6
+33%
* Before amortisation of acquisition intangible assets
† Before fair value remeasurements
‡ The Anachem business has been classified as discontinuing and its results excluded from the analysis in 2009 and 2008.
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 37 is based on these alternative measures and an explanation is set
out in note 2 to the consolidated financial statements.
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Diploma PLC Annual Report and Accounts 2009
Chairman’s Statement
Resilient revenue and profit performance
and strong free cash flow
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Adjusted profit before tax from the continuing
businesses decreased by 5% to £25.5m (2008: £26.8m)
and adjusted earnings per share declined 8% to 14.8p
(2008: 16.0p). Including the discontinuing business,
adjusted profit before tax was £26.7m (2008: £27.5m)
and adjusted earnings per share 15.6p (2008: 16.4p).
The strong cash flow performance is reflected in an
increase of 33% in free cash flow from the continuing
businesses to £23.5m (2008: £17.7m). Cash flow of
£1.7m was added by the discontinuing business and
£12.2m invested in the acquisition of businesses. At 30
September 2009, cash funds had increased by £5.6m to
£21.3m (2008: £15.7m).
In recognition of the strong free cash flow and resilient
earnings performance, the Board proposes to increase
the final dividend by 6% to 5.3p (2008: 5.0p). The total
dividend for the year will increase by 4% to 7.8p
(2008: 7.5p).
Management and Employees
The experience, knowledge and skills of our employees
continue to be a crucial element in the success of
the Group. As the economic outlook has deteriorated
however, there has been a need to reduce the number
of people employed in several of the Group’s
businesses to match the requirements of their
contracting markets. I wish to thank all of our
employees for their understanding and hard work
throughout a challenging year.
Outlook
The Board anticipates that the 2010 financial year will
continue to be challenging and is not planning for early
recovery in trading activity. The Board remains confident
however in the resilience of the Group’s model and the
strength of its cash flow. The Group therefore is well
positioned to take advantage of growth opportunities
which should come with market recovery.
John Rennocks
Chairman
The Diploma Group demonstrated the resilience of its
business model in the face of the global recession which
impacted most markets and geographies from early in
the financial year. The Group drew strength from its
spread of sectors and geographies, as well as the focus
on providing consumable products and services to
specialised market sectors. Where revenues were
reduced, the Group’s businesses reacted quickly to scale
back operating costs and working capital and reduce
balance sheet exposure.
Although underlying Group revenues and operating
profits were reduced, operating margins were held to
a creditable 16% in the continuing businesses and
free cash flow of £23.5m was generated in the year.
This enabled the Group to continue to invest selectively
in new growth initiatives which will bring rewards as
markets eventually recover.
Results and Dividends
Shortly after the financial year end, contracts were
exchanged for the disposal of the Manual Liquid
Handling business of Anachem for cash proceeds up
to a maximum of £8.6m; the results of Anachem for
the year ended 30 September 2009 have been
classified as discontinuing.
In 2009, Group revenue from the continuing businesses
increased by 2% to £160.0m (2008: £156.2m).
Operating profit, before the amortisation of acquisition
intangible assets, decreased by 4% to £25.6m
(2008: £26.6m) and operating margins reduced to
16.0% (2008: 17.0%).
John Rennocks
Chairman
16 November 2009
c101340pu005_Front 24/11/09 14:31 Page 4
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Diploma PLC Annual Report and Accounts 2009
Chief Executive’s Review
The Group focused on short term performance,
while selectively investing for longer term growth
Operating margins were held to a creditable 16.0%
(2008: 17.0%) and operating profits of the continuing
businesses reduced by 4% to £25.6m (2008: £26.6m).
After adjusting for currency effects, acquisitions and
costs of specific overhead reduction programmes,
underlying operating profits reduced by ca. 10%.
Close attention has also been applied to maximising
cash flow and reducing balance sheet exposure.
Working capital and in particular inventory, was sharply
reduced in those businesses with reduced revenues and
this resulted in a strong increase in operating cashflow.
The Group’s total free cash flow from continuing
businesses increased by 33% to £23.5m (2008: £17.7m)
and the Group closed the year with cash balances at
30 September 2009 of £21.3m (2008: £15.7m).
Sector developments
At the sector level, in addition to the focus on short term
performance, the businesses have continued to invest
selectively in new growth initiatives which will position
them well to gain early benefit from any market
recovery. Key developments in each sector are
summarised below.
Life Sciences
The Healthcare businesses in Canada, now managed
together through the newly formed Diploma Canada
Healthcare Inc. (“DCHI”), continued to make good
progress, increasing revenues by 10% in Canadian
dollars and 20% in UK sterling. The DCHI businesses
supply into the public sector funded Healthcare sector
where overall funding has grown steadily over many
years, but with increased focus now on the cost-
effective use of public sector health funds.
Capital expenditure budgets in hospitals have been more
tightly controlled this year and instrument purchases
have been limited to those which can demonstrate
clear performance and/or efficiency benefits. The DCHI
businesses have responded by taking a pro-active
approach to renewing existing supplies contracts and
targeting new contracts. Through these initiatives, there
has been a strong growth in the underlying supplies
component of the businesses, which represents the
larger part of DCHI revenues.
Bruce Thompson
Chief Executive Officer
Strategy and Performance
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.
This year has proved a real test of this strategy as the
Group’s operating businesses, while demonstrating
their resilient characteristics, still felt the effects of the
dramatic downturn in the global economy. The Group’s
revenues from the continuing businesses increased by
2% over the prior year; underlying revenues reduced by
12%, after adjusting for currency translation effects and
contributions from acquisitions.
The downturn impacted early in the year and the
Group’s businesses reacted quickly and decisively to re-
focus efforts on optimising performance at the reduced
revenue levels. Cost reduction programmes implemented
in the first half of the year, reduced the total headcount
and net monthly costs for the continuing businesses by
10% and 6% respectively by the end of the year.
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Diploma PLC Annual Report and Accounts 2009
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DCHI continues to look for opportunities to accelerate
growth by securing new suppliers for the existing
businesses, or by acquiring complementary businesses
which bring these new product lines. The bolt-on
acquisition of Meditech in November 2008, consolidated
DCHI’s position as a leading supplier of products and
services to the growing in-vitro fertilisation (“IVF”)
market, represented by the ca. 30 dedicated IVF clinics
across Canada.
In the European environmental businesses, sales of
consumable products and services have again held up
well, but capital equipment sales have suffered from
decisions by customers to defer capital expenditure.
In response to the 9% reduction in revenues,
operations have been restructured to increase the
focus on segments which offer long term growth
potential, while reducing costs.
Where the growth potential for any Group business is
limited for market or supplier reasons, consideration has
to be given to whether the business may perform better
under different ownership. This was the case with the
Manual Liquid Handling (“MLH”) business of Anachem
Limited. In October 2009, after the year end, a contract
was signed for the disposal of the MLH business to one
of its principal suppliers; the transaction is due to
complete in January 2010.
Seals
The Seals sector businesses have been most impacted
by the downturn in the global economy, since the
principal market drivers are the growth in the industrial
economy and in particular heavy construction. The
core Aftermarket business demonstrated its resilient
characteristics with revenues reducing less than the
broader market. However, the major impact of the
downturn was felt by the Industrial OEM businesses
(RTD Seals and M Seals) and those businesses which
primarily supply to construction equipment dealers
(Bulldog and HKX).
With underlying revenues reducing by 21% (after
adjusting for currency effects and acquisitions),
the main short term priority has been to optimise
performance at the reduced revenue levels. Substantial
cost reduction programmes led to a reduction in the
headcount and monthly operating expenses of 15%
and 9% respectively. Working capital has also been
reduced sharply which generated free cash flow of
£8.6m, an increase of 76% over the prior year.
As in previous cyclical downturns, the Seals businesses
have maintained focused investment in a small number
of strategic projects to ensure that they emerge
stronger and well placed to exploit growth opportunities,
as the markets recover. This year, advantage was taken
of the reduced activity levels to complete the installation
of the new warehouse automation and carousel system
in Hercules’ main Clearwater operations. The investment
in the project this year has been £0.9m and results will
be seen in improved operational leverage, as volumes
increase.
In addition, continued investment has been applied to
establishing the Hercules Europe Aftermarket business,
despite unfavourable current market conditions. A
further £0.3m has been invested in relocating the
business to a new facility, building appropriate inventory
and distributing a new 4-language seal and seal kit
catalogue. As market conditions improve, Hercules
Europe will be well placed to build market share.
Finally, HFPG completed the acquisition of RTD Seals in
January 2009 for a consideration of £10.1m. RTD Seals
is a good sized, long established supplier to industrial
OEMs with a strong market position in the Mid-Western
states in the US. RTD Seals made a positive contribution
of £0.7m to operating profits in very difficult trading
conditions and is well positioned to gain early benefit
from any market recovery.
Controls
With a large proportion of revenues generated 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. In both countries, real
GDP and manufacturing output fell markedly over the
year, with the UK entering recession in late 2008 and
Germany following early in 2009.
While strongly influenced by the general industrial
economic environment, the Controls businesses
focus on more specialised, technology driven market
segments. The businesses have benefited in particular
from the stronger market conditions in the Defence and
Military Aerospace sectors. With a larger part of the
revenues generated from repair, refurbishment and
upgrade programmes, the Controls businesses have
been less exposed to cut-backs and delays in major
capital programmes.
The Medical equipment sector has also remained
strong, but other sectors have performed less
well, including general Industrial, Motorsport and
Commercial Aerospace. Against this market
background, the Controls businesses saw revenues
reduce by 10% in UK sterling terms, a reduction of
15% in local currency terms. As with other sectors,
the Controls businesses have reacted quickly by
implementing cost reduction programmes. Sector
headcount and monthly operating expenses reduced by
10% and 8% respectively over the course of the year.
Further progress was made during the year in building a
more substantial, more integrated business around the
IS-Group. The Cabletec manufactured products were
made available to the IS-Group’s European network of
c101340pu005_Front 24/11/09 11:39 Page 6
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Diploma PLC Annual Report and Accounts 2009
Chief Executive’s Review
The Group continues to deliver against
Key Performance Indicators
sub-distributors. In addition, the portfolio of high
performance wiring and interconnect products, which
share common suppliers, was aligned under a single
management team which will bring benefits in
purchasing, stock management and cross-European
sales opportunities.
Key Performance Indicators (“KPI’s”)
EPS and TSR Growth
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 for the continuing businesses fell back
this year by 8% to 14.8p (2008: 16.0p), but measured
over a longer period, adjusted EPS has grown by an
average of 16% p.a. over the last five years. Over
the same five year period, TSR has grown by 81%
compared with growth of 68% in the TSR for the
FTSE 250 index.
The Group uses four further financial KPI’s which 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. Performance against these
KPIs is summarised below.
Revenue Growth
In 2009, the operating businesses were impacted
by the dramatic downturn in global economies and
markets, but benefited from currency translation effects
and contributions from acquisitions. Revenue from
continuing businesses increased by 2% in the year,
though on an underlying basis adjusted for currency
effects and acquisitions, revenues declined by 12%.
Over five years, revenue has grown at 14% p.a. through
a combination of organic growth and acquisitions.
Operating Margin
As revenues reduced in 2009, cost reduction
programmes were quickly initiated. However, the impact
of these programmes has lagged the revenue reduction
and has not been sufficient to offset the effects of
operational leverage. Operating margins therefore
reduced in the year but remain at a healthy 16.0%,
close to the average of 16.3% over the last five years.
Free Cash Flow
The Group is strongly cash generative over the business
cycle; over the last five years, an average of 99% of
adjusted profit after tax has been converted into free
cash flow. In 2009, in response to the reduction in
trading levels, working capital was reduced sharply
which resulted in a strong increase in operating
cashflow. With capital expenditure focused on a small
number of strategic projects, free cash flow of £23.5m
was generated, an increase of 33% over the prior year.
Return on Trading Capital Employed
Over the previous five years, return on trading capital
employed has remained consistently above 20%.
In 2009, this has reduced to 19.0%, partly because of
the impact of the weak UK sterling on overseas trading
capital employed.
Non Financial KPIs
In the operating businesses, non financial KPIs are used
which are tailored to the particular requirements and
characteristics of each business. At the Group level, non
financial KPIs measure the success in managing two key
elements of the strategy, the management of human
resources and acquisitions.
In 2009, the key employee statistics were broadly
maintained in a year when there were significant
headcount and cost reduction programmes. Two
acquisitions were also completed in a difficult environment
where the supply of good quality acquisitions, with owners
who are ready to sell, has been limited.
The Group has delivered a resilient revenue and profit
performance, together with exceptionally strong free
cash flow, despite the recessionary environment
impacting most of its key markets. The Group has
reacted quickly and decisively in bearing down on
operating costs and working capital, while still investing
in selected growth initiatives. The Group is well
positioned to benefit from any market recovery.
Bruce Thompson
Chief Executive Officer
16 November 2009
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Diploma PLC Annual Report and Accounts 2009
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Five year performance
Adjusted EPS (pence):
16% p.a. growth
TSR growth: +81%
(compared with FTSE 250 +68%)
2009
2008
2007
2006
2005
2004
14.8
16.0
13.1
11.8
9.7
7.0
2009
2008
2007
2006
2005
2004
181
149
209
139
125
100
Financial KPI’s
Revenue growth (£m)
Operating margin (%)
2009
2008
2007
2006
2005
160.0
156.2
124.5
112.1
95.3
2009
2008
2007
2006
2005
Free cash flow* (£m)
ROTCE† (%)
2009
2008
2007
2006
2005
23.5
17.7
11.4
11.8
11.7
2009
2008
2007
2006
2005
16.0
17.0
16.6
16.1
15.7
19.0
22.4
25.5
25.1
23.0
*excluding the sales of surplus land and buildings
†TCE includes goodwill and intangible assets
Non financial KPI’s
Key employee statistics
Acquisition overview
2007
2008
2009
Life Sciences
Seals
Controls
Number of employees
712
833
823
2009 Meditech
RTD Seals
Males as % of total
64%
65%
66%
2008
Hitek
Length of service (years)
5.2
5.2
6.4
2007
AMT
Snijders
M Seals
Cabletec
Average staff turnover
21.1%
20.2%
18.3%
2006
CBISS
Sick days lost per person
2.9
3.4
3.6
2005
HKX
c101340pu005_Front 24/11/09 14:31 Page 8
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Diploma PLC Annual Report and Accounts 2009
Directors and Advisors
Our experienced Board focuses on strategy,
financial control and risk management
JL Rennocks
Non-Executive Chairman
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director and Company Secretary
I Henderson
Chief Operating Officer
JW Matthews
Non-Executive
IM Grice
Non-Executive
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Diploma PLC Annual Report and Accounts 2009
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JL Rennocks FCA (64)*†‡
Non-Executive Chairman
BM Thompson (54)
Chief Executive Officer
Joined the Board in July 2002. He is Chairman of
Nestor Healthcare plc, Deputy Chairman of Inmarsat
plc and a non-Executive Director of Babcock
International Group PLC and of other companies. He
has previously been Executive Director Finance at
Corus Group Plc and Finance Director of PowerGen
Plc and Smith & Nephew plc.
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.
NP Lingwood ACA (50)
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.
JW Matthews FCA (65)*†‡
Non-Executive
Joined the Board in 2003. He is Chairman of Regus
Group 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.
I Henderson (53)
Chief Operating Officer
Joined the Board as a Director in 1998. He was
previously a Director of Glenchewton plc and ANC
Holdings Limited.
IM Grice (56)*†‡
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.
Member of:
* the Remuneration Committee
† the Audit Committee
‡ the Nomination Committee
Investment Bankers:
Lazard & Co
50 Stratton Street
London W1J 8LL
Auditors:
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Corporate Stockbrokers:
Bankers:
Panmure Gordon & Co
Royal Bank of Scotland
Moorgate Hall, 155 Moorgate
London EC2N 6XB
62-63 Threadneedle Street
London EC2R 8LA
Solicitors:
Ashurst LLP
Broadwalk House
5 Appold Street
London EC2A 2HA
10 Diploma PLC Annual Report and Accounts 2009
Strategy and Performance
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 markets which can deliver stable revenue growth
The businesses 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 the Group’s 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.
