DIPLOMA PLC
Annual Report
& Accounts 2013
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DIPLOMA PLC
Our Sectors
Diploma PLC is an international
group of businesses supplying
specialised technical products
and services. We operate
globally in three distinct
sectors:
Life Sciences
Suppliers of consumables, instrumentation and related
services to the healthcare and environmental industries.
Seals
Suppliers of hydraulic seals, gaskets, cylinders,
components and kits for heavy mobile machinery
and industrial equipment.
Controls
Suppliers of specialised wiring, connectors, fasteners and
control devices for technically demanding applications.
Contents
Strategic Report
01 Highlights
02 Chairman’s Statement
04 Group at a Glance
06 Our Business Model and Growth Strategy
08 Chief Executive’s Review
10 Our Year in Review
16 Finance Review
19 Sector Review
– Life Sciences
– Seals
– Controls
32 Principal Risks and Uncertainties
36 Corporate Responsibility
Governance
38 Directors and Advisors
40 Corporate Governance
45 Audit Committee Report
49 Nomination Committee Report
50 Remuneration Committee Report
Financial Statements
67 Directors’ Report
70 Consolidated Income Statement
71
Consolidated Statement of Income and Other
Comprehensive Income
71 Consolidated Statement of Changes in Equity
72 Consolidated Statement of Financial Position
73 Consolidated Cash Flow Statement
74 Notes to the Consolidated Financial Statements
90 Group Accounting Policies
98 Parent Company Balance Sheet
99 Notes to the Parent Company Financial Statements
100 Independent Auditor’s Report
102 Principal Subsidiaries
103 Financial Calendar and Shareholder Information
104 Five Year Record
Diploma PLC
01
Financial
Highlights
Year ended 30 September
Revenue
Adjusted operating profit1
Adjusted operating margin1
Adjusted profit before tax1,2
Profit before tax
Free cash flow3
Adjusted earnings per share1,2
Basic earnings per share
Total dividends per share
Free cash flow per share3
1 Before acquisition related charges.
2 Before fair value remeasurements.
3 Before cash payments on acquisitions and dividends.
2013
£m
2012
£m
285.5 260.2 +10%
54.3
52.8
+3%
19.0% 20.3%
54.3
52.6
48.5
46.0
31.6
32.7
+3%
+5%
-3%
pence
Pence
34.8
30.7
15.7
27.9
33.1
+5%
27.9 +10%
14.4
28.9
+9%
-3%
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 in the Annual Report & Accounts is based on these alternative measures and an explanation is set out in note 2 to the
consolidated financial statements included in the Annual Report & Accounts.
Diploma PLC Annual Report & Accounts 2013Strategic Report 02
Chairman’s
Statement
John Rennocks
Chairman
EpS growth
pence
+17% p.a.
2013
2012
2011
2010
34.8
33.1
27.9
18.9
2009
14.8
0
5
10
525
15
371
240
2013
2012
2011
2010
207
2009
121
30
25
20
35
TSR growth
TSR index = 100
+39% p.a.
0
220
Dividend growth
pence
110
+16% p.a.
330
440
2013
550
2012
2011
2010
2009
0.0
9.0
7.8
15.7
14.4
12.0
15.7
investment for future growth
We have made significant progress this year in developing the
Group’s business through both investment and the effective
execution of the Group’s consistent and proven strategy. The
robust financial performance this year and the continuing
strength of the balance sheet and cash flow provide
confidence in the Group’s long term prospects.
After several years of strong underlying growth, the focus
this year has been on the Group’s Investment for Growth
programme, through which significant investments are
being made across the Group’s businesses to establish a
firm foundation for the next phase of future growth. The
investment programme started last year and by 30 September
2013 the Group had invested £4.4m in modern, enlarged
facilities and new and efficient information systems. Additional
senior management to strengthen the Group’s corporate
development resources have added a further £1.1m to
annual operating costs. This investment programme will be
concluded during the next financial year and details of the key
programme elements, together with an indication of the likely
benefits that will flow to the Group over the coming years,
are described later in this Report.
Acquisitions remain an integral part of the Group’s growth
strategy and we continue to see a promising pipeline of
opportunities. Our strong track record for acquiring good
quality businesses, investing in them and delivering value is
founded on a disciplined approach to acquisitions. This year,
uncertainties about future economic prospects have made
vendors cautious and transaction processes have been
lengthened. With an improving acquisition environment and
additional corporate development resources in place, the
Board remains confident that 2014 will be a successful year
for converting opportunities into good value-enhancing
acquisitions.
After the year end on 5 November 2013, contracts were
signed for the acquisition of 80% of Kentek Oy, based in
Finland, for a maximum consideration of £11.2m, extending
the Seals businesses into new and emerging markets.
Results
Group revenue increased in 2013 by 10% to £285.5m (2012:
£260.2m) driven by a strong performance from the Life
Sciences businesses and benefiting from the contribution
from acquisitions completed last year. The Seals businesses
delivered modest underlying growth against strong prior
year comparatives, while the Controls businesses reported
a decline in underlying revenues given the difficult trading
conditions in Europe, particularly in the first half of the year.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 03
development and I am very grateful to both John and Ian for
their wise counsel and for their substantial contribution to the
success of the Group.
I am confident that the refreshed Board has the right balance
of skills, experience, capabilities, independence, diversity and
knowledge required to lead the Company forward during its
next stage of development.
Employees
It is important to thank all our employees whose tremendous
hard work has been a driving force behind our performance.
Diploma is very much a people business and success is always
a team effort. We continue to foster an entrepreneurial culture
within our businesses which encourages all our staff to take
responsibility for their own businesses.
outlook
The Group has a resilient business model with a good
geographic spread of businesses, supported by a strong
balance sheet and cash flow. We have made significant
investments in the business this year, providing the resources
and capacity to support our future growth in key markets and
improve our ability to target and develop acquisitions.
Looking ahead, the investments we have made provide a
strong platform for growth and the Board is confident that
the Group will make further progress this year.
John Rennocks
Chairman
18 November 2013
Underlying Group revenues increased by 4%, after adjusting
for the additional net contribution from acquisitions, the
divestment last year of a small business in Switzerland and for
currency movements on the translation of overseas results.
As anticipated, adjusted operating margins reduced to 19.0%
(2012: 20.3%) from the record levels reported last year, largely
reflecting the impact on operating costs of investing in the
businesses. Adjusted operating profit increased by 3% to
£54.3m (2012: £52.8m).
Adjusted profit before tax increased by 3% to £54.3m (2012:
£52.6m) and adjusted earnings per share, helped by a lower
effective tax rate, increased by 5% to 34.8p (2012: 33.1p).
The Group continued to generate strong cash flow of £31.6m
(2012: £32.7m), after both increasing capital investment in the
businesses to £4.6m (2012: £3.5m) and making an exceptional
cash contribution of £4.7m (2012: £Nil) to the Group’s
Employee Benefit Trust.
During the year, £17.4m (2012: £14.2m) was distributed to
shareholders as dividends and with a much lower expenditure
on acquisitions of £2.2m (2012: £22.3m), the Group’s net cash
funds increased by £11.4m to £19.3m at 30 September 2013.
Dividends
The strong balance sheet and free cash flow, supported by
a solid set of results has led the Board to recommend an
increase in the final dividend of 5% to 10.7p per share (2012:
10.2p). Subject to shareholder approval at the Annual General
Meeting, this dividend will be paid on 22 January 2014 to
shareholders on the register at 29 November 2013.
The total dividend per share for the year will be 15.7p which
represents a 9% increase on 2012. The dividend is well covered
by adjusted EPS at 2.2 times, in line with our objective of
targeting towards a two times level of cover.
Board development
I am very pleased with the progress we have made this year in
developing and refreshing the Board and its Committees. This
process started some 18 months ago following the Company’s
admission to the FTSE 250 index. In November 2012, we
welcomed Marie-Louise Clayton to the Board as a non-
Executive Director and I was delighted that John Nicholas and
Charles Packshaw agreed to join the Board as non-Executive
Directors in June 2013. These changes were in part brought
about by the decision of John Matthews and Ian Grice to retire
from the Board, having served as independent Directors for
many years. During their tenure they have guided the
Company through a period of significant growth and
Diploma PLC Annual Report & Accounts 2013Strategic Report
04
Group at a Glance
The Group is well diversified by
geographic and business area.
life Sciences
● Healthcare
■ Environmental
Seals
● Aftermarket
■ Industrial OEM
Controls
● Controls
Geography
North America
53%
of revenues1
Europe
38%
of revenues1
Rest of World
9%
of revenues1
27% US
26% Canada
22% UK
16% Continental Europe
North American revenues1 by Sector
North American revenues1 by Sector
North American revenues1 by Sector
European revenues1 by Sector
European revenues1 by Sector
European revenues1 by Sector
ROW revenues1 by Sector
ROW revenues1 by Sector
ROW revenues1 by Sector
Controls
Controls
Controls
Life Sciences
Life Sciences
Life Sciences
Life Sciences
Life Sciences
Life Sciences
Controls
Controls
Controls
Life Sciences
Life Sciences
Life Sciences
Seals
Seals
Seals
1 By destination.
Controls
Controls
Controls
Seals
Seals
Seals
Seals
Seals
Seals
Diploma PLC Annual Report & Accounts 2013Diploma PLC
05
We focus on supplying essential
products and services across a range
of specialised industry segments.
Life Sciences
Healthcare (85% of revenues)
Medical devices and related
consumables and services supplied
to hospital pathology laboratories,
operating rooms and GI Endoscopy
suites and clinics
Environmental (15% of revenues)
Environmental analysers,
containment enclosures and
emissions monitoring systems
aftermarket (55% of revenues)
Next day delivery of seals, sealing
products and cylinder components for
the repair of heavy mobile machinery
industrial oEms (45% of revenues)
Sealing products and custom
moulded and machined parts
supplied to manufacturers of
specialised industrial equipment
interconnect (70% of revenues)
Wiring, harness components and
fasteners used in specialised applications
in Aerospace, Defence, Motorsport,
Energy, Medical and Industrial
Fluid Controls (30% of revenues)
Temperature, pressure and fluid control
products used in Food, Beverage and
Catering industries
principal businesses
DHG and a1-group
principal businesses
HFPG, FPE Group and M Seals
principal businesses
IS Group, Filcon, Clarendon, Hawco Group
33%
of revenues
319
employees worldwide
37%
of revenues
513
employees worldwide
30%
of revenues
300
employees worldwide
Diploma PLC Annual Report & Accounts 2013Strategic ReportSealsControls 06
Our Business Model
and Growth Strategy
Our Business Model
The Group comprises a number of high
quality, specialised businesses which design
their individual business models to make
them essential to their customers.
Essential
Products
= recurring income and
stable revenue growth
Essential
Solutions
= sustainable and
attractive margins
Essential
Values
= agility and
responsiveness
Our businesses focus on supplying
essential products and services funded by
customers’ operating rather than capital
budgets and supplied across a range of
specialised industry segments.
The majority of the Group’s revenues are
generated from consumable products.
In many cases, the products will be used
in repair and maintenance applications
and refurbishment and upgrade
programmes, rather than supplied to
original equipment manufacturers.
These characteristics all contribute to the
Group’s record of stable revenue growth
over the business cycle.
Our businesses design their individual
business models to provide solutions
which closely meet the requirements
of their customers.
The solutions can be in the form of:
• Highly responsive customer service,
such as the next day delivery from stock
of essential, but low value items;
• Deep technical support, where we
work closely with our customers in
designing our products into their
specific applications;
• Added value services which, if we did
not provide these services, customers
would have to pay others to provide
them or would require them to invest in
additional resources of their own.
By supplying solutions, not just products,
we build strong long term relationships with
our customers and suppliers, supporting
sustainable and attractive margins.
We encourage an entrepreneurial
culture across our businesses, through
a decentralised management structure.
We want the managers to feel that they
have the freedom to run their own
businesses, while being able to draw upon
the support and resources of a larger
group where this is beneficial.
Within our businesses we have strong,
self-standing management teams who are
committed to and rewarded according to
the success of their businesses. This
ensures that decisions are made close to
the customer and that the businesses are
agile and responsive to changes in the
market and the competitive environment.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 07
The main focus this year has
been on the “Build” phase of
our growth strategy.
investment in Facilities
£3.6m of capital and revenue cost
is being invested in modern and
expanded facilities. By the end of
2013, four of five planned business
moves had been successfully
completed in the US, UK and Canada
with the final one completed in
Canada in October 2013.
Build
Our Growth Strategy
Acquire
Grow
The Group’s “Acquire, Build, Grow” strategy is designed
to deliver strong, double-digit growth by building larger,
broader-based businesses in the three Group sectors.
The focus this year has been on the “Build” phase of the
strategy through the Group’s “Investment for Growth”
programme. This comprises a series of specific investments
designed to provide the foundation for the next phase of
the Group’s growth.
investment in iT Systems
£1.7m of capital and revenue cost
is being invested in powerful and
efficient new ERP systems. By the end
of 2013, three implementations had
been successfully completed. The
final project will be rolled out to the
Canadian Healthcare businesses
through 2014.
investment in management
Investment is being made in
additional senior managers at the
Group’s Head Office and in the
major businesses to strengthen the
corporate development resources.
These additional managers are all
now in place and add ca. £1.2m to
annual operating costs.
Diploma PLC Annual Report & Accounts 2013Strategic Report 08
Chief
Executive’s
Review
Bruce Thompson
Chief Executive officer
Principal corporate objectives
achieve double digit growth in adjusted EpS over
the business cycle
Adjusted earnings per share (“EPS”), measured over the
business cycle, provides an absolute benchmark of the
Company’s performance. Over the last five years, adjusted
EPS has grown at a compound growth rate of 17% p.a.
through a combination of steady organic growth and
carefully targeted acquisitions.
Generate TSR growth in the upper quartile of the FTSE 250
Total shareholder return (“TSR”) is the growth in value of a
share plus the value of dividends reinvested in the Company’s
shares on the day on which they are paid. This is measured
against the TSR growth of the FTSE mid-250 index (excluding
investment trusts) (“FTSE 250”). The last five years have seen
a compound TSR growth for Diploma of 39% p.a., which
represents upper quartile performance as compared with
the FTSE 250, where median TSR growth has been 18% p.a.
“ Over five years, compound
growth rates for adjusted EPS
and TSR have been 17% p.a.
and 39% p.a. respectively.”
Deliver progressive dividend growth with two times
dividend cover
Diploma follows a progressive dividend policy with a target
cover of two times on an adjusted EPS basis. Over the last five
years, dividends have steadily grown at the rate of 16% p.a. and
this continues the trend of increasing dividends in each of the
last 14 years.
Growth in the value of a hypothetical £100 holding over five years
600
500
400
300
200
100
+425%
+131%
0
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Diploma (rebased)
FTSE 250 (rebased, ex Investment Trusts)
Diploma PLC Annual Report & Accounts 2013Diploma PLC Next level objectives
Key performance indicators
09
Generate stable “GDp plus” organic revenue growth over the
business cycle
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 value enhancing acquisitions.
Total revenue growth:
% p.a.
13%
p.a. compound
2013
2012
2011
2010
£285.5m
£260.2m
£230.6m
£183.5m
2009
£160.0m
Underlying revenue is after adjusting for the impact from
acquisitions and divestments and for currency movements
on the translation of overseas results.
Underlying revenue
growth: % p.a.
+5%
p.a. average
maintain stable attractive margins
Operating margin is an important measure of the success of the
businesses in achieving superior margins by offering strongly
differentiated products and customer focused solutions,
as well as by running efficient operations.
adjusted operating
margins: % of revenue
18-19%
average
0
50
2013
100
150
+4%
200
250
300
2012
2011
2010
2009 –12%
+6%
+17%
+11%
-7.857143-3.7142860.4285714.5714298.71428612.857143
2013
19.0%
2012
2011
2010
2009
20.3%
19.6%
17.5%
16.0%
accelerate growth through carefully selected value
enhancing acquisitions
To complement the Group’s organic growth strategy, the Group
has an ongoing acquisition programme, designed to accelerate
growth and to facilitate entry into related strategic markets.
acquisition spend: £m
0
5
2013 £2.2m
10
15
20
25
£15m
p.a. average
2012
2011
2010
2009
£22.3m
£28.2m
£11.0m
£12.2m
Generate consistently strong cash flow to fund growth strategy
and dividends
Free cash flow is defined as the cash flow generated after tax, but
before acquisitions and dividends. This measures the success of
the Group and its businesses in turning profit into cash through
the careful management of working capital and investments in
fixed assets.
Free cash flow: £m
2013
£31.6m
0.0000004.8333339.66666714.50000019.33333324.16666729.000000
£29m
p.a. average
2012
2011
2010
2009
£32.7m
£25.0m
£29.8m
£23.5m
0.0000005.83333011.66665917.49998923.33331929.16664834.999978
2013
16.7%
Working capital as %
of revenue
16-17%
average
2012
2011
2010
2009
16.5%
16.1%
15.4%
17.6%
Create value by consistently exceeding 20% RoTCE
Return on trading capital employed (“ROTCE”) is defined as
adjusted operating profit as a percentage of trading capital
employed (“TCE”). TCE excludes net cash and non-operating
assets and liabilities, but includes all goodwill and acquired
intangible assets.
RoTCE: %
0
3
2013
6
9
12
15
25.8%
18
24%
average
2012
2011
2010
2009
26.6%
25.4%
22.1%
19.0%
0.0000004.6666679.33333314.00000018.66666723.33333328.000000
Diploma plC Annual Report & Accounts 2013
Strategic Report
10
Our Year
in Review
Life Sciences
Strong growth across all
businesses after prior
year investments
“ The main focus this year has
been the Group’s Investment
for Growth programme.”
Business model and growth strategy
The Group’s strategy is designed to generate strong, double-
digit growth in earnings and value over the business cycle, by
building larger, broader-based businesses in the three Group
Sectors of Life Sciences, Seals and Controls.
Our businesses target organic revenue growth over the business
cycle at the rate of 5–6% p.a. (“GDP plus” growth). Stable and
resilient revenue growth is achieved through our focus on
essential products and services funded by customers’ operating
rather than capital budgets and supplied across a range of
specialised industry segments. By supplying essential solutions,
not just products, we build strong long term relationships with
our customers and suppliers, which support sustainable and
attractive margins. Finally we encourage an entrepreneurial
culture in our businesses through our decentralised
management structure and these essential values ensure
that decisions are made close to the customer and that the
businesses are agile and responsive to changes in the market
and the competitive environment.
Overall growth is accelerated from the underlying GDP plus
levels to the strong, double-digit level through carefully
selected, value-enhancing acquisitions which fit the business
model and offer entry into new strategic markets. Acquisitions
are not made just to add revenue and profit, but rather we are
looking for successful businesses which have growth potential,
capable management and a good track record of profitable
growth and cash generation.
As part of our Acquire, Build, Grow strategy, we invest in the
businesses post acquisition to build a firm foundation to allow
them to move to a new level of growth. These acquisitions
form a critical part of our Sector growth strategies and are
designed to generate a pre-tax return on investment of at least
20% and hence support our Group objective of consistently
exceeding 20% return on trading capital employed (“ROTCE”).
The Group has delivered another year of growth, albeit at a
lower level than previous years. The main focus this year has
been on the Investment for Growth programme to ensure that
following the strong growth in recent years, we continue to
have the right platform in place to support the future growth
of the business. Whilst our pipeline of opportunities remains
promising, we have seen more modest acquisition activity this
year as transaction processes have lengthened in the current
macroeconomic environment.
performance against Kpis
Growth in the year against the principal corporate objectives
of adjusted earnings per share (“EPS”) and total shareholder
return (“TSR”) has been 5% and 42% respectively. Over a five
year period, compound growth rates for EPS and TSR have
been 17% p.a. and 39% p.a. respectively.
This year, the Group increased revenues by 10% over the prior
year with underlying revenue growth of 4% after adjusting for
currency effects, acquisitions and a small divestment in 2012.
Underlying growth rates strengthened from 2% in the first half
of the year to 6% in the second half, trending towards GDP
plus levels of growth as prior year comparatives became less
challenging. The Group continues to benefit from its broad
spread of businesses and geography, with the Life Sciences
businesses growing strongly and more than offsetting the small
decline in underlying revenues in Controls, largely caused by the
challenging trading conditions in Europe. The Seals businesses,
which in recent years have acted as the principal driver for the
Group’s growth, showed modest underlying growth this year
against very strong comparatives.
Diploma PLC Annual Report & Accounts 2013Diploma PLCSealsModest underlying growth but against very strong comparativesGroupMajor investment programme to establish firm foundation for growth 11
Adjusted operating margins reduced to 19% this year from the
record 20% plus levels of last year reflecting the impact on
operating costs of investing in the businesses. There will be
benefits resulting from these investments in terms of greater
operating efficiencies and improved management of working
capital, which should start to make a positive impact in the
second half of 2014. Against this, new acquisitions brought into
the Group are likely to join with initial operating margins below
the Group average.
The level of acquisition spend this year of £2.2m is well below
the five year average of ca. £15m p.a. and a current target of
£25m plus. The uncertainty over future economic prospects
has made vendors very cautious and has resulted in
lengthening transaction processes and delayed completions.
With an improving acquisition environment and additional
corporate development resources in place, prospects for 2014
are more encouraging.
The Group continued to generate strong free cash flow, which
at £31.6m was still close to last year’s level of £32.7m. This was
after an exceptional £4.7m cash contribution this year to fund
the Group’s Employee Benefit Trust and £4.6m of capital
expenditure, which was up £1.1m from the prior year. Free
cash flow as a percentage of adjusted profit after tax (free cash
flow conversion) was 80% compared with the five year average
of ca. 95%. Working capital as a percentage of revenue was
16.7% compared with the five year average of 16.5%.
Return on trading capital employed or ROTCE is the final
indicator of the overall performance of the Group and very
importantly its success in creating value for shareholders.
ROTCE is measured as the pre-tax return on total Group
investment excluding net cash funds, but including all goodwill
and acquired intangible assets. ROTCE has exceeded the 20%
target in each of the last five years and this year was 25.8%.
investment for Growth
The Investment for Growth programme comprises a series
of specific investments designed to provide the foundation
for the next phase of the Group’s growth. Major investments
are being made in modern and expanded facilities, powerful
and efficient new information technology (“IT”) systems and
additional senior management to strengthen corporate
development resources.
By the end of the 2013 financial year, £4.4m of the
programme’s planned investment of £5.3m in new facilities
and IT infrastructure had been invested, with ca. £0.9m still
to be invested in 2014. The benefits resulting from these
investments in facilities and ERP systems should start to impact
in the second half of 2014, delivering greater operating
efficiencies and improved management of working capital.
To date, £3.4m has been invested in major facility moves. In
2012, two of the Industrial OEM Seals businesses, RT Dygert
and All Seals moved to new facilities. This year the Vantage
business in Canada and the IS-Rayfast business in the UK
completed major relocations into new larger facilities in
Markham, Ontario in Canada and Swindon in the UK
respectively. After the year end, the Hercules business in Barrie,
Ontario completed a move to a new custom built facility.
All moves have been successfully completed with minimal
disruption to the businesses. The new facilities not only provide
an appropriate environment for modern, technically biased
companies, but also substantial capacity for future growth.
A further £1.0m has been invested in powerful new ERP
systems to improve the IT infrastructure. During the year,
major new ERP systems were implemented by M Seals across
its three locations in Denmark, Sweden and China, by Hawco
in its principal UK operation and by a1-envirosciences in
Germany. A major new ERP project has also been initiated by
the Healthcare businesses in Canada, with implementation
starting in Somagen during the second half of 2013 and plans
to roll out the system across the other businesses through the
2014 financial year.
Diploma PLC Annual Report & Accounts 2013Strategic ReportGroupStrong cash flow and growth in value AcquisitionsUncertain economic environment slowing transaction processesControlsDecline in underlying revenues in face of challenging trading conditions in Europe
12
Our Year
in Review
continued
Investment has also been made in additional senior managers
at the Group’s Head Office and in the major businesses
to strengthen corporate development resources. These
additional managers are all now in place and have added
ca. £1.1m to annual operating costs this year.
Outside the Investment for Growth programme, there has
been further investment within the businesses to strengthen
sales and business development resources and in regional
management. These additional resources are designed to give
the strong leadership required to extend the businesses into
new areas and develop acquisition opportunities.
acquisitions
Acquisitions remain an integral part of the Board’s strategy, but
this has been a frustrating year for completing acquisitions, as
the general economic uncertainty has contributed to increased
caution from vendors and lengthened transaction processes.
During the past ten years the Group has experienced similar
challenging periods for completing acquisitions and therefore
is prepared to wait until the environment improves, rather
than compromise the quality of acquisitions and risk diluting
shareholder value.
As confidence builds and the prospects for the global
economy improve, there are signs that the acquisition
environment is now improving. With the investments made
this year in additional corporate development resources, the
scope of the acquisition programme has broadened and the
acquisition pipeline has strengthened.
Following the year end, in early November contracts were
signed for the acquisition of 80% of Kentek Oy for a maximum
consideration of £11.2m (€13.3m). Kentek is a specialised
distributor of filters and related products, used in heavy mobile
machinery and industrial equipment applications. Kentek is
based in Finland with operations in Russia and the Baltic States
and will extend the reach of the Seals businesses into new and
emerging markets.
This transaction is expected to close in January 2014 with
completion conditional upon certain conditions precedent.
These conditions include the approval of the Russian
competition authorities, no material adverse change and
warranties to be repeated at closing.
Sector developments
Good progress was made in the year in further developing the
Group’s strategy in each of the three business Sectors and the
key developments this year are summarised below.
Life Sciences
33%
Group revenues
Revenue
Adjusted operating profit
Adjusted operating margin
2013
£m
2012
£m
93.2
20.9
22.4%
78.4
18.0
23.0%
+19%
+16%
• Underlying revenue growth of 15% with strong growth
across all businesses
• Vantage completed integration programme with
move to new facility; strong growth of new mi Surgery
business in amT
• major supplier added at DSl giving step change in
revenues; australian management strengthened and
operations integrated
• major new ERp system initiated in Canada with roll-out
through 2014
• Strong growth in reshaped Environmental businesses
The Life Sciences businesses increased revenues by 19%,
which included a full year contribution from the DSL business
in Australia, acquired in June 2012. After adjusting for this
acquisition, for currency effects and for a minor reshaping of
the Environmental businesses, underlying revenues in Life
Sciences increased by 15%.
Adjusted operating profit increased by 16% and adjusted
operating margins reduced by 60bps to 22.4%. In the
Healthcare businesses, there was some weakening in gross
margins towards the end of the year, caused by the weakening
of the Canadian and Australian exchange rates, relative to the
US dollar. The implementation of the Investment for Growth
programme during the year also impacted Healthcare
operating margins but this was partly offset by an
improvement in Environmental margins.
The DHG group of Healthcare businesses in Canada and
Australia account for ca. 85% of Life Sciences revenues.
The DHG business model is to build strong market positions
in growing niche healthcare markets. Products are sourced
from high quality medical device manufacturers under the
terms of long term exclusive distribution agreements. Full
service solutions are provided by highly qualified DHG
technical sales and product application staff, working closely
Diploma PLC Annual Report & Accounts 2013Diploma PLC 13
with the surgeons, operating room nurses and laboratory
technologists. A large proportion of revenues (ca. 70%)
are secured under multi-year customer contracts.
In Canada, the Somagen and AMT businesses continued to
grow steadily in their core markets of Clinical Diagnostics
and Electrosurgery. The principal drivers of growth this year
however, have been the two newer businesses, Vantage and
AMT’s Minimally Invasive (“MI”) Surgery business. Vantage has
benefited from prior year investments to establish it as a strong
independent business within DHG, focused on the growing
GI Endoscopy market. Vantage started the current financial
year with a complete product range, an integrated and fully
trained sales team and strengthened operational and service
management. Vantage has performed strongly this year with
steadily growing sales of consumable and service products
boosted by strong capital equipment sales and CPP (cost per
procedure) based contracts.
AMT’s new MI Surgery business also benefited from prior
year investments in securing a strong portfolio of products,
negotiating long term supplier agreements and in building a
focused sales team. The business supplies products ranging
from surgical instruments used in standard laparoscopic
procedures to leading edge interventional radiology and
oncology products for use in the treatment of cancer and cancer
related conditions. This year has seen a substantial increase in
revenues from this new business area.
In Australia, DSL in its first full year in the Group, delivered a
step change increase in revenues from the addition of a major
new supplier (also a key supplier to Somagen) shortly after
acquisition. BGS also continued to penetrate the market with
its smoke evacuation products while maintaining steady
growth in sales of its core electrosurgical grounding pads and
laparoscopic electrodes. During the year, senior management
in Australia was strengthened at country level and the BGS
operations and back office functions were successfully
relocated and integrated into the DSL facility in Melbourne.
The DSL and BGS businesses continue to operate as clear
separate sales and marketing businesses, but will now
benefit from the efficiencies and critical mass of a central
services group.
The remaining ca. 15% of Life Sciences revenues are generated
by the Group’s Environmental businesses in Europe, which
supply a range of products used in Environmental testing and
Health & Safety applications. Following various initiatives in
recent years to reshape and refocus the businesses, both
a1-envirosciences and a1-CBISS delivered double digit growth
this year and an improvement in operating margins.
Seals
37%
Group revenues
Revenue
Adjusted operating profit
Adjusted operating margin
2013
£m
2012
£m
106.1
19.5
18.4%
99.9
20.4
20.4%
+6%
–4%
• Underlying revenue growth of 2% against very strong
prior year comparatives
• Continued development of aftermarket Webstore
application with online sales up by 30% this year
• investment in two new seal machining centres and
increased engineering resource to improve service
offering and broaden product line
• investment in the industrial oEm businesses in new seal
compound certifications to move up the value chain
• Hercules Canada relocation completed after year end
and new ERp system installed across the three m Seals
businesses
The Seals businesses increased revenues by 6% including a full
year contribution from J Royal, which had been acquired in
December 2011. After adjusting for the additional contribution
from this acquisition and for currency translation effects,
underlying revenues increased by 2%.
Adjusted operating profits decreased by 4% and operating
margins reduced by 200bps to 18.4% of revenue, reflecting
the impact of investment in the Seals businesses, including
the Group’s Investment for Growth programme begun last
year. Aftermarket gross margins continued to be resilient,
underpinned by essential product availability and added
value technical service, though overall, Seals gross margins
weakened slightly with continued competition in the Industrial
OEM markets.
The Aftermarket businesses account for ca. 55% of Seals
revenues and supply own-branded sealing products used in
a broad range of heavy mobile machinery applications. The
products are generally supplied from inventory on a next day
delivery basis and are used in the repair and maintenance
of equipment after it has completed its initial warranty or
lease term.
Diploma PLC Annual Report & Accounts 2013Strategic Report 14
Our Year
in Review
continued
“ Good progress has been
made in the year in further
developing the Group in
each of the three business
Sectors.”
Seals continued
In North America, the Aftermarket businesses have
consistently out-performed the relevant construction indices
and have posted strong growth rates since emerging from the
2009 downturn. This year, the businesses have consolidated
their market share gains and are now moving to more normal
GDP plus growth rates. Hercules Bulldog has made a number
of investments during the year to reinforce its market leading
levels of service. During the year, over 3,000 new kit
applications were developed and additional revenues were
generated from sales of new parts.
The business continued to develop its electronic trading
capabilities (“Webstore”) with new search and find capabilities,
allowing the business to develop new sales channels to retail
customers, as well as converting existing customers to online
ordering. Online sales increased this year by over 30% and
now represent 15% of revenues. The business also installed its
third seal machining centre and added technical staff and
development engineers to broaden the product range offered
to customers.
In Europe, FPE took operational responsibility for the Hercules
Europe operation in the Netherlands, which will now provide
the impetus to develop a more substantial, unified European
Aftermarket group. The FPE group delivered another year
of good revenue growth and installed an additional seal
machining centre to complement the two existing machines.
The Industrial OEM businesses account for ca. 45% of Seals
revenues and supply seals, O-rings and custom moulded
and machined parts used in a range of specialised industrial
equipment. The businesses work closely with the Industrial
OEM customers to specify the most appropriate sealing
material, design and manufacturer for the application. Once
the product is designed in to the application, the businesses
supply the sealing products and provide the necessary
logistical and technical support, in most cases for the lifetime
of the product.
In North America, the Industrial OEM businesses have
continued to operate in an industrial economy which has
shown slow steady growth since emerging from the 2009
recession. The HFPG businesses have broadly grown with the
market, with a stable level of demand from existing customers
and a steady stream of new projects offsetting any business
lost. In an increasingly competitive market for the more
standard products, the RT Dygert business has enhanced its
product offering through new compound certifications for
a variety of applications, which allows it to meet the more
stringent demands of customers and to move up the value
chain. The J Royal and All Seals businesses have invested in
additional technical sales resource and a new water jet gasket
cutting machine to generate growth. All Seals has also
obtained the AS9100 quality certification which strengthens
its position in the Aerospace and Medical products industries.
In Europe, M Seals delivered good overall growth in its core
Scandinavian markets which more than offset the slowing
demand for its wind turbine seals in China. The new ERP
system implemented this year will provide a solid platform for
growth and more efficient management of inventory across
the three country locations.
The acquisition of Kentek Oy will extend the reach of the
Seals businesses into new and emerging markets. Kentek
is a specialised distributor of filters and related products,
based in Finland, but with 75% of revenues generated by its
operations in Russia and the Baltic States. Kentek supplies its
products to similar heavy mobile machinery applications as
the Aftermarket Seals businesses, but Kentek also has a good
proportion of its revenues in the Oil & Gas and Mining sectors,
where the Seals businesses currently have limited involvement.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 15
Controls
30%
Group revenues
Revenue
Adjusted operating profit
Adjusted operating margin
2013
£m
86.2
13.9
16.1%
2012
£m
81.9
14.4
17.6%
+5%
–3%
• Underlying revenues decreased by 3% in challenging
trading conditions in Europe
• iS-Group relocated to new warehouse/office facility
• amfast integrated into Clarendon; strong performance
in premium aircraft seats and interiors
• Rayquick acquisition strengthened Sommer’s position
in Electrical Distribution in Germany
• New ERp system at Hawco; strengthened sales resource
at abbeychart
The Controls businesses increased revenues in 2013 by 5%,
benefiting from both the acquisition in November 2012 of a
small energy distributor based in Germany and from a full year
contribution from Abbeychart and Amfast, acquired respectively
in March and May 2012. After adjusting for the additional
contribution from these acquisitions and for modest currency
translation effects, underlying revenues decreased by 3%.
