Annual Report
& Accounts 2010
Section 1: Overview
Section 4: Financial Statements
Financial Highlights 01
Chairman’s Statement 02
Group at a Glance 04
Chief Executive’s Review 06
Key Performance Indicators 10
Directors and Advisors 12
Section 2: Business Review
Statement of Directors’ Responsibilities
for the Financial Statements 41
Consolidated Income Statement 42
Consolidated Statement of
Comprehensive Income 43
Consolidated Statement of Changes
in Shareholders’ Equity 43
Consolidated Statement of Financial Position 44
Consolidated Cash Flow Statement 45
Notes to the Consolidated Financial Statements 46
Strategy and Performance 14
Group Accounting Policies 67
Sector Reviews 16
Parent Company Balance Sheet 74
Finance Review 22
Risks and Uncertainties 24
Corporate and Social Responsibility 28
Section 3: Governance
Directors’ Report 29
Corporate Governance 31
Remuneration Report 35
Reconciliation of Movements in
Shareholders’ Funds 74
Notes to the Parent Company
Financial Statements 75
Independent Auditors’ Reports 76
Principal Subsidiaries 78
Financial Calendar and Shareholder Information 79
Five Year Record 80
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Diploma PLC Annual Report and Accounts 2010
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Financial Highlights
Strong revenue and profit growth,
excellent cash flow
Year ended 30 September
Revenue
Adjusted operating profit *
Adjusted operating margin*
Adjusted profit before tax*†
Profit before tax
Profit for the year‡
Free cash flow
Adjusted earnings per share*†
Basic earnings per share
Total dividends per share
Free cash flow per share
2010
£m
183.5
32.1
2009
£m
160.0
25.6
17.5%
16.0%
32.2
26.7
23.0
29.8
Pence
18.9
14.6
9.0
26.3
25.5
20.5
14.3
23.5
Pence
14.8
10.8
7.8
20.8
+15%
+25%
+26%
+30%
+61%
+27%
+28%
+35%
+15%
+27%
* Before acquisition related charges
† Before fair value remeasurements
‡ Profit for the year is stated after tax and includes the profit on sale of the discontinued businesses. All other reported results relate to the continuing businesses.
Note: Diploma PLC uses alternative performance measures as key financial indicators to assess the underlying performance of the Group.
These include adjusted operating profit, adjusted profit before tax, adjusted earnings per share and free cash flow.
The narrative on pages 2 to 40 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 2010
Chairman’s Statement
Strong earnings, value
and dividend growth
over the business cycle
John Rennocks, Chairman
Diploma has delivered good revenue and profit growth
in the 2010 financial year, with a strengthening trend
into the second half of the year. In the face of the
global recession in 2009, the Group quickly scaled
back operating costs and working capital and reduced
balance sheet exposure. These actions left the Group
well placed to maintain performance during the
downturn and then to capitalise on the opportunities
presented by the recovery, which began to emerge in
the second quarter of the 2010 financial year in most
of the Group’s key markets. Given continuing uncertainty
in the major economies, management has continued
to maintain close control over costs and working
capital, which has resulted in a further strengthening
of operating margins and continued strong cash flow.
Results
Group revenue increased in 2010 by 15% to £183.5m
(2009: £160.0m). The combination of increased revenue
and cost reductions implemented in 2009, contributed
to an increase in adjusted operating profit of 25% to
£32.1m (2009: £25.6m) and operating margins improved
to 17.5% (2009: £16.0%)
Adjusted profit before tax increased by 26% to £32.2m
(2009: £25.5m) and adjusted earnings per share
increased by 28% to 18.9p (2009: 14.8p).
The Group generated free cash flow in the year of
£29.8m (2009: £23.5m), including net proceeds of
£6.4m received from the sale of the two Anachem
businesses. After spending £11.0m on acquiring
new businesses and certain minority shareholdings
during the year, the Group ended the year with cash
balances of £30.1m (2009: £21.3m). The strong
balance sheet, together with renewed medium term
bank facilities, will provide the resources to continue
to exploit the acquisition opportunities which are
now emerging.
Dividends
Diploma continues to generate attractive and
growing dividends for its shareholders. The Board is
recommending an increase in the final dividend of
17% to 6.2p per share (2009: 5.3p) which, subject to
shareholder approval at the Annual General Meeting,
will be paid on 19 January 2011, to shareholders on
the register at 3 December 2010.
The total dividend per share for the year will be 9.0p
which represents a 15% increase on 2009 and is
consistent with the Board’s policy to target dividends
per share towards a cover ratio of 2.0 times based on
adjusted earnings.
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Diploma PLC Annual Report and Accounts 2010
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Five Year Performance
EPS growth: +14% p.a.
(Based on adjusted EPS in pence)
TSR growth: +20% p.a.
(compared with FTSE 250: +5% p.a.)
Dividend growth: +18% p.a.
(dividends in pence)
11.8
13.1
16.0
14.8
18.9
112
168
120
145
249
4.6
5.4
7.5
7.8
9.0
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Five years of progress
The strength and resilience of the Group’s business
model is demonstrated by the consistent profitable
growth of the Group over the past five years. Adjusted
earnings per share has grown at 14% per annum
through a combination of organic growth and carefully
targeted acquisitions. This consistent growth in
earnings, combined with a strong balance sheet and
excellent cash flow has encouraged the Board to
significantly increase the rate of dividends paid to
shareholders from 4.0p in 2005 to 9.0p this year, an
annual average increase of 18% per year. At the same
time the Group’s market capitalisation has increased
from £161m in 2005 to over £300m. Taken together,
the Group has therefore delivered an average total
shareholder return of 20% per year, over the past
five years.
Governance
There were no changes to the Board during the year,
but we continue to evaluate performance thoroughly
on an annual basis, as well as reviewing appropriate
succession plans.
Employees
The requirement to reduce costs during the recession
has largely had to be borne by our employees, through
a combination of reduced headcount and constrained
salary increases. The Board is very grateful for the way
in which our employees have adapted to these difficult
and challenging conditions and it again demonstrates
that a key strength of Diploma is the proactive and
responsive attitude of our employees. I wish to thank
all of our employees for their exceptional efforts and
dedication which are key to the success of the Group.
Outlook
In recent years, the Group has demonstrated both the
resilience of its business model and its ability to react
swiftly to changes in market conditions.
Robust underlying organic growth together with strong
cash generation and an active acquisition programme,
provide the Board with confidence that the Group will
achieve further progress in 2011.
John Rennocks
Chairman
22 November 2010
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Diploma PLC Annual Report and Accounts 2010
Group at a Glance
Diploma PLC is an international
group of businesses supplying
specialised technical products
and services
Resilient
Revenues
Attractive
Margins
We focus on essential products and
services funded by customers’ operating
rather than capital budgets, giving
stability to revenues
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
cash flow fund our growth strategy while
providing healthy dividends
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Sectors
Life Sciences
Seals
Controls
30%
of revenues
33%
of revenues
37%
of revenues
199 employees
371 employees
234 employees
Suppliers of
consumables,
instrumentation
and related services
to the healthcare
and environmental
industries
Geography*
Europe
48%
Suppliers of hydraulic
seals, gaskets,
cylinders, components
and kits for heavy
mobile and industrial
machinery
Suppliers of specialised
wiring, connectors,
fasteners and control
devices for technically
demanding applications
North America
Rest of World
46%
6%
UK & Eire
25%
US
Continental
Europe
23%
Canada
21%
25%
* revenue by destination
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Diploma PLC Annual Report and Accounts 2010
Chief Executive’s Review
Stable revenue growth,
sustainable margins and an
active acquisition programme
Strategy and performance
The Group comprises a number of high quality,
specialised businesses supplying technical products
and services to the Life Sciences, Seals and Controls
industries. The businesses aim to achieve stable
revenue growth and attractive margins by focusing
on supplying essential products and services to
customers who value high levels of customer service,
technical support and value adding activities. The
businesses target organic revenue growth over the
economic cycle at a rate of “GDP plus” growth
(5-6% p.a.), with higher growth rates achieved through
carefully selected, value enhancing acquisitions.
This strategic model has been closely tested through
the dramatic downturn in the global economy in 2009
and the subsequent recovery in the markets. During
the recession, the businesses showed their resilience
with revenues less impacted than competitors who
were more dependent on capital equipment budgets
or could offer less differentiated products and services.
With the recovery taking hold in 2010, revenues have
rebounded strongly, supporting our belief that the
businesses have succeeded in further penetrating their
markets by maintaining service levels through the
downturn. Revenues increased by 15% in 2010 to
£183.5m (2009: £160.0m) with underlying growth of
11% after adjusting for currency translation effects,
acquisitions and certain one-off items.
Operating margins have also performed well under
extreme market pressure, providing further evidence
of the continuing value provided to customers and the
success in achieving operational efficiency. During the
recession, the businesses acted quickly and decisively
to optimise performance and reduce costs to match
the reduced revenue levels. As a result, operating
margins were held at 16.0% of revenue. As revenues
have rebounded, the businesses have been very
controlled in adding back costs, given the uncertainty
in the sustainability of the recovery. With the resulting
benefits of operational leverage, operating margins
have increased to 17.5% of revenue and adjusted
operating profits have increased by 25% to £32.1m
(2009: £25.6m); this increase is 19% after adjusting
for currency translation effects, acquisitions and certain
one-off items.
Performance against other key indicators has also
been strong through the recession and into the
subsequent recovery. In 2009, the businesses reduced
working capital by £6.1m to match the reduced
revenues and as revenues have recovered in 2010, the
businesses have again been cautious about adding back
inventory too quickly. Working capital as a percentage of
revenue has decreased to 15.4% (2009: 17.6%), though
it is likely to trend back to the target range of 16-17% if
revenues continue to increase. Free cash flow, including
proceeds from the disposal of the Anachem businesses,
has been very strong at £29.8m (2009: £23.5m).
Finally, return on trading capital employed (“ROTCE”)
has increased to 22.1% (2009: 19.0%) with the
improved operating margins and working capital ratios.
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Diploma PLC Annual Report and Accounts 2010
”The businesses target “GDP plus”
organic growth in revenues over
the economic cycle, with growth
accelerated through carefully selected,
value-enhancing acquisitions.”
Bruce Thompson, Chief Executive Officer
Sector developments
The Group’s strategic objective is to build more
substantial, broader based businesses in each of its
chosen sectors through a combination of organic growth
and acquisition. Good progress was made in the year in
executing this strategy in each of the three sectors. The
key developments in the year are summarised below
with a more detailed analysis of market drivers and
business performance included in the Business Review.
Life Sciences
Revenue
Adjusted operating profit
2010
£m
55.4
11.9
2009
£m
49.9
10.6
+11%
+12%
Adjusted operating margin
21.5% 21.2%
The DCHI group of Healthcare businesses in Canada
now account for over 70% of the Life Sciences sector
revenues. They operate in a market which is mostly
public sector funded and where the demand from a
growing, aging and well-educated population drives a
steady growth in funding. Within this market, DCHI
supplies specialised products which are used
in the pathology laboratories, operating rooms and
endoscopy suites of the hospitals across Canada. The
worldwide recession had some impact on the market
with limits imposed on the number and cost of specific
medical procedures and diagnostic tests and extended
tender processes for capital equipment. However,
overall Healthcare expenditure in Canada has continued
to grow steadily in real terms and recently there has
been some evidence of an easing of capital approvals.
The business model is built on the supply, on an
exclusive basis, of high quality, manufacturer branded
products secured by long term distribution agreements.
Strong customer relationships are forged through
high levels of customer service, including experienced
technical consultants advising on product applications
and new product ideas and service engineers who
ensure the instrumentation products are operating to
the detailed specifications. A large proportion (over
60%) of DCHI’s revenues are secured under multi-year
customer contracts.
During the year, DCHI consolidated its position in
the Canadian market, delivering solid growth in the
core product lines through increased utilisation of
the products in existing accounts and good success
in penetrating new accounts. Good progress was also
achieved in expanding newer product areas including
allergy testing, assisted reproductive technology (“ART”)
and a new instrument to treat Barrett’s oesophagus,
an early stage of oesophageal cancer.
In July 2010, the acquisition was completed of 80% of
BGS in Australia. The Healthcare market in Australia
shares many of the same attractive characteristics as
that of Canada, with steadily growing Healthcare funding
and structural market challenges which make the
specialised distribution model attractive to
manufacturers. We believe there is a good opportunity
to grow the business by investing in direct sales
resource and leveraging from the experience of DCHI’s
electrosurgery business in Canada.
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Diploma PLC Annual Report and Accounts 2010
Chief Executive’s Review continued
The balance (25-30%) of the sector revenues are
generated by the a1-group of Environmental
businesses in Europe, which supply a range of products
used in Environmental Testing and Health & Safety
applications. The market demand is largely driven
by regulation which ensures steady demand for the
essential consumable products. However, in times of
economic downturn, as experienced through the 2009
recession, customers have deferred capital expenditure
on new equipment and instrumentation. Markets have
shown some sign of recovery in 2010 and a1-group
revenues have increased, boosted in particular by new
sales of containment enclosures to protect technicians
in pharmaceutical research laboratories as well as
increased investment in emissions monitoring in
power stations and gas detection. Actions taken during
the year to consolidate operations will also establish a
stronger base for profitable growth.
Seals
Revenue
Adjusted operating profit
2010
£m
60.1
8.9
2009
£m
48.2
5.5
+25%
+62%
Adjusted operating margin
14.8% 11.4%
Currently around 70% of Seals sector revenues are
generated from the Aftermarket businesses of HFPG
(Hercules, Bulldog and HKX) and FPE. Own brand
sealing products are supplied to a broad range of
mobile machinery applications in heavy construction,
logging, mining, agriculture, material handling and
refuse collection. The principal market drivers are
therefore the growth in the general industrial economy
and in particular heavy construction.
With the broad industrial economy in North America
moving into recession in 2009, construction spending,
housing starts and mobile hydraulic shipments all
experienced substantial falls. The Aftermarket
businesses were impacted, but to a lesser extent
than businesses more dependent upon sales of capital
equipment. A recovery in the general economy has
resulted in Aftermarket revenues increasing by ca. 15%,
but activity levels are still below 2008 peak levels and
the construction market has remained somewhat
muted despite the various stimulus packages.
In the core Hercules business, the key to success is
the ability to provide a next day delivery service from
inventory, for seals and seal kits used in a broad range
of different manufacturers’ machinery and different
applications. Hercules has therefore continued to
invest in warehouse automation at the main facility in
Clearwater, Florida. This will improve further Hercules’
service proposition and bring greater efficiency to
warehouse operations. The benefits of operational
leverage can be seen in the improved operating margin
this year as revenues have recovered, but operating
costs have not been added back at a similar level.
Outside North America, the main focus for development
has been in Europe where good progress was made
in both direct sales in the Benelux countries as well
as the appointment of sub-distributors to distribute
Hercules seal kits in other mainland European countries.
Initiatives are also being developed to increase
penetration in other developing markets in Asia Pacific
and South America.
The major rebound in Seals sector revenues has come
from the Industrial OEM businesses, RT Dygert and
M Seals. On a like-for-like basis, these businesses
have increased revenues by 30% in 2010 and are now
experiencing demand levels approaching pre-recession
levels. Order levels from core customers in North
America began to recover at the end of calendar
year 2009, as the OEM’s regained confidence and
moved back to full time working and carried out some
re-stocking. Confidence was slower to return to
M Seals’ customers in Europe, with a return to growth
only in the second half of the year. M Seals has
continued to
be a key supplier of large bearing seals to the wind
turbine manufacturers and has now established a small
specialist team in China to service this rapidly expanding
wind turbine market.
In September 2010, the Industrial OEM business
was further expanded through the acquisition of All
Seals, a long established supplier of O-rings and custom
manufactured parts to Industrial OEM customers
across a range of specialist applications. All Seals has
a strong position in the important Californian market
and the adjacent South Western States and is therefore
complementary to RT Dygert. The company has
enjoyed strong growth in 2010 and plans are being
developed to expand its product range and to penetrate
new accounts.
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Diploma PLC Annual Report and Accounts 2010
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Controls
Revenue
Adjusted operating profit
2010
£m
68.0
11.3
2009
£m
61.9
9.5
+10%
+19%
Adjusted operating margin
16.6% 15.3%
The Controls sector businesses supply high performance
wiring, connectors, fasteners and control devices
used in a range technically demanding applications.
The businesses offer high quality, manufacturer
branded products sourced under the terms of long
term exclusive distribution agreements. Strong customer
relationships are based on ex-stock availability of
product, responsiveness, technical advice on product
applications and a range of value added services.
The largest end user sector is Defence & Aerospace.
The businesses do not typically supply to major platform
OEMs and Tier 1 suppliers, who are mostly served direct
by the manufacturers. Rather, the businesses supply
into repair, refurbishment and upgrade programmes,
where ex-stock availability and responsiveness are
critical. Operational funding has remained buoyant during
the year, particularly in the ground vehicle and military
marine segments, but sales into Military Aerospace have
been softer, possibly reflecting the priority given to
ground vehicles. Although the businesses are not too
directly impacted in the short term by cutbacks and
delays in major defence projects, it is clear that the
defence spending reviews will have an impact longer
term at the sub-contractor and component supply level.
In Commercial Aerospace, the businesses supply
products principally for the initial installation and
subsequent upgrades of aircraft interiors. After falling
back in 2009, demand has again picked up as passenger
numbers have increased.
In Motorsport, activity has suffered in recent years
from cost cutting measures and team withdrawals in
the Formula 1 series. However, this series has returned
to relative stability with a highly competitive grid and
new team entrants. Medical Equipment is another
specialised market where the businesses continue
to have success and maintain a more stable demand
profile than the background economies.
The businesses also supply to a range of specialised
applications in the General Industrial sector in the
major markets of the UK and Germany. Demand has
recovered well and in particular, there has been strong
growth in the Commercial Refrigeration market, with
the major retailers investing in new and refurbished
stores. In the broader Energy sector, there has been
an increased demand for energy efficient components
as customers implement energy reduction programmes
and move to alternative coolant gases using natural
refrigerants. In August 2010, the German Controls
business acquired the customer list and trading stock
of a distributor of Tyco Energy products. The sales and
logistics activities have now been integrated and this
small acquisition will boost our presence in this growing
business area.
Summary and outlook
The steady performance of the businesses through
the dramatic economic downturn and subsequent
period of uncertain recovery, have given added
confidence in the resilience of the business model.
Over the business cycle, we are looking for continued
organic revenue growth at the “GDP plus” level,
combined with sustained attractive operating margins.
The strategy remains to accelerate growth through
carefully selected, value enhancing acquisitions.