In Life Sciences, the Canadian businesses supply into the public
sector funded Healthcare sector which, over many years, has
been growing steadily at the rate of 6-7% p.a. Annual variations
are mostly dependant on the periodic additional tranches of
funding provided by individual Provinces. Additional stability
is provided in this sector by multi-year customer contracts for
consumables and service which underpin at least 60% of sector
revenues. The European environmental businesses supply to
utilities and other industrial customers where the demand is
largely driven by Environmental and Health & Safety regulations.
In Seals, the core business is the next day delivery of seals
and seal kits used in the repair and maintenance of heavy
mobile machinery. This focus on the Aftermarket means that
the businesses, though not immune from a market downturn,
are relatively insulated from the extremes of the business and
economic cycles. The risk profile of the business this year has
been improved by extending further into international markets,
with the further investment in Hercules Europe and into
industrial OEMs, through the acquisition of RTD Seals. In 2009,
33% of sector revenues were generated in international markets
outside North America and Industrial OEMs now account for ca.
23% of sector revenues.
In Controls, the businesses offer specialised products and
services used in technically demanding applications. They have
demonstrated a more resilient performance than the general
industrial economies in which they operate, by focusing on more
buoyant markets including Defence, Aerospace and Medical
Equipment.
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 the businesses is to build strong customer
relationships within selected product and market segments.
Attractive margins are sustained over time by providing a range
of services to customers which they value and are prepared
to pay for. 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.
If real value is not provided to customers, margins will erode
over time. The evidence that value is being delivered to
customers is provided by the stability over time of the Group’s
gross margins in specific product and market segments. Over
five years, average group gross margins have remained stable
at ca. 36%. Shorter term movements in gross margin principally
arise due to changes in the mix of business or short term
currency movements.
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 Quality manufacturer-branded products supplied on an
exclusive basis, typically secured with long term distribution
agreements.
n Own brand products supplied or manufactured under
contract.
n
Selective in-house manufacturing and assembly.
Securing quality differentiated products 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, for example through
Somagen’s bolt-on acquisition this year of Meditech.
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11 Diploma PLC Annual Report and Accounts 2009
The Life Sciences and Controls businesses mostly source
high quality, manufacturer branded products under exclusive,
long term contracts. These contracts are typically 3-5 years
in duration but in some cases extend to ten years. These
manufacturer branded products are supplemented selectively
with own brand and manufactured products. The a1-group
has improved competitiveness by developing its own range of
containment products which are now manufactured by reliable
sub-contractors. Cabletec has also had success with its own
range of manufactured products, including flexible braided
products and multi-core cables.
In Seals, the aftermarket products are marketed under the
businesses’ own brand names including Hercules, Bulldog
and HKX. Products are sourced globally from a range of
manufacturers and security of supply is provided by the control
of the brands and the cultivation of multiple alternative suppliers.
In supplying Industrial OEM’s, more emphasis is placed by
M Seals and RTD Seals on the manufacturer brands.
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.
The development of strong managers and management teams
remains a priority for the Group and is key to the successful
implementation of the business strategies. The Group needs 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, the businesses 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 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 45 and they have an
average length of service within their companies of ten years.
Efficient and responsive operations
and information systems
Continuing, substantial investments are made 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
owner-managed companies into more substantial broader based
businesses.
Ongoing investment programmes ensure that the principal
businesses are operating from purpose built or newly expanded
facilities designed for efficient operations and with the scale to
support significant future growth.
Core Strategic Themes
Focus on markets which can
deliver stable revenue growth
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
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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 £0.5m p.a. has been invested in improving the
Group’s information systems. In 2009, the Hercules operation in
Clearwater, Florida invested a further £0.9m in new warehouse
management software and automated stock picking carousels.
Once the businesses have achieved a certain critical mass and
have invested in appropriate facilities and IT systems, they can
generally increase revenues without a significant increase in
working capital. A strong focus on operating costs (80-90%
employee related) and tight management of working capital
ensure resilient operating margins and strong cashflow.
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12 Diploma PLC Annual Report and Accounts 2009
Strategy and Performance continued
Carefully selected acquisitions to accelerate growth
To complement the organic growth strategy, the Group
makes selective acquisitions to accelerate growth and enter
into new, but related markets. The Group’s ungeared balance
sheet, supported by strong and consistent operating cash
flow, provides the resources to support an active acquisition
programme. In 2009, free cash flow of £23.5m was generated
through tight management of working capital.
Clear criteria have been established to guide the Group’s pro-
active acquisition programme and these criteria 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 in making acquisitions is the Group’s
flexibility in structuring transactions. In many of the medium
sized acquisitions, such as AMT and Somagen, where the
objective was to extend into new markets or geographies, less
than 100% of the business has been acquired. In these cases,
owner managers are left 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 the Group, this reduces risk and gives additional
confidence in the quality of the acquisition.
Acquisition
Overview
2009
2008
2007
2006
2005
Life
Sciences
Meditech
Hitek
AMT
CBISS
Seals
Controls
RTD Seals
Snijders
M Seals
HKX
Cabletec
In 2009, the acquisitions of Meditech in Canada and RTD Seals
in the US have been completed. However, the supply of good
quality acquisitions, with owners who are ready to sell, has been
limited. Owners, unless forced to sell, are generally delaying
their decision until there is firmer evidence of a sustained
economic and market recovery.
Key Performance Indicators
EPS and TSR growth
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.
2005
2006
2007
2008
2009
Adjusted EPS (pence)
TSR index (2004=100)
9.7
125
11.8
139
13.1
209
16.0
149
14.8
181
Adjusted EPS is measured relative to RPI growth and the
method of calculation is detailed in note 2 to the financial
statements. Over the last five years, adjusted EPS has grown at
an average rate of 16% p.a.
TSR is a combination of share price growth and reinvested
dividends and is measured by comparison with the FTSE mid-
250 index, as set out on page 33 of the Remuneration Report.
Over the last five years the TSR of Diploma PLC has grown by
81%, compared to growth of 68% in the TSR of the FTSE mid-
250 index.
In support of these principal measures of performance, the
Group uses four financial key performance indicators (“KPIs”)
as described below and 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.
Revenue growth
Revenue growth is reported in detail for the sectors and
operating businesses and is a key driver in the business.
Revenue growth is compared to the relevant market growth
rate to confirm that progress is being achieved in increasing
market share by a combination of sales and marketing initiatives,
product line extensions and geographic expansion. The Group’s
objective is to grow organically at a rate higher than GDP growth
and then to supplement this with carefully selected acquisitions.
2005
2006
2007
2008
2009
Revenue (£m)
Revenue growth
95.3
+15%
112.1
+18%
124.5
+11%
156.2
+25%
160.0
+2%
Over the last five years, average revenue growth of 14% p.a.
has been achieved in the continuing businesses. In 2009, the
businesses were impacted by the dramatic downturn in global
economies and markets, but benefited from currency translation
effects and contributions from new acquisitions. Revenue from
continuing businesses increased by 2% in the year, though
on an underlying basis, adjusted for currency effects and new
acquisitions, revenues declined by 12%.
Operating margin
Operating margin represents operating profit, before
amortisation of acquisition intangible assets, divided by revenue.
It is an important measure for 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.
2005
2006
2007
2008
2009
Operating margin
15.7%
16.1%
16.6%
17.0%
16.0%
In recent years, the Group’s operating margin in the continuing
businesses steadily increased from ca. 12% in 2004 to 17%
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 was 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.
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13 Diploma PLC Annual Report and Accounts 2009
As revenues reduced in 2009, the operating businesses reacted
quickly by bearing down on operating costs. Headcount and
net monthly operating costs for the continuing businesses
were reduced by 10% and 6% respectively during the year.
However, the impact of cost reduction programmes has lagged
the revenue reduction and has not been sufficient to reverse the
effects of operational leverage. Operating margins reduced in
the year, but remain at a healthy 16%.
At the Group and sector 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%, though in 2009 has slipped to 19.0%,
partly because of the impact of weak UK sterling on overseas
TCE.
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.
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.
2005
2006
2007
2008
2009
Free cash flow (£m)
As % of PAT
11.7
103%
11.8
86%
11.4
75%
17.7
93%
23.5
131%
Over the last five years, the Group has generated a robust free
cash flow averaging £15.2m p.a. representing 99% of average
adjusted profit after tax. These figures exclude the one-off
proceeds from the sale of surplus land and buildings from
legacy businesses – which amounted to ca. £20m over the
period 2003-2007.
Free cashflow in 2009 has been particularly strong at £23.5m
representing 131% of adjusted profit after tax. This has been
achieved through a sharp reduction in working capital which
resulted in a strong increase in operating cashflow.
Return on trading capital employed
Return on trading capital employed (“ROTCE”) represents
operating profit, before amortisation of acquisition intangible
assets, as a percentage of trading capital employed (“TCE”),
defined as net assets less net cash and non-operating assets
and liabilities.
2005
2006
2007
2008
2009
ROTCE
23.0%
25.1%
25.5%
22.4%
19.0%
Non financial KPIs
In the operating businesses, non financial KPIs are used which
are tailored to the particular requirements and characteristics of
each business. At the Group level, non financial KPIs measure
the success in managing human resources.
Key Employee Statistics
2007
2008
2009
Number of employees
Males as % of total
Length of service (years)
Average staff turnover
Sick days lost per person
712
64%
5.2
21.1%
2.9
833
65%
5.2
20.2%
3.4
823
66%
6.4
18.3%
3.6
The average number of employees in the continuing businesses
in 2009 has decreased by 1% to 823 (2008: 833). These figures
include the ca. 40 employees added with the acquisitions of
RTD Seals and Meditech. Excluding these additions, the total
headcount in the continuing businesses has reduced by 10%
over the year. The proportion of males to females is broadly
unchanged with males accounting for 66% of the total (2008:
65%); average length of service has increased to 6.4 years (2008:
5.2 years). The other employee KPIs have remained very stable
given the cost reduction programmes within the businesses.
Average staff turnover has reduced to 18.3% (2008: 20.2%) and
sick days lost per person were 3.6 days (2008: 3.4 days).
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14 Diploma PLC Annual Report and Accounts 2009
Sector Review: Life Sciences
Sector Definition and Scope
The Life Sciences sector businesses supply a range of
consumables, instrumentation and related services to
clinical, environmental and industrial applications.
The Canadian Healthcare businesses are managed through
Diploma Canada Healthcare Inc (“DCHI”) . The two principal
operating 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. It is
also a leading supplier of products and services to the growing
in-vitro fertilisation (“IVF”) market. 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 DCHI’s revenues come
from multi-year customer contracts with hospitals and buying
groups.
The a1-group is a supplier to Environmental testing laboratories
and to Health & Safety engineers. 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. The group supplies a range of specialised
analysers for detecting and measuring specific elements in
liquids, solids and gases. It also supplies gas detection devices,
a range of containment enclosures for potent powder handling
and equipment and services for the monitoring and control of
environmental emissions.
In October 2009, a contract was signed for the disposal of the
manual liquid handling (“MLH”) business of Anachem Limited
with the transaction due to complete in January 2010. Anachem
is being treated in these accounts as a discontinuing business
held for sale and its revenues and profits have been excluded
from the sector analysis.
Market Drivers
The DCHI businesses 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
2005
2006
2007
2008
Growth
% p.a
Public sector health
expenditure in Canada
Total healthcare
expenditure
99.3
105.8
113.2
120.3
6.8%
141.4
151.3
161.6
171.9
6.8%
Source: Canadian Institute for Health Information
The Canadian Healthcare industry is a proven, long term
growth environment for medical device distribution. A growing,
aging and well-educated patient population demands very
high standards of service delivery, helping to ensure on-going
growing demand. The Canadian Health Act (“the Act”) ensures
universal coverage for all insured persons for all medically
necessary services provided by hospitals, physicians and other
healthcare providers. The Act is a piece of federal legislation,
with the Provinces responsible for the delivery of the healthcare
services. The strength of the legislation comes in the Federal
Government’s ability to control delivery through Federal-
Provincial transfer payments, which represent the largest source
of revenues for the Provinces.
The relative stability and consistency in funding by each of
the Provinces, guaranteed through the Act, ensures that the
market remains well funded through the economic cycle. 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 products and
services supplied by the DCHI businesses 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
procedures in hospitals.
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. In 2009, the market for consumable
products has shown resilience, but capital equipment sales
have suffered from decisions by customers to defer capital
expenditure in the face of the economic recession. This initial
impact was seen in the UK, but a similar trend is now being
experienced with customers in Continental Europe.
Sector Performance
The continuing Life Sciences businesses increased revenues
in 2009 by 11% to £49.9m (2008: £45.0m). Sector revenues
benefited on translation from the stronger Canadian dollar and
Euro relative to UK sterling and a contribution from the newly
acquired Meditech business in Somagen. On a comparable and
constant currency basis, sector revenues were broadly flat year
on year. Operating profits increased by 23% to £10.6m (2008:
£8.6m), with operating margins increasing to 21.2% (2008:
19.1%).
Capital expenditure in the sector was £0.6m, including £0.5m
invested in field equipment for placement by the Canadian
Healthcare businesses. The balance was invested in hire
equipment to help service customers of the a1-group. Free cash
flow of £7.6m was generated in the sector (2008: £6.8m).
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15 Diploma PLC Annual Report and Accounts 2009
The DCHI businesses increased revenues by 10% in Canadian
dollars and 20% in UK sterling terms. The businesses continued
to make good progress in markets where overall funding
remains steady, but increased focus is being placed on the
most cost effective use of funds. Although overall Healthcare
funding has remained steady during the economic downturn,
hospitals have been conscious of the need to be seen to use
funds prudently. As a result, there has been a marked increase
in the use of formal tenders for both capital expenditures and
contracted consumables. There are also examples of cost
reduction initiatives at a Provincial or Regional level, such as
grouped purchasing contracts and stated targets for reducing
the number of operating procedures. The DCHI businesses
have responded by strongly selling the benefits to hospitals of
proprietary products, supplied as part of longer term contracts
for competitively priced packages of products. As a result
the underlying supplies component of the business, which
represents the larger part of DCHI group revenues, saw sales
increase by 16% year on year.
AMT reported continued growth in its core Electrosurgery
business with increasing penetration of its proprietary smoke
evacuation products, benefiting from the new Canadian advisory
standard for the capture of smoke plume. There were also
strong sales of other consumable products, including grounding
pads and surgical instruments. Revenues were given a welcome
boost in the second half of the year by an exceptional order
from a single Province for the supply of face shields, to protect
hospital employees from the transfer of swine flu. Depending
on the development of swine flu as a pandemic, there may be
further orders from other Provinces for these face shields in
the current year. The Endoscopy business saw good growth in
its sales of consumable products, including argon probes and
flexible endoscopic instruments. Sales of capital equipment
were reduced against a strong prior year comparative.
For Somagen, there remains pressure on its hospital laboratory
customers, where the focus remains firmly on cost reduction
and efficiency. The laboratories have been targeted as areas
where costs can be managed through limits on services, testing
menus and reimbursements. Responding to these pressures,
Somagen has been very successful in placing new instruments
which provide higher levels of automation and operational
efficiency. The new Sebia Capillarys platform and reagents are
proving very successful with higher volume laboratories, which
are facing a shortage of skilled technologists and increasing
workloads. The Sakura products for pathology laboratory
automation are also filling the need for larger instruments, with
higher throughput capability.
In November 2008, Somagen completed the small bolt-
on acquisition of Meditech, a Montreal based supplier of
in-vitro fertilisation (“IVF”) products. This acquisition has
now established Somagen as a leading supplier of products
and services to the growing IVF market, represented by
approximately 30 dedicated clinics across Canada.