Over 90% of Controls revenues are generated in Europe and
the background trading conditions during the year have been
very challenging, reflecting the economies in the principal
markets of the UK and Germany.
Operating profits decreased by 3% and operating margins
reduced by 150bps to 16.1%. The reduced operating margins
resulted from the reduction in underlying revenues, combined
with increased costs following the major relocation of the
IS-Rayfast business in the UK and the ERP investment at
Hawco. Overall gross margins in the Controls Sector remained
resilient as the businesses continued to focus on specialised
markets and added value opportunities.
The Interconnect businesses account for ca. 70% of Controls
revenues and supply high performance wiring, connectors
and harness components, fasteners and control devices
along with a range of value-added services. The products are
used in technically demanding applications and often harsh
environments in industries including Aerospace, Defence,
Motorsport, Energy, Medical and Industrial.
In the first quarter of this year, IS-Rayfast completed its
relocation from the site it had occupied since 1992 into a
newly refurbished 37,000 sq.ft facility nearby in Swindon. The
facility now accommodates the core IS-Rayfast business and
acts as the central management and operational hub for the
IS-Group businesses in the UK.
Amfast had an excellent first year in the Group and
consolidated its position within the Civil Aerospace sector
as a leading supplier to the premium aircraft seating and cabin
interior market. Later in the year, Amfast’s sales and customer
service functions were fully integrated into Clarendon’s sales
operation in Leicester and warehousing operations were
combined with those of Clarendon at the new Swindon site.
Clarendon and Amfast together now form a single fastener
products group supplying principally to the Aerospace and
Motorsport markets in Europe, but also with potential to
expand into other industrial sectors and geographies.
Early in the year, the acquisition was completed of Rayquick,
a small German distributor focused on the Energy market in
Germany. Rayquick was successfully integrated into Sommer
and has helped Sommer to secure its appointment as a
German Master Distributor for its key energy products supplier.
Sommer and Rayquick are now well positioned to benefit
when a more normal cycle resumes in the repair and
refurbishment of the local transmission networks.
The Fluid Control businesses account for ca. 30% of Controls
revenues and supply a range of fluid control products used
broadly in the Food and Beverage industry. Products are
used in a range of applications including food retailing and
transportation, catering equipment, vending machines,
coffee brewing, pure water and water cooling systems.
The Hawco group businesses faced significant headwinds this
year in challenging market conditions in the UK. Major food
retailers continued to focus on smaller convenience stores
which require less Hawco equipment and commercial
catering equipment customers were overstocked with surplus
equipment after the Olympics in London. There were also
slowdowns in demand from a number of Abbeychart’s
vending, water filter and catering customers, but the coffee
brewing sector remained buoyant.
During the year, the Hawco group made a significant
investment in a new ERP system, which was successfully
implemented at Hawco’s operations in Guildford and Bolton
and which will be rolled out to Abbeychart in 2014. This
investment will provide the Fluid Controls businesses with
a solid modern platform to support future growth.
Diploma PLC Annual Report & Accounts 2013Strategic Report 16
Finance Review
and operating profit on translation was £1.8m and £0.3m
respectively. On a transaction basis, the weakening in both
the Canadian dollar and Australian dollar against the US dollar
and Euro in the last quarter of the year impacted the gross
margin in the Healthcare businesses, since their products are
mainly purchased in these currencies. The existing hedging
programmes in the businesses mitigated much of this effect
this year, such that the reduction in gross margin in the DHG
businesses was only £0.3m compared with the previous year.
The impact on the rest of the Group on a transaction basis
from the change in exchange rates was broadly positive, but
not significant.
investment for Growth programme
As indicated last year, the Board approved a programme of
investments, including additional management resources, of
ca. £6m across the Group designed to secure a platform to
sustain the profitable growth in the businesses over the next
five years. This investment programme comprises the
following elements:
actual
2012
£m
actual
2013
£m
Forecast
2014
£m
Total
£m
Expenditure:
Capital
Revenue cost
Comprising:
Facilities
IT infrastructure
impact on income
Statement:
Additional
management
resources
Revenue cost and
depreciation
3.8
1.5
5.3
3.6
1.7
5.3
1.3
0.4
1.7
1.5
0.2
1.7
0.4
0.6
1.0
2.0
0.7
2.7
1.9
0.8
2.7
1.1
1.1
2.2
0.5
0.4
0.9
0.2
0.7
0.9
1.2
0.9
2.1
During the year the refurbishment of new facilities in Swindon
and Markham was completed and work began on the
relocation of the Barrie facility in Canada which was
completed shortly after the end of the year. In addition, a
number of large IT infrastructure projects were completed in
M Seals, Hawco and a1-envirosciences and a new ERP project
commenced in the second half of the year in the Canadian
Healthcare companies.
The impact on operating profit this year from this programme
of investments has been £2.2m which is £0.7m higher than
was anticipated last year because certain stages of investment
have been advanced or additional costs expensed during
the year. This cost, which represents ca. 80bps of margin, is
expected to continue at a broadly similar running rate in future
years. However as we complete this Investment for Growth
programme in the second half of 2014, we expect to start to
realise efficiency benefits in terms of better management of
Nigel lingwood
Group Finance Director
operating results in 2013
Diploma achieved a robust result this year given challenging
economic conditions in Europe and against a record
performance last year from the Seals businesses. Revenues
and profits increased on the prior year, free cash flow
remained strong and the Group’s return on trading capital
employed was again above 25%.
Revenues increased by 10% to £285.5m (2012: £260.2m) which
included an additional net contribution from businesses
acquired or divested during the past two financial years of
£11.7m. After adjusting for this additional contribution and for
the impact on overseas revenues from the change in exchange
rates, underlying revenues increased by 4%. An improvement
in the trading environment in the Seals and Controls markets,
combined with less demanding prior year comparatives led to
an improvement in the second half, with underlying revenues
up 6% compared with the same period last year.
Adjusted operating profit, which is before acquisition related
charges, increased by 3% to £54.3m (2012: £52.8m) and
adjusted operating margins decreased to 19.0% from the
record level of 20.3% reported last year. As indicated last year,
the ramp up in the Investment for Growth programme which
started in early 2012 contributed to this reduction in margin.
In addition, further revenue investment in sales and business
development resources in the businesses, together with a
slight weakening in gross margins in both the Healthcare
and Fluid Controls businesses also contributed to the margin
reduction. Underlying adjusted operating profits reduced
by 1%, after adjusting for the impact of acquisitions, the
divestment of the small Swiss Environmental business last
year and currency movements.
The relative strength against UK sterling of both the US dollar
and the Euro during the first nine months of the year benefited
the Group’s results this year on the translation of the results of
the overseas businesses to UK sterling. The benefit to revenues
Diploma PLC Annual Report & Accounts 2013Diploma PLC 17
inventory and the ability to take delivery of large supplier
shipments. We are also beginning to see the benefits from
better service levels, as well as having increased capacity in
facilities, information systems and management resource to
support substantially larger businesses.
adjusted profit before tax, earnings per share and dividends
Adjusted profit before tax increased by 3% to £54.3m (2012:
£52.6m). There was no net interest expense this year (2012:
£0.2m) because the combination of the interest earned on
cash deposits and the notional net income earned on the
defined pension scheme of £0.3m, offset interest paid on
bank borrowing and commitment fees. IFRS profit before tax
was £48.5m (2012: £46.0m), after acquisition related charges
of £5.6m (2012: £6.4m) and fair value remeasurements of
£0.2m (2012: £0.2m).
The notional net income earned on the defined pension
scheme of £0.2m will no longer accrue to the Company from
1 October 2013, following the implementation of a change in
accounting under IAS 19 (Retirement Benefit Obligations),
whereby the calculation of the notional return on the assets
will be restricted to the return on high quality corporate bonds.
The Group’s adjusted effective accounting tax charge
decreased in 2013 to 27.3% (2012: 28.7%) of adjusted profit
before tax reflecting the benefit of a further reduction in UK
corporation tax rates to 23.5% (2012: 25%), together with the
impact from a lower proportion of profits being contributed
by HFPG in the US, where the effective tax rate is ca. 38%.
The Group’s adjusted cash rate of tax was 27.3% for the year.
Adjusted earnings per share increased by 5% to 34.8p,
compared with 33.1p last year reflecting the benefit from the
lower effective tax rate this year. IFRS basic earnings per share
increased to 30.7p (2012: 27.9p).
The Board’s policy is to pursue a progressive dividend, while
targeting dividend cover (the ratio of Adjusted EPS to total
dividends paid and proposed for the year) towards two times
cover. Following this policy and recognising the strength of the
Group Balance Sheet and strong free cash flow, the Directors
have recommended an increase in the final dividend of 5% to
10.7p per share; this gives a total dividend per share for the
year of 15.7p per share with represents a 9% increase on the
prior year dividend of 14.4p. The dividend cover moves to 2.2
times from 2.3 times reported last year.
Free cash flow
The Group continues to generate strong free cash flow from
its activities which in 2013 was £31.6m (2012: £32.7m), after
making exceptional cash payments of £4.7m (2012: £nil) to
fund the Company’s Employee Benefit Trust in respect of
incentive awards which had vested in earlier years. Free cash
flow, which is before expenditure on acquisitions or returns to
shareholders, represented 80% of Adjusted profit after tax
(2012: 87%).
Operating cash flow increased to £55.9m (2012: £50.2m) after
investing £1.1m (2012: £5.2m) in working capital which, at
30 September 2013, was broadly stable at 16.7% (2012: 16.5%)
of annual revenues, adjusted for the timing of acquisitions. The
increase in working capital arose partly from a small increase in
inventory and also reflected the timing of a large CPP contract
in DHG which contributed to an increase in receivables. Group
tax payments increased by £1.1m to £14.8m (2012: £13.7m)
primarily reflecting the normalisation of Canadian tax
payments which had been deferred from earlier years,
following the amalgamation of the AMT Endoscopy business
with Vantage.
Capital expenditure increased to £4.6m (2012: £3.5m) with the
Investment for Growth programme accounting for £2.0m of
this expenditure. The completion of the facility relocations in
Swindon in the UK and Markham in Ontario, Canada at the
beginning of the year cost £1.4m and £0.6m was capitalised
in connection with the IT development projects in M Seals,
Hawco, a1-envirosciences and Somagen. The Healthcare
businesses in Canada and Australia spent £1.7m (2012: £1.6m)
on acquiring field equipment in support of their customer
contracts with hospitals; this included £1.0m (2012: £1.0m)
on funding endoscopy cost per procedure (“CPP”) contracts in
Vantage. The remaining capital expenditure of £0.9m was
spent on new seal cutting machinery and testing equipment
in Seals and on general improvements to the IT infrastructure
across the Group. The rate of capital expenditure is currently
running well ahead of depreciation of £2.5m (2012: £2.1m),
but this will begin to recede after next year as the Group
comes to the end of its Investment for Growth programme.
During the year, participants exercised share options in respect
of outstanding awards which had vested in earlier years under
the Company’s Long Term Incentive Plan (“LTIP”). In exchange
for reduced awards to the participants, the Company paid
the PAYE income tax liability on the awards on behalf of
the participants. This liability, including the funding of the
Employee Benefit Trust to acquire shares in the Company in
respect of future LTIP awards, accounted for an exceptional
cash payment of £4.7m by the Company.
The Group spent £2.2m (2012: £22.3m) of the free cash
flow on acquiring businesses during the year, including
deferred consideration of £0.6m (2012: £0.8m) and
£17.6m (2012: £14.3m) on paying dividends to both Company
and minority shareholders.
acquisitions completed during the year
There was a low level of acquisition activity during the
current financial year with only £2.2m (including deferred
consideration of £0.6m) being spent on acquiring both
Rayquick in November 2012, a small Controls business based
in Germany and the outstanding minority interest in BGS. In
2012 the Group had spent £22.3m on acquiring businesses.
In the absence of significant acquisitions, the amount of
acquisition intangible assets held at 30 September 2013
reduced to £26.7m from £32.2m last year; these acquisition
intangible assets are being amortised over a period ranging
from 5 to 15 years and acquisition related charge in the year
was £5.6m (2012: £6.4m), which included a negligible amount
Diploma PLC Annual Report & Accounts 2013Strategic Report
18
Finance Review continued
on acquisition expenses (2012: £0.6m). At 30 September 2013,
the value of goodwill in the Group Balance Sheet, which is not
amortised, was £78.5m (2012: £79.8m).
Shortly after the year end, the Group signed contracts for
the acquisition of 80% of Kentek Oy for consideration of
£11.2m, subject to completion of competition approvals by the
authorities in Russia and certain other conditions precedent.
The business is based in Finland, but much of its activities are
carried out across Russia in supplying filters and related
products for a range of heavy mobile machinery and industrial
applications.
liabilities to minority shareholders
At 30 September 2013, the Group’s liability to purchase
outstanding minority shareholdings had reduced to £2.8m
(2012: £3.2m) following the acquisition on 8 January 2013 of
the outstanding 20% minority interest in BGS, the Australian
Healthcare business. At 30 September 2013 this liability related
to minority interests held in M Seals, DSL and HPS (which is a
small subsidiary of the RT Dygert seals business). These
liabilities arise under put and call option contracts entered into
at the time of acquisition and are based on the Directors’
estimate of the Earnings before Interest and Tax (“EBIT”) of
these businesses when these options crystallise. This liability
was reassessed at 30 September 2013 and this led to a
financial charge of £0.2m (2012: £0.2m) being made in the
Consolidated Income Statement.
The options to acquire the outstanding minorities in these
companies are, with the exception of the 20% minority interest
acquired in DSL last year, likely to be exercised during the
next 12 months and account for £1.9m of the liability at
30 September 2013.
In addition to the liability to minority shareholders, the
Group also has a liability at 30 September 2013 for deferred
consideration of up to £0.2m (2012: £0.6m) arising from the
acquisition of the outstanding minority interest in BGS; this
deferred consideration will be paid during the next 18 months.
During the year, deferred consideration of £0.6m was paid, of
which £0.3m was paid to the vendors of Carsen Medical, the
Canadian endoscopy business acquired in 2010 and £0.3m
was paid to the vendor of Amfast Limited, acquired last year.
Return on trading capital employed and Balance Sheet
The Group continued to achieve a strong return on trading
capital employed (“ROTCE”) of 25.8% in 2013 (2012: 26.6%).
ROTCE, is a pretax measure and includes all gross historic
goodwill and gross intangible assets and gives an indication of
the overall profitability of the Group and its success in creating
value for shareholders. The slight reduction in the return of
80bps to 25.8% largely arose from the large capital
investments in facilities and IT systems which have yet to
contribute to an increase in operating profits. In absolute
terms, trading capital employed, which represents the amount
of operational assets held by the businesses, remained broadly
unchanged at £158.2m (2012: £159.4m). The increased
investment in tangible assets and working capital was offset by
a combination of amortisation of intangibles and a reduction
in overseas capital employed following the strengthening in
UK sterling against overseas currency exchange rates at
30 September 2013.
The Group also continues to maintain a strong Balance Sheet
with net cash funds increasing during the year by £11.4m
to £19.3m at 30 September 2013. Surplus cash funds are
generally repatriated to the UK, unless they are required locally
to meet certain commitments, including acquisitions.
The Group has a £20m revolving credit facility which is
generally utilised to provide any shortfall in cash to fund
acquisitions. During the year, up to £7.0m was drawn down
to fund both prior year acquisitions and short term working
capital requirements, but these had been fully repaid by the
end of the year.
The Group’s bank facility of £20m can, subject to market
pricing, be extended to £40m at the option of the Company.
The facility, which was due to expire in November 2013, has
been extended on the same terms until 30 June 2014 when it
will be renegotiated in light of the acquisition pipeline existing
at that time.
Employee pension obligations
Pension benefits to existing employees, both in the UK and
overseas, are provided through defined contribution schemes
at an aggregate cost in 2013 of £1.5m (2012: £1.1m).
The Group also maintains a legacy defined benefit pension
scheme in the UK which has been closed to new entrants and
further accruals for many years. The Company continues to
make regular cash contributions to the scheme at a rate of
£0.3m, as agreed with the actuary, with the objective of
eliminating the funding deficit of £2.7m over ten years. The
triennial funding actuarial valuation of the scheme is being
carried out as at 30 September 2013 and given the large
reduction in bond yields since the last valuation was
completed in 2010, the funding deficit is likely to increase
substantially, despite the recent strong investment returns.
However the Company will look for opportunities to provide
sufficient security to the Trustees in order to limit any
requirement to increase the Company’s existing cash
contribution to the scheme.
On an accounting basis, the strong performance of global
equity markets during the year has led to a small fall in the
accounting deficit in the scheme to £4.7m (2012: £5.4m)
before the related deferred tax asset. Scheme assets which are
largely represented by equities, increased by £2.6m to £23.3m
while pension liabilities increased by £1.9m following a
correction to equalisation liabilities and a small increase
in the assumption on future inflation.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 19
Sector Review
Life Sciences
33%
of revenues
37%
of revenues
30%
of revenues
Geography1
71% Canada
16% Europe
13% ROW
Customers
84% Clinical
9% Utilities
4% Chemical & Petrochemical
2% Life Sciences Research
1% Other Life Sciences
products
68% Consumables
25%
7%
Instrumentation
Service
Geography1
76% North America
13% Europe
11% ROW
Customers
45% Industrial OEMs
37% Heavy Construction
7% Other Industrial
6%
3% Dump & Refuse Trucks
2% Logging & Agriculture
Industrial Aftermarket
products
53% Seals & Seal Kits
16% O-rings
12% Gaskets
11% Attachment Kits
8% Cylinders & Other
Geography1
58% UK
34% Continental Europe
8% ROW
Customers
29% Aerospace & Defence
25%
Industrial
20% Food & Beverage
14% Motorsport
7% Energy & Utilities
5% Medical & Scientific
products
42% Wire & Cable
15% Control Devices
14% Connectors
13% Fasteners
10% Equipment & Components
6% Other Controls
319 employees worldwide
513 employees worldwide
300 employees worldwide
Geography
North America
53%
of revenues1
27% US
26% Canada
1 By destination.
Europe
38%
of revenues1
Rest of World
9%
of revenues1
22% UK
16% Continental Europe
Diploma PLC Annual Report & Accounts 2013Strategic ReportSealsControls
20
Sector Review
Life Sciences
Sector definition & scope
The Life Sciences Sector businesses supply a range of
consumables, instrumentation and related services to
the healthcare and environmental industries.
Total revenue growth:
16%
p.a. compound
Healthcare
The Diploma Healthcare Group (“DHG”) in Canada comprises
three principal operating businesses which supply to the
ca. 600 public hospitals across the country as well as to private
clinics and laboratories. Somagen Diagnostics (“Somagen”)
supplies a range of consumables and instruments used in
the diagnostic testing of blood, tissue and other samples in
hospital pathology laboratories. It is also a leading supplier to
the growing, assisted reproductive technology (“ART”) market.
AMT Electrosurgery (“AMT”) supplies specialised electrosurgery
equipment and consumables for use in hospital operating
rooms. AMT is also building a portfolio of specialised surgical
instruments and devices used in minimally invasive (“MI”)
Surgery. Vantage Endoscopy (“Vantage”) supplies medical
devices and related consumables and services to GI
Endoscopy suites in hospitals and private clinics.
DHG also operates in Australia and New Zealand through
Diagnostic Solutions (“DSL”) and Big Green Surgical (“BGS”)
which are both located in Melbourne. BGS and DSL focus
on similar markets respectively to the AMT and Somagen
businesses and share a number of common suppliers.
Environmental
The a1-group is a supplier to Environmental testing laboratories
and to Health & Safety engineers. The a1-envirosciences
business, based in Germany, supplies a range of specialised
environmental analysers and a range of containment enclosures
for potent powder handling. The a1-CBISS business, based in
the UK, supplies equipment and services for the monitoring and
control of environmental emissions, as well as a range of gas
detection devices.
principal operations
Healthcare
Somagen Diagnostics
AMT Electrosurgery
Vantage Endoscopy
Big Green Surgical
Diagnostic Solutions
Environmental
a1-CBISS
a1-envirosciences
Edmonton, AB, Canada
Kitchener, ON, Canada
Markham, ON, Canada
Melbourne, VA, Australia
Melbourne, VA, Australia
Tranmere, UK
Dusseldorf, Germany
£93.2m
£78.4m
£74.4m
2013
2012
2011
2010
2009
2008
Total revenue
£55.4m
£49.9m
£45.0m
Principal segments
Environmental 15%
Geography
Rest of World 13%
Europe 16%
Healthcare 85%
Canada 71%
Diploma PLC Annual Report & Accounts 2013Diploma PLC 21
market drivers
The DHG businesses in Canada supply into areas of Healthcare
which are predominantly public sector funded. Private sector
funding in Canada is focused on areas where DHG do not
participate, including dental, cosmetic and eye surgery and
pharmaceuticals. The principal demand driver for DHG is
therefore the level of healthcare spending by the Canadian
Government.
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 ongoing
growing demand; per capita healthcare spending in Canada is
in the top 20% of OECD countries. 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.
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 with
annual variations mostly dependent on the periodic additional
tranches of funding provided by individual Provinces.
The Healthcare market in Australia shares with Canada
many of the same attractive characteristics for specialised
distribution. While privately funded healthcare is more
prevalent in areas such as surgery and laboratory testing,
public sector healthcare funding is still large 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 in the UK, Germany and France. The market demand
is largely driven by Environmental and Health & Safety
regulations and growth in recent years has been driven by the
need to be compliant with a range of EU regulations. Since
market demand is driven by regulation, this ensures reasonably
steady demand for essential consumable products and
services, though customers may defer capital expenditure
during significant downturns in the economy.
Canadian Healthcare Expenditure (C$bn)
Growth
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
144.6
140.6
62.7
60.0
136.1
56.9
128.9
53.0
121.2
50.7
112.3
47.9
105.0
45.8
98.6
42.0
92.6
39.5
86.6
37.0
79.9
35.1
n Public
Source: Canadian Institute for Health Information
n Private
Australian Healthcare Expenditure (A$bn)
2012
2011
2010
2009
2008
2007
2006
2005
97.8
42.4
90.1
40.2
84.8
36.5
78.5
35.0
71.1
32.4
64.3
30.5
58.9
27.7
54.9
26.1
2004
49.3
24.1
2003
46.7 22.0
2002 42.4 20.6
n Public
Source: Australian Institute of Health & Welfare
n Private
3.4%
3.9%
6.1%
5.9%
7.3%
6.2%
7.2%
6.5%
6.9%
7.5%
Growth
7.6%
7.4%
6.8%
9.8%
9.1%
9.5%
6.9%
10.3%
6.8%
9.0%
Total health expenditure as a percentage of GDp
Canada
Australia
2008
10.7%
8.8%
2009
11.9%
9.1%
2010
11.9%
9.4%
2011
11.7%
9.3%
2012
11.6%
9.5%
Sources: As above
Diploma PLC Annual Report & Accounts 2013Strategic Report
22
Sector Review continued
Life Sciences
Sector performance
life Sciences statistics
Revenue
£93.2m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
Trading capital employed
ROTCE
2013
2012
£93.2m
£78.4m
£20.9m
£18.0m
22.4%
23.0%
£14.4m
£13.3m
£67.2m
£68.2m
31.1%
27.4%
The Life Sciences businesses increased revenues by 19% to
£93.2m (2012: £78.4m), which included a full year contribution
from the DSL business in Australia, acquired in June 2012. After
adjusting for this acquisition, for currency effects and for a
minor reshaping of the Environmental businesses, underlying
revenues in Life Sciences increased by 15%.
Adjusted operating profits increased by 16% to £20.9m (2012:
£18.0m), with adjusted operating margins reducing by 60bps
to 22.4% (2012: 23.0%). In the Healthcare businesses, there was
some weakening in gross margins towards the end of the year,
caused by the weakening in the Canadian and Australian
exchange rates, relative to the US dollar. The implementation
of the Investment for Growth programme during the year also
impacted Healthcare operating margins, although this was
partly offset by an improvement in Environmental margins.
Capital expenditure was £2.8m (2012: £2.3m) and included
£1.7m invested in field equipment for placement by the
Healthcare businesses and £0.3m invested in the new ERP
systems in a1-envirosciences and Somagen. A further £0.6m
was spent on completing the fit-out of the new Vantage
facility in Markham. Free cash flow increased modestly to
£14.4m (2012: £13.3m) with the increase limited by the adverse
phasing of tax payments during the year, following the
amalgamation of AMT’s Endoscopy business into Vantage
in 2011. Working capital remained under tight control with
additional investment of only £1.1m.
Healthcare
Revenues from the Diploma Healthcare Group (“DHG”)
increased by 20% in UK sterling terms. After adjusting for
currency and for the DSL acquisition, underlying revenues
increased by 15%. Somagen increased revenues by 8%,
with strong double digit growth achieved from the sale of
consumable products and services which are generally supplied
through multi-year reagent rental contracts and account for
ca. 80% of Somagen’s revenues. Capital equipment sales,
which vary year-to-year depending on availability of capital
budgets were somewhat reduced against a strong prior year
comparative. Somagen had good sales success with placing
new instruments in the areas of allergy testing, a1c diabetes
testing and ART (assisted reproductive technology). Somagen
also won contracts in three Provinces to supply testing
equipment for their new colorectal screening programmes.
AMT increased revenues by 15%, with the major growth driver
being the new MI (minimally invasive) Surgery division, which
was established last year to supply specialised surgical
instruments and devices used in laparoscopic and other MI
Surgery procedures. Products range from surgical instruments
used in standard laparoscopic procedures carried out on
the abdomen, to leading edge interventional radiology and
oncology products for use in the treatment of cancer and
cancer related disorders. In 2012, investment had been made
in securing a strong portfolio of products, negotiating long
term supplier agreements and in building a focused sales
team. The results have been seen this year with a substantial
increase in revenues from these new products and the MI
Surgery division now accounts for ca. 30% of AMT’s revenues.
AMT’s core Electrosurgery business, which represents 70% of
AMT’s revenues, continued to grow steadily with the newly
launched Penevac 1 product (combined electrode and smoke
evacuation device) further penetrating the market and
replacing more traditional products.
Vantage increased revenues by 14%, benefiting from prior year
investments made to combine AMT’s Endoscopy business
with Carsen Medical (acquired in December 2010) and
establish Vantage as a strong independent business within
DHG. Vantage started the current financial year with a
complete product range, an integrated and fully trained sales
team and strengthened operational and service management.
In the first quarter of the year, the business completed the
integration programme by relocating all of its activities to a
new, larger facility, close to the existing location in Markham,
Ontario. The results of these investments have been seen in
the strong performance this year, with steadily growing sales
of consumable and service products, boosted by strong
capital equipment sales of endoscope reprocessors and argon
plasma coagulation units. Sales of endoscopes have also
shown good growth from a combination of capital equipment
sales and CPP (cost per procedure) based contracts. During
the year, £1.0m (2012: £1.0m) was spent on acquiring
instruments in support of these CPP contracts.
In Australia and New Zealand, revenues from DSL and BGS
increased by ca. 30% on a like-for-like basis (after adjusting for
DSL’s pre-acquisition revenues). DSL, in its first full year in the
Group, delivered a step change increase in revenues from
the addition of a major new supplier (also a key supplier to
Somagen) shortly after acquisition. DSL also had good success
in selling auto-immune testing equipment to the leading
private laboratory groups in Australia. In BGS, the growth was
driven by strong sales in smoke evacuation products, building
on the continued steady growth in electrosurgical grounding
pads and laparoscopic electrodes.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 23
During the year, senior management in Australia was
strengthened at the country level and the BGS operations
and back office functions were successfully relocated and
integrated into the DSL facility in Melbourne. The DSL and BGS
businesses continue to operate as clearly separate sales and
marketing businesses, but now benefit from a central services
group which gives increased efficiency and improved service
levels. This consolidation also provides a firm foundation for
further growth of the existing businesses and potentially other
new businesses in Australia and New Zealand.
A number of DHG’s key supplier agreements were extended
during the year and 12 of the 15 key suppliers (which together
account for ca. 80% of DHG’s revenues) now have contracts
that extend through 2016 and beyond. As part of the Group’s
broader Investment for Growth programme, a major new ERP
project has been initiated by DHG in its Canadian businesses.
The implementation of this new system has started in
Somagen in the second half of this year and will roll out across
the other Canadian Healthcare businesses through the 2014
financial year.
Environmental
Revenues from the Environmental businesses increased by
6% in UK sterling terms. In 2012, a small a1-envirosciences
business in Switzerland was sold to its management and from
the beginning of the 2013 financial year, the responsibility for
the small Hitek business was transferred to a1-CBISS from
the Controls sector. After adjusting for these changes and for
currency effects, underlying revenues increased by 15%.
The a1-envirosciences business based in Germany increased
revenues by 14%, with strong demand for elemental analysers
in Germany and continuing growth in laboratory enclosure
sales in both Germany and France. The business also
successfully introduced a new mercury analyser to meet
increasingly stringent requirements to reduce mercury content
in solids, liquids and gases. A new ERP system was implemented
during the year to create a single platform for operational and
accounting processes and to provide capacity for future growth.
The core a1-CBISS business based in the UK experienced
another strong year of trading with revenues growing by 12%.
There was substantial growth in sales of CEMS (continuous
emissions monitoring systems) equipment as new waste
incineration and biomass power stations cleared planning and
funding bottlenecks and advanced to the build stage. a1-CBISS
also benefited from its strong positioning in preventative and
emergency maintenance services and as a specialised
technical distributor of a range of essential products for
the gas detection and air quality sectors.
Highlights from the Year
Healthcare
• Steady growth in consumable and service revenues
across core Canadian businesses
• Vantage benefited from prior year investments in sales,
operations and service; moved to new, larger facility
in Q1
• Strong growth in new AMT division focused
on MI Surgery
• Major new supplier added at DSL, giving step-change
increase in revenues; BGS operations and back office
integrated into DSL in Melbourne
• Key supplier agreements renegotiated – 12 out of 15
contracts now extend through 2016 and beyond
• Major ERP project initiated – Somagen implementation
started in H2, with roll-out to other Canadian
businesses through 2014
Environmental
• Strong growth in core business revenues and
strengthening operating margins
• Reshaping including divestment of small operation
in Switzerland and transfer of Hitek
Potential for Growth
•
Increase share in specialised segments of growing
Canadian Healthcare market
• Extend into other medical disciplines with new
products and technologies
• Build critical mass in Australian market and then
other geographies
• Continue to develop product and geographic spread
of Environmental business
Diploma PLC Annual Report & Accounts 2013Strategic Report 24
Sector Review continued
Seals
Sector definition & 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.
Total revenue growth:
20%
p.a. compound
aftermarket
The Aftermarket businesses supply sealing products to support
a broad range of mobile machinery in applications including
heavy construction, logging, mining, agriculture, material
handling (lift trucks, fork lifts and dump trucks) and refuse
collection. The products are generally supplied on a next day
delivery basis and are 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 rebuilders and other heavy
equipment parts distributors.
2013
2012
2011
2010
2009
2008
Total revenue
£106.1m
£99.9m
£80.0m
£60.1m
£48.2m
£42.6m
industrial oEm
The Industrial OEM businesses supply seals, O-rings and
custom moulded and machined parts to a range of Industrial
OEM customers. The businesses work closely with customers
to select the most appropriate seal material and manufacturer
for the application, provide technical support and guidance
during the product development process and provide the
logistics capabilities to supply from inventory for small to
medium sized production runs.
Principal segments
Industrial
OEM 45%
principal operations
aftermarket
HFPG
Hercules Bulldog
Hercules Canada
HKX
FPE Group
FPE
Hercules Europe
industrial oEm
HFPG
All Seals
J Royal
RT Dygert
HPS
M Seals
Clearwater, FL & Reno, NV, US
Barrie, ON & Dorval, QC, Canada
Monroe, WA, US
Geography
Rest of World 11%
Europe 13%
Darlington & Doncaster, UK
Breda, The Netherlands
Lake Forest, CA, US
Clemmon, NC & Barrington, RI, US
& Shanghai, China
Minneapolis, MN & Chicago, IL, US
Seattle, WA, US
Espergaerde, Denmark
& Halmstad, Sweden
& Tianjin, China
Aftermarket 55%
North America 76%
Diploma PLC Annual Report & Accounts 2013Diploma PLC 25
market drivers
The principal market drivers for both the Aftermarket and
Industrial OEM Seal businesses is the growth in the general
industrial economies, in particular in North America where
almost 80% of Seal Sector revenues are generated. In 2012, the
USA and Canada showed moderate GDP growth of 2.8% and
1.9% respectively, continuing the slow steady growth trend that
has been achieved since emerging from the 2009 recession.
In the UK and Northern Continental European markets where
13% of revenues are generated, the industrial economies have
been flat at best, which has provided a challenging
environment in which to operate. The smaller but growing
percentage of revenues generated in the Rest of the World are
generated from a range of markets in South America, Middle
East, Africa and Asia Pacific, where economic conditions have
been variable.
For the Aftermarket businesses, activity and spending levels
in the US Heavy Construction sector are very important,
since this market accounts for over 50% of Aftermarket Seals
revenues. Statistics on the Total US Construction spend
include non-residential and infrastructure spend, as well as
residential housing activity. The index had begun to fall sharply
ahead of the 2008 financial crisis but recovered by 2010 and
has since remained positive. The earlier recovery was driven
primarily by stimulus funding on infrastructure projects with a
solid contribution from the ground clearance phase of the
fracking boom. More recently, improvements in the residential
housing market have partially offset weakness in mining and
oil and gas exploration.