Over the last five years, we have invested ca. £70m
in acquisitions which are delivering a pre-tax return
of over 20%. Current cash balances of ca. £30m,
combined with the renewed debt facility and strong
continuing cash flow give the resources to continue
to pursue this active acquisition strategy.
The environment for acquisitions has certainly improved
and valuation gaps between Buyer and Seller are
now closer. However, the general uncertainty in
the economic environment means that transactions
are taking longer to complete as Buyers and Sellers
try to identify, quantify and limit any risk elements.
Though more time consuming to bring to closure,
three acquisitions were completed in the second
half of the year and further opportunities are currently
being pursued.
Bruce Thompson
Chief Executive Officer
22 November 2010
10 Diploma PLC Annual Report and Accounts 2010
Key Performance Indicators
Revenue Growth (£m)
+15%
+25% +2%
+11%
+18%
112
125
156
160
184
2006
2007
2008
2009
2010
Operating Margin (%)
16.1
16.6
17.0
16.0
17.5
2006
2007
2008
2009
2010
ROTCE (%)
25.1
25.5
22.4
19.0
22.1
2006
2007
2008
2009
2010
Revenue growth is a key measure of performance at both the
sector and operating business levels. The businesses target
organic revenue growth, over the economic cycle, at a rate of
5-6% p.a. (“GDP plus” growth), with higher growth rates achieved
at the Group level through carefully selected acquisitions.
Over the last five years, average revenue growth of 14% p.a. has
been achieved in the continuing businesses, of which 6% p.a. has been
organic growth with 8% p.a. contributed from acquisitions and currency
gains. In 2010, the businesses recovered well from the 2009 recession
and delivered 15% growth in revenues; 11% growth after adjusting for
acquisitions and currency.
Operating margin represents operating profit, before acquisition
related charges, divided by revenue. It is an important measure of
the success of the businesses in achieving superior margins by
offering strongly differentiated products and services, as well as
by running efficient operations.
Product margins are very stable in all sectors and businesses over the
business cycle with short term variations driven mainly by product mix
or currency effects. With tight management of operations, this translates
into Group operating margins which have consistently been in the range
of 16 -17% of revenue, even during the 2009 recession. As revenues
have recovered in 2010, operating margins have increased to 17.5%,
mainly driven by operational leverage in the Seals sector businesses.
Return on trading capital employed (“ROTCE”) represents
operating profit, before amortisation of acquisition related
charges, as a percentage of trading capital employed (“TCE”),
defined as net assets less net cash and non-operating assets and
liabilities. TCE includes the total cash invested in acquisitions,
including all goodwill and acquired gross intangible assets.
The ROTCE target level of 20% on a pre-tax basis is consistent with
the 13% post tax IRR threshold used for investments. Over the last
five years, ROTCE has mostly been above the 20% target, although it
slipped to 19.0% in the 2009 recession. In 2010, ROTCE has recovered
to 22.1% with the improvement in operating margins and continued
good management of working capital.
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Free Cash Flow (£m)
22.8
12.0
17.7
23.5
29.8
2006
2007
2008
2009
2010
Working Capital (% of revenue)
15.7%
17.3%
17.2%
17.6%
15.4%
2006
2007
2008
2009
2010
Key Employee Statistics
Number of
Employees
Males as
% of total
Length of
Service (years)
Average
staff turnover
Sick days lost
per person
2008
2009
2010
833
823
814
65%
66%
66%
5.2
6.4
6.4
20.2% 18.3% 15.0%
3.4
3.6
2.8
Free cash flow is defined as the cash flow generated after
tax, but before acquisitions and dividends. This measures the
success of the operating businesses and the Group as a whole,
in turning profit into cash through the careful management
of working capital and capital investments in the business.
Over the last five years, the Group has generated a robust free cash
flow averaging £21.2m p.a., which excluding disposal proceeds
represents 99% of average adjusted profit after tax. Free cash flow in
2009 was particularly strong due to tight management of working
capital during the recession. In 2010, an additional £0.1m was released
from working capital, contributing to strong free cash flow of £29.8m.
This measure focuses on working capital as a percentage
of revenue. This measure can vary significantly by business
depending on the level of inventory required by the business
model, as well as credit terms with suppliers and customers.
However, experience shows that, for the Group overall,
an average of 16-17% of revenue is a reasonable target.
When revenues move quickly up or down, it takes time to move working
capital to the appropriate level. Although creditor and debtor balances
adjust reasonably quickly, inventories have to be managed through
forward ordering levels and are slower to respond. Even so, during the
2009 recession, working capital was managed to an average of 17.6%
of revenue and this has decreased in 2010 to 15.4% of revenue.
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, the principal non-financial
KPIs relate to the management of human resources.
The average number of employees in the continuing businesses
in 2010 has decreased by 1% to 814 (2009: 823). The proportion of
males to females is unchanged with males accounting for 66% of
the total (2009: 66%); average length of service remains unchanged
at 6.4 years (2009: 6.4 years). Average staff turnover has decreased
to 15.0% (2009: 18.3%) and sick days lost per person were 2.8 days
(2009: 3.6 days).
12 Diploma PLC Annual Report and Accounts 2010
Directors and Advisors
Our experienced board
focuses on strategy, financial
control and risk management
JL Rennocks FCA (65)*†‡
Non-Executive Chairman
BM Thompson (55)
Chief Executive Officer
NP Lingwood FCA (51)
Group Finance Director
and Company Secretary
Joined the Board in July 2002. He is
Chairman of Nestor Healthcare plc and
Intelligent Energy plc, Deputy Chairman
of Inmarsat plc and a non-Executive
Director of Babcock International Group
PLC 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.
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.
13 Diploma PLC Annual Report and Accounts 2010
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Investment Bankers
Lazard
50 Stratton Street
London W1J 8LL
Auditors
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Bankers
Barclays Bank PLC
1 Churchill Place
London E14 5HP
Corporate Stockbrokers
Panmure Gordon & Co
Moorgate Hall
155 Moorgate
London EC2N 6XB
Solicitors
Ashurst
Broadwalk House
5 Appold Street
London EC2A 2HA
HSBC Bank plc
City Corporate Banking Centre
60 Queen Victoria Street
London EC4 4TR
JW Matthews FCA (66)*†‡
Non-Executive
IM Grice (57)*†‡
Non-Executive
I Henderson (54)
Chief Operating Officer
Joined the Board in 2003. He is Senior
Independent non-Executive Director
of Minerva plc and SDL plc. He has
previously been Chairman of Regus
Group plc, Crest Nicholson plc and
was a Managing Director of County
NatWest and Deputy Chairman/Deputy
Chief Executive of Beazer plc.
Joined the Board in January 2007. He
is a member of the Supervisory Board
of Arcadis NV, a non-Executive Director
of John Graham Holdings Limited,
and Chairman of NM-UK Limited.
He was until February 2008 Group CEO
of Alfred McAlpine plc.
Joined the Board as a Director in 1998. He
was previously a Director of Glenchewton
plc and ANC Holdings Limited.
Member of:
* the Remuneration Committee
† the Audit Committee
‡ the Nomination Committee
14 Diploma PLC Annual Report and Accounts 2010
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 Group’s strategic objective is to build
more substantial, broader based businesses in the chosen
sectors through a combination of organic growth and acquisition.
The following are the 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 and
maintenance applications and up-grade programmes, rather than
supplied to original equipment manufacturers (“OEMs”). 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
publicly 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 acquisition in July 2010 of BGS in Australia,
extends the Healthcare activities into a new geographic market
with similar characteristics to that of Canada. 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. This has been demonstrated by the
performance of the business during the 2009 recession. The
Hercules Aftermarket business saw revenues reduce by ca.
20%, while many construction equipment OEMs experienced
reductions of 40-60% in revenues. The risk profile of the
business has also been improved by extending further into
international markets and specialised industrial OEMs, through
the acquisitions of M Seals, RT Dygert and All Seals and
the investment in Hercules Europe. In 2010, 32% of sector
revenues were generated in international markets outside North
America while Industrial OEMs now account for ca. 30% of
sector revenues.
In Controls, the businesses offer specialised products and
services used in technically demanding applications. These
specialised sectors have demonstrated a more resilient
performance than the general industrial economies in which
they operate, by focusing on more buoyant markets including
Defence & Aerospace, Medical, Motorsport, Energy and General
Industrial. Although total Defence expenditure is now likely to
be constrained by budget cuts, the military operating budgets
on which our businesses mostly depend, should prove more
resilient than major capital programmes.
Strong customer relationships underpinned by full service
offering
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:
(cid:78)
(cid:78)
(cid:78)
Customer service – which can be, for example, the delivery
of products held in inventory on a next day basis.
Technical support – for example, helping customers design
the product into their specific applications.
Value adding activities – services such as kitting or
assembly, which the customers would have to pay
someone else to provide or would require investment in
their own resources.
Ultimately, customers will always demand strong product
performance, competitive pricing and responsive delivery.
However, the broader service offering builds stronger links with
the customers at many levels, making switching to competitive
suppliers more difficult.
If real value is not provided to customers, product 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
product margins in specific product and market segments.
Shorter term movements in product margins principally arise due
to changes in the mix of business or volatile currency markets.
Over time however, the businesses work closely with suppliers
and customers to ensure stable product margins which, with
efficient operations, translate into consistent operating margins
in the range 16-18%.
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:
(cid:78)
(cid:78)
Quality manufacturer-branded products supplied on an
exclusive basis, typically secured with long term distribution
agreements.
Own brand products manufactured under contract to the
businesses’ detailed specifications.
(cid:78)
Selective in-house manufacturing and assembly.
The Life Sciences and Controls sector businesses mostly
source high quality, manufacturer branded products under
exclusive, longer term contracts. These contracts are typically
3-5 years in duration, but in some cases extend to ten years.
In these two sectors, manufacturer branded products account
for 87% of revenues. The balance is made up of own brand
and manufactured products. For example, the a1-group has
improved competitiveness by developing its own range of
containment products for potent powder handling, 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.
15 Diploma PLC Annual Report and Accounts 2010
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In the Seals sector, the business model is a little different,
with own brand and manufactured products accounting for
over 90% of revenues. 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 supply
contracts and by the cultivation of multiple alternative suppliers.
In supplying Industrial OEM’s, more emphasis is placed on the
manufacturer brands by M Seals, RTD Seals and the recently
acquired All Seals.
picking carousels. This will position the operation well to manage
increasing revenues as markets recover, without needing to take
cost levels back to historic levels.
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 cash flow.
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.
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 comprise a combination of
competitive salaries, annual bonuses and long term incentive
plans, targeted at the individual business level.
The cadre of ca. 60 senior managers in the operating
businesses, demonstrate a good blend of energy, ambition and
experience. The average age of these managers is 43 and they
have an average length of service within their companies of 10
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.
Similarly in the area of information systems, regular investment
ensures that the businesses are supported by integrated IT
systems designed to give strong functionality and efficiency
and capable of supporting growth. Over the past five years,
an average of £0.6m p.a. has been invested in improving the
Group’s information systems and this investment is maintained
over the business cycle. During the recent recession, the
Hercules operation in Clearwater, Florida invested £1.2m in
new warehouse management software and automated stock
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 currently ungeared balance
sheet, supported by strong and consistent operating cash flow
and medium term bank facilities, provides the resources to
support an active acquisition programme. 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.
Over the last five years, a total of ca. £70m has been invested in
aquisitions across the sectors and geographies:
Europe
North America
Life
Sciences
CBISS
Seals
Controls
M Seals (90%)
Snijders
Cabletec
Hitek
Fischer
AMT (75%)
Meditech
Somagen (20%)
RT Dygert
HKX
All Seals
Rest of World
BGS (80%)
In evaluating potential acquisitions, a discounted cash flow
model is used with the normal threshold set at an internal rate of
return (“IRR”) of 13% on a post tax basis. This broadly translates
to 20% on a pre-tax basis which corresponds to the Group
target for ROTCE. The success of the acquisition programme in
purely financial terms can be measured crudely by the current
operating profit return on the total investment. In 2010, ca.
£14m of adjusted operating profit was generated from the
businesses acquired over the last five years. This represents a
return of over 20% on the total of £70m invested, after adjusting
for full year contributions from the acquisitions completed in
2010.
16 Diploma PLC Annual Report and Accounts 2010
Sector Review: Life Sciences
Sector Definition and Scope
The Life Sciences sector businesses supply a range of
consumables, instrumentation and related services to the
healthcare and environmental industries.
The 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 assisted
reproductive technology (“ART”) 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.
In July 2010, Diploma completed the acquisition of 80% of Big
Green Surgical (“BGS”) located near Sydney, Australia. BGS
is a smaller more narrowly focused version of AMT’s existing
electrosurgery business in Canada and shares a number of
common suppliers.
The a1-group is a supplier to Environmental testing laboratories
and to Health & Safety engineers. The a1-envirosciences
business has locations in Dusseldorf in Germany and Basel in
Switzerland and also has sales and service resources across
Northern Europe. It supplies a range of specialised analysers
for detecting and measuring specific elements in liquids, solids
and gases and also supplies a range of containment enclosures
for potent powder handling. The CBISS business, located in
Tranmere in the UK, supplies equipment and services for the
monitoring and control of environmental emissions, as well as a
range of gas detection devices.
Market Drivers
The DCHI businesses in Canada supply into the 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
2006
2007
2008
2009
Growth
% p.a
Public sector health
expenditure in Canada
Total healthcare
expenditure
105.8
113.2
120.3
128.6
+6.7%
151.3
161.6
171.9
183.1
+6.6%
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.
In 2009, the recession had some impact on the market with
opportunities at times constrained by extended tender processes
and limits set by individual Provinces on the number and cost
of specific medical procedures in important jurisdictions such
as British Columbia and Ontario. However, overall Healthcare
expenditure continues to grow steadily in real terms and recently
there has been some evidence of an easing in capital approvals.
The Healthcare market in Australia shares many of the same
attractive characteristics as that of Canada. While privately
funded healthcare is more prevalent, public sector healthcare
funding is steady and growing and supported by a stable,
resource based economy. As with Canada, there is a large
geography to be covered, low population density and purchasing
processes that vary by State. These characteristics necessarily
demand a significant investment by manufacturers in technical
sales and service resource which makes the specialised
distribution model more attractive as an efficient way to serve
the market.
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:
(cid:78)
(cid:78)
(cid:78)
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; and
greater use of new technologies in process control and
integrated pollution control.
In the UK, the market demand for emissions monitoring, gas
detection and gas leakage products has been positive; partly in
response to legislative requirements but also driven by larger
enterprises setting internal targets for reductions in pollutants
and energy usage. In Germany, there were signs that capital
budgets were beginning to be released in both the water quality
monitoring and petrochemical analysis sectors.
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 population demands 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
Provinces are responsible for the delivery of the healthcare
services, but the Federal Government controls delivery through
Federal-Provincial transfer payments, which represent the largest
source of revenues for the Provinces.
Sector Performance
The Life Sciences businesses increased revenues in 2010 by
11% to £55.4m (2009: £49.9m). Sector revenues benefited
on translation from the stronger Canadian dollar relative to UK
sterling and from the contribution from the newly acquired BGS
business in Australia. On a comparable and constant currency
basis, sector revenues increased by 1%. On a transaction basis,
the stronger Canadian dollar, relative to both the US dollar and
the euro, had a positive effect on gross margins in the Canadian
businesses. Adjusted operating profits, which also benefited
from the stronger Canadian dollar, increased by 12% to £11.9m
(2009: £10.6m), with operating margins increasing to 21.5%
(2009: 21.2%).
17 Diploma PLC Annual Report and Accounts 2010
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Capital expenditure in the sector was £0.7m, including £0.6m
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. Strong
free cash flow of £10.1m was generated in the sector (2009:
£7.6m) through higher profitability and lower tax payments.
Revenues from the DCHI businesses increased by 13% in UK
sterling terms but were unchanged in Canadian dollars against a
strong prior year comparative. In 2009, revenues were boosted
by an exceptional sale of face shields to protect against swine
flu and there was also a full year’s contribution from the sale of
test kits from a supplier which was discontinued after the first
quarter of this year. After adjusting for these items, underlying
revenues from the continuing product lines increased by 8% in
Canadian dollars.
AMT, excluding the impact of the exceptional face shield sale
in 2009, increased revenues by 13%. In its core electrosurgery
business, AMT encouraged increased utilisation of its proprietary
smoke evacuation products in existing accounts and also
succeeded in penetrating key new installations. There were also
strong sales of grounding pads and laparoscopic electrodes used
in electrosurgery procedures and of other surgical instruments,
such as disposable scissor tips and clips. AMT’s endoscopy
business saw good growth in its sales of consumable products,
including argon probes and flexible endoscopic instruments.
Growth was also achieved in the sales of capital equipment,
including several installations for a new instrument to treat
Barrett’s oesophagus, an early stage of oesophageal cancer.
A number of other new product lines have also been added
later in the year to extend the product offering in the growing
endoscopy market.
In July 2010, the acquisition was completed of 80% of BGS
in Australia. BGS is a specialised distributor of electrosurgery
consumables and equipment supplied to both public and private
hospitals in Australia and New Zealand. It is a smaller version of
AMT’s electrosurgery business in Canada and we believe that
there is a good opportunity to grow BGS revenues by investing
in direct sales resources and broadening the product line and
geographical coverage.
Somagen, excluding the impact of the discontinued product
line, increased revenues by 2%. There was continued growth
in sales from Somagen’s core suppliers of consumable
products, delivered to hospital pathology laboratories under
longer term reagent rental contracts. Somagen also had good
success in placing newly developed instruments into existing
accounts, taking the opportunity to sign up longer term contract
extensions. Good growth was also achieved with new products
for allergy testing and other new products introduced to
strengthen further Somagen’s position in the market for assisted
reproductive technology (“ART”).
The a1-group increased revenues by 7%, with a1-envirosciences
revenues growing by 5% and CBISS revenues growing by
15%. The growth in the a1-envirosciences business was driven
principally by large new contracts in Switzerland for the supply
of customised stainless steel containment enclosures for the
personal protection of technicians in the research laboratories of
major pharmaceutical companies.
scitsitatSecneicSefiL
euneveR
Adjusted Operating Profit
nigraMgnitarepO
wolFhsaCeerF
deyolpmElatipaCgnidarT
ECTOR
sremotsuC
lacinilC
seitilitU
Life Sciences Research
Chemical & Petrochemical
Industrial & Other
yhpargoeG
aciremAhtroN
eporuE
dlroWfotseR
stcudorP
selbamusnoC
noitatnemurtsnI
ecivreS
2010
2009
£55.4m
£11.9m
21.5%
£10.1m
£49.7m
24.0%
£49.9m
£10.6m
21.2%
£7.6m
£45.5m
23.3%
%87
8%
8%
4%
2%
%47
25%
%1%
66%
25%
9%
Germany and the Benelux countries also remain strong markets
for a1-envirosciences in the supply of elemental analysers to
the petrochemical and bulk chemistry industries. Although
constraints in customers’ capital budgets held back demand
earlier in the year, both prospects and order levels improved
in the second half. During the year, the decision was made
to consolidate the UK operations of a1-envirosciences into
Germany. The UK market will now be serviced by home based
sales and service resources and all purchasing, administrative
and logistical support will be provided by the main German
operation. The costs of this reorganisation of £0.1m were
charged against operating profit in 2010.
