DIPLOMA PLC
Annual Report & Accounts 2014
A strong track
record of growth
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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
CONTROLS
Suppliers of hydraulic seals, gaskets, filters,
cylinders, components and kits for heavy
mobile machinery and industrial equipment.
Suppliers of specialised wiring, connectors,
fasteners and control devices for technically
demanding applications.
Contents
Strategic Report
01 Financial Highlights
02 Chairman’s Statement
04 Group at a Glance
06 Business Model
08 Growth Strategy
10 Objectives and Key Performance Indicators
12 Chief Executive’s Review
18 Finance Review
21 Sector Review
– Life Sciences
– Seals
– Controls
34 Principal Risks and Uncertainties
38 Corporate Responsibility
Governance
40 Directors and Advisors
42 Corporate Governance
47 Audit Committee Report
51 Nomination Committee Report
52 Remuneration Committee Report
Financial Statements
68 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
91 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
Financial
Highlights
2014
Year ended 30 September
01
2013
£285.5m
£54.3m
19.0%
£54.3m
£48.5m
£31.6m
2013
pence
34.8
30.7
15.7
27.9
Revenue
£305.8m
Adjusted operating profit1
£56.7m
Adjusted operating margin1
18.5%
Adjusted profit before tax1,2
£56.2m
Profit before tax
£49.8m
Free cash flow3
£37.8m
+7%
+4%
+3%
+3%
+20%
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.
2014
pence
36.1
31.4
17.0
33.4
+4%
+2%
+8%
+20%
Diploma PLC uses alternative performance measures as key financial indicators to assess the underlying performance
of the Group. These include adjusted operating profit, adjusted profit before tax, adjusted earnings per share, free cash
flow, trading capital employed and return on adjusted trading capital employed (ROATCE). 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 PLCAnnual Report & Accounts 2014Strategic Report 02
Chairman’s Statement
“The fundamental principle
of the Board is to focus
on consistently strong
cash flow.”
John Rennocks
Chairman
Delivering strong returns to shareholders
As previously announced, I will be stepping
down from the Board immediately after
the AGM on 21 January 2015. I joined the
Board in 2002 and became Chairman in
2004, following the retirement of the late
Christopher Thomas who had previously
been Chief Executive and then Chairman of
the Company for over 30 years. His guiding
objective for the Company was to focus on
consistently strong cash flow which would
fund the Group’s growth strategy and
deliver healthy and growing dividends; this
has remained a fundamental principle of
the Board during my Chairmanship of the
Company over the last ten years.
The Group’s strong cash flow is generated
from businesses which focus on essential
products and services within specialised
market segments and deliver sustainable
and attractive margins, through the quality
of customer service, depth of technical
support and value adding activities. It is
this business model that has provided the
Group with the resources over ten years to
invest ca.£160m of our internally generated
cash in value enhancing acquisitions to
support our growth strategy and deliver
strong shareholder value.
16% p.a. The objective for TSR growth is to
deliver upper quartile performance relative
to the FTSE mid-250 Index Group (“FTSE-
250”) and over the last ten years, Diploma’s
TSR has grown at a compound rate of
24% p.a. compared with median growth
of 13% p.a. in the FTSE-250.
I believe that this sustained performance
demonstrates the Board’s commitment
to a clearly defined and well executed
strategy, robust business model and
relentless focus on strong cash generation.
This has helped Diploma develop into a
successful and resilient business capable
of delivering strong shareholder value on
a consistent basis and I am confident that
it will continue to do so for many years.
Results
Group revenues increased in 2014 by 7%
to £305.8m (2013: £285.5m) despite the
significant strengthening of UK sterling
against most major currencies in which
the Group operates. With ca.75% of the
Group’s revenues generated outside the
UK, the £17.7m reduction in revenues from
currency translation more than offset the
contribution to revenue of £15.4m from
acquisitions completed during the year.
The success in pursuing this strategy
can be measured against the Group’s two
principal corporate objectives of growth
in adjusted earnings per share (“EPS”)
and total shareholder return (“TSR”). The
target for adjusted EPS is to deliver strong
double-digit growth over the business
cycle and since 2004 the Group’s adjusted
EPS has grown at a compound rate of
On an underlying basis, which is after
adjusting for acquisitions and for currency
effects on translation, Group revenues
increased by 8% with each of the Group’s
business Sectors reporting strong
underlying growth during the year.
Adjusted operating margins remained
robust at 18.5% (2013: 19.0%) and adjusted
Adjusted EPS growth
TSR growth
Dividend growth
+20% p.a.
+36% p.a.
+17% p.a.
pence
TSR index 2009 = 100
2014
2013
2012
2011
2010
36.1
2014
34.8
2013
33.1
2012
27.9
2011
18.9
2010
469
2014
434
2013
306
2012
199
2011
171
2010
pence
17.0
15.7
14.4
12.0
9.0
DIPLOMA PLCStrategic Report 03
operating profit increased by 4% to
£56.7m (2013: £54.3m). Gross margins in
the Canadian and Australian healthcare
businesses were impacted by transactional
currency effects, but these were partly
mitigated by tight control of operating
costs and the benefits arising from the
Group’s recent Investment for Growth
programme which is now substantially
complete.
Adjusted profit before tax increased by 3%
to £56.2m (2013: £54.3m) and adjusted
earnings per share, helped by a lower
effective tax rate, increased by 4% to 36.1p
(2013: 34.8p).
The Group generated strong free cash flow
of £37.8m (2013: £31.6m), despite a larger
investment in working capital, reflecting
both much lower capital expenditure of
£2.2m (2013: £4.6m) and a smaller cash
contribution of £1.8m (2013: £4.7m) to
the Group’s Employee Benefit Trust.
With the acquisition environment
improving, the Group invested £16.5m
(2013: £2.2m) in acquisitions during the
financial year. Shortly after the year end,
the Group acquired 80% of TPD, which
extends the Healthcare business into
Ireland and the UK; this acquisition has
taken the acquisition spend to ca.£26m
in the 2014 calendar year.
At 30 September 2014 the Group’s net
cash funds increased by £2.0m to £21.3m
after distributing £18.2m (2013: £17.4m)
to shareholders during the year.
Dividends
The strong balance sheet and free cash
flow, supported by a good set of results has
led the Board to recommend an increase
in the final dividend of 8% to 11.6p per
share (2013: 10.7p). Subject to shareholder
approval at the AGM, this dividend will be
paid on 28 January 2015 to shareholders
on the register at 28 November 2014.
The total dividend per share for the
year will be 17.0p (2013: 15.7p) which
represents an 8% increase on 2013. The
dividend is well covered by adjusted
EPS at 2.1 times, in line with the Board’s
objective of targeting towards a two times
level of cover. Dividends have increased
progressively in each of the last 15 years
and represent a total of almost £100m
of cash distributed to shareholders over
ten years.
Governance
The Board and its Committees have
worked effectively throughout the year,
benefiting from a stable year, following
a number of years of changes as we
developed and refreshed the Board.
The work of these Committees and the
key achievements this year are set out
in the Corporate Governance section of
the Annual Report & Accounts.
I should like to thank all my colleagues
on the Board, past and present, who
have always been both supportive and
challenging, as needed. Their wise counsel
and experience has made a substantial
contribution to the success of the Group.
Finally, I am delighted that in John
Nicholas, the Company has a highly
successful businessman with broad and
relevant experience, who I am confident
will chair the Group well on the next stage
of its journey and to further success.
Employees
I have very much appreciated the
consistently high levels of service,
performance and hard work that our
employees deliver year after year. I believe
that this is largely due to our decentralised
organisational structure which allows
our employees to understand their
responsibilities and gives them space to
operate efficiently and effectively. This
provides enormous strength to the Diploma
businesses and helps explain the Group’s
sustained success. I wish to sincerely thank
all our employees for their tremendous hard
work and for all they have achieved during
my period with the Company.
Outlook
The Group’s performance this year has
benefited from greater confidence in its
principal markets with strong underlying
revenue growth in each of the Group’s
Sectors. Given the strong comparatives and
the uncertain macroeconomic backdrop,
the Board expects growth to trend this year
towards our target “GDP plus” rates.
The Group has a strong and proven
business model, together with a good
geographic spread of activities, strong
free cash flow and balance sheet. With
an improving acquisition environment
and a good pipeline of opportunities,
prospects for acquisition activity in 2015
are encouraging. This provides the Board
with confidence that further progress will
be made in the new financial year.
John Rennocks
Chairman
17 November 2014
10 years – TSR (rebased to 100)
1,000
800
600
400
200
+747%
+237%
0
Sep 04
Sep 05
Sep 06
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Diploma
FTSE 250 (ex. Investment Trusts)
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report
04
Group at a Glance
We focus on supplying essential products
and services across a range of specialised
industry sectors.
CONTROLS
SEALS
LIFE SCIENCES
Healthcare (80% of revenues)
Medical devices and related
consumables and services supplied
to hospital pathology laboratories,
operating rooms and GI Endoscopy
suites and clinics.
Environmental (20% of revenues)
Environmental analysers,
containment enclosures and
emissions monitoring systems.
Aftermarket (60% of revenues)
Next day delivery of seals, sealing
products, filters and cylinder
components for the repair of
heavy mobile machinery.
Industrial OEMs (40% 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, a1-group
Principal businesses
HFPG, FPE Seals, Kentek, M Seals
Principal businesses
IS Group, Specialty Fasteners,
Filcon, Hawco
30%
of revenues
334
employees worldwide
39%
of revenues
604
employees worldwide
31%
of revenues
312
employees worldwide
More about Life Sciences Sector on
pages 22–25
More about Seals Sector on
pages 26–29.
More about Controls Sector on
pages 30–33.
DIPLOMA PLCStrategic Report 05
The Group is well diversified by
geographic and business area.
Life Sciences
● Healthcare
■ Environmental
Seals
● Aftermarket
■ Industrial OEM
Controls
● Controls
North America
Europe
49%
of revenue
26%
US
43%
of revenue
23%
UK
Rest of World
8%
of revenue
23%
Canada
20%
Continental Europe
North American revenues1 by Sector
European revenues1 by Sector
Rest of World revenues1 by Sector
■ Life Sciences ■ Seals ■ Controls
1 By destination
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 06
Business Model
Our business model is designed to make us
essential to our customers.
s e n t i al Products
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DIPLOMA PLCStrategic Report
07
What we put in
What we get out
Essential Products
Recurring income and stable revenue growth
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.
Our focus on essential products and services contributes to the
Group’s record of stable revenue growth over the business cycle.
Our 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.
Essential Solutions
Sustainable and attractive margins
Our businesses design their individual business models to
provide solutions which closely meet the requirements of
their customers.
By supplying solutions, not just products, we build strong long
term relationships with our customers and suppliers, supporting
sustainable and attractive margins.
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.
Our businesses achieve sustainable and attractive gross margins
by offering strongly differentiated products and customer focused
solutions within specialised market segments. By running efficient
operations, these gross margins are converted into healthy
operating margins.
Essential Values
Agility and responsiveness
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.
Our decentralised organisational model 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 PLCAnnual Report & Accounts 2014Strategic Report 08
Growth Strategy
The Group’s “Acquire, Build, Grow” strategy is
designed to deliver strong, double-digit growth.
A principal focus this year has been on the
“Grow” phase of our strategy.
UIR E
A C Q
B UIL D
W
G R O
Cross-selling
Joint purchasing
Shared back-office
operations
DIPLOMA PLCStrategic Report 09
THIS YEAR’S GROWTH
The Group invested £16.5m this
year in acquisitions designed to build
larger, broader based businesses in
the Group’s three Sectors and extend
the Group’s geographic coverage.
These acquisitions comprised:
Life Sciences
• Chemzyme (Australia)
• DSL (20%) (Australia)
Seals
• Kentek (80%) (Finland, Russia and
Baltic States)
• Ramsay (UK)
• AB Seals (UK)
• HPS (49%) (US)
Controls
• SFC (UK)
• Sacee (France)
5%
of Group revenues (ca.£20m on
annualised basis) were contributed
from businesses acquired in 2014
Acquire
Clear business criteria have been
established to guide the Group’s
acquisition programme:
• Fit with the Group’s business model
of essential products, solutions
and values;
• Marketing led with strong customer
relationships;
• Secure supply of high quality,
differentiated products;
• Capable management.
Build
Acquisitions are intended to give entry
into new but related markets and
thereby extend the reach of the
existing businesses and bring new
growth opportunities.
The acquisitions we make are of
companies which are already successful
and with a good track record. However,
these businesses have typically reached
the point where additional resources are
needed to take them to the next level
of growth.
Grow
Once the acquisition is integrated
into the Group, with a solid platform
established, the focus is on delivering
stable, profitable growth.
Except in the case of smaller, bolt-on
acquisitions, the acquisitions will maintain
their distinct sales and marketing identity
and will be managed as independent
business units. However, where there are
opportunities for synergies with other
Group businesses, these will be managed
within larger business clusters.
The principal financial criteria are:
• Track record of stable, profitable
growth and cash generation;
• Exceed IRR threshold of 13% to
ensure 20%+ return on investment.
Working with the management, we
provide the investment required to build
a solid foundation to allow the company
to move to a new level of growth. The
investment will normally be in new
facilities and IT systems, increased but
better managed working capital and
additional management resource.
Typically synergies come in the
following areas:
• Cross-selling between the businesses;
• Joint purchasing between the
businesses;
• Shared back-office functions for
finance and administration.
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 10
Objectives and Key Performance Indicators
Principal corporate objectives
Achieve double digit
growth in adjusted EPS
over the business cycle
Next level objectives
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.
Underlying revenue is after adjusting
for the impact from acquisitions and
divestments and for currency movements
on the translation of overseas results.
Total revenue growth
Underlying revenue growth
+14%
p.a. compound
+9%
p.a. average
2014
2013
2012
2011
2010
£305.8m
2014
£285.5m
2013
£260.2m
2012
£230.6m
2011
£183.5m
2010
Maintain stable
attractive margins
Adjusted 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
18–19%
of revenue
2014
2013
2012
2011
2010
+8%
+4%
+6%
+17%
+11%
18.5%
19.0%
20.3%
19.6%
17.5%
DIPLOMA PLCStrategic Report 11
Generate TSR growth in
the upper quartile of the
FTSE 250
Deliver progressive
dividend growth with two
times dividend cover
More about our corporate objectives
and KPIs on pages 13–14
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
£16m
p.a. average
2014
2013
2012
2011
2010
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.
Create value by
consistently exceeding
20% ROATCE
Return on adjusted trading capital
employed (“ROATCE”) is defined as
adjusted operating profit as a percentage
of adjusted trading capital employed
(“TCE”). Adjusted TCE excludes net cash
and non-operating assets and liabilities,
but includes all goodwill and acquired
intangible assets.
Free cash flow
Working capital % of revenue
£31m
p.a. average
16–17%
average
2014
2013
2012
2011
2010
ROATCE
25%
average
£37.8m
2014
£31.6m
2013
£32.7m
2012
£25.0m
2011
£29.8m
2010
2014
2013
2012
2011
2010
£16.5m
£2.2m
£22.3m
£28.2m
£11.0m
17.2%
16.7%
16.5%
16.1%
15.4%
25.8%
25.8%
26.6%
25.4%
22.1%
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 12
Chief Executive’s
Review
“ Another year of strong underlying
growth with an improving
acquisition environment”
Bruce Thompson
Chief Executive Officer
U P
G R O
LIFE S CIE N C ES
SE A LS
C O
N T R O LS
A C Q
N S
U P
UISITIO
G R O
Year in review
INVESTMENT FOR
GROWTH PROGRAMME
HAS ESTABLISHED
FIRM FOUNDATION
FOR GROWTH
STRONG CONSUMABLE
REVENUES; 9%
UNDERLYING
GROWTH
GOOD PROGRESS IN
AFTERMARKET AND
INDUSTRIAL OEMS; 7%
UNDERLYING GROWTH
GOOD DEMAND ACROSS
MARKET SECTORS; 8%
UNDERLYING GROWTH
MORE POSITIVE
ACQUISITION
ENVIRONMENT WITH
IMPROVED PIPELINE
REPORTED RESULTS HELD
BACK BY TRANSLATIONAL
IMPACT OF STRONG
UK STERLING
Underlying revenue growth
8%
Strong
performance
across all three
Sectors
DIPLOMA PLCStrategic Report 13
In 2014, the Group has delivered underlying
revenue growth of 8% (after adjusting for
acquisitions and currency effects) with a
strong performance across all three Sectors.
Adjusted operating margins remained
robust at 18.5% of revenue. In an improving
environment for acquisitions, £16.5m was
invested in acquisitions which contributed
£15.4m to revenues this year. This addition
to revenues was offset by the adverse
translation effect of the stronger UK sterling
which reduced revenues by £17.7m. Free
cash flow increased by 20% to £37.8m and
return on adjusted trading capital employed
(“ROATCE”) was maintained at 25.8%.
Business model and growth strategy
The Group’s strategy is designed to
generate strong, double-digit growth
in earnings and shareholder value over
the business cycle, by building larger,
broader-based businesses in the three
Group Sectors of Life Sciences, Seals
and Controls.
Our businesses target “GDP plus” levels
of organic revenue growth over the
business cycle. Stable and resilient revenue
growth is achieved through our focus on
essential products and services funded
by customers’ operating rather than
capital budgets and supplied across a
range of specialised industry segments.
By supplying essential solutions, not
just products, we build strong long term
relationships with our customers and
suppliers, which support sustainable and
attractive margins. Finally we encourage an
entrepreneurial culture in our businesses
through our decentralised management
structure and these essential values ensure
that decisions are made close to the
customer and that the businesses are agile
and responsive to changes in the market
and the competitive environment.
Overall growth is accelerated from the
underlying GDP plus levels to the corporate
target of strong, double-digit growth,
through carefully selected, value-enhancing
acquisitions which fit the business model
and offer entry into new strategic markets.
Acquisitions are not made just to add
revenue and profit, but rather to bring into
the Group successful businesses which have
growth potential, capable management
and a good track record of profitable
growth and cash generation. As part of our
Acquire, Build, Grow strategy, we invest in
the businesses post acquisition to build a
firm foundation to allow them to move to
a new level of growth. These acquisitions
Adjusted operating margin
18.5%
form a critical part of our Sector growth
strategies and are designed to generate a
pre-tax return on investment of at least 20%
and hence support our Group objective of
consistently exceeding 20% ROATCE.
Performance against objectives and KPIs
The Group’s principal corporate objectives
relate to growth in adjusted earnings per
share (“EPS”) and total shareholder return
(“TSR”). Growth in the year in adjusted EPS
has been 4% and growth in TSR has been
8%. Over a five year period, compound
growth rates for adjusted EPS and TSR have
been 20% p.a. and 36% p.a. respectively.
Underpinning the principal corporate
objectives are a set of further objectives,
with related key performance indicators
(“KPIs”) which are used to measure
performance at the Group level, but
also to drill down through the operating
businesses. The first of these next level
objectives is to generate stable “GDP plus”
levels of underlying revenue growth over
the business cycle.
This year, after adjusting for translational
currency effects and acquisitions, the
Group increased revenues by 8% on an
underlying basis, with strong performance
across all three Sectors. Life Sciences
benefited from strong consumable
revenues across the businesses, offsetting
weaker capital equipment and service
revenues and delivered 9% underlying
revenue growth. In Seals, underlying
revenues grew by 7%, reflecting a more
favourable performance in the Aftermarket
businesses and continuing good growth
in the Industrial OEM businesses. Controls
returned to growth this year with good
demand across its market sectors and
particularly strong performances from the
Civil Aerospace, Motorsport and Energy
markets; underlying revenue growth of
8% was achieved.
The objective for adjusted operating
margins is to maintain stable attractive
margins which reflect the focus
on specialised segments, strongly
differentiated products and customer
focused solutions, combined with
efficiently run operations. This year,
adjusted operating margins were 18.5%
which is comfortably within the five year
average range of 18–19%. Gross margins
in the Group’s Healthcare businesses
came under increasing pressure during
the year, from the transactional currency
effects of the strong depreciation of the
Canadian and Australian dollars. However,
the impact on Group operating margins
was limited by tight control of operating
costs in the Healthcare businesses. More
broadly, the Group’s Investment for Growth
programme, started in 2012 and now
nearing completion, has started to deliver
the benefits we had expected. As revenues
have increased, operational leverage has
reduced operating costs as a percentage of
revenue and these benefits have offset the
impact of acquisitions joining the Group
with lower initial operating margins.
To achieve the Group’s objective of strong
double-digit growth, acquisition spend at
the level of ca.£25m p.a. is targeted. The
level of spend this year of £16.5m is below
this target level but is close to the five year
average of ca.£16m p.a. and is well ahead
of the prior year spend of only £2m. After
the financial year end in early October
2014, a further acquisition was completed
of 80% of Technopath Distribution (“TPD”)
and this has taken the acquisition spend to
ca.£26m in the 2014 calendar year.
The Group continues to focus strongly
on free cash flow, which funds the growth
strategy and allows the Company to provide
healthy dividends to shareholders. In 2014,
free cash flow was £37.8m, compared
with a five year average of £31m p.a. and
was equivalent to a conversion rate of
over 90% of adjusted after tax earnings.
Now that the Investment for Growth
programme is approaching completion,
capital expenditure is trending back to
more normal levels and the principal
determinant of free cash flow conversion
“ Free cash flow in the year
was £37.8m, a conversion
rate of over 90%”
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 14
Chief Executive’s Review continued
is now the effective management of
working capital. The KPI used to measure
and monitor this performance is working
capital as a percentage of revenue; in 2014
this increased to 17.2% compared with both
the target and the five year average level
of 16–17%.
ROATCE is the final indicator of the
overall performance of the Group
and very importantly of its success in
creating value for shareholders. ROATCE
is measured as the pre-tax return on total
Group investment excluding net cash,
but including all goodwill and acquired
intangible assets. ROATCE has exceeded
the 20% target in each of the last five years
and this year was 25.8%.
Acquisitions
Acquisitions are an integral part of the
Group’s strategy, designed to accelerate
growth and to facilitate entry into related
strategic markets. Despite sustained
and increasing resources focused on
identifying and completing value-enhancing
acquisitions, acquisition spend does ebb and
flow over time. The acquisition environment
has improved this year after a period when
the uncertainty over future economic
prospects had made vendors very cautious,
resulting in lengthening transaction
processes and delayed completions.
ROATCE
25.8%
During the year, a number of acquisitions
have been completed which are natural
extensions of the Group’s existing
businesses and which have extended the
scope of the businesses into new products,
market segments and geographies.
In Life Sciences, DHG extended its
business in Australia with the acquisition
of Chemzyme, which has now been
integrated into DHG’s principal operations
in Melbourne. During the year DHG also
acquired the remaining 20% minority
shareholdings in DSL and shortly after
the year end, acquired 80% of TPD, an
established supplier to the Biotechnology,
Clinical Laboratory and Medical markets
in Ireland and the UK. The acquisition of
TPD represents an important first step in
extending the scope of DHG’s business
into the markets of Ireland and the UK, as
well as adding important new products
and suppliers.
In Seals, the Group acquired 80% of Kentek,
a specialised filter distributor which adds a
new product line and extends the reach of
the Seals activities into the new markets of
Finland, Russia and the Baltic States. During
the year, two smaller acquisitions were
completed in the UK, AB Seals and Ramsay
Services, which will be managed by FPE
Seals and M Seals respectively. RT Dygert
also acquired the remaining 49% in the HPS
Industrial OEM seal business in Seattle.