US Construction Equipment unit sales of heavy mobile
equipment (including excavators above 12 tonnes, crawler
dozers and wheeled loaders), is an important short term
indicator for the HKX attachment business. It is also important
as a medium term indicator for Hercules’ replacement
hydraulic seals activities, as the new heavy equipment will
move out of the dealer warranty period in the coming years.
There was an exceptional level of growth from 2009 to 2011 as
tighter emissions legislation accelerated machine replacement
and hire companies re-equipped their fleets. Residual
momentum from these factors continued into 2012
before growth levels began to moderate.
For the Industrial OEM Seal businesses, the best indicator is the
US Industrial Production index, which made solid gains from
2009 to 2011, with a mixed performance in 2012 as demand
levelled out at below pre-recession levels.
US Construction Spend ($bn)
1,000
800
600
400
200
0
2006
2007
2008
2009
2010
2011
2012
Source: Cyclast Intercast
US Construction Equipment Units (’000)
70
60
50
40
30
20
10
0
2006
2007
2008
2009
2010
2011
2012
Source: Cyclast Intercast
US Industrial Production Index
105
100
95
90
85
80
2006
2007
2008
2009
2010
2011
2012
Source: US Federal Reserve (Seasonally Adjusted)
Diploma PLC Annual Report & Accounts 2013Strategic Report
26
Sector Review continued
Seals
Sector performance
Seals statistics
Revenue
£106.1m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
Trading capital employed
ROTCE
2013
2012
£106.1m
£99.9m
£19.5m
£20.4m
18.4%
20.4%
£15.9m
£13.7m
£54.1m
£56.8m
36.0%
37.4%
The Seals business increased revenues by 6% to £106.1m
(2012: £99.9m) which included a full year contribution from
J Royal, which had been acquired in December 2011. After
adjusting for the additional contribution from this acquisition
and for currency translation effects, underlying Seals revenues
increased by 2%.
Adjusted operating profits decreased by 4% to £19.5m (2012:
£20.4m) and adjusted operating margins reduced by 200bps
to 18.4% (2012: 20.4%), reflecting the impact of investment in
the Seals businesses, including the Group’s Investment for
Growth programme begun last year. Significant investments
over the past two years include the two facility relocations
completed in the prior year in RT Dygert and All Seals, a new
ERP system in M Seals and the general strengthening of
management across the Seals businesses with investment in
targeted business development resources. Aftermarket gross
margins continued to be resilient, underpinned by essential
product availability and added value technical service, though
overall, Seals gross margins weakened slightly with continued
competition in the Industrial OEM markets.
Free cash flow improved by £2.2m to £15.9m (2012: £13.7m),
benefiting from a reduction in working capital, as the pace of
growth moderated; this more than offset the impact from
reduced operating profits and increased capital investment.
Capital expenditure increased to £0.9m (2012: £0.6m) with a
£0.3m investment made in two seal machining centres in the
Aftermarket businesses and a water-jet gasket cutter in the
Industrial OEM businesses; these investments allow the Seals
businesses to deliver specialist seals and gaskets to customers
on demand. In Europe, M Seals invested £0.2m on
implementing a new ERP installation as part of the Group’s
broader Investment for Growth programme.
aftermarket
The Aftermarket businesses, which account for ca. 55% of
Seals revenues, saw revenues increase by 2% in UK sterling
terms and by 1% in constant currency terms.
In North America, the HFPG Aftermarket businesses (Hercules
Bulldog and HKX) reported revenues broadly flat against the
prior year. This represents a very creditable performance when
set against the strong double digit annual growth achieved in
the three years since emerging from the 2009 downturn. The
businesses have significantly out-performed the relevant
construction indices over this period, benefiting from superior
inventory depth and advantageous long term relationships
with key suppliers. In 2013, the uneven demand spikes from
the economic recovery have abated, supplier product lead
times have decreased and pricing has stabilised. Against this
more stable market background, the businesses have
consolidated their market share gains and are moving back
towards more normal GDP plus rates of growth.
In the US, Hercules Bulldog continued to develop its electronic
trading capabilities (“Webstore”) with new search and find
capabilities, allowing the business to develop new sales
channels to retail customers, as well as converting existing
customers to online ordering. Online sales are up by 30% over
the prior year and now represent 15% of revenues at US$7.0m.
The company also installed its third seal machining centre as the
two existing machines reached capacity. These seal machining
centres, which now contribute over US$1.0m to revenues, have
proved to be successful additions to the Aftermarket customer
service offering, enabling repairers to have access to hard-to-
find and outsized seals within 24 hours. Additional development
engineers have also been added to broaden the product range
and during the year over 3,000 new kit applications were
developed. In Canada, the Hercules operation in Barrie, Ontario
successfully completed a move in October 2013 to a new,
custom built facility, providing Hercules in Canada with a first
class platform for future growth.
HKX’s revenues fell marginally against an exceptional 33%
increase in the prior year, when the combination of new
emissions regulations and the re-equipping of hire fleets drove
strong demand for HKX’s attachment kits. While revenues in
2013 were sustained at close to record levels, the company
took the opportunity to strengthen its service offering by
adding technical staff and investing in additional CAE
(computer aided engineering) software.
In Europe, FPE took operational responsibility for the Hercules
Europe operation in the Netherlands, which will now provide
the impetus to develop a more substantial, unified European
Aftermarket group. The FPE group delivered good revenue
growth, again following several years of steady revenue
development. While domestic UK and Benelux demand for
hydraulic seals was muted, there were good opportunities for
an expanding range of hydraulic cylinder metal parts and
selling into export markets. FPE also installed a seal machining
centre in its Doncaster operation to complement the two
existing machines located at Darlington.
Outside the core, directly-served markets in North America
and Europe, the Aftermarket businesses continue to generate
revenues by selling Hercules and Bulldog branded products
through in-country sub-distributors. There was good growth
in sales in Mexico, the Middle East and South Africa, though
revenues were softer in several South American and South
East Asian countries.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 27
industrial oEm
The Industrial OEM businesses, which account for ca. 45% of
Seals revenues, reported an 11% increase in revenues. After
adjusting for the acquisition of J Royal and for currency
effects, underlying revenue growth of 4% was achieved.
In North America, the HFPG Industrial OEM businesses
(RT Dygert, J Royal and All Seals) continued to operate in
an industrial economy which has shown slow steady growth
since emerging from the 2009 downturn. For the HFPG
businesses, the level of demand from existing customers has
been generally stable with a reasonably steady stream of new
projects. However, there were also some revenue losses
during the year, arising from a combination of reasons
including customer loss of business, product design changes
and in one case, a manufacturer taking business directly.
Overall, the business gains broadly balanced out the business
lost, with market share not significantly impacted. In an
increasingly competitive market for the more standard
products, the businesses have enhanced their product offering
through new compound certifications for a variety of
applications which allows them to meet the more stringent
demands of customers, as well as to move up the value chain.
RT Dygert delivered good revenue growth as existing and new
OEM customers introduced new products to their markets
and the traditional Mid-West cylinder producers benefited
from the growth in new mobile equipment demand.
RT Dygert also invested in a range of regulatory compliant
elastomer compounds to penetrate the pharmaceutical, water
and petrochemical industries. All Seals had a relatively flat year
with good new customer gains being offset by revenue
reductions from legacy customers. All Seals invested during
the year in the Seals businesses first water-jet gasket cutting
machine to support the growing demand for turnaround
custom gaskets. All Seals also obtained the AS9100 quality
certification which strengthens its position in the Aerospace
and Medical products industries. J Royal continued to invest in
a significant strengthening of its management and sales
development resources to diversify its customer base in the
Eastern US. Development lead times can be lengthy for new
projects, but the prospect and project pipelines are growing
and should underpin the long term growth potential.
In Europe, M Seals delivered good overall growth, with the
core territories of Denmark and Sweden performing well. Sales
of large bearing seals to Chinese wind power customers were
subdued as the Chinese wind power industry appeared to take
a pause in its development in the year. During the year, M Seals
successfully completed the implementation of a new ERP
software package which will provide a solid platform for future
growth, as well as providing more efficient management of
inventory across the three country locations.
Highlights from the Year
aftermarket
• Continued development of Aftermarket “Webstore”
with online sales up 30%
• Additional engineering resources at Bulldog to drive
New Product Introduction
• New seal machining centres in Hercules and FPE –
now seven machines in total
• New facility for Hercules Canada in Barrie, Ontario
– completed in October 2013
• HKX investment in CAE software and additional
technical staff
• Creation of unified Aftermarket seals group in Europe
industrial oEm
• New GM and additional sales resource at J Royal to
focus on new customers
• Development of new range of regulatory compliant,
elastomer compounds at RT Dygert
• Automated water jet gasket cutting system at All Seals
• New Microsoft AX ERP system implemented across all
three M Seals locations
Potential for Growth
• Aftermarket share gains through superior marketing
and product development
•
Increase global footprint of Aftermarket – particularly
in Europe and Asia Pacific
• Expand group of Industrial OEM businesses in North
America and internationally
Diploma PLC Annual Report & Accounts 2013Strategic Report
28
Sector Review continued
Controls
Total revenue growth:
5%
p.a. compound
2013
2012
2011
2010
2009
2008
Total revenue
Principal segments
Fluid Controls 30%
Geography
Rest of World 8%
Continental
Europe 34%
Sector definition & scope
The Controls Sector businesses supply specialised wiring,
connectors, fasteners and control devices used in a range
of technically demanding applications.
interconnect
The IS-Group, Filcon and Clarendon businesses supply high
performance interconnect products used in technically
demanding applications in a range of industries including
Aerospace, Defence, Motorsport, Energy, Medical and
Industrial. Products include electrical wiring, connectors and
harnessing products, aerospace-quality fasteners, seals,
customised assemblies and kits. A range of value adding
activities enhances the customer offering, including marking
of protective sleeves, cut-to-length tubing, kitting, connector
assembly and prototype quantities of customised multi-core
cables. There is also a range of internally manufactured
products, including flexible braided products for earthing
and lightning protection, power shunt connectors, and
multi-core cables.
Fluid Controls
The Hawco Group businesses supply a range of fluid control
products used broadly in the Food and Beverage industry,
in applications including food retailing and transportation,
catering equipment, vending machines, coffee brewing, pure
water and water cooling systems. Products include fluid
controllers, compressors, valves, temperature and pressure
measurement devices and specialised vending and liquid
dispensing components. The customer offering is enhanced
by value adding services including kitting for production
line flow and the repair and refurbishment of soft drinks
dispensing equipment.
principal operations
interconnect
IS-Group
IS-Rayfast
IS-Cabletec
IS-Sommer
IS-Connect
Filcon
Clarendon
Fluid Controls
Hawco Group
Hawco
Abbeychart
Swindon, UK
Weston-super-Mare, UK
Stuttgart, Germany
Indianapolis, US
Munich, Germany
Leicester, UK
Guildford & Bolton, UK
Faringdon, UK
£86.2m
£81.9m
£76.2m
£68.0m
£61.9m
£68.6m
Interconnect 70%
UK 58%
Diploma PLC Annual Report & Accounts 2013Diploma PLC
29
market drivers
industrial economic background
The Controls businesses focus on specialised, technical
applications in a range of industries, with over 90% of Sector
revenues generated in the UK and Continental Europe
(principally Germany). The background market drivers are
therefore the growth of the industrial economies in the UK
and Germany.
A good indicator of the health of the UK industrial economy
is the UK Index of Production. This index tracks the severe
decline in 2009 caused by the financial crisis, a partial recovery
in 2010 and then a continued steady decline in 2011 and 2012.
Although there has been some improvement in 2013, the
background is still one of limited and fluctuating confidence
among general manufacturing customers.
Similarly, the German Production Sector Output Index again
tracks the severe decline in 2008 and 2009, but shows a more
sustained recovery before flattening out in 2011 and 2012 as
the Euro crisis deepened and German export growth slowed.
In comparison to the UK, production output has remained
close to pre-recession levels.
Specific industry drivers
Although influenced by the general industrial economic
cycles, there are also more specific drivers within the main
market segments served by the Controls businesses.
The Civil Aerospace market continued to grow steadily with
growth in World Passenger Traffic returning to the long term
average of around 5% per annum. New aircraft continue to
come into service and Europe has taken its share of the fit-out
projects for aircraft interiors, including the continued upgrade
of the technology and components used in premium cabins.
The Defence markets in the UK and Germany remained
subdued with programme delays, expenditure reduction and a
general slowdown in the time taken to gain firm commitment
to spending decisions.
The Motorsport market was underpinned by a stable grid in
Formula 1 but demand for products used in testing was limited
in a year when there were no major technological changes.
New engines for Formula 1 will be introduced in the 2014
season which should boost demand. In Energy markets,
demand for repair components for the electricity distribution
sector in Germany was lower; the mobile generator and
commercial battery sectors were also slower following a
strong performance in the previous year.
Demand for fluid control products from the UK food retailing
sector was in line with last year but well below previous highs
as retailers continued to focus on smaller convenience stores.
The beverage, vending and purified waters sectors were
steady with new coffee dispensing formats continuing to
generate interest and growth.
UK Index of Production
115
110
105
100
95
90
85
80
75
2006
2007
2008
2009
2010
2011
2012
Source: UK Office of National Statistics
Calendar & Seasonally Adjusted, Reference Year 2010=100
German Production Sector Output (including Construction)
115
110
105
100
95
90
85
80
75
2006
2007
2008
2009
2010
2011
2012
Source: Deutsche Bundesbank
Calendar & Seasonally Adjusted, Reference Year 2010=100
World Passenger Traffic – Annual Growth Rate
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: International Civil Aviation Organisation
Diploma PLC Annual Report & Accounts 2013Strategic Report
30
Sector Review continued
Controls
Sector performance
Controls statistics
Revenue
£86.2m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
Trading capital employed
ROTCE
2013
2012
£86.2m
£81.9m
£13.9m
£14.4m
16.1%
17.6%
£11.9m
£10.0m
£35.5m
£35.7m
39.2%
44.2%
The Controls businesses increased revenues in 2013 by 5% to
£86.2m (2012: £81.9m), benefiting from both the acquisition
in November 2012 of a small energy distributor based in
Germany and from a full year contribution from Abbeychart
and Amfast, acquired respectively in March and May 2012.
After adjusting for the additional contribution from these
acquisitions and for modest currency translation effects,
underlying revenues decreased by 3%.
Adjusted operating profits decreased by 3% to £13.9m (2012:
£14.4m) and adjusted operating margins reduced by 150bps to
16.1% (2012: 17.6%). The reduced operating margins resulted
from the reduction in underlying revenues, combined with
increased costs following the major relocation of the IS-
Rayfast business in the UK (completed in November 2012) and
the ERP investment at Hawco. Overall gross margins in the
Controls Sector remained resilient as the businesses continued
to focus on specialised markets and added value
opportunities.
Free cash flow improved by £1.9m to £11.9m (2012: £10.0m),
with a reduction in working capital reflecting the weaker trading
environment and from stronger management of working
capital in the more recently acquired businesses. Capital
expenditure increased to £0.9m (2012: £0.6m) including £0.7m
on the completion of the new IS-Rayfast facility in Swindon
and £0.1m on installing a new ERP system in Hawco. Both of
these investments were part of the Group’s broader
Investment for Growth programme.
interconnect
The Interconnect businesses, which account for ca. 70% of
Controls revenues, increased revenues by 4% in UK sterling terms.
After adjusting for acquisitions and currency effects, underlying
revenues decreased by 3%, reflecting a combination of strong
prior year comparatives in Motorsport, a weaker Defence market
and a generally challenging Eurozone backdrop.
Aerospace and Defence accounts for ca. 40% of Interconnect
revenues and in this market, there was a sharp contrast
between the Civil and Military segments. In Civil Aerospace,
there was good demand for the full range of electrical
harnessing products and bonding leads for cabin interiors.
There was also significant demand for fasteners supplied by
Amfast, which had an excellent first full year in the Group and
consolidated its position as a leading supplier to the premium
aircraft seating industry. By contrast, Military Aerospace
demand in both the UK and Germany slowed with the
reduction in the annual production rate of Eurofighter
Typhoon aircraft having the largest impact.
Defence markets more broadly also remained subdued, but
our businesses demonstrated their resilience by ending the
year with revenues marginally ahead of the prior period. In the
UK, there were fewer large projects but IS-Rayfast leveraged
its excellent stocking profile to provide a rapid turnaround of
orders to its wide customer base. IS-Rayfast, as a European
Master Distributor for key suppliers, was also able to provide
critical stocking support to its distribution partners across
Europe. In Germany, Filcon saw good growth from the
provision of connectors for specialist engines for use in the
Puma and K9 Howitzer military vehicles, as well as from a
return to increased production of military radios.
Sales to the Industrial markets in the UK and Germany (ca. 25%
of Interconnect revenues) were essentially flat, which was
a creditable performance in a difficult UK and Eurozone
manufacturing environment. The field sales teams in the UK and
Germany were able to offset slower demand by winning new
business from both existing and new customers. In Germany,
Sommer benefited from the strengthening of its field sales
team and made solid progress in penetrating a wider customer
base, again supported by superior stocking and value added
services. Examples of business gains include the supply of
miniature solder sleeves for a fan system used in high end car
seats and the provision of a wide range of components for
the refurbishment and upgrade of cruise ships.
Motorsport accounts for ca. 20% of Interconnect revenues and
in this market, revenues reduced against strong prior year
comparatives. In the UK there was much lower development
and testing activity this year, ahead of the proposed introduction
of new engines and upgraded Energy Recovery Systems for the
2014 Formula 1 season. In the US, sales had been boosted in
2012 by the adoption of fuel injectors for the Nascar racing
series and a change in the chassis used in the Indy car series;
this year, there were no such technological changes to drive
increased demand. In Germany, Filcon delivered good growth
in Motorsport sales through the supply of specialist connectors
for the VW World Engine, the new car design for the Le Mans
series and multiple developments in electric and hybrid engines
for both racing and road cars.
In the German Energy market, Sommer supplies components
used in repair and refurbishment of medium voltage electricity
generation equipment. Sales slowed this year due to a
combination of an extended period of bad weather and the
focus by large generating companies in Germany on the high
voltage distribution network, at the expense of a more normal
cycle of repair and refurbishment of the local transmission
networks. The small acquisition of Rayquick, which coincided
Diploma PLC Annual Report & Accounts 2013Diploma PLC 31
Highlights from the Year
interconnect
•
Investment in a new 37,000 sq.ft. warehouse/office
facility for the IS-Group
• Acquisition of Rayquick by Sommer, strengthening
position in the Electrical Distribution market
in Germany
• Filcon expansion into the French Motorsport market
with specialist sales resource
• Amfast fully integrated into Clarendon including sales,
ERP system and warehousing
• Strong performance in Civil Aerospace with further
penetration into premium aircraft seating
Fluid Controls
• Successful implementation of new ERP system
at Hawco giving platform for future growth
• Strengthened UK sales resources in Abbeychart
Potential for Growth
• Further penetrate specialised market sectors in Europe
• Broaden range of high performance products and
added value services
• Expand geographical reach outside Northern
Continental Europe
with this slowdown, was successfully integrated into Sommer
and helped Sommer to secure its appointment as a German
Master Distributor for its key supplier of energy products. In the
UK, the Cabletec energy business focuses on high reliability
industrial batteries mainly for use in UPS (uninterrupted power
supply) applications. As the market is concentrated in a small
number of key customers, demand can vary significantly and
2013 was a relatively slow year in comparison to the prior year.
Cabletec continued to improve its in-house manufacturing
capabilities and competitiveness resulting in share gains on key
components, such as its tin and nickel plated copper braiding
used for the protection of electrical cables and harnesses in
harsh environments.
Operationally, this was a year of significant change for
IS-Rayfast, as it successfully completed its relocation from
the site it had occupied since 1992 into a newly refurbished
37,000 sq.ft. building. The new facility not only provides an
appropriate environment for a modern, technically biased
company, but also substantial capacity for future growth.
Later in the year, Amfast’s sales and customer service
functions were fully integrated into Clarendon’s sales
operation in Leicester and warehousing operations were
combined with those of Clarendon at the new Swindon site.
Fluid Controls
The Fluid Controls businesses, which account for ca. 30%
of Controls revenues, increased revenues by 14% in UK
sterling terms. After adjusting for currency effects and for
the acquisition of Abbeychart last year, underlying revenues
decreased by 2%. The Hawco business faced significant
headwinds this year as the major food retailers continued
to focus on smaller convenience stores, which require less
Hawco product. In addition, some key commercial catering
equipment manufacturers were left with surplus equipment,
having leased the products on a temporary basis to vendors
at the 2012 Olympics’ sites. Hawco continued to have success
with its range of space and energy saving components and
benefited from the rise in home deliveries through increased
sales to the refrigerated transport market.
The Abbeychart business also faced challenges in its markets,
but was able to offset this by utilising its expanded field sales
team to increase the company’s share of business from smaller
customers through superior technical support and stock
availability. The coffee sector remained buoyant with
consumers continuing to look for new, personal-use
dispensing methods and from high street vendors taking an
increasingly technical approach to brewing. With vendors
now looking to install increasingly sophisticated equipment to
guarantee the purity and consistency of the water used in the
brewing process, prospects for next year remain encouraging.
During the year, the Hawco Group made a significant
investment in a new ERP system which was successfully
implemented at Hawco’s operations in Guildford and Bolton
and which will be rolled out to Abbeychart next year. This
investment will provide the Fluid Controls businesses with
a solid, modern IT platform to support future growth.
Diploma PLC Annual Report & Accounts 2013Strategic Report 32
Principal Risks and Uncertainties
Risk assessment and evaluation is an integral part of the
Group’s annual planning cycle and market specific risks
are evaluated as part of the annual budgeting process.
Each operating business is required each year to identify
and document the significant strategic, operational and
financial and accounting risks facing the business. For each
significant risk, a number of scenarios are mapped out and
an assessment is made of the likelihood and impact of each
risk scenario.
Finally, plans and processes are established which are
designed to control each risk and minimise its potential
impact. The risk assessments from each of the operating
businesses are reviewed with the Executive Directors and
a consolidated risk assessment is reviewed by the Board.
The principal risks and uncertainties which are currently
judged to have the largest potential impact on the Group’s
long term performance are set out below. There have been
no significant changes to these risks and uncertainties, or
their potential impact on the Group, since last year.
Risk: Strategic
Downturn in major markets
Adverse changes in the major markets in which the businesses
operate can have a significant impact on performance. The
effects will either be seen in terms of slowing revenue growth,
due to reduced or delayed demand for products and services,
or margin pressures due to increased competition.
A number of characteristics of the Group’s businesses
moderate the impact of economic and business cycles on
the Group as a whole:
• The Group’s businesses operate in three different sectors
with different cyclical characteristics and across a number
of geographic markets.
mitigation
• The businesses offer specialised products and services;
this offers a degree of protection against customers
quickly switching business to achieve a better price.
• A high proportion of the Group’s revenues comprise
consumable products which are purchased as part of
customers’ operating expenditure, rather than through
capital budgets.
In many cases the products are used in repair, maintenance
and refurbishment applications, rather than original
equipment manufacture.
•
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.
loss of key supplier(s)
For manufacturer-branded products, there are risks to the
business if a major supplier decides to cancel a distribution
agreement or if the supplier is acquired by a company which
has its own distribution channels in the relevant market. There
is also the risk of a supplier taking away exclusivity and either
setting up direct operations or appointing another distributor.
In times of rapid economic expansion in activity, such as after a
global recession, there is also a risk that the lead times to
supply key product can become very long.
Currently no single supplier represents more than 15% of
Group revenue and only four single suppliers represent more
than 2% each of Group revenue.
Relationships with suppliers have normally been built up over
many years and a strong degree of interdependence has
been established. The average length of the principal supplier
relationships in each of the sectors is over ten years.
The strength of the relationship with each supplier and the
volume of activity generally ensures continuity of supply,
when there is shortage of product.
mitigation
Actions to mitigate the risks include:
• Long term, multi-year exclusive contracts signed
• Regular review of inventory levels.
• Bundling and kitting of products and provision of added
with suppliers with change of control clauses, where
possible, included in contracts for protection or
compensation in the event of acquisition.
• Collaborative projects and relationships maintained with
individuals at many levels of the supplier organisation,
together with regular review meetings and adherence to
contractual terms.
value services.
• Periodic research of alternative suppliers as part of
contingency planning.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 33
Risk: Strategic
loss of major customer(s)
The loss of one or more major customers can be a material
risk.
The nature of the Group’s businesses is such that there is not
a high level of dependence on any individual customers and
no single customer represents more than 5% of Sector
revenue or more than 2% of Group revenue.
mitigation
Specific large customers are important to individual operating
businesses and a high level of effort is invested in ensuring that
these customers are retained and encouraged not to switch to
another supplier.
In addition to providing high levels of customer service, close
integration is established where possible with customers’
systems and processes.
product liability
There is a risk that products supplied by a Group business may
fail in service, which could lead to a claim under product
liability. The businesses, in their Terms and Conditions of sale
with customers, will typically mirror the Terms and Conditions
of purchase from the suppliers. In this way the liability can be
limited and subrogated to the supplier.
However, if a legal claim is made it will typically draw in our
business as a party to the claim and the business may be
exposed to legal costs and potential damages if the claim
succeeds and the supplier fails to meet its liabilities for
whatever reason. Product liability insurance can be limited in
terms of its scope of insurable events, such as product recall.
mitigation
Technically qualified personnel and control systems are
in place to ensure products meet quality requirements. The
Group’s businesses are required to undertake Product Risk
assessments and Supplier Quality Assurance assessments.
The Group has also established Group-wide product liability
insurance which provides worldwide umbrella insurance
cover of £20m in all Sectors.
loss of key personnel
The success of the Group is built upon strong, self-standing
management teams in the operating businesses, committed
to the success of their respective businesses. As a result, the
loss of key personnel can have a significant impact on
performance, at least for a time.
mitigation
The Group’s businesses may also elect not to supply
products if they are not fully confident that the products
will meet the demands of the operating environment.
As set out on page 36, the average length of service for all
personnel in the Group is over five years.
Contractual terms such as notice periods and non-compete
clauses can mitigate the risk in the short term. However, more
successful initiatives focus on ensuring a challenging work
environment with appropriate reward systems. The Group
places very high importance on planning the development,
motivation and reward for key managers in the operating
businesses including:
• Ensuring a challenging working environment where
managers feel they have control over, and responsibility
for their businesses.
• Establishing management development programmes
to ensure a broad base of talented managers.
• Offering a balanced and competitive compensation
package with a combination of salary, annual bonus and
long term cash incentive plans targeted at the individual
business level.
• Giving the freedom, encouragement, financial resources
and strategic support for managers to pursue ambitious
growth plans.
Diploma PLC Annual Report & Accounts 2013Strategic Report 34
Principal Risks and Uncertainties
continued
Risk: operational
major damage to premises
The Group’s businesses mostly operate from combined office/
warehouse facilities which are dedicated to each business and
not shared with other Group businesses.
Major damage to the facilities from fire, malicious damage or
natural disaster would impact a business for a period until the
damage is repaired or alternative facilities have been established.
mitigation
However, the Group has not suffered any major damage
to premises in recent years and in Clearwater, Florida there
has been no significant hurricane activity for at least the last
five years.
The business where the risk is greatest is Hercules in
Clearwater, Florida which is most at risk from an environmental
disaster caused by a hurricane or tornado. The building
structure has been designed to withstand 150mph winds,
electricity generators have been installed on site and a specific
disaster plan has been drawn up and is regularly reviewed.
The other businesses have also 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.
Contingency plans include:
• Backup power generators.
• Materials on hand to secure the facility.
• Communications rerouted to other branches or interim
locations.
IT recovery plan using backup server in separate location.
•
• Regular building inspection and weather monitoring.
• Plans to drop-ship product from suppliers direct
to customers.
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
mitigation
However, the priority in such an event is to become fully
operational as quickly as possible so as to minimise disruption
to customers. Plans to ensure a quick and orderly recovery
have been developed by the businesses and are periodically
reviewed.
trading and other records, would be more damaging to the
businesses than major physical damage to facilities.
Business interruption insurance cover is held across the Group
and contingency plans have been drawn up in all businesses.
The recovery plans differ by individual business, but will include
some or all of the following elements:
• Full data backups as a matter of routine are automatically
taken on a regular basis each week and stored online.
• Backup servers identified and communication reroute
options identified.
• Service contracts with IT providers with access to
replacement servers.
• Uninterruptible power sources and backup generators
where required.
• Virus checkers and firewalls.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 35
Risk: Financial and accounting
The Group’s activities expose it to a variety of financial and
accounting risks, including foreign currency, liquidity, interest
rate and credit. The policies for managing these financial risks,
as well as the management of capital risks, are set out in note
19 to the consolidated financial statements. The principal
financial and accounting risks are summarised below. The
Group’s overall management of the financial risks is carried out
by a central treasury team under policies and procedures
which are reviewed and approved by the Board.
Foreign currency risk – Translational exposure
Foreign currency risk is the risk that changes in currency
rates will affect the Group’s results. The Group operates
internationally and is exposed to foreign exchange risk arising
from various currency exposures, primarily with respect to the
US dollar, the Canadian dollar, the Australian dollar and the
Euro. The net assets of the Group’s operations outside the UK
are also exposed to foreign currency translation risk.
During the year ended 30 September 2013, ca. 75% of the
Group’s revenue and adjusted operating profits were earned in
currencies other than UK sterling. In comparison to the prior
year, the net effect of currency translation was to increase
revenue by £1.8m and increase adjusted operating profit by
£0.3m. It is estimated that a strengthening of UK sterling by
10% against all the currencies in which the Group does
business, would reduce adjusted operating profit before tax
by approximately £4.2m (8%), due to currency translation.
mitigation
The Group does not hedge translational exposure.
Foreign currency – Transactional exposure
The treasury team identifies, evaluates and where appropriate,
hedges financial risks in close co-operation with the Group’s
operating businesses. The treasury team does not undertake
speculative foreign exchange dealings for which there is no
underlying exposure.
The principal accounting risk is that of inventory
obsolescence which is managed by the operating business.
Currency exposures also arise from the net assets of the
Group’s foreign operations. At 30 September 2013, the
Group’s non-UK sterling trading capital employed in overseas
businesses was £125.7m (2012: £131.9m), which represented
79% 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 £12.1m.
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 28 to the
consolidated financial statements.
The Group’s UK businesses are exposed to foreign currency
risk on those purchases that are denominated in a currency
other than their local currency, principally US dollars, Euro
and Japanese yen. The Group’s Canadian and Australian
businesses are also exposed to a similar risk as the majority of
their purchases are denominated in US dollars and Euros. The
Group’s US businesses do not have any material foreign
currency transactional risk.
mitigation
The Group’s businesses may hedge up to 80% of forecast
(being a maximum of eighteen months) foreign currency
exposures using forward foreign exchange contracts.
The Group classifies its forward foreign exchange contracts,
which hedge forecast transactions, as cash flow hedges and
states them at fair value.
inventory obsolescence
Working capital management is critical to success in
specialised industrial business as this has a major impact on
cash flow. The principal risk to working capital is in inventory
obsolescence and write-off.
mitigation
The charge against operating profit in respect of old or
surplus inventory is ca. £1.0m p.a., but inventories are
generally not subject to technological obsolescence.
Inventory write-offs are controlled and minimised by active
management of inventory levels based on sales forecasts and
regular cycle counts.
Where necessary, a provision is made to cover both excess
inventory and potential obsolescence.
Diploma PLC Annual Report & Accounts 2013Strategic Report 36
Corporate Responsibility
Employees
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 which has remained strong.
In addition the number of working days lost to sickness is less
than 1% a year. These measures remain consistent across each
of the Group’s Sectors.
Key Employee Statistics
Average number of employees
in year
Females as % of total
Length of service (years)
Average staff turnover
Sick days lost per person
2013
2012
2011
1,145
35%
6.2
20.4%
2.2
1,062
33%
6.0
16.7%
2.3
910
32%
6.3
16.3%
1.9
Set out below is an analysis of the number of employees by
gender at the year end.
Directors
Senior Managers
Employees
2013
2012
male
6
55
695
756
Female
male
Female
1
17
385
403
6
46
696
748
–
13
356
369
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 Review and Annual Report & Accounts
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 2013 the Group employed one disabled employee.
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.
Some of the Group’s operating companies have structured
apprenticeship schemes for technical staff and the Group
provides sponsorship for high potential employees for higher
education courses where appropriate. Vocational training
is also provided and some staff are enrolled on National
Vocational Qualification (“NVQ”) level courses. Employees are
actively encouraged to undertake Continuing Professional
Development (“CPD”).
Health & Safety
The Group is fully committed to ensuring clean, safe and
healthy working conditions. The Group actively promotes a
strong safety culture and ensures a collective responsibility for
ensuring Health & Safety standards are continually improved.
The Group Chief Operating Officer, Iain Henderson, has
overall responsibility for Health & Safety procedures across
the Group. However, in line with the Group’s decentralised
management approach, accountability for Health & Safety
is with local management to match local regulatory
requirements, culture and specific business needs. The Group
requires that each operating business conducts a Health &
Safety review against its specific operational risk profile and
local regulatory requirements.
Minor injuries
Reportable lost time incidents1
1 Three or more day’s absence from workplace.
2013
54
1
2012
21
2
2011
16
1
The increase in minor injuries through 2012 and 2013 reflects
the improved systems for reporting and collecting injury data,
particularly in relation to recently acquired businesses. The
most common types of injury relate to minor cuts, slips/trips
and lifting injuries.
All injuries are fully investigated and corrective actions and
preventative measures put in place to ensure that the injury
does not reoccur and future risks are mitigated.
Health & Safety forms part of the induction process for new
employees and where relevant, more specialist training is
provided for specific functions. The Group has good coverage
of employees who have formal Health & Safety training and/or
qualifications and this will be expanded during 2014.
Human rights
The Group’s activities are substantially carried out in developed
countries that have strong legislation governing human rights.
The Group complies fully with appropriate legislation in the
countries in which it operates.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 37
The Group’s policy towards suppliers is that each operating
business is responsible for negotiating the terms and conditions
under which they trade with their suppliers. The Group does not
operate 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 or 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.