CBISS experienced strong growth across its product range.
The core emissions monitoring (“CEMS“) business returned
to growth as new power stations came on line and operators
replaced out-dated monitoring equipment in existing installations.
The value of active prospects also increased sharply during the
year as funding became more readily available for alternative
power plants (waste, biofuels, syngas) and concerted efforts
were made to remove bottlenecks in the planning process.
CBISS also had success with gas detection products designed to
reduce greenhouse gas emissions and improve energy useage
in supermarkets and other specialised applications.
18 Diploma PLC Annual Report and Accounts 2010
Sector Review: Seals
Sector Definition and Scope
The Seals sector businesses supply a range of hydraulic
seals, gaskets, cylinders, components and kits used in heavy
mobile machinery and specialised industrial equipment.
2006
2007
2008
2009
Growth
% p.a.
US real GDP growth(1) +2.7% +1.9%
+0%
-2.6%
0.5%
The Hercules Fluid Power Group (“HFPG”) supplies to the
Aftermarket through the Hercules, Bulldog and HKX businesses
and to Industrial OEM’s (“Original Equipment Manufacturers”)
and equipment dealers through the RT Dygert and All Seals
businesses.
Hercules is the core Aftermarket business based in Clearwater,
Florida and 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, based
in Reno, supplies a range of gasket and seal kits for heavy duty
diesel engines, transmissions and hydraulic cylinders used in
off road and marine applications. HKX is based near Seattle and
supplies hydraulic kits used in the installation of attachments on
excavators.
The Industrial OEM businesses in North America comprise RT
Dygert, acquired in January 2009, with operations in Minneapolis
and Chicago and All Seals, acquired in September 2010, based
in Santa Ana, California. Both companies supply seals, O-rings
and custom moulded and machined parts to a range of Industrial
OEM customers, cylinder manufacturers and sub-distributors.
Applications range from spray painting guns to water filtration to
medical devices.
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, supplied to a range of
specialised Industrial OEM customers. 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 Aftermarket businesses supply sealing products to the
mobile machinery Aftermarket to support 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. The customers of the Industrial OEM businesses
are manufacturers of a wide range of specialised industrial (and
some retail) products. The principal market driver in the OEM
sector is therefore general growth in the industrial economy.
Annual US construction
spending $billion(2)
US mobile hydraulic
shipments $million(3)
1,168
1,151
1,072
908
-4.7%
2,766
2,626
2,913
1,669
-11.5%
Sources:
(1) Bureau of Economic Analysis – US Department of Commerce
(2) US Census Bureau
(3) National Fluid Power Association
In the US, while the residential construction sector had been
in decline since 2007, the broader industrial economy moved
into recession in 2009 and construction spending, housing
starts and mobile hydraulic shipments all registered substantial
falls. The HFPG Aftermarket businesses were impacted, but
to a lesser extent than the Industrial OEM businesses, where
manufacturers moved quickly to shorter working weeks and
generally destocked. In 2010, more favourable economic
conditions began to restore confidence in the general industrial
sector and the Industrial OEM business rebounded strongly.
Construction spending however has remained muted, despite
the stimulus packages.
Canada was not as severely impacted by the financial crisis, but
by 2009 there was significantly lower economic activity in key
industrial regions which are dependent on demand from the US
market. The Canadian economy grew strongly in the first two
quarters of 2010 as worldwide demand for natural resources
returned and the manufacturing sector in Eastern Canada
regained momentum after a period of severe destocking.
In Europe, the general downturn impacted in the UK from late
2008, followed by Continental Europe in early 2009. Activity
levels in general picked up in the final quarter of 2009 and have
been sustained throughout 2010, though still below peak 2008
levels.
Sector Performance
The Seals businesses saw revenues increase in UK sterling
terms by 25% to £60.1m (2009: £48.2m). The results benefited
from a full twelve months trading from RT Dygert compared to
nine months in 2009, and a first month’s contribution from All
Seals. After adjusting for these acquisitions and the impact of
currency translation, underlying sector revenues increased by
20%. Adjusted operating profits increased by 62% to £8.9m
(2009: £5.5m) and operating margins, through a combination
of a strong increase in revenue and the impact of the prior
year cost reduction programmes, increased to 14.8% (2009:
11.4%). Capital expenditure in the sector was £0.5m with the
major elements being the continued investment by HFPG in the
new warehouse automation system at Clearwater and a new
custom seal making machine in FPE. Free cash flow of £7.9m
was generated in the year compared with £8.6m in 2009 which
benefited from a sharp reduction in working capital.
HFPG saw underlying revenues, adjusted for the acquisitions
of RT Dygert and All Seals, increase by 21% in US dollar terms.
The core Hercules business in North America, with its focus on
the Aftermarket, achieved ca. 12% growth for the year, with
the recovery strengthening during the second half, which has
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traditionally been the seasonal peak period for construction
activity, though not in 2009. Hercules continued to invest in
the warehouse automation and picking carousel project, which
will provide a further underpinning to the Hercules service
proposition and add greater efficiency to the warehouse
operations in Clearwater. Phase 1 was completed in 2010 and
Phase 2 has now begun and is expected to be completed in
2011. The Seals-on-Demand business of custom machining of
non-standard and out-of-production seals, delivered another year
of substantial growth and investment in additional capacity is
planned for 2011. Investment in e-commerce is also delivering
results with ca. 7% of Hercules Clearwater revenues now
processed through the new WebStore service.
Hercules Canada had an excellent year and delivered particularly
strong growth in the second half of the year, with revenues
improving across all regions and customer groups. Outside
North America, the strategic development of the Aftermarket
seal kit business in Europe continued to be a key focus for
Hercules, with good progress being made in both direct sales
in the Netherlands and Belgium and in the appointment of sub-
distributors in other mainland European countries. Sales from the
US to other international markets also grew with the key South
American region recovering strongly.
Bulldog sells its products through a worldwide network of
dealers that buy in relatively large quantities to take advantage
of volume discounting and lower, consolidated, freight charges.
Following destocking by the dealer network during the
recession, confidence began to return in the final quarter of
2009 with demand being sustained throughout 2010, translating
into 20% revenue growth for the year. Domestic US sales were
strong across the board and the international business, which
represents over 75% of Bulldog’s sales, saw the return of large
stocking orders from a range of countries.
In the Industrial OEM businesses, there was a strong rebound in
demand from RT Dygert’s core customers. Order levels began
to recover at the end of 2009 as the OEM’s regained confidence
and moved back towards full working weeks and carried out
some re-stocking. By March 2010, RT Dygert was experiencing
demand comparable to pre-recession levels, with second half
revenues up by ca. 50%, compared to the prior year. RT Dygert
added new sales and product development resources during
the year and qualified many new products and compounds for
customer applications. In September 2010, HFPG acquired
All Seals, a well established supplier of O-rings and custom
manufactured parts to Industrial OEM customers across a range
of specialist applications in aerospace, medical, filtration and
general manufacturing industries. All Seals has a strong position
in the important Californian market and the adjacent South
Western States. The company has enjoyed strong growth in
2010 and plans are being developed to expand its product range
and to penetrate new accounts.
HKX’s traditional customers are the North American franchised
dealers of the key excavator manufacturers. In 2009, sales of
new excavators fell sharply (down by over 70% from the 2005
peak) and although the construction market stabilised in 2010,
new excavator sales in North America remained subdued. In
response, HKX has extended its business model to target the
attachment retro-fit sector, as machine operators seek to make
more flexible use of existing excavators. HKX also expanded
internationally, finding new business in the South American and
Seals Statistics
euneveR
Adjusted Operating Profit
nigraMgnitarepO
wolFhsaCeerF
deyolpmElatipaCgnidarT
ECTOR
sremotsuC
Heavy Construction
Industrial OEMs
Logging & Agriculture
Dump & Refuse Trucks
General Industrial
yhpargoeG
aciremAhtroN
eporuE
dlroWfotseR
stcudorP
Seals & Seal Kits
O-rings
Attatchment Kits
Gaskets
Cylinders & Other
2010
2009
£60.1m
£48.2m
£8.9m
14.8%
£7.9m
£43.5m
20.6%
£5.5m
11.4%
£8.6m
£38.2m
14.6%
47%
28%
4%
3%
18%
68%
66%
16%
16%
13%
9%
6%
6%
Middle Eastern markets and this contributed to overall revenue
growth of 24% for HKX.
The FPE business in the UK recovered quickly from the
worst effects of the downturn and delivered 18% revenue
growth. In the domestic UK market, FPE expanded its range
of cylinder components sold into its traditional seal customer
base and also invested £0.2m in a third seal making machine
to meet increasing demand from customers for low volume,
non-standard seals. Exports to sub-distributors increased
significantly as dealers began to restock their depleted
inventories. For M Seals, confidence was slower to return
among its core Industrial OEM customers, with a return
to steady growth only in the second half. This resulted in
an increase in revenues of 12% for the full year. M Seals
continues to be a key supplier of large bearing seals to the
established wind turbine manufacturers and achieved steady
business throughout the year. In China, which is forecast to
become the largest wind turbine market in the world, M Seals
has established a small specialist team to service the rapidly
expanding Chinese wind turbine industry.
20 Diploma PLC Annual Report and Accounts 2010
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 supplies high performance wiring, interconnect
and fastener products for use in a range of technically
demanding applications in industries including Defence &
Aerospace, Motorsport, Energy and General Industrial. The
IS-Group also supplies a range of its own manufactured
products, including flexible braided products and multi-core
cables.
The IS-Rayfast, Cabletec and Clarendon businesses are located
in the UK in Swindon, Weston-Super-Mare and Leicester.
The businesses serve the UK market, as well as supplying to
other sub-distributors across Continental Europe. IS-Connect
is located in Indianapolis to serve the Motorsport market in
the US, as well as other specialised technical applications.
A representative office has also been established in Beijing,
China with an initial focus on Aftermarket requirements in the
Commercial Aerospace and Industrial sectors.
Hawco supplies a range of 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.
In Germany, Sommer and Filcon supply a range of high
performance wiring, connectors and other interconnect
products to customers in industries including Defence &
Aerospace, Medical Equipment, Energy and General Industrial.
A range of value adding activities enhances the customer
offering, including connector assembly, marking of protective
sleeves, cut-to-length tubing, kitting and prototype quantities
of customised multi-core cables. Sommer and Filcon have
operations in Stuttgart and Munich in Germany.
Market Drivers
The Controls sector businesses focus on specialised, technical
applications in a range of industries including Defence
& Aerospace, Motorsport, Medical Equipment, Energy,
Commercial Refrigeration and General Industrial. The most
important sector is Defence & Aerospace.
Defence equipment budgets:
2006
2007
2008
2009
Growth
% p.a.
UK £billion(1)
German (cid:96) billion(2)
8.7 +7.6%
10.3 +6.2%
Commercial Aerospace market growth(3) +5.2% +7.2% +1.6% -2.0% +3.0%
6.8
8.2
7.2
8.6
7.9
9.5
Sources:
(1) MOD UK Defence Statistics
(2) Federal Ministry of Finance – Germany
(3) Boeing and Airbus market outlook – revenue passenger kilometres
The Defence equipment budgets in the UK and Germany have
grown strongly in recent years averaging 7.6% p.a. and 6.2%
p.a. growth respectively.
The IS-Group and Sommer businesses focus primarily on
repair, refurbishment and upgrade programmes, as well as
supplying to Tier 2 electronics suppliers. As a result, they
have benefited from Urgent Operational Requirements during
a period when the armed forces have been involved in two
major conflicts. The businesses typically only supply to
OEMs and the Tier 1 suppliers when ex-stock availability and
responsiveness are important; they have therefore been less
exposed to cutbacks and postponements 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. Nevertheless, in both the UK and Germany, Defence
spending reviews are underway and it is not yet clear how the
likely cutbacks will impact at the sub-contractor and component
supply level.
In the Commercial Aerospace sector, the businesses supply
products principally for the initial fit-out of aircraft interiors
and then their subsequent upgrade and refurbishment. The
Commercial Aerospace market has shown strong growth in
the five year period to 2008, before registering a 2% decline in
2009 as a result of the global economic downturn. Passenger
numbers began to recover in 2010 with an average 6% annual
growth rate projected for 2011 through 2014.
In Motorsport, activity has suffered in recent years from
the range of cost cutting measures, including the testing
restrictions implemented in Formula One and the withdrawal
of the Toyota and BMW teams. The Formula One series,
however, returned to relative stability in the 2009/10 season
with a highly competitive grid and the introduction of three
new teams. Certain markets, including Medical Equipment
(particularly in Germany) and Energy, have remained resilient
through the downturn and the products supplied to these
markets have generally maintained a stable demand profile
over the period.
The businesses also supply to a range of specialised technical
applications in the General Industrial sector. There has been
strong growth in the Commercial Refrigeration market in the
UK, with the major retailers investing in new and refurbished
stores. For other Industrial segments, the underlying market
drivers are the growth of the industrial economies:
2006
2007
2008
2009
Growth
% p.a.
UK real GDP growth(1)
UK Production index(2)
Germany real GDP growth(1)
+2.9% +2.6% +0.5 % -4.9% +0.3%
-2.9%
+3.4% +2.6% +1.0% -4.9% +0.5%
100.0
100.5
87.1
97.6
Sources:
(1) Organisation for Economic Co-operation and Development (OECD)
(2) The Office of National Statistics – Index of Production for Manufacturing
The worldwide recession impacted the UK in late 2008 and
Germany in early 2009. The economy in the UK returned to
modest growth in the final quarter of 2009 and activity in
Germany picked up in the first quarter of 2010 with a sharp
recovery in demand from German industrial customers.
Sector Performance
The Controls businesses saw revenues increase in 2010 by
10% to £68.0m (2009: £61.9m) on both a UK sterling and a
constant currency basis. Adjusted operating profits increased
by 19% to £11.3m (2009: £9.5m). As with other sectors,
improved sales combined with the impact of the cost reduction
measures implemented in 2009, moved operating margins up
to 16.6% (2009: 15.3%).
21 Diploma PLC Annual Report and Accounts 2010
S
e
c
t
i
o
n
2
:
B
u
s
i
n
e
s
s
R
e
v
i
e
w
A combination of higher profitability, tight control over working
capital and modest capital investment of £0.1m, combined to
generate strong free cash flow of £9.9m (2009: £8.9m).
Controls Statistics
The UK Controls businesses grew revenues by 13%,
with good growth in IS-Group revenues and a very strong
performance from Hawco.
The IS-Group’s core Defence market benefited from on-going
upgrade, refurbishment and maintenance programmes focused
largely on ground equipment. Revenues were strong with
components supplied into the Light Weight Mine Roller project
and other military vehicle programmes. The marine sector
benefited from work on gun systems and below-deck cabinet
work on Type 45 destroyers and on radiation monitoring,
periscope and sonar systems for Astute submarines. Sales into
Military Aerospace have been softer, possibly reflecting the
priority given to ground vehicles. In Civil Aerospace, demand
picked up during the year as new aircraft deliveries began to
gather momentum. In Motorsport, the relative stability in the
Formula One series enabled the IS-Group to maintain its leading
position as a supplier of wiring and components to specialist
electrical harness builders. Significant gains were also made in
the supply of aerospace quality fasteners to the Formula One
teams and engine manufacturers in the UK and Continental
Europe. There was a substantial increase in demand for
IS-Group’s products supplied to General Industrial customers.
In addition, the Energy market benefited from the returning
confidence, with strong demand for components supplied to
manufacturers of Uninterrupted Power Supply (UPS) batteries
and Fuel Cells. Undersea cables for oil and gas exploration also
provided good opportunities for the IS-Group’s wire products.
Hawco delivered strong revenue growth as its core
Commercial Refrigeration customers responded to significantly
increased demand from the large food retailing groups
opening new stores or refurbishing existing outlets. Hawco
has positioned itself as a specialist supplier of energy efficient
components as many of the large food retailers implement
energy reduction programmes and move to alternative coolant
gases using natural refrigerants.
The German Controls businesses grew revenues by 4% in
both UK sterling and constant currency terms. The market
downturn came later to Germany than the UK and the US, but
there was a strong rebound in demand in certain sectors in
2010. Sommer benefited from a sharp recovery in Germany’s
traditionally strong General Industrial sector where it achieved
strong revenue increases. Sales to the specialist satellite
market were also strong with both Astrium and NASA adopting
the Sommer backshells for scientific satellites. However,
Defence & Aerospace sales declined as projects came to
an end and were not replaced by new programmes and in
Motorsport, the withdrawal of the Toyota and BMW Formula
One teams in late 2009 had a significant impact on Motorsport
revenues in Germany.
The Medical market had another strong year supplying
protective sleeves for stents, laparoscopic and cardiovascular
instruments and catheters. In order to develop the market
further, Sommer invested in a new cut and slit machine which
will allow the business to add significant value to products
sold in this market. In August 2010, Sommer purchased the
customer list and trading stock of Fischer, a distributor of Tyco
euneveR
Adjusted Operating Profit
nigraMgnitarepO
wolFhsaCeerF
deyolpmElatipaCgnidarT
ECTOR
sremotsuC
Defence & Aerospace
Commercial Refrigeration
Motorsport
Medical & Scientific
Energy & Utilities
General Industrial
yhpargoeG
United Kingdom & Eire
Continental Europe
dlroWfotseR
stcudorP
Wire & Cable
Connectors
Control Devices
Fasteners
Equipment & Components
2010
£68.0
£11.3m
16.6%
£9.9m
£29.3m
38.6%
2009
£61.9
£9.5m
15.3%
£8.9m
£30.0m
31.7%
34%
19%
11%
5%
5%
26%
55%
39%
6%
38%
24%
12%
8%
18%
Energy products with sales in 2009 of ca. (cid:69)0.4m. The sales
and logistics activities have now been integrated and this small
acquisition will boost Sommer’s presence in this growing niche
business.
The principal markets for Filcon’s connector products are the
Defence, Aerospace and Motorsport sectors. In common with
many countries, Germany is reviewing its spending on Defence
and there was a general slowdown in approvals for new
projects during the year and delays in their commencement
dates. Nevertheless Filcon delivered increased sales as
existing programmes such as the Eurofighter and four separate
helicopter projects, the NH90, Eurocopter 135, CH53 and Tiger,
continued to generate demand. Sales to the ManPack radio
project were also very strong. Order levels were marginally
down reflecting delays to programmes, but Filcon has its
products designed-in to a wide range of applications and is
therefore not over-dependant on single projects.