In Controls, the fastener business was
strengthened through the acquisition
of SFC, a UK fastener distributor which
has a strong fit with Clarendon and brings
specialist technical and design skills as well
as added value assembly expertise. During
the year, Filcon also acquired the goodwill
and assets of Sacee, a supplier of specialist
connectors to the Satellite sector in France;
Sacee’s operations have been integrated
into Filcon in Munich.
With an improving acquisition environment,
a good pipeline of opportunities and
additional corporate development resources
in place, prospects for acquisition activity in
2015 are encouraging.
Acquisition spend (£)
16.5m
• Life Sciences –
Chemzyme, DSL (20%)
• Seals – Kentek (80%),
Ramsay, AB Seals,
HPS (49%)
• Controls – SFC, Sacee
31.6m
8.0m
7.9m
0.3m
12.2m 11.0m
28.2m
22.3m
2.2m
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
DIPLOMA PLCStrategic Report
15
Life Sciences
% of Group revenue
30%
2014
2013
Revenue
£91.4m
£93.2m
Adjusted operating
profit
£19.7m £20.9m
Adjusted operating
margin
21.6%
22.4%
Free cash flow
£14.9m
£14.1m
• Underlying Sector revenue growth
of 9%
•
In DHG Canada, strong consumable
revenues offset weaker capital
equipment and service revenues
• ERP project well advanced –
Somagen completed, Vantage in
process and AMT to follow in 2015
• DHG Australia building critical
mass under single leadership and
with consolidated operations;
Chemzyme acquired and integrated
• Acquisition of TPD after year end
extends DHG into Ireland and the UK
and adds new products and suppliers
• Strong growth in Environmental
businesses with stable operating
margins
Performance in the year
Reported revenues of the Life Sciences
businesses decreased by 2% because of
the translational currency impact from
the significant weakening in the Canadian
and Australian dollars relative to UK sterling.
On a constant currency basis, underlying
revenues increased by 9%. Similarly on
a reported basis, adjusted operating
profit decreased by 6% in UK sterling
terms, but increased by 8% on a constant
currency basis.
Gross margins in the Healthcare
businesses were also significantly
impacted on a transactional basis by the
strong depreciation of the Canadian and
Australian dollars against the US dollar
and the Euro. These currency effects were
partly mitigated by an increased proportion
of higher margin consumable product
revenues this year, by price concessions
negotiated with suppliers and by tight
management of operating costs. There
were also benefits starting to accrue
from prior year investments and adjusted
operating margins decreased by only
80bps to 21.6%.
Free cash flow increased by 6% to £14.9m,
reflecting a combination of lower capital
expenditure and tax payments, offset in part
by investment in higher working capital.
Strategy development
The DHG group of Healthcare businesses
account for ca.80% 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 technical sales and
product application staff, working closely
with surgeons, operating room nurses and
laboratory technologists. A large proportion
of revenues (ca.70%) are secured under
multi-year customer contracts.
In Canada, the three principal businesses
made good progress during the year
in expanding the growth potential of
their businesses with new products and
new suppliers. Somagen revenues were
boosted by the supply of new testing kits
used in the roll-out of colorectal cancer
screening programmes across three
Provinces and made good progress with
new best-in-class products in HbA1c
diabetes testing and Autoimmunity. AMT
continued to increase revenues in its new
minimally invasive (“MI”) Surgery division,
consolidating its position in the supply
of specialised surgical instruments used
in laparoscopic and other MI Surgery
procedures. Vantage launched its new
range of endoscopes offering significant
benefits in terms of image quality and
handling ability.
There remain significant opportunities for
DHG in Canada to increase its share in
its core specialised segments of Clinical
Diagnostics, Electrosurgery, MI Surgery
and GI Endoscopy with new products and
suppliers. DHG is also actively seeking to
extend its business, either organically or by
acquisition, into other specialised medical
disciplines where its business model can
be deployed successfully.
In Australia, BGS and DSL have grown
revenues strongly and have now been
brought together under a newly formed
leadership group and with operations and
back office systems consolidated into a
single facility in Melbourne. Now that DHG
in Australia has established a firm base with
sufficient critical mass, it is now looking for
further opportunities to grow by adding
bolt-on acquisitions. During the year,
DHG acquired the assets and goodwill of
Chemzyme, a small distributor supplying
products to the sterilising departments in
hospitals across Australia and New Zealand.
Chemzyme has been integrated into the
Melbourne operations and has extended
the scope of the DHG business in Australia
with a supplier which also is a key supplier
to Vantage in Canada. DHG also during the
year acquired the remaining 20% minority
shareholdings in DSL.
Shortly after the year end, DHG acquired
80% of TPD, an established supplier to the
Biotechnology, Clinical Laboratory and
Medical markets in Ireland and the UK. The
acquisition of TPD represents an important
first step in extending the scope of DHG’s
business into the markets of Ireland and
the UK as well as adding important new
products and suppliers. Once DHG has
firmly established its position in these new
markets, opportunities will be explored in
further new geographic territories.
The a1-group of Environmental businesses
accounts for ca.20% of Sector revenues
and supplies a range of products used in
Environmental testing and Health & Safety
applications. The a1-group has been
successful in recent years by maintaining
a sharp focus on attractive niche market
segments and this year has delivered
strong growth with stable operating
margins. While maintaining its focus, the
a1-group is also looking for carefully
selected bolt-on acquisitions to introduce
new growth opportunities.
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 16
Chief Executive's Review continued
Seals
% of Group revenue
39%
2014
2013
Revenue
£119.8m £106.1m
Adjusted operating
profit
£21.7m
£19.5m
Adjusted operating
margin
18.1%
18.4%
Free cash flow
£16.4m
£15.9m
• Underlying Sector revenue growth
of 7%
• Good growth in HFPG Aftermarket
Seals business in North America
despite disruption from severe
winter weather
• Unified European Aftermarket Seals
group taking shape, centred on
FPE Seals – AB Seals added during
the year
• Kentek acquisition brings new
geographic markets and adds
filter products
• Continuing strong growth in the
Industrial OEM Seals businesses in
the US and Europe
• M Seals acquired Ramsay Services in
the UK and All Seals is opening new
branch operation in Houston, Texas
Performance in the year
The Seals businesses increased revenues by
13%, which included part year contributions
from Kentek, acquired in January 2014,
and two smaller bolt-on acquisitions in
the UK. After adjusting for the additional
contribution from these acquisitions and
for the impact from currency translation,
underlying revenues increased by 7%. The
acquisition of Kentek and the continued
development of the FPE Seals and M Seals
businesses, through organic growth and
bolt-on acquisitions, have increased the
European region’s share of total Seals
revenues to ca.25% in 2014.
Across the Seals businesses, gross margins
continued to be resilient, underpinned by
essential product availability and added
value technical service. Operating margins
in the HFPG and FPE Seals businesses
improved as they benefited from prior
year investment in people, facilities and
equipment. However, with Kentek joining
the Group with lower initial operating
margins, adjusted operating margins
reduced by 30bps to 18.1%.
Free cash flow increased by £0.5m to
£16.4m, as capital expenditure decreased,
but increased working capital reduced the
contribution from higher operating profits.
Strategy development
The Aftermarket Seals businesses account
for ca.60% of Sector 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 typically used in the
repair and maintenance of equipment after
it has completed its initial warranty or lease
term. Our businesses act as a one-stop
source of replacement components for all
main brands of machinery and compared
to the OEM dealer network, offer higher
levels of customer service and more
competitive pricing.
In North America, HFPG continues to
penetrate the market through its superior
marketing, its relentless sales approach
and product development to extend the
product line. HFPG is always looking to
improve its service to customers and
during the year, the level of sales processed
online increased by 26% and now accounts
for ca.20% of US revenues. Capacity is also
expanding in the seal machining centres
which respond to the demand from repair
shop customers for hard-to-find and
outsized seals on a 24 hour basis.
Outside North America, the Group
continues to target an increased global
footprint for Aftermarket, particularly
in Europe and Asia Pacific. During the
year, plans to create a more substantial,
unified European Aftermarket Seals group
continued to take shape, centred on FPE
Seals and with operations in the UK and
the Netherlands. FPE Seals added AB Seals
as a bolt-on to its operations in the UK,
strengthening coverage in the important
South East region. The Group also acquired
80% of Kentek, a specialised distributor of
filters and related products, used in heavy
mobile machinery and industrial equipment
applications. Kentek extends the reach of
the Seals activities into the new markets of
Finland, Russia and the Baltic States, as well
as adding filters to the Group’s product line.
The Industrial OEM businesses account
for ca.40% 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 their
Industrial OEM customers to specify the
most appropriate sealing material and
design for the customer’s application
and the most suitable seal manufacturer
from which to source the parts. Once the
part is designed in to the application, the
businesses provide the necessary logistical
and technical support, in most cases for
the lifetime of the OEM’s product.
The Group’s growth strategy in the
Industrial OEM Seal sector is to build and
expand a group of businesses in North
America and internationally. During
the year, RT Dygert benefited from its
investment in new elastomer compounds
to penetrate new technically demanding
applications. RT Dygert also acquired the
remaining 49% in the HPS seal business
in Seattle. Both All Seals and J Royal saw
good gains in existing and new market
segments with the introduction of new
higher specification products. All Seals also
benefited from its investment in a water-jet
gasket cutting machine and in November,
will open a branch operation in Houston,
Texas. In Europe, M Seals acquired Ramsay
Seals, a specialist distributor of O-rings
which will give M Seals an entry into the
Industrial OEM seal business in the UK, as
well as adding strengths in the Aerospace
and Oil & Gas sectors.
DIPLOMA PLCStrategic Report 17
Controls
% of Group revenue
31%
2014
2013
Revenue
£94.6m £86.2m
Adjusted operating
profit
£15.3m
£13.9m
Adjusted operating
margin
16.2%
16.1%
Free cash flow
£11.4m
£10.8m
• Underlying Sector revenue growth
of 8%
• Strong growth in Interconnect,
driven by improved markets in the
UK and Germany, particularly Civil
Aerospace, Energy and Motorsport
• Acquisition of SFC strengthened the
fasteners business and added design
skills and added-value assembly
expertise
• Sacee acquisition extended
Filcon’s business into Satellite
sector in France
•
In Fluid Controls, significant
gains made by Hawco in Food &
Beverage sector
• Relocation of Hawco’s offices,
consolidation of warehouse
facilities and extension of new
ERP system into Abbeychart
Performance in the year
The Controls businesses increased
revenues by 10%, including part year
contributions from SFC, a specialty fastener
company acquired in June 2014 and Sacee,
a small connector distributor acquired
in October 2013. After adjusting for the
contribution from these acquisitions and
for the impact of currency translation,
underlying revenues increased by 8%.
focus on specialised markets and added
value opportunities. The benefits from
investment programmes completed last
year, enabled the businesses to gain some
operational leverage which offset the
impact from the lower initial operating
margin of SFC.
Free cash flow increased by £0.6m to
£11.4m, with reduced capital expenditure,
but with working capital increasing to
take advantage of opportunities within
existing markets.
Strategy development
The Interconnect businesses account
for 70% of Controls revenues and supply
a range of high performance wiring,
connectors, harness components,
fasteners and control devices. These
products are used in technically demanding
applications, often in harsh environments,
in industries including Aerospace, Defence,
Motorsport, Energy and Medical as well as
in other specialised Industrial applications.
The products are generally used in
refurbishment, upgrade and maintenance
programmes for equipment in service and
are supplied to major new build programmes
only where smaller quantities are required
from stock. The businesses act as a single
source for a wide range of products, have
strong technical knowledge to specify
products for customer applications and
offer ex-stock availability and a full range
of added value services.
A key element of the growth strategy within
Interconnect is to broaden the range of
high performance products and added
value services offered. As part of this
strategy, a grouping of specialty fastener
businesses is being built and this group
was strengthened through the acquisition
of SFC, a UK based distributor of fasteners
and ancillary products to the Aerospace,
Industrial and Motorsport sectors. SFC
has a strong fit with Clarendon and brings
specialist technical and design skills as well
as added value assembly expertise. As the
group’s supply of fasteners to the premium
aircraft seating industry continues to grow
strongly, Clarendon is extending production
line-side support to key customers and
exploiting further opportunities to export to
sub-contract manufacturers.
Adjusted operating profits increased by
10% to £15.3m and adjusted operating
margins were held steady at 16.2%.
Overall gross margins in the Controls
businesses remained resilient with their
Another important element of the growth
strategy is to further penetrate specialised
market sectors in Europe. During the
year, Filcon acquired the goodwill and
assets of Sacee, a supplier of specialist
connectors to the Satellite sector in France;
Sacee’s operations have been successfully
integrated into Filcon in Munich. In the
Energy market, following its acquisition
of Rayquick in late 2012, IS-Sommer was
appointed by its key energy products
supplier as one of only two master
distributors in Germany.
The Fluid Controls businesses account
for 30% of revenues and supply a
range of fluid control products used
broadly across 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.
Hawco has had to respond to significant
structural changes in its markets and now
is seeing the benefits of its repositioning
and developmental activities. The trend
away from major out-of-town food retail
stores and towards convenience stores
initially dampened demand for Hawco’s
equipment, but Hawco is now having good
success in both the UK and Europe with its
range of scroll compressors which offer
a smaller footprint and greater efficiency.
Hawco is also seeing growing demand
for refrigeration units used in transport
applications reflecting the increased use
of home shopping and delivery. Sales
into the Brewery sector have also been
buoyed by the introduction of the scroll
compressors and other improved products
designed to provide “at source” cooling for
smaller outlets such as cafes and bars. The
Abbeychart business model and resources
applied to the coffee and catering segments
are also being reshaped to match changes
in end-user tastes and to focus on growth
segments where technical expertise can
add value. During the year, Hawco’s offices
were relocated, warehouse facilities were
consolidated and the new Hawco ERP
system was extended into Abbeychart.
Geographically, the Controls businesses
are still very concentrated in Northern
Europe and in particular in the UK and
Germany, where ca.80% of revenues
are generated. The Group continues to
look for new growth opportunities to
expand into other geographic territories
outside of Northern Europe, most likely
through acquisitions which share the same
specialised business model and stable
financial characteristics.
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 18
Finance Review
“Strong focus on key
performance metrics”
Nigel Lingwood
Group Finance Director
Results in 2014
Diploma reported a strong performance
this year, with both underlying revenues
and adjusted operating profit increasing
by 8% respectively, as the businesses
benefited from more positive economic
conditions in most of its key markets.
Reported revenues and adjusted operating
profits were £305.8m and £56.7m
respectively. Free cash flow was strong
at £37.8m of which £16.5m was spent
on acquisitions and the Group’s return
on adjusted trading capital employed
(“ROATCE”) remained strong at 25.8%.
Underlying revenues and adjusted
operating profits are after adjusting for
the contribution from businesses acquired
during the year and for the impact on
the translation of the results of the
overseas businesses from the significant
strengthening of UK sterling, in most
of the major currencies in which the
Group operates.
With ca.75% of the Group’s revenues
generated overseas, the impact on
reported results from currency translation
has led to a reduction in revenues and
adjusted operating profits of £17.7m
and £4.1m respectively, on a constant
currency basis. These translational currency
effects more than offset contributions
from acquisitions of £15.4m in revenue
and £2.3m in adjusted operating profit.
The results of the Healthcare businesses,
which represent 80% of Life Sciences
revenues, were also impacted by the large
depreciation of the Canadian and Australian
dollars against the currencies in which these
businesses purchase their products. This
currency transactional exposure led to a
300bps reduction in gross margins in these
businesses, despite a substantial amount
of this exposure being hedged through to
June 2014 by forward currency contracts.
As these are replaced by contracts which
reflect more current exchange rates,
the impact on Healthcare gross margins
from the weaker Canadian and Australian
currencies will continue well into 2015.
Transactional currency exposures in the rest
of the Group’s businesses were not material.
The weaker gross margins in the Healthcare
businesses were partly mitigated by a
stronger mix of higher margin consumable
revenues in these businesses and by strong
control over operating costs. With resilient
gross margins continuing in the Seals
and Controls businesses and operational
benefits now coming through from the
Investment for Growth programme, Group
adjusted operating margins reduced by
only 50bps to 18.5%, compared with 19.0%
reported last year.
Investment for Growth programme
The Investment for Growth programme
which was initiated in 2012 is now
approaching completion. The programme
comprised a series of specific investments
and additional management resources
designed to provide the foundation for the
next phase of the Group’s growth.
By the end of the 2014 financial year,
£5.1m had been invested across the
Group in modern and expanded facilities
and in powerful and efficient new ERP
systems. Of this total, £3.6m was in capital
expenditure and £1.5m had been expensed.
The remaining investment of ca.£0.3m
will be spent in 2015 in completing the
implementation of a new ERP system in
the Canadian Healthcare businesses. The
benefits resulting from these investments
have started to positively impact in the
second half of 2014, delivering greater
operating efficiencies and improved
management of working capital as
revenues increased.
Investment was also made in additional
senior managers at the Group’s Head Office
and in the major businesses to strengthen
corporate development resources, adding
Revenue bridge
£m
320
300
280
260
240
285.5
2013
15.4
(17.7)
22.6
Underlying
growth
Acquisitions
Exchange
effects
305.8
2014
DIPLOMA PLCStrategic Report 19
ca.£1.2m to annual operating costs. Outside
the Investment for Growth programme,
there was also further investment within the
businesses to strengthen sales and business
development resources and in regional
management. These additional resources
were in place at the beginning of 2014
and gave the strong leadership required to
extend the businesses into new areas and
develop acquisition opportunities.
Adjusted profit before tax, earnings per
share and dividends
Adjusted profit before tax increased by
3% to £56.2m (2013: £54.3m). There was
a net finance expense this year of £0.5m
(2013: £Nil) which included £0.4m of bank
facility and commitment fees, following
the renewal of the Group’s bank facilities
in June 2014. A change in the interest rate
used to calculate the return on the pension
scheme assets, required by IAS19 (revised),
led to a net interest charge against profit this
year of £0.2m, compared with net interest
income of £0.2m last year. Statutory profit
before tax was £49.8m (2013: £48.5m), after
acquisition related charges of £6.4m (2013:
£5.6m) and fair value remeasurements of
the put options held over minority interests
which this year were net £Nil (2013: £0.2m).
The Group’s adjusted effective accounting
tax charge fell again in 2014 to 26.3% of
adjusted profit before tax (2013: 27.3%).
This reflected the benefit of a further
reduction in the effective UK corporation
tax rates to 22.0% (2013: 23.5%), together
with the benefit of current and prior year
manufacturing tax relief claims in the
US Seals businesses which led to a lower
effective tax rate in the US of 35% (2013:
38%). The Group’s cash tax rate on adjusted
profit before tax fell to 23.1% (2013: 27.3%)
as UK tax payments benefited from the
exercise of share awards last year under
the Group’s LTIP.
Adjusted earnings per share (“EPS”)
increased by 4% to 36.1p, compared with
34.8p last year reflecting the benefit from
the lower effective tax rate this year. IFRS
basic earnings per share increased to 31.4p
(2013: 30.7p).
The Board continues to pursue a policy
of increasing dividends to shareholders
each year, while targeting towards two
times dividend cover (defined as the ratio
of adjusted EPS to total dividends paid and
proposed for the year). Given the strong
underlying performance and encouraging
prospects for acquisition activity in 2015,
the Directors have recommended an
increase in the final dividend of 8% to 11.6p
per share. This gives a total dividend per
share for the year of 17.0p per share which
represents an 8% increase on the prior
year dividend of 15.7p. The dividend cover
moves to 2.1 times from 2.2 times reported
last year.
Free cash flow
The Group continues to generate strong
free cash flow which in 2014 was £37.8m
(2013: £31.6m), despite funding an increase
in working capital to support the stronger
trading environment towards the end of
the year. Free cash flow, which is before
expenditure on acquisitions or returns to
shareholders, represented 91% of adjusted
profit after tax (2013: 80%).
The increase in funding of working
capital of £4.6m (2013: £1.1m) led to a
small reduction in operating cash flow
of £0.9m to £55.0m (2013: £55.9m). This
increase was driven by increased inventory
of £4.6m (2013: £0.9m) which reflected a
number of operational priorities, including
contingencies held against a possible
longshoreman’s dispute in the United
States. The higher level of inventories at the
year end led to the Group’s KPI metric of
working capital as a proportion of revenue
increasing to 17.2%, compared with 16.7%
last year.
Strong free cash flow
£37.8m
Group tax payments reduced by £1.8m
to £13.0m (2013: £14.8m) despite higher
profits, primarily because of the tax relief
taken on the exercise of the LTIP share
awards in 2013 and reflecting the benefit
of small prior year tax repayments in the
US Seals businesses. On an underlying
basis and before the currency effects of
translation, cash tax payments remained
in line with last year at ca.27% of adjusted
profit before tax.
As anticipated last year, capital expenditure
reduced to a more normal level of £2.2m
(2013: £4.6m) as the Group’s Investment
for Growth programme reached its final
stages. During the year, £0.3m was invested
in the ongoing ERP implementation in
the Canadian Healthcare businesses
which represents the final project in this
programme. This compares with £2.0m of
capital invested in this programme last year.
Outside of the Investment for Growth
programme, the Healthcare businesses in
Canada and Australia also reduced their
expenditure on acquiring field equipment to
support customer contracts with hospitals
to £0.7m (2013: £1.7m). Last year this
expenditure included £1.0m on funding
endoscopy contracts in Vantage structured
on a cost per procedure (“CPP”) basis; these
contracts have been delayed, pending
the introduction in 2015 of a new series
of endoscopes. In the Seals and Controls
Sectors, £0.5m was spent on new tooling
and warehouse equipment, including
£0.1m on line-side equipment to support
a new supply project in the IS Group. A
further £0.2m was invested in refurbishing
the office and warehouse facilities in
Hawco and HKX and £0.5m was spent
on upgrading the existing IT hardware and
software infrastructure in a number of the
Group’s businesses.
The Company paid the PAYE income tax
liability of £1.8m arising on the exercise
of LTIP share awards, in exchange for
reduced share awards to participants; the
comparable payments last year of £4.7m
related to the exercise of several awards
which had vested in earlier years under
the Company’s LTIP.
The Group spent £16.5m of the free
cash flow on acquisitions, as described
below and £18.4m (2013: £17.6m) on
paying dividends to both Company and
minority shareholders.
Acquisitions completed during the year
The Group invested cash of £16.5m
(2013: £2.2m) in acquisitions during
the year, including £1.5m on acquiring
outstanding minority interests and £0.1m
of deferred consideration.
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 20
Finance Review continued
The largest investment was £9.9m in
acquiring 80% of Kentek, a business based
in Finland, but with a large proportion of
its sales being carried out across Russia
in supplying filters and related products
for a range of heavy mobile machinery.
A further £5.0m, was invested in acquiring
several small, but strategically important
businesses which extend either the product
or geography of the Group’s existing
businesses. These acquisitions added £9.0m
to the Group’s acquired intangible assets
which at 30 September 2014 were £28.6m,
after amortisation of £5.6m (2013: £5.6m).
Goodwill increased by £6.0m to £80.2m at
30 September 2014, after making some small
fair value adjustments to the assets acquired.
Goodwill is not amortised, but is assessed
each year to determine whether there
has been any impairment in the historic
value of goodwill acquired. This year the
assessment has been carried out at a
Sector level rather than a business unit
level as this more accurately reflects the
level at which management monitor the
value of goodwill. The exercise to assess
whether goodwill has been impaired which
is described in note 10 to the consolidated
financial statements, concluded that there
had been no impairment in the value of
goodwill at 30 September 2014.