The a1-group experienced an overall reduction of 9% in
revenues. The analyser and containment businesses delivered
modest revenue growth, with the centre of activity moving
towards Continental Europe and the results benefiting on
translation from the stronger euro relative to UK sterling.
The businesses are increasing their focus on core competencies
in the areas of containment technologies for personal
protection and elemental analysis with related automation.
In the containment business, new contracts have been won
during the year for the supply of customised stainless steel
Life Sciences Statistics
Revenue
2009
2008
£49.9m
£45.0m
Operating Profit*
£10.6m
£8.6m
Operating Margin*
21.2%
19.1%
Free Cash Flow
£7.6m
£6.8m
Trading Capital Employed
£45.5m
£44.2m
ROTCE
23.3%
19.4%
*before amortisation of acquisition intangible assets.
Customers
Clinical
Utilities
Life Sciences Research
Chemical & Petro-chemical
Industrial & Other
Geography
North America
Europe
Rest of World
Products
Consumables
Instrumentation
Service
77%
73%
67%
8%
6%
5%
4%
26%
1%
23%
10%
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solutions for the personal protection of technicians in the
research laboratories of the major European pharmaceutical
companies. These products, supplied under the a1-safetech
brand and manufactured under contract, combine distinct
ergonomic advantages with unique handling and safety
features. The a1-group is also a leading supplier of elemental
analysers (branded a1-envirotech) which respond to the needs
of the petrochemical industry to measure sulphur and nitrogen
accurately at low levels. In parallel, new products are being
introduced to measure contamination by halides in petrochemical
and bulk chemistry products.
CBISS experienced a continued slowdown in the market for
new continuous emissions monitoring systems (“CEMS”). The
longer term demand is still forecast to be strong for new CEMS
installations in energy from waste (“EFW”), Biomass and power
applications; however, projects are being deferred due to lack of
funding or extended planning processes. Orders for new capital
equipment are therefore significantly reduced and the business
is currently relying on the base business, generated from
service contracts. CBISS has responded to the lower activity
levels in 2009 by restructuring itself operationally to improve
efficiency, reduce costs and lead times and complete MCERTS
accreditation of CEMS software.
Anachem is being treated in these financial statements as
a discontinuing business held for sale and its revenues of
£15.7m (2008: £16.1m) and operating profits of £1.2m (2008:
£0.7m) have been excluded from the sector analysis.
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16 Diploma PLC Annual Report and Accounts 2009
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 (“HFPG”) comprises Hercules
Sealing Products (“Hercules”), Bulldog Hydraulic & Gaskets
(“Bulldog”), RTD Seals 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. In
Europe, Hercules has centred its operations in the Netherlands.
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 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.
RTD Seals, acquired in January 2009, has operations in
Minneapolis, Minnesota and Chicago, Illinois. RTD Seals
supplies seals, O-rings and custom moulded and machined parts
to a range of Industrial OEM customers, cylinder manufacturers
and sub-distributors.
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.
Market Drivers
The core business of HFPG is the supply of sealing products to
the mobile machinery Aftermarket, where HFPG supplies into
a broad range of applications in heavy construction, logging,
mining, agriculture, material handling (lift trucks, fork lifts and
dump trucks) and refuse collection.
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
main customers are machinery and cylinder repair shops, engine
and transmission re-builders and tractor parts distributors.
The principal market drivers are the growth in the general
industrial economy 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.
2005
2006
2007
2008
Growth
% p.a.
US real GDP growth(1) +3.1%
+2.7%
+2.1%
+0.4%
2.1%
Annual US construction
spending $billion(2)
US mobile hydraulic
shipments $million(3)
1,102
1,168
1,151
1,072
(0.9)%
2,724
2,766
2,626
2,913
2.2%
Sources:
(1) Bureau of Economic Analysis – US Department of Commerce
(2) US Census Bureau
(3) National Fluid Power Association
In the US, HFPG benefited from the strong growth in the
economy from mid-2003 to mid-2006. Into 2007 and 2008, the
residential construction sector declined due to over supply of
homes and the sub-prime mortgage crisis. In late 2008 and
2009, the recession broadened and deepened to impact the
whole US economy. In spite of the announcement of national
stimulus packages, funding has remained limited for national and
municipal infrastructure and maintenance programmes and the
house building sector has remained depressed.
In Canada, there has been significantly lower economic activity
in the key industrial regions close to the US border which are
dependant on demand from the US market. The Oil and Gas
industry in Alberta, which fuelled economic growth in recent
years, has also slowed as lower oil prices have constrained the
establishment of new extraction sites in the oil sands territories.
In Europe, FPE and Hercules Europe supply to a broad range of
industrial users including construction, agriculture and material
handling. Growth has remained sluggish in these sectors in
recent years and this was exacerbated by the general downturn
in the economy – in the UK from late 2008, followed by
Continental Europe in early 2009.
In the Industrial OEM sector served by RTD Seals and M Seals,
manufacturers have cut back production and reduced inventories
to respond to the reduction in general demand. There are some
signs that this business is stabilising, but customers remain very
cautious as they wait to see whether there will be a sustained
recovery.
Sector Performance
The Seals businesses saw revenues increase in UK sterling
terms by 13% to £48.2m (2008: £42.6m). However, the results
benefited on translation from the stronger US dollar and euro,
relative to UK sterling and from the first year contribution from
RTD Seals. Underlying sector revenues decreased by 21%, after
adjusting for currency effects and for the acquisition.
The businesses responded to the reduced revenues with
substantial cost reduction programmes which led to a reduction
of 15% in headcount and of 9% in monthly operating costs.
However, these programmes lagged the revenue reduction
and were not sufficient to offset the negative impact from
operational leverage. As a result, operating profits reduced by
18% to £5.5m (2008: £6.7m) and operating margins reduced to
11.4% (2008: 15.7%).
In response to the reduction in trading activity, working capital
was reduced sharply which resulted in a strong increase in
operating cashflow. Capital expenditure in the sector was £1.1m
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17 Diploma PLC Annual Report and Accounts 2009
with the major element being investment in the new warehouse
automation system in Hercules’ main Clearwater operations.
Strong free cash flow of £8.6m was generated in the year
(2008: £4.9m)
HFPG saw underlying revenues (excluding the RTD Seals
acquisition) reduce by 23% in US dollar terms. The core
Hercules business, with its focus on the Aftermarket,
demonstrated its resilient characteristics, with revenues
reducing less than the broader market. Focused marketing
initiatives have been implemented to capture market
share during the downturn, including the launch of a new
e-commerce site, monthly new seal and seal kit product
introductions and special product promotions. There was also
growth in the Seals-on-Demand business from the custom
machining of over-sized and out-of-production seals.
Internationally, the main focus has been on the strategic
development of the Aftermarket business in Europe. Despite
unfavourable market conditions during the year, investment
has continued in establishing the Hercules Europe business to
ensure that it is well positioned to exploit the market recovery
when it comes. The business has been relocated to a larger
facility in the Netherlands and inventory has been built of ca.
1,300 seal kit products for popular European heavy equipment
models. A new website has been established and a 4-language
seal and seal kit catalogue, tailored for the European market,
has been distributed. Outside of the European initiative,
Hercules’ international sales and marketing efforts have been
focused on Latin America and Asia.
The major impact of the downturn has been experienced by
the Bulldog, HKX and RTD Seals businesses, which supply
to construction equipment dealers and Industrial OEMs.
Bulldog has seen a significant fall in demand for its products,
exacerbated by extensive de-stocking by customers who
are typically distributors and dealers, rather than end-users.
As with Hercules, Bulldog has worked hard to maintain or
improve market share in a depressed market through sales and
marketing initiatives and new product introductions.
HKX has been impacted by the dramatic reduction in the
market for new excavators in North America. In 2009, sales
of new excavators are down by ca. 70% from the peak in
2005. HKX’s revenues have reduced by ca. 40% over the
same period which shows that it has been able to increase
penetration in a severely depressed market. This has been
achieved by introducing attachment kit programmes to new
customers, as well as improving the product and service
offering. HKX has also responded to the depressed market for
new equipment by developing kit programmes targeted at the
refit sector.
In January 2009, HFPG acquired RTD Seals, a leading US
based supplier of seals, O-rings and custom moulded and
machined parts. RTD Seals is a good sized, long established
supplier to Industrial OEMs with a strong position in the Mid-
Western US states. This acquisition, when supported by
HFPG’s broader sales and marketing resources, will provide
a platform for building HFPG’s Industrial OEM business in
North America. RTD Seals has been impacted this year by the
significant downturn in industrial activity in the US. However,
it contributed £6.9m to revenues and £0.7m to operating profit
in a very difficult trading environment and is well positioned to
benefit early from any market recovery.
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Seals Statistics
Revenue
2009
2008
£48.2m
£42.6m
Operating Profit*
£5.5m
£6.7m
Operating Margin*
11.4%
15.7%
Free Cash Flow
£8.6m
£4.9m
Trading Capital Employed
£38.2m
£30.1m
ROTCE
14.6%
22.5%
*before amortisation of acquisition intangible assets.
Customers
Heavy Construction
Industrial OEMs
Logging & Agriculture
Dump & Refuse Trucks
General Industrial
Geography
North America
Europe
Rest of World
Products
Seals & Seal Kits
O-rings
Attachment Kits
Gaskets
Cylinders & Other
49%
67%
68%
23%
5%
4%
19%
20%
13%
9%
9%
6%
8%
In response to the reduced revenues, HFPG has implemented
cost reduction programmes which have resulted in a 17%
reduction in headcount and a 10% reduction in monthly
operating expenses. There continues to be a focus on
operational efficiency and on further opportunities to reduce
working capital, with resources being planned assuming no near
term recovery in the markets.
Investment has been maintained in the new warehouse
automation and carousel system project in Hercules’ Clearwater
operations to ensure that, when the market eventually recovers,
the business will emerge stronger and well placed to exploit
growth opportunities.
The FPE business in the UK was impacted by the general
economic downturn in the UK and by a sharp decline in exports
to sub-distributors in Continental Europe, resulting in a 11%
decline in revenues. As with the US, there are some signs of
stability returning to the market, but with recovery expected
to be slow. M Seals has also been substantially impacted by
the economic downturn as its major OEM customers reduced
production and took extended summer shutdowns. Good
progress in supplying the major wind turbine manufacturers has
not been sufficient to offset the general downturn in activity
and revenues have fallen sharply in the second half of the year.
There are few signs yet of demand returning to pre-recession
levels and recovery is expected to be slow.
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18 Diploma PLC Annual Report and Accounts 2009
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 Indianapolis
and Mooresville, in the US. The IS-Group has also established
a representative office in Beijing, with an initial focus on the
Chinese commercial aerospace repair and Aftermarket sector.
In Germany, after a period of modest recovery in 2006 and 2007,
mainly driven by export performance, growth slowed through
2008. The German economy entered recession later than the
US and UK economies, with the fall in output accelerating at the
beginning of 2009. The decline in GDP is projected at ca. 6% for
2009 with activity forecast to pick up slowly during the course
of 2010.
While strongly influenced by the UK and German economies,
the Controls sector businesses focus on more specialised,
technology driven market segments, including the Defence and
Aerospace sectors:
2005
2006
2007
2008
Growth
% p.a.
German Defence equipment
budget € billion(1)
8.1
8.2
8.6
9.5
5%
UK Defence capital
equipment £billion(2)
Commercial Aerospace
market growth(3)
6.7
6.4
7.0
7.7
5%
+7.2%
+5.1%
+7.2%
+1.8%
5%
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 Guildford and Bolton, in the UK.
Sources:
(1)
(2)
(3)
Federal Ministry of Finance – Germany.
UK Government’s Expenditure Plans 2008/9
Boeing and Airbus market outlook publications – revenue passenger
kilometres
In Germany, 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.
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:
2005
2006
2007
2008
Growth
% p.a.
UK real GDP growth(1) +2.1%
+2.8%
+3.0%
+0.7%
2.1%
UK Production index(2)
100.0
101.6
102.2
99.2
(0.3)%
Germany real
GDP growth(1)
+0.9%
+3.2%
+2.6%
+1.0%
1.9%
Sources:
(1) Organisation for Economic Co-operation and Development (OECD)
(2) The Office of National Statistics – Index of Production for Manufacturing
Over the period 2005 – 2007, real GDP in the UK grew at an
average rate of 2-3% p.a. but manufacturing has remained
relatively flat. The economy slowed through 2008 and then
entered a severe recession in the final quarter of the year. Real
GDP and manufacturing output are projected to fall by ca. 4%
and 10% respectively in 2009, with only slow recovery forecast
for 2010.
The combined Defence capital budgets in the UK and Germany
have grown at an average of ca. 5% p.a. over the last five years.
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. As a result, they are less exposed to cutbacks
and delays in major defence programmes. Filcon has a greater
involvement in the major capital projects through its supply of
connectors; however, Filcon has its products designed-in to a
broad range of air, sea and land applications and is not over-
exposed to individual projects.
In the commercial aerospace sector, again the IS-Group and
Sommer focus more on repair, refurbishment and upgrades and
they benefited from the buoyancy in the overall market which
showed strong growth in the five year period to 2008. Boeing
and Airbus are still projecting longer term growth of ca. 5% p.a.
in revenue passenger kilometres, but the industry has slowed
dramatically with the global economic downturn. The effects are
seen most dramatically in the reduction in projected new aircraft
orders (less than 300 in 2009 compared with ca. 1500 in 2008).
Although the backlog remains strong, the reduced level of new
orders along with cancellations of existing orders will lead to a
further slow-down in production rates.
In Motorsport, demand has been impacted by the range of
cost cutting measures, including testing restrictions, being
implemented in Formula One and other motor racing series.
Other specialised, technically driven markets including
Medical, have remained more resilient than the general
industrial sectors, though they have not been immune from the
economic downturn.
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19 Diploma PLC Annual Report and Accounts 2009
Sector Performance
The Controls businesses saw revenues decrease in 2009 by
10% to £61.9m (2008: £68.6m); on a constant currency basis,
revenues reduced by 15%. Sector operating profits decreased
by 16% to £9.5m (2008: £11.3m), with operating margins
reduced to 15.3% (2008: 16.5%).
As with other sectors, cost reduction measures were
implemented in the Controls sector businesses to respond to
reductions in revenues. Sector headcount and monthly operating
expenses reduced by 10% and 8% respectively during the year.
With only £0.1m being invested in the sector during 2009,
strong free cash flow of £8.9m was generated (2008: £8.3m).
The UK Controls businesses saw revenues decrease by 9%
with lower sales in all market sectors, except the core Defence
and Military Aerospace markets, which have benefited from
ongoing upgrade, refurbishment and maintenance programmes.
In the land systems segment, the Force protection programme
of electronic counter measures, vehicle camera systems,
protected weapon stations and the tactical support vehicle
programmes have contributed to IS-Group revenues. The military
marine segment revenues have closely tracked the ongoing
build programmes for the Astute submarine and the Type 45
frigates. In Military Aerospace, again robust revenues have
been supported by a range of ongoing programmes, including
the Eurofighter, unmanned air vehicles, Nimrod and the various
helicopter programmes.
Other markets for the IS-Group have been impacted by the
general economic slowdown, as well as by sector specific
factors. In Civil Aerospace, the IS-Group supplies products
principally for the initial fit-out of aircraft interiors and then
their subsequent upgrade and refurbishment; revenues have
been softer here in line with the general slowdown in new
aircraft production. In Motorsport, demand has been impacted
by the range of cost cutting measures, including testing
restrictions, being implemented in Formula One. The cut-backs
in sponsorship by major automotive companies is also having a
significant impact on other series, especially World Rally
and NASCAR.
IS-Group’s manufactured products supplied to Energy and
Industrial customers and the Hawco business in general, have
been more exposed to the major downturn in UK industrial
markets. Declining end-user demand and over-stocking at
customers have contributed to reduced revenues. The Hitek
calibration services business, which was transferred into Hawco
at the beginning of the year, has maintained revenues and
shown a good degree of resilience.