22 Diploma PLC Annual Report and Accounts 2010
Finance Review
Strong Increase in Operating Profits
Diploma achieved strong revenue and profit growth and
excellent cash generation during 2010, as market conditions
gradually improved during the year. Revenue increased by 15%
to £183.5m (2009: £160.0m) and adjusted operating profit,
which is before acquisition related charges, increased by 25%
to £32.1m (2009: £25.6m). The adjusted operating margin
increased to 17.5% from 16.0% in the 2009 financial year. The
Group’s principal markets began to show signs of recovery
in the second quarter of the financial year and continued to
strengthen throughout the year. Adjusted operating profits in
the second half of the year of £17.5m were 28% ahead of the
comparable period last year and represented 55% of the full
year’s operating profit.
These results demonstrate both the benefit of action taken
in 2009 to reduce operating costs in the face of weak trading
markets and the impact of operational leverage, particularly in
the Seals businesses, as revenues increased.
Underlying Operating Profits
Acquisitions completed during both 2009 and 2010 incrementally
contributed £3.4m and £0.5m to revenues and operating
profit, respectively. In addition, with over 70% of the Group’s
results denominated in US dollars, Canadian dollars or Euros,
the Group’s revenues and adjusted operating profits benefited
on translation to UK sterling by £3.5m (2%) and £1.1m (3%),
respectively. The gross margin of the Canadian Healthcare
businesses also benefited from the strength of the Canadian
dollar against the US dollar, in which the majority of its inventory
is purchased. However this benefit in 2010 was matched by the
benefit these businesses received in 2009 from the exceptional
sale in AMT of face shields to protect against swine flu. After
adjusting for these items, underlying revenues and adjusted
operating profits increased by 11% and 19%, respectively.
Adjusted Profit, Earnings per Share and Dividends
Adjusted profit before tax increased 26% to £32.2m (2009:
£25.5m), after net interest income of £0.1m (2009: expense of
£0.1m). IFRS profit before tax, which is after acquisition related
charges of £3.5m (2009: £3.1m) and fair value remeasurements
of £2.0m (2009: £1.9m), was £26.7m (2009: £20.5m).
The Group’s adjusted effective tax charge represented 29.2%
(2009: 29.8%) of adjusted profit before tax. This year’s effective
rate benefited from a reduction in the Canadian corporate
tax rate following a change to the Provincial tax residence
of Somagen. The Group’s adjusted effective tax rate in any
particular year also continues to depend on the geographic mix
of profits made by the Group.
Adjusted earnings per share increased 28% to 18.9p compared
with 14.8p last year, reflecting increased profits, a slightly lower
effective tax rate and the buyout of certain minority interests this
year. IFRS basic earnings per share were 14.6p (2009: 10.8p).
Diploma follows a progressive dividend policy and also targets
a dividend cover of two times based on adjusted earnings per
share; the recommended final dividend of 6.2p per share gives
a total dividend per share for the year of 9.0p per share with
represents a 15.4% increase on the prior year.
Successful Disposal of Anachem Businesses
The Group completed the disposal of the MLH business of
Anachem on 7 January 2010 and Anachem Instruments on
29 April 2010. Cash proceeds of £7.9m were received on
completion of these disposals of which £0.8m will be held in
escrow until July 2011. The results of these businesses are
classified as discontinued and the contribution to profit after tax
from these businesses was £5.1m, including a profit on disposal
of the businesses of £5.5m.
Excellent Free Cash Flow Generation
The Group generated excellent free cash flow in 2010 of £29.8m
(2009: £23.5m), which is before expenditure on acquisitions or
returns to shareholders, but includes £6.4m received from the
sale of the Anachem businesses.
Operating cash flow remained broadly unchanged from last
year at £34.3m (2009: £34.2m) as the businesses worked
hard to constrain any increases in working capital, despite the
underlying growth in trading. This led to a further improvement
in the Group’s key metric of working capital to sales to 15.4%
from 17.6% reported in 2009. Group tax payments of £9.3m
were also similar to last year’s payments of £9.0m, although last
year’s payments were inflated by 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 was particularly
modest in 2010 at £1.3m (2009: £1.8m), following completion
during the year of a number of projects commenced in 2009.
In Seals, HFPG spent £0.3m on completion of Phase 1 of the
warehouse automation project at the Clearwater facility and FPE
acquired a second custom seal machine for £0.2m; in Controls
a new cut and slit machine was acquired for £0.1m to further
enhance its product supplied to medical device companies.
The Healthcare businesses continued to acquire field equipment
in support of their customer contracts and spent £0.6m during
the year.
The Group spent £11.0m (2009: £12.2m) of its cash resources
on the acquisition of businesses during the year, including £2.5m
on acquiring minority interests and £0.4m (2009: £1.1m) on
deferred consideration.
Minority Shareholdings Acquired
On 12 January 2010 the Group acquired the remaining 8.2%
of the outstanding shares in Somagen from the minority
shareholders for consideration of £2.5m. These shares were
acquired through the exercise of put/call options, agreed at the
time of acquisition in July 2004. Dividends of £1.1m were also
paid to the minority shareholders of Somagen, AMT and M Seals
during the year.
At 30 September 2010, the Group retains a liability to purchase
the remaining minority shareholdings in AMT, M Seals and BGS.
The liability for the outstanding 25% minority shareholding in
AMT is estimated at £12.0m (2009: £10.1m) and it is now likely
that the larger part of this will be paid in the first half of 2011.
The remaining liability of £1.2m relates to M Seals and BGS and
will be payable in the first half of 2013. 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.
23 Diploma PLC Annual Report and Accounts 2010
Based on the expected performance of these businesses, the
Directors have reassessed the potential liability at 30 September
2010 to acquire the remaining outstanding minority interests.
The fair value remeasurement of these options results in a
financial charge of £2.0m (2009: £1.9m) being made in the
Consolidated Income Statement.
Improved Environment for Acquisitions
The environment for acquisitions improved during 2010,
following a year when uncertainties caused by the recession
had severely limited opportunities to acquire businesses. In
the final quarter of the year, the Group completed three small
acquisitions for an initial cash cost of £8.1m; further deferred
consideration payable of £1.0m has also been provided at
30 September 2010 in respect of these acquisitions. Each of
these acquisitions extends the geographic coverage of the
Group’s existing businesses, while continuing to focus on the
core products and competencies developed in each business
sector.
Acquisition intangible assets of £4.5m were recognised in
connection with these acquisitions, as well as goodwill of
£3.8m, 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.
Robust Balance Sheet and Strong Return
on Trading Capital
The Group is highly cash generative and cash balances increased
again in 2010 by £8.8m to £30.1m (2009: £21.3m). These funds
are generally repatriated to the UK, unless they are required
locally to meet certain commitments, including acquisitions.
The Group also has substantial bank facilities available, having
negotiated a new three year £20m revolving credit facility (with
an option to extend to £40m) on competitive terms and shared
between two banks.
The Group’s trading capital employed (“TCE”), which is defined
in note 2 to the consolidated financial statements, represents
the amount of operational assets held by the businesses
on which they are required to generate operating profits. At
30 September 2010 Group TCE increased by £6.2m to £122.3m
(2009: £116.1m), most of which increase was accounted by
goodwill which arose on acquisitions completed during the
year. The Group’s return on TCE, which is a pre-tax measure
and includes all gross historic goodwill and intangible assets,
represents an indication of the profitability of the Group and
increased to 22.1% in 2010, from 19.0% last year. This increase
arose from a combination of the growth in profits and from good
management of working capital across the businesses.
Merger of Pension Schemes Completed
The Group retains a small number of defined benefit pension
schemes in the UK which are closed to future accruals. In
a drive to reduce the costs of administering these legacy
schemes, the Group completed a merger of all these schemes
as at 30 September 2010. An actuarial funding valuation of the
merged scheme will now be undertaken and the benefits of
having a single defined benefit pension scheme will start to be
realised.
S
e
c
t
i
o
n
2
:
B
u
s
i
n
e
s
s
R
e
v
i
e
w
During the year the Group increased its cash contribution to fund
the deficit in these schemes to £0.4m pa (2009: £0.2m pa). In
addition the Group made exceptional one-off contributions of
£0.7m in connection with the Trustees’ consents to both the
scheme merger and to the transfer of the residual liabilities of
the Anachem scheme to Diploma Holdings PLC, on sale of the
Anachem businesses. Despite these higher cash contributions,
the accounting deficit in the principal defined benefit schemes
increased by £0.6m to £5.3m (2009: £4.7m) at 30 September
2010, largely because of the continuing reduction in bond yields.
Pension benefits to existing employees are provided through
defined contribution schemes at an aggregate cost in 2010 of
£0.7m (2009: £0.7m).
Land at Stamford
The Group continues to retain approximately 150 acres of farm
and former quarry land in Stamford which relates to a former
legacy business. This land is included in the Consolidated
Statement of Financial Position 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.
Measuring Financial Performance
The implementation of a revised IFRS on Business Combinations
this year has included the requirement for the Group to expense
the costs of acquiring businesses against operating profit,
rather than capitalise such costs as part of the investment.
In order to allow the Board and Shareholders to continue to
assess the underlying performance of the Group, this new IFRS
has prompted the introduction of Adjusted Operating Profit,
which adds back to operating profit the expenses of acquiring
businesses, as well as the amortisation of acquisition intangible
assets (collectively,“acquisition related charges”). This new
measure is one of a number of specific measures used 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.
24 Diploma PLC Annual Report and Accounts 2010
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.
Loss of key supplier(s)
The Group’s businesses ensure that they have secure long
term access to high quality, differentiated product offerings by
combining:
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:
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:0)The Group’s businesses operate in three different sectors
with different cyclical characteristics and across a number
of geographic markets.
(cid:0)The businesses offer specialised products and services and
this offers a degree of protection against customers quickly
switching business to achieve better pricing.
(cid:0)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.
(cid:0)In many cases the products will be used in repair,
maintenance and refurbishment applications, rather than
original equipment manufacture.
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:0)Quality manufacturer-branded products, mostly sourced
under long term distribution agreements.
(cid:0)Own-brand products, manufactured under contract.
(cid:0)Selective in-house manufacture and assembly.
For manufacturer-branded products, 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
revenues 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:
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:0)Where dependence is high, long term, multi-year exclusive
contracts signed with suppliers.
(cid:0)Where possible, change of control clauses included in
contracts for protection or compensation in the event of
acquisition.
(cid:0)Collaborative projects and relationships maintained with
individuals at many levels of the supplier organisation.
(cid:0)Regular review meetings and adherence to contractual
terms.
(cid:0)Regular reviews of inventory levels.
(cid:0)Bundling and kitting of products and provision of added
value services.
(cid:0)Periodic research of alternative suppliers as part of
contingency planning.
Loss of major customer(s)
As with any business, 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 invested in ensuring that
these customers are retained and encouraged not to switch to
another supplier. In addition, to providing high levels of customer
service, close integration is established where possible with
customers’ systems and processes.
25 Diploma PLC Annual Report and Accounts 2010
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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 6% of sector
revenue or more than 2% of total 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
ensure early warning of changes in product competitiveness,
so that plans can be developed with suppliers for replacement
products. 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.
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:
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:0)Ensuring a challenging working environment where
managers feel they have control over and responsibility for
their businesses.
(cid:0)Establishing management development programmes to
ensure a broad base of talented managers.
(cid:0)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.
(cid:0)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:
(cid:78)(cid:0) Back-up power generator.
(cid:78)(cid:0) Materials on hand to secure the facility.
(cid:78)(cid:0)
(cid:0)Communications re-route to other branches or interim
location.
26 Diploma PLC Annual Report and Accounts 2010
Risks and Uncertainties continued
(cid:78)(cid:0)
IT recovery plan using back-up server in separate location.
(cid:78)(cid:0) Regular building inspection and weather monitoring.
(cid:78)(cid:0)
(cid:0)Plans to drop-ship product from suppliers direct to
customers.
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:
(cid:78)(cid:0)
Full data back-ups as a matter of routine.
(cid:78)(cid:0) Back-up tapes stored in fire proof safes.
(cid:78)(cid:0) Back-up servers identified.
(cid:78)(cid:0) Communication re-route options identified.
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:0)Service contracts with IT providers with access to
replacement servers.
(cid:0)Uninterruptible power sources and back-up generators
where required.
(cid:78)(cid:0)
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 performance closely 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 2010, ca. 70% of the Group’s
revenue and operating profits were earned in currencies other
than UK sterling. In comparison to the prior year, the net effect
of currency translation was to increase revenue by £3.5m and
to increase operating profit by £1.1m. 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 acquisition related charges and tax, by approximately
£2.4m (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 2010, the
Group’s non-UK sterling trading capital employed in overseas
businesses was £103.1m (2009: £87.7m), which represented
84% of the Group’s trading capital employed. It is estimated that
a strengthening of UK sterling of 10% against all the non UK
sterling capital employed would reduce shareholders’ funds by
£9.8m.
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 and
Australian businesses are also exposed to a similar risk as the
majority of their purchases are denominated in US dollars.
These businesses may 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.
27 Diploma PLC Annual Report and Accounts 2010
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 the Group also has an undrawn committed £20m
revolving bank facility which was renewed on 19 November
2010. Interest on this facility is payable at between 150 and
195 bps over LIBOR, depending on the ratio of net debt to
EBITDA.
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 £0.3m.
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 inventory and potential obsolescence.
Fraud and theft
The Group’s operating businesses are relatively straightforward
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:
(cid:78)(cid:0)
(cid:78)(cid:0)
Specified signature levels and responsibilities.
Segregation of responsibilities.
(cid:78)(cid:0) Controls on shipping addresses.
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:0)Weekly flash reports of cash balances and regular bank
reconciliations.
(cid:0)Regular review of supplier and creditor ledgers to identify
fictitious suppliers.
(cid:78)(cid:0) 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.
28 Diploma PLC Annual Report and Accounts 2010
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 (2009: 6.4 years). In addition
the number of working days lost to sickness is less than 1% a
year (2009: 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 2010 the Group’s employees included one who
was 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 2010, 5 employees (2009: 36)
were reported as having suffered minor injuries at work; none
of these injuries resulted in absence from work for more than
three days. One employee (2009: none) suffered a serious injury
during the year and was absent from work for four days.
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 2010 the amount of trade creditors shown in the
Group balance sheet represents 51 days (2009: 46 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 £25,950 (2009: £14,852). No political
donations were made.
29 Diploma PLC Annual Report and Accounts 2010
Directors’ Report
For the year ended 30 September 2010
The Directors present their Report and the audited financial
statements for the year ended 30 September 2010.
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 14 to 28; the Business Review incorporates the
requirements of the Companies Act.
Results and Dividends
The profit for the financial year attributable to shareholders
was £21.5m (2009: £13.0m). The Directors recommend a final
dividend of 6.2p per ordinary share (2009: 5.3p), to be paid, if
approved, on 19 January 2011. This, together with the interim
dividend of 2.8p per ordinary share paid on 16 June 2010,
amounts to 9.0p for the year (2009: 7.8p).
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 13 January 2010. These powers will expire at the conclusion
of the 2011 Annual General Meeting and resolutions to renew
the Directors’ powers are therefore included within the Notice of
the 2011 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 13 January 2010. In the year
to 30 September 2010 the Company has not acquired any of
its own shares. This authority will expire at the conclusion of
the 2011 Annual General Meeting and a resolution to renew
the authority is therefore included within the Notice of the 2011
Annual General Meeting.
Substantial Shareholdings
At 19 November 2010 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
Mondrian Investment Partners Limited
Newton Investment Management Limited
Legal & General Investment Management Limited
IG International Management Limited
Percentage of
ordinary share
capital
9.77
8.27
6.02
4.31
3.93
3.20
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 12 and 13. I Henderson, NP Lingwood
and IM Grice retire from the Board by rotation at the Annual
General Meeting on 12 January 2011 and being eligible, offer
themselves for re-election. The Directors’ beneficial interests in
the Company’s ordinary share capital at 30 September 2010 are
set out in the Remuneration Report on page 39.
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 14 to 28. The financial
position of the Group, its cash flows, liquidity position and
borrowing facilities are described in the Finance Review on page
23. In addition pages 26 and 27 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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Directors’ Report continued
For the year ended 30 September 2010
Directors’ and Officers’ Liability Insurance
and Indemnity
The Company has purchased insurance to cover its Directors
and Officers against the costs of defending themselves in
legal proceedings taken against them in that capacity and in
respect of any damages resulting from those proceedings.
The Company also indemnifies its Directors and Officers to
the extent permitted by law. Neither the insurance nor the
indemnity provide cover where the Director or Officer has acted
fraudulently or dishonestly.
Other Statutory Information
An explanation of the Company’s policy on matters relating
to Employment, Health and Safety, Environmental and its
relationship with suppliers, customers and other stakeholders is
set out within the Business Review on page 28 of the Annual
Report. The Group’s use of financial instruments is discussed on
page 26. Corporate Governance disclosures are set out on pages
31 to 40.
Annual General Meeting
The Annual General Meeting will be held at midday on
12 January 2011 in the Brewers Hall, Aldermanbury Square,
London EC2V 7HR. The special business of the meeting
includes resolutions which seek Shareholders’ approval for
the replacement of the Company’s Long Term Incentive Plan
(“LTIP”) with a new LTIP comprising a Performance Share Plan
and a Share Matching Plan, as explained further on page 36 in
the Remuneration Report. A Circular setting out in detail these
proposals, together with the routine 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 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
22 November 2010
31 Diploma PLC Annual Report and Accounts 2010
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 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.
The FRC published the UK Corporate Governance Code 2010 on
28 May 2010. This new Code is designed to replace the existing
Code, although compliance with the new Code will not be
mandatory for the Company until 2011.
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 12 and 13. The Board has
six scheduled meetings each year and meets more frequently as
required. It met on six occasions during the year under review.
The following table sets out the number of meetings of the
Board and its Standing Committees during the year and
individual attendance by Board members at these meetings:
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
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
6
6
6
5
7
7
7
7
1
1
1
1
*The Executive Directors attend all the meetings of the Audit Committee;
BM Thompson attended the meetings of the Remuneration Committee
during the year.
The September 2010 Board meeting was held in Edmonton,
Canada and was extended to a two day meeting to include a
bi-annual review and discussion of the Group’s longer term
strategy.
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.
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 35. Non-Executive Directors
are required to inform the Board of any changes to their other
appointments.