Net cash at year end
£21.3m
Shortly after the year end, the DHG
business completed the acquisition of 80%
of Technopath Distribution Limited for cash
consideration of £9.6m and debt acquired
of £1.5m. Put/call options have also been
included which allows the Group to acquire
the outstanding minority shares over a
period of up to five years.
Liabilities to minority shareholders
At 30 September 2014, the Group’s
liability to purchase outstanding minority
shareholdings had increased modestly to
£3.5m (2013: £2.8m). During the year, the
outstanding minority interests of 20% in
DSL and of 49% in HPS (a small subsidiary
of the RT Dygert seals business) were
acquired for cash consideration of £1.5m.
The acquisition of Kentek in January
2014 included put/call options over the
outstanding 20% of share capital held by
management in this business which were
valued at £2.3m.
At 30 September 2014, the put options over
the outstanding minority interests held in
M Seals and Kentek were valued at £3.5m,
based on the Directors’ latest estimate of
the Earnings before Interest and Tax (“EBIT”)
of these businesses when these options
are expected to crystallise. The Directors
expect to acquire 10% of the outstanding
minority interest in Kentek within the next
six months, with the remaining interest likely
be exercised between the next two and
five years.
In addition to the liability to minority
shareholders, the Group also has a
liability at 30 September 2014 for deferred
consideration of up to £0.5m (2013: £0.2m)
primarily relating to acquisitions completed
during the year and which, subject to
achievement of performance conditions,
will be paid before the end of the 2015
calendar year. During the year, deferred
consideration of £0.1m was paid to the
vendor of BGS, the Australian Healthcare
business acquired in 2010 and there
remains £0.1m which will be paid shortly.
Return on adjusted trading capital
employed and capital management
A key metric that the Group uses to provide
an indication of the overall profitability of
the Group and its success in creating value
for shareholders is the Return on Adjusted
Trading Capital Employed (“ROATCE”). This
is a pre-tax measure which is applied against
the fixed assets and working capital of the
Group, together with all the acquisition
related charges and goodwill previously
written off. At 30 September 2014, the
Group ROATCE remained unchanged
from last year at 25.8%. Adjusted trading
capital employed is set out in note 3 to the
consolidated financial statements.
At the Sector level, we have this year
amended the basis of the ROATCE
calculation to be consistent with that used
to calculate Group ROATCE. In particular,
all previously written off acquisition related
charges and goodwill is now included in
each Sector’s trading capital employed
for the purposes of calculating Sector
ROATCE. The comparative ROATCEs for
2013 have been restated on a similar basis.
The Group continues to maintain a strong
balance sheet with net cash funds increasing
during the year by £2.0m to £21.3m at
30 September 2014. Surplus cash funds
are generally repatriated to the UK, unless
they are required locally to meet certain
commitments, including acquisitions.
On 28 June 2014, the Group renewed its
existing revolving multi-currency credit
facility at £25m, with an option for the
Group to extend this facility to £50m,
subject to market pricing. This facility,
which is generally utilised to meet any
shortfall in cash to fund acquisitions,
is committed until June 2017 and was
renewed on more favourable terms than
the previous facility.
Employee pension obligations
Pension benefits to existing employees,
both in the UK and overseas, are provided
through defined contribution schemes
at an aggregate cost in 2014 of £1.7m
(2013: £1.5m).
The Group also maintains a small legacy
defined benefit pension scheme in the UK
which has been closed to new entrants and
further accruals for many years. The latest
triennial actuarial valuation was carried out
as at 30 September 2013 and the funding
deficit remained unchanged at £2.7m, with
strong equity returns in 2013 offsetting
the large reduction in bond yields since
the last valuation was completed in 2010.
The Group continues to make regular
cash contributions to the scheme at an
annual rate of £0.3m, as agreed with the
actuary, with the objective of eliminating
the funding deficit over eight years. The
Group continues to look for opportunities
to provide sufficient security to the
Trustees in order to limit any requirement
to increase the existing cash contribution
to the scheme.
On an accounting basis, a further reduction
of ca.0.5% in bond yields since last year was
again offset by stronger equity returns and
the accounting deficit improved to £4.3m at
30 September 2014 (2013: £4.7m). Scheme
assets which are largely represented by
equities, increased by £1.6m to £24.9m
while pension liabilities increased by £1.2m
to £29.2m.
DIPLOMA PLCStrategic Report 21
Sector Review
LIFE SCIENCES
SEALS
CONTROLS
% of Group revenue
% of Group revenue
% of Group revenue
30%
Geography1
67% Canada
19% Europe
14% Rest of World
39%
Geography1
68% North America
24% Europe
8% Rest of World
31%
Geography1
58% UK
34% Continental Europe
8% Rest of World
Customers
Customers
Customers
40% Industrial OEMs
31% Heavy Construction
19% Other Industrial
5%
3% Dump & Refuse Trucks
2% Logging & Agriculture
Industrial Aftermarket
27% Aerospace & Defence
27% Industrial
19% Food & Beverage
15% Motorsport
8% Energy & Utilities
4% Medical & Scientific
Products
Products
81% Clinical
12% Utilities
4%
2% Life Sciences Research
1% Other Life Sciences
Chemical & Petrochemical
Products
69% Consumables
23% Instrumentation
8% Service
Employees
334
46% Seals & Seal Kits
14% O-rings
11% Filters
10% Attachment Kits
10% Cylinders & Other
9% Gaskets
Employees
604
41% Wire & Cable
15% Fasteners
15% Equipment & Components
12% Control Devices
12% Connectors
5% Other Controls
Employees
312
Principal businesses
IS Group
Specialty Fasteners
Filcon
Hawco
Principal businesses
Principal businesses
Diploma Healthcare Group (DHG)
a1-group
Hercules Fluid Power Group (HFPG)
FPE Seals
Kentek
M Seals
1 By destination.
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 22
Sector Review continued
Life Sciences
The Life Sciences Sector businesses supply
a range of consumables, instrumentation
and related services to the healthcare and
environmental industries.
Revenue growth
+13% p.a.
compound over five years
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.
2014
2013
2012
2011
2010
2009
£91.4m
£93.2m
£78.4m
£74.4m
£55.4m
£49.9m
Principal segments
Healthcare 80%
Environment 20%
Geography
Canada 67%
Europe 19%
Rest of World 14%
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. In October 2014, DHG extended its operations into Ireland
and the UK with the acquisition of Technopath Distribution (“TPD”).
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
DHG
Somagen Diagnostics
AMT Electrosurgery
Vantage Endoscopy
Big Green Surgical
Diagnostic Solutions
Technopath Distribution
Environmental
a1-group
a1-CBISS
a1-envirosciences
Edmonton, AB, Canada
Kitchener, ON, Canada
Markham, ON, Canada
Melbourne, VA, Australia
Melbourne, VA, Australia
Ballina, Co. Tipperary, Ireland
Tranmere, UK
Dusseldorf, Germany
DIPLOMA PLCStrategic Report 23
Market drivers
The DHG businesses in Canada supply into areas of Healthcare
which are predominantly public sector funded. Private sector funding
in Canada is mostly focused on areas where DHG does not participate,
including dental, cosmetic and eye surgery and pharmaceuticals. The
principal demand driver for DHG is therefore the level of healthcare
spending funded 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. In periods when the economy is slower, as has been the case
in 2013 and 2014, healthcare funding may be constrained. This can be
experienced through targeted controls imposed on the number of
laboratory tests and operating procedures as well as more rigorous
tendering processes for expenditure on capital equipment. Even during
such periods, however, healthcare funding has shown positive growth
albeit at reduced levels.
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 Australian Healthcare market
has experienced similar economic pressures to those in Canada but
again has shown some growth, driven by increased private sector
spending offsetting decreased spending in real terms in the public sector.
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$bn)
% growth
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
148.1
144.6
63.1
1.9%
62.7
3.4%
140.6
60.0
3.9%
136.1
56.9
128.9
53.0
121.2
50.7
112.3
47.9
105.0
45.8
98.6
42.0
92.6
39.5
6.1%
5.9%
7.3%
6.2%
7.2%
6.5%
6.9%
n Public
Source: Canadian Institute for Health Information
n Private
Australian healthcare expenditure (A$bn)
% growth
2013
2012
2011
2010
2009
2008
2007
100.8
46.6
97.8
42.4
90.1
40.2
84.8
36.5
78.5
35.0
71.1
32.4
64.3
30.5
2006
58.9
27.7
2005
54.9
26.1
2004
49.3
24.1
n Public
Source: Australian Institute of Health & Welfare
n Private
5.1%
7.6%
7.4%
6.8%
9.8%
9.1%
9.5%
6.9%
10.3%
6.8%
Total healthcare expenditure as a percentage of GDP
Canada
Australia
2009
11.9%
9.1%
2010
11.9%
9.4%
2011
11.7%
9.3%
2012
11.6%
9.5%
2013
11.2%
9.7%
Sources: As above
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report
24
Sector Review continued
Life Sciences
Sector performance
Life Sciences statistics
Revenue
£91.4m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
2014
2013
£91.4m
£93.2m
£19.7m
£20.9m
21.6%
22.4%
£14.9m
£14.1m
21.9%
22.3%
Reported revenues of the Life Sciences businesses decreased by 2%
to £91.4m (2013: £93.2m) because of the translational currency impact
from the significant weakening in the Canadian and Australian dollars
relative to UK sterling. On a constant currency basis, underlying
revenues increased by 9%. Similarly on a reported basis, adjusted
operating profit decreased in UK sterling terms by 6% to £19.7m
(2013: £20.9m), but increased by 8% on a constant currency basis.
Gross margins in the Healthcare businesses were significantly impacted
by the strong depreciation of the Canadian and Australian dollars against
the US dollar and the Euro, which are the currencies in which their
products are mostly purchased; the impact was increasingly felt as the
year progressed, with existing hedging contracts being replaced by less
favourable contracts. These transactional currency effects were partly
mitigated by an increased proportion of higher margin consumable
product revenues this year and by price concessions negotiated with
suppliers. However, Sector gross margins still reduced by 190bps in the
first half and by 300bps in the second half, compared to the prior year
comparable periods. The impact of these reduced gross margins was
limited by tight management of operating costs and the benefits from
prior year investments and adjusted operating margins decreased by only
80bps to 21.6% (2013: 22.4%).
Capital expenditure in the Sector was £1.2m (2013: £2.8m), which included
£0.7m invested in field equipment for placement in hospitals and clinics
by the Healthcare businesses and £0.3m invested in the new ERP systems
in Somagen and Vantage as part of the Group’s broader Investment for
Growth programme. Somagen completed the installation of its new
ERP system in February 2014 and the implementation at Vantage is well
underway, with plans to go live in the first half of the new financial year.
The implementation of the new ERP system in AMT will be completed
in the second half of 2015. Free cash flow increased by 6% to £14.9m
(2013: £14.1m), reflecting lower capital expenditure and tax payments,
offset in part by higher investment in working capital.
Healthcare
Revenues from the DHG group of Healthcare businesses, which
account for 80% of Sector revenues, increased by 8% after adjusting for
translational currency effects and for the initial contribution from a small
business acquired in Australia.
The Canadian Healthcare businesses increased revenues by 6% in local
currency, with very strong consumable revenues more than offsetting
weaker capital and service revenues. Somagen was the strongest
performer with increased consumable revenues across its key suppliers
and boosted by the supply of testing kits used in the roll-out of
colorectal cancer screening programmes across three Provinces.
Capital equipment sales have been at a somewhat reduced level this
year, but good progress has been made in establishing Somagen in the
HbA1c diabetes testing market with best in class technology and as a key
player in the Autoimmunity market. Somagen has also been successful
in adding new suppliers and products in specialised market segments
including quality control products used in calibrating and monitoring
clinical diagnostic instrumentation, automated testing of urine and
sterile fluids and specialised immunoassay technology to assess the
progression of diseases by tracking specific proteins and antibodies.
These efforts have contributed to Somagen entering the new financial
year with a good backlog of capital equipment orders and good
prospects for sales of new instrumentation.
AMT’s core electrosurgery business, led by the new Penevac 1 product
(combined electrode and smoke evacuation device), continued to deliver
strong double-digit growth in volume terms, though growth in value
terms has been constrained by keener pricing in certain central buying
group tenders. Though these tenders can put pressure on the pricing of
core products such as the Penevac and the Megapad grounding pad,
success generally results in higher unit volumes for these core products,
as well as the opportunity to achieve preferred status for a broader range
of products. AMT also made further progress in its minimally invasive
(“MI”) Surgery division, consolidating its position in the supply of
specialised surgical instruments and devices used in laparoscopic and
other MI Surgery procedures. Good advances have been made with
core product lines, ranging from surgical instruments used in standard
laparoscopic procedures, to leading edge interventional radiology and
oncology products for use in the treatment of cancer and cancer
related conditions.
Vantage continued to generate strong growth in revenues from
consumable products and service which this year accounted for
ca.80% of Vantage revenues (2013: ca.65%). In particular there were
strong performances from the sale of argon plasma probes, from the
specialty chemicals used in endoscope reprocessors and from tubing
sets for endoscopes as well as from other endoscopic accessories
including specialist retrieval devices. Capital equipment revenues were
significantly reduced compared with the prior year, when Vantage had
an exceptionally strong year for sales of endoscope reprocessors and
argon plasma coagulation units. Vantage’s supplier of endoscopes
has this year launched its new 600 series endoscope range, offering
significant benefits in terms of image quality and handling ability.
Vantage has been trialling the new endoscopes with target customers
in the second half of the year and the response has been positive
which should give momentum to capital sales in the new financial year.
In Australia and New Zealand, revenues from DSL and BGS increased
by 19% in local currency. BGS generated strong growth by penetrating
the existing market for smoke evacuation products, as well as creating
new demand for these products. BGS also continued to deliver steady
growth in electrosurgical grounding pads and laparoscopic electrodes.
DSL has continued to generate good growth in its consumable products
and service business, but had a softer year for capital sales. Encouraging
progress was made, however, in developing opportunities in HbA1c
diabetes testing, haemoglobin testing and autoimmunity. Following
the integration last year of operations and back office functions in
Melbourne, DSL and BGS are successfully operating as distinct sales
and marketing businesses, benefiting from a single leadership group
and shared operations and back office systems in Melbourne – giving
the efficiencies and critical mass of a shared services group.
DIPLOMA PLCStrategic Report 25
During the year, DHG acquired the remaining 20% minority shareholdings
in DSL and in July 2014, DHG acquired the assets and goodwill of
Chemzyme Australia, a small distributor of enzymatic cleaning products
supplied to the sterilising departments in hospitals across Australia and
New Zealand. Chemzyme has been integrated successfully into DHG’s
operations in Melbourne. The principal supplier to Chemzyme has signed
a new ten year exclusive distribution agreement with DHG in Australia as
well as extending its agreement with Vantage in Canada.
Shortly after the year end, in early October 2014, DHG acquired 80% of
TPD, an established supplier to the Biotechnology, Clinical Laboratory
and Medical markets in Ireland and the UK. The principal owner
managers of the business will remain as Directors of TPD and retain a
20% minority shareholding with put and call options to allow the Group
to acquire the shares over a period of up to five years. TPD employs
ca.40 staff at its principal location in Ballina, County Tipperary and
shares certain key suppliers with the DHG business in Canada. The
acquisition of TPD represents an important first step in extending the
scope of the Group’s Healthcare businesses into the markets of Ireland
and the UK, as well as adding important new products and suppliers.
Environmental
Revenues from the Environmental businesses, which account for 20%
of Sector revenues increased by 14% in constant currency terms. The
a1-envirosciences business based in Germany increased revenues by
8%, generating good sales of analytical instruments in both the UK and
Germany, while increasing the penetration of its laboratory enclosure
systems across Europe. The business has also enjoyed an increase in
service revenues following an investment in engineering staff last year.
During the year, the business’s largest supplier of analytical instruments
extended its exclusive distribution arrangements with a1-envirosciences
to include France.
The a1-CBISS business based in the UK experienced another strong
year of trading, with revenues growing by 20%. There was further strong
growth in sales of CEMS (continuous emissions monitoring systems)
equipment for both alternative energy and conventional electricity
generating stations, though more demanding tender requirements had
an impact on gross margins. a1-CBISS also benefited from its strong
positioning in preventative and emergency maintenance services and as
a specialised technical distributor of a range of essential products for the
gas detection and air quality sectors.
Highlights from the Year
Healthcare
• Steady growth in consumable revenues across core
Canadian businesses
• Capital and service revenues softer against strong
comparatives – but good groundwork completed
with new products and suppliers
• Major ERP project well advanced – Somagen went
live in February 2014; Vantage in process and targeted
for H1 2015; AMT to follow in H2 2015
• Strong growth in Australia, now under single
leadership and with consolidated operations giving
critical mass and efficiencies
• Acquisition of TPD after year end extends DHG into
Ireland and the UK and adds important new products
and suppliers
Environmental
• Strong growth in core business revenues with stable
operating margins
• Substantial demand for CEMS equipment as the UK
seeks to increase electricity generating capacity
• Extension of analyser business into France
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 Healthcare market
and then other geographies
• Continue to develop product and geographic spread
of Environmental business
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 26
Sector Review continued
Seals
The Seals Sector businesses supply a
range of hydraulic seals, gaskets, filters,
cylinders, components and kits used in
heavy mobile machinery and specialised
industrial equipment.
Revenue growth
+20% p.a.
compound over five years
Aftermarket
The Aftermarket businesses supply sealing and associated 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.
2014
2013
2012
2011
2010
2009
Industrial OEM
The Industrial OEM businesses supply seals, gaskets, 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
Principal operations
Aftermarket
HFPG
Hercules Bulldog
Hercules Canada
HKX
FPE Seals
Kentek
Industrial OEM
HFPG
All Seals
J Royal
RT Dygert
M Seals
Clearwater, FL & Reno, NV, US
Barrie, ON & Dorval, QC, Canada
Monroe, WA, US
Darlington, Doncaster & Gravesend,
UK & Breda, The Netherlands
Helsinki, Finland
St. Petersburg & Moscow, Russia
Tallin, Riga & Vilnius, Baltic States
Geography
Lake Forest, CA, US
Clemmons, NC & Barrington, RI, US
& Shanghai, China
Minneapolis, MN & Chicago, IL
& Seattle, WA, US
Espergaerde, Denmark & Halmstad,
Sweden & Tianjin, China
Gateshead, UK
£119.8m
£106.1m
£99.9m
£80.0m
£60.1m
£48.2m
Aftermarket 60%
Industrial OEM 40%
North America 68%
Europe 24%
Rest of World 8%
DIPLOMA PLCStrategic Report 27
Market drivers
The principal market drivers for both the Aftermarket and Industrial
OEM Seals businesses is the growth in the general industrial economies,
in particular North America where ca.70% of Sector revenues are
generated. In 2014, the USA economy is forecast to show annual GDP
growth of 2.8% (2013: 2.8%) as the economy contracted during the
severe winter weather but then returned to steady growth. In Canada,
2014 GDP growth is forecast to improve to 2.7% (2013: 1.9%). In general ,
the economic conditions in the principal South and Central American
economies served by the Aftermarket businesses have been challenging.
In Europe, where ca.25% of Sector revenues are generated, the industrial
economies have been variable in 2013 and 2014. The UK economy
showed growth in the early part of 2014, whilst the Continental
European markets have remained broadly flat.
For the Aftermarket businesses, activity and spending levels in the US
Heavy Construction sector are important, since this market accounts
for over 50% of Aftermarket Seals revenues. Statistics on total US
Construction Spend include non-residential and infrastructure spend,
as well as residential housing activity. Following the significant drop in
spending ahead of the 2008 financial crisis the index started to recover
in 2010 and the rate of steady annual growth has continued into 2013
and 2014.
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 kit
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 2012 as tighter emissions
legislation accelerated machine replacement and hire companies
re-equipped their fleets. The rate of growth slowed significantly in
2013 across all heavy mobile equipment types but recovered in 2014.
For the Industrial OEM seal businesses, the most appropriate indicator
is the US Industrial Production Index, which has continued at a near
constant, modest growth rate since the 2008/2009 recession. The index
moved above pre-recession levels in the second half of 2013 and has
continued to rise in the first half of 2014.
US construction spend ($bn)
1,000
800
600
400
200
0
2007
2008
2009
2010
2011
2012
2013
Source: Cyclast Intercast
US construction equipment units (’000)
70
60
50
40
30
20
10
0
2007
2008
2009
2010
2011
2012
2013
Source: Cyclast Intercast
US industrial production index
105
100
95
90
85
80
2007
2009
Source: US Federal Reserve (seasonally adjusted)
2008
2010
2011
2012
2013
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report
28
Sector Review continued
Seals
Sector performance
Seals statistics
Revenue
£119.8m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
2014
2013
£119.8m £106.1m
£21.7m
£19.5m
18.1%
18.4%
£16.4m
£15.9m
26.0%
27.1%
The Seals businesses increased revenues by 13% to £119.8m (2013:
£106.1m) which included part year contributions from Kentek, acquired
in January 2014 and two smaller bolt-on acquisitions in the UK. After
adjusting for the additional contribution from these acquisitions and for
the impact from currency translation, underlying revenues increased by
7%. The acquisition of Kentek and the continued development of the
FPE Seals and M Seals businesses, through organic growth and bolt-on
acquisitions, have increased the European region’s share of total Seals
revenues from ca.15% in 2013 to ca.25% in 2014.
Adjusted operating profits increased by 11% to £21.7m (2013: £19.5m),
but with Kentek joining the Group with lower initial operating margins,
adjusted operating margins reduced by 30bps to 18.1% (2013: 18.4%).
Across the Seals businesses, gross margins continued to be resilient,
underpinned by essential product availability and added value technical
service. Operating margins in the HFPG and FPE Seals businesses
improved as they benefited from prior year investment in people,
facilities and equipment.
Free cash flow increased by £0.5m to £16.4m (2013: £15.9m), as
increased working capital, particularly in the US businesses, reduced
the contribution from higher operating profits. Capital expenditure
decreased to £0.5m (2013: £0.9m) following the completion last year of
the Investment for Growth programme. In HKX, £0.3m was invested in
new automated tube-bending equipment and on expanding the facility
to manage higher growth in this business. Further investment was also
made in the Clearwater facility in vertical storage carousels to deliver
increased efficiencies in inventory handling.
Aftermarket
The Aftermarket businesses, which now account for ca.60% of Sector
revenues, reported a 21% increase in overall revenues. After adjusting for
currency translation and the acquisitions of Kentek and AB Seals,
underlying revenues increased by 5%.
In the US, Hercules Bulldog grew domestic sales by a robust 6%, despite
the disruption caused to general infrastructure projects and heavy
construction activities by the severe winter conditions across much of
the US which extended through to the end of May. Sales to smaller
sub-distributors and OEM cylinder manufacturers increased strongly
compared to the prior year and the US business continued to develop
its electronic trading capabilities. The level of sales processed online
increased by 26% and now accounts for ca.20% of Hercules Bulldog
revenues in the US. The seal machining centres in Hercules Bulldog also
continued to deliver good growth, with strong demand from repair shop
customers looking to source hard-to-find and outsized seals within
24 hours. Capacity will be further expanded with a fourth machine
which is on order for delivery in 2015. Revenues from exports outside
the US, which account for 25% of Hercules Bulldog sales, decreased by
5% with reduced demand in Mexico, Central America and Saudi Arabia
impacting performance, particularly in the first half of the year.
The Hercules Canada businesses in Ontario and Quebec delivered
growth at a similar level to the US, supported by strong sales to OEM
cylinder manufacturers. The first half of the year was more challenging
as the Canadian economy adjusted to the downturn in demand for
natural resources, but the businesses continued to be successful in
winning key orders as confidence returned in the second half. The
operation in Barrie, Ontario successfully completed its move to a new,
custom built facility in October 2013, providing Hercules Canada with a
first class platform for future growth.