The Group considers the environmental and social impacts of
conducting business on the community and this forms part
of the business decision making process. Many community
activities and events are fully supported by the Group and
this relationship is managed by the local management teams.
Some examples of Group community activities include:
•
In North America:
– Various charitable donations made locally at each
operating company by employees for local charities
such as United Way (over $20k donated by employees),
Haven House (Abused Women) and Clothes for Kids.
– Hercules US sponsorships at charity golf challenges.
– Adopt a Needy Family at Thanksgiving and Christmas at
Hercules US; employees donate cash, food and gifts for
a designated family in the community.
•
In Europe:
– Staff from a1-CBISS took part in the ‘Tough Mudder’
fund raising activity on behalf of Claire House Children’s
Hospice in November 2012.
– IS-Rayfast supported Prospect Hospice near Swindon
UK, in memory of a long term colleague who was sadly
lost to cancer last year and took part in the Swindon
Race for Life to support Cancer Research UK.
– Cabletec supported Weston Hospice in Weston-super-
Mare UK, again in memory of a long term colleague who
was sadly lost to cancer. Teams from IS-Cabletec and
IS-Rayfast took part in the national ‘Movember’ charity
event to raise awareness of men’s health issues.
The Group also contributes to local worthwhile causes and
charities and in 2013 the Group made donations of £32,359
(2012: £28,285). No political donations were made.
Environmental
The Group comprises sales and marketing focused businesses
which essentially receive products from suppliers and
despatch them to customers. The Group’s businesses do not
operate delivery fleets; they use third party carriers to provide
much of their packaging requirements and to deliver their
products to customers. The Group’s ability to control the
environmental impact of its logistics partners is therefore
limited. The primary impact on the environment, which is
entirely in the Group’s control, is consumption of the normal
business energy sources such as heating and power, which the
Group aims to minimise.
The Group ensures it minimises its impact on the environment
through compliance with relevant environmental legislation.
The Group is committed to identifying and assessing
environmental risks, such as packaging waste, arising from
its operations.
Waste management initiatives are encouraged and supported
by the Group and materials are recycled where practical.
Local management are committed to good environmental
management practices throughout our operations.
The Managing Directors have responsibility for environmental
performance of their operating businesses and each subsidiary
is required to implement initiatives to meet their
responsibilities. Some specific environmental initiatives are
provided below:
• Each location participates in recycling paper, plastic,
cardboard, and wood from pallets.
• Hercules US has reduced the amount of plastic bags used
for packaging of parts to be shipped by over 50% .
• Hercules Canada has worked with local waste
management to recycle over 95% of all disposal items,
virtually eliminating any landfill waste.
• HKX is in compliance with ISPM15 phytosanitary regulations
for international shipping.
• Cabletec in the UK has modified all products to ensure they
are now fully REACH (Registration, Evaluation, Authorisation
and restriction of Chemicals) compliant.
Ethics
The Group recognises its obligations towards the parties with
whom the Group has business dealings including customers,
shareholders, employers, suppliers and advisors.
Dealings with these groups depend upon the honesty and
integrity of employees and the Group ensures that a high
standard of expertise and business principles are maintained in
all such dealings.
Community
The Group believes that good community relations are
important to the long term development and sustainability
of the operating businesses. It recognises the obligation it
has towards the parties with whom it has business dealings
including customers, suppliers, shareholders, employees and
advisors. In general, the interactions with these parties are
managed at a local level by senior management and the
Group expects a high standard of expertise and business
principles are maintained in such dealings.
Diploma PLC Annual Report & Accounts 2013Strategic Report 38
Directors and Advisors
John Rennocks1, 3
Bruce Thompson
Marie‑Louise Clayton1,2,3
Nigel Lingwood
Chairman
Chief Executive Officer
Non‑Executive Director
Group Finance Director
Appointed:
Joined the Board in July
2002 and appointed
Chairman in January
2004.
Appointed:
Joined the Board in
1994 as a Group Director
and appointed Chief
Executive Officer in 1996.
Skills and experience:
Bruce started his career in
the automotive industry, first
as a design engineer and
then in product marketing.
He then spent three years
in international marketing
with a construction materials
company, developing new
markets in Europe, the Middle
East and North Africa. Prior
to joining Diploma, he was a
Director with Arthur D Little
Inc., the technology and
management consulting
firm, initially in the UK and
then as Director of the firm’s
Technology Management
Practice based in Cambridge,
Massachusetts.
External appointments:
None.
Skills and experience:
John is a Chartered
Accountant with over
41 years of experience
in commerce and industry,
including nearly 20 years as
the Finance Director of FTSE
100 companies. He has been
a non‑Executive Director
of many companies in the
past 18 years, including as
Chairman of six other public
or private companies across
several industrial or support
service sectors.
External appointments:
John is currently
non‑Executive Director
of GreenKo Group PLC,
Chairman of Bluefield Solar
Income Fund Ltd and Deputy
Chairman of Inmarsat plc.
Appointed:
Joined the Board in
November 2012 and
appointed Chairman,
Audit Committee
March 2013.
Skills and experience:
Marie‑Louise is a Chartered
Certified Accountant with
some 30 years experience in
commerce and industry, who
has held senior positions in
Alstom (formerly, Alsthom
GEC) and was previously
Group Finance Director
of Venture Production
PLC. She has also been
a non‑Executive Director of
Forth Ports PLC and Ocean
Rig ASA.
Appointed:
Joined the Company
in June 2001 and
appointed Group Finance
Director in July 2001.
Skills and experience:
Prior to joining the Company,
Nigel was the Group Financial
Controller at Unigate PLC
where he gained experience
of working in a large multi‑
national environment and on
a number of large corporate
transactions. Nigel qualified
as a Chartered Accountant
with Price Waterhouse,
London.
External appointments:
None.
External appointments:
Marie‑Louise is Chairman of
the Audit Committee and a
non‑Executive Director of
Zotefoams plc. Marie‑Louise
is also a non‑Executive
Director of Independent
Oil and Gas plc and of two
private companies.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 39
John Nicholas1,2,3
Iain Henderson
Charles Packshaw1,2,3
Chief Operating Officer
Non‑Executive Director
Appointed:
Joined the Board as
a Director in 1998
and appointed Chief
Operating Officer in 2005.
Appointed:
Joined the Board in June
2013.
Skills and experience:
Charles is Head of UK
Advisory and Managing
Director in HSBC’s global
banking business. With
30 years City experience,
including 18 years at Lazard
in London, where he was
Head of Corporate Finance,
prior to joining HSBC in 2002.
Charles has been a non‑
Executive Director of two
listed companies and he is
also a Chartered Engineer.
Skills and experience:
Iain qualified as a Chartered
Management Accountant and
began his career in the food
industry, progressing to be an
operations general manager
with H J Heinz. Since 1988,
Iain has specialised in the
acquisition and development
of small to medium sized
enterprises within group
structures. This was firstly
within the privately owned
Bricom MBO, where he ran
ANC Holdings and from
1994 in a public company
environment as a Director
of Glenchewton plc.
External appointments:
None.
External appointments:
None.
Senior Independent
Non‑Executive Director
Appointed:
Joined the Board in
June 2013 and appointed
Chairman, Remuneration
Committee in July 2013.
Skills and experience:
A Chartered Certified
Accountant with a Masters
degree in Business
Administration from Kingston
University. John has a wealth
of business and commercial
experience and spent
much of his early career
in technology‑focused
international manufacturing
and service companies
involved in analytical
instruments, fire protection
and food processing.
He has been Group Finance
Director of Kidde plc (on
its demerger from Williams
Holdings) and of Tate & Lyle
PLC.
External appointments:
John is currently non‑
Executive Director and
Chairman of the Audit
Committees of Mondi plc,
Hunting PLC and Rotork plc.
John is also a member of the
Financial Reporting Review
Panel.
Auditor
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Solicitors
Ashurst LLP
Broadwalk House
5 Appold Street
London EC2A 2HA
Bankers
Barclays Bank PLC
1 Churchill Place
London E14 5HP
HSBC Bank plc
City Corporate Banking Centre
60 Queen Victoria Street
London EC4N 4TR
Investment Bankers
Lazard
50 Stratton Street
London W1J 8LL
Corporate Stockbrokers
Numis Securities
10 Paternoster Square
London EC4M 7LT
Member of:
1
2
3
the Remuneration Committee
the Audit Committee
the Nomination Committee
Diploma PLC Annual Report & Accounts 2013Governance 40
Corporate Governance
Members of Board:
Chairman
John Rennocks
Independent non‑Executive Directors
Marie‑Louise Clayton – appointed 13 November 2012
Ian Grice
John Matthews
John Nicholas
Charles Packshaw
Executive Directors
Iain Henderson
Nigel Lingwood
Bruce Thompson
– retired 30 September 2013
– retired 30 September 2013
– appointed 1 June 2013
– appointed 1 June 2013
Attendance
7/7
7/7
6/6
6/6
3/3
3/3
7/7
7/7
7/7
Compliance with the Code
Diploma PLC is required to state whether it has complied
with the Main Principles of the UK Corporate Governance
Code, published by the Financial Reporting Council in
September 2012. Set out on pages 41 to 65 is an
explanation of how the Company has complied with the
Main Principles of the Code.
The Board confirms that throughout the financial year, the
Company applied all of the Principles set out in sections
A to E of the UK Corporate Governance Code for the
period under review. The Board also confirms that it
complies with all of the Provisions of the Code as at the
date of this Report. However, as a result of the timing of
appointments to the Board, there were two short periods
during the year where the Company did not comply with
three Provisions. The explanations relating to these
exceptions are set out on page 44.
The Company’s auditor Deloitte LLP, are required to
review whether the above statement reflects the
Company’s compliance with the nine provisions of the UK
Corporate Governance Code specified for their review by
the Listing Rules of the UK Listing Authority and to report if
it does not reflect such compliance.
Following the developments over the past two years I am
pleased to report that at the date of this Report, the Company
is able to comply fully with all of the principles and provisions
enshrined in the Code.
Finally, I would like to encourage all shareholders to find the
time to attend our AGM on 15 January 2014. It provides an
excellent opportunity to meet the Executive Directors and the
independent non‑Executive Directors on the Board whose
Committee’s reports are set out in the following pages of this
Report on Governance.
John Rennocks
18 November 2013
John Rennocks
Chairman
Dear Shareholder
I am pleased to present Diploma’s report on Corporate
Governance on behalf of our Board. We have developed and
expanded this report this year which I hope gives a clear and
meaningful explanation of how the Board and its Committees
discharge their governance duties and apply the principles of
good governance as set out in the UK Corporate Governance
Code (“Code”).
The Board is committed to ensuring the highest standards of
corporate governance and that values and behaviours are
consistent across the Group. As I indicated in my earlier
Reports to shareholders, in October 2011 on joining the FTSE
250, I set clear objectives for the Board to develop its policies
and processes to ensure that the Board would be able to meet
the more stringent governance standards commensurate with
a Company that is now firmly established in the FTSE 250
constituent group.
The appointment of John Nicholas and Charles Packshaw in
June as independent non‑Executive Directors, following the
appointment of Marie‑Louise Clayton earlier in the financial
year, has allowed the Board to refresh its Committees and
provides a firm foundation for continued oversight and
scrutiny of the Company’s activities. These appointments
follow the decision of John Matthews and Ian Grice to step
down from the Board at 30 September 2013.
We have also made solid improvements in the Board processes
over the past two years and further developments in policies
and review processes are planned for the coming financial year,
including an external evaluation of the performance of the
Board. Towards the end of next year we will also carry out a
further formal review of the Group’s strategy, following that
carried out in October 2012. This will be the first opportunity for
the new members of the Board to contribute to the Group’s
future strategic direction, having had an opportunity to gain a
thorough understanding of the Group’s operations.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 41
Framework of Corporate Governance
The Board
The Diploma PLC Board is accountable to the Company’s
shareholders for standards of governance across the
Group’s businesses. Certain strategic decision‑making
powers and authorities of the Company are reserved as
matters for the Board. The principal matters reserved for
the Board are set out below. Day‑to‑day operational
decisions are managed by the Chief Executive Officer.
• Setting the overall strategic direction and oversight of
the management of Diploma PLC.
Audit Committee
Chaired by Marie‑Louise Clayton
Number of meetings in the year: 6
Role of the Committee
The Audit Committee has responsibility for overseeing
and monitoring the Company’s financial statements,
accounting processes, audit (internal and external),
internal control matters and also monitors issues
relating to fraud and whistleblowing.
• Recommending or declaring dividends.
• Approval of the Group and Company financial
statements.
Nomination Committee
Chaired by John Rennocks
Number of meetings in the year: 3
• Maintaining sound systems of internal controls and risk
management.
• Approval of major corporate transactions and
commitments.
• Succession planning and appointments to the Board
and senior management remuneration.
• Review of the Group’s overall corporate governance
arrangements and reviewing the performance of the
Board and its Committees annually.
• Approval of the delegation of authority between the
Chairman and the Group Chief Executive and the
terms of reference of all Committees of the Board.
Where appropriate, matters are delegated to a
Committee which will consider them in accordance with
its terms of reference. Details of each Committee’s terms
of reference are available on the Diploma PLC website at
www.diplomaplc.com
Role of the Committee
The Nomination Committee regularly reviews the
structure, size and composition of the Board and its
Committees. It identifies and nominates suitable
candidates to be appointed to the Board (subject to
Board approval) and considers succession generally.
Remuneration Committee
Chaired by John Nicholas
Number of meetings in the year: 7
Role of the Committee
The Committee reviews and recommends to the Board
the framework and policy for the remuneration of the
Chairman and the Executive Directors. The remuneration
of the non‑Executive Directors is determined by the
Chairman and the Executive Directors. The Committee
takes into account the business strategy of the Group
and how remuneration policy should reflect and support
that strategy.
Diploma PLC Annual Report & Accounts 2013Governance 42
Corporate Governance continued
Leadership
Board composition
The Board comprises a Chairman, three Executive Directors and
three independent non‑Executive Directors. The non‑Executive
Directors are appointed for specified terms and the details of
their respective appointments are set out in the Remuneration
Committee Report on page 57. The biographical details of the
Board members are set out on pages 38 and 39.
Other matters reserved to the Board include treasury policies,
internal control, risk management and the appointment or
removal of the Group Company Secretary.
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.
During the year, the Board completed an exercise begun last
year to refresh the composition of non‑Executive Directors on
the Board. Marie‑Louise Clayton was appointed as an
independent non‑Executive Director on 13 November 2012
and on 1 June 2013, John Nicholas and Charles Packshaw
joined the Board as independent non‑Executive Directors.
Following these appointments, John Matthews, a long serving
director who had completed ten years of service and Ian Grice,
who had been a member of the Board for six years, retired
from the Board. Both John Matthews and Ian Grice served
throughout the year to enable smooth hand‑overs of their
Committee chairmanship roles and retired as planned on
30 September 2013.
The role of Senior Independent Director became vacant on
the retirement of John Matthews and on 15 November 2013
John Nicholas was appointed Senior Independent Director.
Activities of the Board
The Company’s governance framework is set out on page 41
together with a summary of the formal terms of reference. The
core activities of the Board and its Committees are planned on
an annual basis and this framework forms the basic structure
within which the Board operates.
The Board’s terms of reference also sets out the separate and
distinct roles of the Chairman and the Chief Executive.
The Chairman is responsible for the overall leadership of the
Board and the governance of the Board and ensures that the
Directors have an understanding of the views of the
Company’s major shareholders. The Chairman sets the
Board’s agenda and ensures that there is a healthy culture of
challenge and debate at Board and Committee meetings.
The Board appoints the Chief Executive and monitors his
performance in leading the Company and providing operational
and performance management in delivering the agreed
strategy. The Chief Executive is responsible for developing, for
the Board’s approval, appropriate values and standards to guide
all activities undertaken by the Company and for maintaining
good relationships and communications with investors.
The approval of acquisitions, for the most part, is a matter
reserved for the Board, save that it delegates to the Chief
Executive 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. Beyond these levels of authority, projects are
referred to the Board for approval.
The Company also indemnifies its Directors and Officers to
the extent permitted by law. Neither the insurance nor the
indemnity provides cover where the Director or Officer has
acted fraudulently or dishonestly.
To ensure that non‑Executive Directors can constructively
challenge and support proposals on strategy, the Board has
adopted a process of reviewing and approving the agreed
strategy for the Company on a two/three yearly basis. In
October 2012, the Board undertook a strategy development
review at the Group’s business in Swindon, UK. The next
strategy meeting is likely to be held later in 2014.
Meetings of the Board
The Board has six scheduled meetings each year and meets
more frequently as required. It met on seven occasions during
the year under review and attendance at these meetings is set
out on page 40.
Each Director is required to attend all meetings of the Board or
Committees of which they are a member. In addition senior
management from across the Group and advisers attend
some of the meetings for the discussion of specific items in
greater depth.
This exposure to the members of senior management
from across the businesses helps enhance the Board’s
understanding of the business, the implementation of strategy
and the changing dynamics of the markets in which the
business operates.
Effectiveness
Independent non‑Executive Directors
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. The Chairman, John
Rennocks was considered independent by the Board both at
the time of his appointment as Director on 12 July 2002 and
as Chairman on 7 January 2004. In accordance with the
Code, the ongoing test of independence for the Chairman
is not appropriate.
All non‑Executive Directors are advised of the likely time
commitments at appointment. The ability of individual
Directors to allocate sufficient time to the discharge of their
responsibilities is considered as part of the Directors’ annual
evaluation process, overseen by the Chairman. Any issues
concerning the Chairman’s time commitment are dealt with
by the Nomination Committee, chaired for this purpose by the
Senior Independent Director.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 43
The Group Company Secretary acts as an advisor to the Board
on matters concerning governance and regulatory issues and
ensures compliance with Board procedures. 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 Group Company Secretary
and his remuneration are matters for the Board as a whole.
Board evaluation
The Board undertakes an annual evaluation of effectiveness
using specifically designed evaluation forms and under the
direction of the Chairman. This exercise encompasses an
evaluation of the performance of the Board as a whole, as
well as of the Committees and individuals. Feedback on Board
performance is presented by the Chairman to a meeting of
the Board and actions and objectives are agreed for the
following year.
The Board intends to introduce periodic externally facilitated
evaluations of the Board, commencing with the 2014 evaluation.
Re‑election
All Directors to the Board are subject to election by the
shareholders at the first Annual General Meeting following
their appointment by the Board and in accordance with the
Code, all Directors will also stand for re‑election annually at
the Annual General Meeting.
Conflicts of interest
Directors are subject to a statutory duty under the Act to avoid
a situation where they have, or could have, a direct or indirect
interest that conflicts, or possibly could conflict, with the
Company’s interests. The Act allows directors of public
companies to authorise conflicts and potential conflicts where
appropriate, where the Articles of Association contain a
provision to this effect. The Act also allows the Articles to
contain other provisions for dealing with directors’ conflicts of
interest to avoid a breach of duty. At the 2009 AGM, revised
Articles that contained such provisions were adopted.
Procedures adopted to deal with conflicts of interest continue
to operate effectively and the Board’s authorisation powers are
being exercised properly in accordance with the Company’s
Articles of Association.
Each non‑Executive Director is required to inform the Board of
any changes to their other appointments.
During the year the Chairman has also held meetings with the
non‑Executive Directors, without the Executive Directors present.
The appointment of non‑Executive Directors are subject
to formal, rigorous and transparent procedures which are
described more fully in the Report from the Nomination
Committee which is set out on page 49.
Diversity
The Board is committed to a culture that attracts and retains
talented people to deliver outstanding performance and
further enhance the success of the Group. In that culture,
diversity across a range of criteria is valued, primarily in relation
to skills, knowledge and experience and also in other criteria
such as gender and ethnicity. The Board has considered
setting objectives in relation to diversity, but does not believe
that such objectives are appropriate at this juncture, given
the relatively small Board. The Board will however keep this
matter under review, particularly in light of Board succession
and development.
Information and professional development
An induction programme is agreed for all new Directors aimed
at ensuring that they are able to develop an understanding and
awareness of the Group’s core processes, its people and
businesses. The non‑Executive Directors’ awareness of the
businesses is further developed through periodic visits to the
principal business locations and presentations to the Board by
senior management of the businesses.
Following the new appointments to the Board this year, a
comprehensive induction programme was set up which
included a visit by each of the new non‑Executive Directors to
the major business units in each of the Group’s Sectors where
they had an opportunity to meet with senior management in
these businesses. Further meetings were held individually
between each of the non‑Executive Directors and the
Executive Directors and with the principal advisors to
the Company.
The Chairman, with the assistance of the Chief Executive and
the Group Company Secretary, is responsible for ensuring
that Directors are supplied with information in a timely manner
that is in a form and of a quality appropriate to enable them
to discharge their duties. In the normal course of business,
the Chief Executive gives an oral report to the Board at
each meeting and information is provided and reported
through formal Board reports that include information on
operational matters and strategic developments. There are
also reports on the performance of Group operations,
financial performance relative to the budget, business
development and investor relations.
The training needs of the Directors are periodically discussed
at Board meetings and where appropriate, briefings as
necessary are provided on various elements of corporate
governance and other regulatory issues.
Diploma PLC Annual Report & Accounts 2013Governance 44
Corporate Governance continued
Accountability
The Board is responsible for ensuring that the Annual Report
& Accounts present a fair, balanced and understandable
assessment of the Group’s position and prospects.
20 working days prior to the meeting. The Company proposes
a separate resolution on each substantially separate issue
and for each resolution proxy appointment forms provide
shareholders with the option to vote in advance of the AGM.
The Board is also responsible for determining the nature and
extent of the significant risks it is willing to take in achieving
its strategic objectives and for maintaining sound risk
management and internal control systems. They also review
the effectiveness of these systems through the work of the
Audit Committee as reported on in the Report of the Audit
Committee on pages 45 to 48.
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 key risks which the Board has focused on this year are set
out in the Principal Risks and Uncertainties section on page 32
to 35. The Board is committed to providing shareholders with
a clear assessment of the Company’s financial position and
prospects. This is achieved through this Annual Report &
Accounts, the Annual Review and through other periodic
financial statements and announcements.
Relations with shareholders
The Company has a well‑developed investor relations
programme managed by the Chief Executive and Group
Finance Director. Through this programme the Company
maintains regular contact with major shareholders to
communicate clearly the Group’s objectives and monitors
movements in significant shareholdings.
During the past two years, these communications have been
enhanced by the introduction of Investor Days, both in the UK
and in Canada which were well attended. In addition Investor
Roadshows are now held each year in the US as well as in the
UK and formal investor presentations are made twice a year to
groups of private client fund managers.
Most shareholder contact is with the Chief Executive Officer
and Group Finance Director through presentations made
twice a year on the operating and financial performance of
the Group and its longer term strategy. The Chief Executive
Officer and Group Finance Director generally deal with
questions from individual shareholders. All financial and
trading announcements are published immediately on the
Company’s website, including copies of the presentations
made to analysts and key shareholders.
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, focused on both investors
and analysts.
Through these processes, the Board is kept abreast of key
issues and the opportunity for shareholders to meet the
Chairman or Senior Independent Director, separately from
the Executive Directors, is available on request.
Electronic communications to shareholders include the
Notice of the Annual General Meeting which is sent at least
The Board has resolved, in line with emerging best practice,
to conduct a poll on each resolution proposed at the Annual
General Meeting. The results of the Annual General Meeting
resolutions, including details of votes cast, are published on
the Company’s website.
Code non‑compliance
The Company complied with the Principles of the Code
throughout the year, but for very short periods of time, did not
comply with the following Provisions of the Code during the
year under review. In each case this was attributable to the
timing of appointments:
• A.4.1 – There was no Senior Independent Director
appointed for the period from 30 September 2013 when
John Matthews retired, until the appointment of John
Nicholas on 15 November 2013. The candidates for Senior
Independent Director were recently appointed as non‑
Executive Directors to the Board and this, together with the
need to follow a fair and structured appointment process,
meant that the appointment was delayed until early in the
new financial year.
• B.1.2 – At least half the Board did not comprise
independent non‑Executive Directors from 1 October
2012 until the appointment of Marie‑Louise Clayton as
an independent non‑Executive Director on 13 November
2012. The Board narrowly missed the end of the transition
period permitted by the Code for smaller companies, under
which the Company was previously allowed to have at least
two independent non‑Executive Directors.
• C.3.1 – The Audit Committee did not comprise at least
three independent non‑Executive Directors for the period
1 October 2012 until the appointment of Marie‑Louise
Clayton to the Committee on 13 November 2012. The
Board narrowly missed the end of the transition period
permitted by the Code for smaller companies, under
which the Audit Committee was previously allowed to
have at least two independent non‑executive directors
with the Company Chairman being a member of the
Audit Committee.
As set out above in this Report, the Company was in full
compliance with all of the Principles and Provisions of the
Code at the date of this Report.
Diploma PLC Annual Report & Accounts 2013Diploma PLC Audit Committee Report
45
Members of Committee:
Marie‑Louise Clayton
Ian Grice
John Matthews
John Nicholas
Charles Packshaw
John Rennocks
– appointed on 13 November
2012 and as Chairman on
21 March 2013
– retired on 30 September 2013
– retired as Chairman on
21 March 2013 and as member
on 30 September 2013
– appointed on 29 July 2013
– appointed on 29 July 2013
– resigned on 13 November 2012
Attendance
6/6
5/5
4/5
3/3
3/3
–
Key Duties
Marie‑Louise Clayton
Chairman of the Audit Committee
(Full terms of reference are available on the Company’s
website).
Dear Shareholder
I was delighted to be appointed Chairman of the Audit
Committee in March 2013 and would like to thank my
predecessor, John Matthews who has guided the Committee
over many years. In June 2013, John Nicholas and Charles
Packshaw, both of whom have substantial experience of
corporate financial reporting, joined the Committee and I look
forward to their support and contribution to the Committee’s
oversight in the coming years.
In my first year as Chairman, I have devoted a large amount
of time to gain a thorough understanding of the financial
reporting processes in the Group and to reviewing the overall
control environment related to the Group’s strategic,
operational and financial activities. As part of this exercise
I have been assisted particularly by the Group Finance Director
and Internal Auditor, but I have also met with local
management in the larger business units to ensure
I understand the way in which the Group’s processes
and controls are applied by the Group’s businesses.
I have also met separately with the Company’s auditors during
which meetings I have sought their views on the strength and
depth of financial reporting and internal control processes
operating over the Group’s activities. I welcome Ed Hanson as
the lead engagement audit partner this year and wish to thank
his predecessor, Ian Waller who had reported on the Group’s
financial statements for the past five years.
Set out over the following pages is my Report on the activities
of the Committee during the year; the Committee’s agenda
continues to grow each year and this year we have given
further insight into the work of the Committee by expanding
the Committee’s Report to explain how the Committee has
dealt with the areas of financial reporting that require
particularly careful review and judgement. None of these
areas have proved critical in preparing the Group’s financial
statements this year.
• Monitors the integrity of the financial statements of the
Group and assists the Board to fulfil its responsibilities
relating to external financial reporting and similar
announcements, including Half Year and Annual
financial statements, Interim Management Statements
and trading updates.
• Reviews key accounting and auditing issues.
• Reviews Group’s internal control systems and risk
management procedures.
• Recommends appointment and/or reappointment of
the external auditor and approves their terms of
engagement.
• Reviews and monitors independence of the external
auditor and the effectiveness of the audit process.
• Monitors policy on external auditor supplying
non‑audit services.
• Monitors fraud reports and operation of the Company’s
whistleblowing policy.
• Reviews effectiveness of the internal audit function and
makes recommendations to the Board.
I hope you will find this Report helpful in understanding the
work of the Committee.
Marie‑Louise Clayton
18 November 2013
Diploma PLC Annual Report & Accounts 2013Governance 46
Audit Committee Report continued
Audit Committee
The Committee is chaired by Marie‑Louise Clayton and
comprises independent non‑Executive Directors. The
Chairman and John Nicholas are both qualified accountants,
who have recent and relevant financial experience.
John Rennocks, the Chairman of the Company, resigned from
the Audit Committee on 13 November 2012 in accordance
with good governance practice, but continues to attend
meetings at the invitation of the Committee.
The Group Company Secretary acts as Secretary to the
Committee. The Executive Directors also attend Committee
meetings and the Internal Audit Manager also attended two
Committee meetings. The Committee met with the external
auditor during the year, without the Executive Directors
being present.
Engagement of the external auditor
The external auditor is engaged to express an opinion on the
Group’s and Company’s financial statements. The audit
includes the review and test of the systems of internal financial
control and the data contained in the financial statements to
the extent necessary for expressing an audit opinion on the
truth and fairness of the financial statements.
Deloitte LLP has been the Company’s auditor since their
appointment in 2008. Deloitte LLP provides the Committee
with relevant reports, reviews and advice throughout the year,
as set out in their terms of engagement.
In accordance with UK regulations, the Company’s auditor
adheres to a rotation policy based on best practice and a new
Group lead engagement partner was appointed this year in
place of the previous lead engagement partner who had
completed a term of five years in that role.
During the year the performance of the auditor was formally
assessed by the Committee in conjunction with the senior
management team. In making this assessment the Committee
focussed on the robustness of the audit, the quality of delivery
of audit services and the quality of the auditor’s staff. The
Committee is satisfied that the audit continues to be effective
and provides an appropriate independent challenge of the
Group’s senior management.
The Committee is satisfied that Deloitte continues to provide
an effective audit and considers that the cost and disruption
that would be caused to the Group’s businesses by an audit
tender process, outweighs any benefit to shareholders from a
more frequent change in the Company’s auditor. However the
Committee remains supportive of the Code’s requirement that
the audit should be put out to tender at least once in every
ten years.
Audit Committee Agenda – 2013
• Reviews and agrees the scope of work to be undertaken
by the external auditor and agrees the terms of
engagement and fees to be paid for the external audit.
• Reviews the Annual Report & Accounts and receives
reports from the Group Finance Director and the
external auditor on the key accounting issues and areas
of significant judgement. Reviews the processes
necessary to ensure that the Board is able to confirm
that the Annual Report & Accounts are “fair, balanced
and understandable”.
• Reviews a report from the Group Finance Director on
the controls in place to mitigate fraud risk.
• Reviews the Interim Management Statements and
Trading Updates at meetings held in January, March,
July and September.
•
Invites the Internal Audit Manager to attend meetings in
September and January to review the results of the
internal audit work for the current year and agree the
scope and focus of internal audit work to be carried out
in the following year.
• Reviews the Half Year Announcement and receives
reports from the Group Finance Director and the
external auditor on the key accounting issues and areas
of significant judgement.
• Assesses the effectiveness of the external audit at the
meeting in May.
• Reviews the effectiveness of the Group’s internal
control and risk management procedures and makes
recommendations to the Board on areas for
improvement.
• Reviews the effectiveness and independence of
the external auditor, the audit plan process, and
recommends the re‑appointment of the Group’s
external auditors.
• Reviews the Group’s policy on non‑audit services
which may be provided by the auditor and the Group’s
policy on whistleblowing.
• Reviews the Audit Committee Terms of Reference.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 47
Financial reporting and significant judgements
As part of their monitoring of the integrity of the financial
statements, the Committee reviews whether suitable accounting
policies have been adopted, whether management has made
appropriate estimates and judgements and also seeks support
from the external auditors to assess them.
Impairment of goodwill and intangible assets:
The main issues reviewed in the year ended 30 September 2013
are set out below:
•
The Committee considered the carrying value of goodwill
and the assumptions underlying the impairment review. The
judgements in relation to goodwill impairment largely relate
to the assumptions underlying the calculations of the value in
use of the business being tested for impairment, primarily the
achievability of long term business plans and macroeconomic
assumptions underlying the valuation process. This area is a
prime source of audit focus and accordingly the external
auditor provided detailed reporting to the Committee.
• Valuation of inventory:
The Committee reviewed the Report of the Group Finance
Director that set out the gross balances by businesses,
together with any related provision against the carrying value.
The Committee reviewed the bases used to value and confirm
existence of inventory held across the Group; they also
considered the appropriateness of provisions held against the
carrying value of inventory, having regard to the age and
volumes of inventory, relative to expected usage. These
matters were also discussed with the Group Finance Director
and the auditor.
• Recoverability of accounts receivable:
The Committee reviewed the Report of the Group Finance
Director that set out the gross balances by businesses,
together with any related provision against the carrying value.
The Committee reviewed the report of work done by the
external auditor on trade receivables to confirm both existence
and recoverability; they also considered the appropriateness
of provisions held against the carrying value of accounts
receivables having regard to the age and creditworthiness of
the customer. These matters were also discussed with the
Group Finance Director and the auditor.
The Committee was satisfied that each of the matters set
out above had been fully and adequately addressed by the
Executive Directors, appropriately tested and reviewed by the
external auditor and that the disclosures made in the Annual
Report & Accounts were appropriate.
Risk management and internal control
The Committee is responsible for reviewing the effectiveness
of the Group’s system of internal control. The system of
internal control 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.
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 half year reforecasts which have been approved
and reviewed by the Board. On an annual basis, each business
unit is required to prepare a risk assessment process on the key
strategic, operational, financial and accounting risks to identify,
evaluate and manage the significant risks to the Group’s
business. They include 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. These assessments are
supplemented by a detailed evaluation of the key financial
controls of the business units which are critically reviewed
by the Group’s Internal Audit Manager. The Committee will
annually review the results of these assessments and the
key strategic and operating risks of the Group identified by
management. 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 most significant impact on the Group’s long term
performance are set out on pages 32 to 35.
The Committee has reviewed the effectiveness of the Group’s
risk management and internal control systems. Taking into
account the processes that have been designed and
implemented for 2013, the Board, with the advice of the
Committee, has reviewed the effectiveness of the risk
management and internal control systems for the period from
1 October 2012 to the date of this Report and is satisfied that
the Group has in place effective risk management and internal
control systems.
Diploma PLC Annual Report & Accounts 2013Governance 48
Audit Committee Report continued
Internal audit
The Group’s finance department includes a separate internal
audit function. This is managed by a qualified internal auditor
who is based in Toronto, Canada. On larger audit
engagements the Internal Audit Manager is assisted by a
member of the Group finance team at Diploma PLC.