The non-Executive Directors are determined by the Board to
be independent in character and judgement and there are no
relationships or circumstances which could affect, or appear
to affect, a Director’s judgement. JW Matthews is the senior
independent Director.
There are three standing Committees of the Board to which
various matters are delegated. Membership of the Committees
is set out on page 13 and terms of reference are available on
request and are set out on the Company’s website. Following
publication of the UK Corporate Governance Code 2010, earlier
this year, the terms of reference of each Committee are being
updated to bring them into line with current guidance. The
new terms of reference will be available on the Company’s
website in 2011. In order to ensure that undue reliance is not
placed on particular individuals, the Board has decided that all
its independent non-Executive Directors should serve on all
Committees. The Board regularly reviews the chairmanship of its
Committees.
During the year the Chairman has had meetings with the non-
Executive Directors, without the Executive Directors present.
Appointments to the Board
The Board has established a Nomination Committee which
leads the process for Board appointments and makes
recommendations to the Board. The members of the
Nomination Committee are JL Rennocks, who is the Chairman,
and the two non-Executive Directors.
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.
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32 Diploma PLC Annual Report and Accounts 2010
Corporate Governance continued
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:
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:0)To be responsible for identifying and nominating, for the
approval of the Board, candidates to fill Board vacancies as
and when they arise.
(cid:0)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.
(cid:0)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.
(cid:0)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.
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 relatively 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 discussed by 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 35.
Accountability and Audit
Financial Reporting
It is a requirement of the Code that the Board should present
a balanced and understandable assessment of the Company’s
position and prospects. This requirement extends to interim and
other price sensitive public reports and to reports to regulators,
as well as to information required to be presented by statutory
requirements.
In this context, reference should be made to the Statement of
Directors’ Responsibilities on page 41, the Directors’ Report
on pages 29 and 30 which includes a statement regarding the
Group’s status as a going concern, and to the Reports of the
Auditors on pages 76 and 77, 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 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 24 to 27.
33 Diploma PLC Annual Report and Accounts 2010
The Group’s finance department includes a full time internal
auditor. During the year, a full programme of internal audit
visits has been completed at all of the Group’s businesses. The
scope of work carried out by internal audit is focused on internal
financial controls and processes operating within each business.
While there were no significant weaknesses identified during
these audits, a number of recommendations were made to
improve internal review processes and procedures, particularly
in businesses where the opportunity to segregate duties was
limited.
The Audit Committee keeps under review the need for a fully
independent internal audit function in the Group. The Audit
Committee believes that the Group’s system of internal control
is appropriate for a group of the size and nature of Diploma
PLC and the Audit Committee’s current view is that a separate
independent internal audit function is not necessary.
Audit Committee and Auditors
The Board has established an Audit Committee comprising the
three non-Executive Directors. The Committee is chaired by
JW Matthews. The Company Secretary is the Secretary to the
Committee.
The main roles and responsibilities of the Committee are set out
in written terms of reference, which were reviewed and updated
during 2005 and which generally encompass those set out in the
Code, which are as follows:
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:0)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;
(cid:0)to review the Group’s internal financial controls and its
internal controls and risk management systems;
(cid:0)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;
(cid:0)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;
(cid:0)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;
(cid:0)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;
and
(cid:0)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.
The Committee reviewed the audit engagement in 2008 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:
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:78)(cid:0)
(cid:0)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;
(cid:0)the external auditors present their audit plan at the
September meeting; and
(cid:0)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 placed
with 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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34 Diploma PLC Annual Report and Accounts 2010
Corporate Governance continued
The non-Executive Directors are given regular updates as to the
views of institutional shareholders and an independent insight
is sought through research carried out twice a year by the
Company’s advisors.
Through these processes, the Board is kept abreast of key
issues. The opportunity for shareholders to meet the Chairman
or Senior Independent Director, separately from the Executive
Directors, is available on request.
Notice of the Annual General Meeting is sent to shareholders
at least twenty working days prior to the meeting and includes
a separate resolution on each substantially separate issue. In
the absence of a poll being called, proxy votes cast are declared
after each resolution has been dealt with on a show of hands.
The Chief Executive Officer and Company Secretary
generally deal with questions from individual shareholders.
All shareholders have the opportunity to put questions at
the Company’s Annual General Meeting when the Chairman
and Chief Executive Officer give a statement on the Group’s
performance during the year, together with a statement on
current trading conditions. The Chairman of the Board and of the
Remuneration and Audit Committees will normally be available
to answer questions at the meeting.
The Committee received reports from management on two
incidences of fraud which occurred during the year. In April
2010, one of the Group’s UK businesses was subject to a
sophisticated bank related fraud, carried out by an overseas third
party, pretending to be a potential customer.
In July 2010, management discovered fraud in one of its
overseas businesses, carried out by an employee who incurred
unauthorised transactions on a company credit card.
The Group lost £106,000 in aggregate as a consequence of
these two matters; the Committee concluded that both frauds
were one-off opportunistic frauds and were not an indication of
inadequate internal controls. However existing internal controls,
which may have prevented these occurrences, have been
strengthened and reinforced in each of the businesses.
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
35 Diploma PLC Annual Report and Accounts 2010
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 updated in June 2008, relating to Directors’ remuneration are applied.
A resolution will be put to shareholders at the Annual General Meeting on 12 January 2011, 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 2010. 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.
250.00
200.00
150.00
100.00
50.00
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Diploma TSR (rebased to 100)
FTSE All Share (ex Inv. Trusts) TSR (rebased to 100)
The five year total shareholder return figures for Diploma PLC and the FTSE mid-250 index were as follows:
September 2005
September 2010
Diploma
FTSE
mid-250
100
249
100
125
+149%
+25%
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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 comprises 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.
As indicated in last year’s report, in 2010 the Committee
appointed Kepler Associates to conduct a review of the
Company’s long term incentive arrangements for Executive
Directors. The Company’s existing long-term incentive plan
(“LTIP”) has been in place since 2004 and will expire in 2011.
As part of this review, the Committee received a written report
from Kepler Associates and met with their consultants to
discuss their recommendations. As a result of this exercise, as
well as other routine business, the Committee met seven times
during the year.
Following advice from Kepler Associates, the Committee is
proposing to seek shareholders’ approval for the adoption of
new long-term incentive plans comprising a Performance Share
Plan (“PSP”) and a Share Matching Plan (“SMP”). The PSP will
have a structure similar to the LTIP. The new SMP will offer
an additional reward opportunity in return for an investment
in shares and will provide a mechanism to reward exceptional
performance.
These proposals will be set out in detail in a Circular to
Shareholders for review and if thought fit, for approval at the
Company’s Annual General Meeting on 12 January 2011. The
Remuneration Committee believes that these proposals are
important to the Company being able to continue to motivate
and retain its Executive Directors and are in the interests of
Shareholders. The targets for the PSP represent a significant
strengthening of the EPS performance condition and the
maintenance of a stretching TSR condition. Additional reward
will result only from Executive Directors making a significant
personal investment in Company shares (as part of the SMP)
and in large part for delivering performance above the upper-
quartile of the market. Accordingly, the proposals have the full
support of both the Remuneration Committee and the entire
Board.
Remuneration Policy
This Remuneration Report sets out the Company’s policy on
Directors’ remuneration for 2010 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, relative remuneration levels throughout the Group 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
2010 will be described in future Remuneration Reports. Any
statements in this Report in relation to remuneration policy for
years after 2010 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 38 and comprises
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 2010 is 100% of basic salary
for the Chief Executive Officer and 80% for other Executive
Directors. On target bonus is 60% for the Chief Executive
Officer and 50% 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% based on the financial performance of the
Group, with the remaining 25% subject to achievement of
specified personal objectives.
Long Term Incentive Plan
The Company’s LTIP for Executive Directors provides for annual
grants to Executive Directors. It is intended that this LTIP will be
replaced by the new PSP in January 2011, as described above. It
is intended that no further awards will be made under the LTIP.
Under the existing 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 made to a participant in any year have been
equal to 100% of basic salary.
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
37 Diploma PLC Annual Report and Accounts 2010
or placed under option, under any all-employee share plan
established by the Company, may not exceed 10% of the issued
ordinary share capital of the Company, from time to time.
Two performance conditions apply to the awards so that the
vesting of 50% of the award will be linked to earnings per share
(“EPS”) growth and 50% will be linked to Total Shareholder
Return (share price growth and reinvested dividends) (“TSR”),
measured by comparison with the FTSE mid-250 index
(excluding investment trusts).
The first performance condition is that the average annual
compound growth in the Company’s earnings per share (“EPS”)
over the three consecutive financial years, following the year
prior to the grant, must exceed the annual compound growth
rate in the UK Retail Price Index (RPI) plus 3% per annum, over
the same period. At this level of performance, 30% of the award
relating to EPS performance would vest. Full vesting of the
award relating to EPS performance requires that the Company’s
average annual compound growth in EPS exceeds the
compound growth in RPI plus 5% per annum over the period.
Between these two points, an increasing proportion of vesting
occurs at RPI plus 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.
payments equal to the net dividend paid (excluding any tax
credit) on shares in their LTIP awards which have vested, but
are unexercised. Such discretionary payments will be made
in respect of awards granted under the LTIP in 2007 and
subsequent years.
Awards under this LTIP have been made annually by the
Remuneration Committee to BM Thompson, I Henderson
and NP Lingwood. The final award under the LTIP was made
on 18 November 2009. 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 numbers of shares over which the 2007 awards
have vested at 30 September 2010 are set out on page 39. The
outstanding awards will vest on 30 September 2011 and 2012
respectively, subject to the performance conditions set out
above, measured over three year performance periods ending on
30 September 2011 and 2012.
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% (2009: 20.0%) of base
remuneration, excluding bonuses.
In September 2010, the Company established an unregistered
retirement benefits scheme, known as the Diploma Holdings
PLC Employer-Financed Retirement Benefits Scheme (“the
Scheme”). The Scheme was established for Executive Directors
and higher paid UK employees in the Group as an alternative
to the employees’ current pension arrangements and contains
all the key features of a conventional registered pension plan.
At 30 September 2010, no contributions had been paid into
the Scheme. In light of the statement issued on 14 October
2010 by HM Treasury and HM Revenue and Customs, entitled
“Restricting Pensions Relief”, the Committee is likely to review
further in 2011 the provision of pensions to Executive Directors
and higher paid employees.
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:
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.
BM Thompson
I Henderson
NP Lingwood
The Company’s Employee Benefit Trust waives dividends on
all the shares held for the purposes of the Company’s LTIP.
In 2010, the Remuneration Committee agreed that participating
executive directors in the LTIP may receive discretionary
Date of Contract
Notice Period
13 July 2000
1 August 2000
3 July 2001
12 months
12 months
12 months
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38 Diploma PLC Annual Report and Accounts 2010
Remuneration Report continued
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 2011
24 July 2011
11 July 2011
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 2010 the non-Executive
Directors each received a fee of £35,000 per annum (2009:
£35,000). The Chairman, who is a non-Executive Director,
received a fee of £70,000 per annum (2009: £70,000) for his
services during the year ended 30 September 2010.
Total Remuneration of the Directors
The total remuneration of the Directors for the year ended 30 September 2010 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
210
220
35
70
345
915
–
11
12
–
–
14
37
–
168
176
–
–
345
689
2010
Total
£000
35
389
408
35
70
704
2009
Total
£000
35
268
269
35
70
456
1,641
1,133
2010
£000
2009
£000
69
42
44
68
41
41
155
150
39 Diploma PLC Annual Report and Accounts 2010
Long Term Incentive Plan
On 18 November 2009 the Executive Directors received a share award with a face value of one times salary as set out below. On
30 September 2010 the performance period relating to the award made on 17 December 2007 ended and the LTIP awards vested and
became exercisable by each of the Directors, as set out below.
LTIP shares
held at
30 Sept
2009 Number
LTIP shares
awarded
during the
year ended
30 Sept 2010
Number
LTIP shares
vested on
30 Sept 2010
(note 1)
Number
LTIP shares
lapsed on
30 Sept 2010
Number
Share price
on date of
award
Vesting
date
Total
LTIP shares
held at
30 Sept 2010
Number
BM Thompson
17 December 2007
17 December 2008
18 November 2009
I Henderson
17 December 2007
17 December 2008
18 November 2009
NP Lingwood
17 December 2007
17 December 2008
18 November 2009
178,225
276,423
–
–
–
204,748
106,715
168,293
–
–
–
124,629
106,715
168,293
–
–
–
130,564
178,225
–
–
106,715
–
–
106,715
–
–
–
–
–
–
–
–
–
–
–
184.6p 30 Sept 2010
123.0p 30 Sept 2011
168.5p 30 Sept 2012
184.6p 30 Sept 2010
123.0p 30 Sept 2011
168.5p 30 Sept 2012
184.6p 30 Sept 2010
123.0p 30 Sept 2011
168.5p 30 Sept 2012
–
276,423
204,748
–
168,293
124,629
–
168,293
130,564
Note:
1.
(cid:202)
(cid:202)
The awards which vested on 30 September 2010 were calculated in accordance with the performance conditions described on pages 36 and 37. The
awards may be exercised at any time before 17 December 2017 on payment of £1. In aggregate 100% of the total LTIP award granted on 17 December
2007 vested unconditionally and became exercisable.
(cid:85)(cid:202)
(cid:202)(cid:49)(cid:152)(cid:96)(cid:105)(cid:192)(cid:202)(cid:204)(cid:133)(cid:105)(cid:202)(cid:118)(cid:136)(cid:192)(cid:195)(cid:204)(cid:202)(cid:171)(cid:105)(cid:192)(cid:118)(cid:156)(cid:192)(cid:147)(cid:62)(cid:152)(cid:86)(cid:105)(cid:202)(cid:86)(cid:156)(cid:152)(cid:96)(cid:136)(cid:204)(cid:136)(cid:156)(cid:152)(cid:93)(cid:202)(cid:204)(cid:133)(cid:105)(cid:202)(cid:62)(cid:219)(cid:105)(cid:192)(cid:62)(cid:125)(cid:105)(cid:202)(cid:62)(cid:152)(cid:152)(cid:213)(cid:62)(cid:143)(cid:202)(cid:86)(cid:156)(cid:147)(cid:171)(cid:156)(cid:213)(cid:152)(cid:96)(cid:202)(cid:125)(cid:192)(cid:156)(cid:220)(cid:204)(cid:133)(cid:202)(cid:192)(cid:62)(cid:204)(cid:105)(cid:202)(cid:136)(cid:152)(cid:202)(cid:204)(cid:133)(cid:105)(cid:202)(cid:10)(cid:156)(cid:147)(cid:171)(cid:62)(cid:152)(cid:222)(cid:189)(cid:195)(cid:202)(cid:62)(cid:96)(cid:141)(cid:213)(cid:195)(cid:204)(cid:105)(cid:96)(cid:202)(cid:13)(cid:42)(cid:45)(cid:202)(cid:173)(cid:62)(cid:195)(cid:202)(cid:96)(cid:105)(cid:118)(cid:136)(cid:152)(cid:105)(cid:96)(cid:202)(cid:156)(cid:152)(cid:202)(cid:171)(cid:62)(cid:125)(cid:105)(cid:202)(cid:123)(cid:200)(cid:174)(cid:202)(cid:156)(cid:219)(cid:105)(cid:192)(cid:202)(cid:204)(cid:133)(cid:105)(cid:202)
three year period ended 30 September 2010 was 13.0% pa; this compares with an annual compound growth rate in RPI +5.0% over the same period
of 7.6% pa. Accordingly 100% of the shares relating to this award (representing 50% of the total award) vested unconditionally.
(cid:202)(cid:49)(cid:152)(cid:96)(cid:105)(cid:192)(cid:202)(cid:204)(cid:133)(cid:105)(cid:202)(cid:195)(cid:105)(cid:86)(cid:156)(cid:152)(cid:96)(cid:202)(cid:171)(cid:105)(cid:192)(cid:118)(cid:156)(cid:192)(cid:147)(cid:62)(cid:152)(cid:86)(cid:105)(cid:202)(cid:86)(cid:156)(cid:152)(cid:96)(cid:136)(cid:204)(cid:136)(cid:156)(cid:152)(cid:93)(cid:202)(cid:204)(cid:133)(cid:105)(cid:202)(cid:10)(cid:156)(cid:147)(cid:171)(cid:62)(cid:152)(cid:222)(cid:189)(cid:195)(cid:202)(cid:47)(cid:45)(cid:44)(cid:202)(cid:125)(cid:192)(cid:105)(cid:220)(cid:202)61.5% over the three year period ended 30 September 2010; this growth
gave the Company a ranking of 26 in the comparator group and put the Company in the 87 percentile. The median TSR was -20.8% and the lower
threshold of the upper quartile was 17.4%. Accordingly 100% of the shares relating to this part of the award (representing 50% of the total award)
vested unconditionally.
(cid:85)(cid:202)
Directors’ Shareholdings
IM Grice
I Henderson
NP Lingwood
JW Matthews
JL Rennocks
BM Thompson
Ordinary shares of 5p each
At
22 November
2010
Number
At
30 September
2010
Number
20,000
416,604
150,000
–
20,000
416,604
150,000
–
At
1 October
2009
Number
20,000
534,604
100,000
–
73,766
73,766
223,766
1,125,000
1,125,000
1,215,039
Note:
1.
The above table excludes interests in the Company’s Long Term Incentive Plan, disclosed above.
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40 Diploma PLC Annual Report and Accounts 2010
Remuneration Report continued
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 2009 and 2010 the number of shares which are the subject of vested LTIP awards and are held by each Director
were as follows:
BM Thompson
I Henderson
NP Lingwood
Vested LTIP awards
Share price
Amount
At
30 Sept
2009
Number
Exercised
during
2010
Number
Vested
during 2010
Number
At
30 Sept
2010
Number
At
30 Sept
2009
At
30 Sept
2010
At
30 Sept
2009
£
At
30 Sept
2010
£
175,132 (175,132) 178,225
178,225
173.0p
284.5p 302,978
507,050
105,079 (105,079) 106,715
106,715
173.0p
284.5p 181,787
303,604
105,079 (105,079) 106,715
106,715
173.0p
284.5p 181,787
303,604
Note:
1.
2.
On 16 November 2009, each participant exercised their option to acquire shares which had vested at 30 September 2009, for consideration of £1.
The share price at the date of exercise was 165.0p.
The share price during the year to 30 September 2010 ranged from 161.0p to 284.5p.
The information set out above under the headings Total Remuneration of the Directors, Long Term Incentive Plan and Directors’
Shareholdings has been audited. All other information provided in the Remuneration Report is not subject to audit.
This Remuneration Report has been approved by the Board and signed on its behalf by:
IM Grice
Chairman of the Remuneration Committee
22 November 2010
41 Diploma PLC Annual Report and Accounts 2010
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:
(cid:78)
(cid:78)
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 22 November 2010 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:
(cid:78)
Select suitable accounting policies and then apply them
consistently.