The German Controls businesses saw revenues decrease by
10% in UK sterling terms and by 22% in local currency terms.
The market downturn came later to Germany than the UK
and the US, but its impact was felt strongly in the second half
of the year. For Sommer, significantly weaker trading activity
was experienced in the supply of components to Germany’s
traditionally strong Industrial, Automobile and Motorsports
sectors. The Defence and Aerospace sectors were also
impacted, but to a lesser degree. The Medical market proved to
be an exception, with growth being generated from several long
standing projects coming to fruition, as well as from a good level
of repeat business. The business is centred on the provision of
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Controls Statistics
Revenue
2009
2008
£61.9m
£68.6m
Operating Profit*
£9.5m
£11.3m
Operating Margin*
15.3%
16.5%
Free Cash Flow
£8.9m
£8.3m
Trading Capital Employed
£30.0m
£27.3m
ROTCE
31.7%
41.4%
*before amortisation of acquisition intangible assets.
Customers
Aerospace & Defence
Electronics
Motorsport
Rail, Energy & Utilities
Medical & Scientific
Industrial & Other
Geography
United Kingdom & Eire
Continental Europe
Rest of World
Products
Wire & Cable
Connectors
Control Devices
Fasteners
Equipment & Components
36%
12%
11%
8%
5%
28%
5%
52%
43%
45%
22%
16%
5%
12%
protective sleeves for stents, laparoscopic and cardiovascular
instruments and catheters, where demand has remained strong.
The Utilities market in Germany has also remained stable and
sales here advanced modestly.
The principal markets for Filcon’s connector products are
Defence, Aerospace and Motorsport. Unlike the other Controls
businesses, Filcon supplies a high proportion of its products
to capital projects. As the general economy has slowed in
Germany, there have been increasing levels of project cut-backs
and delays. Filcon has its products designed-in to a wide range
of applications and is therefore not over-dependant on single
projects. The backlog of orders remains solid and call-offs are
now resuming.
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20 Diploma PLC Annual Report and Accounts 2009
Finance Review
Continuing Businesses
Revenue increased by 2% to £160.0m (2008: £156.2m) and
operating profit, before amortisation of acquisition intangible
assets, decreased by 4% to £25.6m (2008: £26.6m). The
operating margin, before amortisation of acquisition intangible
assets, reduced to 16.0% (2008: 17.0%) reflecting in particular,
the significant operational leverage in the Seals businesses.
Free Cash Flow and Cash Funds
The Group’s free cash flow from the continuing businesses,
which is before expenditure on acquisitions or returns to
shareholders, increased by £5.8m to £23.5m. With a further
£1.7m of free cash flow being contributed by the discontinuing
business, aggregate total free cash flow of £25.2m represented
134% of adjusted profit after tax (2008: 92%).
The results this year benefited from currency gains of £14.8m
to revenue and £2.4m to operating profit, which arose on the
translation of the results of the overseas businesses. In addition
the businesses acquired in 2009 and 2008 contributed £1.2m
to operating profits on revenue of £8.4m. In response to the
difficult trading environment this year, £0.6m of costs were
incurred on specific cost reduction programmes which should
pay back in the coming financial year. The UK and Canadian
businesses also suffered an impact on gross margins from
the depreciation of local currencies on products purchased in
overseas markets. After adjusting for these items, underlying
revenues decreased by ca. 12% and operating profits, before
amortisation of acquisition intangible assets, decreased by
ca. 10%.
Adjusted profit before tax (which is a defined alternative
performance measure, as discussed below) decreased 4.9% to
£25.5m (2008: £26.8m), after net finance expense, excluding
fair value remeasurements, of £0.1m (2008: income of £0.2m).
Adjusted earnings per share fell 7.5% to 14.8p compared with
16.0p last year, reflecting the larger proportion of earnings
contributed in 2009 by those businesses owned in part by
minority shareholders.
IFRS profit before tax, which is after amortisation of acquisition
intangible assets of £3.1m (2008: £2.7m) and fair value
remeasurements of £1.9m (2008: £3.0m), was £20.5m (2008:
£21.1m) and IFRS basic earnings per share were 10.8p (2008:
11.4p).
Discontinuing Business
The results of Anachem, which was formerly part of the
Life Sciences sector, have been disclosed separately in the
consolidated financial statements as a discontinuing business.
Contracts were exchanged in October 2009 for the sale of the
MLH business, which represents the largest part of Anachem,
and will realise proceeds of up to £8.6m. On completion in
early January 2010, the net assets of the MLH business are
expected to be ca. £1.4m. The sale contract provides that the
residual pension liabilities in the closed defined pension scheme
of Anachem will be transferred, prior to completion, to Diploma
Holdings PLC. At 30 September 2009 the accounting deficit in
the Anachem pension scheme was £3.0m, out of the Group
deficit of £4.7m, before deferred tax. Further information on the
results of Anachem are set out in note 22 to the consolidated
financial statements.
Taxation
The Group’s adjusted effective tax charge represented 29.8%
(2008: 29.1%) of adjusted profit before tax. This year’s
effective rate benefited from the reduction in UK corporate
tax rates to 28% from 29% in 2008. However this was not
sufficient to offset the benefit to last year’s tax charge of one-
off adjustments made to prior year tax returns. The Group’s
adjusted effective tax rate in any particular year will also depend
on the geographic mix of profit made by the Group.
Operating cash flow from the continuing businesses increased
by £6.4m to £34.2m (2008: £27.8m) and was boosted by
a reduction in working capital of £6.1m, compared with an
increase of £1.3m last year. The reduction in working capital
arose principally from a targeted reduction in stock across the
Group to match the lower trading activity; a reduction in trade
receivables which followed from reduced revenues, was largely
offset by a similar reduction in trade payables.
At 30 September 2009, working capital in the Group’s operating
businesses remained unchanged from 2008 at 17.6% of Group
revenue, reflecting the reduction in working capital in line with
the decrease in revenue.
Group tax payments increased by £1.2m to £9.0m (2008:
£7.8m), largely reflecting the impact of AMT moving to a
monthly tax payment basis in 2009, as well as having to pay its
2008 annual tax liabilities.
Capital expenditure of £1.8m (2008: £1.6m) represented 82%
(2008: 73%) of annual depreciation and included £0.9m on
a major project to complete the installation of warehouse
automation in the Seals facility in Clearwater. A further £0.6m
was spent on acquiring field equipment in support of contracts
in the Life Sciences businesses and the balance was spent on
various tooling projects and on small upgrades to the general IT
infrastructure across the Group.
The Group spent £11.1m (2008: £7.6m) on the acquisition of
businesses during the year and paid deferred consideration of
£1.1m (2008: £0.3m), as described below. At 30 September
2009 the Group’s cash funds had increased by £5.6m to
£21.3m (2008: £15.7m). The Group continues to maintain
a £20m committed revolving bank facility which expires on
23 November 2010, together with £5m of working capital
facilities. None of these facilities were utilised at 30 September
2009.
Related Party Transactions
The minority shareholders in Somagen, AMT and M Seals are
also directors and employees of these companies and as such
represent related parties. During the year, dividends of £0.7m
(2008: £0.9m) were paid to the minority shareholders and £1.1m
was paid to the vendors of AMT as deferred consideration in
respect of the final settlement of their performance payment.
At 30 September 2009, the Group also has a liability to purchase
the minority shareholdings in AMT, Somagen and M Seals. The
aggregate liability is estimated at £13.1m (2008: £11.2m), of
which ca. £3.1m will be payable in December 2009 to acquire
the final 8.2% minority shareholding in Somagen; the balance
will be payable between 1 October 2010 and 31 December 2012
to acquire the minority shareholdings in AMT and M Seals. In
2008, £3.7m was paid to the minority shareholders in Somagen
to acquire 11.8% of the share capital. These liabilities arise under
put/call options entered into at the time of acquisition and are
based on the Directors’ estimate of the Earnings Before Interest
and Tax of these businesses when the options crystallise.
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21 Diploma PLC Annual Report and Accounts 2009
Based on the expected performance of these businesses, the
Directors have reassessed the potential liability at 30 September
2009 to acquire the remaining outstanding minority interests.
The fair value remeasurement of these options has led to a
charge of £1.9m (2008: £3.0m) 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.
£96,000 pa (2008: £42,000 pa) from 1 October 2009. A triennial
actuarial funding valuation of the Anachem scheme is due as of
30 September 2009.
Net of deferred tax, the aggregate deficit in the defined benefit
schemes at 30 September 2009 was £3.4m (2008: £1.2m),
which equates to 2.8% (2008: 1.1%) of total shareholders’
equity.
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.
Acquisitions, Intangible Assets and Goodwill
During the year the Group acquired two businesses, in support
of broadening its Life Sciences and Seals businesses, for
£11.1m, in aggregate; deferred consideration payable of £0.6m
has been provided at 30 September 2009 in respect of each
of these businesses, as described further in note 21 to the
consolidated financial statements. The acquisition of RTD in
January 2009 was partly funded by drawing down £4.6m of US$
borrowings from the revolving bank facility. These borrowings
were repaid in full during the year from the operating cash flow
of the US businesses.
Acquisition intangible assets of £4.2m were recognised in
connection with these acquisitions, as well as goodwill of
£3.5m, reflecting the amount paid for the acquisitions during
the year, in excess of the value of the net assets. This goodwill
largely comprises the value in each of these businesses relating
to the product know-how held by the employees, prospects for
sales growth in the future (from both new customers and new
products) and operating cost synergies.
The Directors have carried out an impairment review of the
total Group goodwill of £59.6m held at 30 September 2009 and,
despite the weakened trading environment, remain satisfied that
none of this goodwill has been impaired.
Pensions
Pension benefits to employees are provided through defined
contribution schemes at an aggregate cost in 2009 of £0.7m
(2008: £0.6m). In addition, the Group retains a small number of
legacy defined benefit pension schemes in the UK which are
closed to future accrual. At 30 September 2009 the accounting
deficit in these defined benefit schemes had increased by £3.0m
to £4.7m (2008: £1.7m). The upheaval in the financial markets
caused by the banking crisis has contributed to a sharp reduction
in bond yields, which are used to value the pension liabilities.
This led to an increase in the gross pension liability of £4.6m
to £18.8m (2008: £14.2m) which more than offset a strong
increase in the market value of the underlying investments of
£1.6m and the Group’s cash contribution to the schemes this
year of £0.2m.
During the year, a triennial actuarial funding valuation of the
PLC scheme was completed, as of 30 September 2008.
This valuation, using tighter mortality assumptions, resulted
in a reduction in the ongoing funding level of this scheme to
84% (2008: 96%). As a consequence, the Group has agreed
to increase its annual contributions to fund this deficit to
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Capitalisation and Dividends
At 30 September 2009, the number of shares in issue is
113.2m, of which 0.9m are held by the Company’s employee
benefit trust. Shareholders’ funds, which represents the Group’s
total capital, increased by £13.3m to £121.4m, due to the effect
of exchange rate movements and 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 2009 by £11.6m to £116.1m (2008: £104.5m), of
which £80.8m (2008: £70.2m) was accounted for by goodwill
and acquisition intangible assets. The Group’s return on
trading capital employed decreased to 19.0% (2008: 22.4%) at
30 September 2009. This reduction reflects the lower operating
profits earned this year, but was exacerbated by the impact of
the increase in overseas trading capital at 30 September 2009,
resulting from the weakening in UK sterling.
Following the Board’s announcement last year that it intended
to move dividend cover towards 2.0 times, based on adjusted
earnings per share, the amount distributed to shareholders in the
form of ordinary dividends increased by £1.5m in 2009 to £8.4m
(2008: £6.9m).
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 which are reflected in the consolidated
financial statements prepared in accordance with International
Financial Reporting Standards (“IFRS”), as adopted by the
European Union.
The Group has not been required to adopt any other new
accounting standards during the year which have had a material
impact on the consolidated financial statements.
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22 Diploma PLC Annual Report and Accounts 2009
Risks and Uncertainties
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
n
n
n
The Group’s businesses operate in three different sectors
with different cyclical characteristics and across a number
of geographic markets.
The businesses offer specialised products and services 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 supplier represents more than 15%
of Group revenue and only six 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
n
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.
Regular review meetings and adherence to contractual
terms.
Regular reviews of inventory levels.
Bundling and kitting of products and provision of added
value services.
Periodic research of alternative suppliers as part of
contingency planning.
Loss of major customer(s)
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.
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23 Diploma PLC Annual Report and Accounts 2009
23 Diploma PLC Annual Report and Accounts 2009
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The nature of the Group’s businesses, however, ensures
that there is not a high level of dependence on any individual
customers. No 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.
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 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.
n
Communications re-route to other branches or interim
location.
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24 Diploma PLC Annual Report and Accounts 2009
Risks and Uncertainties continued
n
n
n
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.
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
n
n
n
n
Full data back-ups as a matter of routine.
Back-up tapes stored in fire proof safes.
Back-up servers identified.
Communication re-route options identified.
Service contracts with IT providers with access to
replacement servers.
Uninterruptible power sources and back-up generators
where required.
n
Virus checkers and firewalls.
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 2009, ca. 70% of the Group’s
revenue and operating profits from continuing businesses were
earned in currencies other than UK sterling. In comparison to the
prior year, the net effect of currency translation was to increase
revenue by £14.8m and to increase operating profit by £2.4m.
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 acquisition
intangible assets and tax, by approximately £1.8m (7.0%) (2008:
£2.0m (7.5%)) 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 2009, the
Group’s non-UK sterling trading capital employed in overseas
businesses was £87.7m (2008: £75.0m), which represented
76% 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 £7.8m
(2008: £6.9m).
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 UK 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 27 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.
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25 Diploma PLC Annual Report and Accounts 2009
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 on 23 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 18
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 an increase of 1% in interest rates would
increase the Group’s profit before tax by a maximum of £0.2m
(2008: £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 public and private wholesalers, to small privately owned
businesses and the underlying local economic risks vary
throughout the world. An analysis of the Group’s credit risk
to trade receivables is set out in note 15 to the consolidated
financial statements.
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.
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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 obsolescence 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, a provision 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
n
n
n
n
Specified signature levels and responsibilities.
Segregation of responsibilities.
Controls on shipping addresses.
Weekly flash reports of cash balances and regular bank
reconciliations.
Regular review of supplier and creditor ledgers to identify
fictitious suppliers.
n
Group wide policy and procedures for “whistle-blowing”.
The Audit Committee carries out an annual assessment of the
fraud risks in the businesses and discusses these risks with
management.
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26 Diploma PLC Annual Report and Accounts 2009
Corporate and Social Responsibility
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 6.4 years (2008: 5.2 years). In addition
the number of working days lost to sickness is less than 2% a
year (2008: 2%). 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 2009 the Group’s employees included two who
were disabled and one who was 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 2009, 36 employees (2008: 41)
were reported as having suffered minor injuries at work; none of
these injuries resulted in absence from work for more than three
days. No employee (2008: one) suffered a serious injury during
the year.
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 2009 the amount of trade creditors shown in the
Group balance sheet represents 46 days (2008: 48 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 £14,825 (2008: £20,452). No political
donations were made.
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27 Diploma PLC Annual Report and Accounts 2009
Directors’ Report
For the year ended 30 September 2009
The Directors present their Report and the audited financial
statements for the year ended 30 September 2009.
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 10 to 26; the Business Review incorporates the
requirements of the Companies Act.
Results and Dividends
The profit for the financial year attributable to shareholders
was £13.0m (2008: £13.3m). The Directors recommend a final
dividend of 5.3p per ordinary share (2008: 5.0p), to be paid, if
approved, on 20 January 2010. This, together with the interim
dividend of 2.5p per ordinary share paid on 17 June 2009,
amounts to 7.8p for the year (2008: 7.5p).
Share Capital
At the date of this Report there were 113,239,555 ordinary
shares of 5 pence each in issue, all of which are fully paid up
and quoted on the London Stock Exchange. The rights attaching
to the Company’s ordinary shares, as well as the powers of the
Company’s Directors, are set out in the Company’s Articles of
Association, copies of which can be obtained from the Company
Secretary.