A full programme of internal audit visits has been completed
during the year. The scope of work carried out by internal audit
generally focuses on the internal financial controls and risk
management procedures operating within each business. In
January, the Internal Audit Manager presents his audit plan for
the year to the Committee for their approval. Written reports are
prepared on the results of each visit which sets out weaknesses
identified during the work, together with recommendations to
improve the control environment. These reports are reviewed
and discussed with the Executive Directors.
At the conclusion of the financial year, the Internal Audit
Manager reports to the Committee on the results of the
audit work carried out in the year. The Committee reviews
management’s response to matters raised, including the time
taken to resolve such matters. There were no significant
weaknesses identified in the audits undertaken during the
current year, but a number of recommendations were made to
improve internal review processes and procedures operating
over supplier masterfile data and credit card terminals.
The Committee continues to keep under review the need
for a more independent internal audit function in the Group.
The Committee remains satisfied that the Group’s system
of internal control is appropriate for a group of the size and
nature of Diploma PLC and the Committee’s current view is
that a separate formal independent internal audit function
is not appropriate to a group of Diploma’s size.
Non‑audit fees
The Committee has an established a set of guidelines covering
the type of non‑audit work that can be assigned to the external
auditor. These guidelines were reviewed and updated during the
year and relate to advisory services where the auditor’s 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.
The external auditor may only provide such services where
these do not conflict with their statutory responsibilities and
ethical guidance. Work in connection with acquisitions,
including due diligence reviews, is generally not provided
by the auditor, but is placed with other firms.
Taxation services are generally not provided by the auditor;
a separate firm is retained to provide tax advice, including any
assistance with tax compliance matters generally. However
during the year the tax department of Deloitte LLP provided
advice to the Company in connection with the application
of new legislation relating to Controlled Foreign Companies.
This advice has resulted in a small assignment which will be
concluded in the 2014 financial year. The Committee remains
satisfied that this assignment, which largely arose from
Deloitte’s detailed knowledge of the Group’s tax affairs, is
sufficiently ring‑fenced so as not to conflict with the duties
of the auditor.
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 assures itself of the auditor’s independence
by receiving regular reports which provides details of any
assignments and related fees carried out by the auditor in
addition to their normal audit work, and these are reviewed
against the above guidelines.
Details of the external auditor’s total fees, including non‑audit
fees of £71,000 paid to Deloitte LLP during the year are set out
in note 27 to the financial statement.
Anti‑Bribery and Whistleblowing
Diploma has a group wide anti‑Bribery and Corruption policy
to comply with the Bribery Act 2010 and it periodically reviews
its procedures to ensure continued effective compliance in its
businesses around the world.
During the year, the Committee formally reviewed and
updated the Group’s Whistleblowing Policy, which provides
the framework to encourage and give employees confidence
to “blow the whistle” and report irregularities. Employees are
encouraged to raise concerns with designated individuals,
including the Executive Directors, the Group Company
Secretary or the Chairman of the Audit Committee. All such
reports will be investigated and reported to the Committee,
together with details of corrective action taken. The Group’s
Whistleblowing Policy is monitored by the Committee.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 49
Nomination Committee Report
The Nomination Committee is chaired by John Rennocks, the
Chairman of the Company. The Committee would be chaired
by the Senior Independent Director on any matter concerning
the chairmanship of the Company. The Committee comprises
the non‑Executive Directors.
The Group Company Secretary acts as Secretary to the
Committee.
Board development
The Committee’s primary focus for 2013 was the continued
development of the Board with the appointment of
independent non‑Executive Directors for succession
and Board balance.
The current development phase of the Board began in 2012
with the appointment of Marie‑Louise Clayton as a non‑
Executive Director on 13 November 2012. With John Matthews
having completed ten years’ service and Ian Grice having
indicated his wish to retire from the Board, two new
independent non‑Executive Directors were appointed during
the year to maintain Board balance and structure.
Advisors
The Committee appointed Norman Broadbent LLP, an
external search agency in 2012, to assist with the identification
of suitable candidates as non‑Executive Directors. Norman
Broadbent LLP has no other connection with the Company.
Bruce Thompson, the Group Chief Executive Officer provides
advice to the Committee to help it make informed decisions.
Diversity
The Board’s policy on diversity is set on page 43.
Appointment process
As part of the appointments process, the Committee
determined the selection criteria for each of the new
independent non‑Executive Directors. The Committee
worked with Norman Broadbent LLP who drew up a list of
candidates from a range of industries and backgrounds for
initial appraisal by the Committee. From this, a shortlist of
suitable candidates that met the search and selection criteria,
was prepared and these candidates were interviewed by
members of the Nomination Committee.
Members of Committee:
John Rennocks (Chairman)
Marie‑Louise Clayton
Ian Grice
John Matthews
John Nicholas
Charles Packshaw
– Appointed on 29 July 2013
– Retired on 30 September 2013
– Retired on 30 September 2013
– Appointed on 29 July 2013
– Appointed on 29 July 2013
Attendance
3/3
1/1
2/2
2/2
1/1
1/1
Key Duties
(Full terms of reference are available on the Company’s
website).
• Review the composition and structure of the Board
and the Committees.
•
Identify and nominate candidates to fill Board
vacancies, after evaluating the existing balance of skills,
knowledge and diversity on the Board and preparing a
description of the role and capabilities required for a
particular appointment.
• Review the succession planning for the Board and
senior executives and in doing so take account of
experience, knowledge, skills and diversity.
• Review the Group Conflicts of Interest policy and
register and ensure there are no material conflicts
of interest.
Nomination Committee Agenda
– 2013
• Evaluated the balance of skills, knowledge and experience
on the Board and its diversity, including gender and
prepared a description of the role and capabilities for
candidates for appointment as a non‑Executive Director.
• Retained Norman Broadbent to search for and
interview candidates.
Following these interviews, the Nomination Committee
recommended to the Board the appointments of John
Nicholas and of Charles Packshaw as non‑Executive Directors.
• Made recommendations to the Board for appointment
of non‑Executive Directors, after a rigorous interview
process of shortlisted candidates.
Appointment terms
All three non‑Executive Directors have been appointed for an
initial period of three years, subject to election by shareholders
at the first Annual General Meeting. Thereafter, and subject to
their individual and separate re‑election, the appointments will
be for a term of three years unless terminated earlier by, and at
the discretion of, either party, upon three months’ notice.
• Refreshed Board Committees in light of new
appointments of non‑Executive Directors.
• Reviewed Terms of Reference of the Committee.
Diploma PLC Annual Report & Accounts 2013Governance 50
Remuneration Committee Report
Members of Committee:
John Nicholas
– Appointed as Chairman on
29 July 2013
Marie‑Louise Clayton – Appointed on 29 July 2013
Ian Grice
– Retired as Chairman on
29 July 2013 and as a member
on 30 September 2013
– Retired on 30 September 2013
– Appointed on 29 July 2013
John Matthews
Charles Packshaw
John Rennocks
Attendance
2/2
2/2
6/6
5/6
2/2
7/7
The Committee believes it is important that remuneration
policy and structure continues to be targeted to deliver long
term shareholder value. The Committee is also aware of
investors’ preference for simplicity and transparency. Against
that background, the Committee intends to undertake a
review of remuneration arrangements during the coming
financial year and should there be any changes to the
Remuneration Policy, they will be submitted for shareholder
approval at the AGM in January 2015.
The Committee welcomes dialogue with shareholders
on remuneration matters and aims to ensure that the
remuneration policy supports the business strategy and is
closely aligned to the interests of the Company’s shareholders.
I hope you will find this report of the Committee’s work
comprehensive and understandable and that you will join
me in supporting the two resolutions in respect of this year’s
Remuneration Committee Report at the Company’s AGM
on 15 January 2014.
John Nicholas
18 November 2013
John Nicholas
Chairman of the Remuneration Committee
Dear Shareholder
This is my first report to shareholders as Chairman of the
Committee having joined the Board this year and taken over
from Ian Grice at the end of July.
Diploma has again delivered a good financial performance
in the year as set out in other parts of the Report & Accounts.
The absence of any substantial acquisitions in the year has
meant that growth, although good, was lower than target.
This has been reflected in the lower bonus awards paid to
Executive Directors this year.
However the Company’s Total Shareholder Return over the
past three years ended 30 September 2013 was outstanding
with growth of 193% over this period placing the Company in
the upper quintile against the FTSE 250 benchmark. This
strong performance resulted in 100% of the long term awards
granted to the Executive Directors in January 2011 vesting at
30 September 2013. It has also established the Company
firmly in the FTSE 250 index which was one of the principal
objectives set for the Executive Directors in earlier years.
During the year the Committee held seven meetings.
No substantial changes were made to the remuneration
arrangements for the Executive Directors, other than to
introduce malus arrangements for the PSP, SMP and annual
performance bonus arrangements. Other routine matters
discussed at Committee meetings included the annual
salary review, bonus target setting and long term incentive
awards, together with the determination of prior year
target achievements in respect of the short and longer
term incentive plans. The Committee also reviewed the
remuneration arrangements of the cadre of senior
management (ca. 70 managers) across the Group.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 51
Remuneration Committee
The Remuneration Committee (”the Committee”) is chaired by
John Nicholas and comprises independent non‑Executive
Directors.
Bruce Thompson, Chief Executive, attends meetings at the
invitation of the Committee to provide advice to the Committee
to help it make informed decisions. The Group Company
Secretary attends meetings as Secretary to the Committee.
The Report which follows has been prepared in accordance
with Schedule 8 to the Large and Medium‑sized Companies
and Groups (Accounts and Reports) Regulations SI 2008/410
(as amended) which came into force on 1 October 2013.
Changes to the Remuneration Committee Report
The Report is presented in two sections as required under the
new regulations:
• Directors’ Remuneration Policy – set out on pages 52 to 57.
• Annual Report on Remuneration – set out on pages 58 to 65.
The Directors’ Remuneration Policy is subject to a binding vote
of shareholders at the forthcoming AGM on 15 January 2014.
The Annual Report on Remuneration continues to be subject
to an advisory vote by shareholders at the AGM.
Remuneration principles and structure
The Committee has adopted remuneration principles which
are designed to ensure that senior executive remuneration:
•
is aligned to the business strategy and the achievement of
planned business goals;
• supports the creation of sustainable long‑term shareholder
value;
• provides an appropriate balance between remuneration
elements that attract, retain and motivate the right calibre
of executive talent; and
• encourages a high‑performance culture by ensuring
performance‑related remuneration constitutes a substantial
proportion of the remuneration package and by linking
maximum payout opportunity to outstanding results.
The Remuneration Policy table on pages 52 and 53 outlines
the principles behind each key element of remuneration, the
opportunity for each Director in the year ahead and a brief
summary of how it works. A more detailed explanation of how
the incentive plans work can be found on page 54.
Key Duties
(Full terms of reference are available on the Company’s
website).
• Setting, reviewing and recommending to the Board
for approval the Group’s overall remuneration policy
and strategy.
• Setting, reviewing and approving individual
remuneration arrangements for the Executive
Directors, including terms and conditions of
employment and any policy changes.
• Reviewing and monitoring remuneration arrangements
for the senior managers of the operating businesses,
including terms and conditions of employment and
any policy changes.
• Approving the rules and design of any Group share‑
based incentive plans, and the granting of awards
under any such plans.
• Setting, reviewing and approving the fees of
the Chairman.
Remuneration Committee agenda
– 2013
• Approval of Annual Performance Bonus targets for 2013.
• Approval of PSP and SMP awards to Executive Directors
under the Long Term Incentive Plan.
• Review of Executive Directors’ salaries.
• Confirmation of the vesting percentages for the LTIP
award made in 2011 and vesting in 2013.
• Approval of the 2013 remuneration report.
• Approval of updated terms of reference.
• Confirmation of the performance conditions for the
2013 LTIP awards.
• Approval of Executive Directors’ exercise of nil‑cost
options.
• Approval of minor changes to LTIP documentation.
Diploma PLC Annual Report & Accounts 2013Governance 52
Remuneration Committee Report continued
Directors’ Remuneration Policy
Policy Table
The table below summarises the components of reward for Executive Directors of Diploma PLC that will govern the Company’s
intentions as regards future payments; more detailed descriptions of the incentive plans are given in the following sections.
This Remuneration Policy (“Policy”), if approved by shareholders at the Annual General Meeting on 15 January 2014, will
apply from 15 January 2014 for a term of three years. Any commitments made by the Company prior to the approval and
implementation of the Policy set out in this Report which were consistent with the remuneration policy in force at the time,
can be honoured, even if they would not be consistent with the policy prevailing when the commitment is fulfilled.
Executive Directors
Component
Base Salary
Purpose and link
to strategy
Operation
To attract and retain
talent by ensuring that
salaries are competitive.
Salaries are paid monthly and
are reviewed annually, with
changes normally effective
from 1 October.
Maximum
opportunity
There is no maximum
increase.
To reflect the
individual’s experience
and role within the
Group.
Performance metrics
Salary levels and increases are
determined based on a number
of factors, including individual
and business performance,
level of experience, scope of
responsibility, salary increases
for employees more generally
and the competitiveness of
total remuneration against
companies of a similar size
and complexity.
Pensions
Benefits
Designed to be
competitive within the
market to reward
sustained contribution
by Executive Directors.
Pension contributions at 20% of
base salary, which are either paid
into personal pension savings
schemes or paid as a separate
cash allowance.
No maximum limit set.
As for Base Salary.
Payment in lieu of a
company car.
Life assurance, annual leave and
medical insurance.
Dependent on adjusted EPS of
the Group for the Chief
Executive Officer. For other
Executive Directors, 75% of
bonus opportunity is based on
the same financial criteria as the
Chief Executive Officer, with the
remaining 25% of bonus
opportunity subject to
achievement of specific
personal objectives.
Performance assessed over
rolling three‑year performance
periods.
Annual
Performance
Bonus Plan
A cash based scheme
designed to focus
Executive Directors on
achievement of the
annual budget and
other business priorities
for the financial year.
Long Term
Incentive Plan
– Share Awards
Incentivise Executive
Directors to achieve
superior returns and
long term value growth.
Align the interests of the
Executive Directors with
those of Diploma PLC
shareholders through
building a shareholding
in the Company.
Awards are discretionary and do
not vest until the date on which
the performance conditions are
determined. If employment
ceases during a three‑year
performance period, awards
will normally lapse.
Awards include dividend
equivalents which are cash
bonuses or shares in lieu of
dividends forgone on, vested
but unexercised LTIP awards.
As for Base Salary.
Adjusted EPS is the principal
metric.
Discretion related to minimum
thresholds for operating
margin, free cash flow and
ROTCE.
Personal objectives for Chief
Operating Officer and Group
Finance Director.
• 50% on adjusted EPS relative
to the compound annual
growth rate in the UK Retail
Price Index (“RPI”).
• 50% on Total Shareholder
Return (“TSR”) relative to the
median performance of the
FTSE 250 Index (excluding
Investment Trusts).
No maximum limit is
prescribed, but the
Committee monitors
annually the overall cost of
the benefit provision.
Maximum 125% of salary
for the Chief Executive
Officer and 100% for other
Executive Directors. On
target bonus is 60% of
salary for the Chief
Executive Officer and 50%
of salary for the other
Executive Directors.
Opportunity as a
percentage of salary is
100% for each award made
to the Executive Directors
under each of the 2011
Performance Share Plan
and the 2011 Share
Matching Plan. Committee
has discretion to increase
awards under the
Performance Share Plan
to 150% of salary in
exceptional circumstances.
Dependent on the level of
dividends as applied to the
number of unexercised,
but vested LTIPs.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 53
Chairman and non-Executive Directors
Component
Chairman and non‑
Executive Directors’ Fees
Purpose and link
to strategy
To attract and retain a
Chairman and suitable
independent non‑
Executive Directors by
ensuring that fees are
competitive.
Operation
Paid quarterly in arrears
and reviewed each year.
Performance metrics
Annual Board evaluation.
Maximum
opportunity
The Chairman’s and
non‑Executive Directors’
fees are determined by
reference to the time
commitment and relevant
benchmark market data. A
Board Committee
chairman and the Senior
Independent Director may
also receive an additional
fee in recognition of the
greater time commitment.
Executive Director’s potential value of 2014 remuneration package
Bruce Thompson
Iain Henderson
Minimum
On-Target
Maximum
Minimum
On-Target
Maximum
%
4
8
%
6
1
%
9
2
%
5
4
£514,000
£1,077,000
£1,870,000
%
0
4
%
8
%
3
2
%
3
2
%
4
%
8
2
%
2
4
%
8
%
0
2
%
5
2
%
5
%
4
2
%
4
8
%
6
1
%
0
3
%
6
4
£323,000
£647,000
£1,102,000
%
0
20
40
60
80
100
%
0
20
40
80
80
100
Nigel Lingwood
Minimum
On-Target
Maximum
%
2
4
%
8
%
0
2
%
5
2
%
5
%
4
2
%
4
8
%
6
1
%
0
3
%
6
4
£336,000
£674,000
£1,147,000
%
0
20
40
60
80
100
1 Base salary is as at 1 October 2013; benefits are as set out on page 58.
Key
Fixed elements
n Base salary and benefits1
n Pension
Variable elements
n Annual performance bonus
n Long-term incentive plans
On‑Target performance assumes an annual performance bonus of 60% of salary for the CEO and 50% of salary for the other
two Executive Directors. It has been assumed that a face value limit of 100% of base salary applies to each PSP and SMP award.
On‑target vesting of the LTIPs assumes adjusted EPS performance of RPI plus 5.5% p.a. and TSR performance of median plus
3.5% p.a. which is equivalent to 50% of the vesting under the PSP and 25% of the awards vesting under the SMP. Maximum
performance assumes maximum annual performance bonus and maximum vesting of LTIP schemes. In all cases, for simplicity
no share price growth is assumed.
Diploma PLC Annual Report & Accounts 2013Governance 54
Remuneration Committee Report continued
Directors’ Remuneration Policy
Executive Directors
Base salary
In determining the annual base salary increases which apply
from 1 October, the Committee considers comparative
salaries in similar companies and the range of remuneration
increases applying across the Group and in particular for the
Group’s senior management cadre comprising ca. 70 senior
managers across the Group’s businesses.
Annual Performance Bonus
The Diploma PLC Annual Performance Bonus Plan is a cash
based scheme designed to reward Executive Directors for
meeting stretching shorter term performance targets. At the
start of the financial year (1 October), the Board sets a financial
performance target principally focused on achievement of a
target adjusted EPS, which to pay‑out at the maximum is
significantly ahead of both internal annual budgets and market
consensus. The Committee has discretion to reduce awards if
minimum thresholds are not achieved for operating margins,
free cash flow and return on trading capital employed
(“ROTCE”). The level of bonus payable for achieving the
minimum EPS target is 5% of the maximum.
Different performance measures and weightings may be used
for future cycles of the Annual Performance Bonus Plan to
those set out in the Policy Table to take into account changes
in the business strategy.
Individual objectives are also set for the Chief Operating
Officer and the Group Finance Director relating to factors
including operating performance, business and management
development activities. At the end of the financial year, the
Committee meets to assess the performance of each
Executive Director against the financial and individual
objectives. Bonuses are normally paid in cash in December.
Long Term Incentive Plans
The Company operates long term incentive arrangements for
Executive Directors. These are designed to reward and retain
Executive Directors over the longer term, while also aligning
their interests with those of Diploma PLC shareholders. These
arrangements comprise two incentive plans; the Diploma PLC
2011 Performance Share Plan (“PSP”) and the Diploma PLC
2011 Share Matching Plan (“SMP”).
The PSP, in which the Executive Directors of the Company
participate, provides for a grant of conditional awards of a
specified number of ordinary shares in the Company, or an
option to acquire a specified number of shares at an exercise
price determined by the Committee (which may be nil or a
nominal amount). No payment is required for the grant of
an award.
The SMP operates for Executive Directors of the Company, as
a form of deferred reward and again provides for a grant of
conditional awards of a specified number of ordinary shares in
the Company. In the case of the SMP an Executive Director
must accept an invitation from the Committee to personally
acquire or pledge shares for a period of three years. These
acquired or pledged shares are held by a nominee for the
Executive Director and are released at the end of the three
year performance period applying to the awards.
Awards, which are normally granted annually, must generally
be made within 42 days after the announcement of the
Company’s annual results. When making the decision on the
level of award, the Committee takes into consideration a
number of factors, including the face value of the award and
plan dilution limits.
The face value of an award is equal to the number of shares, or
shares under option, multiplied by the relevant share price. The
relevant share price will be the mid‑market closing share price
on the day before the award. A face value limit of 100% of base
salary applies to each PSP award to Executive Directors,
although the Committee, at its discretion, may increase the
face value of an award to a maximum of 150% in exceptional
circumstances. A face value limit of up to 100% of base salary
applies to each SMP award in respect of which the Executive
Director must pledge shares equal to 50% of base salary
after tax.
All awards will normally vest on the date on which the
performance conditions are determined and confirmed by
the Committee. The vesting of awards is conditional on:
• continued employment;
• the Company’s growth in adjusted EPS over a three year
performance period; and
• the Company’s TSR performance over a three year
performance period.
The latter two performance conditions apply to each award
so that the vesting of 50% of the award is based on growth in
adjusted EPS and 50% of the award is based on the relative TSR
performance. Each performance condition is measured over a
three year period commencing on the first day of the financial
year in which the award is made. There is no retesting of either
performance metric. 30% of the Performance Share Plan
awards and 15% of the Share Matching Plan awards will vest at
the minimum performance threshold.
The Committee will regularly monitor the continuing suitability
of the performance conditions and may impose different
conditions on awards granted in subsequent years, having
regard to prevailing market conditions.
The Committee may decide, on or before the grant of a share
incentive award, that on exercise of the award, the participant
may receive, in addition to the shares to which he then
becomes entitled, a payment equal in value to the aggregate
amount of the dividends (excluding any tax credit) which
would have been paid to the participant in respect of those
shares between the date on which the award vests (and the
option period commences) and the date on which the option
is exercised, as if they had been beneficially owned by him
over that period. These payments are referred to as dividend
equivalent payments and may be made in cash or in an
equivalent number of shares.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 55
Service contracts
The Executive Directors’ service contracts, including
arrangements for early termination, are carefully considered
by the Committee and are designed to recruit, retain and
motivate directors of the calibre required to manage the
Company and successfully deliver its strategic objectives.
The Committee considers that a rolling contract with a notice
period of one year is appropriate for existing and newly
appointed directors. A longer initial period of notice, that
would reduce to one year in accordance with the Code, may
be used on occasion to successfully complete the recruitment
of an external candidate.
The Executive Directors’ service contracts, which were drafted
in accordance with best practice at the relevant time, contain
provisions for compensation in the event of early termination or
change of control, equal to the value of salary and contractual
benefits, including pension, for the notice period. However
when calculating termination payments, the Committee takes
into account a variety of factors, which will normally include
individual and Company performance, the obligation for the
Director in appropriate circumstances to mitigate loss (for
example, by gaining new employment) and the Director’s
length of service.
The Committee considers that these provisions assist with
recruitment and retention and that their inclusion is therefore
in the best interests of shareholders.
Details of the service contracts of the Executive Directors who
served during the year are set out below:
Contract date
Unexpired
term
Notice
period
Bruce Thompson
13 July 2000
Rolling
Iain Henderson
1 August 2000
Rolling
Nigel Lingwood
3 July 2001
Rolling
1yr
1yr
1yr
Compensation
payable
upon early
termination
1yr
1yr
1yr
Other remuneration policies
Payment for loss of office
The Committee has considered the Company’s policy on
remuneration for Executive Directors leaving the Company
and is committed to applying a consistent approach to ensure
that the Company pays no more than is necessary.
The loss of office payment policy is generally in line with
market practice and will depend on whether the departing
Executive Director is, or is deemed to be treated as, a “good
leaver” or a “bad leaver”. In the case of a “good leaver” the
policy normally includes:
• Notice period of 12 months’ base salary, pension and
contractual benefits or payment in lieu of notice;
• Bonus payable for the period worked, subject to
achievement of the relevant performance condition.
Different performance measures (to the other Executive
Directors) may be set for a departing director as
appropriate, to reflect any change in responsibility.
• Vesting of award shares under the Company’s long term
incentive plans is not automatic and the Committee would
retain discretion to allow partial vesting depending on the
extent to which performance conditions had been met at
the date of cessation and the length of time the awards
have been held. Time pro‑rating may be disapplied if the
Committee considers it appropriate, given the circumstances.
• The Committee will also provide for the leaver to be
reimbursed for a reasonable level of legal fees in
connection with a settlement agreement.
When calculating termination payments, the Committee will
also take into account a variety of factors, including individual
and Company performance, the obligation for the Executive
Director in appropriate circumstances to mitigate loss (for
example, by gaining new employment) and the Executive
Director’s length of service.
Change of control
Change of control provisions have been set in accordance
with best practice at the relevant time and provide for
compensation equal to the value of salary, pension and
contractual benefits for the notice period.
In the event of a change in control, vesting of award shares
under the Company’s long term incentive plans depends on
the extent to which performance conditions had been met at
that time. Time pro‑rating may be disapplied if the Committee
considers it appropriate, given the circumstances of the
change of control.
Malus
Malus provisions (also known as ‘soft clawback’) apply to
awards made since 1 October 2012 under the Company’s
share incentive and annual bonus plans which give the
Committee the right to cancel or reduce unvested share
awards (or in the case of the Annual Performance Bonus Plan,
cash payments) in the event of material misstatement of the
Company’s financial results, miscalculation of a participant’s
entitlement or individual gross misconduct.
Remuneration for new appointments
The Committee has determined that under normal
circumstances, new Executive Directors will receive
a compensation package in accordance with Company
remuneration policy for base salary, benefits, bonuses
and long term incentive awards.
The Committee has agreed the following principles that will
apply when arranging a remuneration package to recruit new
Executive Directors:
• The remuneration structure will be kept simple where
practicable, hence the use of Base Salary, Benefits, Pension
(or cash allowance in lieu), Annual Performance Bonus and
Long Term Incentives;
Diploma PLC Annual Report & Accounts 2013Governance 56
Remuneration Committee Report continued
Directors’ Remuneration Policy
The Remuneration Committee will not exercise discretion to
reward failure and will report on any exercise of discretion that
changes the amount of remuneration paid in any year.
Dilution
In any ten‑year period, the number of shares which are or may
be issued under option or other share awards 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 aggregate
number of shares which are or may be issued under option,
or other share awards under all share plans established by the
Company, may not exceed 10% of the issued ordinary share
capital of the Company, from time to time.
Consultation with shareholders and employees
The Committee will consult with its major shareholders in
advance of any significant changes to the approved
Remuneration Policy. The Committee also receives reports
from the Group Company Secretary on correspondence
received from shareholders relating to remuneration matters
when their approval of the Remuneration Committee Report
is sought at the AGM.
The Committee has not consulted with employees on setting
the Remuneration Policy for Executive Directors.
Comparison with employee conditions
In determining annual increases in base salary, annual
performance bonuses and benefits, the Committee takes into
account the employment conditions applying across the senior
management cadre. This comparator group comprises ca.
70 senior managers across the Group’s businesses. This senior
management cadre has been chosen as a representative
group, since comparisons drawn from across the globe and
by differing roles, skills, experience and qualifications would
reduce the scope for meaningful comparisons.
• The emphasis on linking pay with performance shall
continue; hence the use of variable pay in the form of an
Annual Performance Bonus and a long term incentive
award, which will continue to be a significant component
of the Executive Directors’ total remuneration package;
•
In setting base salary the Committee will take into
consideration both the existing salary package of the new
Executive Director and the level of previous experience;
in setting the annual performance bonus, the Committee
may wish to set different performance metrics (to those
applying to the other Executive Directors) in the first year
of appointment;
• The policy shall be set so as to align the interests of
Executive Directors (including their direct reports) with
those of shareholders, hence the use of Long Term
Incentive Plans linked to growth in both total shareholder
return and earnings per share;
• The maximum level of variable remuneration would be in
line with the existing level of variable remuneration granted
to the current Executive Directors;
• The Committee wishes to have the ability to make buy‑out
awards to a new Executive Director to facilitate their
recruitment in accordance with the rules of the UK Listing
Authority. Any such award would only be made in
exceptional circumstances, would not exceed the expected
value being forfeited and would include performance and
timing conditions appropriate to the Company; and
• Relocation costs which are reasonable and appropriate
may be paid.
Committee discretion
The Committee has powers delegated by the Board under
which it operates. In addition, it complies with rules which
have either been approved by shareholders (Long Term
Incentive Plan) or by the Board (Annual Performance Bonus
Plan). These rules provide the Committee with certain
discretions which serve to ensure that the implementation of
the Remuneration Policy is fair both to the individual director
and to shareholders, taking overall performance and position
of the Company into account. The Committee also has
discretions to set components of remuneration within a range
from time to time. The extent of such discretions are set out in
the relevant rules or in the maximum opportunity for
performance metrics sections of the Policy Table.
In addition, the Committee requires discretion to deal with
genuinely exceptional or unforeseen circumstances. This form
of discretion will only be applied in the best interests of the
Company and is intended to provide for changed
circumstances or strategy that has not been provided for in the
Remuneration Policy, when it would be disproportionate to
seek specific approval from a general meeting of shareholders.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 57
Chairman and non‑Executive Directors
Recruitment and term
The Board aims to recruit non‑Executive Directors of a high calibre, with broad and diverse commercial, international
or other relevant experience. Non‑Executive Directors are appointed by the Board on the recommendation of the
Nomination Committee.
Appointments of the non‑Executive Directors are for an initial term of three years, subject to election by shareholders at the
first general meeting following their appointment and subject to annual re‑election thereafter. The terms of engagement are
set out in letters of appointment which can be terminated by either party serving three months’ notice.
Chairman
John Rennocks was appointed as a non‑Executive Director of the Company with effect from 12 July 2002 and as Chairman
with effect from 7 January 2004. John Rennocks was re‑appointed at the Annual General Meeting held on 16 January 2013
and his appointment will continue to be subject to annual re‑election by shareholders at the Annual General Meeting.
Chairman and non‑Executive Directors’ letters of appointment
John Rennocks
Marie‑Louise Clayton
Ian Grice
John Matthews
John Nicholas
Charles Packshaw
Date of original
appointment
Date of
re‑election
16 Jan 13
16 Jan 13
16 Jan 13
16 Jan 13
12 Jul 02
13 Nov 12
24 Jan 07
24 Jul 03
1 Jun 13
1 Jun 13
Expiry of term
12 July 14
13 Nov 15
1 Jun 16
1 Jun 16
John Matthews and Ian Grice retired from the Board on 30 September 2013.
Fees
The non‑Executive Directors are paid a competitive basic annual fee which is approved by the Board on the recommendation
of the Chairman and the Executive Directors. The Chairman’s fee is approved by the Committee, excluding the Chairman.
Additional fees may also be payable for chairing a Committee of the Board or for acting as Senior Independent Director.
The fees are reviewed each year and take account of the fees paid in other companies of a similar size and complexity,
the responsibilities and the required time commitment.
The non‑Executive Directors are not eligible to participate in any of the Company’s share plans, incentive plans or pension
schemes and there is no provision for payment in the event of early termination.
Diploma PLC Annual Report & Accounts 2013Governance 58
Remuneration Committee Report continued
Annual Report on Remuneration
The following section of this Report provides details of the implementation of the Remuneration Policy for all Directors for the
year ended 30 September 2013. All of the information set out in this section of the Report has been audited, unless indicated
otherwise. The Policy as set out on pages 52 to 57 and subject to approval of the shareholders at the AGM on 15 January 2014
will apply from the date of the AGM. The Company’s existing policy applies until the date of the AGM.
Executive Directors
Total remuneration in 2013 and 2012
Salary
Benefits
Pensions
Annual performance bonus
Short term remuneration (cash)
Long term incentive plan – performance element
Long term incentive plan – share appreciation element
Long term incentive plan – dividend equivalent
Long term share price based remuneration (non‑cash)
Total
Bruce Thompson
Iain Henderson
Nigel Lingwood
2013
£000
401
14
80
164
659
720
888
125
1,733
2,392
2012
£000
385
14
77
367
843
345
628
6
979
1,822
2013
£000
250
11
50
108
419
440
542
75
1,057
1,476
2012
£000
240
11
48
186
485
210
382
4
596
1,081
2013
£000
260
12
52
112
436
460
566
75
1,101
1,537
2012
£000
250
12
50
193
505
220
401
4
625
1,130
The aggregate short term remuneration paid to the Executive Directors in the year ended 30 September 2013 was £1.5m
(2012: £1.8m).
Base salary
The average base salary increase for Executive Directors which applied from 1 October 2012 was 4% compared with 7% for the
Group’s senior management cadre. On 12 November 2013, the Committee approved an increase of ca. 4% in base salaries for
the Executive Directors which will apply in respect of the year beginning 1 October 2013.
Benefits
Bruce Thompson
Iain Henderson
Nigel Lingwood
2013
2012
Cash
allowance
in lieu of
a car
£000
13
10
11
Medical
insurance
£000
Total
benefit
£000
1
1
1
14
11
12
Cash
allowance
in lieu of
a car
£000
13
10
11
Medical
insurance
£000
Total
benefit
£000
1
1
1
14
11
12
Pensions
The Executive Directors receive pension contributions from the Company which they may pay into personal savings vehicles or
may take as a separate cash allowance, subject to income tax.
Pension contributions, which are equivalent to 20% (2012: 20%) of base salary were applied as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
2013
2012
Paid as
cash
allowance
£000
Paid as
pension
contribution
£000
Total
cash paid
£000
Paid as
cash
allowance
£000
Paid as
pension
contribution
£000
Total
cash paid
£000
80
50
52
–
–
–
80
50
52
77
–
21
–
48
29
77
48
50
Diploma PLC Annual Report & Accounts 2013Diploma PLC 59
Annual Performance Bonus
The following table summarises the annual performance measures and performance assessment by the Committee in respect
of 2013 with regard to the following performance measures:
(1) Group Financial Objectives – Bruce Thompson 100% of bonus, Iain Henderson and Nigel Lingwood 75% of bonus
Performance measure
Performance in 2013
Adjusted EPS
Adjusted EPS grew by 5.1% which compares with minimum performance of 0%,
on target performance of 8.0% and maximum target of 20.0%.