(cid:78) Make judgements and estimates that are reasonable and
prudent.
(cid:78)
(cid:78)
(cid:78)
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.
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42 Diploma PLC Annual Report and Accounts 2010
Consolidated Income Statement
For the year ended 30 September 2010
Continuing businesses
Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Operating profit
Financial expense, net
Profit before tax
Tax expense
Profit for the year from continuing businesses
Profit from discontinued 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 – discontinued
Basic and diluted earnings – continuing and discontinued
Alternative Performance Measures (note 2)
Operating profit
Add: Acquisition related charges
Adjusted operating profit
Add/(deduct): Net interest income/(expense)
Adjusted profit before tax
Adjusted earnings per share
The notes on pages 46 to 73 form part of these financial statements.
Note
2010
£m
2009
£m
3,4
183.5
160.0
(115.5)
(101.7)
3
6
7
22
20
9
68.0
(4.4)
(35.0)
28.6
(1.9)
26.7
(8.8)
17.9
5.1
23.0
21.5
1.5
23.0
58.3
(4.1)
(31.7)
22.5
(2.0)
20.5
(7.1)
13.4
0.9
14.3
13.0
1.3
14.3
14.6p
4.5p
19.1p
10.8p
0.8p
11.6p
Note
11
3,4
6
2010
£m
28.6
3.5
32.1
0.1
32.2
2009
£m
22.5
3.1
25.6
(0.1)
25.5
9
18.9p
14.8p
43 Diploma PLC Annual Report and Accounts 2010
Consolidated Statement of Comprehensive Income
For the year ended 30 September 2010
Profit for the year
Exchange rate adjustments on foreign currency net investments
Losses on fair value of cash flow hedges
Actuarial losses on defined benefit pension schemes
Deferred tax on items recognised in equity
Other comprehensive income for the year
Total comprehensive income for the year
Attributable to:
Shareholders of the Company
Minority interests
Note
24
13
2010
£m
23.0
1.9
(0.4)
(1.8)
0.6
0.3
2009
£m
14.3
10.7
(0.4)
(3.1)
1.0
8.2
23.3
22.5
21.8
1.5
23.3
21.2
1.3
22.5
Consolidated Statement of Changes
in Shareholders’ Equity
For the year ended 30 September 2010
At 1 October 2008
Total comprehensive income
Share-based payments
Dividends
At 30 September 2009
Total comprehensive income
Share-based payments
Purchase of minority interests
Future purchase of minority interests
Purchase of own shares
Dividends
At 30 September 2010
The notes on pages 46 to 73 form part of these financial statements.
Share
capital
£m
Translation
reserve
£m
Hedging
reserve
£m
Retained
earnings
£m
Note
5.7
–
–
–
5.7
–
–
–
–
–
–
8.0
10.7
–
–
18.7
1.9
–
–
–
–
–
0.7
(0.4)
–
–
0.3
(0.4)
–
–
–
–
–
93.7
10.9
0.5
(8.4)
96.7
20.3
0.5
2.5
(0.6)
(0.4)
(9.1)
5
8
5
19
19
8
Total
£m
108.1
21.2
0.5
(8.4)
121.4
21.8
0.5
2.5
(0.6)
(0.4)
(9.1)
5.7
20.6
(0.1)
109.9
136.1
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44 Diploma PLC Annual Report and Accounts 2010
Consolidated Statement of Financial Position
As at 30 September 2010
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
2010
£m
2009
£m
10
11
11
12
13
14
15
17
16
19
67.3
22.7
0.6
11.1
2.4
104.1
32.0
30.5
–
30.1
92.6
59.6
21.2
0.8
11.6
2.1
95.3
28.0
25.2
5.4
21.3
79.9
(32.3)
(2.0)
(13.0)
–
(23.3)
(1.8)
(3.1)
(3.5)
(47.3)
(31.7)
45.3
48.2
149.4
143.5
24
19
13
(5.3)
(1.2)
(3.7)
(4.7)
(10.6)
(4.1)
139.2
124.1
5.7
20.6
(0.1)
109.9
5.7
18.7
0.3
96.7
136.1
121.4
20
3.1
2.7
139.2
124.1
The consolidated financial statements were approved by the Board of Directors on 22 November 2010 and signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
The notes on pages 46 to 73 form part of these financial statements.
45 Diploma PLC Annual Report and Accounts 2010
Consolidated Cash Flow Statement
For the year ended 30 September 2010
Continuing businesses
Cash flow from operating activities
Cash flow from operations
Interest income received, net
Tax paid
Net cash from operating activities
Cash flow from investing activities
Acquisition of subsidiaries (net of cash acquired)
Acquisition of minority interests
Disposal of subsidiaries (net of cash disposed)
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 (used in)/from discontinued businesses
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/minority interests
Deferred consideration paid
Free cash flow – continuing and discontinued businesses
Add/(deduct): Free cash flow – discontinued businesses
Free cash flow – continuing businesses
The notes on pages 46 to 73 form part of these financial statements.
2010
£m
2009
£m
34.3
0.1
(9.3)
34.2
–
(9.0)
25.1
25.2
(8.1)
(2.5)
6.4
(0.4)
–
(1.2)
(0.1)
(11.1)
–
–
(1.1)
0.1
(1.5)
(0.3)
(5.9)
(13.9)
Note
23
21
21
22
19
12
11
8
20
(9.1)
(1.1)
(0.4)
(10.6)
22
(0.5)
8.1
21.3
0.7
30.1
17
2010
£m
8.1
9.1
1.1
10.6
0.4
29.3
0.5
29.8
(8.4)
(0.7)
–
(9.1)
1.7
3.9
15.7
1.7
21.3
2009
£m
3.9
8.4
0.7
11.1
1.1
25.2
(1.7)
23.5
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46 Diploma PLC Annual Report and Accounts 2010
Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
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
22 November 2010. 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 74 to 75.
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 operating profit
At the foot of the consolidated income statement, “adjusted operating profit” is defined as operating profit before amortisation and
impairment of acquisition intangible assets, acquisition costs and adjustments to deferred consideration (collectively, “acquisition
related charges”). The Directors believe that adjusted operating profit is an important measure of the underlying operational
performance of the Group.
2.2 Adjusted profit before tax
At the foot of the consolidated income statement, “adjusted profit before tax” is separately disclosed, being defined as 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 acquisition related charges. The
Directors believe that adjusted profit before tax is an important measure of the underlying performance of the Group.
2.3 Adjusted earnings per share
“Adjusted earnings per share” is calculated as the total of adjusted profit, less income tax costs, but excluding the tax impact on the
items included in the calculation of adjusted profit and the tax effects of goodwill in overseas jurisdictions, less profit attributable to
minority interests, divided by the weighted average number of ordinary shares in issue during the year. The Directors believe that
adjusted earnings per share provides an important measure of the underlying earning capacity of the Group.
2.4 Free cash flow
At the foot of the consolidated cash flow statement, “free cash flow” is reported, being defined as net cash flow from operating
activities, after net capital expenditure on fixed assets and including proceeds received from business disposals, but before expenditure
on business combinations and dividends paid to both minority shareholders and the Company’s shareholders. The Directors believe
that free cash flow gives an important measure of the cash flow of the Group, available for future investment.
2.5 Trading capital employed
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 operating profit, divided by trading capital employed plus all historic goodwill and as adjusted for the timing
effect of major acquisitions and disposals. Return on trading capital employed at the sector level does not include historic goodwill. The
Directors believe that return on trading capital employed is an important measure of the underlying performance of the Group.
3. Business Segment Analysis
For management reporting purposes, the Group is organised into three main business segments: Life Sciences, Seals and Controls.
These segments form the basis of the primary reporting format disclosures below. The principal activities of each of these segments is
described in the Business Review on pages 14 to 28. 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.
Revenue – existing businesses
– acquisitions
Revenue
Adjusted operating profit – existing businesses
– acquisitions
Adjusted operating profit
Acquisition related charges (note 11)
Operating profit
Life Sciences
Seals
Controls
Total
2010
£m
55.0
0.4
55.4
11.8
0.1
11.9
(1.6)
10.3
2009
£m
49.9
–
49.9
10.6
–
10.6
(1.4)
9.2
2010
£m
59.6
0.5
60.1
8.8
0.1
8.9
(1.5)
7.4
2009
£m
48.2
–
48.2
5.5
–
5.5
(1.3)
2010
£m
68.0
–
68.0
11.3
–
11.3
(0.4)
2009
£m
2010
£m
2009
£m
61.9
182.6
160.0
–
0.9
–
61.9
183.5
160.0
9.5
–
9.5
(0.4)
31.9
0.2
32.1
(3.5)
25.6
–
25.6
(3.1)
4.2
10.9
9.1
28.6
22.5
47 Diploma PLC Annual Report and Accounts 2010
3. Business Segment Analysis (continued)
Segment assets exclude cash and cash equivalents, deferred tax assets and corporate assets that cannot be allocated on a reasonable
basis to a business segment. Segment liabilities exclude retirement benefit obligations, deferred tax liabilities and corporate liabilities
that cannot be allocated on a reasonable basis to a business segment. These items are shown collectively in the following analysis as
“unallocated assets” and “unallocated liabilities”, respectively.
Operating assets
Goodwill
Acquisition intangible assets
Unallocated assets:
– Deferred tax assets
– Cash and cash equivalents
– 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)
Alternative Performance Measures (note 2)
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 liabilities/(assets), net
Life Sciences
Seals
Controls
Total
2010
£m
17.6
38.2
9.9
65.7
2009
£m
15.6
32.5
10.9
59.0
2010
£m
27.1
14.2
11.5
52.8
2009
£m
23.6
12.0
8.8
44.4
2010
£m
25.9
14.9
1.3
42.1
2009
£m
23.3
15.1
1.5
2010
£m
70.6
67.3
22.7
2009
£m
62.5
59.6
21.2
39.9
160.6
143.3
2.4
30.1
–
3.6
2.1
21.3
5.4
3.1
196.7
175.2
(11.3)
(9.0)
(8.0)
(4.8)
(12.2)
(9.3)
(31.5)
(23.1)
(3.7)
(5.3)
(4.1)
(4.7)
(13.2)
(13.1)
–
(3.8)
(3.5)
(2.6)
(57.5)
(51.1)
139.2
124.1
0.7
0.8
0.6
0.8
0.5
0.9
1.1
0.8
0.1
0.4
0.1
0.6
1.3
2.1
1.8
2.2
Life Sciences
Seals
Controls
Total
2010
£m
2009
£m
2010
£m
2009
£m
2010
£m
2009
£m
2010
£m
2009
£m
(4.7)
(4.5)
(1.3)
(1.4)
(0.6)
(0.6)
139.2
124.1
1.3
5.3
13.2
(30.1)
(6.6)
2.0
4.7
13.1
(21.3)
(6.5)
122.3
116.1
–
0.2
(1.9)
(0.5)
Segment trading capital employed
49.7
45.5
43.5
38.2
29.3
30.0
122.5
113.7
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Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
4. Geographic Segment Analysis by Origin
United Kingdom
Rest of Europe
North America
Revenue
2010
£m
55.9
35.1
92.5
2009
£m
50.1
32.6
77.3
183.5
160.0
Adjusted
operating profit
2010
£m
2009
£m
8.4
4.5
19.2
32.1
6.8
3.9
14.9
25.6
Gross assets
Trading capital
employed
2010
£m
50.0
33.2
113.5
2009
£m
49.3
34.8
91.1
2010
£m
19.2
19.6
83.5
2009
£m
28.4
21.0
66.7
196.7
175.2
122.3
116.1
Capital
expenditure
2010
£m
2009
£m
0.3
0.1
0.9
1.3
0.1
0.2
1.5
1.8
5. Group Employee Costs
The key management of the Group are the Executive Directors who have authority and responsibility for planning and controlling all
significant activities of the Group. The Directors’ emoluments and interests in shares of the Company are given in the Remuneration
Report on pages 35 to 40. 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 (2009: £0.2m).
Group staff costs, including Directors’ emoluments, are as follows:
Wages and salaries
Social security costs
Pension costs – defined contribution
Share-based payments
The average number of employees, including Executive Directors, during the year were:
Life Sciences
Seals
Controls
Corporate
Number of employees – average
Number of employees – year end
6.
Financial Expense, net
Interest and similar income
– interest receivable on short term deposits
– net finance income from defined benefit pension scheme (note 24)
Interest expense and similar charges
– bank commitment fees
– unwinding of discount on provisions
– net finance expense from defined benefit pension scheme (note 24)
Net interest income/(expense)
– fair value remeasurement of put options (note 19)
Financial expense, net
2010
£m
32.1
2.9
0.7
0.5
2009
£m
29.3
2.8
0.7
0.5
36.2
33.3
2010
Number
2009
Number
199
371
234
10
814
847
207
358
248
10
823
809
2010
£m
2009
£m
0.2
0.1
0.3
(0.1)
(0.1)
–
(0.2)
0.1
(2.0)
(1.9)
0.1
–
0.1
(0.1)
–
(0.1)
(0.2)
(0.1)
(1.9)
(2.0)
The fair value remeasurement of £2.0m (2009: £1.9m) includes £1.1m (2009: £1.1m) which relates to the unwinding of the discount on
the liability for future purchases of minority interests.
49 Diploma PLC Annual Report and Accounts 2010
7.
Tax Expense
Current tax
The tax charge is based on the profit for the year of the continuing businesses and comprises:
UK corporation tax
Overseas tax
Adjustments in respect of prior year:
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
2010
£m
2009
£m
2.2
7.0
9.2
(0.1)
(0.1)
9.1
(0.1)
(0.2)
(0.3)
8.8
2.4
5.2
7.6
–
–
7.6
(0.2)
(0.3)
(0.5)
7.1
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% (2009: 28%)
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
2010
£m
26.7
7.5
1.0
(0.1)
0.6
(0.2)
8.8
2009
£m
20.5
5.7
0.7
–
0.5
0.2
7.1
The Group earns its profits in the UK and Overseas. The UK corporation tax rate is 28% (2009: 28%) 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 28% to 40%. The tax relating to the discontinuing business is £0.2m credit
(2009: £0.3m charge), as set out in note 22.
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50 Diploma PLC Annual Report and Accounts 2010
Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
8. Dividends
Interim dividend, paid in June
Final dividend of the prior year, paid in January
2010
pence
per share
2009
pence
per share
2.8
5.3
8.1
2.5
5.0
7.5
2010
£m
3.1
6.0
9.1
2009
£m
2.8
5.6
8.4
The Directors have proposed a final dividend in respect of the current year of 6.2p (2009: 5.3p) which will be paid on 19 January 2011,
subject to approval of shareholders at the Annual General Meeting on 12 January 2011. The total dividend for the current year, subject
to approval of the final dividend, will be 9.0p (2009: 7.8p).
The Diploma Employee Benefit Trust holds 732,973 (2009: 868,263) shares, which 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 112,577,283 (2009: 112,316,906) and the profit for the year attributable to shareholders of £21.5m (2009: £13.0m).
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 businesses
Tax expense
Minority interests
Profit from discontinued businesses
Earnings for the year attributable to shareholders of the Company
Acquisition related charges
Fair value remeasurements
Tax effects on goodwill, acquisition intangible assets and fair value remeasurements
Profit from discontinued businesses
2010
pence
per share
2009
pence
per share
14.6
4.5
19.1
3.1
1.8
(0.6)
(4.5)
10.8
0.8
11.6
2.7
1.7
(0.4)
(0.8)
2010
£m
26.7
(8.8)
(1.5)
16.4
5.1
21.5
3.5
2.0
(0.6)
(5.1)
2009
£m
20.5
(7.1)
(1.3)
12.1
0.9
13.0
3.1
1.9
(0.5)
(0.9)
Adjusted earnings – continuing businesses
18.9
14.8
21.3
16.6
51 Diploma PLC Annual Report and Accounts 2010
10. Goodwill
At 1 October 2008
Acquisitions
Reclassification
Exchange adjustments
At 30 September 2009
Acquisitions (note 21)
Adjustment to prior year goodwill
Exchange adjustments
At 30 September 2010
Life Sciences
£m
Seals
£m
Controls
£m
Total
£m
51.6
3.5
–
4.5
59.6
6.2
(0.2)
1.7
8.9
2.1
–
1.0
12.0
2.5
(0.2)
(0.1)
12.1
–
2.4
0.6
15.1
–
–
(0.2)
30.6
1.4
(2.4)
2.9
32.5
3.7
–
2.0
38.2
14.2
14.9
67.3
The Directors carry out an impairment test on all goodwill generally twice a year. Goodwill is ascribed to a business which, for the
purpose of these impairment tests, is referred to as a cash generating unit.
The impairment test requires each cash generating unit to prepare “value in use” valuations from discounted cash flow forecasts. The
cash flow forecasts are initially based on the annual budgets and five year strategic plans, prepared by each business.
The key assumptions used to prepare the cash flow forecasts relate to gross margin, growth rates and discount rates. The gross
margins are assumed to remain sustainable, which is supported by historical experience; growth rates generally approximate to the
long term average rates for the markets in which the business operate, unless there are particular factors relevant to a business, such
as start-ups. The growth rates used in the cash flow forecasts vary between 2-5% across all sectors over the next five years and trend
down towards 2.0% over the longer term.
The cash flow forecasts are discounted to determine a current valuation, using a pre-tax discount rate of ca. 13% (2009: 13%). This
rate is based on the characteristics of lower risk non-technically driven, distribution businesses with robust capital structures, which is
broadly consistent with each of the Group’s businesses.
Based on the criteria set out above, no impairment of the value of goodwill was identified.
The Directors have also carried out sensitivity analysis on the key assumptions to determine whether a “reasonably possible change”
in any of these assumptions would result in an impairment of goodwill. This analysis indicates that a “reasonably possible change” in
these key assumptions would be unlikely to give rise to an impairment charge to goodwill in any of the businesses in the Controls or
Life Sciences segments. However, a reduction of 2% in revenue growth in the medium term in some of the businesses in the Seals
sector would result in an impairment charge of up to £1.0m. The headroom in the cash flow forecasts before any sensitivities and
based on the original assumptions, in respect of the businesses in the Seals sector is £2.0m.