HKX had an excellent year and resumed its upward momentum after a
pause in 2013 following several periods of exceptional growth. Revenues
increased by 14% with strong demand from the core excavator dealers
and from specialist installers linked to the equipment OEMs. During
2014, the new emissions regulations for heavy mobile equipment
continued to be implemented, with the machines fitted with Tier 4
Interim technology beginning to be phased out and replaced by Tier 4
Final technology equipment. With OEM engineering resources focused
on this technology transition, more excavators were delivered to dealers
without attachments which provided increased demand for HKX’s
attachment kits. In 2014, HKX also successfully introduced new products
and a quality enhancement programme. It also invested in improved
automated tube-bending equipment and re-engineered process flows
in its expanded facility in the US.
In the European region, plans to create a more substantial, unified
European Seals Aftermarket group continued to take shape in 2014.
These Aftermarket activities are now centred on FPE Seals with its
operations in the UK and the Netherlands. FPE Seals delivered strong
organic revenue growth of 11% in the year against the background of a
positive economic environment in the UK, although Continental Europe
remains challenging. There was continued success in expanding sales
of hydraulic cylinder metal parts and the seal machining centre installed
at the Doncaster operation in late 2013, also contributed to the positive
overall result. FPE Seals acquired AB Seals in February 2014, a small
addition to its UK operations which is based in Gravesend, Kent and
strengthens the FPE Seals coverage of the important South East region
of the UK.
Outside the core, directly-served markets in the Americas and Europe,
the principal products sold by the Aftermarket businesses are the
Bulldog branded seal and gasket kits. With effect from October 2014,
FPE Seals will take over responsibility, from Hercules Bulldog, for the
sales of these Bulldog products to the Middle East and Africa creating
a unified EMEA Aftermarket sales region. Hercules Bulldog will retain
responsibility for Bulldog sales in the Americas.
In January 2014, the Group completed the acquisition of 80% of Kentek, a
specialised distributor of filters and related products, used in heavy mobile
machinery and industrial equipment applications. Kentek is based in
Finland with operations in Russia and the Baltic States and the acquisition
extends the reach of the Seals activities into these new markets. Kentek
has solid, long term relationships with its key suppliers and customers in
each of its territories and has performed well and in line with expectations
since acquisition. The business has managed the inevitable pressures
exerted on the Russian economy and the international supply chain by
sanctions imposed following the conflicts in Ukraine and Crimea.
DIPLOMA PLCStrategic Report 29
Highlights from the Year
Aftermarket
• Good growth in North America, resilient performance
despite disruption from severe winter weather.
Double-digit growth in attachment kit sales at HKX
• European Aftermarket Seals group taking shape,
centred on FPE Seals – AB Seals acquired and Bulldog
branded products transferred to European operation
• Kentek acquired and performing well and in line with
expectations; it brings a new product portfolio and
important territorial expansion
Industrial OEM
• Benefits of investments in earlier periods translated
into improved results. Excellent growth delivered at
All Seals and J Royal
• RT Dygert acquisition of remaining shares in HPS,
opportunity for further product cross-selling and
territorial coverage
• Acquisition of Ramsay Services by M Seals, provides
a good platform for expansion into UK Industrial
OEM market
• All Seals opening a new branch operation in
Houston, Texas
Potential for Growth
• Continue to gain share in the North American
Aftermarket through superior marketing and product
development
• Increase the global footprint for Aftermarket –
particularly in Europe and Asia Pacific
• Build and expand group of Industrial OEM businesses
in North America and internationally
Industrial OEM
The Industrial OEM businesses, which account for ca.40% of Sector
revenues, reported a 3% increase in revenues. After adjusting for
currency and the small acquisition of Ramsay Services, underlying
revenue growth was 8%.
In North America, the Industrial OEM businesses (RT Dygert, J Royal and
All Seals) all performed well in a generally positive industrial economy.
As in the prior year, the Industrial OEM businesses continued with
initiatives to move up the value chain, by procuring higher level technical
approvals to meet the more stringent demands of customers. The
businesses have continued to gain expertise in the approval processes
and in qualifying new products for new and existing OEM customers.
RT Dygert delivered another year of solid growth, increasing revenues by
5% and benefiting from its investment in the development of regulatory-
compliant elastomer compounds to penetrate the Pharmaceutical, Water
and Petrochemical industries. Solid gains were also made in the supply
of parts to catalogue houses and these gains more than offset a small
reduction in demand from the traditional mid-West cylinder producers.
In July 2014, RT Dygert acquired the outstanding 49% shareholding in
the HPS business in Seattle, taking its ownership to 100%. HPS delivered
strong growth in 2014 benefiting from demand for its heavy duty and
harsh environment seals for specialist construction equipment.
All Seals delivered a strong performance in 2014, increasing revenues
by 11%, as the investment in people and equipment in prior periods
came through in the results. All Seals reported good gains in the Water,
Oil & Gas and Medical sectors with the introduction of new, higher
specification products and the addition of new customers. The Seals
Sector’s first water-jet gasket cutting machine became fully operational
during the year, supporting the growing demand for rapid turnaround
custom gaskets and contributing to the overall positive revenue growth.
In November 2014, All Seals will open a branch operation in Houston,
Texas to serve the large Texas Oil & Gas sector.
J Royal delivered 16% revenue growth in 2014, benefiting from the
significant investments made last year in management and sales
resources. Development lead times can be lengthy for new product
introductions as OEM customers, prior to ordering production-level
quantities, require the completion of stringent quality control processes.
In 2014, J Royal saw the results of its efforts in the successful introduction
of many new products to existing OEM customers. J Royal also benefited
from exceptionally strong demand from the Water sector and filter
manufacturers and was also successful in penetrating new, smaller
customer accounts across the Eastern US, as its expanded sales team
began to win new business.
In Europe, M Seals had a mixed year in its different markets, but
increased overall revenues by 8%, helped by the contribution from the
acquisition of Ramsay Services. Revenues in the long-established Danish
territory were flat as the Danish markets hovered between contraction
and growth in the year. The Swedish operation continued to deliver
double-digit growth and the business is now expanding out of its
Southern base with the addition of a dedicated sales person for the
important industrial region around Stockholm. Sales of large bearing
seals to Chinese wind power customers were subdued for a second
year as the Chinese wind power industry struggled to regain its earlier
momentum. In December 2013, our European Industrial OEM activities
were expanded through the acquisition of Ramsay Services, located in
Gateshead in the UK. Ramsay is a small, specialist distributor of O-rings
and holds the AS9120 accreditation for the Aerospace sector, as well as
having valuable expertise in the UK Oil & Gas sector. M Seals has taken
full responsibility for the Ramsay operation and the business has
performed well since acquisition.
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 30
Sector Review continued
Controls
The Controls Sector businesses supply
specialised wiring, connectors, fasteners
and control devices used in a range
of technically demanding applications.
Revenue growth
+9% p.a.
compound over five years
Interconnect
The IS-Group, Specialty Fasteners and Filcon 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 screening, earthing and lightning protection, power shunt
connectors, multi-core cables and special fasteners.
2014
2013
2012
2011
2010
2009
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 segments
£94.6m
£86.2m
£81.9m
£76.2m
£68.0m
£61.9m
Interconnect 70%
Fluid Controls 30%
Principal operations
Interconnect
IS-Group
IS-Rayfast
IS-Cabletec
IS-Sommer
IS-Connect
Specialty Fasteners
Clarendon
SFC
Filcon
Fluid Controls
Hawco Group
Hawco
Abbeychart
Swindon, UK
Weston-super-Mare, UK
Stuttgart, Germany
Indianapolis, US
Leicester, UK
Totnes, UK
Munich, Germany
Guildford & Bolton, UK
Faringdon, UK
Geography
UK 58%
Continental Europe 34%
Rest of World 8%
DIPLOMA PLCStrategic Report
31
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, partial recovery in 2010 and then a continued
steady decline in 2011 and 2012. Towards the end of 2012, the index
returned to growth and has increased steadily through to 2014. This
reflects increased confidence in the UK economy in general, although
activity remains below pre-recession levels.
Similarly, the German Production Sector Output Index again tracks the
severe decline in 2008 and 2009, but shows a sharper recovery until
2011. The index has since stabilised around pre-recession levels.
Specific industry drivers – Interconnect
Although influenced by the general industrial economic cycles, there are
also more specific drivers within the main market segments served by
the Interconnect businesses.
The Civil Aerospace market continued to grow steadily with growth in
World Passenger Traffic averaging 5–6% p.a. New aircraft continue to
come into service with the trend towards replacing ageing fleets with
more fuel efficient wider bodied aircraft. The Civil Aircraft markets are
also seeing increased activity in the interiors market where the wide
range of complex seating and entertainment systems is driving growth.
The Defence markets in the UK and Germany remain subdued following
the reduction in government spending on defence following the
reduction in activity in conflict areas. The recent engagement in
conflicts in 2014 may however prompt a review of defence spending
levels in the UK and Germany.
In the UK, the Motorsport market has benefited from change of the
Formula 1 engine to the new 1.6 V6 turbo engine and the new ERS
(Energy Recovery System) technology. Activity in preparation for the
new Formula E series has also gained momentum.
Specific industry drivers – Fluid Controls
The Fluid Controls business generate almost 70% of their revenues
from the Food and Beverage sector in the UK. In Food Retailing, there
are significant structural changes which are impacting segment growth
rates including the trend away from major out-of-town stores to
convenience stores and the increase in home shopping and delivery.
These trends, along with the increasing need for “at source” cooling in
smaller Brewery industry outlets, are driving demand for smaller, more
energy efficient components as supplied by Hawco.
The coffee market sector continues to grow and the UK retail coffee
market has reached over £1 billion p.a. Abbeychart supplies both
the coffee machine manufacturers and the aftermarket sector,
predominately in the UK but also in Europe. The traditional hot and cold
drinks vending and pure water operator/contractor sectors are facing a
period of consolidation due to limited growth and excess capacity.
UK index of production
115
110
105
100
95
90
2006
2007
2008
2009
2010
2011
2012
2013 2014
Source: UK Office of National Statistics
Calendar and seasonally adjusted, reference year 2010=100
German production sector output index (including construction)
115
110
105
100
95
90
85
80
75
2006
2007
2008
2009
2010
2011
2012
2013 2014
Source: Deutsche Bundesbank
Calendar and seasonally adjusted, reference year 2010=100
World passenger traffic – annual growth rate
10
8
6
4
2
0
-2
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: International Civil Aviation Organisation
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 32
Sector Review continued
Controls
Sector performance
Controls statistics
Revenue
£94.6m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
2014
2013
£94.6m
£86.2m
£15.3m
£13.9m
16.2%
16.1%
£11.4m
£10.8m
33.2%
32.0%
The Controls businesses increased revenues by 10% to £94.6m
(2013: £86.2m), including part year contributions from Specialty Fasteners
and Components (“SFC”), acquired in June 2014 and Sacee, a small
connector distributor acquired in October 2013. After adjusting for the
contribution from these acquisitions and for the impact of currency
translation, underlying revenues increased by 8%.
Adjusted operating profits increased by 10% to £15.3m (2013: £13.9m)
and adjusted operating margins held steady at 16.2% (2013: 16.1%).
Overall gross margins in the Controls businesses remained resilient with
their focus on specialised markets and added value opportunities. The
benefits from investment programmes completed last year also enabled
the businesses to gain some operational leverage which offset the
impact from the lower initial operating margin of SFC.
Free cash flow increased by £0.6m to £11.4m (2013: £10.8m), with
working capital increasing to take advantage of opportunities within
existing markets; this investment more than offset the contribution
from increased operating profits. Capital expenditure reduced by
£0.4m to £0.5m (2013: £0.9m) following completion last year of the
new IS-Rayfast facility and Hawco’s investment in a new ERP system,
as part of the Group’s broader Investment for Growth programme.
The IS-Group invested £0.2m in upgrading its IT infrastructure by
replacing older servers and adding further functionality to its existing
manufacturing systems at IS-Cabletec. Hawco invested £0.2m in the
relocation of its sales and administrative offices and extending the new
ERP system into the Abbeychart business.
Interconnect
The Interconnect businesses, which account for ca.70% of Sector
revenues, increased revenues by 10% in UK sterling terms. After adjusting
for acquisitions and currency translation effects, underlying revenues
increased by 8%, reflecting good demand across the market sectors and
particularly strong performances from the Civil Aerospace, Energy and
Motorsport markets.
Aerospace and Defence accounts for ca.40% of Interconnect revenues and
in 2014, revenues increased by 5%, with Civil Aerospace maintaining strong
positive momentum while the Military segments appeared to be stabilising.
In Civil Aerospace, the supply of fasteners to the premium aircraft seating
industry continued to grow, with Clarendon extending production line-side
support to key customers and exploiting further opportunities to export to
sub-contract manufacturers. There was also steady demand for the full
range of electrical harnessing and protection products. In Military
Aerospace, by contrast, the reduced annual production rate of Eurofighter
aircraft continued to have an impact on sales of specialist connectors and
bonding leads.
The broader Defence markets in the UK remained subdued but the
businesses were still able to deliver modest growth over the prior year.
While no new major defence projects were initiated, there were signs that
activity levels were higher at several specialist military harness contractors.
IS-Rayfast also leveraged its excellent stocking profile to provide a rapid
turnaround to support projects including the Astute 6 submarine build and
modest upgrades to Hawk and Jaguar aircraft. There was continuing
demand for IS-Cabletec’s cable protection products and an additional
braiding machine was added during the year to meet increased production
requirements. In Germany, Filcon’s traditionally strong sales of specialist
connectors to the larger legacy military radio and engine projects were
softer in 2014. As with the UK, however, IS-Sommer saw improved, general
demand from German military harness sub-contractors.
Sales to specialised Industrial markets (ca.25% of Interconnect revenues)
were positive with revenues growing by 11%. In the UK, there was good,
across-the-board demand for specialist tubing and for added value services
such as re-spooling wire onto compact spools for repair and refurbishment
customers. In Germany, there was also a strong performance in the
Industrial markets, despite the uncertain manufacturing environment in
the Eurozone countries. IS-Sommer continued to win business through
an invigorated field sales team, again supported by superior stocking and
value added services. Sales in the US benefited from the generally positive
manufacturing environment.
Motorsport accounts for ca.20% of Interconnect revenues and this sector
delivered revenue growth of 21% in 2014. There were gains in the UK,
Germany and the US and across both the harnessing and fastener product
groups. It was a record year for Motorsport revenues, primarily driven by the
changes introduced to the Formula 1 racing series. For the 2014 season, the
new 1.6 litre V6 turbo engine was introduced as well as upgraded Energy
Recovery Systems. These changes required substantial development
engineering and design work and our businesses closely supported the
teams and engine manufacturers to ensure the new technologies were
successfully introduced. Beyond Formula 1, the Formula E series prepared
for the inaugural race and there was continued success in the US in
servicing the Nascar and United Sports Cars series. In Germany, Filcon
continued to grow its sales to VW and Porsche for the supply of connectors
for the VW World Engine and for the Le Mans and GT car series.
In the Energy market (ca.10% of Interconnect revenues), IS-Sommer
supplies components used in repair and refurbishment of low and medium
voltage electricity distribution in Germany. In 2014, revenues increased by
13% driven by a higher level of refurbishment work by its customers and
benefiting from development work carried out in the prior year. Following
its acquisition of Rayquick in late 2012, IS-Sommer secured its appointment
as one of only two German master distributors for its key energy products
supplier. In the UK, the businesses are focused on a small number of key
customers involved in portable electricity generators, subsea power
transmission cables and the manufacture of batteries. As the market is
concentrated in a small number of key customers, demand can vary
significantly and 2014 was a particularly positive year.
In October 2013, Filcon acquired the assets and goodwill of the Sacee
business which supplies specialist connectors to the Satellite sector
in France; its operations were successfully integrated into Filcon in Munich.
In June 2014, the fastener business was strengthened by the acquisition of
SFC, a UK based distributor of fasteners and ancillary products to the
Aerospace, Industrial and Motorsport sectors. SFC has a strong fit
DIPLOMA PLCStrategic Report 33
with Clarendon and brings a long-standing reputation for technical
competence, design skills and added-value assembly expertise to our
rapidly expanding fastener activities. These acquisitions have strengthened
the Group’s position in attractive segments of the Interconnect market and
the performance of both businesses since acquisition has been good and
in line with expectations. .
Fluid Controls
The Fluid Controls businesses, which account for ca.30% of Sector
revenues, increased revenues by 9%. The Hawco business made
significant gains in the core Food & Beverage sector, following a
subdued prior year which had included delayed investments by
customers and a hang-over of surplus catering equipment from the
2012 London Olympics.
In Food Retailing, Hawco has had to respond to significant
structural changes in the industry and now is seeing the benefits of its
repositioning and developmental activities. The trend away from major
out-of-town food retail stores and towards convenience stores initially
dampened demand for Hawco’s equipment, but Hawco is now having
good success in both the UK and Europe with its range of scroll
compressors which offer a smaller footprint and greater efficiency.
Hawco is also seeing growing demand for refrigeration units used in
transport applications reflecting the increased use of home shopping
and delivery. Sales into the Brewery sector have also been buoyed by
the introduction of scroll compressors and other improved products
designed to provide at source cooling for smaller outlets such as cafes
and bars. This reduces the need for cellar cooling space, is more energy
efficient and avoids product waste as the beer is only cooled
when needed.
The Abbeychart business faced a mixed environment in its key markets
with Coffee and Catering continuing to perform well but with demand
from the Vending machine and pure Water applications weakening. In
the Coffee and Catering markets, Abbeychart supplies to the equipment
OEMs and in the traditional hot and cold drinks Vending market, the
primary customers are the equipment operators that supply ingredients
and maintain the machines. There have been attempts to drive
consolidation in the fragmented Vending operators’ market and it may
take some time before the results of this activity are clear. The Hawco
Group will continue to realign the Abbeychart business model and
resources to match changes in end-user tastes and to focus on
growth markets where technical expertise can add value.
Highlights from the Year
Interconnect
• Strong performance in Civil Aerospace with further
penetration into premium aircraft seating
• The acquisition of SFC, strengthened position in the
fasteners business and added design skills and
added-value assembly expertise
• Record year for Motorsport, with success across all
racing formats in the UK, Germany and the US
• Outstanding sales growth in German Energy
sector; deserved return for development activities
in earlier periods
• Sacee acquisition extended Filcon’s business into the
Satellite sector in France
Fluid Controls
• Encouraging gains in the UK Food and Beverage
sector; platform for technology transfer to other
geographies
• Relocation of Hawco sales and administrative offices
and consolidation of warehouse facilities
• Extension of Hawco’s new ERP system into
Abbeychart, leading to further efficiencies
Potential for Growth
• In Interconnect, further penetrate specialised market
sectors in Europe
• Broaden the range of high performance products and
added value services
• In Fluid Controls, reposition the businesses to take
advantage of structural market changes
• Expand geographical reach outside Northern Europe
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 34
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.
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.
Each operating business is required each year to identify and document
the significant strategic, operational, 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.
The principal risks and uncertainties which are currently judged to have
the largest potential impact on the Group’s long term performance are
set out below. There have been no significant changes to these risks and
uncertainties, or their potential impact on the Group, since last year.
Risk: Strategic
Downturn in major markets
Adverse changes in the major markets in which the businesses operate
can have a significant impact on performance. The effects will either be
seen in terms of slowing revenue growth, due to reduced or delayed
demand for products and services, or margin pressures due to
increased competition.
A number of characteristics of the Group’s businesses moderate the
impact of economic and business cycles on the Group as a whole:
• The Group’s businesses operate in three different Sectors with different
cyclical characteristics and across a number of geographic markets.
• The businesses offer specialised products and services; this offers
a degree of protection against customers quickly switching
business to achieve a better price.
• A high proportion of the Group’s revenues comprise consumable
products which are purchased as part of customers’ operating
expenditure, rather than through capital budgets.
In many cases the products are used in repair, maintenance and
refurbishment applications, rather than original equipment
manufacture.
•
Mitigation
The businesses identify key market drivers and monitor the trends
and forecasts, as well as maintaining close relationships with key
customers who may give an early warning of slowing demand.
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.
Mitigation
Actions to mitigate the risks include:
• Long term, multi-year exclusive contracts signed with suppliers with
change of control clauses, where possible, included in contracts for
protection or compensation in the event of acquisition.
• Collaborative projects undertaken and relationships maintained with
individuals at many levels of the supplier organisation, together with
regular review meetings and adherence to contractual terms.
Changes to cost levels and inventories can then be made in a
measured way to mitigate the effects.
Significant global events are closely monitored to determine any
potential impact on key markets.
Currently no single supplier represents more than 10% of Group
revenue and only five single suppliers represent more than 2% each
of Group revenue.
Relationships with suppliers have normally been built up over many
years and a strong degree of interdependence has been established.
The average length of the principal supplier relationships in each
of the Sectors is over ten years.
The strength of the relationship with each supplier and the volume of
activity generally ensures continuity of supply, when there is shortage
of product.
• Regular review of inventory levels.
• Bundling and kitting of products and provision of added
value services.
• Periodic research of alternative suppliers as part of
contingency planning.
DIPLOMA PLCStrategic Report 35
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 comprehensive 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.
The Group’s businesses continue to invest in new testing equipment;
employees have also undergone product liability training during the
year and are regularly reviewed to demonstrate compliance with
Group policies and procedures relating to product liability.
As set out on page 38, the average length of service for all personnel
in the Group is over six 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 PLCAnnual Report & Accounts 2014Strategic Report 36
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.
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.
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
The business where the risk is greatest is Hercules in Clearwater, Florida
which is most at risk from an environmental disaster caused by a
hurricane or tornado. The building structure has been designed to
withstand 150mph winds, electricity generators have been installed
on site and a specific disaster plan has been drawn up and is regularly
reviewed.
Contingency plans include:
• Backup power generators.
• Materials on hand to secure the facility.
• Communications rerouted to other branches or interim locations.
•
• Regular building inspection and weather monitoring.
• Plans to drop-ship product from suppliers direct to customers.
IT recovery plan using backup server in separate location.
Loss of Information Technology (“IT”) systems
Computer systems are critical to the businesses since their success is
built on high levels of customer service and quick response. A complete
failure of IT systems, with the loss of trading and other records,
Mitigation
Business interruption insurance cover is held across the Group and
contingency plans have been drawn up in all businesses. The recovery
plans differ by individual business, but will include some or all of the
following elements:
• Full data backups as a matter of routine are automatically taken on a
regular basis each week and stored online.
The other businesses have also developed plans in the event of
incidents, including fire and security alarms and regular fire drills.
Insurance policies are also in place including property, contents and
business interruption cover which would mitigate the financial impact.
However, the priority in such an event is to become fully operational
as quickly as possible so as to minimise disruption to customers. Plans
to ensure a quick and orderly recovery have been developed by the
businesses and are periodically reviewed.
would be more damaging to the businesses than major physical
damage to facilities.
• 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 PLCStrategic Report 37
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 – Translational 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 businesses.
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.
Currency exposures also arise on the net assets of the Group’s foreign
operations. At 30 September 2014, the Group’s non-UK sterling net
assets in overseas businesses was £144.9m (2013: £132.9m), which
represented 77% of the Group’s net assets. It is estimated that a further
strengthening of UK sterling of 10% against all the non-UK sterling net
assets would reduce shareholders’ funds by £13.2m.