Overall assessment against targets
Below target, but above minimum.
(2) Individual Objectives – Iain Henderson and Nigel Lingwood 25% of bonus
Overall assessment against targets
Iain Henderson
Achieve Sector financial budgets as measured against Key Performance Indicators. Above target, but below maximum.
Achieve specific development objectives in the businesses and contribute to
strategic development of the Group.
Further strengthen and develop management teams.
Nigel Lingwood
Maintain strong control environment and develop finance capabilities across
the Group.
Above target, but below maximum.
Maximise value to Group from management of tax, pensions and
property exposures.
Manage and develop Investor Relations programme.
Based on the performance set out above, the resulting bonus for each Executive Director relating to 2013 is as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
2013 actual bonus – as a % of 2013 base salary
Target
Maximum
60%
50%
50%
125%
100%
100%
Financial
objectives
Individual
strategic
objectives
41%
26%
26%
17%
17%
Total
bonus
41%
43%
43%
2013 bonus
delivered as
cash
£000
164
108
112
The Annual Performance Bonus for the financial year beginning 1 October 2013 will be in accordance with the policy set out on
page 54. The performance targets set for the Annual Performance Bonus will be disclosed in next year’s Annual Report & Accounts.
Long Term Incentive Plans
Performance conditions
Set out below is a summary of the performance conditions that apply to both the LTIP awards vesting in 2013 and the
outstanding LTIP awards, including those granted in 2012. Performance Share Plan awards at 100% of salary and Share Matching
Plan awards of 100% of salary will be granted in December 2013. The performance conditions applying to the awards will be the
same as those set out below for existing awards.
The first performance condition is that the average annual compound growth in the Company’s adjusted EPS, over the three
consecutive financial years following the financial year immediately prior to the grant, must exceed the annual compound
growth rate in the UK Retail Price Index (“RPI”) by a specified amount over the same period. Currently, the performance
conditions for all outstanding awards are as follows:
Adjusted EPS growth (over 3 years)
RPI + 15% p.a. or above
RPI + 12% p.a.
RPI + 3% p.a.
Below RPI + 3% p.a.
% of awards vesting
PSP
100
100
30
Nil
SMP
100
50
15
Nil
Diploma PLC Annual Report & Accounts 2013Governance 60
Remuneration Committee Report continued
Annual Report on Remuneration
Where the Company’s adjusted EPS performance is between these percentage bands, vesting of the award is on a straight line
basis. For the purposes of this condition, EPS is 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 Committee in previous years.
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 250 Index (excluding Investment Trusts). Currently, the performance conditions are as follows:
Median + 15% p.a. or greater
Median + 12% p.a.
Median
Below Median
% of awards vesting
PSP
100
100
30
Nil
SMP
100
50
15
Nil
The FTSE 250 index was chosen because this is a recognised broad equity market index of which the Company is a member.
Awards vesting in 2013
The PSP and SMP awards made to the Executive Directors on 24 and 27 January 2011 respectively, were subject to independently
operating performance conditions, assessed over a three year period ended 30 September 2013, as set out in the table above.
The outcome of each award is also shown in the table below:
Adjusted Earnings per Share:
PSP
SMP
TSR Growth against FTSE 250 (excl. Inv. Trusts)
PSP
SMP
Base EPS
18.9p
18.9p
EPS at
30 Sept
2013
34.8p
34.8p
TSR at
30 Sept
2013
193%
193%
CAGR
in EPS pa.
RPI
+12%/15%
Maximum
award
22.6%
22.6%
15.8%
18.8%
50%
50%
Median
82%
82%
Median
+12%/15%
Maximum
award
141%
157%
50%
50%
Vested
award
50%
50%
Vested
award
50%
50%
As a result of meeting the above performance conditions, 100% of the shares awarded as nil cost options under the 2011 PSP
and SMP vested to each Executive Director as follows:
Share price
at date of
grant
Pence
Share
price at
30 Sep 2013
Pence
Proportion
of award
vesting
Shares
vested
Number
Performance
element1
£000
Share
appreciation
element2
£000
Bruce Thompson
– PSP
– SMP
292.5p
292.5p
653.0p
653.0p
100%
100%
Iain Henderson
Nigel Lingwood
– PSP
– SMP
292.5p
292.5p
653.0p
653.0p
100%
100%
– PSP
– SMP
292.5p
292.5p
653.0p
653.0p
100%
100%
123,077
123,077
246,154
75,214
75,214
150,428
78,632
78,632
157,264
360
360
720
220
220
440
230
230
460
444
444
888
271
271
542
283
283
566
Total
£000
804
804
1,608
491
491
982
513
513
1,026
1 The performance element represents the face value of awards granted on 24 and 27 January 2011 that vested, having met the performance conditions set out above.
2 The share appreciation element represents the additional value generated through appreciation of the share price from the date the awards were granted to the end of the three year
performance period on 30 September 2013.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 61
Dividend equivalent payments
Dividend equivalent payments were paid in respect of outstanding nil cost options which were exercised during the year as follows:
Brian Thompson
Iain Henderson
Nigel Lingwood
2013
2012
Options
Exercised
Number
539,700
325,777
328,492
Dividend
Equivalent
Payments
£000
125
75
75
Options
Exercised
Number
58,157
36,254
37,764
Dividend
Equivalent
Payments
£000
6
4
4
Long Term Incentive Plan – awards granted in the year
The Executive Directors received grants of Performance Share Plan and Share Matching Plan awards on 19 December 2012
and 20 December 2012 respectively, in the form of nil‑cost options. These awards were based on the mid‑market price of an
ordinary share in the Company at close of business on the day immediately preceding the award. Under the Share Matching
Plan, the Executive Directors are required to pledge shares for a minimum period of three years; these shares are pledged on
an after tax basis and awards are made on a pre‑tax basis.
Under normal circumstances, the options will not become exercisable until the performance conditions are determined after the
end of the three‑year measurement period which begins on the first day of the financial year in which the award is made, and
provided the Director remains in employment. The level of vesting is dependent on the achievement of specified performance
criteria at the end of the three‑year measurement period. The performance conditions for these awards are set out on pages
59 and 60.
Outstanding share based performance awards
Set out below is a summary of the share based awards outstanding at 30 September 2013, including both share awards which
have vested during the year based on performance and share awards which have been granted during the year. All of the awards
set out below were granted based on a face value limit of 100% of base salary. No awards will vest unless the performance
conditions set out on pages 59 and 60 are achieved over a three year measurement period.
Diploma PLC 2011 Performance Share Plan
Market
price
at date
of award
Face value of
the award at
date of grant
£000
End of
performance
period
Vesting date
Shares over
which awards
held at
1 Oct 2012
Shares over
which awards
granted
during
the year
Vested
during
the year
Lapsed
during
the year
Shares over
which awards
held as at
30 Sep 2013
Bruce Thompson
24 January 2011
16 December 2011
19 December 2012
Iain Henderson
24 January 2011
16 December 2011
19 December 2012
Nigel Lingwood
24 January 2011
16 December 2011
19 December 2012
292.5p
332.0p
502.0p
292.5p
332.0p
502.0p
292.5p
332.0p
502.0p
360
385
401
220
240
250
230
250
260
30 Sep 2013
30 Sep 2014
30 Sep 2015
Sept 2013
Sept 2014
Sept 2015
123,077
116,314
–
– (123,077)
–
–
–
79,880
30 Sep 2013
30 Sep 2014
30 Sep 2015
Sept 2013
Sept 2014
Sept 2015
30 Sep 2013
30 Sep 2014
30 Sep 2015
Sept 2013
Sept 2014
Sept 2015
75,214
72,508
–
78,632
75,529
–
–
–
49,801
(75,214)
–
–
–
–
51,793
(78,632)
–
–
–
–
–
–
–
–
–
–
–
–
116,314
79,880
–
72,508
49,801
–
75,529
51,793
Diploma PLC Annual Report & Accounts 2013Governance 62
Remuneration Committee Report continued
Annual Report on Remuneration
Diploma PLC 2011 Share Matching Plan
Face value
of the
award at
date of
grant
£000
Market
price
at date
of award
Pledged
investment
shares
End of
performance
period
Vesting date
Shares over
which
awards
held at
1 Oct 2012
Shares over
which awards
granted
during
the year
Vested
during
the year
Lapsed
during
the year
Shares over
which
awards
held as at
30 Sep 2013
Bruce Thompson
27 January 2011
19 December 2011
20 December 2012
Iain Henderson
27 January 2011
19 December 2011
20 December 2012
Nigel Lingwood
27 January 2011
19 December 2011
20 December 2012
292.5p
332.0p
502.0p
292.5p
332.0p
502.0p
292.5p
332.0p
502.0p
360
385
401
220
240
250
230
250
260
30,154
27,915
19,171
30 Sep 2013
30 Sep 2014
30 Sep 2015
Sept 2013
Sept 2014
Sept 2015
123,077
116,314
–
– (123,077)
–
–
–
79,880
18,427
17,402
11,952
30 Sep 2013
30 Sep 2014
30 Sep 2015
19,265
18,127
12,430
30 Sep 2013
30 Sep 2014
30 Sep 2015
Sept 2013
Sept 2014
Sept 2015
Sept 2013
Sept 2014
Sept 2015
75,214
72,508
–
78,632
75,529
–
–
49,801
(75,214)
–
–
– (78,632)
–
–
–
51,793
–
–
–
–
–
–
–
–
–
–
116,314
79,880
–
72,508
49,801
–
75,529
51,793
The vesting date for the Performance Share Plan and Share Matching Plan awards granted on 24 January and 27 January 2011
respectively, have been modified in accordance with the rules of both Plans so that such awards will vest on the date on which
the performance conditions are determined following the end of the performance period on 30 September 2013, as opposed to
the third anniversary of their date of grant. This change has been made to align the timing of the grant and vesting of awards with
the announcement of Group’s annual results.
Both the Performance Share Plan and Share Matching Plan awards are granted in the form of nil‑cost options (there is a notional
exercise price of £1 per award). To the extent that the awards vest, the options are then exercisable until the tenth anniversary of
the award date. Details of options exercised during the year and outstanding at 30 September 2013 are set out on page 64.
Services from external advisors
Stephenson Harwood LLP provides legal advice to the Remuneration Committee on remuneration matters. During the current
year, this advice largely related to the implications of the Government’s proposals to improve corporate communication on
executive pay, formalising the Annual Performance Bonus Plan and advising on the introduction of malus arrangements in the
incentive plans. Stephenson Harwood LLP does not advise the Group on other issues.
In September 2013 the Committee also appointed New Bridge Street to provide general advice on remuneration policy and also
engages MEIS to provide certain data analysis to the Committee.
The Committee has considered and is satisfied that the advice received from the external advisors it has appointed is objective
and independent.
Advisor
Appointed by
Services provided to the Committee
Other services provided to the Company
Fees
Stephenson Harwood LLP
Committee
Legal advice
New Bridge Street
Committee
General advice on remuneration policy
MEIS
Committee
Data analysis
None
None
None
£17,520
–
£7,000
Shareholder voting at previous Annual General Meeting (unaudited)
The Directors’ Remuneration Report (the “Report”) for the year ended 30 September 2012 was approved by shareholders at the
Annual General Meeting held on 16 January 2013. The Report described remuneration policy, together with details of payments,
awards and changes made during the year. A total of 81% of shareholder votes were voted and the percentage of votes cast in
favour of the resolution to approve the Report was 99.8% and 0.2% of votes were cast against the resolution.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 63
Aligning pay with performance (unaudited)
The graph below shows the Total Shareholder Return (“TSR”) performance of Diploma PLC for the five year period ended
30 September 2013 against the FTSE 250 index.
Growth in the value of a hypothetical £100 holding over five years
600
500
400
300
200
100
+425%
+131%
0
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Diploma (rebased)
FTSE 250 (rebased, ex Investment Trusts)
TSR is defined as the return on investment obtained from holding a company’s shares over a period. It includes dividends paid, the change in the capital value of the shares and
other payments to or by shareholders within the period.
CEO remuneration compared with annual growth in TSR
Annual growth in TSR
Salary, pensions and benefits
Annual performance bonus
Short term remuneration
Long term incentive plans (including dividend equivalent)
CEO total remuneration
Actual bonus as a percentage of the maximum
Actual share award vesting as a percentage of the maximum
2013
+42%
£000
495
164
659
1,733
2,392
33%
100%
2012
+54%
£000
476
367
843
979
1,822
95%
100%
2011
+16%
£000
446
360
806
887
1,693
100%
100%
2010
+71%
£000
428
345
773
507
1,280
100%
100%
2009
+21%
£000
422
102
524
303
827
30%
91%
Set out below is the change over the prior year in base salary, benefits, pension, annual performance bonus and short term
remuneration of the Chief Executive Officer and the Group’s senior management cadre.
Chief Executive Officer
Senior management cadre
Change in
base salary
%
Change in
pension
%
Change in
benefits
%
Change
in annual
performance
bonus
%
Change in
short term
remuneration
%
+4%
+7%
+4%
+2%
0%
0%
–55%
–4%
–22%
+5%
The Committee chose the senior management cadre for pay comparisons with the Chief Executive Officer as it provided the
most closely aligned comparator group whereas comparisons with employees drawn from across the globe and by differing
roles, skills, experience and qualifications would reduce the scope for meaningful comparisons.
Relative importance of Executive Director remuneration (unaudited)
Total employee remuneration
Total dividends paid
FY2013
£m
54.8
17.4
FY2012
£m
48.5
14.2
Change
£m
+6.3
+3.2
Diploma PLC Annual Report & Accounts 2013Governance 64
Remuneration Committee Report continued
Annual Report on Remuneration
Executive Director’s interest in options over shares
In respect of nil cost options granted under the PSP and SMP, the remuneration receivable by an Executive Director is calculated
on the date that the options first vest. The remuneration of the Executive Director is the difference between the amount the
Executive Director is required to pay to exercise the options to acquire the shares and the total value of the shares on the
vesting date.
If the Executive Director chooses not to exercise the nil cost options on the vesting date (he may exercise the options at any time
up to the day preceding the tenth anniversary of the date of grant), any subsequent increase or decrease in the amount realised
will be due to movements in the underlying share price between the initial vesting date and the date of exercise of the option.
This increase or decrease in value is the result of an investment decision by the Executive Director and, as such, is not recorded
as remuneration.
The nil cost options outstanding at 30 September 2013 and the movement during the year are as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
Year of
vesting
Options as at
1 Oct 2012
Exercised
in year
Vested
during
the year
Options
unexercised
as at 30 Sep
20135
Exercise
price
Earliest
normal
exercise
date
Expiry date
2010
2011
2012
2013
2010
2011
2012
2013
2010
2011
2012
2013
116,686
218,266
204,748
–
69,109
132,039
124,629
–
67,399
130,529
130,564
–
(116,686)1
(218,266)1
(204,748)1
–
(69,109)2
(132,039)2
(124,629)2
–
(67,399)3
(130,529)3
(130,564)3
–
–
–
–
246,154
–
–
–
150,428
–
–
–
157,264
–
–
–
246,154
–
–
–
150,428
–
–
–
157,264
£1 Nov 2010 Nov 2017
£1 Nov 2011 Dec 2018
£1 Nov 2012 Dec 2019
Jan 2021
£1 Nov 2013
£1 Nov 2010 Nov 2017
£1 Nov 2011 Dec 2018
£1 Nov 2012 Dec 2019
Jan 2021
£1 Nov 2013
£1 Nov 2010 Nov 2017
£1 Nov 2011 Dec 2018
£1 Nov 2012 Dec 2019
Jan 2021
£1 Nov 2013
1 Bruce Thompson exercised 39,940 options on 19 December 2012, at a market price of 518.0p per share and the total proceeds before tax was £206,889. On 14 May 2013, Bruce
2
Thompson exercised 499,760 options (representing all of the remaining 2004 LTIP shares) at a market price of 572.0p and the total proceeds before tax was £2,858,627.
Iain Henderson exercised 24,900 options on 19 December 2012, at a market price of 518.0p per share and the total proceeds before tax was £128,982. On 14 May 2013, Iain Henderson
exercised 300,877 options (representing all of the remaining 2004 LTIP shares) at a market price of 572.0p and the total proceeds before tax was £1,721,016.
3 Nigel Lingwood exercised 25,896 options on 19 December 2012, at a market price of 518.0p per share and the total proceeds before tax was £134,141. On 14 May 2013, Nigel Lingwood
exercised 302,596 options (representing all of the remaining 2004 LTIP shares) at a market price of 572.0p and the total proceeds before tax was £1,730,849.
4 On 19 December 2012, a total of 47,183 shares which were subject to these exercises were sold to cover the tax liability together with associated dealing costs due on exercise. The
market price at that time was 518p. On 15 May 2013, the aggregate number of shares received by the participants was reduced by 518,519 shares as part of arrangements under which
the Company settled the PAYE liability that arose as a result of the exercise in full by the Executive Directors of options held over shares which had vested in previous years. The market
price at that time was 572.0p.
5 The closing price of an ordinary share on 30 September 2013 was 653.0p (2012: 475.3p).
Executive Directors’ interests in ordinary shares
The Executive Directors’ interests in ordinary shares of the Company at the start and end of the financial year were as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
As at 30 Sep 2013
As at 30 Sep 2012
Ordinary
shares
Options
vested but
unexercised
Interest in shares with
performance measures
PSP
SMP
Ordinary
shares
Options
vested but
unexercised
1,040,000
510,000
250,000
246,154
150,428
157,264
196,194
122,309
127,322
196,194 1,120,569
452,433
122,309
212,392
127,322
539,700
325,777
328,492
Interest in shares with
performance measures
PSP
SMP
239,391
147,722
154,161
239,391
147,722
154,161
Interests in ordinary shares include investment shares pledged under the Company’s 2011 Share Matching Plan and shares held
through personal saving vehicles. As of 15 November 2013 there have been no changes to these interests in ordinary shares of
the Company.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 65
Shareholding guidelines
The Committee has adopted guidelines for Executive Directors, to encourage substantial long term share ownership. These
specify that, over a period of five years from the date of appointment, the Chief Executive Officer should build up and then retain
a holding of shares with a value equivalent to 200% of base salary. The guideline holding for other Executive Directors is 100% of
base salary. The guidelines also require that, in relation to LTIP awards, vested shares (net of tax) should be retained by the
individual until the required shareholding level is reached. As at 15 November 2013, all Executive Directors exceeded the
applicable shareholding guidelines.
Shareholdings at 30 September 2013 against guidelines
%
2000
1500
1000
500
0
1,694%
1,334%
200%
100%
100%
Bruce Thompson
Iain Henderson
Nigel Lingwood
628%
Directors’ shareholding
Committee guideline
Chairman and non‑Executive Directors’ remuneration
Individual remuneration for the year ended 30 September was as follows:
John Rennocks
Marie‑Louise Clayton
Ian Grice
John Matthews
John Nicholas
Charles Packshaw
– appointed on 13 November 2012
– retired 30 September 2013
– retired 30 September 2013
– appointed on 1 June 2013
– appointed on 1 June 2013
Total fees
2013
£000
2012
£000
125
42
43
43
14
14
125
–
43
43
–
–
The non‑Executive Directors received a basic annual fee during the year and there were no additional fees paid in 2013 and 2012
for chairing a Committee of the Board or for acting as Senior Independent Director. The fees for non‑Executive Directors are
reviewed every year by the Board, taking into account their responsibilities and required time commitment. Following a review
undertaken in November 2013, the Board approved an increase in the Chairman’s fees to £130,000 per annum (2013: £125,000)
and in the annual fees paid to non‑Executive Directors to £45,000 (2013: £43,000); both to take effect from 1 October 2013.
Chairman and non‑Executive Directors’ interests in ordinary shares
The non‑Executive Directors’ interests in ordinary shares of the Company at the start and at the end of the financial year were as
follows:
John Rennocks
Marie‑Louise Clayton
Ian Grice
John Matthews
John Nicholas
Charles Packshaw
Interest in ordinary shares
As at
30 Sep 2013
As at
1 Oct 2012
80,000
5,000
20,000
12,420
–
–
103,766
–
20,000
12,420
–
–
Senior Executives below the Board
The policies and practices with regard to the remuneration of senior executives below the Executive Directors are generally
treated consistently with the Executive Directors. These senior executives all have a significant portion of their reward package
linked to performance. Annual bonuses are linked to short term financial targets which use similar performance metrics to the
targets for the Executive Directors. They also participate in cash based long term incentive plans which are focused on the
operating profit growth of their businesses over rolling three year periods. The Committee reviews and monitors the senior
executive remuneration arrangements.
Diploma PLC Annual Report & Accounts 2013Governance 66
Financial Statements
Contents
67 Directors’ Report
70 Consolidated Income Statement
71
Consolidated Statement of Income and Other
Comprehensive Income
71 Consolidated Statement of Changes in Equity
72 Consolidated Statement of Financial Position
73 Consolidated Cash Flow Statement
74 Notes to the Consolidated Financial Statements
90 Group Accounting Policies
98 Parent Company Balance Sheet
99 Notes to the Parent Company Financial Statements
100 Independent Auditor’s Report
102 Principal Subsidiaries
103 Financial Calendar and Shareholder Information
104 Five Year Record
Diploma PLC Annual Report & Accounts 2013Diploma PLC 67
Directors’ Report
This section contains information which the Directors are required by law and regulation to include within the Annual
Report & Accounts.
Shareholders
Incorporation and principal activity
Diploma PLC is domiciled in England and registered in England
& Wales under Company Number 3899848. At the date of this
Report there were 113,239,555 ordinary shares of 5p each in
issue, all of which are fully paid up and quoted on the London
Stock Exchange.
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 on pages 4 to 37;
the Strategic Report on pages 1 to 37 incorporates the
requirements of the Companies Act 2006 (the “Act”).
Annual General Meeting
The Annual General Meeting will be held at midday on
Wednesday, 15 January 2014 in the Brewers Hall,
Aldermanbury Square, London EC2V 7HR. A Circular setting
out the proposed resolutions, including a resolution to
re‑appoint Deloitte LLP as the auditor, will be set out in the
Notice of Annual General Meeting which is a separate
document which will be sent to all shareholders and published
on the Group’s website.
Substantial shareholdings
At 15 November 2013 the Company had been notified of the
following interests amounting to 3% or more of the voting
rights in its ordinary share capital:
The Company is not aware of any agreements between
shareholders that may result in restrictions on the transfers
of securities and/or voting rights, other than those relating to
the Company’s Share Matching Plan, described further below.
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.
In accordance with the Listing Rules of the Financial Conduct
Authority, all employees are required to seek approval of the
Company before dealing in its shares.
Restrictions on transfer of shares
The Directors may refuse to register a transfer of a certificated
share that is not fully paid, provided that the refusal does not
prevent dealings in shares in the Company from taking place
on an open and proper basis, or where the Company has
lien over that share. The Directors may also refuse to register
a transfer of a certificated share, unless the instrument of
transfer is: (i) lodged, duly stamped (if necessary), at the
registered office of the Company or any other place as the
Board may decide accompanied by the certificate for the
share(s) to be transferred and/or such other evidence as the
Directors may reasonably require to show the right of the
transferor to make the transfer: (ii) in respect of only one class
of shares; (iii) in favour of a person who is not a minor, infant,
bankrupt or a person of unsound mind; or (iv) in favour of not
more than four persons jointly.
Mondrian Investment Partners Ltd
F&C Asset Management plc
Standard Life Investments Ltd
Threadneedle Asset Management Ltd
Fidelity Management & Research Co
Power Financial Corporation
Baillie Gifford & Co.
Royal London Asset Management Ltd
Blackrock Inc.
Schroders PLC
Legal & General Investment Management Limited
Percentage
of ordinary
share capital
8.49%
5.04%
4.41%
4.06%
4.00%
3.95%
3.95%
3.47%
3.24%
3.21%
3.06%
As far as the Directors are aware there were no other interests
above 3% of the issued ordinary share capital.
Share capital
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 Group Company Secretary and are
available on the Company’s website.
Transfers of certificated shares must be carried out using
CREST and the Directors can refuse to register a transfer of an
uncertified share in accordance with the regulations governing
the operation of CREST.
Participants in the Company’s Share Matching Plan pledge
investment shares to a nominee for a period of three years,
during which period these shares cannot be transferred. There
are no other restrictions on the transfer of ordinary shares in
the Company except certain restrictions which may from time
to time be imposed by laws and regulations (for example
insider trading laws); or where a shareholder with at least a
0.25% interest in the Company’s certified shares has been
served with a disclosure notice and has failed to provide the
Company with information concerning interests in those
shares. Other than shares held by participants of the
Company’s Share Matching Plan, the Directors are not aware
of any agreements between holders of the Company’s shares
that may result in restrictions on the transfer of securities or on
voting rights.
Shares held by the Diploma Employee Benefit Trust
While 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. The Trustees of the Diploma Employee Benefit Trust
also waive dividends on all shares held for the purposes of the
Company’s long term incentive arrangements.
Diploma PLC Annual Report & Accounts 2013Financial Statements 68
Directors’ Report continued
Share allotment
A general allotment power and a limited power to allot shares
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 16 January 2013. In the year ended 30
September 2013, the Company has not allotted any shares.
These powers will expire at the conclusion of the 2014 Annual
General Meeting and resolutions to renew the Directors’
powers are therefore included within the Notice of the Annual
General Meeting 2014.
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 16 January 2013. In the year
to 30 September 2013 the Company has not acquired any of
its own shares. This authority will expire at the conclusion of
the 2014 Annual General Meeting and a resolution to renew
the authority is therefore included within the Notice of the
Annual General Meeting in 2014.
Greenhouse Gas Emissions
During the year, the UK Government introduced a requirement
that UK listed companies should report their global levels of
Greenhouse Gas (“GHG”) emissions in their Annual Report
and Accounts. The mandatory requirement is for disclosure
of scope 1 and 2 only (direct emissions, e.g. heating, cooling,
transport fuel and indirect emissions, e.g. from purchased
electricity) and only to the extent that such emissions are the
responsibility of the Company.
The Company has not in the past collected the data necessary
to meet these GHG emissions reporting requirements and
therefore is not able to comply with these new reporting
requirements at 30 September 2013. A task force has been
set up to establish the scope of information required and the
processes required to collect the relevant data. The Company
should therefore be able to meet these disclosure
requirements when it reports to shareholders for the year
ending 30 September 2014.
Financial
Results and dividends
The profit for the financial year attributable to shareholders
was £34.5m (2012: £31.3m). The Directors recommend a final
dividend of 10.7p per ordinary share (2012: 10.2p), to be paid, if
approved, on 22 January 2014. This, together with the interim
dividend of 5.0p per ordinary share paid on 19 June 2013
amounts to 15.7p for the year (2012: 14.4p).
The results are shown more fully in the consolidated financial
statements on pages 70 to 97 and summarised in the Finance
Review on pages 16 to 18.
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 Strategic Report on pages 1 to 37. The financial
position of the Group, its cash flows, liquidity position and
borrowing facilities are described in the Finance Review on
pages 16 to 18. In addition, pages 82 to 84 of the Annual
Report & Accounts include 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.
The Group also has a committed revolving bank facility of
£20m which expires on 30 June 2014. The Directors are
confident that this facility will be successfully renegotiated
prior to expiry on 30 June 2014. At 30 September 2013, the
Group had cash funds of £19.3m and had no borrowings.
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 & Accounts.
Statement of disclosure
Each of the Directors has reviewed this Annual Report &
Accounts and confirmed that so far as he is aware, there is no
relevant audit information of which the Company’s auditor is
unaware and that he has taken all the 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
auditor is aware of that information.
Statement of Directors’ responsibilities for preparing the
financial statements
The Directors are responsible for preparing the Annual Report
& Accounts, 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).
Diploma PLC Annual Report & Accounts 2013Diploma PLC 69
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 Parent Company financial
statements, the Directors are required to:
• Select suitable accounting policies and then apply
them consistently;
• Make judgements and estimates that are reasonable
and prudent;
• 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.
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.
Directors’ Responsibility Statement
The Directors confirm that to the best of their knowledge:
• 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;
• The Annual Report & Accounts includes a fair review of
the development and performance of the business and
the position of the Group and the undertakings
included in the consolidation taken as a whole,
together with a description of the principal risks and
uncertainties faced by the Group; and
• The Annual Report & Accounts, taken as a whole, is fair,
balanced and understandable and provides the
information necessary for shareholders to assess the
Company’s performance, business model and strategy.
This responsibility statement was approved by the Board
of Directors on 18 November 2013 and is signed on its
behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
Registered office:
12 Charterhouse Square
London
EC1M 6AX
Diploma PLC Annual Report & Accounts 2013Financial Statements 70
Consolidated Income Statement
For the year ended 30 September 2013
Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Operating profit
Financial expense, net
Profit before tax
Tax expense
Profit for the year
Attributable to:
Shareholders of the Company
Minority interests
Earnings per share
Basic and diluted earnings
Alternative Performance Measures (note 2)
Operating profit
Add: Acquisition related charges
Adjusted operating profit
Deduct: Net interest expense
Adjusted profit before tax
Adjusted earnings per share
The notes on pages 74 to 97 form part of these financial statements.
Note
3, 4
3
6
7
21
2013
£m
285.5
(178.6)
106.9
(6.4)
(51.8)
48.7
(0.2)
48.5
(13.7)
34.8
34.5
0.3
34.8
2012
£m
260.2
(161.0)
99.2
(5.4)
(47.4)
46.4
(0.4)
46.0
(14.4)
31.6
31.3
0.3
31.6
9
30.7p
27.9p
Note
11
3, 4
6
2013
£m
48.7
5.6
54.3
–
54.3
2012
£m
46.4
6.4
52.8
(0.2)
52.6
9
34.8p
33.1p
Diploma PLC Annual Report & Accounts 2013Diploma PLC Consolidated Statement of Income and Other Comprehensive Income
For the year ended 30 September 2013
71
Profit for the year
Items that will not be reclassified to Consolidated Income Statement
Actuarial gains/(losses) on defined benefit pension schemes
Deferred tax on items that will not be reclassified
Items that may be reclassified to Consolidated Income Statement
Exchange rate adjustments on foreign currency net investments
Losses on fair value of cash flow hedges
Net changes to fair value of cash flow hedges transferred to Consolidated Income Statement
Deferred tax on items that may be reclassified
Total comprehensive income for the year
Attributable to:
Shareholders of the Company
Minority interests
Note
25
7
19
19
7
2013
£m
34.8
0.2
–
0.2
(2.5)
–
(0.2)
0.1
(2.6)
2012
£m
31.6
(0.4)
0.1
(0.3)
(2.1)
(0.4)
(0.5)
0.2
(2.8)
32.4
28.5
32.1
0.3
32.4
28.2
0.3
28.5
Consolidated Statement of Changes in Equity
For the year ended 30 September 2013
At 1 October 2011
Total comprehensive income
Share-based payments
Acquisition of subsidiary
Tax on items recognised directly in equity
Recognition of minority interest put options
Dividends
At 30 September 2012
Total comprehensive income
Share-based payments
Minority interests acquired
Tax on items recognised directly in equity
Purchase of own shares
Dividends
At 30 September 2013
Note
5
21
7
20
8, 21
5
21
7
8, 21
Share
capital
£m
Translation
reserve
£m
Hedging
reserve
£m
Retained
earnings
£m
Shareholders’
equity
£m
Minority
interests
£m
5.7
–
–
–
–
–
–
5.7
–
–
–
–
–
–
5.7
20.8
(2.1)
–
–
–
–
–
18.7
(2.5)
–
–
–
–
–
16.2
1.1
(0.9)
–
–
–
–
–
0.2
(0.2)
–
–
–
–
–
–
123.8
31.2
0.8
–
0.6
(1.0)
(14.2)
141.2
34.8
0.5
–
0.6
(4.7)
(17.4)
151.4
28.2
0.8
–
0.6
(1.0)
(14.2)
165.8
32.1
0.5
–
0.6
(4.7)
(17.4)
155.0
176.9
0.5
0.3
–
0.7
–
–
(0.1)
1.4
0.3
–
(0.1)
–
–
(0.2)
1.4
Total
equity
£m
151.9
28.5
0.8
0.7
0.6
(1.0)
(14.3)
167.2
32.4
0.5
(0.1)
0.6
(4.7)
(17.6)
178.3
The notes on pages 74 to 97 form part of these financial statements.
Diploma PLC Annual Report & Accounts 2013Financial Statements 72
Consolidated Statement of Financial Position
As at 30 September 2013
Non-current assets
Goodwill
Acquisition intangible assets
Other intangible assets
Investment
Property, plant and equipment
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Current liabilities
Trade and other payables
Current tax liabilities
Other liabilities
Borrowings
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
10
11
11
12
13
14
15
16
18
17
20
24
25
20
14
21
2013
£m
78.5
26.7
0.8
0.7
13.9
2.1
2012
£m
79.8
32.2
0.7
0.7
12.3
2.9
122.7
128.6
46.7
42.8
19.3
108.8
(40.0)
(1.7)
(2.0)
–
(43.7)
65.1
187.8
(4.7)
(1.0)
(3.8)
45.8
40.6
11.4
97.8
(38.5)
(3.5)
(2.8)
(3.5)
(48.3)
49.5
178.1
(5.4)
(1.0)
(4.5)
178.3
167.2
5.7
16.2
–
155.0
176.9
1.4
178.3
5.7
18.7
0.2
141.2
165.8
1.4
167.2
The consolidated financial statements were approved by the Board of Directors on 18 November 2013 and signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
The notes on pages 74 to 97 form part of these financial statements.