There are no restrictions on the transfer of ordinary shares in the
capital of the Company, other than those which may be imposed
by law from time to time. In accordance with the Listing Rules
of the Financial Services Authority, certain employees are
required to seek approval of the Company to deal in its shares.
The Company is not aware of any agreements between
shareholders that may result in restrictions on the transfers of
securities and/or voting rights. No person holds securities in
the Company carrying special rights with regard to control of
the Company. The Company’s Articles of Association may be
amended by special resolution of the Company’s shareholders.
Share Allotment
A general allotment power and a limited power to allot in
specific circumstances for cash, otherwise than pro-rata to
existing shareholders, were given to the Directors by resolutions
approved at the Annual General Meeting of the Company held
on 14 January 2009. These powers will expire at the conclusion
of the 2010 Annual General Meeting and resolutions to renew
the Directors’ powers are therefore included within the Notice of
the 2010 Annual General Meeting.
Authority to Make Market Purchases of Own Shares
An authority to make market purchases of shares was given
to the Directors by a special resolution at the Annual General
Meeting of the Company held on 14 January 2009. In the year
to 30 September 2009 the Company has not acquired any of
its own shares. This authority will expire at the conclusion of
the 2010 Annual General Meeting and a resolution to renew
the authority is therefore included within the Notice of the 2010
Annual General Meeting.
Substantial Shareholdings
At 13 November 2009 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:
Fidelity International
F&C Asset Management plc
Legal & General Investment Management Limited
Insight Investments Limited
Lincoln Vale European Partners Master Fund LP
Newton Investment Management Limited
IG International Management Limited
Legg Mason
Herald Investment Trust plc
Percentage of
ordinary share
capital
9.46
9.04
5.84
3.81
3.71
3.69
3.20
3.17
3.05
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 8 and 9. JW Matthews retires from the Board
by rotation at the Annual General Meeting on 13 January 2010
and being eligible, offers himself for re-election. The Directors’
beneficial interests in the Company’s ordinary share capital at
30 September 2009 are set out in the Remuneration Report on
page 37.
Directors’ Assessment of Going Concern
The Group’s business activities, together with the factors likely
to affect its future development, performance and position are
set out in the Business Review on pages 10 to 26. The financial
position of the Group, its cash flows, liquidity position and
borrowing facilities are described in the Finance Review on page
20. In addition pages 24 and 25 of the Annual Report includes
the Group’s objectives, policies and processes for managing its
capital; its financial risk management objectives; details of its
financial instruments and hedging activities; and its exposures to
credit risk and liquidity risk.
The Group has considerable financial resources together with
a broad spread of customers and suppliers across different
geographic areas and sectors, often secured with longer term
agreements. As a consequence, the Directors believe that the
Group is well placed to manage its business risks successfully,
despite the current uncertain economic outlook.
After making enquiries, the Directors have a reasonable
expectation that the Company and the Group have adequate
resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the going
concern basis in preparing the Annual Report and Accounts.
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28 Diploma PLC Annual Report and Accounts 2009
28 Diploma PLC Annual Report and Accounts 2009
Directors’ Report continued
For the year ended 30 September 2009
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.
A summary of the material changes brought about by the
proposed adoption of the New Articles will be set out in an
Appendix to the Notice of Annual General Meeting. It is intended
that a special resolution for adoption of the New Articles of the
Company will be put to shareholders at the Annual General
Meeting.
A copy of the New Articles 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 will be available on the Company’s website.
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 26 of the Annual
Report. The Group’s use of financial instruments is discussed on
page 24. Corporate Governance disclosures are set out on pages
29 to 37.
Articles of Association
As a result of implementation of the final tranche of the
Companies Act 2006 on 1 October 2009 and of the Shareholder
Rights Directive in August 2009, the Company’s Articles of
Association in their current form, now contain certain provisions
that no longer reflect current legislation and best practice. The
Board therefore considers it prudent to replace the Company’s
existing Articles of Association with new Articles of Association
(“New Articles”) that take into account these new developments
in legislation.
Annual General Meeting
The Annual General Meeting will be held at midday on 13
January 2010 in the Brewers’ Hall, Aldermanbury Square,
London EC2V 7HR. The business of the meeting 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
A resolution to re-appoint Deloitte LLP (formerly Deloitte
& Touche LLP) as auditors and to authorise the Directors
to determine their remuneration will be proposed at the
forthcoming Annual General Meeting.
By order of the Board
NP Lingwood
Company Secretary
16 November 2009
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29 Diploma PLC Annual Report and Accounts 2009
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 Combined Code on Corporate Governance (“the
Code”), issued in June 2003 and last updated in June 2008 by
the Financial Reporting Council, 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 8 and 9. 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 Remuneration
Committee
Committee
Nomination
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.
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 33. 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.
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
5
5
5
5
3
3
3
3
1
1
1
1
There are three standing Committees of the Board to which
various matters are delegated. Membership of the Committees
is set out on page 9 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.
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*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 acquisitions
and withdrawal from existing activities. It approves the Group’s
strategy and the operating budget and reviews performance
through monthly reports and management accounts.
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.
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.
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
n
To be responsible for identifying and nominating, for the
approval of the Board, candidates to fill Board vacancies as
and when they arise.
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.
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30 Diploma PLC Annual Report and Accounts 2009
30 Diploma PLC Annual Report and Accounts 2009
Corporate Governance continued
n
n
In identifying suitable candidates, the Committee shall
consider candidates on merit and against objective criteria
and will take care that appointees have enough time
available to devote to the position.
The Committee will consider candidates from a range of
backgrounds, both internally and externally and may use
the services of external advisors to facilitate the search.
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.
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 33.
In this context, reference should be made to the Statement of
Directors’ Responsibilities on page 38, the Directors’ Report
on pages 27 and 28 which includes a statement regarding the
Group’s status as a going concern, and to the Reports of the
Auditors on pages 70 and 71, 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.
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 22 to 25.
In January 2009, the company appointed a full time internal
auditor as a member of the Group’s finance department. Since
this appointment, a programme of internal audit visits has been
completed at most of the Group’s businesses. The remaining
businesses will be visited during the forthcoming financial year.
The Audit Committee keeps under review the need for a fully
independent internal audit function in the Group. The Audit
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31 Diploma PLC Annual Report and Accounts 2009
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
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.
to annually consider whether there is a need for a formal
internal audit function and make recommendation to the
Board.
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.
In 2008, the Committee reviewed the audit engagement and,
following an audit tender process, recommended to the Board
the appointment of Deloitte LLP as auditors to the Company and
Group.
The Committee normally meets at least five times a year.
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 Report and the Annual Report and
Accounts 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).
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 generally not provided by the auditors;
a separate firm is retained to provide tax advice, including any
assistance with tax compliance matters generally, except in
Canada, where the auditors provide some assistance on the tax
computations.
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.
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32 Diploma PLC Annual Report and Accounts 2009
32 Diploma PLC Annual Report and Accounts 2009
Corporate Governance continued
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.
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.
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33 Diploma PLC Annual Report and Accounts 2009
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 2003 and last updated in June 2008, relating to Directors’ remuneration are applied.
A resolution will be put to shareholders at the Annual General Meeting on 13 January 2010, 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 2009. 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
180.57
167.91
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Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
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 2004
September 2009
Diploma
FTSE
mid-250
100
181
100
168
+81%
+68%
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34 Diploma PLC Annual Report and Accounts 2009
34 Diploma PLC Annual Report and Accounts 2009
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 three occasions during the year.
The Committee received advice and a written report from
Towers Perrin in July 2008 on matters relating to Directors’
Remuneration, as reported in last year’s Remuneration Report.
The Committee took the advice into account in establishing
remuneration policies for the 2009 financial year. The Committee
has not sought any external advice during the current financial
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.
However, the Committee intends to take advice on the current
share incentive scheme and other aspects of remuneration
during 2010.
Remuneration Policy
This Remuneration Report sets out the Company’s policy on
Directors’ remuneration for 2009 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
2009 will be described in future Remuneration Reports. Any
statements in this Report in relation to remuneration policy for
years after 2009 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 36 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 2009 is 100% of basic salary
for the Chief Executive Officer and 80% (2008: 70%) for other
Executive Directors. On target bonus is 60% for the Chief
Executive Officer and 50% (2008: 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 75% (2008: 80%) based
on the financial performance of the Group with the remaining
25% (2008: 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
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35 Diploma PLC Annual Report and Accounts 2009
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 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 November
2008. 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
number of shares over which the 2006 awards have vested at
30 September 2009 are set out on page 36. The outstanding
awards will vest on 30 September 2010 and 2011 respectively,
subject to the performance conditions set out above, measured
over three year performance periods ending on 30 September
2010 and 2011.
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% (2008: 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:
BM Thompson
I Henderson
NP Lingwood
Date of Contract Notice Period
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
24 January 2010
24 July 2010
11 July 2010
Renewal
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 2009 the non-Executive
Directors each received a fee of £35,000 per annum (2008:
£30,000). The Chairman, who is a non-Executive Director,
received a fee of £70,000 per annum (2008: £60,000) for his
services during the year ended 30 September 2009.
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36 Diploma PLC Annual Report and Accounts 2009
36 Diploma PLC Annual Report and Accounts 2009
Remuneration Report continued
Total Remuneration of the Directors
The total remuneration of the Directors for the year ended 30 September 2009 is set out below.
IM Grice
I Henderson
NP Lingwood
JW Matthews
JL Rennocks
BM Thompson
The pension contributions paid on behalf of the Directors are as follows:
BM Thompson
I Henderson
NP Lingwood
Fixed emoluments
Salary
& fees
£000
Other
benefits
£000
Performance
based
bonus
£000
35
207
207
35
70
340
894
–
11
12
–
–
14
37
–
50
50
–
–
102
202
2009
Total
£000
35
268
269
35
70
456
2008
Total
£000
30
328
329
30
60
631
1,133
1,408
2009
£000
2008
£000
68
41
41
66
39
39
150
144
Long Term Incentive Plan
On 17 November 2008 Executive Directors received a share award with a face value of one times salary as set out below. On 30
September 2009 the performance period relating to the award made on 22 December 2006 ended and the LTIP awards vested and
became exercisable by each of the Directors, as set out below.
LTIP shares
held at
30 Sept 2008
Number
LTIP shares
awarded
during the
year ended
30 Sept 2009
Number
LTIP shares
vested on
30 Sept 2009
(note 1)
Number
LTIP shares
lapsed on
30 Sept 2009
Number
Share price
on date of
award
Vesting
date
Total
LTIP shares
held at
30 Sept 2009
Number
BM Thompson
22 December 2006
17 December 2007
17 November 2008
I Henderson
22 December 2006
17 December 2007
17 November 2008
NP Lingwood
22 December 2006
17 December 2007
17 November 2008
Note:
191,925
178,225
–
–
–
276,423
175,132
16,793
161.6p 30 Sept 2009
–
–
–
–
184.6p 30 Sept 2010
123.0p 30 Sept 2011
115,155
106,715
–
–
–
168,293
105,079
10,076
161.6p 30 Sept 2009
–
–
–
–
184.6p 30 Sept 2010
123.0p 30 Sept 2011
115,155
106,715
–
–
–
168,293
105,079
10,076
161.6p 30 Sept 2009
–
–
–
–
184.6p 30 Sept 2010
123.0p 30 Sept 2011
–
178,225
276,423
–
106,715
168,293
–
106,715
168,293
1.
The awards which vested on 30 September 2009 were calculated in accordance with the performance conditions described on pages 34 and 35. The
awards may be exercised at any time before 22 December 2016 on payment of £1. In aggregate 91.3% of the total LTIP award granted on 22 December
2006 vested unconditionally and became exercisable.
•
•
Under the first performance condition, the average annual compound growth rate in the Company’s adjusted EPS (as defined on page 43) over the
three year period ended 30 September 2009 was 7.5% pa; this compares with an annual compound growth rate in RPI +4.5% over the same period
of 7.5% pa. Accordingly 82.5% 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 14.5% over the three year period ended 30 September 2009; this growth
gave the Company a ranking of 42 in the comparator group and put the Company in the 77 percentile. The median TSR was -18.1% and the lower
threshold of the upper quartile was 11.7%. Accordingly 100% of the shares relating to this part of the award vested unconditionally.
c101340Book.indb 36
24/11/09 11:34:23
37 Diploma PLC Annual Report and Accounts 2009
Directors’ Shareholdings
IM Grice
I Henderson
NP Lingwood
JW Matthews
JL Rennocks
BM Thompson
Note:
Ordinary shares of 5p each
At
16 November
2009
Number
At
30 September
2009
Number
20,000
534,604
100,000
–
20,000
534,604
100,000
– –
At
1 October
2008
Number
20,000
421,875
195,875
223,766
223,766
214,766
1,215,039
1,215,039
1,026,940
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 2008 and 2009 the number of shares which are the subject of vested LTIP awards and are held by each Director
were as follows:
At
30 Sept
2008
Number
Vested LTIP awards
Exercised
during
Vested
2009 during 2009
Number
Number
At
30 Sept
2009
Number
Share price
At
30 Sept
2008
At
30 Sept
2009
Amount
At
30 Sept
2008
£
At
30 Sept
2009
£
BM Thompson
I Henderson
NP Lingwood
Note:
188,099
(188,099) 175,132
175,132
152.5p
173.0p
286,851
302,978
112,729
(112,729) 105,079
105,079
152.5p
173.0p
171,912
181,787
112,729
(112,729) 105,079
105,079
152.5p
173.0p
171,912
181,787
1.
On 17 November 2008, each participant exercised their option to acquire shares which had vested at 30 September 2008, for consideration of £1.
The share price at the date of exercise was 114.0p.
2. The share price during the year to 30 September 2009 ranged from 92.25p to 173.0p.
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:
G
o
v
e
r
n
a
n
c
e
IM Grice
Chairman of the Remuneration Committee
16 November 2009
c101340Book.indb 37
24/11/09 11:34:23
38 Diploma PLC Annual Report and Accounts 2009
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 Article 4 of the IAS Regulations
and have elected to prepare the Parent Company financial
statements in accordance with United Kingdom Generally
Accepted Accounting Standards (UK Accounting Standards).
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.
Directors’ Responsibility Statement
The Directors confirm that to the best of their knowledge:
n
n
the Group’s 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 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 Group and the undertakings included in the
consolidation taken as a whole, together with a description
of the principal risks and uncertainties faced by the Group.
This responsibility statement was approved by the Board of
Directors on 16 November 2009 and is signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
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 2006 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.
In preparing each of the Group and Company financial
statements, the Directors are required to:
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 2006. 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.
c101340Book.indb 38
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39 Diploma PLC Annual Report and Accounts 2009
39 Diploma PLC Annual Report and Accounts 2009
Consolidated Income Statement
For the year ended 30 September 2009
Continuing businesses
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, net
Profit before tax
Tax expense
Profit for the year from continuing business
Profit from discontinuing businesses
Profit for the year
Attributable to:
Shareholders of the Company
Minority interests
Earnings per share
Basic and diluted earnings – continuing
Basic and diluted earnings – discontinuing
Basic and diluted earnings – continuing and discontinuing
Note
2009
£m
3,4
160.0
2008
£m
156.2
(99.3)
56.9
(4.1)
(28.9)
26.6
(2.7)
23.9
(2.8)
21.1
(7.2)
13.9
0.5
14.4
13.3
1.1
14.4
(101.7)
58.3
(4.1)
(31.7)
25.6
(3.1)
22.5
(2.0)
20.5
(7.1)
13.4
0.9
14.3
13.0
1.3
14.3
10.8p
0.8p
11.6p
11.4p
0.4p
11.8p
3,4
11
3
6
7
22
20
9
9
9
Alternative Performance Measures (note 2)
Profit before tax
Add: Amortisation of acquisition intangible assets
Fair value remeasurements
Adjusted profit before tax – continuing
Adjusted profit before tax – discontinuing
Adjusted profit before tax – continuing and discontinuing
Adjusted earnings per share – continuing
Adjusted earnings per share – continuing and discontinuing
The notes on pages 43 to 67 form part of these financial statements.