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Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
11. Acquisition and Other Intangible Assets
Customer
relationships
£m
Supplier
relationships
£m
Trade
names and
databases
£m
Total
acquisition
intangible
assets
£m
Other
intangible
assets
£m
Cost
At 1 October 2008
Additions
Acquisitions
Disposals
Exchange adjustments
Reclassified as held for sale
At 30 September 2009
Additions
Acquisitions (note 21)
Exchange adjustments
At 30 September 2010
Amortisation
At 1 October 2008
Charge for the year
Disposals
Exchange adjustments
On assets reclassified as held for sale
At 30 September 2009
Charge for the year
Exchange adjustments
At 30 September 2010
Net book value
At 30 September 2010
At 30 September 2009
12.5
–
2.7
–
1.1
–
16.3
–
4.5
0.1
20.9
2.4
1.8
–
0.2
–
4.4
1.9
–
6.3
14.6
11.9
9.2
–
–
–
0.8
–
10.0
–
–
0.3
10.3
1.5
1.1
–
0.1
–
2.7
1.1
0.1
3.9
6.4
7.3
1.1
–
1.5
–
–
–
2.6
–
–
–
2.6
0.3
0.2
–
0.1
–
0.6
0.3
–
0.9
1.7
2.0
22.8
–
4.2
–
1.9
–
28.9
–
4.5
0.4
33.8
4.2
3.1
–
0.4
–
7.7
3.3
0.1
11.1
22.7
21.2
2.3
0.3
–
(0.2)
0.1
(0.4)
2.1
0.1
–
–
2.2
1.1
0.4
(0.2)
0.1
(0.1)
1.3
0.3
–
1.6
0.6
0.8
Total
£m
25.1
0.3
4.2
(0.2)
2.0
(0.4)
31.0
0.1
4.5
0.4
36.0
5.3
3.5
(0.2)
0.5
(0.1)
9.0
3.6
0.1
12.7
23.3
22.0
Acquisition related charges are £3.5m (2009: £3.1m) and comprise £3.3m (2009: £3.1m) of amortisation of acquisition intangible assets
and £0.2m (2009: £Nil) of acquisition costs.
Acquisition intangible assets relate to items acquired through business combinations which are amortised over their useful economic
life.
Customer relationships
Supplier relationships
Databases and trade names
Economic
life
5-15 years
7-10 years
5-10 years
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.
53 Diploma PLC Annual Report and Accounts 2010
12. Property, Plant and Equipment
Cost
At 1 October 2008
Additions
Acquisitions
Disposals
Exchange adjustments
Reclassified as held for sale
At 30 September 2009
Additions
Disposals
Exchange adjustments
At 30 September 2010
Depreciation
At 1 October 2008
Charge for the year
Disposals
Exchange adjustments
On assets reclassified as held for sale
At 30 September 2009
Charge for the year
Disposals
Exchange adjustments
At 30 September 2010
Net book value
At 30 September 2010
At 30 September 2009
Freehold
properties
£m
Leasehold
properties
£m
Plant &
equipment
£m
Total
£m
23.5
1.6
0.2
(1.5)
2.0
(1.4)
14.1
1.6
0.2
(1.5)
1.5
(1.4)
14.5
24.4
1.2
0.5
0.4
1.2
0.5
0.4
8.4
1.0
–
–
–
0.4
–
8.8
–
–
–
–
–
–
0.1
–
1.1
–
–
–
8.8
1.1
16.6
26.5
1.8
0.1
–
0.1
–
2.0
0.1
–
–
2.1
6.7
6.8
0.5
0.1
–
–
–
0.6
0.1
–
–
9.6
1.9
(1.3)
1.0
(1.0)
11.9
2.1
(1.3)
1.1
(1.0)
10.2
12.8
1.6
0.5
0.3
1.8
0.5
0.3
0.7
12.6
15.4
0.4
0.5
4.0
4.3
11.1
11.6
Land included above, but not depreciated, is £2.0m (2009: £2.0m). Capital commitments contracted, but not provided, were £Nil
(2009: £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) (2009: £0.5m and £Nil, respectively).
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54 Diploma PLC Annual Report and Accounts 2010
Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
13. Deferred Tax
The movement on deferred tax is as follows:
At 1 October
Credit for the year (note 7)
Acquisitions
Accounted for in equity
Exchange adjustments
At 30 September
2010
£m
2009
£m
(2.0)
(3.3)
0.3
–
0.6
(0.2)
(1.3)
0.5
0.1
1.0
(0.3)
(2.0)
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
Liabilities
Net
2010
£m
2009
£m
0.3
–
1.4
0.7
0.1
1.3
3.8
0.2
0.1
1.3
0.9
0.1
0.8
3.4
(1.4)
(1.3)
2.4
2.1
2010
£m
(0.5)
(4.6)
–
–
–
–
(5.1)
1.4
(3.7)
2009
£m
(0.5)
(4.9)
–
–
–
–
(5.4)
1.3
(4.1)
2010
£m
(0.2)
(4.6)
1.4
0.7
0.1
1.3
(1.3)
–
(1.3)
2009
£m
(0.3)
(4.8)
1.3
0.9
0.1
0.8
(2.0)
–
(2.0)
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 £1.2m (2009: £0.7m).
14.
Inventories
Finished goods and goods held for resale
2010
£m
32.0
2009
£m
28.0
Inventories are stated net of impairment provisions of £3.6m (2009: £3.4m). During the year £1.0m (2009: £1.1m) was recognised as
an expense relating to the write-down of inventory to net realisable value.
15. Trade and Other Receivables
Trade receivables
Less: Impairment provision
Other receivables
Prepayments and accrued income
2010
£m
28.5
(0.6)
27.9
1.4
1.2
30.5
2009
£m
23.7
(0.5)
23.2
0.8
1.2
25.2
55 Diploma PLC Annual Report and Accounts 2010
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 partially 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
2010
£m
10.0
6.8
7.0
2.8
1.9
2009
£m
8.6
5.0
4.6
3.5
2.0
28.5
23.7
2010
£m
23.1
4.6
0.8
28.5
2009
£m
19.7
3.4
0.6
23.7
2010
£m
2009
£m
3.5
0.8
0.2
0.1
4.6
2010
£m
0.5
0.2
(0.1)
0.6
2010
£m
16.5
2.8
1.2
11.8
32.3
2.4
0.8
0.2
–
3.4
2009
£m
0.6
–
(0.1)
0.5
2009
£m
11.5
1.9
1.7
8.2
23.3
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56 Diploma PLC Annual Report and Accounts 2010
Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
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
2010
£m
2009
£m
5.6
6.7
0.4
3.1
0.7
3.9
4.2
0.7
2.5
0.2
16.5
11.5
17. Cash and Cash Equivalents
Cash at bank
Short term deposits
Sterling
£m
2.7
7.7
10.4
US$
£m
3.5
–
3.5
Can$
£m
1.5
12.2
13.7
Euro
£m
1.4
1.1
2.5
2010
Total
£m
9.1
21.0
30.1
Sterling
£m
1.0
5.8
6.8
US$
£m
2.8
–
2.8
Can$
£m
1.5
6.9
8.4
Euro
£m
1.2
2.1
3.3
2009
Total
£m
6.5
14.8
21.3
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 26 within
Risks and Uncertainties, which has been audited.
Further analyses of these risks are set out below:
Credit risk
a)
The Group’s maximum exposure to credit risk was as follows:
Trade receivables
Other receivables
Cash and cash equivalents
Carrying amount
2009
2010
£m
£m
27.9
1.4
30.1
59.4
23.2
0.8
21.3
45.3
There is no material difference between the carrying amount of the financial assets and their fair value at each reporting date. An
analysis of the ageing and currency of trade receivables and the associated provision for impairment is set out in note 15. An analysis of
cash and cash equivalents is set out in note 17.
57 Diploma PLC Annual Report and Accounts 2010
18. Financial Instruments (continued)
Liquidity risk
b)
The Group has no cash loans or overdrafts at each reporting date.
Trade payables
Other payables
Other liabilities
The maturities of the undiscounted financial liabilities are as follows:
Less than one year
One-two years
Two-five years
Less: Discount
Carrying amount
2009
2010
£m
£m
16.5
2.8
14.2
33.5
32.3
–
1.4
33.7
(0.2)
11.5
1.9
13.7
27.1
16.5
8.5
3.7
28.7
(1.6)
33.5
27.1
There is no material difference between the carrying amount of these financial liabilities and their fair value at each reporting date.
Currency risk
c)
The Group’s main currency risk is its exposure to movements in US dollars, Canadian dollars and euros on trade receivables, trade
payables and cash and cash equivalents balances. These balances are analysed by currency in notes 15, 16 and 17, respectively.
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 2010 was a £0.7m liability
(2009: £0.3m liability). The amount removed from equity and taken to the consolidated income statement in cost of sales during the
year was £0.1m (2009: £0.1m). The fair value of cash flow hedges taken to equity during the year was £0.3m (2009: £0.4m).
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.
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 24 months from the year end. (Level 1 as defined by
IFRS 7 Financial Instrument: Disclosure).
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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58 Diploma PLC Annual Report and Accounts 2010
Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
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 on acquisition (note 21)
Put options entered into during the year
Unwinding of discount
Fair value remeasurements
At 30 September
2010
£m
13.2
1.0
14.2
13.0
1.2
2010
£m
13.1
(2.5)
0.6
1.1
0.9
2009
£m
13.1
0.6
13.7
3.1
10.6
2009
£m
11.2
–
–
1.1
0.8
13.2
13.1
The Group retains put/call options to acquire the outstanding minority shareholdings in AMT, BGS and M Seals, which are exercisable
between 1 October 2010 and 31 December 2013. The Group is engaged in discussions with the minority shareholders in AMT with a
view to acquiring all of the outstanding 25% shareholding in AMT in 2011. This would be earlier than anticipated in the original put/call
option agreements and therefore the liability to acquire these interests of £12.0m has been shown as falling due within one year.
At 30 September 2010, 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 2010. This led to a remeasurement of the fair value of these put options and the liability was increased by £0.9m
(2009: £0.8m) by a charge to the consolidated Income Statement.
At 30 September 2010, deferred consideration of £1.0m comprised £0.8m payable to the vendors of All Seals, £0.1m payable
to the vendors of the Fischer business and £0.1m payable to the vendors of BGS. Deferred consideration of £0.3m was paid on 17
December 2009 to the vendors of Meditech in final settlement of their performance payment and £0.1m was paid on 19 May 2010
to the vendors of the trade and assets of RT/Dygert International Inc, in final settlement of their performance payment. The balance
of £0.2m was not required and was released to goodwill (note 10).
20. Minority Interests
At 1 October 2008
Share of profit for the year
Dividends paid
Exchange adjustments
At 30 September 2009
Purchase of minority interests
Share of profit for the year
Dividends paid
Exchange adjustments
At 30 September 2010
£m
1.9
1.3
(0.7)
0.2
2.7
(0.1)
1.5
(1.1)
0.1
3.1
59 Diploma PLC Annual Report and Accounts 2010
21. Acquisition of Subsidiaries and Minority Interests
On 12 January 2010, the Group acquired the outstanding 8.2% of the ordinary share capital in Somagen Diagnostics Inc (“Somagen”)
for £2.5m (C$4.3m) from the minority shareholders of Somagen, pursuant to put/call option agreements entered into at the time of the
original acquisition in July 2004. As a consequence, the future purchase of minority interest liability of £2.5m that was recognised in
the consolidated financial statements at 30 September 2009 has been released to retained earnings.
On 30 July 2010, the Group acquired 80% of Big Green Surgical Company Pty Limited (“BGS”) for maximum consideration of £1.5m
(A$2.5m), before expenses. The initial cash paid on acquisition was £1.4m (A$2.4m) and the balance of £0.1m (A$0.1m) was paid on
29 October 2010, based on the net assets at completion. The outstanding 20% of shares are subject to put/call options, exercisable in
2013, based on an agreed multiple of operating profit.
On 3 August 2010, Sommer Gmbh purchased the stock and customer list of ET Fischer Elektrotechnik (“Fischer”) for maximum
consideration of £0.2m ((cid:69)0.3m), before expenses. The initial cash paid on acquisition was £0.1m ((cid:69)0.2m) and further amount up to
£0.1m ((cid:69)0.1m) is payable, based on the revenue generated from those customers in the eighteen month period from the date of
acquisition.
On 8 September 2010, the Group acquired 100% of All Seals Inc (“All Seals”) for maximum consideration of £7.8m (US$11.9m),
before expenses. The initial cash paid on acquisition was £6.8m (US$10.5m); a further amount up to £1.0m (US$1.4m) is payable in
March 2011, based on a number of factors, including principally, the results of All Seals in the year ending 31 December 2010. At
30 September 2010, £0.8m (US$1.3m) has been provided 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
Inventories
Trade and other receivables
Trade and other payables
Minority’s share of net assets
Net assets acquired by the Group
Goodwill arising on acquisitions completed during the year
Satisfied by:
Cash paid, before acquisition expenses
Cash acquired
Net cash paid
Provision for deferred consideration payable
Total consideration
Book value
£m
Fair value
£m
–
0.9
1.0
(0.9)
1.0
4.5
0.8
1.0
(1.0)
5.3
0.1
5.4
6.2
11.6
10.8
(0.2)
10.6
1.0
11.6
Goodwill of £6.2m which arose on acquisitions completed during the year respresents the product know-how held by employees,
prospects for sales growth from new customers and operating cost synergies. Goodwill and acquisition intangible assets acquired
during the year of £10.7m, includes £7.1m that will be allowable for a tax deduction in future years.
Acquisition costs incurred during the year of £0.2m were expensed to the Consolidated Income Statement.
From the date of acquisition to 30 September 2010, the newly acquired businesses contributed £0.9m to revenue and £0.2m to
operating profit. If the acquisition of these businesses had been made at the beginning of the financial year, these businesses would
have contributed £5.2m to revenue and £0.5m to profit after tax. Profit after tax should not be viewed as indicative of the results of
these businesses that would have occurred, if these acquisitions had been completed at the beginning of the year.
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60 Diploma PLC Annual Report and Accounts 2010
Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
22. Discontinued Businesses
On 7 January 2010, the Group completed the disposal of the Manual Liquid Handling (“MLH”) business of Anachem Limited for a
maximum consideration of £8.5m, before disposal costs. Initial cash proceeds of £7.7m were received, of which £0.8m is held in
escrow; a further £0.8m may be receivable, depending on the revenues generated in the 12 months to 31 December 2010.
The remainder of the business in Anachem Limited comprised the Instruments division which supplied laboratory automation products.
This was transferred to a separate entity, Anachem Instruments Limited, prior to completion of the sale of the MLH business.
On 29 April 2010, the Group completed the disposal of Anachem Instruments Limited for a maximum consideration of £0.4m, before
disposal costs. Initial proceeds of £0.2m were received in cash with a further £0.2m due to be received over the next two years.
There is no tax payable on the profit on disposal of these businesses of £5.5m.
Anachem Limited and Anachem Instruments Limited were both classified as discontinued businesses in 2009 and their net assets
were classified as “held for sale” at 30 September 2009.
The results of the MLH business, until it was sold on 7 January 2010, and the results of Anachem Instruments, until it was sold on
29 April 2010, are set out below:
Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
(Loss)/profit before tax
Tax credit/(expense)
(Loss)/profit after tax
Profit on disposal
Profit attributable to discontinued businesses
2010
£m
5.3
(4.3)
1.0
(0.2)
(1.4)
(0.6)
0.2
(0.4)
5.5
5.1
2009
£m
15.7
(10.2)
5.5
(0.6)
(3.7)
1.2
(0.3)
0.9
–
0.9
The assets and liabilities of Anachem Limited and Anachem Instruments Limited sold during the year ended 30 September 2010 were
as follows:
Other intangible assets
Property, plant and equipment
Deferred tax
Inventories
Trade and other receivables
Trade and other payables
Net assets disposed of
Profit on disposal
Consideration
Satisfied by:
Cash received on completion
Less: Expenses of sale
Less: Related disposal costs
Less: Cash disposed
Net cash proceeds received at 30 September 2010
Add: Cash held in escrow, net
Consideration
£m
0.3
0.3
0.1
1.6
1.8
(2.7)
1.4
5.5
6.9
£m
7.1
(0.2)
(0.4)
(0.1)
6.4
0.5
6.9
61 Diploma PLC Annual Report and Accounts 2010
22. Discontinued Businesses (continued)
Cash flows from the discontinued businesses included in the consolidated Cash Flow Statement are as follows:
(Loss)/profit from discontinued businesses
Depreciation/amortisation of tangible and other intangible assets
Tax (credit)/expense
Operating cash flow before changes in working capital
Decrease in working capital
Cash paid into defined benefit scheme (note 24)
Cash flow from operating activities
Tax recovered/(paid)
Net cash (used in)/from operating activities
Net cash used in investing activities
Net cash (used in)/from discontinued businesses
2010
£m
(0.4)(cid:0)
0.1(cid:0)
(0.2)
(0.5)
0.5
(0.6)
(0.6)
0.1
(0.5)
–
(0.5)
2009
£m
0.9
0.3
0.3
1.5
0.5
–
2.0
(0.2)
1.8
(0.1)
1.7
As part of the agreement to dispose of the MLH business of Anachem Ltd, the Trustees of the Anachem Limited Retirement Benefit
Scheme (“Scheme”) consented to the transfer of the residual liabilities in the Scheme to Diploma Holdings PLC (“DHPLC”). In return
for their consent, a cash sum of £625,000 was paid directly into the Scheme and is included in the net cash outflow of £0.5m from the
discontinued businesses in the year ended 30 September 2010.
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 discontinued businesses were as follows:
Wages and salaries
Social security costs
Pension costs – defined contribution
Number of employees – average
2010
£m
–
0.1
2009
£m
0.1
0.3
2010
£m
2009
£m
1.1
0.1
0.1
1.3
3.7
0.4
0.2
4.3
2010
Number
2009
Number
110
118
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62 Diploma PLC Annual Report and Accounts 2010
Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
23. Reconciliation of Cash Flow from Operating Activities
Profit for the year from continuing businesses
Depreciation/amortisation of tangible and other intangible assets
Acquisition related charges
Share-based payments expense
Financial expense, net
Tax expense
Operating cash flow before changes in working capital
(Increase)/decrease in inventories
(Increase)/decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Cash paid into defined benefit schemes (note 24)
Cash flow from operating activities
2010
£m
17.9
2.1
3.5
0.5
1.9
8.8
2009
£m
13.4
2.2
3.1
0.5
2.0
7.1
34.7
28.3
(3.2)
(4.0)
7.3
(0.5)
6.0
2.4
(2.3)
(0.2)
34.3
34.2
24. Retirement Benefit Obligations
The Group maintains several defined benefit schemes in the UK, 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. At 30 September
2010, all of the Group’s defined benefit schemes were merged into a single scheme which was renamed Diploma Holdings PLC UK
Pension Scheme. In connection with this merger, the sponsoring employer, Diploma Holdings PLC made an additional cash contribution
of £120,000 to the merged scheme on 30 September 2010. A full funding valuation of the merged schemes will be undertaken as at
30 September 2010.
Prior to the merger, the two principal defined benefit schemes (“the schemes”) were 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 Consolidated Statement of Financial Position:
Market value of schemes’ assets
Equities
Bonds
Cash
Present value of schemes’ liabilities
Amounts credited/(charged) to the Consolidated Income Statement in respect of defined benefit schemes:
Charged to operating profit
Interest cost
Expected return on schemes’ assets
Credited/(charged) to financial income/(expense) (note 6)
2010
£m
2009
£m
12.9
3.4
–
16.3
(21.6)
11.1
3.0
–
14.1
(18.8)
(5.3)
(4.7)
2010
£m
–
(1.0)
1.1
0.1
0.1
2009
£m
–
(1.0)
0.9
(0.1)
(0.1)
63 Diploma PLC Annual Report and Accounts 2010
24. Retirement Benefit Obligations (continued)
Amounts recognised in the Consolidated Statement of Comprehensive Income:
Experience adjustments on schemes’ assets
Changes in assumptions on schemes’ liabilities
Experience adjustments on schemes’ liabilities
Actuarial loss on schemes’ liabilities
2010
£m
0.3
(2.2)
0.1
(1.8)
2009
£m
0.7
(3.8)
–
(3.1)
The cumulative amount of actuarial losses recognised in the consolidated Statement of Comprehensive Income, since the transition to
IFRS, is £3.9m (2009: £2.1m).