Diploma PLC Annual Report & Accounts 2013Diploma PLC Consolidated Cash Flow Statement
For the year ended 30 September 2013
73
Cash flow from operating activities
Cash flow from operations
Interest paid, net
Tax paid
Net cash from operating activities
Cash flow from investing activities
Acquisition of businesses (net of cash acquired)
Acquisition of investment
Deferred consideration paid
Purchase of property, plant and equipment
Purchase of other intangible assets
Net cash used in investing activities
Cash flow from financing activities
Acquisition of minority interests
Dividends paid to shareholders
Dividends paid to minority interests
Purchase of own shares
Notional purchase of own shares on exercise of share options
Repayment of borrowings
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of year
Alternative Performance Measures (note 2)
Free cash flow
Net increase/(decrease) in cash and cash equivalents
Add: Dividends paid to shareholders
Dividends paid to minority interests
Acquisition of businesses/minority interests/investment
Deferred consideration paid
Repayment of borrowings
Free cash flow
Net funds
Cash and cash equivalents
Borrowings
Net funds
The notes on pages 74 to 97 form part of these financial statements.
Note
23
22
12
20
13
11
21
8
21
24
18
2013
£m
55.9
(0.2)
(14.8)
40.9
(1.2)
–
(0.6)
(4.1)
(0.5)
(6.4)
(0.4)
(17.4)
(0.2)
(1.7)
(3.0)
(3.5)
(26.2)
8.3
11.4
(0.4)
19.3
2013
£m
8.3
17.4
0.2
1.6
0.6
3.5
31.6
19.3
–
19.3
2012
£m
50.2
(0.3)
(13.7)
36.2
(20.8)
(0.7)
(0.8)
(3.3)
(0.2)
(25.8)
–
(14.2)
(0.1)
–
–
(2.2)
(16.5)
(6.1)
17.8
(0.3)
11.4
2012
£m
(6.1)
14.2
0.1
21.5
0.8
2.2
32.7
11.4
(3.5)
7.9
Diploma PLC Annual Report & Accounts 2013Financial Statements
74
Notes to the Consolidated Financial Statements
For the year ended 30 September 2013
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 18 November
2013. 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 & Accounts on pages 98 and 99.
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 & Accounts.
2.1 Adjusted operating profit
At the foot of the Consolidated Income Statement, “adjusted operating profit” is defined as operating profit before amortisation and
impairment of acquisition intangible assets, acquisition expenses 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 businesses or property, fair
value remeasurements under 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 before tax, less income tax costs, but excluding the tax impact
on the items included in the calculation of adjusted profit and the tax effects of goodwill in overseas jurisdictions, less profit attributable
to minority interests, divided by the weighted average number of ordinary shares in issue during the year. The Directors believe that
adjusted earnings per share provides an important measure of the underlying earning capacity of the Group.
2.4 Free cash flow
At the foot of the Consolidated Cash Flow Statement, “free cash flow” is reported, being defined as net cash flow from operating
activities, after net capital expenditure on fixed assets and including proceeds received from business disposals, but before expenditure
on business combinations/investments and dividends paid to both minority shareholders and the Company’s shareholders. The
Directors believe that free cash flow gives an important measure of the cash flow of the Group, available for future investment.
2.5 Trading capital employed
In the segment analysis in note 3, “trading capital employed” is reported, being defined as net assets less cash and cash equivalents and
after adding back borrowings, retirement benefit obligations, deferred tax, amounts in respect of future purchases of minority interests
and adjusting for goodwill in respect of the recognition of deferred tax on acquisition intangible assets. Return on trading capital
employed is defined as the adjusted operating profit, divided by trading capital employed plus all historical goodwill and adjusted for
the timing effect of major acquisitions and disposals. Return on trading capital employed at the sector level does not include historical
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 Strategic Report on pages 1 to 37. 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.
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 borrowings, 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.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 3. Business Segment Analysis continued
Life Sciences
Seals
Controls
Total
Revenue – existing businesses
– acquisition
Revenue
Adjusted operating profit – existing businesses
– acquisition
Adjusted operating profit
Acquisition related charges (note 11)
Operating profit
2013
£m
93.2
–
93.2
20.9
–
20.9
(2.8)
18.1
2012
£m
78.4
–
78.4
18.0
–
18.0
(2.7)
15.3
2013
£m
106.1
–
106.1
19.5
–
19.5
(2.0)
17.5
2012
£m
99.9
–
99.9
20.4
–
20.4
(2.5)
17.9
2013
£m
84.9
1.3
86.2
13.5
0.4
13.9
(0.8)
13.1
2012
£m
81.9
–
81.9
14.4
–
14.4
(1.2)
13.2
2013
£m
284.2
1.3
285.5
53.9
0.4
54.3
(5.6)
48.7
Life Sciences
Seals
Controls
Total
Operating assets
Investment
Goodwill
Acquisition intangible assets
Unallocated assets:
– Deferred tax assets
– Cash and cash equivalents
– Corporate assets
Total assets
Operating liabilities
Unallocated liabilities:
– Deferred tax liabilities
– Retirement benefit obligations
– Future purchases of minority interests
– Borrowings
– Corporate liabilities
Total liabilities
Net assets
Other segment information
Capital expenditure
Depreciation and amortisation
2013
£m
29.0
–
47.3
12.9
89.2
2012
£m
25.9
–
47.6
16.4
89.9
2013
£m
38.4
0.7
16.6
11.3
67.0
2012
£m
37.9
0.7
16.5
13.2
68.3
2013
£m
33.5
–
14.6
2.5
50.6
2012
£m
32.1
–
15.7
2.6
50.4
(14.7)
(14.0)
(11.6)
(10.3)
(13.7)
(13.5)
2.8
1.4
2.3
1.2
0.9
0.7
0.6
0.6
0.9
0.4
0.6
0.3
2013
£m
100.9
0.7
78.5
26.7
206.8
2.1
19.3
3.3
231.5
(40.0)
(3.8)
(4.7)
(2.8)
–
(1.9)
(53.2)
178.3
4.6
2.5
75
2012
£m
260.2
–
260.2
52.8
–
52.8
(6.4)
46.4
2012
£m
95.9
0.7
79.8
32.2
208.6
2.9
11.4
3.5
226.4
(37.8)
(4.5)
(5.4)
(3.2)
(3.5)
(4.8)
(59.2)
167.2
3.5
2.1
In 2013 a small business unit within the Controls segment with revenues below £1.0m was transferred to the Life Sciences segment as
part of an operational reorganisation. The comparatives have not been restated as these amounts are not material to the consolidated
financial statements.
Alternative Performance Measures (note 2)
Life Sciences
Seals
Controls
Total
Net assets
Add/(less):
– Deferred tax, net
– Retirement benefit obligations
– Future purchases of minority interests
– Cash and cash equivalents
– Borrowings
– Adjustment to goodwill
Group trading capital employed
Corporate (assets)/liabilities, net
2013
£m
2012
£m
2013
£m
2012
£m
2013
£m
2012
£m
(7.3)
(7.7)
(1.3)
(1.2)
(1.4)
(1.2)
Segment trading capital employed
67.2
68.2
54.1
56.8
35.5
35.7
2013
£m
178.3
1.7
4.7
2.8
(19.3)
–
(10.0)
158.2
(1.4)
156.8
2012
£m
167.2
1.6
5.4
3.2
(11.4)
3.5
(10.1)
159.4
1.3
160.7
Diploma PLC Annual Report & Accounts 2013Financial Statements 76
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2013
4. Geographic Segment Analysis by Origin
United Kingdom
Rest of Europe
North America
Revenue
Adjusted operating profit
Non-current assets1
Trading capital employed
Capital expenditure
2013
£m
74.8
40.1
170.6
285.5
2012
£m
69.8
37.6
152.8
260.2
2013
£m
12.0
6.3
36.0
54.3
2012
£m
12.5
5.3
35.0
52.8
2013
£m
21.3
12.9
85.7
2012
£m
21.6
11.6
91.8
119.9
125.0
2013
£m
32.5
20.2
105.5
158.2
2012
£m
27.5
19.3
112.6
159.4
2013
£m
1.0
0.4
3.2
4.6
2012
£m
0.6
0.2
2.7
3.5
1 Non-current assets exclude the investment and deferred tax assets.
5. Group Employee Costs
The key management of the Group are the Executive and non-Executive Directors who have authority and responsibility for planning
and controlling all significant activities of the Group. The Directors’ emoluments and their interests in shares of the Company are given
in the Remuneration Committee Report on pages 50 to 65. The amount charged against operating profit in the year in respect of
Director short term remuneration was in aggregate £1.8m (2012: £2.0m). The charge for share-based payments of £0.5m (2012: £0.8m)
relate to the Group’s share schemes for the Executive Directors, described in the Remuneration Committee 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 (2012: £0.3m).
Group staff costs, including Directors’ emoluments, were 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
– notional income from defined benefit pension scheme (note 25)
Interest expense and similar charges
– bank commitment fees
– interest payable on bank and other borrowings
Net interest expense
– fair value remeasurement of put options (note 20)
Financial expense, net
2013
£m
47.5
5.3
1.5
0.5
54.8
2012
£m
42.8
3.8
1.1
0.8
48.5
2013
Number
2012
Number
319
513
300
13
1,145
1,159
2013
£m
0.1
0.2
0.3
(0.1)
(0.2)
(0.3)
–
(0.2)
(0.2)
270
489
292
11
1,062
1,117
2012
£m
0.1
0.1
0.2
(0.1)
(0.3)
(0.4)
(0.2)
(0.2)
(0.4)
The fair value remeasurement of £0.2m (2012: £0.2m) includes £0.3m (2012: £0.1m) which relates to the unwinding of the discount on
the liability for future purchases of minority interests.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 7. Tax Expense
Current tax
The tax charge is based on the profit for the year and comprises:
UK corporation tax
Overseas tax
Adjustments in respect of prior year:
Overseas tax
Total current tax
Deferred tax
The net 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
77
2013
£m
2012
£m
2.7
12.1
14.8
(0.3)
14.5
0.1
(0.9)
(0.8)
13.7
3.3
11.8
15.1
(0.1)
15.0
(0.1)
(0.5)
(0.6)
14.4
In addition to the above credit for deferred tax included in the Consolidated Income Statement, deferred tax relating to the retirement
benefit scheme and cash flow hedges of £0.1m (2012: £0.3m) was credited directly to the Consolidated Statement of Income and
Other Comprehensive Income. A further £0.6m (2012: £0.6m) was credited to equity which relates to share-based payments made
during the year. This represented a current tax credit of £1.3m (2012: £nil) less a deferred tax debit of £0.7m (2012: £0.6m credit).
Factors affecting the tax charge for the year:
The difference between the total tax charge calculated by applying the standard rate of UK corporation tax to the profit before tax and
the amounts set out above is as follows:
2013
£m
2012
£m
Profit before tax
Tax on profit at UK effective corporation tax rate of 23.5% (2012: 25%)
Effects of:
change in UK tax rates
higher tax rates on overseas earnings
adjustments to tax charge in respect of previous years
other permanent differences
Total tax on profit for the year
48.5
11.4
0.2
2.5
(0.3)
(0.1)
13.7
46.0
11.5
0.2
2.7
(0.1)
0.1
14.4
The Group earns its profits in the UK and overseas. The UK corporation tax rate was reduced from 24% to 23% on 31 March 2013;
however as the Group prepares its consolidated financial statements for the year to 30 September, the effective tax rate for UK
corporation tax in respect of the year ended 30 September 2013 was 23.5% (2012: 25%) and this rate has been used for tax on profit in
the above reconciliation. The Group’s net overseas tax rate is higher than that in the UK, primarily because the profits earned in the US
are taxed at rates of up to 38%.
Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and a further reduction to 20% (effective from
1 April 2015) were substantively enacted on 2 July 2013.
These reductions in the UK corporation tax rate are likely to lead to a further reduction in the future UK current tax charge. The UK
deferred tax assets and liabilities at 30 September 2013 have been calculated based on the rate of 20% substantively enacted at
30 September 2013.
8. Dividends
Interim dividend, paid in June
Final dividend of the prior year, paid in January
2013
pence
per share
2012
pence
per share
5.0
10.2
15.2
4.2
8.5
12.7
2013
£m
5.6
11.8
17.4
2012
£m
4.7
9.5
14.2
The Directors have proposed a final dividend in respect of the current year of 10.7p per share (2012: 10.2p) which will be paid on
22 January 2014, subject to approval of shareholders at the Annual General Meeting on 15 January 2014. The total dividend for
the current year, subject to approval of the final dividend, will be 15.7p per share (2012: 14.4p).
The Diploma Employee Benefit Trust holds 586,887 (2012: 962,337) shares, which are not eligible for dividends.
Diploma PLC Annual Report & Accounts 2013Financial Statements 78
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2013
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 112,454,287 (2012: 112,373,327) and the profit for the year attributable to shareholders of £34.5m (2012: £31.3m).
There are 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
Tax expense
Minority interests
Earnings for the year attributable to shareholders of the Company
Acquisition related charges
Fair value remeasurement of put options
Tax effects on goodwill, acquisition intangible assets and fair value remeasurements
Adjusted earnings
10. Goodwill
At 1 October 2011
Acquisitions
Exchange adjustments
At 30 September 2012
Transfers
Acquisitions (note 22)
Exchange adjustments
At 30 September 2013
2013
pence
per share
2012
pence
per share
30.7
4.9
0.2
(1.0)
34.8
Life Sciences
£m
45.3
1.5
0.8
47.6
1.9
–
(2.2)
47.3
27.9
5.6
0.2
(0.6)
33.1
Seals
£m
14.2
3.0
(0.7)
16.5
–
–
0.1
16.6
2013
£m
48.5
(13.7)
(0.3)
34.5
5.6
0.2
(1.1)
39.2
Controls
£m
14.9
1.1
(0.3)
15.7
(1.9)
0.5
0.3
14.6
2012
£m
46.0
(14.4)
(0.3)
31.3
6.4
0.2
(0.7)
37.2
Total
£m
74.4
5.6
(0.2)
79.8
–
0.5
(1.8)
78.5
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 using discounted cash flow forecasts. The cash flow forecasts are based on a combination of annual
budgets prepared by each business and on the Group’s five year strategic plan.
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 operates, unless there are particular factors relevant to a business, such
as start-ups. The annual growth rates used in the cash flow forecasts in respect of the next five years vary between 2% and 5% in each
of the Sectors; these annual growth rates then trend down towards 2% over the longer term.
The cash flow forecasts are discounted to determine a current valuation using a pre-tax discount rate of ca. 13% (2012: 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 in 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 Life Sciences
or Controls Sectors. However, in the Seals Sector a reduction of 2% in revenue growth in the medium term in one of the businesses
in this Sector would result in an impairment charge of up to £0.8m. Before any sensitivities and based on the original assumptions in
respect of this business in the Seals Sector, the headroom in the cashflow valuation was £1.0m. In the prior year, the sensitivity analysis
indicated that a reduction of 2% in revenue growth in the medium term in a business in the Controls Sector would have resulted in an
impairment of £0.3m. This business is no longer at risk of impairment in 2013.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 11. Acquisition and Other Intangible Assets
Cost
At 1 October 2011
Additions
Acquisitions
Disposals
Exchange adjustments
At 30 September 2012
Additions
Acquisitions (note 22)
Disposals
Exchange adjustments
At 30 September 2013
Amortisation
At 1 October 2011
Charge for the year
Disposals
Exchange adjustments
At 30 September 2012
Charge for the year
Disposals
Exchange adjustments
At 30 September 2013
Net book value
At 30 September 2013
At 30 September 2012
79
Customer
relationships
£m
Supplier
relationships
£m
Trade
names and
databases
£m
Total
acquisition
intangible
assets
£m
Other
intangible
assets
£m
23.8
–
10.4
–
(0.6)
33.6
–
0.6
–
(0.4)
33.8
8.8
3.5
–
(0.2)
12.1
3.3
–
(0.2)
15.2
18.6
21.5
16.5
–
0.6
–
0.2
17.3
–
–
–
(0.6)
16.7
5.6
2.0
–
–
7.6
2.0
–
(0.2)
9.4
7.3
9.7
2.6
–
–
–
(0.1)
2.5
–
–
–
–
2.5
1.2
0.3
–
–
1.5
0.3
–
(0.1)
1.7
0.8
1.0
42.9
–
11.0
–
(0.5)
53.4
–
0.6
–
(1.0)
53.0
15.6
5.8
–
(0.2)
21.2
5.6
–
(0.5)
26.3
26.7
32.2
2.6
0.2
–
(0.1)
–
2.7
0.5
–
(0.3)
–
2.9
1.9
0.2
(0.1)
–
2.0
0.3
(0.2)
–
2.1
0.8
0.7
Acquisition related charges are £5.6m (2012: £6.4m) and comprise £5.6m (2012: £5.8m) of amortisation of acquisition intangible assets
and negligible acquisition expenses (2012: £0.6m).
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 fair value of customer relationships was assessed using a discounted cash flow model; the databases have been valued using a
replacement cost model; the amount in respect of supplier relationships and trade names have been valued on a relief from royalty method.
Other intangible assets comprise computer software that is separately identifiable from plant and equipment and includes software
licences.
12. Investment
Investment
2013
£m
0.7
2012
£m
0.7
The Group holds a 10% interest in the share capital of Kunshan J Royal Precision Products Inc. (“JRPP”), a supplier to J Royal. The Group
has no involvement in the day-to-day operations or management of JRPP. At 30 September 2013, there was no material difference
between the book value of this investment and its fair value.
Diploma PLC Annual Report & Accounts 2013Financial Statements 80
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2013
13. Property, Plant and Equipment
Cost
At 1 October 2011
Additions
Acquisitions
Disposals
At 30 September 2012
Additions
Disposals
Exchange adjustments
At 30 September 2013
Depreciation
At 1 October 2011
Charge for the year
Disposals
At 30 September 2012
Charge for the year
Disposals
Exchange adjustments
At 30 September 2013
Net book value
At 30 September 2013
At 30 September 2012
Freehold
properties
£m
Leasehold
properties
£m
Plant &
equipment
£m
8.8
–
–
–
8.8
–
–
–
8.8
2.2
0.1
–
2.3
0.1
–
–
2.4
6.4
6.5
1.1
0.8
0.1
–
2.0
0.9
–
–
2.9
0.7
0.1
–
0.8
0.2
–
–
1.0
1.9
1.2
17.6
2.5
0.2
(4.0)
16.3
3.2
(1.0)
(0.3)
18.2
13.9
1.7
(3.9)
11.7
1.9
(0.9)
(0.1)
12.6
5.6
4.6
Total
£m
27.5
3.3
0.3
(4.0)
27.1
4.1
(1.0)
(0.3)
29.9
16.8
1.9
(3.9)
14.8
2.2
(0.9)
(0.1)
16.0
13.9
12.3
Land included within freehold properties above, but which is not depreciated, is £2.0m (2012: £2.0m). Capital commitments contracted,
but not provided, were £0.1m (2012: £1.2m).
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 unchanged from 30 September 2012 at £0.5m, with a book value
of £nil.
14. Deferred Tax
The movement on deferred tax is as follows:
At 1 October
Credit for the year (note 7)
Acquisitions (note 22)
Accounted for in equity (note 7)
Accounted for in Other Comprehensive Income
Exchange adjustments
At 30 September
2013
£m
(1.6)
0.8
(0.2)
(0.7)
0.1
(0.1)
(1.7)
2012
£m
(2.0)
0.6
(0.9)
0.6
0.3
(0.2)
(1.6)
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 on a net basis.
Property, plant and equipment
Goodwill and intangible assets
Retirement benefit obligations
Inventories
Share-based payments
Trading losses
Other temporary differences
Set off of deferred tax
Assets
Liabilities
Net
2013
£m
0.4
–
0.9
1.1
0.8
0.4
0.8
4.4
(2.3)
2.1
2012
£m
0.4
–
1.2
1.0
1.5
0.4
0.9
5.4
(2.5)
2.9
2013
£m
(0.8)
(5.2)
–
–
–
–
(0.1)
(6.1)
2.3
(3.8)
2012
£m
(0.7)
(6.2)
–
–
–
–
(0.1)
(7.0)
2.5
(4.5)
2013
£m
(0.4)
(5.2)
0.9
1.1
0.8
0.4
0.7
(1.7)
–
(1.7)
2012
£m
(0.3)
(6.2)
1.2
1.0
1.5
0.4
0.8
(1.6)
–
(1.6)
Diploma PLC Annual Report & Accounts 2013Diploma PLC 81
14. Deferred Tax continued
No deferred tax has been provided on unremitted earnings of overseas Group companies as the Group controls the dividend policies
of its subsidiaries. Unremitted earnings may be liable to additional overseas withholding tax (after allowing for double taxation relief)
if they were to be distributed as dividends. The aggregate amount for which deferred tax has not been recognised in respect of
unremitted earnings was £2.2m (2012: £1.8m).
15. Inventories
Finished goods and goods held for resale
2013
£m
46.7
2012
£m
45.8
Inventories are stated net of impairment provisions of £5.0m (2012: £4.3m). During the year £1.2m (2012: £1.2m) was recognised as a
charge against operating profit, comprising the write-down of inventory to net realisable value.
16. Trade and Other Receivables
Trade receivables
Less: impairment provision
Other receivables
Prepayments and accrued income
The maximum exposure to credit risk for trade receivables at 30 September, 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 classified 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
Credited against profit, net
Utilised by write off
At 30 September
2013
£m
39.8
(0.3)
39.5
1.5
1.8
42.8
2013
£m
13.3
9.6
9.5
4.7
2.7
39.8
2013
£m
33.1
6.4
0.3
39.8
2013
£m
5.3
0.9
0.2
–
6.4
2013
£m
0.4
–
(0.1)
0.3
2012
£m
37.4
(0.4)
37.0
1.9
1.7
40.6
2012
£m
12.9
9.1
8.9
4.2
2.3
37.4
2012
£m
30.3
6.7
0.4
37.4
2012
£m
5.4
0.8
0.4
0.1
6.7
2012
£m
0.5
(0.1)
–
0.4
Diploma PLC Annual Report & Accounts 2013Financial Statements
82
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2013
17. Trade and Other Payables
Trade payables
Other payables
Other taxes and social security
Accruals and deferred income
The maximum exposure to foreign currency risk for trade payables at 30 September, by currency was:
Sterling
US dollars
Canadian dollars
Euro
Other
2013
£m
23.2
1.5
2.5
12.8
40.0
2013
£m
6.2
10.9
0.8
4.5
0.8
23.2
18. Cash and Cash Equivalents
Cash at bank
Short term
deposits
Sterling
£m
3.9
2.5
6.4
US$
£m
3.7
1.8
5.5
C$
£m
1.6
3.2
4.8
Euro
£m
1.0
0.6
1.6
Other
£m
1.0
–
1.0
2013
Total
£m
11.2
8.1
19.3
Sterling
£m
2.3
–
2.3
US$
£m
3.4
–
3.4
C$
£m
2.7
–
2.7
Euro
£m
0.7
0.9
1.6
Other
£m
1.4
–
1.4
2012
£m
20.5
3.1
2.3
12.6
38.5
2012
£m
5.1
9.2
1.1
4.2
0.9
20.5
2012
Total
£m
10.5
0.9
11.4
The short term deposits and cash at bank are both interest bearing at rates linked to the UK Base Rate, or equivalent rate.
19. Financial Instruments
The Group’s principal financial instruments, other than a limited number of forward foreign currency contracts, comprise cash and
short term deposits, investments, trade and other receivables and trade and other payables, borrowings and other liabilities. Trade
and other receivables and trade and other payables arise directly from the Group’s day-to-day operations.
The financial risks to which the Group is exposed are those of credit, liquidity, foreign currency, interest rate and capital management.
An explanation of each of these risks, how the Group manages these risks and an analysis of sensitivities is set out below and on page
35 within Principal Risks and Uncertainties, which has been audited.
a) 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.
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. 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 establishes a provision for impairment that represents its estimate of potential 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 provision is
written off against the underlying receivable. The Group has not had any material irrecoverable trade receivables in the past five years.
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 “AA” or better.
The Group’s maximum exposure to credit risk was as follows:
Trade receivables
Other receivables
Cash and cash equivalents
Carrying amount
2013
£m
39.5
1.5
19.3
60.3
2012
£m
37.0
1.9
11.4
50.3
There is no material difference between the book value 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 16. An analysis of cash and
cash equivalents is set out in note 18.
Diploma PLC Annual Report & Accounts 2013Diploma PLC
83
19. Financial Instruments continued
b) 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 continually monitors
net funds and forecast cash flows to ensure that sufficient resources are available to meet the Group’s requirements in the short, medium
and long term. Additionally, compliance with debt covenants are monitored regularly and during 2013 all covenants have been
complied with fully.
The Group is highly cash generative and uses monthly cash flow forecasts to monitor cash requirements and to optimise its return on
deposits. Typically the Group ensures that it has sufficient cash on hand to meet foreseeable operational expenses, but the Group also
has a committed £20m revolving bank facility (with an option to increase its facility to £40m, subject to market pricing) which expires
on 30 June 2014. Interest on this facility is payable at between 150 and 195 bps over LIBOR, depending on the ratio of net debt to
EBITDA. At 30 September 2013, none of the facility had been drawn down (2012: £3.5m).
The undrawn committed facilities available at 30 September are as follows:
Expiring within one year
Expiring after one year but within two years
The Group’s financial liabilities are as follows:
Trade payables
Other payables
Other liabilities
Borrowings
The maturities of the undiscounted financial liabilities are as follows:
Less than one year
One-two years
Two-five years
Less: Discount
2013
£m
20.0
–
2012
£m
–
16.5
Carrying amount
2013
£m
23.2
1.5
3.0
–
27.7
26.8
1.1
–
27.9
(0.2)
27.7
2012
£m
20.5
3.1
3.8
3.5
30.9
26.4
3.5
1.2
31.1
(0.2)
30.9
There is no material difference between the book value of these financial liabilities and their fair value at each reporting date.
c) Currency risk
The Group’s currency risk comprises translational and transactional risk from its exposure to movements in US dollars, Canadian
dollars, Euros and Australian dollars. The transactional exposure arises on trade receivables, trade payables and cash and cash
equivalents and these balances are analysed by currency in notes 16, 17 and 18, respectively. Net foreign exchange gains of £0.1m
(2012: £0.1m losses) were recognised in operating profit for the year.
The Group holds forward foreign exchange contracts in certain of the Group’s businesses to hedge forecast transactional exposure to
movements in the US dollar, Canadian dollar and Euro. These forward foreign exchange contracts are classified as cash flow hedges
and are stated at fair value. The notional value of forward contracts as at 30 September 2013 was £15.4m (2012: £13.4m). The net fair
value of forward foreign exchange contracts used as hedges at 30 September 2013 was negligible (2012: £0.3m liability). The amount
removed from Other Comprehensive Income and taken to the Consolidated Income Statement in cost of sales during the year was
£0.2m debit (2012: £0.5m debit). The change in the fair value of cash flow hedges taken to Other Comprehensive Income during the
year was negligible (2012: £0.4m debit).
The currency risk arising from both translational and transactional risks are described further on page 35 within Principal Risks and Uncertainties.
d) 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 and borrowings.
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.
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 rate. An increase of 1% in interest
rates would not have a significant impact on the Group’s adjusted profit before tax.
An analysis of cash and cash equivalents at the reporting dates is set out in note 18.
Diploma PLC Annual Report & Accounts 2013Financial Statements 84
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2013
19. Financial Instruments continued
e) Fair values
There are no material differences between the book 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 12 months from the year end.
Trade and other receivables/payables
As the majority of receivables/payables have a remaining life of less than one year, the book value 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.
f) Capital management risk
The Group’s policy is to maintain a strong capital base so as to maintain investor, supplier and market confidence and to provide strong
returns to shareholders which will support the future development of the business. The capital structure of the Group consists of cash
and cash equivalents, short term debt (which includes bank borrowings) and equity attributable to equity holders of the parent,
comprising issued share capital, reserves and retained earnings.
The Group is not subject to any externally imposed capital requirements and there were no changes in the Group’s approach to capital
management during the year.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to
shareholders, issue new shares or increase bank borrowings.
20. 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
Acquisition of minority interest
Put options entered into during the year
Unwinding of discount
Fair value remeasurements
At 30 September
2013
£m
2.8
0.2
3.0
2.0
1.0
2013
£m
3.2
(0.6)
–
0.3
(0.1)
2.8
2012
£m
3.2
0.6
3.8
2.8
1.0
2012
£m
2.0
–
1.0
0.1
0.1
3.2
At 30 September 2013 the Group retained put options to acquire minority interests in M Seals, DSL and HPS all of which are exercisable
within the next 18 months. On 8 January 2013, the Group acquired the remaining 20% minority interest in Big Green Surgical Pty
Limited (“BGS”), as explained in note 21.
At 30 September 2013 the estimate of the financial liability to acquire the outstanding minority shareholdings was reassessed by
the Directors, based on their current estimate of the future performance of these businesses and to reflect foreign exchange rates
at 30 September 2013. This led to a remeasurement of the fair value of these put options and the liability was reduced by £0.1m
(2012: increased £0.1m). This reduction was offset by the charge from unwinding the discount on the liability and in aggregate
£0.2m (2012: £0.2m) has been charged to the Consolidated Income Statement.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 85
20. Other Liabilities continued
At 30 September 2013 deferred consideration of £0.2m related to amounts payable to the vendor of BGS in connection with the sale of
his outstanding minority interest during the year. This is payable in two instalments in November 2013 and 2014. Deferred consideration
of £0.3m was paid on 27 September 2013 to the vendors of CMI in full and final satisfaction of their outstanding deferred consideration
and £0.3m was paid on 17 July 2013 to the vendor of Amfast in final settlement of the performance payment.
21. Minority Interests
At 1 October 2011
Acquisition of subsidiary
Share of profit
Dividends paid
At 30 September 2012
Minority interests acquired
Share of profit
Dividends paid
At 30 September 2013
£m
0.5
0.7
0.3
(0.1)
1.4
(0.1)
0.3
(0.2)
1.4
On 8 January 2013, the Group acquired the outstanding 20% share capital in Big Green Surgical (“BGS”), held by the previous owner,
Mr A Bennett. The maximum consideration payable is £0.9m (A$1.4m), including deferred consideration of £0.5m (A$0.8m), based on
the achievement of certain gross profit targets for FY2013 and FY2014. On completion, the initial cash consideration paid was £0.4m
(A$0.6m) and £0.2m (A$0.3m) has been provided as deferred consideration at 30 September 2013.
22. Acquisition of Business
On 2 November 2012, the Group acquired the trade and net assets of Rayquick GmbH (“Rayquick”) for consideration of £1.2m (€1.4m)
from Mr S Rinas, which was settled in cash. Acquisition intangible assets of £0.6m and goodwill of £0.5m arose on this acquisition. The
goodwill is represented by prospects for revenue growth from new customers. Goodwill and acquisition intangible assets relating to
these acquisitions of £1.1m will be allowable for a tax deduction (£0.2m) in future years.
From the date of acquisition to 30 September 2013, the Rayquick business contributed £1.3m to revenue and £0.4m to adjusted
operating profit; if this acquisition had been completed at the beginning of the financial year, the contribution to revenue and adjusted
operating profit would not have been materially different.
23. Reconciliation of Cash Flow from Operating Activities
Operating profit
Acquisition related charges (note 11)
Adjusted operating profit
Depreciation or amortisation of tangible and other intangible assets
Share-based payments expense
Cash paid into defined benefit schemes (note 25)
Operating cash flow before changes in working capital
Increase in inventories
Increase in trade and other receivables
Increase in trade and other payables
Cash flow from operating activities, before acquisition expenses
2013
£m
48.7
5.6
54.3
2.5
0.5
(0.3)
57.0
(0.9)
(2.5)
2.3
55.9
2012
£m
46.4
6.4
52.8
2.1
0.8
(0.3)
55.4
(4.1)
(1.2)
0.1
50.2
Diploma PLC Annual Report & Accounts 2013Financial Statements 86
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2013
24. Net Funds
The movement in net funds during the year is as follows:
Net increase/(decrease) in cash and cash equivalents
Decrease in borrowings
Effect of exchange rates
Movement in net funds
Net funds at beginning of year
Net funds at end of year
Comprising:
Cash and cash equivalents
Borrowings
Net funds at 30 September
2013
£m
8.3
3.5
11.8
(0.4)
11.4
7.9
19.3
19.3
–
19.3
2012
£m
(6.1)
2.2
(3.9)
(0.4)
(4.3)
12.2
7.9
11.4
(3.5)
7.9
The Group has a committed £20m revolving bank facility which expires on 30 June 2014. Interest on this facility is payable at between
150 and 195 bps over LIBOR, depending on the ratio of net debt to EBITDA.
25. Retirement Benefit Obligations
The Group maintains a defined benefit pension scheme in the UK called Diploma Holdings PLC UK Pension Scheme (“the Scheme”).
The Scheme is closed to further accrual and the assets of the Scheme are held in separate trustee administered funds. The Scheme is
funded in accordance with rates recommended by an independent qualified actuary on the basis of triennial reviews using the
projected unit method.
Pension deficit included in the Consolidated Statement of Financial Position:
Market value of Scheme assets
Equities
Bonds
Cash
Present value of Scheme liabilities
Pension scheme net deficit
Amounts credited to the Consolidated Income Statement:
Charged to operating profit
Interest cost
Expected return on Scheme assets
Credited to financial income (note 6)
Amount credited to the Consolidated Income Statement
Amounts recognised in the Consolidated Statement of Income and Other Comprehensive Income:
Experience adjustments on Scheme assets
Changes in assumptions on Scheme liabilities
Experience adjustments on Scheme liabilities
Actuarial gain/(loss) on Scheme liabilities
2013
£m
18.6
4.7
–
23.3
(28.0)
(4.7)
2013
£m
–
(1.2)
1.4
0.2
0.2
2013
£m
1.9
(1.4)
(0.3)
0.2
2012
£m
16.1
4.5
0.1
20.7
(26.1)
(5.4)
2012
£m
–
(1.2)
1.3
0.1
0.1
2012
£m
1.3
(1.1)
(0.6)
(0.4)
The cumulative amount of actuarial losses recognised in the Consolidated Statement of Income and Other Comprehensive Income,
since the transition to IFRS, is £4.7m (2012: £4.9m).