Details of average exchange rates used in the translation of overseas
earnings and of year end exchange rates, used in the translation of
overseas balance sheets, for the principal currencies used by the
Group, are shown in note 28 to the consolidated financial statements.
During the year ended 30 September 2014, ca.75% of the Group’s revenue
and adjusted operating profits were earned in currencies other than
UK sterling. In comparison to the prior year, the net effect of currency
translation was to decrease revenue by £17.7m and decrease adjusted
operating profit by £4.1m. It is estimated that a further strengthening of
UK sterling by 10% against all the currencies in which the Group does
business, would reduce adjusted operating profit before tax
by approximately £4.3m (8%), due to currency translation.
Mitigation
The Group does not hedge translational exposure.
Foreign currency – Transactional exposure
The Group’s UK businesses are exposed to foreign currency risk on
those purchases that are denominated in a currency other than
their local currency, principally US dollars, Euro and Japanese yen.
The Group’s Canadian and Australian businesses are also exposed
to a similar risk as the majority of their purchases are denominated
in US dollars and Euros. The Group’s US businesses do not have any
material foreign currency transactional risk.
Mitigation
The Group’s businesses may hedge up to 80% of forecast (being a
maximum of 18 months) foreign currency exposures using forward
foreign exchange contracts.
The Group classifies its forward foreign exchange contracts, which
hedge forecast transactions, as cash flow hedges and states them at
fair value.
Inventory obsolescence
Working capital management is critical to success in specialised industrial
businesses as this has a major impact on cash flow. The principal risk to
working capital is in inventory obsolescence and write-off.
The charge against operating profit in respect of old or surplus
inventory is ca.£1m each year, but inventories are generally not
subject to technological obsolescence.
Mitigation
Inventory write-offs are controlled and minimised by active management
of inventory levels based on sales forecasts and regular cycle counts.
Where necessary, a provision is made to cover both excess inventory
and potential obsolescence.
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 38
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 high. In addition the number of working
days lost to sickness is ca. 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 percentage of total
Length of service (years)
Average staff turnover
Sick days lost per person
2014
2013
2012
1,264
35%
6.3
21.5%
3.0
1,145
35%
6.2
20.4%
2.2
1,062
33%
6.0
16.7%
2.3
The increase in sick days lost per person is heavily influenced by a small
number of employees who are on long term sick leave.
Set out below is an analysis of the number of employees by gender at
the year end.
Directors
Senior Managers
Employees
2014
2013
Male
6
67
788
861
Female
Male
Female
1
17
445
463
6
55
695
756
1
17
385
403
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 2014
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 & 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”) or similar level
courses. Employees are actively encouraged to undertake Continuing
Professional Development (“CPD”).
In accordance with the Listing Rules of the Financial Conduct Authority,
employees are required to seek approval of the Company before dealing
in its shares.
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
Health & Safety reviews against its specific operational risk profile and
local regulatory requirements.
Minor injuries
Reportable lost time incidents1
1 Three or more days’ absence from workplace.
2014
55
5
2013
54
1
2012
21
2
The level of minor injuries has remained constant, despite the increased
number of employees and new businesses acquired during the year.
While the number of reportable lost time incidents has increased, only
one of the injuries resulted in greater than five days’ lost time. The most
common types of injury relate to minor cuts, slips/trips or 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 has
continued to increase 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 PLCStrategic Report 39
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 deliver their products to customers and to
provide much of their packaging requirements. 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.
Each facility participates in recycling paper, plastic, cardboard, and wood
from pallets and continues to focus on minimising energy consumption
through the efficient use of heating and lighting. In addition a number of
the businesses now use fully recycled and biodegradable filler materials
for packaging.
Greenhouse gas emissions
Last 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 & 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 Group have considered the six main Greenhouse Gases (“GHG’s”)
and report emissions in tonnes of CO2 equivalent (CO2e) for Scope 1
(direct) and Scope 2 (indirect) emissions. These emissions are calculated
following the GHG Protocol and UK Government Environmental
Reporting Guidelines. The Group has used DEFRA UK GHG Conversion
Factors, US Environmental Protection Agency Emission Factors and
International Energy Agency Factors.
As a distributor with no owned logistics or freight, the Group’s primary
direct energy usage and related CO2 emissions arise from the Group’s
facilities. Where possible the Group has reported billed data which
represents ca.80% of the Group’s global emissions. For the remaining
entities the Group has used an estimation using sales data and local
conversion factors.
Business ethics
The Group recognises its obligations towards the parties with whom
the Group has business dealings including customers, shareholders,
employers, suppliers 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 to be maintained in such dealings.
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.
Community
The Group believes that good community relations are important to the
long term development and sustainability of the operating businesses.
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 highlights from the year include:
In North America
– Various charitable donations made locally at each business by
employees for local charities such as United Way, Clothes to Kids,
Haven House (abused women), food banks, schools and cancer
awareness.
– Hercules Canada sponsorship of charity golf tournaments.
– Educational support via scholarships and schools engagement
through the National Fluid Power Association.
In Europe
– IS Group and Clarendon supported Red Bull Racing in their
chosen charity Wings for Life, raising over £9,000 for spinal cord
injury research. Support included a “Tough Mudder” event,
a charity ball, car washes and many other events.
– SFC supported the Race2Recovery charity by supplying products
used on two vehicles competing in the 2014 Dakar Rally. The
charity supports combat injured team members with life-
changing injuries participating in Motorsport.
The Group also contributes to local worthwhile causes and charities
and in 2014 the Group made donations of £42,698 (2013: £32,359).
No political donations were made.
An intensity ratio of CO2e per £1m turnover has been selected, which
will allow a comparison of our performance over time and with other
similar types of business.
Direct emissions (Scope 1)
Source of emissions
Natural gas
Owned transport
Indirect emissions (Scope 2) Electricity
Gross emissions
Tonnes CO2e per £1m revenue
Tonnes of Co2E
2014
2013
822.0
63.2
2,015.1
2,900.3
9.5
779.4
60.1
1,973.6
2,813.1
9.9
DIPLOMA PLCAnnual Report & Accounts 2014Strategic Report 40
Directors and Advisors
John Rennocks1,3
Chairman
Bruce Thompson
Chief Executive Officer
Marie‑Louise Clayton1,2,3
Non‑Executive Director
Nigel Lingwood
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.
Appointed:
Joined the Board in November
2012 and appointed Chairman,
Audit Committee March 2013.
Appointed:
Joined the Company in June
2001 and appointed Group
Finance Director in July 2001.
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, 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.
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:
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.
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 PLCGovernance 41
Iain Henderson
Chief Operating Officer
Charles Packshaw1,2,3
Non‑Executive Director
Appointed:
Joined the Board as a Director
in 1998 and appointed Chief
Operating Officer in 2005.
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.
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. Over
30 years of 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.
External appointments:
None.
External appointments:
Charles is a non‑Executive
Director of BMT Group Limited.
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
John Nicholas1,2,3
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
and Hunting PLC. John is Senior
Independent Director of Rotork
plc. John is also a member of the
Financial Reporting Review Panel.
Member of:
1
2
3
the Remuneration Committee
the Audit Committee
the Nomination Committee
DIPLOMA PLCAnnual Report & Accounts 2014Governance
42
Corporate Governance
Members of Board
Attendance
Chairman
John Rennocks
Independent non‑Executive Directors
Marie‑Louise Clayton
John Nicholas
Charles Packshaw
Executive Directors
Iain Henderson
Nigel Lingwood
Bruce Thompson
7/7
7/7
7/7
7/7
7/7
7/7
7/7
John Rennocks
Chairman
Dear Shareholder
I am pleased to present Diploma’s report on Corporate Governance on
behalf of our Board.
Set out in this section of the Annual Report & Accounts is a report on
the activities of the Board and each of its three Committees which are
responsible for ensuring that the Board fully discharges its governance
duties and applies the principles of good governance as set out in the
2012 UK Corporate Governance Code (“the Code”).
In my Report to shareholders on Governance in 2011, I set out clear
objectives for the Board to develop its policies and processes to ensure
that the Board would be able to meet the stringent governance standards
required for a Company that is now firmly established in the FTSE 250
constituent group. I am pleased that, as I come to the end of my term
with the Company, we have made good progress in meeting those
objectives with a refreshed set of non‑Executive members of the Board
and its Committees. Further amendments in the Board’s existing
governance processes will be required next year as the FRC continues
to revise and expand the scope of the Code with the publication of the
2014 Code.
The Committees have been focused this year on ensuring that the
Board’s governance polices remain both robust and in line with best
practice and appropriate to manage the development of the Group as
it continues to broaden its activities into new markets and geographies.
As part of this work, the Remuneration Committee has reviewed
further the appropriateness of the Group’s remuneration policies,
which has included a consultation exercise with the Company’s
larger shareholders.
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 43 to
67 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 with the exception of one; namely the Company’s evaluation
of the Board has not been externally facilitated at least every three years,
as explained further on page 45. In addition and as explained in the 2013
Annual Report & Accounts, the Company had not identified a Senior
Independent Director from 1 October 2013 until 15 November 2013
when John Nicholas was appointed as Senior Independent Director.
The Company’s auditor Deloitte LLP, is 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.
The Audit Committee has had to extend its activities to ensure that
the Group’s newly acquired Russian businesses comply fully with
new international sanctions. The Committee has also worked with
management to develop further its procedures for maintaining
compliance with the Group’s anti‑Bribery and Corruption policy.
Following the announcement of my intention to retire from the Board in
2015, the Nomination Committee has worked diligently with the Chief
Executive Officer to ensure that a transparent and orderly process has
been followed to identify and appoint John Nicholas as my replacement
as Chairman of the Company.
Finally, as always I would like to encourage shareholders to find the
time to attend our AGM on Wednesday, 21 January 2015. It provides
an excellent opportunity to meet the Executive Directors and the
independent non‑Executive Directors on the Board whose Committees’
Reports are set out in the following pages of this Report on Governance.
The Nomination Committee has also begun an exercise to identify
and appoint a new non‑Executive Director which will ensure that the
Company continues to maintain an appropriate composition and
structure for the Board and its Committees, with the right balance of
skills and experience to lead Diploma as it continues to grow.
John Rennocks
17 November 2014
DIPLOMA PLCGovernance 43
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.
• Recommending or declaring dividends.
• Approval of the Group and Company financial statements.
• Maintaining sound internal control and risk management systems.
• Approval of major corporate transactions and commitments.
• Succession planning, 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
Audit Committee
Chaired by Marie‑Louise Clayton
Number of meetings in the year: six
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 systems and
risk management procedures and also monitors issues relating to
fraud and whistleblowing.
Nomination Committee
Chaired by John Rennocks
Number of meetings in the year: two
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: eight
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 PLCAnnual Report & Accounts 2014Governance 44
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 59. The biographical details of the Board members are set out on
pages 40 and 41.
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. It is intended that the next formal review of the
Company’s strategy will be carried out by the Board in June 2015 at one
of the Group’s businesses based in the US. The previous formal strategy
development review took place in October 2012 at the Group’s business
in Swindon, UK.
The existing Chairman has confirmed that he will stand down from his
role as Chairman and retire from the Board at the conclusion of the
Annual General Meeting on 21 January 2015.
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 42.
The Board has appointed John Nicholas, who is currently a non‑
Executive Director and the Senior Independent Director of the
Company, as Chairman‑designate. As a consequence of this
appointment, the Board has also asked the Nomination Committee
to set up an appropriate process to identify and recommend for
appointment a new non‑Executive Director. This process has not
yet concluded as at the date of this Report.
Activities of the Board
The Company’s governance framework is set out on page 43 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 set out the separate and distinct
roles of the Chairman and the Chief Executive.
The Chairman is responsible for the overall leadership and 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.
Other matters reserved to the Board include treasury policies, internal
control and risk management.
The Company has purchased insurance to cover its Directors and
Officers against the costs of defending themselves in legal proceedings
taken against them in that capacity and in respect of any damages
resulting from those proceedings.
The Company also indemnifies its Directors and Officers to the
extent permitted by law. Neither the insurance nor the indemnity
provides cover where the Director or Officer has acted fraudulently
or dishonestly.
Each Director is expected to attend all meetings of the Board
or Committees of which they are a member. In addition senior
management from across the Group and advisors attend certain
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 businesses,
the implementation of strategy and the changing dynamics of the
markets in which the businesses operate.
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. The Chairman‑designate, John Nicholas is considered
by the Board to be independent.
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.
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 appointments 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 51.
DIPLOMA PLCGovernance 45
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 last year, a managed
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. Meetings were held individually
between each of the non‑Executive Directors and the Executive
Directors and with some of 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 the Group’s businesses, 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.
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 each 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 had intended this year to carry out an evaluation of the Board
using external facilitation. However, with the impending appointment of
a new Chairman and as the current non‑Executive Directors have only
been members of the Board for a relatively short period, it was decided
to postpone this externally facilitated evaluation of the Board until 2015.
The Board therefore continued with its normal internal evaluation
exercise this year, as described above. This exercise was completed in
September 2014 and identified the following areas that the Board
wished to address in 2015:
• strengthen the Board’s competencies through appointment of a new
non‑Executive Director with broad industrial experience gained in an
international environment;
• seek more regular presentations at Board meetings from senior
•
management across the Group; and
target a meeting of the Board to focus on management of risk and
review of effectiveness of Group’s risk management and internal
control systems.
The Board will report next year on the progress it has made with
these objectives.
The decision to postpone the externally facilitated evaluation this
year has led to the Company not being in compliance with the Code
Provision which requires that such an external facilitation is carried out
at least every three years.
Re‑election
All Directors to the Board are subject to election by the shareholders
at the first AGM following their appointment by the Board and in
accordance with the Code, all Directors will also stand for re‑election
annually at the AGM.
Conflicts of interest
Directors are subject to a statutory duty under the Companies Act 2006
(“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.
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.
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.
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. It
also reviews the effectiveness of these systems through the work of the
Audit Committee as reported on in the Report of the Audit Committee on
pages 47 to 50.
DIPLOMA PLCAnnual Report & Accounts 2014Governance 46
Corporate Governance continued
The key risks which the Board has focused on this year are set out in the
Principal Risks and Uncertainties section on page 34 to 37. 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 three 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 is available on request for shareholders to meet the
Chairman or Senior Independent Director, separately from the
Executive Directors.
Electronic communications to shareholders include the Notice of the AGM
which is sent at least 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.
All shareholders have the opportunity to put questions at the Company’s
AGM 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 Board has resolved, in line with best practice, to conduct a poll
on each resolution proposed at the AGM. The results of the AGM
resolutions, including details of votes cast, are published on the
Company’s website.
DIPLOMA PLCGovernance 47
Audit Committee Report
Members of Committee:
Marie‑Louise Clayton (Chairman)
John Nicholas
Charles Packshaw
Attendance
6/6
6/6
6/6
Marie‑Louise Clayton
Chairman of Audit Committee
Key Duties
Dear Shareholder
I am pleased to present my report on the activities of the Audit
Committee in the year ended 30 September 2014.
It has been another busy year for the Committee and much has been
reviewed and reported from across the Group. The Committee held six
meetings during the year, during which it focused in particular on the
integrity of the Group’s financial reporting and on the effectiveness of
both the internal and external audit.
The Committee also focused attention on ensuring that the Group’s
policies relating to anti‑Bribery and Corruption continue to develop.
This is a significant challenge in a decentralised group such as ours with
businesses operating over a wide spread of geographies and markets.
The Committee was pleased to support management’s response to
these challenges by developing a comprehensive e‑learning training
programme which will initially focus on anti‑bribery training, before
being extended to other matters of governance. This training will be
provided to all employees across the Group and is due to commence
early in the new financial year.
The acquisition of Kentek Oy and subsequent political upheaval in
Ukraine has also challenged the Committee to closely review the scope
of international sanctions applied against certain Russian operations and
to ensure that appropriate procedures are in place in the Group’s Russian
businesses to ensure that compliance with these sanctions is maintained.
I have continued to meet separately with the Company’s auditor to seek
their views on the strength and depth of financial reporting and internal
control processes over the Group’s activities. Based on this discussion
and on the report the Committee receives from the Group’s Internal
Audit manager, I am satisfied that management maintains a strong focus
on ensuring that robust systems of internal control are in place across
the Group’s businesses.
Marie‑Louise Clayton
17 November 2014
(Full terms of reference are available on the Company’s website).
• Monitors the integrity of the financial statements of the Group and
assists the Board in fulfilling 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 the 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 and the anti‑Bribery and Corruption policies.
• Reviews effectiveness of the Internal Audit function and makes
recommendations to the Board.
• Approves the Internal Audit work programme and reviews the
results of the work undertaken.
• Reviews the basis on which the Company and its principal
subsidiaries continue to prepare their financial statements on a
going concern basis.
• Reports to the Board on how it has discharged its responsibilities.
DIPLOMA PLCAnnual Report & Accounts 2014Governance 48
Audit Committee Report continued
Audit Committee
The Committee is chaired by Marie‑Louise Clayton and comprises
independent non‑Executive Directors. The Chairman of the Committee
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 financial
statements of the Group and of the Company. The audit includes the
review and testing 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 its 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 in 2013 in place of the previous lead engagement
partner who had completed a term of five years in that role.
During the year, the Committee carried out an assessment of the
effectiveness of the external audit process. The assessment was led by
the Chairman of the Committee, assisted by the Group Finance Director
and focused on certain criteria which the Committee considered to be
important factors in demonstrating an effective audit process. These
factors included the quality of audit staff, the planning and execution of
the audit and the role of management in the audit process. Following
this assessment, the Committee concluded that the external audit
process remained effective and that it provides an appropriate
independent challenge of the Group’s senior management.
The Committee remains satisfied that Deloitte continues to provide
a robust and effective audit and supports the work of the Committee
through clear and objective communication on developments in
financial reporting and governance. The Committee supports the
requirement of the Code that the audit should be put out to tender
at least once every ten years. The Committee will be reviewing the
Company’s audit tender timetable and processes as part of a wider
review of the Competition & Markets Authority Order which is effective
from 1 January 2015.
Audit Committee Agenda –
2014
• Reviewed and agreed the scope of work to be undertaken by the
external auditor and agreed the terms of engagement and fees to
be paid for the external audit.
• Reviewed the Annual Report & Accounts and received reports
from the Group Finance Director and the external auditor on
the key accounting issues and areas of significant judgement.
Reviewed the processes necessary to ensure that the Board
was able to confirm that the Annual Report & Accounts are
“fair, balanced and understandable”.
• Reviewed the report from the Group Finance Director on the
controls in place to mitigate fraud risk.
• Reviewed the Interim Management Statements and Trading
Updates at meetings held in January, March, July and September.
•
Invited 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 to agree the scope and focus of
Internal Audit work to be carried out in the following year.
• Reviewed the Half Year Announcement and received reports from
the Group Finance Director and the external auditor on the key
accounting issues and areas of significant judgement.
• Reviewed the effectiveness of the Group’s internal control and risk
management procedures and made recommendations to the
Board on areas for improvement.
• Reviewed the Group’s policy on anti‑Bribery and Corruption and
the procedures being developed to ensure compliance across the
Group.
• Reviewed the scope of sanctions issued during the year by the
European Union and the US and the procedures set up to monitor
compliance by the Group’s businesses.
• Reviewed the effectiveness of the external audit process and
recommended the re‑appointment of the Group’s external
auditors.
• Reviewed the Group’s policy on non‑audit services which may be
provided by the auditor and the Group’s policy on whistleblowing.
• Reviewed the Audit Committee Terms of Reference.
DIPLOMA PLCGovernance 49
Financial reporting and significant judgements
As part of its monitoring of the integrity of the financial statements,
the Committee reviews whether suitable accounting policies have been
adopted and whether management has made appropriate estimates and
judgements and seeks support from the external auditors to assess them.
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 implement 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
annually reviews 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 34 to 37.
The Committee has reviewed the effectiveness of the Group’s risk
management and internal control systems for the period from 1 October
2013 to the date of this Report. Taking into account the results of this
year’s business risk assessment process and the reports from the Internal
Audit manager, the Board, with the advice of the Committee, is satisfied
that the Group has in place effective risk management and internal
control systems.
The main issues reviewed in the year ended 30 September 2014 are set
out below:
Impairment of goodwill and intangible assets:
The Committee considered the carrying value of goodwill and the
assumptions underlying the impairment review. In particular, the
Committee discussed with management and the external auditor the
background to the change of the level at which goodwill is assessed for
impairment, as described further in note 10 to the consolidated financial
statements. The Committee was satisfied that this change was reasonable
and appropriate. The judgements in relation to goodwill impairment
largely relate to the assumptions underlying the calculations of the value
in use of the business or Sector being tested for impairment. These
judgements are primarily the calculation of the discount rate, 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 business, 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 external auditor.
Recoverability of accounts receivable:
The Committee reviewed the Report of the Group Finance Director
that set out the gross balances by business, 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; the appropriateness
of provisions held against the carrying value of accounts receivable were
also considered, having regard to the age and creditworthiness of the
customer. These matters were also discussed with the Group Finance
Director and the external 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.
In addition to the main issues reviewed above, the Committee also seeks
confirmation from the auditor that the Group’s businesses follow
appropriate policies to recognise material streams of revenue and that
the audit work carried out more generally has assessed any instances
where management may be able to override key internal controls
designed to guard against fraud or material misstatement. The auditor
also reports to the Committee on other less material matters relating to
the Group’s small defined pension scheme, the Group’s taxation
position and any legal provisions existing at the reporting date.
DIPLOMA PLCAnnual Report & Accounts 2014Governance 50
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 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 set 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 matters identified in the internal audits undertaken during
the year, but recommendations were made in relation to ensuring the
completeness and sufficiency of cycle counts of inventories and to
ensuring that the procedures for chasing older receivable balances
remained robust and were consistently applied. The Internal Audit
manager also assisted the Committee in its oversight of the Group’s
controls designed to ensure compliance with the policy on anti‑Bribery
and Corruption. As part of this work Internal Audit work ensured that
appropriate support was provided in relation to employee’s claims for
reimbursement of expenditure on entertaining customers and suppliers.
The Internal Audit manager also reported to the Committee that good
progress had been made by the Group’s businesses in implementing
recommendations made last year and in particular in improving
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 required at this time.
Non‑audit fees
The Committee has 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 last year and relate to advisory
services where the auditor’s detailed knowledge of the Group’s affairs
means that it 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 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. During the year the Company continued to
use the tax department of Deloitte LLP to provide advice to the Company
in connection with legislation relating to controlled foreign companies.
This legislation was significantly amended by HM Government during the
year and the implications are currently being assessed by the Company
with the assistance of Deloitte LLP tax advisors. As this is not a significant
assignment, the Committee remains satisfied that the work is sufficiently
ring‑fenced so as not to conflict with the duties of Deloitte LLP as auditor.
In other circumstances, proposed assignments are generally 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 provide 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
£12,000 paid to Deloitte LLP during the year are set out in note 27 to
the financial statements.
Sanctions
In January 2014, the Company acquired Kentek, a specialised
distributor of filters and related products which is based in Finland and
with substantial operations in Russia and the Baltic States. Shortly after
completion of the acquisition, and in response to political developments
in Ukraine, the EU and US implemented various sanctions against a
growing list of market sectors, corporations and individuals based in
Russia. As a consequence, the Audit Committee worked with senior
management of the Company, in conjunction with local management
of Kentek, to determine the scope and reach of these sanctions and
have implemented a system to ensure ongoing compliance with this
new sanctions regime. The Committee has received reports on
compliance with these sanctions and will continue to monitor
developments until the sanctions are suspended or revoked.
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 Group developed an e‑learning training programme
on anti‑Bribery and Corruption which will be undertaken by all Group
employees during the new financial year and periodically thereafter.