Note
11
6
22
2009
£m
20.5
3.1
1.9
25.5
1.2
26.7
2008
£m
21.1
2.7
3.0
26.8
0.7
27.5
9
9
14.8p
15.6p
16.0p
16.4p
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
c101340Book.indb 39
24/11/09 11:34:23
40 Diploma PLC Annual Report and Accounts 2009
Consolidated Balance Sheet
As at 30 September 2009
Non-current assets
Goodwill
Acquisition intangible assets
Other intangible assets
Property, plant and equipment
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Assets held for sale
Cash and cash equivalents
Current liabilities
Trade and other payables
Current tax liabilities
Other liabilities
Liabilities associated with assets held for sale
Net current assets
Total assets less current liabilities
Non-current liabilities
Retirement benefit obligations
Other liabilities
Deferred tax liabilities
Net assets
Equity
Share capital
Translation reserve
Hedging reserve
Retained earnings
Total shareholders’ equity
Minority interests
Total equity
Note
2009
£m
2008
£m
10
11
11
12
13
14
15
22
17
59.6
21.2
0.8
11.6
2.1
95.3
28.0
25.2
5.4 –
21.3
79.9
51.6
18.6
1.2
11.6
1.3
84.3
31.5
26.7
15.7
73.9
16
(23.3)
(26.3)
19
22
(1.8)
(3.1)
(3.5) –
(3.3)
(1.1)
(31.7)
(30.7)
48.2
43.2
143.5
127.5
24
19
13
(4.7)
(10.6)
(4.1)
(1.7)
(11.2)
(4.6)
124.1
110.0
5.7
18.7
0.3
96.7
5.7
8.0
0.7
93.7
121.4
108.1
20
2.7
1.9
124.1
110.0
The consolidated financial statements were approved by the Board of Directors on 16 November 2009 and signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
The notes on pages 43 to 67 form part of these financial statements.
c101340Book.indb 40
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41 Diploma PLC Annual Report and Accounts 2009
41 Diploma PLC Annual Report and Accounts 2009
Consolidated Statement of Recognised
Income and Expense
For the year ended 30 September 2009
Exchange rate adjustments on foreign currency net investments
(Losses)/gains on fair value of cash flow hedges
Actuarial losses 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
24
13
2009
£m
10.7
(0.4)
(3.1)
1.0
8.2
14.3
22.5
21.2
1.3
22.5
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 2007
Total recognised income and expense for the year
attributable to shareholders
Bonus issue of shares
Share-based payments
Purchase of own shares
Purchase of minority interests
Dividends
At 30 September 2008
Total recognised income and expense for the year
attributable to shareholders
Share-based payments
Dividends
At 30 September 2009
1.1
–
4.6
–
–
–
–
5.7
–
–
–
5.7
0.2
–
(0.2)
–
–
–
–
–
–
–
–
–
5
19
8
5
8
The notes on pages 43 to 67 form part of these financial statements.
0.6
7.4
–
–
–
–
–
(0.6)
89.4
1.3
12.4
–
–
–
–
–
(4.4)
0.5
(0.9)
3.6
(6.9)
Total
£m
90.7
21.1
–
0.5
(0.9)
3.6
(6.9)
8.0
0.7
93.7
108.1
10.7
(0.4)
–
–
–
–
10.9
0.5
(8.4)
21.2
0.5
(8.4)
18.7
0.3
96.7
121.4
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
c101340Book.indb 41
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42 Diploma PLC Annual Report and Accounts 2009
Consolidated Cash Flow Statement
For the year ended 30 September 2009
Continuing businesses
Cash flow from operating activities
Cash flow from operations
Finance income received, net
Tax paid
Net cash from operating activities
Cash flow 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 flow from financing activities
Dividends paid to shareholders
Dividends paid to minority interests
Purchase of own shares
Net cash used in financing activities
Net cash flow from discontinuing business
Net increase 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 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 – continuing and discontinuing
Less: Free cash flow – discontinuing
Free cash flow – continuing
The notes on pages 43 to 67 form part of these financial statements.
Note
2009
£m
2008
£m
23
21
19
12
11
8
20
22
17
34.2
– –
(9.0)
27.8
(7.8)
25.2
20.0
(11.1)
(1.1)
0.1
(1.5)
(0.3)
(13.9)
(8.4)
(0.7)
–
(9.1)
1.7
3.9
15.7
1.7
21.3
(7.6)
(0.3)
0.2
(1.4)
(0.2)
(9.3)
(6.9)
(0.9)
(0.9)
(8.7)
0.3
2.3
12.4
1.0
15.7
2009
£m
3.9
8.4
0.7
11.1
1.1
25.2
(1.7)
2008
£m
2.3
6.9
0.9
7.6
0.3
18.0
(0.3)
23.5
17.7
c101340Book.indb 42
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43 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
1. General Information
Diploma PLC is a public limited company registered and domiciled in England and Wales and listed on the London Stock Exchange.
The address of the registered office is 12 Charterhouse Square, London, EC1M 6AX. The consolidated financial statements comprise
the Company and its subsidiaries (together referred to as the “Group”) and were authorised by the Directors for publication on
16 November 2009. 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 2006, 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 68 to 69.
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 expense/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 – Continuing
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 10 to 26. 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 – existing businesses
– acquisitions
2009
£m
48.8
1.1
2008
£m
45.0
–
2009
£m
41.3
6.9
2008
£m
42.6
–
Revenue – continuing
49.9
45.0
48.2
42.6
Segment operating profit – existing businesses
– acquisitions
Segment operating profit – continuing
Amortisation of acquisition intangible assets
Operating profit – continuing
10.3
0.3
10.6
(1.4)
9.2
8.6
–
8.6
(1.5)
7.1
4.8
0.7
5.5
(1.3)
4.2
6.7
–
6.7
(0.8)
5.9
2009
£m
61.9
–
61.9
9.5
–
9.5
(0.4)
2008
£m
Total
2009
£m
2008
£m
68.6
152.0
156.2
–
8.0 –
68.6
160.0
156.2
11.3
–
11.3
(0.4)
24.6
1.0 –
25.6
(3.1)
26.6
26.6
(2.7)
9.1
10.9
22.5
23.9
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
c101340Book.indb 43
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44 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
3. Business Segment Analysis – Continuing (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
– Assets held for sale
– Corporate assets
Total assets
Operating liabilities
Unallocated liabilities:
– Deferred tax liabilities
– Retirement benefit obligations
– Future purchases of minority interests
– Liabilities associated with assets held for sale
– Corporate liabilities
Total liabilities
Net assets
Other segment information
Capital expenditure
Depreciation (including software)
Life Sciences
Seals
Controls
Total
2009
£m
15.6
32.5
10.9
2008
£m
21.5
30.6
11.4
2009
£m
23.6
12.0
8.8
2008
£m
22.0
8.9
5.3
2009
£m
23.3
15.1
1.5
2008
£m
24.5
12.1
1.9
2009
£m
62.5
59.6
21.2
2008
£m
68.0
51.6
18.6
59.0
63.5
44.4
36.2
39.9
38.5
143.3
138.2
2.1
21.3
5.4 –
3.1
1.3
15.7
3.0
175.2
158.2
(9.0)
(12.4)
(4.8)
(4.9)
(9.3)
(10.5)
(23.1)
(27.8)
(4.1)
(4.7)
(4.6)
(1.7)
(13.1)
(11.2)
(3.5) –
(2.6)
(2.9)
(51.1)
(48.2)
124.1
110.0
0.6
0.8
0.8
1.0
1.1
0.8
0.5
0.7
0.1
0.6
0.3
0.5
1.8
2.2
1.6
2.2
Alternative Performance Measures (note 2)
Life Sciences
2009
£m
2008
£m
Seals
2009
£m
Controls
Total
2008
£m
2009
£m
2008
£m
2009
£m
2008
£m
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
Assets held for sale, net
Corporate assets, net
(4.5)
(4.1)
(1.4)
(1.2)
(0.6)
(0.7)
124.1
110.0
2.0
4.7
13.1
(21.3)
(6.5)
3.3
1.7
11.2
(15.7)
(6.0)
116.1
104.5
(1.9) –
(0.5)
(0.1)
Segment trading capital employed
45.5
47.0
38.2
30.1
30.0
27.3
113.7
104.4
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45 Diploma PLC Annual Report and Accounts 2009
4. Geographic Segment Analysis by Origin – Continuing
United Kingdom
Rest of Europe
North America
Revenue
2009
£m
50.1
32.6
77.3
2008
£m
57.7
33.7
64.8
Operating profit*
2008
2009
£m
£m
6.8
3.9
14.9
7.9
5.7
13.0
Gross assets
Trading capital
employed
2009
£m
49.3
34.8
91.1
2008
£m
51.2
26.8
80.2
2009
£m
28.4
21.0
66.7
2008
£m
29.5
20.7
54.3
160.0
156.2
25.6
26.6
175.2
158.2
116.1
104.5
Capital
expenditure
2009
£m
2008
£m
0.1
0.2
1.5
1.8
0.4
0.3
0.9
1.6
*before amortisation of acquisition intangible assets
5. Group Employee Costs – Continuing
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 33 to 37. 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 (2008: £0.2m).
Group staff costs, including Directors’ emoluments, are as follows:
2009
£m
2008
£m
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, net
Finance income
– interest receivable on short term deposits
– net finance income from defined benefit pension scheme (note 24)
Finance expense
– interest payable on bank borrowings
– fair value remeasurement of put options (note 19)
– net finance expense from defined benefit pension scheme (note 24)
Net finance expense
29.3
26.3
2.8
0.7
0.5
2.4
0.6
0.5
33.3
29.8
2009
2008
Number Number
207
358
248
10
823
809
203
360
261
9
833
852
2009
£m
2008
£m
0.1
–
0.1
(0.1)
(1.9)
(0.1) –
(2.1)
(2.0)
0.3
0.2
0.5
(0.3)
(3.0)
(3.3)
(2.8)
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The fair value remeasurement of £1.9m (2008: £3.0m) includes £1.1m (2008: £0.7m) which relates to the unwinding of the discount on
the liability for future purchases of minority interests.
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46 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
7. Taxation – Continuing
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 based on the origination and reversal of timing differences comprises:
United Kingdom
Overseas
Total deferred tax
Total tax on profit for the year
2009
£m
2008
£m
2.4
5.2
7.6
–
–
–
7.6
(0.2)
(0.3)
(0.5)
7.1
2.8
5.4
8.2
(0.4)
0.2
(0.2)
8.0
(0.3)
(0.5)
(0.8)
7.2
Factors affecting the tax charge for the year:
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 28% (2008: 29%)
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
2009
£m
2008
£m
20.5
21.1
5.7
6.1
0.7
–
0.5
0.2
7.1
0.7
(0.2)
0.9
(0.3)
7.2
The Group earns its profits in the UK and overseas. The UK corporation tax rate is 28% (2008: 29%) and this rate has been used for tax
on profit in the above reconciliation. The Group’s overseas tax rate is higher than that in the UK, primarily because the profits earned in
North America are taxed at rates varying from 32% to 38%. The tax relating to the discontinuing business is £0.3m (2008: £0.2m), as
set out in note 22.
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47 Diploma PLC Annual Report and Accounts 2009
8. Dividends
Interim dividend, paid in June
Final dividend of the prior year, paid in January
2009
pence
2008
pence
per share per share
2.5
5.0
7.5
2.5
3.6
6.1
2009
2008
£m
2.8
5.6
8.4
£m
2.8
4.1
6.9
The Directors have proposed a final dividend in respect of the current year of 5.3p (2008: 5.0p) which will be paid in January 2010,
subject to approval of shareholders at the Annual General Meeting on 13 January 2010. The total dividend for the current year, subject
to approval of the final dividend, will be 7.8p (2008: 7.5p).
Shares held by the Diploma Employee Benefit Trust are not eligible for dividends.
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 112,316,906 (2008: 112,237,586) and the profit for the year attributable to shareholders of £13.0m (2008: £13.3m).
There were no potentially dilutive shares.
Adjusted earnings per share
Adjusted earnings per share, which is defined in note 2, is calculated as follows:
Profit before tax – continuing
Tax expense
Minority interests
Profit from discontinuing business
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
2009
pence
2008
pence
per share per share
10.8
0.8
11.6
2.7
1.7
(0.4)
11.4
0.4
11.8
2.4
2.7
(0.5)
2009
£m
20.5
(7.1)
(1.3)
12.1
0.9
13.0
3.1
1.9
(0.5)
2008
£m
21.1
(7.2)
(1.1)
12.8
0.5
13.3
2.7
3.0
(0.6)
Adjusted earnings – continuing and discontinuing
15.6
16.4
17.5
18.4
10. Goodwill
At 1 October 2007
Acquisitions
Adjustments to prior year goodwill
Exchange adjustments
At 30 September 2008
Acquisitions (note 21)
Reclassification
Exchange adjustments
At 30 September 2009
Life Sciences
£m
Seals
£m
Controls
£m
23.4
5.8
(0.2)
1.6
30.6
1.4
(2.4)
2.9
7.4
0.8
–
0.7
8.9
2.1
–
1.0
Total
£m
42.7
6.6
(0.4)
2.7
11.9
–
(0.2)
0.4
12.1
51.6
–
2.4
0.6
3.5
–
4.5
32.5
12.0
15.1
59.6
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48 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
10. Goodwill (continued)
Goodwill of £3.5m, which arose on acquisitions completed during the year relates to the product know-how held by the employees,
prospects for sales growth from new customers and operating cost synergies.
An impairment review of goodwill held at 30 September 2009 has been completed. The key assumptions used in this review are
those regarding the discount rates and forecast for future growth in revenue and cash flow. The discount rates used were ca. 13%
(2008: ca. 16%). The revenue and cash flow forecasts are derived from budgets, approved by management, for the next financial
year. These are extrapolated thereafter using growth rates ranging from 2% - 10% pa in the medium term and at GDP rates
thereafter; changes in selling prices and direct costs are based on past practices and take account of any expectations of future
changes in the market.
An increase in the discount rates of up to 2% would be likely to lead to impairments in the carrying value of goodwill of certain
businesses of ca. £1m. If growth rates achieved over the next five years are only 2% - 5% pa, this would lead to impairments in
the carrying value of goodwill of certain businesses of ca. £3m.
11. Acquisition and Other Intangible Assets
Cost
At 1 October 2007
Additions
Disposals
Exchange adjustments
At 30 September 2008
Additions
Acquisitions (note 21)
Disposals
Exchange adjustments
Reclassified as held for sale (note 22)
At 30 September 2009
Amortisation
At 1 October 2007
Charge for the year
Disposals
Exchange adjustments
At 30 September 2008
Charge for the year
Disposals
Exchange adjustments
On assets reclassified as held for sale (note 22)
At 30 September 2009
Net book value
At 30 September 2009
At 30 September 2008
Acquisition
intangible
assets
£m
Other
intangible
assets
£m
21.4
–
–
1.4
22.8
–
4.2
–
1.9
–
1.5
0.3
(0.2)
0.7
2.3
0.3
–
(0.2)
0.1
(0.4)
Total
£m
22.9
0.3
(0.2)
2.1
25.1
0.3
4.2
(0.2)
2.0
(0.4)
28.9
2.1
31.0
1.3
2.7
–
0.2
4.2
3.1
–
0.4
–
7.7
21.2
18.6
0.5
0.3
(0.1)
0.4
1.1
0.4
(0.2)
0.1
(0.1)
1.3
0.8
1.2
1.8
3.0
(0.1)
0.6
5.3
3.5
(0.2)
0.5
(0.1)
9.0
22.0
19.8
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 and trade names
11.9
5-15 years
7.3
2.0
7-10 years
5-10 years
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49 Diploma PLC Annual Report and Accounts 2009
11. Acquisition and Other Intangible Assets (continued)
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 and trade names were 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.