Diploma PLC Annual Report & Accounts 2013Diploma PLC 25. Retirement Benefit Obligations continued
Analysis of movement in the pension deficit:
At 1 October
Amounts credited to Consolidated Income Statement
Contributions paid by employer
Actuarial (gain)/loss
At 30 September
Analysis of movements in the present value of the Scheme liabilities:
At 1 October
Interest cost
Actuarial loss
Loss on changes in assumptions
Benefits paid
At 30 September
Analysis of movements in the present value of the Scheme assets:
At 1 October
Expected return on assets
Actuarial gain
Contributions paid by employer
Benefits paid
At 30 September
The actual return on Scheme assets during the year was a £3.3m gain (2012: £2.6m gain).
Principal actuarial assumptions for the Scheme at balance sheet dates:
Inflation rate
– RPI
– CPI
Expected rate of pension increases – CPI
Discount rate
Number of years a current pensioner is expected to live beyond age 65
Men
Women
Expected return on Scheme assets1
Analysed as:
Equities
Bonds
Cash
2013
3.3%
2.6%
2.6%
4.6%
22.5
24.9
n/a
n/a
n/a
87
2013
£m
5.4
(0.2)
(0.3)
(0.2)
4.7
2013
£m
26.1
1.2
0.3
1.4
(1.0)
28.0
2013
£m
20.7
1.4
1.9
0.3
(1.0)
23.3
2012
2.6%
1.9%
1.9%
4.6%
22.4
24.8
7.8%
4.3%
1.0%
2012
£m
5.4
(0.1)
(0.3)
0.4
5.4
2012
£m
23.6
1.2
0.6
1.1
(0.4)
26.1
2012
£m
18.2
1.3
1.3
0.3
(0.4)
20.7
2011
3.2%
2.5%
2.5%
5.1%
22.3
24.6
8.0%
3.8%
1.0%
1 The historical expected return for each class of scheme assets is based on a combination of historical performance, current market yields and advice from investment
managers. This will no longer be relevant from 1 October 2013 as IAS 19 (revised) requires the replacement of the expected return on pension scheme assets and interest
charge on pension scheme liabilities with a net financing cost based on the discount rate.
Demographic assumptions:
Basic mortality table used:
Year the mortality table was published:
S1NA
CMI 2010
Allowance for future improvements in longevity:
Year of birth projections, with a long term improvement rate of 1.25%
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)
Diploma PLC Annual Report & Accounts 2013Financial Statements
88
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2013
25. Retirement Benefit Obligations continued
Sensitivities:
The sensitivity of the 2013 pension liabilities to changes in assumptions are as follows:
Assumption
Discount rate
Inflation
Life expectancy
Assumption
Decrease by 0.5%
Increase by 0.5%
Increase by 1 year
Impact on pension liabilities
Estimated
increase
%
Estimated
increase
£m
9.6
3.9
1.4
2.7
1.1
0.4
Cash funding:
Accounting costs do not impact on the incidence or amount of cash contributions for defined benefit plans. Future cash contributions
are determined based upon the triennial actuarial valuations.
Date of last formal funding valuation
30 September 2010
Deficit
Funding level
Funding approach
£2,682,000
87%
Assumes that Scheme assets will outperform Government 20 year fixed
interest gilt yield by 2.90% p.a. pre-retirement and 0.80% p.a. post-retirement
Post retirement mortality table
S1NA
Post retirement mortality projections
CMI 2010 with long term improvement rate of 1.25% p.a.
Contributions per annum to remove the deficit
£320,000 increasing at 2% p.a.
Period over which the deficit is expected to be removed
1 October 2010 – 30 September 2021
Expected contributions during FY2014
£332,900
Current investment strategy
80% Equities and 20% Bonds
Number of deferred members at date of actuarial valuation
344
History of experience gains and losses:
All experience adjustments are recognised directly in equity, net of related tax.
Experience adjustments arising on Scheme assets:
Amount (£m)
% of Scheme assets
Changes in assumptions arising on present value of Scheme liabilities:
Amount (£m)
% of present value of Scheme liabilities
Experience adjustments arising on present value of Scheme liabilities:
Amount (£m)
% of present value of Scheme liabilities
Present value of Scheme liabilities
Market value of Scheme assets
Deficit
2013
2012
2011
2010
2009
1.9
8%
(1.4)
5%
(0.3)
1%
(28.0)
23.3
(4.7)
1.3
6%
(1.1)
4%
(0.6)
2%
(26.1)
20.7
(5.4)
(1.8)
10%
2.1
9%
(0.5)
2%
(23.6)
18.2
(5.4)
0.3
2%
(2.2)
10%
0.1
–
(21.6)
16.3
(5.3)
0.7
5%
(3.8)
20%
–
–
(18.8)
14.1
(4.7)
26. Commitments
At 30 September 2013 the Group has outstanding aggregate commitments for future minimum lease payments under non-cancellable
operating leases in respect of the following years:
Land and Buildings
Within one year
For years two to five
After five years
Operating lease payments made in respect of land and buildings during the year were £2.1m (2012: £2.1m).
2013
£m
1.8
4.0
1.1
6.9
2012
£m
1.8
4.3
0.9
7.0
Diploma PLC Annual Report & Accounts 2013Diploma PLC 27. Auditor’s Remuneration
During the year the Group received the following services from the auditor:
Fees payable to the auditor for the audit of:
– the Company’s annual report
– the Company’s subsidiaries, pursuant to legislation
Total audit fees
89
2013
£m
0.1
0.2
0.3
2012
£m
0.1
0.2
0.3
Non-audit fees of £71,000 (2012: £13,500) were paid to the Group’s auditor primarily for a tax assignment and for reviewing the Half Year
Announcement, which is unaudited.
28. Exchange Rates
The following exchange rates have been used to translate the results of the overseas businesses:
US dollar (US$)
Canadian dollar (C$)
Australian dollar (A$)
Euro (€)
Average
Closing
2013
1.56
1.59
1.58
1.19
2012
1.58
1.59
1.53
1.22
2013
1.62
1.66
1.73
1.20
2012
1.61
1.59
1.55
1.26
29. Subsequent Events
On 5 November 2013 the Group signed contracts in connection with the acquisition of 80% of Kentek Oy for consideration of up to
£11.2m (€13.3m), subject to completion of competition enquiries by the authorities in Russia and certain other conditions precedent.
The business is based in Finland, but much of its activities are carried out across Russia in supplying filters and related products for a
range of heavy mobile machinery and industrial applications. Kentek Oy will form part of the Seals Sector.
On 17 October 2013 the Group acquired certain trade and goodwill from Sacee International SAS, based in France, for a maximum
consideration of £0.3m (€0.3m). The business distributes connectors to the Satellite industry and will be absorbed into Filcon in the
Controls Sector.
Diploma PLC Annual Report & Accounts 2013Financial Statements 90
Notes to the Consolidated Financial Statements continued
Group Accounting Policies
For the year ended 30 September 2013
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 2012 and the comparative period.
Other than presentational changes to the Consolidated Statement of Income and Other Comprehensive Income to identify amounts
which will and will not be reclassified to the Consolidated Income Statement as set out on page 71, there were no new standards,
amendments and interpretations to existing standards which have been published and endorsed by the EU which have any impact on
the results, financial position or presentation of the consolidated financial statements for the year ended 30 September 2013.
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 on page 68.
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 Acquisitions
Acquisitions are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred
to the Group. Goodwill at the acquisition date represents the cost of the business combination (excluding acquisition related costs,
which are expensed as incurred) plus the amount of any non-controlling interest in the acquiree in excess of the fair value of the
identifiable assets, liabilities and contingent liabilities acquired.
Goodwill is allocated to cash generating units and is tested annually for impairment. Negative goodwill arising on acquisition is
recognised immediately in the Consolidated Income Statement.
Minority interests may be initially measured at fair value or, alternatively, at the minority interest’s proportionate share of the recognised
amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made for each business combination separately.
1.4 Divestments
The results and cash flows of major lines of businesses that have been divested have been classified as discontinued businesses.
1.5 Revenue recognition
Revenue is measured as the fair value of the consideration received or receivable for goods and services supplied to customers, after
deducting sales allowances and value added taxes; revenue receivable for services supplied to customers, as opposed to goods, is less
than 3% of Group revenue. 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 on a pro-rata basis over the period of the contract.
1.6 Employee benefits
The Group operates a number of pension plans, both of the defined contribution and defined benefit type. The defined benefit scheme
is closed to the accrual of further 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.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 91
1.6 Employee benefits continued
(b) Defined benefit pension plan: The deficit recognised in the balance sheet for the Group’s defined benefit pension scheme 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 plan is recognised as follows:
(i) Within the Consolidated Income Statement:
– Gains and losses arising on settlements and curtailments – where the item that gave rise to the settlement or curtailment is
recognised in operating profit;
– Interest cost on the liabilities of the schemes – calculated by reference to the scheme liabilities and major assumptions, including
the discount rate, at the beginning of the year; and
– Expected return on the assets of the schemes – calculated by reference to the scheme assets and long term expected rate of
return at the beginning of the year.
(ii) Within the Consolidated Statement of Income and Other Comprehensive Income:
– Actuarial gains and losses arising on the assets and liabilities of the scheme 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 its defined benefit scheme in the period in
which they occur, outside the Consolidated Income Statement, but in the Consolidated Statement of Income and Other
Comprehensive Income.
Proposed changes to IAS19 and the impact on the Group have been outlined in note 1.19 below.
(c) Share-based payments
The Executive Directors of the Group receive part of their remuneration in the form of share-based payment transactions, whereby
the Directors render services in exchange for shares in the Company, or rights over shares (“equity-settled” transactions).
Equity-settled transactions are measured at fair value at the date of grant. The fair value determined at the grant date takes account of
the effect of market based measures, such as the Total Shareholder Return (“TSR”) targets upon which vesting of part of the award is
conditional, and is expensed to the Consolidated Income Statement 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.
1.7 Foreign currencies
The individual financial statements of each Group entity are prepared in their functional currency, which is the currency of the primary
economic environment in which that entity operates. For the purpose of the consolidated financial statements, the results and financial
position of each entity are translated into UK sterling, which is the presentational currency of the Group.
(a) Reporting foreign currency transactions in functional currency:
Transactions in currencies other than the entity’s functional currency (foreign currencies) are initially recorded at the rates of
exchange prevailing on the dates of the transactions. At each subsequent balance sheet date:
(i) Foreign currency monetary items are retranslated at the rates prevailing at the balance sheet date. Exchange differences arising
on the settlement or retranslation of monetary items are recognised in the Consolidated 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 Consolidated Income Statement, any exchange component of that gain or loss is also recognised in the Consolidated
Income Statement.
Diploma PLC Annual Report & Accounts 2013Financial Statements
92
Notes to the Consolidated Financial Statements continued
Group Accounting Policies
For the year ended 30 September 2013
1.7 Foreign currencies continued
(b) Translation from functional currency to presentational currency:
When the functional currency of a Group entity is different from the Group’s presentational currency, its results and financial
position are translated into the presentational currency as follows:
(i) Assets and liabilities are translated using exchange rates prevailing at the balance sheet date;
(ii) Income and expense items are translated at average exchange rates for the year, except where the use of such an average rate
does not approximate the exchange rate at the date of the transaction, in which case the transaction rate is used; and
(iii) All resulting exchange differences are recognised in the Consolidated Statement of Income and Other Comprehensive Income;
these cumulative exchange differences are recognised in the Consolidated Income Statement in the period in which the foreign
operation is disposed of.
(c) Net investment in foreign operations:
Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation
are recognised in the Income Statement in the separate financial statements of the reporting entity or the foreign operation as
appropriate. In the consolidated financial statements such exchange differences are initially recognised in the Consolidated
Statement of Income and Other Comprehensive Income as a separate component of equity and subsequently recognised in
the Consolidated Income Statement on disposal of the net investment.
1.8 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 Consolidated 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 scheme, 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 than 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 Consolidated 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.
Diploma PLC Annual Report & Accounts 2013Diploma PLC
93
1.9 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 Consolidated
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 Consolidated 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 – term of the lease
Plant and equipment – plant and machinery between 3 and 7 years
– between 20 and 50 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 Consolidated Income Statement.
1.10 Intangible assets
All intangible assets, excluding goodwill arising on a business combination, are stated at their amortised cost or fair value less any
provision for impairment.
(a) Research and development costs
Research expenditure is written off as incurred. Development costs are written off as incurred until it can be demonstrated that the
conditions for capitalisation as described in IAS 38 “Intangible Assets” are met. At which point further costs are capitalised as intangible
assets up until the intangible asset is readily available for production and amortised on a straight-line basis over the asset’s estimated useful
life.
Costs are capitalised as intangible assets unless physical assets, such as tooling, exist when they are classified as property, plant
and equipment.
(b) Computer software costs
Where computer software is not integral to an item of property, plant or equipment its costs are capitalised as other intangible
assets. Amortisation is provided on a straight line basis over its useful economic life of between three and seven years.
(c) Acquired intangible assets – business combinations
Intangible assets that are acquired as a result of a business combination, including, but not limited to, customer lists, supplier lists,
databases, technology and software and patents and that can be separately measured at fair value, on a reliable basis, are separately
recognised on acquisition at the fair value, together with the associated deferred tax liability. Amortisation is charged on a straight
line basis to the Consolidated 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, tangible and current 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.
Diploma PLC Annual Report & Accounts 2013Financial Statements
94
Notes to the Consolidated Financial Statements continued
Group Accounting Policies
For the year ended 30 September 2013
1.11 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 Consolidated Income Statement.
(a) Impairment of goodwill
Goodwill acquired in a business combination is allocated to a cash-generating unit; cash-generating units for this purpose are
the business entities which represent the lowest level within the Group at which the goodwill is monitored by the Group’s Board
of Directors for internal and management purposes. Cash-generating units to which goodwill has been allocated are tested for
impairment annually, or more frequently when there is an indication that the unit may be impaired.
If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated
first to reduce the goodwill attributable to the cash-generating unit.
An impairment loss recognised for goodwill is not reversed in a subsequent period.
(b) Impairment of other tangible and intangible assets
At each balance sheet date, the Group reviews the carrying amount of its tangible and intangible assets to determine whether there is
any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is
estimated in order to determine the extent, if any, of the impairment loss. For the purposes of assessing impairment, assets are grouped
at the lowest levels for which there are separately identifiable cash inflows. Where it is not possible to estimate the recoverable amount
of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the
revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that
would have been determined had no impairment loss been recognised for the asset or cash-generating unit in prior years. A reversal
of an impairment loss for tangible and intangible assets other than goodwill is recognised immediately in the Consolidated Income
Statement.
1.12 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.
1.13 Financial instruments
Financial assets and liabilities are recognised in the Group balance sheet when the Group becomes a party to the contractual provisions
of the instrument.
(a) Trade receivables
Trade receivables are initially measured at fair value, do not carry any interest and are reduced by a charge for impairment for
estimated irrecoverable amounts. Such impairment charges are recognised in the Income Statement.
(b) Trade payables
Trade payables are non-interest bearing and are initially measured at their fair value.
(c) Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, interest bearing deposits, bank overdrafts and short term highly liquid investments with
original maturities of three months or less that are readily convertible to a known amount of cash and are subject to an insignificant risk of
changes in value. Bank overdrafts are repayable on demand and can form an integral part of the Group’s cash management system.
Diploma PLC Annual Report & Accounts 2013Diploma PLC
95
1.13 Financial instruments continued
(d) Put options held by minority interests
The purchase price of shares to be acquired under options held by minority shareholders in the Group’s subsidiaries, are calculated by
reference to the estimated 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 Consolidated 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 IAS 39, 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 in the Consolidated
Statement of Income and Other Comprehensive Income and the ineffective portion is recognised in the Consolidated Income
Statement. 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 Consolidated 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 Other Comprehensive
Income is kept in equity until the hedged transaction occurs, when it is recognised in the Consolidated Income Statement. If a
hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the
Consolidated Income Statement 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 the Consolidated Income Statement (fair value hedges). No financial
instruments are used to hedge net investments in a foreign operation (net investment hedges).
1.14 Investments available for sale financial assets
The investment held by the Group comprises equity shares which are not held for the purposes of equity trading and in accordance with
IAS 39 is classified as available for sale. They are initially recognised at fair value. Subsequent to initial recognition, they are measured at fair
value and changes therein are recognised in the Consolidated Statement of Income and Other Comprehensive Income.
1.15 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. Rentals payable under operating leases are charged to the Consolidated 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.
Diploma PLC Annual Report & Accounts 2013Financial Statements
96
Notes to the Consolidated Financial Statements continued
Group Accounting Policies
For the year ended 30 September 2013
1.16 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.
1.17 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.
1.18 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.
(c) Retained earnings reserve – The retained earnings reserve comprises total cumulative recognised income and expense 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.
1.19 Accounting standards, interpretations and amendments to published standards not yet effective
The IASB has published a number of new standards, amendments and interpretations to existing standards which are not yet effective,
but will be mandatory for the Group’s accounting periods beginning on or after 1 October 2013. Set out below are those which are
considered most relevant to the Group:
•
IAS 19 “Employee Benefits”: makes changes to the recognition and measurement of defined benefit pension expense and to the
disclosures of certain employee benefits;
IFRS 10/11/12 “Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in other Entities”: suite of new
standards on consolidation and related matters; and
IFRS 13 “Fair Value Measurement”: replacement of existing guidance on fair value measurement in different IFRSs.
•
•
Other than as relates to IAS 19 which is discussed further below, the Group has considered the impact of these in future periods and no
significant impact is expected on reported profit or net assets.
The amendments to IAS 19, which become effective for the Group from 1 October 2013, will impact the Consolidated Income
Statement due to the change in the interest rate used to calculate the return on assets; they will also require additional disclosure in the
notes to the consolidated financial statements. If the Group had adopted these amendments to IAS 19 in the year ended 30 September
2013, the notional income from the defined benefit scheme of £0.2m set out in notes 6 and 25 would have been a notional charge
of £0.2m.
Diploma PLC Annual Report & Accounts 2013Diploma PLC 97
1.20 Critical Accounting Estimates and Judgements
In order to prepare these consolidated financial statements in accordance with the accounting policies set out in note 1 above,
management has used estimates and judgements to establish the amounts at which certain items are recorded. Critical accounting
estimates and judgements are those which have the greatest impact on the financial statements and require the most difficult and
subjective judgements about matters that are inherently uncertain. Estimates are based on factors including historical experience and
expectations of future events that management believe to be reasonable. However given the judgemental nature of such estimates,
actual results could be different from the assumptions used. The critical accounting estimates and judgements are set out below:
1.20.1 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 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.
1.20.2 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.
1.20.3 Inventory and trade receivable provisions
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
receivables.
The decision to make an impairment charge is based on the facts available at the time the consolidated 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.
1.20.4 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 the assumption that year end exchange rates will remain
consistent until the exercise of the option. 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.
Diploma PLC Annual Report & Accounts 2013Financial Statements 98
Parent Company Balance Sheet
As at 30 September 2013
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
2013
£m
2012
£m
c
72.0
72.0
(37.4)
34.6
5.7
28.9
34.6
(42.1)
29.9
5.7
24.2
29.9
d
The financial statements of Diploma PLC, company number 3899848, were approved by the Board of Directors on 18 November 2013
and signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
Reconciliation of Movement in Shareholders’ Funds
At 1 October 2012
Retained profit for the year
Transfers of own shares (net)
At 30 September 2013
Share capital
£m
Profit and
loss account
£m
5.7
–
–
5.7
24.2
5.7
(1.0)
28.9
Total
£m
29.9
5.7
(1.0)
34.6
The notes on page 99 form part of these financial statements.
Diploma PLC Annual Report & Accounts 2013Diploma PLC Notes to the Parent Company Financial Statements
For the year ended 30 September 2013
99
a) Accounting Policies
a.1 Basis of accounting
These financial statements have been prepared on a going concern basis, as discussed on page 68, under the historical cost
convention in accordance with the Companies Act 2006 and applicable UK Accounting Standards. As permitted by section 408 of the
Companies Act 2006, no separate profit and loss account is presented for the Company. The Company’s profit after tax for the year
was £22.7m (2013: £14.4m).
a.2 Investments and dividends
Investments are stated at cost less provision for impairment. Dividend income is recognised when received. Final 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 and options have been exercised by the participants.
a.4 Cash flow statement
The Company is exempt from the requirements of FRS1 (revised) to include a cash flow statement as part of its Company financial
statements because it prepares a Consolidated Cash Flow Statement, as part of the consolidated financial statements.
a.5 Related parties
The Company has taken advantage of paragraph 3(c) of FRS8 (“Related Party Disclosures”) not to disclose transactions with Group
entities or interests of the Group qualifying as related parties.
a.6. Auditor’s remuneration
Fees payable to the auditor for the audit of the Company’s accounts of £3,500 (2012: £3,500) were borne by a fellow Group undertaking.
b) Directors’ and employees’ remuneration
No emoluments are paid directly by the Company; information on the Directors’ remuneration and their interests in the share capital of
the Company are set out in the Remuneration Committee Report on pages 50 to 65. The Company had no employees (2012: none).
c) Investments
Shares in Group undertakings
At 30 September 2013 and 1 October 2012
Details of the principal subsidiaries are set out on page 102.
d) Share Capital
Allotted, issued and fully paid ordinary shares of 5p each
At 30 September
£m
72.0
2013
Number
2012
Number
2013
£m
2012
£m
113,239,555 113,239,555
5.7
5.7
During the year 675,450 shares (2012: 132,175) were transferred from the Trust to participants in connection with the exercise of
options in respect of awards which have vested under the 2004 Long Term Incentive Plan. During the year the Trust purchased a further
300,000 shares for an aggregate amount of £1.7m. At 30 September 2013 the Trust held 586,887 (2012: 962,337) ordinary shares in the
Company representing 0.5% of the called up share capital. The market value of the shares at 30 September 2013 was £3.8m (2012:
£4.6m).
Diploma PLC Annual Report & Accounts 2013Financial Statements 100
Independent Auditor’s Report to the members of Diploma PLC
Opinion on financial statements of Diploma PLC
In our opinion:
•
the financial statements give a true and fair view of the state
of the Group’s and of the parent company’s affairs as at
30 September 2013 and of the Group’s profit for the year
then ended;
the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union;
the parent company financial statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice; and
the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as
regards the group financial statements, Article 4 of the IAS
Regulation.
•
•
•
The financial statements comprise the Consolidated Income
Statement, the Consolidated Statement of Comprehensive
Income and Other Comprehensive Income, the Consolidated
Statement of Changes in Equity, the Consolidated Statement of
Financial Position, the Consolidated Cash Flow Statement, the
related notes 1 to 29 and the Group Accounting policies. This also
comprises the Parent Company Balance Sheet, the Reconciliation
of Movement in Shareholders’ Funds and its related notes (a) to (d)
and the Parent Company Accounting policies. The financial
reporting framework that has been applied in the preparation of
the Group financial statements is applicable law and IFRSs as
adopted by the European Union. The financial reporting
framework that has been applied in the preparation of the parent
company financial statements is applicable law and United
Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice).
Going concern
As required by the Listing Rules we have reviewed the directors’
statement on page 68 that the Group is a going concern. We
confirm that:
• we have not identified material uncertainties related to events
or conditions that may cast significant doubt on the Group’s
ability to continue as a going concern which we believe would
need to be disclosed in accordance with IFRSs as adopted by
the European Union; and
• we have concluded that the directors’ use of the going
concern basis of accounting in the preparation of the financial
statements is appropriate.
However, because not all future events or conditions can be
predicted, this statement is not a guarantee as to the Group’s
ability to continue as a going concern.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are
those that had the greatest effect on our audit strategy, the
allocation of resources in the audit and directing the efforts of the
engagement team:
•
the assessment of the carrying value of goodwill and intangible
assets;
the valuation of inventory including appropriateness of
judgements applied within the obsolescence provision; and
the recoverability of trade receivables.
•
•
Our audit procedures relating to these matters were designed in
the context of our audit of the financial statements as a whole,
and not to express an opinion on individual accounts or
disclosures. Our opinion on the financial statements is not
modified with respect to any of the risks described above,
and we do not express an opinion on these individual matters.
Our application of materiality
We apply the concept of materiality both in planning and
performing our audit, and in evaluating the effect of
misstatements on our audit and on the financial statements. For
the purposes of determining whether the financial statements are
free from material misstatement we define materiality as the
magnitude of misstatement that makes it probable that the
economic decisions of a reasonably knowledgeable person,
relying on the financial statements, would be changed or
influenced.
When establishing our overall audit strategy, we determined a
magnitude of uncorrected misstatements that we judged would
be material for the financial statements as a whole. We
determined planning materiality for the Group to be £2.5 million,
which is approximately 5% of pre-tax profit.
We agreed with the Audit Committee that we would report to
them all audit differences in excess of £50,000, as well as
differences below that threshold that, in our view, warranted
reporting on qualitative grounds.
An overview of the scope of our audit
Our Group audit scope focussed primarily on the audit work at 7
locations. Each of these 7 locations was subject to a full scope
audit. An additional 5 locations were subject to specific agreed
upon audit procedures which address each of the significant
balances and significant risks within these entities. Together the
work at these 12 locations represent the principal business units
of the Group and account for 79% of the Group’s revenues and
96% of the Group’s profit before tax. Our audit work at the 12
principal business units was executed at levels of materiality
applicable to each individual entity which were lower than Group
materiality.
The Group audit team has designed and implemented a rotational
country visit programme to ensure that the Senior Statutory
Auditor or another senior member of the group audit team visits
these locations. Each year this programme of visits includes the
three most significant territories (being the US, Canada and UK)
which comprise 10 locations and 71% of Group revenue. Where
no visits are carried out, the Senior Statutory Auditor or another
senior member of the team has held discussions with the lead
partner. We have performed analytical procedures for those
locations making up the remaining revenue and operating profit.
The way in which we scoped our response to the risks identified
above was as follows:
• we challenged management’s assumptions used in the
impairment model for goodwill and intangible assets,
described in note 10 to the financial statements, including
specifically the cash flow projections, the discount and
perpetuity rates applied to those cash flows, and the
sensitivities considered;
• we tested the existence of stocks and tested that the book
value does not exceed the net realisable value of stocks. We
challenged management’s inventory provisions and assessed
their adequacy; and
• we challenged management’s calculation of the bad debt
provision and tested the recoverability of trade receivables.
The Audit Committee’s consideration of these risks is set out on
page 47.
Diploma PLC Annual Report & Accounts 2013Diploma PLC
101
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors’
responsibilities, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a
true and fair view.
Our responsibility is to audit and express an opinion on the
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
Ethical Standards for Auditors.
Opinions on matters prescribed by the Companies Act 2006
In our opinion:
•
the information given in the Strategic report and the Directors’
Report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
the part of the Directors’ Remuneration Report to be audited
has been properly prepared in accordance with the Companies
Act 2006.
•
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records.
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
• we have not received all the information and explanations we
require for our audit; or
• 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 are not in agreement
with the accounting records and returns.
•
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 either required
to state to them in an auditor’s 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.
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 and 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. In addition, we read all the financial and
non-financial information in the Annual Report to identify material
inconsistencies with the audited financial statements and to
identify any information that is apparently materially incorrect
based on, or materially inconsistent with, the knowledge acquired
by us in the course of performing the audit. If we become aware
of any apparent material misstatements or inconsistencies we
consider the implications for our report.
Edward Hanson (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London
United Kingdom
18 November 2013
We have nothing to report in respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if
in our opinion certain disclosures of directors’ remuneration have
not been made or the part of the Directors’ Remuneration Report
to be audited is not in agreement with the accounting records and
returns. Under the Listing Rules we are required to review certain
elements of the Directors’ Remuneration Report. We have nothing
to report arising from these matters or our review.
Corporate Governance Statement
Under the Listing Rules we are also required to review the part of
the Corporate Governance Statement relating to the company’s
compliance with nine provisions of the UK Corporate Governance
Code. We have nothing to report arising from our review.
Our duty to read other information in the Annual Report
Under the ISAs (UK and Ireland), we are required to report to you
if, in our opinion, information in the annual report is:
• materially inconsistent with the information in the audited
financial statements; or
• apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Group acquired in the
course of performing our audit; or
is otherwise misleading.
•
In particular, we are required to consider whether we have
identified any inconsistencies between our knowledge acquired
during the audit and the directors’ statement that they consider
the annual report is fair, balanced and understandable and
whether the annual report appropriately discloses those matters
that we communicated to the audit committee which we consider
should have been disclosed. We confirm that we have not
identified any such inconsistencies or misleading statements.
Diploma PLC Annual Report & Accounts 2013Financial Statements
102
Principal Subsidiaries
Life Sciences
a1-CBISS Limited
a1-envirosciences GmbH
Hitek Limited
Somagen Diagnostics Inc
AMT Electrosurgery Inc
Vantage Endoscopy Inc
Big Green Surgical Company Pty Limited
Diagnostic Solutions Pty Limited
Seals
HB Sealing Products Inc
J Royal US, Inc
HKX Inc
Hercules Europe BV
All Seals Inc
RTD Seals Corp
M Seals A/S
FPE Limited
Controls
IS Rayfast Limited
IS Motorport Inc
Amfast Limited
Clarendon Engineering Supplies Limited
Cabletec Interconnect Components Systems Limited
Sommer GmbH
Filcon Electronic GmbH
Hawco Limited
Abbeychart Limited
Other Companies
Diploma Holdings PLC
Diploma Holdings Inc
Group
percentage
of equity
capital
Country of
incorporation or
registration
100%
100%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
100%
90%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
England
Germany
England
Canada
Canada
Canada
Australia
Australia
USA
USA
USA
Netherlands
USA
USA
Denmark
England
England
USA
England
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.
Diploma PLC Annual Report & Accounts 2013Diploma PLC Financial Calendar and Shareholder Information
103
Announcements (provisional dates):
First Interim Management Statement released
Annual General Meeting (2013)
15 January 2014
15 January 2014
Half Year Results announced
Second Interim Management Statement released
12 May 2014
30 July 2014
Preliminary Results announced
Annual Report posted to shareholders
Annual General Meeting (2014)
Dividends (provisional dates):
Interim announced
Paid
Final announced
Paid (if approved)
17 November 2014
4 December 2014
14 January 2015
12 May 2014
18 June 2014
17 November 2014
21 January 2015
Annual Report & Accounts:
Copies can be obtained from the Group Company Secretary at the address shown below.
Share Registrar – Computershare Investor Services PLC:
The Company’s Registrar is Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 6ZZ.
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 Group Company Secretary at the address shown below.
Secretary and Registered Office:
AJ Gallagher FCIS, Solicitor, 12 Charterhouse Square, London EC1M 6AX. Telephone: 020 7549 5700. Fax: 020 7549 5715.
Registered in England and Wales, number 3899848.
Website:
Diploma’s website is www.diplomaplc.com
Diploma PLC Annual Report & Accounts 2013Financial Statements
104
Five Year Record
Year ended 30 September
Continuing businesses
Revenue
Adjusted operating profit
Finance (expense)/income
Adjusted profit before tax
Acquisition related charges
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
borrowings
retirement benefit obligations
future purchases of minority interests
deferred tax, net
adjustment to goodwill in respect of deferred tax
Trading capital employed
Net increase/(decrease) in net funds
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
Working capital: revenue
Operating margin
Continuing and discontinued businesses
Revenue
Adjusted profit before tax
Adjusted earnings per ordinary share (pence)
2013
£m
2012
£m
2011
£m
285.5
260.2
230.6
54.3
–
54.3
(5.6)
(0.2)
48.5
(13.7)
34.8
–
34.8
176.9
1.4
(19.3)
–
4.7
2.8
1.7
(10.0)
158.2
11.8
17.6
2.2
31.6
30.7
34.8
15.7
156
2.2
%
25.8
16.7
19.0
£m
285.5
54.3
34.8
52.8
(0.2)
52.6
(6.4)
(0.2)
46.0
(14.4)
31.6
–
31.6
165.8
1.4
(11.4)
3.5
5.4
3.2
1.6
(10.1)
159.4
(3.9)
14.3
22.3
32.7
27.9
33.1
14.4
146
2.3
%
26.6
16.5
20.3
£m
260.2
52.6
33.1
45.2
(0.3)
44.9
(4.8)
(0.9)
39.2
(11.6)
27.6
–
27.6
151.4
0.5
(17.8)
5.6
5.4
2.0
2.0
(8.9)
140.2
(18.0)
14.8
28.2
25.0
24.0
27.9
12.0
134
2.3
%
25.4
16.1
19.6
£m
230.6
44.9
27.9
2010
£m
183.5
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)
122.3
8.6
10.2
11.0
29.8
14.6
18.9
9.0
120
2.1
%
22.1
15.4
17.5
£m
188.8
31.6
18.5
2009
£m
160.0
25.6
(0.1)
25.5
(3.1)
(1.9)
20.5
(7.1)
13.4
0.9
14.3
121.4
2.7
(21.3)
–
4.7
13.1
2.0
(6.5)
116.1
2.2
9.1
12.2
23.5
10.8
14.8
7.8
107
1.9
%
19.0
17.6
16.0
£m
175.7
26.7
15.6
Notes
1 Return on trading capital employed represents operating profit, before acquisition related charges, as a percentage of trading capital employed (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.
2 Adjusted earnings per share is calculated in accordance with note 9 to the consolidated financial statements.
3 Total shareholders’ equity per share has been calculated by dividing equity shareholders’ funds by the number of ordinary shares in issue at the year end.
4 Dividend cover is calculated on adjusted earnings as defined in note 2 to the consolidated financial statements.
5 Acquisition expenses 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.
6 The Group disposed of Anachem Limited in the financial year ended 30 September 2010 and this business was reclassified as a discontinued business; the comparatives
have been restated accordingly.
Diploma PLC Annual Report & Accounts 2013Diploma PLC DIPLOMA PLC
Diploma PLC
12 Charterhouse Square
London EC1M 6AX
T +44 (0)20 7549 5700
F +44 (0)20 7549 5715
www.diplomaplc.com
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