During the year, the Committee formally reviewed 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 are investigated and reported to the Committee, together with
details of corrective action taken. The Group’s Whistleblowing Policy is
monitored by the Committee and no matters were reported to the
Committee under this policy during the year.
DIPLOMA PLCGovernance 51
Nomination Committee Report
Members of Committee
John Rennocks (Chairman)
Marie‑Louise Clayton
John Nicholas
Charles Packshaw
Key Duties
Attendance
2/2
2/2
2/2
2/2
(Full terms of reference are available on the Company’s website)
• Reviews the size, composition and structure of the Board and the
Board Committees.
• Ensures the right balance of skills, knowledge, experience and
diversity on the Board.
•
Identifies, evaluates and nominates candidates to fill Board and
Committee vacancies.
• Reviews succession planning for the Board and senior executives,
taking account of experience, knowledge, skills and diversity.
• Reviews the Group policy on conflicts of interest and register and
ensure there are no material conflicts of interest.
• Reviews, as part of the annual evaluation exercise, the time
commitment of non‑Executive Directors to the role and externally.
Agenda 2014
• Considered and progressed the process for Chairman succession.
• Evaluated the balance of skills, knowledge and experience on the
Board and its diversity, including gender.
• Commenced search with Norman Broadbent for a further
non‑Executive Director and prepared a description of the role and
capabilities for candidates for appointment.
• Considered succession planning in relation to the Executive
Directors and senior management.
• Reviewed and recommended appointment of Senior Independent
Director and changes to membership of Committees.
• Reviewed and updated Board members’ register of conflicts
of interest.
• Reviewed Committee Terms of Reference.
The Nomination Committee is chaired by John Rennocks, the Chairman
of the Company. The Committee is 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 a Secretary to the Committee.
Chairmanship
During the year, John Rennocks after 12 years’ service on the Board,
indicated his intention to retire from the Board. At this stage, John did
not specify the actual timing of his retirement, as he was keen to ensure
that an orderly succession took place with the full support of the existing
members of the Board.
The Committee carefully considered the process it should follow to
appoint a Chairman and concluded, in view of the relatively small Board
size and the importance of close but challenging working relationships,
that it was in the best long term interests of the Company to appoint a
Chairman with good knowledge and experience of the Company and
the Board. The Committee invited the Chief Executive and the existing
Chairman to lead the selection process.
The Committee took informal soundings from existing members of
the Board and from the Company’s advisors. At the conclusion of this
exercise and in light of his demonstrable commitment and suitability
for the role, the Committee proposed to the Board that John Nicholas
should replace John Rennocks as Chairman of the Board.
On 11 November 2014, John Rennocks confirmed to the Board that
he would retire as Chairman at the conclusion of the Annual General
Meeting (“AGM”) on 21 January 2015. Following this decision, the Board
confirmed its intention to appoint John Nicholas as successor to John
Rennocks as Chairman of the Board, with effect from the conclusion of
the AGM in 2015.
The Committee has now commenced a formal search, using the
appointment process described below, for a new independent
non‑Executive Director to preserve balance on the Board. In this search
process, the Committee is working with Norman Broadbent LLP, which
has no other connection with the Company. The Committee has also
commenced plans to appoint a new Senior Independent Director and
make changes to Board Committees which will be required following
the change of Chairman. These new appointments will formally be
announced once they have been confirmed by the Board.
Succession planning
The Board annually reviews succession planning for the Executive
Directors and for the senior management cadre comprising ca.80 senior
managers across the Group’s businesses. The next review will take place
in January 2015 in conjunction with the Remuneration Committee’s
review of compensation for the senior management cadre. The Board
will also focus more substantially on future succession plans at the Board
Strategy Review meeting to be held in June 2015.
Appointment of Directors
As part of any appointment process for new Directors, the Committee
determines the selection criteria for each Director which takes account
of diversity, including gender and sets out a detailed description of the
requirements for the role. The Committee works with external search
agencies as appropriate, who draw up a long‑list of candidates from
a range of industries and backgrounds for initial appraisal by the
Committee. From this, a shortlist is prepared of suitable candidates
that most closely meet the selection criteria and these candidates are
interviewed by members of the Committee. Following these interviews,
the Committee recommends to the Board the appointment of a Director.
The Committee implements the Board’s policy on diversity as set out on
page 45.
DIPLOMA PLCAnnual Report & Accounts 2014Governance 52
Remuneration Committee Report
Members of Committee:
John Nicholas (Chairman)
Marie‑Louise Clayton
Charles Packshaw
John Rennocks
Attendance
8/8
8/8
8/8
8/8
John Nicholas
Chairman of the Remuneration Committee
Dear Shareholder
At the time of last year’s Report, I advised shareholders that the
Committee intended to undertake a review of its Remuneration Policy
for Executive Directors to ensure that it met investors’ preference for
simplicity and transparency, as well as remaining appropriate as the
Company develops.
As part of this review, the Committee sought the view of the Company’s
larger shareholders representing over 50% in value of the Group’s shares.
This review has now concluded and as a result, the Committee proposes
to make a number of changes to its Remuneration Policy. I summarise
these below and they are described in more detail later in this Report.
It is important that the Remuneration Policy maintains the correct
balance between delivering reward for shorter term execution of the
Group’s strategy of delivering GDP+ annual growth in earnings, whilst
also encouraging the long term creation of value by executing the
Group’s acquisition strategy to deliver significant value to shareholders.
As a result the Committee intends to make the following changes to the
remuneration arrangements for Executive Directors:
• The base salaries of the Executive Directors’ will be re‑positioned
from 1 October 2014 through a one‑off increase of 8% which
in aggregate, amounts to ca.£79,000. This adjustment recognises
that base salaries of the Executive Directors were not competitive
when compared with peers of a similar size or in a similar sector.
General pay inflation increases will normally apply thereafter.
In future the Company will only grant long term incentive awards
under the Performance Share Plan (“PSP”) within the Company’s
Long Term Incentive Plan (“LTIP”). No new awards will be made
under the Share Matching Plan (“SMP”).
•
• The size of the awards under the LTIP will be reduced to 175% (from
200%) and the award at threshold vesting will be reduced to 25%
(from 30%).
• The vesting of 50% of awards under the PSP is based on growth in
adjusted Earnings Per Share (“EPS”) (the other 50% is based on
relative TSR performance). In future the target for adjusted EPS will be
an absolute target and will no longer be inflation linked. It is currently
intended that the adjusted EPS growth target for maximum vesting
will be 14% p.a.; however these targets will be reviewed annually to
ensure they remain demanding and stretching.
• Going forward, future Executive Director appointees will be subject to
deferral arrangements. The Committee does not believe it appropriate
to defer share awards for existing Executive Directors as each Executive
Director is already aligned to shareholders’ interests through their
substantial shareholdings in the Company.
• The Committee will no longer retain any general overriding discretion
in relation to the remuneration arrangements for Executive Directors.
The revised Remuneration Policy, including the changes to PSP awards
and performance conditions are subject to shareholder approval at the
Company’s AGM in January. Full details will be set out in the Notice of AGM.
The Company’s continuing strong financial performance is reflected in
another year of growth in total shareholder return which, for the past six
years has delivered a 468% return, compared with 143% for the FTSE 250
Index. This excellent performance has again pushed the Company to the
upper quartile of TSR performance in the FTSE 250 Index and has
contributed to the Executive Directors receiving 61% of their awards
under the Company’s three year LTIP.
With respect to short term performance, Diploma has delivered strong
underlying growth of 8% in revenues and adjusted profits during the year.
Adjusted EPS increased by 4% on a reported basis, which represented
12% when translated on a constant currency basis and after adjusting
for the IAS19 accounting policy change. The thresholds for operating
margins, free cash flow and ROATCE have all been comfortably
exceeded and personal objectives fully achieved. On the basis of this
performance, the Committee have approved annual bonuses for the
Chief Executive of 65% of the maximum and 66% of the maximum for
the other Executive Directors.
As well as reviewing the Remuneration Policy this year, the Committee
has also completed a thorough review of the service contracts of each of
the Executive Directors. These contracts were issued many years ago and
changes to legislation and governance over the past ten years has meant
that the existing contracts needed to be substantially updated. However
in completing this exercise, no substantive changes were made to the
underlying conditions of employment.
Turning to next year, the Committee intends to address the new guidance
on Executive Director remuneration recently set out in the new 2014 UK
Corporate Governance Code
I hope that shareholders will be pleased with the progress made by the
Committee this year and that you will join me in supporting the two
resolutions in respect of this year’s Remuneration Committee Report,
together with the resolution that proposes changes to the PSP rules,
at the Company’s AGM on 21 January 2015.
John Nicholas
17 November 2014
DIPLOMA PLCGovernance 53
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 the
Large and Medium‑sized Companies and Groups (Accounts and
Reports) (Amendment) Regulations SI 2013/1981 which came into
force on 1 October 2013.
The Remuneration Committee Report
The Report is presented in two sections as required under the
new regulations:
• Directors’ Remuneration Policy – set out on pages 54 to 59.
• Annual Report on Remuneration – set out on pages 60 to 67.
During the year the Committee undertook a detailed review of its
Remuneration Policy for Executive Directors to ensure that it remains
appropriate as the Company develops. This review has now concluded
and as a result, the Committee proposes to make a number of changes
to the Remuneration Policy which was approved by the shareholders at
last year’s AGM.
These changes are reflected in the revised Directors’ Remuneration
Policy which will be subject to a binding vote of shareholders at the
forthcoming AGM on 21 January 2015. 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 promotes the long term
success of the Company;
• supports the creation of sustainable long term shareholder value;
• provides an appropriate balance between remuneration elements
which include performance related elements which are transparent,
stretching and rigorously applied; 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 54 and 55 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 arrangements work
can be found on page 56.
Key Duties
(Full terms of reference are available on the Company’s website).
• Sets, reviews and recommends to the Board for approval the
Group’s overall remuneration policy and strategy.
• Sets, reviews and approves individual remuneration arrangements
for the Executive Directors, including terms and conditions of
employment and any policy changes.
• Reviews and monitors remuneration arrangements for the senior
managers of the operating businesses, including terms
and conditions of employment and any policy changes.
• Approves the rules and design of any Group share‑based incentive
plans, and the granting of awards under any such plans.
• Sets, reviews and approves the fees of the Chairman.
Agenda 2014
• Reviewed policy on remuneration for Executive Directors;
receiving reports and advice from New Bridge Street and
Stephenson Harwood LLP.
• Carried out a consultation with the Company’s major
shareholders on the proposed changes to the Remuneration
Policy for Executive Directors.
• Reviewed Chairman’s fees.
• Carried out a detailed review and update of Executive Directors’
service contracts; receiving advice from Ashurst LLP
• Reviewed Executive Directors’ salaries, pensions and benefits.
• Approved Annual Performance Bonus targets for 2014 and the
subsequent Bonus awards for 2014.
• Approved new PSP and SMP awards to Executive Directors
under the LTIP and confirmation of the performance conditions
for such awards.
• Confirmed the vesting percentages for the PSP and SMP awards
made in 2011 which matured in 2014.
• Approved the exercise of nil cost options.
• Approved the 2014 Remuneration Committee Report.
DIPLOMA PLCAnnual Report & Accounts 2014Governance 54
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”) replaces the Policy approved by shareholders at the AGM held on 15 January 2014 and, if approved by
shareholders at the AGM on 21 January 2015, will apply from 21 January 2015 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 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
Maximum
opportunity
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.
To reflect the
individual’s experience
and role within
the Group.
There is no maximum limit
set. Salaries are targeted at
a mid‑market range for
equivalent roles in similar
companies.
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.
To provide a
competitive package
of benefits.
Payment in lieu of a company car.
Life assurance, income protection,
annual leave and medical insurance.
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.
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.
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.
No maximum limit set.
As for Base salary.
No maximum limit is
prescribed, but the
Committee monitors
annually the overall cost of
the benefit provision.
Maximum 125% of base
salary for the Chief Executive
Officer and 100% for other
Executive Directors. On
target bonus is 50% of
maximum bonus and
threshold performance is
5% of base salary.
Opportunity as a percentage
of salary is 175% for each
award made to the Executive
Directors under the 2011
Performance Share Plan.
Committee has discretion
to increase awards under
the Performance Share
Plan to 250% of salary in
exceptional circumstances.
As for Base salary.
Adjusted EPS is the
principal metric.
Discretion related to minimum
thresholds for operating
margin, free cash flow
and ROATCE.
Personal objectives for Chief
Operating Officer and Group
Finance Director.
• 50% on adjusted EPS
relative to a set of absolute
performance targets set
by the Committee.
• 50% on Total Shareholder
Return (“TSR”) relative to the
median performance of the
FTSE 250 Index (excluding
Investment Trusts).
Awards include dividend
equivalents which are cash bonuses
or shares in lieu of dividends
forgone on dividends accrued up to
time of vesting, but not thereafter.
Dependent on the level
of dividends as applied to
the number of unvested
PSP awards.
DIPLOMA PLCGovernance 55
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.
The changes made to the Policy approved last year comprise new performance metrics which will apply to the PSP awards, a new award limit of
175% for PSP awards and revised provisions on dividend equivalent payments. In addition no new awards will be made under the SMP. These
changes were made in order to better reflect current best practice in remuneration policies for Executive Directors.
Executive Director’s potential value of 2015 remuneration package
Bruce Thompson
Minimum
Iain Henderson
84%
16%
£575,000
Minimum
84%
16%
£360,000
On target
38% 7%
23%
£1,265,000
32%
On target
40% 8%
19%
33%
£753,000
Maximum
25% 5%
29%
41%
£1,955,000
Maximum
26% 5%
25%
44%
£1,147,000
Nigel Lingwood
Minimum
84%
16%
£374,000
On target
40%
8%
19%
33%
£783,000
Maximum
26% 5%
25%
44%
£1,191,000
Key
Fixed elements
n Base salary and benefits1
n Pension
Variable elements
n Annual performance bonus
n Long term incentive plans
1 Base salary is as at 1 October 2014; benefits are as set out on page 60.
On target remuneration assumes an annual performance bonus of 50% of the maximum for the Executive Directors. It has been assumed that a
face value limit of 175% of base salary applies to each PSP award. On target vesting of PSP awards assumes adjusted EPS growth of 8% p.a. and TSR
performance which is equivalent to 50% of the maximum vesting under the PSP. Maximum remuneration assumes maximum annual performance
bonus and maximum vesting of PSP awards. In all cases, for simplicity no share price growth or dividend accrual is assumed.
DIPLOMA PLCAnnual Report & Accounts 2014Governance 56
Remuneration Committee Report continued
Directors’ Remuneration Policy
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 175% 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 250% in
exceptional circumstances.
All awards will normally vest on the date on which the performance
conditions are determined and confirmed by the Committee,
following the end of the performance period. 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. 25% of
the PSP 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 in which he then becomes entitled, a dividend
equivalent in respect of the dividends (excluding any tax credit) which
would have been paid to the participant in respect of shares vesting
between the date of the award and the time of vesting. These dividend
equivalent payments may be made in cash or in an equivalent number
of shares.
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.80 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 level of bonus payable for achieving the
minimum target is 5% of base salary. No bonus is payable if adjusted
EPS does not meet the minimum target.
The definition of adjusted EPS is consistent with the Group’s
financial statements, however the Committee has discretion to
modify the definition in the event of changes in accounting policy and/
or material operational, market, exchange rate or environmental factors
in order to more appropriately reflect management performance. The
Committee has discretion to reduce awards if minimum thresholds
are not achieved for operating margins, free cash flow and return on
adjusted trading capital employed (“ROATCE”). Where used, the
rationale for the exercise of this discretion will be disclosed in the
next Remuneration Committee Report.
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 Plan
The Company operates a long term incentive plan for Executive
Directors, being the Diploma PLC 2011 Performance Share Plan (“PSP”).
The PSP is designed to promote the long term success of the Company,
while also aligning the Directors’ interests with those of Diploma
PLC shareholders.
The PSP 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.
DIPLOMA PLCGovernance 57
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.
When calculating termination payments, the Committee will 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.
The Committee considers that a rolling contract with a notice period
of one year is appropriate for existing and newly appointed directors.
Change of control
Change of control provisions provide for compensation equal to
the value of salary and contractual benefits for the notice period.
The Executive Directors’ service contracts, copies of which are held
at the Company’s registered office, were updated during the year to
recognise developments in law and best practice relating to such
contracts during recent years. These service contracts contain provisions
for compensation in the event of early termination or change of control,
equal to the value of salary and contractual benefits for the Directors’
notice period. The Company may make a payment in lieu of notice in
the event of early termination and the Company may make any such
payment in instalments with the Director being obliged in appropriate
circumstances to mitigate loss (for example by gaining new employment).
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
24 March 2014
Rolling
1 year
Iain Henderson
24 March 2014
Rolling
1 year
Nigel Lingwood
24 March 2014
Rolling
1 year
Compensation
payable
upon early
termination
1 year
1 year
1 year
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 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 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
plan 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.
In the event of a change in control, vesting of award shares under
the Company’s LTIP 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 apply to awards made since 1 October 2012 under
the Company’s LTIP 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.
The Committee intends to give further consideration in 2015 to the
requirements set out in the revised 2014 UK Governance Code, including
application of clawback provisions to awards made from 2015 onwards.
Remuneration for new appointments
The Committee has determined that new Executive Directors will receive
a compensation package in accordance with the terms of the Group’s
approved Remuneration Policy in force at the time of appointment.
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;
• 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;
Initial base salary will take into account the experience and calibre
of the individual and their existing remuneration package. Where it
is appropriate to offer a lower salary initially, a series of increases to
the desired salary positioning may be given over subsequent years
subject to individual performance.
• The structure of variable pay will be in accordance with Diploma’s
approved Policy detailed above with an exceptional maximum
aggregate variable pay opportunity of 375% of salary. Different
performance measures may be set in the first year for the annual
bonus, taking account of the responsibilities of the individual,
and the point in the financial year that the executive joined.
• Benefits will generally be provided in accordance with the approved
Policy, with relocation expenses/an expatriate allowance paid
if appropriate.
DIPLOMA PLCAnnual Report & Accounts 2014Governance 58
Remuneration Committee Report continued
Directors’ Remuneration Policy
•
•
In the case of an external recruitment and after having taken into
account any variable pay awards to be granted to the executive,
the Committee may also offer additional cash and/or share‑based
elements when it considers these to be in the best interests of
Diploma and shareholders, to replace variable remuneration awards
or arrangements that an individual has foregone in order to join the
Group. This includes the use of awards made under section 9.4.2
of the UK Listing Rules. Any such payments would take account
of the details of the remuneration foregone including the nature,
vesting dates and any performance requirements attached to that
remuneration and any payments would not exceed the expected
value being forfeited.
In the case of an internal appointment, any outstanding variable pay
awarded in relation to the previous role will be allowed to pay out
according to the terms of grant.
• For all new Executive Director appointments, deferral arrangements
will apply, to be set according to the circumstances of individual
appointments and will involve a requirement to acquire shares with
a proportion of any post tax annual bonus and/or retention of a
proportion of LTIP shares received (after tax), in either case, any such
shares to be retained for at least two years after vesting or until the
mandated shareholding guidelines have been met.
• Fees for a new Chairman or non‑Executive Director will be set in
line with the approved Policy.
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 (e.g. the LTIP) or by the Board (e.g. the Annual
Performance Bonus Plan). These rules provide the Committee with
certain discretions which serve to ensure that the implementation of the
Policy is fair both to the Executive 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.
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 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.
During the year, the Committee consulted with major shareholders
on proposed changes to the Policy for the Executive Directors.
This consultation exercise was carried out through a combination
of correspondence, meetings and telephone conversations.
The Committee carefully considered the views expressed by shareholders
and made certain amendments to the proposed changes to the Policy.
A summary of the results of this consultation exercise, setting out the
final proposed changes to the Policy, were then communicated to the
shareholders by letter in September 2014. This consultation exercise has
now been concluded.
The Committee has not consulted with employees on setting the 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.80 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.
DIPLOMA PLCGovernance 59
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 AGM 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 AGM held on 15 January 2014 and his appointment will continue until the end of the
AGM to be held on 21 January 2015 when he will retire as Chairman and as a non‑Executive Director.
John Nicholas was appointed as a non‑Executive Director of the Company with effect from 1 June 2013 and on 11 November 2014 was appointed
as Chairman with effect from 21 January 2015. His appointment is subject to annual re‑election by shareholders at the AGM.
Chairman and non‑Executive Directors’ letters of appointment
John Rennocks
Marie‑Louise Clayton
John Nicholas
Charles Packshaw
Date of original
appointment
12 Jul 02
12 Nov 12
1 Jun 13
1 Jun 13
Date of
election/
re‑election
15 Jan 14
15 Jan 14
15 Jan 14
15 Jan 14
Expiry of term
21 Jan 15
12 Nov 15
1 Jun 16
1 Jun 16
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 PLCAnnual Report & Accounts 2014Governance 60
Remuneration Committee Report continued
Annual Report on Remuneration
The following section of this Report provides details of the implementation of the Policy for all Directors for the year ended 30 September 2014.
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 54 to 59 and
subject to approval of the shareholders at the AGM on 21 January 2015 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 2014 and 2013
Salary
Benefits1
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
1 Benefit figures restated for 2013 to include life assurance and income protection.
Bruce Thompson
Iain Henderson
Nigel Lingwood
2014
£000
417
23
83
339
862
474
510
–
984
1,846
2013
£000
401
23
80
164
668
720
888
125
1,733
2,401
2014
£000
260
17
52
172
501
295
318
–
613
1,114
2013
£000
250
16
50
108
424
440
542
75
1,057
1,481
2014
£000
270
18
54
179
521
308
331
–
639
1,160
2013
£000
260
18
52
112
442
460
566
75
1,101
1,543
The aggregate short term remuneration paid to the Executive Directors in the year ended 30 September 2014 was £1.9m (2013: £1.5m).
Base salary
The average base salary increase for Executive Directors which applied from 1 October 2013 was 4%, compared with 6% for the Group’s senior
management cadre. On 11 November 2014, the Committee approved an increase of 10% in base salaries for the Executive Directors which will apply
in respect of the year beginning 1 October 2014. This change includes an increase of 8% which represents a one‑off re‑alignment of base salaries to
a broadly mid‑market level when compared with prior year data from companies of similar market capitalisation, plus an inflation increase of 2%.
Benefits
Bruce Thompson
Iain Henderson
Nigel Lingwood
2014
2013
Cash
allowance
in lieu of
a car
£000
Life
assurance
and income
protection
£000
13
10
11
9
6
6
Medical
insurance
£000
Total
benefit
£000
Cash
allowance
in lieu of
a car
£000
Life
assurance
and income
protection
£000
1
1
1
23
17
18
13
10
11
9
5
6
Medical
insurance
£000
Total
benefit
£000
1
1
1
23
16
18
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% (2013: 20%) of base salary were applied as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
2014
2013
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
83
52
54
–
–
–
83
52
54
80
50
52
–
–
–
80
50
52
DIPLOMA PLCGovernance 61
Annual performance bonus
The following table summarises the performance assessment by the Committee in respect of 2014 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 2014
Adjusted EPS
The minimum performance target was 0% growth in adjusted EPS, on target performance
was 5.0% growth and the maximum target was at least 15.0% growth. Adjusted EPS grew
by 4% in reported terms and 12% on a constant currency basis. After adjusting for the IAS19
accounting policy change and in accordance with the rules of the Annual Performance
Bonus Plan the Committee used 6% growth in calculating the finance performance element.