12. Property, Plant and Equipment
Cost
At 1 October 2007
Additions
Acquisitions
Disposals
Exchange adjustments
At 30 September 2008
Additions
Acquisitions (note 21)
Disposals
Exchange adjustments
Reclassified as held for sale (note 22)
At 30 September 2009
Depreciation
At 1 October 2007
Charge for the year
Disposals
Exchange adjustments
At 30 September 2008
Charge for the year
Disposals
Exchange adjustments
On assets reclassified as held for sale (note 22)
At 30 September 2009
Net book value
At 30 September 2009
At 30 September 2008
Freehold Leasehold
Plant &
properties properties equipment
£m
£m
£m
Total
£m
8.4
–
–
(0.1)
0.1
8.4
–
–
–
0.4
–
8.8
1.7
0.2
(0.1)
–
1.8
0.1
–
0.1
–
2.0
6.8
6.6
0.7
0.2
–
–
0.1
1.0
–
–
–
0.1
–
1.1
0.2
0.1
–
0.2
0.5
0.1
–
–
–
12.3
21.4
1.4
0.1
(0.9)
1.2
1.6
0.1
(1.0)
1.4
14.1
23.5
1.6
0.2
(1.5)
1.5
(1.4)
1.6
0.2
(1.5)
2.0
(1.4)
14.5
24.4
7.8
1.9
(0.6)
0.5
9.6
1.9
(1.3)
1.0
(1.0)
9.7
2.2
(0.7)
0.7
11.9
2.1
(1.3)
1.1
(1.0)
0.6
10.2
12.8
0.5
0.5
4.3
4.5
11.6
11.6
Land included above, but not depreciated, is £2.0m (2008: £2.0m). Capital commitments contracted, but not provided, were £Nil
(2008: £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).
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50 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
13. Deferred Tax
The movement on deferred tax is as follows:
At 1 October
Credit for the year
Acquisitions (note 21)
Accounted for in equity
Exchange adjustments
At 30 September
2009
£m
2008
£m
(3.3)
0.5
0.1
1.0
(0.3)
(2.0)
(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
2009
£m
0.2
0.1
1.3
0.9
0.1
0.8
3.4
(1.3)
2.1
2008
£m
0.2
0.3
0.5
0.7
0.1
0.5
Liabilities
2009
£m
(0.5)
(4.9)
–
–
–
–
2008
£m
(0.5)
(5.1)
–
–
–
–
2009
£m
(0.3)
(4.8)
1.3
0.9
0.1
0.8
Net
2008
£m
(0.3)
(4.8)
0.5
0.7
0.1
0.5
2.3
(1.0)
(5.4)
1.3
(5.6)
1.0
(2.0)
(3.3)
– –
1.3
(4.1)
(4.6)
(2.0)
(3.3)
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 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 £0.7m (2008: £1.0m).
14. Inventories
Finished goods and goods held for resale
Inventories are stated net of impairment provisions of £3.4m (2008: £3.5m).
15. Trade and Other Receivables
Trade receivables
Less: Impairment provision
Other receivables
Prepayments and accrued income
2009
£m
2008
£m
28.0
31.5
2009
£m
23.7
(0.5)
23.2
0.8
1.2
25.2
2008
£m
24.9
(0.6)
24.3
1.0
1.4
26.7
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51 Diploma PLC Annual Report and Accounts 2009
15. Trade and Other Receivables (continued)
The maximum exposure to credit risk for trade receivables at the reporting date, by currency 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
At 30 September
16. Trade and Other Payables
Trade payables
Other payables
Other taxes and social security
Accruals and deferred income
2009
£m
8.6
5.0
4.6
3.5
2.0
2008
£m
11.0
4.5
4.3
3.7
1.4
23.7
24.9
2009
£m
19.7
3.4
0.6
23.7
2008
£m
19.8
4.5
0.6
24.9
2009
£m
2008
£m
2.4
0.8
0.2
–
3.4
3.0
0.8
0.5
0.2
4.5
2009
£m
2008
£m
0.6
–
(0.1)
0.5
2009
£m
11.5
1.9
1.7
8.2
0.6
–
–
0.6
2008
£m
15.2
1.0
1.7
8.4
23.3
26.3
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52 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
16. Trade and Other Payables (continued)
The maximum exposure to foreign currency risk for trade payables at the reporting date, by currency was:
Sterling
US Dollars
Canadian Dollars
Euro
Other
2009
£m
2008
£m
3.9
4.2
0.7
2.5
0.2
5.4
5.0
0.7
3.8
0.3
11.5
15.2
17. Cash and Cash Equivalents
Cash at bank
Short term deposits
Sterling
£m
1.0
5.8
6.8
US$
£m
2.8
–
2.8
Can$
£m
Euro
£m
1.5
6.9
8.4
1.2
2.1
3.3
2009
Total
£m
6.5
14.8
21.3
Sterling
£m
0.5
1.0
1.5
US$
£m
1.3
4.0
5.3
Can$
£m
Euro
£m
0.5
6.2
6.7
1.4
0.8
2.2
2008
Total
£m
3.7
12.0
15.7
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 24 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
2009
£m
£m
23.2
0.8
21.3
45.3
24.3
1.0
15.7
41.0
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.
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53 Diploma PLC Annual Report and Accounts 2009
18. Financial Instruments (continued)
b)
The Group has no cash loans or overdrafts at each reporting date.
Liquidity risk
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
2009
£m
£m
11.5
1.9
13.7
27.1
16.5
8.5
3.7
28.7
(1.6)
15.2
1.0
12.3
28.5
17.3
2.1
12.2
31.6
(3.1)
27.1
28.5
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 2009 was a £0.3m liability (2008:
£0.2m asset).
Interest rate risk
d)
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 January 2009, the Group drew down US$7.0m (£4.6m) from its revolving bank facility of £20.0m to finance the acquisition of RTD,
as described in note 21. The loan was repaid in full by 30 September 2009. The weighted average of the interest paid on the loan,
which was by reference to LIBOR, was 1.3%.
An analysis of cash and cash equivalents at the reporting dates is set out in note 17.
Fair values
e)
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.
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54 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
19. Other Liabilities
Future purchases of minority interests
Deferred consideration
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 to retained earnings
Unwinding of discount
Fair value remeasurements
At 30 September
2009
£m
13.1
0.6
13.7
3.1
10.6
2009
£m
11.2
–
1.1
0.8
2008
£m
11.2
1.1
12.3
1.1
11.2
2008
£m
11.8
(3.6)
0.7
2.3
13.1
11.2
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.
At 30 September 2009, 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 2009. This led to a remeasurement of the fair value of these put options and the liability was increased by £0.8m
(2008: £2.3m) by a charge to the consolidated Income Statement.
At 30 September 2009, deferred consideration of £0.6m comprised £0.3m payable to the vendors of the business and assets of
RTD and £0.3m payable to the vendors of Meditech, as described further in note 21. Deferred consideration of £1.1m was paid on
9 February 2009 to the vendors of AMT in final settlement of their performance payment.
20. Minority Interests
At 1 October 2007
Acquisition of minority interests
Share of profit for the year
Accounted for in equity
Dividends paid
Exchange adjustments
At 30 September 2008
Share of profit for the year
Dividends paid
Exchange adjustments
At 30 September 2009
£m
1.8
(0.3)
1.1
0.1
(0.9)
0.1
1.9
1.3
(0.7)
0.2
2.7
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55 Diploma PLC Annual Report and Accounts 2009
21. Acquisitions
On 5 November 2008, Somagen Diagnostics Inc, a subsidiary in the Group, acquired 100% of Meditech Istisharat Canada Inc
(“Meditech”) for maximum consideration of £1.6m (C$2.9m), including expenses. The initial cash paid on acquisition was £1.3m
(C$2.4m) and a balance of £0.3m (C$0.5m) is payable in November 2009, based on the performance of the business in the year ended
31 October 2009.
On 12 January 2009, the Group completed the acquisition of the business, assets and goodwill of RT/Dygert International Inc (“RTD”)
for maximum consideration, including expenses, of £13.4m (US$20.3m). The business was acquired by RTD Seals Corp (“RTD Seals”),
a wholly owned subsidiary of the Group’s North American Seals business of Hercules Fluid Power Group. The initial cash consideration
was £9.8m (US$14.9m), with the balance of up to £3.6m (US$5.4m) payable in deferred consideration in 2010, based on a number of
factors, including principally the performance of the business in the year ending 31 December 2009. At 30 September 2009, £0.3m
(US$0.5m) has been provided for as deferred consideration.
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.
Acquisition intangible assets
Property, plant and equipment
Deferred tax
Inventories
Trade and other receivables
Trade and other payables
Net assets acquired
Goodwill arising on acquisitions completed during the year
Satisfied by:
Cash paid
Expenses of acquisition
Net cash paid
Provision for deferred consideration payable
Total consideration
Book value Fair value
£m
£m
–
0.2
–
2.7
1.6
4.2
0.2
0.1
2.8
1.6
(0.7)
(0.7)
3.8
8.2
3.5
11.7
10.9
0.2
11.1
0.6
11.7
From the date of acquisition to 30 September 2009, these acquired businesses contributed £8.0m to revenue and £1.0m 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 £10.4m to revenue and £0.6m 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. Discontinuing Business
Diploma PLC has signed a contract for the disposal of the Manual Liquid Handling (“MLH”) business of Anachem Limited. The
transaction is expected to complete on, or about, 8 January 2010.
On completion, the business of Anachem Limited will comprise the core MLH business which supplies manual liquid handling products
(eg pipettes and tips), services and related laboratory consumables to major pharmaceutical and biotechnology companies, research
institutions and universities.
The MLH business contributed £10.7m to revenue in the year ended 30 September 2009 (2008: £10.6m). At completion, net assets,
excluding cash, of the MLH business of Anachem Limited are expected to be approximately £1.4m.
The initial sale proceeds to be received on Completion, which will be reinvested in the Group’s businesses, are £7.8m, before disposal
costs, of which £0.8m will be held in escrow. The sale proceeds may be subject to minor adjustment, based on the net assets
at completion. Further sale proceeds of up to £0.8m may be receivable, depending on the revenues earned in the 12 months to
31 December 2010.
The remainder of the business in Anachem Limited comprises the Instruments division which supplies laboratory automation products;
this business will be transferred to a separate entity prior to completion, with the intention of realising further value.
Anachem Limited was not discontinued or classified as held for sale as at 30 September 2008 and the comparative consolidated
Income Statement and consolidated Cash Flow Statement have been restated to show the activities as a discontinuing business.
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56 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
22. Discontinuing Business (continued)
The results of the discontinuing business included in the consolidated Income Statement for the year ended 30 September 2009 were
as follows:
Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Profit before tax
Tax expense
Profit attributable to discontinuing business
The major classes of assets and liabilities comprising the business classified as held for sale are as follows:
Other intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Total assets held for sale
Trade and other payables
Current tax liabilities
Total liabilities associated with assets held for sale
Net assets of discontinuing business
Cash flows from the discontinuing business included in the consolidated Cash Flow Statement are as follows:
Profit from discontinuing business
Depreciation/amortisation of tangible and other intangible assets
Tax expense
Operating cash flow before changes in working capital
Decrease in working capital
Cash flow from operating activities
Tax paid
Net cash from operating activities
Net cash used in investing activities
Net cash flow from discontinuing business
2009
£m
15.7
(10.2)
5.5
(0.6)
(3.7)
1.2
(0.3)
0.9
2009
£m
0.9
0.3
0.3
1.5
0.5
2.0
(0.2)
1.8
(0.1)
1.7
2008
£m
16.1
(10.7)
5.4
(0.8)
(3.9)
0.7
(0.2)
0.5
2009
£m
0.3
0.4
2.4
2.3
5.4
(3.2)
(0.3)
(3.5)
1.9
2008
£m
0.5
0.3
0.2
1.0
–
1.0
(0.4)
0.6
(0.3)
0.3
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57 Diploma PLC Annual Report and Accounts 2009
22. Discontinuing Business (continued)
Anachem Limited was previously reported within the Life Sciences business segment and within the United Kingdom geographic
segment analysis.
Capital expenditure
Depreciation (including software)
The aggregate payroll costs and average number of employees of the discontinuing business were as follows:
Wages and salaries
Social security costs
Pension costs – defined contribution
Number of employees – average
23. Reconciliation of Cash Flow from Operating Activities – Continuing
Profit for the year from continuing businesses
Depreciation/amortisation of tangible and other intangible assets
Amortisation of acquisition intangible assets
Share-based payments expense
Finance expense, net
Tax expense
Operating cash flow before changes in working capital
Decrease/(increase) in inventories
Decrease in trade and other receivables
Decrease in trade and other payables
Cash paid into defined benefit schemes
Cash flow from operating activities
2009
£m
0.1
0.3
2008
£m
0.3
0.3
2009
£m
2008
£m
3.7
0.4
0.2
4.3
4.0
0.4
0.2
4.6
2009
2008
Number Number
118
133
2009
£m
13.4
2.2
3.1
0.5
2.0
7.1
28.3
6.0
2.4
(2.3)
(0.2)
2008
£m
13.9
2.2
2.7
0.5
2.8
7.2
29.3
(1.4)
0.8
(0.7)
(0.2)
34.2
27.8
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58 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
24. 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:
Market value of schemes’ assets
Equities
Bonds
Cash
Present value of schemes’ liabilities
Amounts (charged)/credited to the consolidated Income Statement in respect of defined benefit schemes:
Charged to operating profit
Interest cost
Expected return on schemes’ assets
(Charged)/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
Actuarial loss on schemes’ liabilities
Analysis of movement in the pension deficit:
At 1 October
Amounts charged/(credited) to profit and loss account
Contributions paid by employer
Actuarial loss
At 30 September
2009
£m
2008
£m
11.1
3.0
–
9.5
3.0
–
14.1
(18.8)
12.5
(14.2)
(4.7)
(1.7)
2009
£m
2008
£m
–
(1.0)
0.9
(0.1)
(0.1)
–
(0.9)
1.1
0.2
0.2
2009
£m
2008
£m
0.7
(3.8)
–
(3.1)
(3.4)
3.0
(0.1)
(0.5)
2009
£m
2008
£m
1.7
0.1
(0.2)
3.1
4.7
1.6
(0.2)
(0.2)
0.5
1.7
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59 Diploma PLC Annual Report and Accounts 2009
24. Retirement Benefit Obligations (continued)
Analysis of the movements in the present value of the schemes’ liabilities:
At 1 October
Interest cost
Actuarial loss
Loss/(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 gain/(loss)
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
2009
£m
14.2
1.0
–
3.8
(0.2)
2008
£m
16.4
0.9
0.1
(3.0)
(0.2)
18.8
14.2
2009
£m
2008
£m
12.5
14.8
0.9
0.7
0.2
(0.2)
1.1
(3.4)
0.2
(0.2)
14.1
12.5
2009
2008
2007
3.4%
3.4%
5.5%
22.1
25.0
8.0%
5.5%
2.0%
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%
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60 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
24. Retirement Benefit Obligations (continued)
Demographic assumptions:
Basic mortality table used:
100% of PCMA00/PCFA00
Year the mortality table was published:
2003
Allowance for future improvements in longevity:
Year of birth projections, with medium cohort improvements
Allowance made for members to take a cash lump sum on retirement
Members are assumed to take 100% of their maximum
with adjustments to reflect expected scheme experience
cash sum (based on current commutation factors)
Sensitivities:
Sensitivity of 2009 pension liabilities to changes in assumptions are as follows:
Assumption
Assumption
Discount rate
Decrease by 0.5%
Expected rate of pension increase
Increase by 0.5%
Life expectancy
Increase by 1 year
Impact on pension liabilities
Estimated
increase
%
12.2
4.2
1.9
Estimated
increase
£m
2.3
0.8
0.4
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
30 September 2008
PLC
Deficit
Funding level
Funding approach
£1,508,000
84%
Anachem
5 April 2007
£839,000
91%
Assumes that schemes’ assets will
Assumes that schemes’ assets will
outperform Government bonds by
outperform Government bonds by
2.84% pa pre-retirement and 0.24% pa
2.35% pa pre-retirement and NIL% pa
post-retirement
post-retirement
Lump sum contributions per annum to
remove the deficit
£96,000
£120,000
Period over which the deficit is expected
to be removed
1 October 2009 – 30 September 2029
1 October 2007 – 30 September 2017
Expected contributions during FY2010
£96,000
£120,000
Current investment strategy
80% Equities/20% Bonds
85% Equities/15% Bonds
Number of deferred members at date of
actuarial valuation
137
187
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61 Diploma PLC Annual Report and Accounts 2009
Notes to the Consolidated Financial Statements
For the year ended 30 September 2009
24. Retirement Benefit Obligations (continued)
History of experience gains and losses:
All experience adjustments are recognised directly in equity, net of related tax.