Analysis of movement in the pension deficit:
At 1 October
Amounts (credited)/charged to income statement
Contributions paid by employer
Actuarial loss
At 30 September
Analysis of the movements in the present value of the schemes’ liabilities:
At 1 October
Interest cost
Actuarial gain
Loss 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
Contributions paid by employer
Benefits paid
At 30 September
The actual return on schemes’ assets during the year was £1.4m (2009: £1.6m).
2010
£m
4.7
(0.1)
(1.1)
1.8
5.3
2010
£m
18.8
1.0
(0.1)
2.2
(0.3)
2009
£m
1.7
0.1
(0.2)
3.1
4.7
2009
£m
14.2
1.0
–
3.8
(0.2)
21.6
18.8
2010
£m
14.1
1.1
0.3
1.1
2009
£m
12.5
0.9
0.7
0.2
(0.3)
(0.2)
16.3
14.1
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64 Diploma PLC Annual Report and Accounts 2010
Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
24. Retirement Benefit Obligations (continued)
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
(cid:202) (cid:202) (cid:85)(cid:202)(cid:31)(cid:105)(cid:152)
(cid:202) (cid:202) (cid:85)(cid:202)(cid:55)(cid:156)(cid:147)(cid:105)(cid:152)
Expected return on schemes’ assets*
Analysed as:
Equities
Bonds
Cash
Demographic assumptions:
Basic mortality table used:
100% of PCMA00/PCFA00
2010
2009
2008
3.2%
3.2%
5.0%
22.1
25.0
8.0%
5.0%
1.0%
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%
Year the mortality table was published:
2003
Allowance for future improvements in longevity:
Year of birth projections, with medium cohort improvements
with adjustments to reflect expected scheme experience
Allowance made for members to take a cash lump sum on retirement: Members are assumed to take 100% of their maximum
cash sum (based on current commutation factors)
Sensitivities:
Sensitivity of 2010 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
%
11.1
4.2
1.9
Estimated
increase
£m
2.4
0.9
0.4
* The expected return for each class of scheme assets is based on a combination of historical performance, current market yields and advice from
investment managers.
65 Diploma PLC Annual Report and Accounts 2010
24. Retirement Benefit Obligations (continued)
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.
PLC
Anachem
Date of last formal funding valuation
30 September 2008
30 September 2009
Deficit
Funding level
£1,508,000
84%
£2,786,000
75%
Funding approach
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
2.15% pa pre-retirement and NIL% pa
post-retirement
post-retirement
Lump sum contributions per annum to
remove the deficit – on going
£96,000
– exceptional in 2010
£120,000
Period over which the deficit is expected
£216,000
£625,000
to be removed
1 October 2009 – 30 September 2029
1 October 2009 – 30 June 2026
Expected contributions during FY2011
£96,000
£216,000
Current investment strategy
80% Equities/20% Bonds
85% Equities/15% Bonds
Number of deferred members at date of
actuarial valuation
137
187
History of experience gains and losses:
All experience adjustments are recognised directly in equity, net of related tax.
Experience adjustments arising on schemes’ assets:
Amount (£m)
% of schemes’ assets
Changes in assumptions arising on present value of schemes’ liabilities:
Amount (£m)
% of present value of schemes’ liabilities
Experience adjustments arising on present value of schemes’ liabilities:
Amount (£m)
% of present value of schemes’ liabilities
Present value of schemes’ liabilities
Market value of schemes’ assets
Deficit
2010
2009
2008
2007
2006
0.3
2%
0.7
5%
(3.4)
27%
0.3
2%
(2.2)
10%
(3.8)
20%
3.0
21%
2.3
14%
0.1
–
–
–
(21.6)
16.3
(18.8)
14.1
(0.1)
1%
(14.2)
12.5
0.1
1%
(16.4)
14.8
0.6
5%
(0.6)
3%
(0.6)
3%
(18.0)
13.3
(5.3)
(4.7)
(1.7)
(1.6)
(4.7)
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66 Diploma PLC Annual Report and Accounts 2010
Notes to the Consolidated Financial Statements
For the year ended 30 September 2010
25. Commitments
At 30 September 2010 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 £1.3m (2009: £1.4m).
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
2009
£m
2010
£m
1.3
2.3
–
3.6
1.3
2.0
0.3
3.6
2010
£’m
2009
£’m
0.1
0.1
0.2
0.1
0.1
0.2
Non audit fees of £7,000 (2009: £4,000) for taxation advisory services provided in Canada and £10,000(cid:0)(2009: £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 businesses:
US Dollar
Canadian Dollar
Euro
Average
Closing
2010
2009
2010
2009
1.56
1.63
1.15
1.54
1.82
1.14
1.58
1.62
1.15
1.60
1.72
1.09
67 Diploma PLC Annual Report and Accounts 2010
Group Accounting Policies
For the year ended 30 September 2010
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 2010 and the comparative period. The following new
standards, amendments and interpretations to existing standards have been published and have been endorsed by the EU; these are
mandatory for the first time for the year ending 30 September 2010 and are relevant to the Group:
(cid:0)
(cid:0)
(cid:0)
(cid:0)
(cid:0)
(cid:0)
(cid:78)
(cid:78)
(cid:78)
(cid:78)
(cid:78)
(cid:78)
IAS 1 (revised) ‘Presentation of Financial Statements’;
IAS 23 (revised) ‘Borrowing Costs’;
IAS 27 (revised) ‘Consolidated and Separate Financial Statements’;
IFRS 2 (revised) ‘Share-based Payment’;
IFRS 3 (revised) ‘Business Combinations’; and
IFRS 8 ‘Operating Segments’.
IAS 1 (revised) ‘Presentation of Financial Statements’ requires the presentation of a statement of comprehensive income and the
presentation of the statement of changes in equity as a primary statement. The changes are merely presentational and have not
impacted the Group’s reported profit or net assets.
IFRS 3 (revised) ‘Business Combinations’ applies to business combinations arising after 1 October 2009. 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. These changes have been applied for acquisitions acquired during
the year.
IFRS 8 ‘Operating Segments’ requires that operating segments should be determined on the basis of those segments whose
operating results are regularly reviewed by the chief operating decision maker, which has been determined to be the Board. This has
not impacted the Group’s presentation of its results and the Group continues to report using the same three business segments as
previously.
IAS 23 (revised) ‘Borrowing Costs’, IAS 27 (revised) ‘Consolidated and Separate Financial Statements’ and IFRS 2 (revised) ‘Share-
based Payment’ have had no impact on the results or net assets of the Group.
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. The consolidated financial statements have been prepared on a going concern basis, as
discussed in the Directors’ Report on page 29.
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.
Non-controlling interests, defined as 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 businesses that have been divested have been classified as discontinued businesses.
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.
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68 Diploma PLC Annual Report and Accounts 2010
Group Accounting Policies continued
For the year ended 30 September 2010
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:
(cid:78)
(cid:78)
(cid:78)
(cid:0)Gains and losses arising on settlements and curtailments – where the item that gave rise to the settlement or
curtailment is recognised in operating profit;
(cid:0)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
(cid:0)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:
(cid:78)
(cid:0)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 Consolidated Statement of Comprehensive Income.
Share-based payments
(c)
The Executive Directors of the Group receive part of their remuneration in the form of share-based payment transactions, whereby
the Directors render services in exchange for shares in the Company, or rights over shares (“equity-settled” transactions).
Equity-settled transactions are measured at fair value at the date of grant. The fair value determined at the grant date takes
account of the effect of market based measures, such as the Total Shareholder Return (“TSR”) targets upon which vesting of part
of the award is conditional, and is expensed to the profit and loss account on a straight line basis over the vesting period, with a
corresponding credit to equity. The cumulative expense recognised is adjusted to take account of shares forfeited by Executives
who leave during the performance or vesting period and, in the case of non-market related performance conditions, where it
becomes unlikely that shares will vest. For the market based measure, the Directors have used a predicted future value model to
determine fair value of the shares at the date of grant.
The Group operates an Employee Benefit Trust for the granting of shares to Executives. The cost of shares in the Company
purchased by the Employee Benefit Trust are shown as a deduction from equity.
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.
Reporting foreign currency transactions in functional currency:
(a)
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.
Translation from functional currency to presentational currency:
(b)
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)
(ii)
(iii)
Assets and liabilities are translated using exchange rates prevailing at the balance sheet date;
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
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.
69 Diploma PLC Annual Report and Accounts 2010
(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.
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.
1.9 Intangible assets
All intangible assets, excluding goodwill arising on a business combination, are stated at their amortised cost or fair value less any
provision for impairment.
Research and development costs
(a)
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.
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70 Diploma PLC Annual Report and Accounts 2010
Group Accounting Policies continued
For the year ended 30 September 2010
Acquired intangible assets – business combinations
(c)
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 and net of the aggregate fair value of the liabilities
(including contingent liabilities of businesses acquired at the date of acquisition). 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.
Impairment of goodwill
(a)
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.
Impairment of other tangible and intangible assets
(b)
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.
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.
Trade receivables
(a)
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.
Trade payables
(b)
Trade payables are non interest-bearing and are initially measured at their fair value.
Cash and cash equivalents
(c)
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.
71 Diploma PLC Annual Report and Accounts 2010
Put options held by minority interests
(d)
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.
Finance leases
(a)
Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower,
at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a
finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to
achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the income statement.
(b) Operating leases
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant
lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over
the expected lease term.
1.14 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 an effective hedge.
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Group Accounting Policies continued
For the year ended 30 September 2010
(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 2010:
(cid:78)
(cid:78)
(cid:78)
(cid:78)
(cid:78)
(cid:78)
Amendment to IFRS 2 ‘Share-based Payments’: cash-settled share-based payment transaction;
IFRS 9 (revised) ‘Financial Instruments – Classification and Measurement’;
Amendment to IAS 24 ‘Related Party Disclosures’: revised definition of related parties;
Amendment to IAS 32 ‘Financial Instruments: Presentation’: classification of rights issues;
Amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’: eligible hedged items; and
Annual Improvements to IFRSs issued April 2009 and May 2010.
The Group has considered the impact of these new standards and interpretations in future periods and no significant impact is
expected on reported profit or net assets.
The Group has chosen not to early adopt any of these new standards and interpretations.
Critical Accounting Estimates and Judgements
2
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 Directors’ 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.
73 Diploma PLC Annual Report and Accounts 2010
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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74 Diploma PLC Annual Report and Accounts 2010
Parent Company Balance Sheet
As at 30 September 2010
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
2010
£m
2009
£m
c
72.0
70.2
(42.3)
(41.0)
29.7
29.2
d
5.7
24.0
29.7
5.7
23.5
29.2
The financial statements of Diploma PLC, company number 3899848, were approved by the Board of Directors on 22(cid:0)November 2010
and signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
The notes on page 75 form part of these financial statements.
Reconciliation of Movements in
Shareholders’ Funds
For the year ended 30 September 2010
At 1 October 2009
Retained profit for the year
Transfer of own shares, net
At 30 September 2010
Share
capital
£m
Profit and
loss
account
£m
5.7
–
–
5.7
23.5
0.3
0.2
24.0
Total
£m
29.2
0.3
0.2
29.7
75 Diploma PLC Annual Report and Accounts 2009
75 Diploma PLC Annual Report and Accounts 2010
Notes to the Parent Company Financial Statements
For the year ended 30 September 2010
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.
a.2 Investments and dividends
Investments are stated at cost less provision for impairment. Dividend income is recognised when received. Dividend distributions are
recognised in the Company’s financial statements in the year in which the dividends are approved by the Company’s shareholders.
Interim dividends are recognised when paid.
a.3 Employment Benefit Trust and Employee Share Schemes
Shares held by the Diploma Employee Benefit Trust (“the Trust”) are stated at cost and accounted for as a deduction from
shareholders’ funds in accordance with UITF 38. Shares that are held by the Trust are not eligible for dividends until such time as the
awards have vested 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 35 to 40.
c)
Investments
Shares in Group undertakings
At 1 October 2009
Additions
At 30 September 2010
Details of the principal subsidiaries are set out on page 78.
d) Share Capital
£m
70.2
1.8
72.0
2010
Number
2009
Number
2010
£m
2009
£m
Allotted, issued and fully paid ordinary shares of 5p each
At 30 September
113,239,555
113,239,555
5.7
5.7
During the year 385,290 shares were transferred from the Diploma Employee Benefit Trust to participants in connection with vesting
of awards under the Long Term Incentive Plan. On 19 March 2010, the Trust purchased a further 250,000 of shares for £0.4m.
In accordance with UITF 38, the purchase cost of own shares, net of shares which have vested, are shown as a movement in
shareholders’ funds.
At 30 September 2010 the Trust held 732,973(cid:0)(2009: 868,263) ordinary shares in the Company representing 0.6% of the called up
share capital. The market value of the shares at 30 September 2010 was £2.1m (2009: £1.5m).
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76 Diploma PLC Annual Report and Accounts 2010
Independent Auditors’ Reports
For the year ended 30 September 2010
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 2010 which comprise the
consolidated income statement, the consolidated statement of financial position, the consolidated cash flow statement, the
consolidated statement of comprehensive income, the consolidated statement of changes in shareholders’ equity, 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 Chapter 3 of Part 16 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 for the Financial Statements, 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:
(cid:78)
(cid:78)
(cid:78)
give a true and fair view of the state of the Group’s affairs as at 30 September 2010 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:
(cid:78)
(cid:78)
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
(cid:78)
(cid:78)
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
22 November 2010
77 Diploma PLC Annual Report and Accounts 2010
77 Diploma PLC Annual Report and Accounts 2010
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 2010 which comprise
the Parent company balance sheet, the reconciliation of movements 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 Chapter 3 of Part 16 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 for the Financial Statements, 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:
(cid:78)
(cid:78)
(cid:78)
give a true and fair view of the state of the Parent company’s affairs as at 30 September 2010;
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:
(cid:78)
(cid:78)
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:
(cid:78)
(cid:78)
(cid:78)
(cid:78)
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
certain disclosures of directors’ remuneration specified by law are not made; or
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 2010.
Ian Waller (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditors
London
22 November 2010
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78 Diploma PLC Annual Report and Accounts 2010
Principal Subsidiaries
Life Sciences
a1-envirosciences Limited
a1-envirosciences GmbH
a1-safetech AG
Somagen Diagnostics Inc
AMT Vantage Holdings Inc
Big Green Surgical Company Pty Limited
Seals
Hercules Sealing Products Inc
RTD Seals Corp
All Seals 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%
75%
80%
100%
100%
100%
100%
100%
90%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
England
Germany
Switzerland
Canada
Canada
Australia
USA
USA
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.
79 Diploma PLC Annual Report and Accounts 2010
Financial Calendar and Shareholder Information
Announcements (provisional dates):
Interim Management Statement released
Interim Management Statement released
Half Year Results announced
Preliminary Results announced
Annual Report posted to shareholders
Annual General Meeting
Dividends (provisional dates)
Interim announced
Paid
Final announced
Paid (if approved)
12 January 2011
1 August 2011
17 May 2011
21 November 2011
5 December 2011
11 January 2012
17 May 2011
22 June 2011
21 November 2011
18 January 2012
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 FCA, 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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80 Diploma PLC Annual Report and Accounts 2010
Five Year Record
Five Year Record
For the year ended 30 September 2010
For the year ended 30 September 2010
Continuing businesses
Revenue
Adjusted operating profit
Finance income/(expense)
Adjusted profit before tax
Acquisition related charges
Property profits
Fair value remeasurements
Profit before tax
Tax expense
Profit for the year from continuing businesses
Profit from discontinued businesses
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 discontinued businesses
Revenue
Adjusted profit before tax
2010
£m
2009
£m
2008
£m
2007
£m
2006
£m
183.5
160.0
156.2
124.5
112.1
32.1
0.1
32.2
(3.5)
–
(2.0)
26.7
(8.8)
17.9
5.1
23.0
136.1
3.1
(30.1)
5.3
13.2
1.3
(6.6)
25.6
(0.1)
25.5
(3.1)
–
(1.9)
20.5
(7.1)
13.4
0.9
14.3
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
121.4
108.1
2.7
1.9
90.7
1.8
18.1
1.0
19.1
(0.3)
11.1
–
29.9
(6.6)
23.3
0.9
24.2
92.9
1.6
(21.3)
(15.7)
(12.4)
(36.7)
4.7
13.1
2.0
(6.5)
1.7
11.2
3.3
(6.0)
1.6
11.8
3.6
(5.6)
4.7
–
(3.4)
–
122.3
116.1
104.5
91.5
59.1
8.6
10.2
11.0
29.8
14.6
18.9
9.0
120
2.1
%
22.1
17.5
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
22.8
20.3
11.8
4.6
82
2.6
%
25.1
16.1
£m
188.8
31.6
£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)
18.5
15.6
16.4
14.0
12.6
Notes
1
2
3
4
5
6
Return on trading capital employed represents operating profit, before acquisition related charges, 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 consolidated 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 have been restated to reflect this bonus issue.
Acquisition costs have been charged against profit from 1 October 2009; prior to 1 October 2009 acquisition costs were included as part of the cost of
investment.
Design: Energy Design Studio T. +44 (0)20 7249 1881
Production: Imprima Limited T. +44 (0)20 7105 0300
Diploma PLC
12 Charterhouse Square
London EC1M 6AX
T. +44 (0)20 7549 5700
F. +44 (0)20 7549 5715
www.diplomaplc.com