Minimum thresholds were exceeded for adjusted operating margins, free cash flow
and ROATCE.
Overall assessment against targets
55% of maximum
(CEO 65% of maximum1).
1 The Committee increased the amount payable to the Chief Executive (“CEO”) by 10% of the maximum bonus (as allowed for in the rules of the Annual Performance Bonus Plan) to reflect the
performance of the CEO in delivering strong growth in a challenging environment, while also strengthening the Group’s acquisition pipeline.
(2) Individual objectives – Iain Henderson and Nigel Lingwood 25% of bonus
The performance of Iain Henderson and Nigel Lingwood was assessed against a range of specific individual objectives under the following headings:
Iain Henderson
Achieve Sector financial budgets as measured against Key Performance Indicators.
Achieve specific development objectives in the businesses and contribute to strategic
development of the Group.
Further strengthen and develop management teams.
100% of maximum
Nigel Lingwood
Maintain strong control environment and develop finance capabilities across the Group.
Maximise value to Group from management of tax, pensions and property exposures.
Manage and develop Investor Relations programme.
100% of maximum
Based on the performance set out above, the resulting bonus for each Executive Director relating to 2014 is as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
2014 actual bonus – as a % of 2014 base salary
On
target
63%
50%
50%
Maximum
125%
100%
100%
Financial
objectives
Individual
performance
objectives
81%
41%
41%
25%
25%
2014 bonus
delivered
as cash
£000
339
172
179
Total
bonus
81%
66%
66%
The annual performance bonus for the financial year beginning 1 October 2014 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 plan
Performance conditions
Set out below is a summary of the performance conditions that apply to both the LTIP awards maturing in 2014 and the outstanding LTIP awards,
including those granted in 2012 and 2013.
With effect from 1 October 2014 and subject to shareholder approval at the AGM on 21 January 2015, new LTIP awards will be granted under the PSP at
175% of base salary; no further awards will be made under the SMP although existing SMP awards will continue to mature with the final awards maturing
in November 2016. The performance conditions applying to new awards made under the PSP will be revised from those set out below for existing
awards granted in 2011, 2012 and 2013.
The first performance condition for the LTIP awards 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. For the new awards, the adjusted EPS targets will be specified as absolute figures,
not relative to RPI. The performance conditions are as follows:
Existing awards
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 existing
awards vesting
New awards
PSP
100
100
30
Nil
SMP
100
50
15
Nil
Adjusted EPS growths (over 3 years)
14% p.a
5% p.a
Below 5 % p.a
% of new
awards
vesting
PSP
100
25
Nil
DIPLOMA PLCAnnual Report & Accounts 2014Governance 62
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 and this definition remains consistent
with the definition of adjusted 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). The performance conditions are as follows:
Existing awards
TSR relative to FTSE 250 Index (over 3 years)
Median + 15% p.a. or greater
Median + 12% p.a.
Median
Below Median
% of existing
awards vesting
New awards
PSP
100
100
30
Nil
SMP
100
50
15
Nil
Upper Quartile
Median
Below Median
% of new
awards
vesting
PSP
100
25
Nil
Where the Company’s TSR performance is between these percentage bands, vesting of the award is on a straight‑line basis. 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 2014
The PSP and SMP awards made to the Executive Directors on 16 and 19 December 2011 respectively, were subject to independently operating
performance conditions, assessed over a three year period ended 30 September 2014, as set out in the table above. The outcome of each award is
shown in the table below:
Adjusted Earnings per Share:
PSP
SMP
* Amended to reflect change in accounting policy for notional pension interest.
TSR Growth against FTSE 250 (excl. Inv. Trusts)
PSP
SMP
Base EPS*
27.6p
27.6p
EPS at
30 Sept
2014
36.1
36.1
TSR at
30 Sept
2014
116%
116%
CAGR
in EPS
9.4%
9.4%
RPI
+12%/15%
Maximum
award
14.7%
17.7%
50%
50%
Vested
award
29%
15%
Median
59%
59%
Median
+12%/15%
Maximum
award
114%
129%
50%
50%
Vested
award
50%
29%
As a result of meeting the above performance conditions, 79% and 43% respectively 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 2014
pence
Proportion
of award
vesting
Shares
vested
Number
Performance
element1
£000
Share
appreciation
element2
£000
Bruce Thompson
– PSP
– SMP
332.0p
332.0p
689.5p
689.5p
Iain Henderson
Nigel Lingwood
– PSP
– SMP
332.0p
332.0p
689.5p
689.5p
– PSP
– SMP
332.0p
332.0p
689.5p
689.5p
79%
43%
79%
43%
79%
43%
92,353
50,364
142,717
57,571
31,396
88,967
59,971
32,704
92,675
307
167
474
191
104
295
199
109
308
330
180
510
206
112
318
214
117
331
1 The performance element represents the face value of awards granted on 16 and 19 December 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 2014.
Total
£000
637
347
984
397
216
613
413
226
639
DIPLOMA PLCGovernance 63
Dividend equivalent payments
There were no dividend equivalent payments paid in respect of outstanding nil cost options which were exercised during the year:
Bruce Thompson
Iain Henderson
Nigel Lingwood
2014
2013
Options
exercised
Number
246,154
150,428
157,264
Dividend
equivalent
Payments
£000
–
–
–
Options
exercised
Number
539,700
325,777
328,492
Dividend
equivalent
payments
£000
125
75
75
Long Term Incentive Plan – awards granted in the year
The Executive Directors received grants of PSP and SMP awards on 9 December 2013, 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 SMP, the
Executive Directors are required to pledge shares for a minimum period of three years; these shares were pledged on an after tax basis and awards
were 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 61 and 62.
Outstanding share‑based performance awards
Set out below is a summary of the share‑based awards outstanding at 30 September 2014, 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 61 and 62 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
Maturity date
Shares over
which awards
held at
1 Oct 2013
Shares over
which awards
granted
during
the year
Vested
during
the period
Lapsed
during
the period
Shares over
which awards
held as at
30 Sep 2014
332.0p
502.0p
700.0p
332.0p
502.0p
700.0p
332.0p
502.0p
700.0p
385
401
417
240
250
260
250
260
270
30 Sep 2014
30 Sep 2015
30 Sep 2016
30 Sep 2014
30 Sep 2015
30 Sep 2016
30 Sep 2014
30 Sep 2015
30 Sep 2016
30 Sep 2014
30 Sep 2015
30 Sep 2016
30 Sep 2014
30 Sep 2015
30 Sep 2016
30 Sep 2014
30 Sep 2015
30 Sep 2016
116,314
79,880
72,508
49,801
75,529
51,793
–
–
59,571
–
–
37,143
–
–
38,571
(92,353)
–
–
(57,571)
–
–
(59,971)
–
–
(23,961)
–
–
(14,937)
–
–
(15,558)
–
–
–
79,880
59,571
–
49,801
37,143
–
51,793
38,571
Bruce Thompson
16 December 2011
19 December 2012
9 December 2013
Iain Henderson
16 December 2011
19 December 2012
9 December 2013
Nigel Lingwood
16 December 2011
19 December 2012
9 December 2013
DIPLOMA PLCAnnual Report & Accounts 2014Governance 64
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
Maturity date
Shares over
which
awards
held at
1 Oct 2013
Shares over
which awards
granted
during
the year
Vested
during
the period
Lapsed
during
the period
Shares over
which
awards
held as at
30 Sep 2014
Bruce Thompson
19 December 2011
20 December 2012
9 December 2013
Iain Henderson
19 December 2011
20 December 2012
9 December 2013
Nigel Lingwood
19 December 2011
20 December 2012
9 December 2013
332.0p
502.0p
700.0p
332.0p
502.0p
700.0p
332.0p
502.0p
700.0p
385
401
417
240
250
260
250
260
270
27,915
19,171
15,786
30 Sep 2014
30 Sep 2015
30 Sep 2016
30 Sep 2014
30 Sep 2015
30 Sep 2016
116,314
79,880
–
– (50,364)
–
–
–
59,571
(65,950)
–
–
17,402
11,952
9,843
30 Sep 2014
30 Sep 2015
30 Sep 2016
30 Sep 2014
30 Sep 2015
30 Sep 2016
18,127
12,430
10,221
30 Sep 2014
30 Sep 2015
30 Sep 2016
30 Sep 2014
30 Sep 2015
30 Sep 2016
72,508
49,801
–
75,529
51,793
–
– (31,396)
–
–
–
37,143
(41,112)
–
–
– (32,704)
–
–
–
38,571
(42,825)
–
–
–
79,880
59,571
–
49,801
37,143
–
51,793
38,571
The PSP and SMP awards vest on the date on which the performance conditions are determined and confirmed by the Committee, following
the end of the performance period.
Both the PSP and SMP 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 2014 are set out on page 66.
Services from external advisors
Stephenson Harwood LLP provides legal advice to the Remuneration Committee on remuneration matters and Ashurst LLP provide advice on
employment matters. During the current year, this advice related to the changes to certain elements of Executive Directors’ Remuneration Policy
proposed by the Committee and to updating the Executive Director service contracts.
The Committee also received advice from New Bridge Street on the proposed changes to the Policy. The Committee engages MEIS to provide
certain data analyses 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
Ashurst LLP
Appointed by
Services provided to the Committee
Other services provided to the Company
Fees
Committee
Legal advice
General legal advice
Stephenson Harwood LLP
Committee
Legal advice
New Bridge Street
MEIS
Committee
Committee
General advice on Remuneration Policy
Data analysis
None
None
None
£10,000
£21,800
£24,676
£7,000
Shareholder voting at previous Annual General Meeting (unaudited)
The Remuneration Committee’s Annual Report (“Report”) and the Remuneration Committee’s Report on Directors’ Remuneration Policy (“Policy”)
for the year ended 30 September 2013 were approved by shareholders at the AGM held on 15 January 2014, with the following votes being cast:
Votes for
Votes against
Withheld
Policy
67,514,494
4,500,423
19,186,751
93.75%
6.25%
Report
88,497,059
385,448
2,319,161
99.6%
0.4%
DIPLOMA PLCGovernance 65
Aligning pay with performance (unaudited)
The graph below shows the Total Shareholder Return (“TSR”) performance of Diploma PLC for the six year period ended 30 September 2014 against
the FTSE 250 Index.
Growth in the value of a hypothetical £100 holding over six years
700
600
500
400
300
200
100
+468%
+143%
0
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
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
2014
+8%
£000
523
339
862
984
1,846
65%
61%
2013
+42%
£000
504
164
668
1,733
2,401
33%
100%
2012
+54%
£000
484
367
851
979
1,830
95%
100%
2011
+16%
£000
454
360
814
887
1,701
100%
100%
2010
+71%
£000
435
345
780
507
1,287
100%
100%
2009
+21%
£000
429
102
531
303
834
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%
6%
4%
2%
0%
0%
+107%
+17%
+29%
+8%
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
FY2014
£m
57.1
18.2
FY2013
£m
54.8
17.4
Change
£m
+2.3
+0.8
DIPLOMA PLCAnnual Report & Accounts 2014Governance 66
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 reflects an
investment decision by the Executive Director and, as such, is not recorded as remuneration.
The nil cost options outstanding at 30 September 2014 and the movement during the year are as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
Year of
vesting
Options as at
1 Oct 2013
Exercised
in year
Vested
during
the year
Options
unexercised
as at 30 Sep
20145
Exercise
price
Earliest
normal
exercise
date
Expiry date
2013
2014
2013
2014
2013
2014
246,154
–
150,428
–
157,264
–
(246,154)1
–
(150,428)2
–
(157,264)3
–
–
142,717
–
88,967
–
92,675
–
142,717
–
88,967
–
92,675
Jan 2021
£1 Nov 2013
£1 Nov 2014 Dec 2021
£1 Nov 2013
Jan 2021
£1 Nov 2014 Dec 2021
£1 Nov 2013
Jan 2021
£1 Nov 2014 Dec 2021
1 Bruce Thompson exercised 246,154 options on 21 November 2013, at a market price of 676.0p per share and the total proceeds before tax were £1,664,001.
2
Iain Henderson exercised 150,428 options on 21 November 2013, at a market price of 676.0p per share and the total proceeds before tax were £1,016,893.
3 Nigel Lingwood exercised 157,264 options on 21 November 2013, at a market price of 676.0p per share and the total proceeds before tax were £1,063,104.
4 On 21 November 2013, the aggregate number of shares received by the participants was reduced by 260,307 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 676.0p.
5 The closing price of an ordinary share on 30 September 2014 was 689.5p (2013: 653.0p).
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 2014
As at 30 Sep 2013
Ordinary
shares
1,060,462
559,727
275,000
Options
vested but
unexercised
142,717
88,967
92,675
Interest in shares with
performance measures
PSP
SMP
Ordinary
shares
Options
vested but
unexercised
Interest in shares with
performance measures
PSP
SMP
139,451
86,944
90,364
139,451 1,040,000
510,000
86,944
250,000
90,364
246,154
150,428
157,264
196,194
122,309
127,322
196,194
122,309
127,322
Interests in ordinary shares include investment shares pledged under the Company’s 2011 SMP and shares held through personal saving vehicles. As
of 14 November 2014 there have been no changes to these interests in ordinary shares of the Company.
DIPLOMA PLCGovernance 67
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
14 November 2014, all Executive Directors exceeded the applicable shareholding guidelines.
Shareholdings at 30 September 2014 against guidelines
%
2000
1500
1000
500
0
1,753%
1,474%
200%
100%
100%
Bruce Thompson
Iain Henderson
Nigel Lingwood
702%
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
John Nicholas
Charles Packshaw
Total fees
2014
£000
130
45
45
45
2013
£000
125
42
14
14
The non‑Executive Directors received a basic annual fee during the year and there were no additional fees paid in 2014 and 2013 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 2014, the Board approved an
increase of 2% in the Chairman’s fees to £133,000 per annum and in the annual fees paid to non‑Executive Directors to £46,000, both to take effect
from 1 October 2014.
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
John Nicholas
Charles Packshaw
Interest in ordinary shares
As at
30 Sep 2014
As at
1 Oct 2013
80,000
5,000
2,000
–
80,000
5,000
–
–
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 PLCAnnual Report & Accounts 2014Governance 68
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 39; the Strategic Report on pages 1 to 39
incorporates the requirements of the Companies Act 2006 (the “Act”).
Annual General Meeting
The Annual General Meeting (“AGM”) will be held at midday on
Wednesday, 21 January 2015 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 the AGM which is a separate document which
will be sent to all shareholders and published on the Group’s website.
Substantial shareholdings
At 14 November 2014 the Company had been notified of the following
interests amounting to 3% or more of the voting rights in its ordinary
share capital:
Mondrian Investment Partners Ltd.
Standard Life Investments Ltd
Royal London Asset Management Ltd.
BlackRock Inc.
Mawer Investment Management Limited
Baillie Gifford & Co.
Fidelity Management & Research Co.
Invesco PLC
Schroders PLC
Percentage
of ordinary
share capital
7.96%
5.84%
4.42%
4.15%
3.39%
3.32%
3.28%
3.07%
3.05%
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.
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
(“SMP”), 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.
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.
Transfers of uncertificated 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 SMP 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.
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.
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 AGM of the
Company held on 15 January 2014. In the year ended 30 September
2014, the Company has not allotted any shares. These powers will
expire at the conclusion of the 2015 AGM and resolutions to renew
the Directors’ powers are therefore included within the Notice of the
AGM in 2015.
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 AGM of the Company held on
15 January 2014. In the year to 30 September 2014 the Company has
not acquired any of its own shares. This authority will expire at the
conclusion of the 2015 AGM and a resolution to renew the authority
is therefore included within the Notice of the AGM in 2015.
Financial
Results and dividends
The profit for the financial year attributable to shareholders was £35.5m
(2013: £34.5m). The Directors recommend a final dividend of 11.6p per
ordinary share (2013: 10.7p), to be paid, if approved, on 28 January 2015.
This, together with the interim dividend of 5.4p (2013: 5.0p) per ordinary
share paid on 18 June 2014 amounts to 17.0p for the year (2013: 15.7p).
The results are shown more fully in the consolidated financial
statements on pages 70 to 97 and summarised in the Finance Review on
pages 18 to 20.
Details of post balance sheet events are included in note 29 to the
consolidated financial statements.
DIPLOMA PLCFinancial Statements 69
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 39. The financial position of the Group,
its cash flows, liquidity position and borrowing facilities are described
in the Finance Review on pages 18 to 20. 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.
• 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 adequate accounting records
that are sufficient to show and explain the Parent Company’s transactions
and disclose with reasonable accuracy at any time the financial position
of the Parent Company and enable them to ensure that the financial
statements comply with the Act. They are also responsible for
safeguarding the assets of the Parent Company and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
The Group also has a committed multi‑currency revolving bank facility
of £25m which expires on 23 June 2017. At 30 September 2014, the
Group had cash funds of £21.3m and had no borrowings.
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.
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).
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;
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 17 November 2014 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 PLCAnnual Report & Accounts 2014Financial Statements 70
Consolidated Income Statement
For the year ended 30 September 2014
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
Note
3, 4
3
6
7
21
2014
£m
305.8
(194.2)
111.6
(6.4)
(54.9)
50.3
(0.5)
49.8
(13.7)
36.1
35.5
0.6
36.1
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
9
31.4p
30.7p
Note
11
3, 4
6
2014
£m
50.3
6.4
56.7
(0.5)
56.2
2013
£m
48.7
5.6
54.3
–
54.3
9
36.1p
34.8p
The notes on pages 74 to 97 form part of these financial statements.
DIPLOMA PLCFinancial Statements Consolidated Statement of Income and
Other Comprehensive Income
For the year ended 30 September 2014
Profit for the year
Items that will not be reclassified to the Consolidated Income Statement
Actuarial gains in defined benefit pension scheme
Deferred tax on items that will not be reclassified
Items that may be reclassified to Consolidated Income Statement
Exchange rate losses on foreign currency net investments
Gains on fair value of cash flow hedges
Net changes to fair value of cash flow hedges transferred to the 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
25c
19
19
7
2014
£m
36.1
0.3
–
0.3
(8.7)
0.4
–
(0.1)
(8.4)
28.0
27.7
0.3
28.0
Consolidated Statement of Changes in Equity
For the year ended 30 September 2014
At 1 October 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
Total comprehensive income
Share-based payments
Acquisition of businesses
Minority interest put option
Minority interests acquired
Tax on items recognised directly in equity
Notional purchase of own shares
Dividends
At 30 September 2014
Note
5
21
7
8, 21
5
21
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
18.7
(2.5)
–
–
–
–
–
16.2
(8.7)
–
–
–
–
–
–
–
7.5
0.2
(0.2)
–
–
–
–
–
–
0.3
–
–
–
–
–
–
–
0.3
141.2
34.8
0.5
–
0.6
(4.7)
(17.4)
155.0
36.1
0.7
–
(2.3)
0.9
0.5
(1.8)
(18.2)
165.8
32.1
0.5
–
0.6
(4.7)
(17.4)
176.9
27.7
0.7
–
(2.3)
0.9
0.5
(1.8)
(18.2)
170.9
184.4
1.4
0.3
–
(0.1)
–
–
(0.2)
1.4
0.3
–
2.3
–
(0.9)
–
–
(0.2)
2.9
The notes on pages 74 to 97 form part of these financial statements.
71
2013
£m
34.8
0.2
–
0.2
(2.5)
–
(0.2)
0.1
(2.6)
32.4
32.1
0.3
32.4
Total
equity
£m
167.2
32.4
0.5
(0.1)
0.6
(4.7)
(17.6)
178.3
28.0
0.7
2.3
(2.3)
–
0.5
(1.8)
(18.4)
187.3
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements 72
Consolidated Statement of Financial Position
As at 30 September 2014
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
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
25a
20
14
21
2014
£m
80.2
28.6
0.8
0.7
13.1
0.9
2013
£m
78.5
26.7
0.8
0.7
13.9
2.1
124.3
122.7
54.1
46.3
21.3
121.7
(43.9)
(2.3)
(1.6)
(47.8)
73.9
198.2
(4.3)
(2.4)
(4.2)
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)
187.3
178.3
5.7
7.5
0.3
170.9
184.4
2.9
187.3
5.7
16.2
–
155.0
176.9
1.4
178.3
The consolidated financial statements were approved by the Board of Directors on 17 November 2014 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 PLCFinancial Statements Consolidated Cash Flow Statement
For the year ended 30 September 2014
Operating profit
Acquisition related charges
Non-cash items
Increase in working capital
Cash flow from operating activities
Interest paid, net
Tax paid
Net cash from operating activities
Cash flow from investing activities
Acquisition of businesses (including expenses)
Deferred consideration paid
Purchase of property, plant and equipment
Purchase of other intangible assets
Proceeds from sale of property, plant and equipment
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 in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of year
Alternative Performance Measures (note 2)
Net increase in cash and cash equivalents
Add: Dividends paid to shareholders
Dividends paid to minority interests
Acquisition of businesses and minority interests
Deferred consideration paid
Repayment of borrowings
Free cash flow
Cash and cash equivalents
Borrowings
Net cash
The notes on pages 74 to 97 form part of these financial statements.
73
Note
23
23
23
22
20
13
11
21
8
21
24
18
2014
£m
50.3
6.4
2.9
(4.6)
55.0
(0.3)
(13.0)
41.7
(14.9)
(0.1)
(1.9)
(0.3)
0.1
(17.1)
(1.5)
(18.2)
(0.2)
–
(1.8)
–
(21.7)
2.9
19.3
(0.9)
21.3
2014
£m
2.9
18.2
0.2
16.4
0.1
–
37.8
21.3
–
21.3
2013
£m
48.7
5.6
2.7
(1.1)
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
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements
74
Notes to the Consolidated Financial Statements
For the year ended 30 September 2014
1. General information
Diploma PLC is a public limited company registered and domiciled in England and Wales and listed on the London Stock Exchange.
The address of the registered office is 12 Charterhouse Square, London EC1M 6AX. The consolidated financial statements comprise the
Company and its subsidiaries (together referred to as “the Group”) and were authorised by the Directors for publication on 17 November 2014.
These statements are presented in UK sterling, with all values rounded to the nearest one hundred thousand, except where otherwise
indicated.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as
adopted by the European Union (“EU”) 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, adjustments to deferred consideration (collectively, “acquisition related
charges”), the costs of restructuring or rationalisation of operations and the profit or loss relating to the sale of businesses or property.
The Directors believe that adjusted operating profit is an important measure of the underlying operational performance of the Group.
2.2 Adjusted profit before tax
At the foot of the Consolidated Income Statement, “adjusted profit before tax” is separately disclosed, being defined as adjusted operating
profit, after finance expenses (before fair value remeasurements under IAS 39 in respect of future purchases of minority interests) and before
tax. The Directors believe that adjusted profit before tax is an important measure of the underlying performance of the Group.
2.3 Adjusted earnings per share
“Adjusted earnings per share” (“EPS”) 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 EPS provides an important measure of the underlying earning capacity of the Group.
2.4 Free cash flow
At the foot of the Consolidated Cash Flow Statement, “free cash flow” is reported, being defined as net cash flow from operating activities,
after net capital expenditure on fixed assets and including proceeds received from business disposals, but before expenditure on business
combinations/investments and dividends paid to both minority shareholders and the Company’s shareholders. The Directors believe that
free cash flow gives an important measure of the cash flow of the Group, available for future investment.