2009
2008
2007
2006
2005
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:
0.7
5%
(3.4)
27%
(3.8)
20%
3.0
21%
Amount (£m)
% of present value of schemes’ liabilities
Present value of schemes’ liabilities
Market value of schemes’ assets
Deficit
–
–
(18.8)
14.1
(4.7)
(0.1)
1%
(14.2)
(16.4)
(18.0)
12.5
(1.7)
14.8
(1.6)
13.3
(4.7)
0.3
2%
2.3
14%
0.1
1%
0.6
5%
(0.6)
3%
(0.6)
3%
1.1
9%
–
–
(1.7)
11%
(16.1)
11.7
(4.4)
25. Commitments
At 30 September 2009 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 £1.4m (2008: £1.1m).
26. Audit Fees
During the year the Group received the following services from the auditors:
Fees payable to the auditors for the audit of:
– the Company’s annual report
– the Company’s subsidiaries, pursuant to legislation
Total audit fees
Land and Buildings
2008
£m
2009
£m
1.3
2.0
0.3
3.6
1.1
2.3
0.3
3.7
2009
£’m
2008
£’m
0.1
0.1
0.2
0.1
0.1
0.2
Non audit fees of £4,000 (2008: £Nil) for taxation advisory services provided in Canada and £10,000 in connection with the Interim
Report, were paid to the Group’s auditors.
27. Exchange Rates
The following exchange rates have been used to translate the results of the overseas business:
US Dollar
Canadian Dollar
Euro
Average
2009
2008
2009
Closing
2008
1.54
1.82
1.14
1.97
1.99
1.31
1.60
1.72
1.09
1.78
1.90
1.27
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62 Diploma PLC Annual Report and Accounts 2009
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 2006, as applicable to companies reporting under IFRS. The
accounting policies set out below have been consistently applied in 2009 and the comparative period. There has been no material impact
on the Group’s consolidated financial statements in 2009 from the issue of IFRS, or interpretations to existing Standards, during the year.
1 Group Accounting Policies
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 Divestments
The results and cash flows of major lines of business that have been divested have been classified as discontinuing businesses and the
comparatives for the year to 30 September 2008 amended accordingly.
1.4 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.
1.5 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:
n
n
n
Gains and losses arising on settlements and curtailments – where the item that gave rise to the settlement or curtailment
is recognised in operating profit;
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
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:
n
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.
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63 Diploma PLC Annual Report and Accounts 2009
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.
1.6 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.
1.7 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, as the Group controls the
dividend policies of its subsidiaries.
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.
1.8 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.
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64 Diploma PLC Annual Report and Accounts 2009
Group Accounting Policies continued
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
– between 20 and 50 years
–
term of the lease
Plant and equipment – plant and machinery between 3 and 7 years
–
–
IT hardware between 3 and 5 years
fixtures and fittings 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.
Intangible assets
1.9
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 of between three and seven 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 is not amortised.
1.10 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 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.
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65 Diploma PLC Annual Report and Accounts 2009
1.11 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.
1.12 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).
1.13 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.
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66 Diploma PLC Annual Report and Accounts 2009
Group Accounting Policies continued
1.14 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.
1.15 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.
1.16 Share capital and reserves
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. The Group also maintains the following reserves:
(a) Translation reserve – The translation reserve comprises all foreign exchange differences arising from the translation of the
financial statements of foreign businesses.
(b) Hedging reserve – The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash
flow hedging instruments that are determined to be effective hedge.
(c) Retained earnings reserve – The retained earnings reserve comprises total recognised income and expense for the year
attributable to shareholders. Bonus issues of share capital and dividends to shareholders are also charged directly to this
reserve. On acquisition of minority interests, the liability held in the consolidated financial statements for the future purchases
of those minority interests is released to the retained earnings reserve. In addition the cost of acquiring shares in the
Company and the liability to provide those shares to employees, is accounted for in this reserve.
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.
1.17 Accounting standards, interpretations and amendments to published standards not yet effective
The following new standards, amendments and interpretations to existing standards have been published and have been endorsed by
the EU, that are mandatory for the Group’s accounting periods beginning on or after 1 October 2009:
n
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IAS1 (revised) ‘Presentation of Financial Statements’;
IAS23 (revised) ‘Borrowing Costs’;
IAS27 (revised) ‘Consolidated and Separate Financial Statements’;
IFRS2 (revised) ‘Share-based Payment’;
IFRS3 (revised) ‘Business Combinations’; and
IFRS8 ‘Operating Segments’.
The Group has considered the impact of these new standards and interpretations in future periods and, subject to the comments
below, no significant impact is expected on reported profit or net assets.
IFRS3 (revised) ‘Business Combinations’ will apply to business combinations arising from 1 October 2010. Amongst other changes,
the revisions effected by the new standard require subsequent changes in the fair value of contingent consideration payable in respect
of an acquisition to be recognised in the income statement rather than against goodwill, and require transaction costs attributable to
an acquisition to be recognised immediately in the income statement. IFRS3 (revised) will be applied prospectively to transactions
occurring from 1 October 2009. It is therefore not possible to assess in advance the impact on the Group’s financial statements.
IAS1 (revised) ‘Presentation of Financial Statements’ requires entities to prepare a statement of comprehensive income. All no-owner
changes in equity are required to be shown in a performance statement, but entities can choose whether to present one performance
statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive
income). Owner changes in equity are shown in a statement of changes in equity. IAS1 will be applied to all future financial reporting
from 1 October 2009. However this will not impact the Group’s reported profit or net assets since only the disclosure and presentation
of the financial statements will be affected.
The Group has chosen not to early adopt any of these new standards and interpretations.
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67 Diploma PLC Annual Report and Accounts 2009
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. This calculation is usually based on projecting future cash flows over at least 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 24.
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.
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68 Diploma PLC Annual Report and Accounts 2009
Parent Company Balance Sheet
As at 30 September 2009
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
Profit and loss account
Note
2009
£m
2008
£m
c
70.2
70.2
(41.0)
(43.0)
29.2
27.2
d
5.7
23.5
29.2
5.7
21.5
27.2
The financial statements were approved by the Board of Directors on 16 November 2009 and signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
The notes on page 69 form part of these financial statements.
Reconciliation of Movements in
Shareholders’ Funds
For the year ended 30 September 2009
At 1 October 2008
Retained profit for the year
Transfer of own shares
At 30 September 2009
Share
capital
£m
Profit and
loss
account
£m
5.7
–
–
21.5
1.3
0.7
Total
£m
27.2
1.3
0.7
5.7
23.5
29.2
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69 Diploma PLC Annual Report and Accounts 2009
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 2006 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 404 of the Companies Act 2006, no separate profit and loss account is presented for the Company.
Investments and dividends
a.2
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 33 to 37.
c)
Investments
Shares in Group undertakings
At 30 September 2009 and 1 October 2008
Details of the principal subsidiaries are set out on page 72.
d) Share Capital
Authorised ordinary shares of 5p each
At 30 September
Allotted, issued and fully paid ordinary shares of 5p each
£m
70.2
2009
Number
2008
Number
2009
£m
2008
£m
135,000,000 135,000,000
6.7
6.7
At 30 September
113,239,555
113,239,555
5.7
5.7
During the year 413,557 shares were transferred from the Diploma Employee Benefit 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 2009 the Trust held 868,263 (2008: 1,281,820) ordinary shares in the Company representing 0.8% of the called up
share capital. The market value of the shares at 30 September 2009 was £1.5m (2008: £2.0m).
Following the implementation of the final tranche of the Companies Act 2006 on 1 October 2009, a company is no longer required to
have an authorised share capital. The Directors intend to update the Company’s Articles of Association at the forthcoming AGM which
will thereafter remove the requirement to obtain shareholders’ consent to increase the authorised share capital if it would otherwise
have been required to do so when issuing new shares in the Company.
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70 Diploma PLC Annual Report and Accounts 2009
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 2009 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. The financial reporting framework
that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the
European Union.
This report is made solely to the Company’s members, as a body, in accordance with sections 495 and 496 of the Companies Act
2006. 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
As explained more fully in the Statement of Directors’ Responsibilities, the directors are responsible for the preparation of the Group
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Group financial
statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to
comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the
financial statements.
Opinion on financial statements
In our opinion the Group financial statements:
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give a true and fair view of the state of the Group’s affairs as at 30 September 2009 and of its profit for the year then ended;
have been properly prepared in accordance with IFRSs as adopted by the European Union; and
have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is
consistent with the Group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
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certain disclosures of directors’ remuneration specified by law are not made; or
n we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
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the directors’ statement contained within the Directors’ Report in relation to going concern; and
the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the June 2008
Combined Code specified for our review.
Other matter
We have reported separately on the Parent company financial statements of Diploma PLC for the year ended and on the information in
the Directors’ Remuneration Report that is described as having been audited.
Ian Waller (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditors
London
16 November 2009
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71 Diploma PLC Annual Report and Accounts 2009
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 2009 which comprise
the Parent company balance sheet, the reconciliation of movement in shareholders’ funds and the related notes a) to d). The financial
reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United
Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body, in accordance with sections 495, 496 and 497 of the Companies
Act 2006. 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
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the Parent
company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Parent
company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall
presentation of the financial statements.
Opinion on financial statements
In our opinion the Parent company financial statements:
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give a true and fair view of the state of the Parent company’s affairs as at 30 September 2009;
have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
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the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
2006; and
the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent
with the Parent company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our
opinion:
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adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
the Parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
n
certain disclosures of directors’ remuneration specified by law are not made; or
n we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the Group financial statements of Diploma PLC for the year ended 30 September 2009.
Ian Waller (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditors
London
16 November 2009
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72 Diploma PLC Annual Report and Accounts 2009
Principal Subsidiaries
Life Sciences
Anachem 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
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
Hitek Limited
Other Companies
Diploma Holdings PLC
Diploma Holdings Inc
Group
percentage of
equity capital
Country of
incorporation
or registration
100%
100%
100%
100%
91.8%
75%
100%
100%
100%
90%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
England
England
Germany
Switzerland
Canada
Canada
USA
USA
Netherlands
Denmark
England
England
USA
England
England
Germany
Germany
England
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.
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73 Diploma PLC Annual Report and Accounts 2009
Financial Calendar and Shareholder Information
Announcements (provisional dates):
Interim Management Statement released
Interim Management Statement released
Interim Results announced
Preliminary Results announced
Annual Report posted to shareholders
Annual General Meeting
Dividends (provisional dates)
Interim announced
Paid
Final announced
Paid (if approved)
13 January 2010
5 August 2010
10 May 2010
15 November 2010
29 November 2010
12 January 2011
10 May 2010
16 June 2010
15 November 2010
19 January 2011
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. Their website for shareholder enquiries is
www.computershare.co.uk
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
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74 Diploma PLC Annual Report and Accounts 2009
Five Year Record
For the year ended 30 September 2009
Continuing businesses
Revenue
Operating profit
Finance (expense)/income
Adjusted profit before tax
Amortisation of acquisition intangibles and goodwill
Property profits and restructuring costs, net
Fair value remeasurements
Profit before tax
Tax expense
Profit for the year from continuing businesses
Profit from discontinuing business
Profit for the year
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
Total shareholders’ equity
Dividend cover
Ratios
Return on trading capital employed
Operating margin
Continuing and discontinuing businesses
Revenue
Adjusted profit before tax
25.6
(0.1)
25.5
(3.1)
–
(1.9)
20.5
(7.1)
13.4
0.9
14.3
121.4
2.7
(21.3)
4.7
13.1
2.0
(6.5)
2009
£m
2008
£m
2007
£m
2006
£m
160.0
156.2
124.5
112.1
26.6
0.2
26.8
(2.7)
–
(3.0)
21.1
(7.2)
13.9
0.5
14.4
20.7
1.2
21.9
(1.0)
–
–
20.9
(7.1)
13.8
1.0
14.8
18.1
1.0
19.1
(0.3)
11.1
–
29.9
(6.6)
23.3
0.9
24.2
108.1
1.9
90.7
1.8
92.9
1.6
2005
£m
95.3
15.0
0.7
15.7
–
–
–
15.7
(4.6)
11.1
1.1
12.2
75.4
1.7
(15.7)
(12.4)
(36.7)
(25.7)
1.7
11.2
3.3
(6.0)
1.6
11.8
3.6
(5.6)
4.7
–
(3.4)
–
4.4
–
(3.1)
–
116.1
104.5
91.5
59.1
52.7
2.2
9.1
12.2
23.5
10.8
14.8
7.8
107
1.9
%
19.0
16.0
2.0
7.8
7.9
17.7
11.4
16.0
7.5
95
2.1
%
22.4
17.0
(25.3)
5.7
31.6
12.0
11.8
13.1
5.4
80
2.4
%
25.5
16.6
9.8
5.0
8.0
7.3
4.1
0.3
22.8
11.7
20.3
11.8
4.6
82
2.6
%
25.1
16.1
9.5
9.7
4.0
67
2.4
%
23.0
15.7
£m
111.3
17.2
£m
175.7
26.7
£m
172.3
27.5
£m
140.7
23.3
£m
128.2
20.4
Adjusted earnings per ordinary share (pence)
15.6
16.4
14.0
12.6
10.7
Notes
1
2
3
4
5
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.
Total shareholders’ equity per share have been calculated by dividing equity shareholders’ funds by the number of ordinary shares in issue at the year end.
Dividend cover is calculated on adjusted earnings as defined in note 2 to the financial statements.
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.
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Diploma PLC is an international group of businesses
supplying specialised technical products and services
Section 1:
Overview
Group at a Glance
Financial Highlights
Chairman’s Statement
Chief Executive’s Review
Directors and Advisors
Section 2:
Business Review
Strategy and Performance
Sector Reviews
Finance Review
Risks and Uncertainties
Corporate and Social Responsibility
Section 3:
Governance
Directors’ Report
Corporate Governance
Remuneration Report
01
02
03
04
08
10
14
20
22
26
27
29
33
Section 4:
Financial Statements
Statement of Directors’ Responsibilities
for the Financial Statements
Consolidated Income Statement
Consolidated Balance Sheet
Consolidated Statement of
Recognised Income and Expense
Consolidated Cash Flow Statement
Notes to the Consolidated
Financial Statements
Group Accounting Policies
Parent Company Balance Sheet
Reconciliation of Movements
in Shareholders’ Funds
Notes to the Parent Company
Financial Statements
Independent Auditors’ Reports
Principal Subsidiaries
Financial Calendar and
Shareholder Information
Five Year Record
38
39
40
41
42
43
62
68
68
69
70
72
73
74
www.diplomaplc.com
Design www.energydesignstudio.com
Production Imprima Limited 020 7105 0300
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Diploma PLC
12 Charterhouse Square
London EC1M 6AX
Telephone: +44 (0)20 7549 5700
Fax: +44 (0)20 7549 5715
www.diplomaplc.com
Diploma PLC
Annual Report and Accounts 2009