2.5 Trading capital employed and ROATCE
In the segment analysis in note 3, “trading capital employed” is reported, being defined as net assets less cash and cash equivalents and after
adding back: borrowings, retirement benefit obligations, deferred tax and acquisition liabilities in respect of future purchases of minority
interests and deferred consideration. Adjusted trading capital employed is reported as being trading capital employed plus goodwill and
acquisition related charges previously written off (net of deferred tax on acquisition intangible assets). Return on adjusted trading capital
employed (“ROATCE”) at the Group and Sector level is defined as the adjusted operating profit, divided by adjusted trading capital employed
and adjusted for the timing effect of major acquisitions and disposals. The Directors believe that ROATCE is an important measure of the
underlying performance of the Group.
3. Business sector analysis
For management reporting purposes, the Group is organised into three main business Sectors: Life Sciences, Seals and Controls. These
Sectors form the basis of the primary reporting format disclosures below. The principal activities of each of these Sectors is described in the
Strategic Report on pages 1 to 39. Sector revenue represents revenue from external customers; there is no inter-Sector revenue. Sector
results, assets and liabilities include items directly attributable to a Sector, as well as those that can be allocated on a reasonable basis.
Sector assets exclude cash and cash equivalents, deferred tax assets and corporate assets that cannot be allocated on a reasonable basis
to a business Sector. Sector liabilities exclude borrowings, retirement benefit obligations, deferred tax liabilities and corporate liabilities that
cannot be allocated on a reasonable basis to a business Sector. These items are shown collectively in the following analysis as “unallocated
assets” and “unallocated liabilities”, respectively.
DIPLOMA PLCFinancial Statements 3. Business sector analysis continued
Life Sciences
Seals
Controls
Group
Revenue – existing businesses
– acquisitions
Revenue
Adjusted operating profit – existing businesses
– acquisitions
Adjusted operating profit
Acquisition related charges (note 11)
Operating profit
2014
£m
91.3
0.1
91.4
19.6
0.1
19.7
(2.3)
17.4
2013
£m
93.2
–
93.2
20.9
–
20.9
(2.8)
18.1
2014
£m
106.4
13.4
119.8
19.8
1.9
21.7
(3.2)
18.5
2013
£m
106.1
–
106.1
19.5
–
19.5
(2.0)
17.5
2014
£m
92.7
1.9
94.6
15.0
0.3
15.3
(0.9)
14.4
2013
£m
86.2
–
86.2
13.9
–
13.9
(0.8)
13.1
2014
£m
290.4
15.4
305.8
54.4
2.3
56.7
(6.4)
50.3
Life Sciences
Seals
Controls
Group
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
– Acquisition liabilities
– Corporate liabilities
Total liabilities
Net assets
Other Sector information
Capital expenditure
Depreciation and amortisation
2014
£m
29.3
–
44.2
10.1
83.6
2013
£m
29.0
–
47.3
12.9
89.2
2014
£m
45.0
0.7
21.0
15.8
82.5
2013
£m
38.4
0.7
16.6
11.3
67.0
2014
£m
37.2
–
15.0
2.7
54.9
2013
£m
33.5
–
14.6
2.5
50.6
83.6
(14.7)
89.2
(14.7)
82.5
(14.6)
67.0
(11.6)
54.9
(14.9)
50.6
(13.7)
(14.7)
68.9
1.2
1.3
(14.7)
74.5
2.8
1.4
(14.6)
67.9
0.5
0.7
(11.6)
55.4
0.9
0.7
(14.9)
40.0
0.5
0.5
(13.7)
36.9
0.9
0.4
2014
£m
111.5
0.7
80.2
28.6
221.0
0.9
21.3
2.8
246.0
(44.2)
(4.2)
(4.3)
(4.0)
(2.0)
(58.7)
187.3
2.2
2.5
Alternative Performance Measures (note 2)
Life Sciences
Seals
Controls
Group
Net assets
Add/(less):
– Deferred tax, net
– Retirement benefit obligations
– Future purchases of minority interests
– Cash and cash equivalents
Reported trading capital employed
– Historic goodwill and acquisition related
charges, net of deferred tax
Adjusted trading capital employed
2014
£m
68.9
2013
£m
74.5
2014
£m
67.9
2013
£m
55.4
2014
£m
40.0
2013
£m
36.9
22.3
91.2
19.1
93.6
19.6
87.5
17.3
72.7
7.7
47.7
6.7
43.6
2014
£m
187.3
3.3
4.3
4.0
(21.3)
177.6
49.6
227.2
75
2013
£m
285.5
–
285.5
54.3
–
54.3
(5.6)
48.7
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)
(3.0)
(1.7)
(53.2)
178.3
4.6
2.5
2013
£m
178.3
1.7
4.7
3.0
(19.3)
168.4
43.1
211.5
ROATCE1
21.9%
22.3%
26.0%
27.1%
33.2%
32.0%
25.8%
25.8%
1 ROATCE is calculated after adjusting for the timing of acquisitions completed during the year.
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements 76
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2014
4. Geographic segment analysis by origin
United Kingdom
Rest of Europe
North America2
Revenue
Adjusted operating profit
Non-current assets1
Trading capital employed
Capital expenditure
2014
£m
85.7
53.2
166.9
305.8
2013
£m
74.8
40.1
170.6
285.5
2014
£m
13.8
7.9
35.0
56.7
2013
£m
12.0
6.3
36.0
54.3
2014
£m
23.8
22.0
76.9
2013
£m
21.3
12.9
85.7
122.7
119.9
2014
£m
39.7
32.2
105.7
177.6
2013
£m
34.2
21.7
112.5
168.4
2014
£m
0.5
0.1
1.6
2.2
2013
£m
1.0
0.4
3.2
4.6
1 Non-current assets exclude the investment and deferred tax assets.
2 North America includes the Australian Healthcare businesses.
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 52 to 67. The amount charged against operating profit in the year in respect of Director
short term remuneration was in aggregate £2.2m (2013: £1.7m). The charge for share-based payments of £0.7m (2013: £0.5m) relates to
the Group’s Long Term Incentive Plan (“LTIP”), 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 (2013: £0.2m).
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
– interest income on the defined benefit pension scheme (note 25b)
Interest expense and similar charges
– bank facility and commitment fees
– interest payable on bank and other borrowings
– interest expense on the defined benefit pension scheme (note 25b)
Net interest expense
– fair value remeasurement of put options (note 20)
Financial expense, net
2014
£m
49.5
5.2
1.7
0.7
57.1
2013
£m
47.5
5.3
1.5
0.5
54.8
2014
Number
2013
Number
334
604
312
14
1,264
1,324
2014
£m
0.1
–
0.1
(0.4)
–
(0.2)
(0.6)
(0.5)
–
(0.5)
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)
The fair value remeasurement of £Nil (2013: £0.2m) includes £0.1m (2013: £0.3m) which relates to the unwinding of the discount on the
liability for future purchases of minority interests.
As described further in note 25b, the Group has adopted the amendments set out in IAS19 (revised) ‘Employee Benefits’ which has given rise
to an interest expense on the defined benefit pension scheme of £0.2m, compared with interest income of £0.2m last year. If this amendment
had been adopted last year, the interest income of £0.2m on the defined pension scheme would have been an interest expense of £0.2m.
The comparative however has not been restated as the amount is not material.
DIPLOMA PLCFinancial Statements 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:
UK corporation tax
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
2014
£m
2013
£m
2.6
12.1
14.7
(0.1)
(0.4)
14.2
–
(0.5)
(0.5)
13.7
2.7
12.1
14.8
–
(0.3)
14.5
0.1
(0.9)
(0.8)
13.7
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 was charged (2013: £0.1m credit) directly to the Consolidated Statement of Income and
Other Comprehensive Income. A further £0.5m (2013: £0.6m) was credited to the Consolidated Statement of Changes in Equity which
relates to share-based payments made during the year, comprising a current tax credit of £1.0m (2013: £1.3m credit) less a deferred tax
charge of £0.5m (2013: £0.7m charge).
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 of 22.0% to the profit before tax
of £49.8m and the amounts set out above is as follows:
2014
£m
2013
£m
Profit before tax
Tax on profit at UK effective corporation tax rate of 22.0% (2013: 23.5%)
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
49.8
11.0
–
3.2
(0.5)
–
13.7
48.5
11.4
0.2
2.5
(0.3)
(0.1)
13.7
The Group earns its profits in the UK and overseas. The UK corporation tax rate was reduced from 23.0% to 21.0% on 31 March 2014; however
as the Group prepares its consolidated financial statements for the year to 30 September, the effective tax rate for UK corporation tax in respect
of the year ended 30 September 2014 was 22.0% (2013: 23.5%) 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 ca.38%.
A reduction in the UK corporation tax rate from 21.0% to 20.0% (effective from 1 April 2015) was substantively enacted on 2 July 2013.
This reduction in the UK corporation tax rate is likely to lead to a further reduction in the future UK current tax charge. The UK deferred tax
assets and liabilities at 30 September 2014 have been calculated based on the rate of 20.0% substantively enacted at 30 September 2014.
8. Dividends
Interim dividend, paid in June
Final dividend of the prior year, paid in January
2014
pence
per share
2013
pence
per share
5.4
10.7
16.1
5.0
10.2
15.2
2014
£m
6.1
12.1
18.2
2013
£m
5.6
11.8
17.4
The Directors have proposed a final dividend in respect of the current year of 11.6p per share (2013: 10.7p) which will be paid on 28 January
2015, subject to approval of shareholders at the Annual General Meeting (“AGM”) on 21 January 2015. The total dividend for the current year,
subject to approval of the final dividend, will be 17.0p per share (2013: 15.7p).
The Diploma Employee Benefit Trust holds 293,348 (2013: 586,887) shares, which are not eligible for dividends.
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements 78
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2014
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 112,893,129 (2013: 112,454,287) and the profit for the year attributable to shareholders of £35.5m (2013: £34.5m).
There are no potentially dilutive shares.
Adjusted earnings per share
Adjusted EPS, 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 acquisition related charges and fair value remeasurements
Adjusted earnings
10. Goodwill
At 1 October 2012
Transfers
Acquisitions
Exchange adjustments
At 30 September 2013
Acquisitions (note 22)
Exchange adjustments
At 30 September 2014
2014
pence
per share
2013
pence
per share
31.4
5.7
–
(1.0)
36.1
Life Sciences
£m
47.6
1.9
–
(2.2)
47.3
0.3
(3.4)
44.2
30.7
4.9
0.2
(1.0)
34.8
Seals
£m
16.5
–
–
0.1
16.6
5.0
(0.6)
21.0
2014
£m
49.8
(13.7)
(0.6)
35.5
6.4
–
(1.1)
40.8
Controls
£m
15.7
(1.9)
0.5
0.3
14.6
0.7
(0.3)
15.0
2013
£m
48.5
(13.7)
(0.3)
34.5
5.6
0.2
(1.1)
39.2
Total
£m
79.8
–
0.5
(1.8)
78.5
6.0
(4.3)
80.2
The Group tests goodwill for impairment generally twice a year. For the purposes of impairment testing, goodwill is allocated to each of
the Group’s three operating Sectors. This represents a change from the prior year and reflects the lowest level within the Group at which
goodwill is monitored by management and better reflects the Group’s strategy of acquiring businesses to drive synergies across a Sector,
rather than in an individual business. The impairment test requires a “value in use” valuation to be prepared for each Sector using discounted
cash flow forecasts. The cash flow forecasts are based on a combination of annual budgets prepared by each business and the Group’s five
year strategic plan. Beyond five years cash flow projections utilise a perpetuity growth rate of 2%.
The key assumptions used to prepare the cash flow forecasts relate to gross margins, growth rates and discount rates. The gross margins are
assumed to remain sustainable, which is supported by historical experience; growth rates generally approximate to the long term average
rates for the markets in which the business operates, unless there are particular factors relevant to a business, such as start-ups. The annual
growth rates used in the cash flow forecasts for the next five years represent the budgeted amounts for 2015 and thereafter, average growth
rates for each Sector; these annual growth rates then trend down to 2% over the longer term.
The cash flow forecasts are discounted to determine a current valuation using a single market derived pre-tax discount rate of ca.13% (2013:
13%). This single rate is based on the characteristics of lower risk, non-technically driven, distribution businesses operating generally in well
developed markets and geographies and with robust capital structures. As these features are consistent between each of the Group’s
Sectors the Board considers that it is more appropriate to use a single discount rate applied to each Sector’s cash flow forecasts.
Based on the criteria set out above, no impairment in the value of goodwill in any of the Sectors was identified.
The Directors have also carried out sensitivity analysis on the key assumptions noted above to determine whether a “reasonably possible
change” in any of these assumptions would result in an impairment of goodwill. The analysis indicates that a “reasonably possible change”
would be not give rise to an impairment charge to goodwill in any of the three Sectors. Given the significant headroom in the Group’s
impairment calculations, an impairment would not have arisen had goodwill continued to have been assessed on a business unit basis.
DIPLOMA PLCFinancial Statements 79
Customer
relationships
£m
Supplier
relationships
£m
Trade
names and
databases
£m
Total
acquisition
intangible
assets
£m
Other
intangible
assets
£m
33.6
–
0.6
–
(0.4)
33.8
–
9.0
–
(1.5)
41.3
12.1
3.3
–
(0.2)
15.2
3.9
–
(0.6)
18.5
22.8
18.6
17.3
–
–
–
(0.6)
16.7
–
–
–
(1.1)
15.6
7.6
2.0
–
(0.2)
9.4
1.6
–
(0.5)
10.5
5.1
7.3
2.5
–
–
–
–
2.5
–
–
–
–
2.5
1.5
0.3
–
(0.1)
1.7
0.1
–
–
1.8
0.7
0.8
53.4
–
0.6
–
(1.0)
53.0
–
9.0
–
(2.6)
59.4
21.2
5.6
–
(0.5)
26.3
5.6
–
(1.1)
30.8
28.6
26.7
2.7
0.5
–
(0.3)
–
2.9
0.3
–
(0.2)
(0.1)
2.9
2.0
0.3
(0.2)
–
2.1
0.3
(0.2)
(0.1)
2.1
0.8
0.8
11. Acquisition and other intangible assets
Cost
At 1 October 2012
Additions
Acquisitions
Disposals
Exchange adjustments
At 30 September 2013
Additions
Acquisitions (note 22)
Disposals
Exchange adjustments
At 30 September 2014
Amortisation
At 1 October 2012
Charge for the year
Disposals
Exchange adjustments
At 30 September 2013
Charge for the year
Disposals
Exchange adjustments
At 30 September 2014
Net book value
At 30 September 2014
At 30 September 2013
Acquisition related charges are £6.4m (2013: £5.6m) and comprise £5.6m (2013: £5.6m) of amortisation of acquisition intangible assets and
£0.8m of acquisition expenses (2013: negligible).
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
Other intangible assets comprise computer software that is separately identifiable from plant and equipment and includes software licences.
12. Investment
Investment
2014
£m
0.7
2013
£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 2014, there was no material difference between the
book value of this investment and its fair value.
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements 80
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2014
13. Property, plant and equipment
Cost
At 1 October 2012
Additions
Disposals
Exchange adjustments
At 30 September 2013
Additions
Acquisitions
Disposals
Exchange adjustments
At 30 September 2014
Depreciation
At 1 October 2012
Charge for the year
Disposals
Exchange adjustments
At 30 September 2013
Charge for the year
Disposals
Exchange adjustments
At 30 September 2014
Net book value
At 30 September 2014
At 30 September 2013
Freehold
properties
£m
Leasehold
properties
£m
Plant and
equipment
£m
8.8
–
–
–
8.8
–
–
–
(0.2)
8.6
2.3
0.1
–
–
2.4
0.1
–
0.1
2.6
6.0
6.4
2.0
0.9
–
–
2.9
0.2
–
(0.1)
(0.2)
2.8
0.8
0.2
–
–
1.0
0.2
(0.1)
–
1.1
1.7
1.9
16.3
3.2
(1.0)
(0.3)
18.2
1.7
0.3
(3.3)
(0.9)
16.0
11.7
1.9
(0.9)
(0.1)
12.6
1.9
(3.2)
(0.7)
10.6
5.4
5.6
Total
£m
27.1
4.1
(1.0)
(0.3)
29.9
1.9
0.3
(3.4)
(1.3)
27.4
14.8
2.2
(0.9)
(0.1)
16.0
2.2
(3.3)
(0.6)
14.3
13.1
13.9
Land included within freehold properties above, but which is not depreciated, is £2.0m (2014: £2.0m). Capital commitments contracted, but not
provided, were £0.1m (2013: £0.1m).
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 at 30 September 2014 is £1.0m (2013: £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
2014
£m
(1.7)
0.5
(1.7)
(0.5)
(0.1)
0.2
(3.3)
2013
£m
(1.6)
0.8
(0.2)
(0.7)
0.1
(0.1)
(1.7)
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
Deferred tax offset
Assets
Liabilities
Net
2014
£m
0.3
–
0.9
1.0
0.2
0.3
0.6
3.3
(2.4)
0.9
2013
£m
0.4
–
0.9
1.1
0.8
0.4
0.8
4.4
(2.3)
2.1
2014
£m
(0.8)
(5.7)
–
–
–
–
(0.1)
(6.6)
2.4
(4.2)
2013
£m
(0.8)
(5.2)
–
–
–
–
(0.1)
(6.1)
2.3
(3.8)
2014
£m
(0.5)
(5.7)
0.9
1.0
0.2
0.3
0.5
(3.3)
–
(3.3)
2013
£m
(0.4)
(5.2)
0.9
1.1
0.8
0.4
0.7
(1.7)
–
(1.7)
DIPLOMA PLCFinancial Statements 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
£3.0m (2013: £2.2m).
15. Inventories
Finished goods
2014
£m
54.1
2013
£m
46.7
Inventories are stated net of impairment provisions of £5.3m (2013: £5.0m). During the year £1.3m (2013: £1.2m) was recognised as a charge
against operating profit, comprising the write-down of inventories 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:
UK 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
Charged against profit, net
Set up on acquisition
Utilised by write-off
At 30 September
2014
£m
42.3
(0.5)
41.8
2.6
1.9
46.3
2014
£m
14.1
10.3
9.0
5.3
3.6
42.3
2014
£m
34.5
7.3
0.5
42.3
2014
£m
6.0
1.0
0.2
0.1
7.3
2014
£m
0.3
0.1
0.1
–
0.5
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
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements
2014
£m
26.1
1.2
2.7
13.9
43.9
2014
£m
7.8
11.5
0.8
5.1
0.9
26.1
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
2013
Total
£m
11.2
8.1
19.3
82
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2014
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:
UK sterling
US dollars
Canadian dollars
Euro
Other
18. Cash and cash equivalents
Cash at bank
Short term deposits
UK
£m
3.4
3.0
6.4
US$
£m
5.6
–
5.6
C$
£m
1.3
2.4
3.7
Euro
£m
2.3
1.7
4.0
Other
£m
1.4
0.2
1.6
2014
Total
£m
14.0
7.3
21.3
UK
£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
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 small 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 37
within Principal Risks and Uncertainties, all of which have 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 each 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 counterparty credit risk with financial institutions is controlled by the Group treasury team which establishes and monitors
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
2014
£m
41.8
2.6
21.3
65.7
2013
£m
39.5
1.5
19.3
60.3
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 PLCFinancial Statements
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
cash and forecasts 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 2014 all covenants were 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 £25m revolving bank facility (with an option to increase its facility to £50m, subject to market pricing) which expires on
23 June 2017. Interest on this facility is payable at between 120 and 170bps over LIBOR, depending on the ratio of net debt to EBITDA.
At 30 September 2014 none of the facility had been drawn down (2013: £Nil).
The undrawn committed facilities available at 30 September are as follows:
Expiring within one year
Expiring after two years
The Group’s financial liabilities are as follows:
Trade payables
Other payables
Other liabilities (note 20)
The maturities of the undiscounted financial liabilities are as follows:
Less than one year
One to two years
Two to five years
Less: Discount
2014
£m
–
25.0
2013
£m
20.0
–
Carrying amount
2014
£m
26.1
1.2
4.0
31.3
28.9
–
3.3
32.2
(0.9)
31.3
2013
£m
23.2
1.5
3.0
27.7
26.8
1.1
–
27.9
(0.2)
27.7
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 (2013: £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, Euro and Japanese yen. 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 2014 was £31.0m (2013: £15.4m). The net fair
value of forward foreign exchange contracts used as hedges at 30 September 2014 was £0.3m (2013: negligible). The amount removed from
Other Comprehensive Income and taken to the Consolidated Income Statement in cost of sales during the year was negligible (2013: £0.2m
debit). The change in the fair value of cash flow hedges taken to Other Comprehensive Income during the year was £0.4m (2013: negligible).
The currency risk arising from both translational and transactional risks are described further on page 37 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 PLCAnnual Report & Accounts 2014Financial Statements 84
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2014
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 18 months from the year end.
Trade and other receivables/payables
As the majority of receivables/payables have a remaining life of less than one year, the 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 comprises 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 change 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
2014
£m
3.5
0.5
4.0
1.6
2.4
2014
£m
2.8
(1.6)
2.3
0.1
(0.1)
3.5
2013
£m
2.8
0.2
3.0
2.0
1.0
2013
£m
3.2
(0.6)
–
0.3
(0.1)
2.8
At 30 September 2014, the Group retained put options to acquire minority interests in Kentek and M Seals which are exercisable between
2015 and 2022. As described in note 22, put/call options were recognised during the year at a value of £2.3m (€2.7m) in respect of the
20% minority interest in Kentek, acquired on 13 January 2014. On 13 January 2014 and 31 July 2014, the Group acquired the outstanding
minority interests in DSL for an aggregate of £0.9m (A$1.6m). On 31 July 2014 the Group acquired the outstanding minority interest in
HPS for £0.7m (US$1.2m), including deferred consideration of £0.1m (US$0.1m).
At 30 September 2014 the estimate of the financial liability to acquire the outstanding minority shareholdings was reassessed by the Directors,
based on their current estimate of the future performance of these businesses and to reflect foreign exchange rates at 30 September 2014.
This led to a remeasurement of the fair value of these put options and the liability was reduced by £0.1m (2013: reduced by £0.1m). This
reduction was offset by the charge from unwinding the discount on the liability and in aggregate £Nil (2013: £0.2m) has been charged to
the Consolidated Income Statement.
DIPLOMA PLCFinancial Statements 85
20. Other liabilities continued
At 30 September 2014 deferred consideration of £0.5m relates to £0.1m payable to the vendor of Specialty Fasteners & Components Limited
(“SFC”), £0.1m (A$0.2m) payable to the vendor of BGS, £0.2m (€0.2m) payable to the vendor of Kentek and £0.1m (US$0.1m) payable to the
vendor of HPS. The amount payable to the vendor of BGS represents the third and final instalment of deferred consideration, having paid a
second instalment of deferred consideration of £0.1m (A$0.2m) during this year.
21. Minority interests
At 1 October 2012
Share of net assets acquired
Share of profit
Dividends paid
At 30 September 2013
Acquisition of Kentek Oy
Share of net assets acquired
Share of profit
Dividends paid
Exchange adjustments
At 30 September 2014
£m
1.4
(0.1)
0.3
(0.2)
1.4
2.3
(0.9)
0.6
(0.2)
(0.3)
2.9
On 13 January 2014 and 31 July 2014 the Group acquired 6% and 14% respectively of the outstanding 20% share capital in DSL from the
previous owners for cash consideration of £0.9m (A$1.6m). On 31 July 2014, the Group acquired the outstanding 49% shareholding in HPS
for a maximum consideration of £0.7m (US$1.1m). On completion, the initial consideration was £0.6m (US$1.0m) with a further payment of
up to £0.1m (US$0.1m) dependent on the achievement of certain performance criteria in the 12 months ending on 30 September 2015.
22. Acquisition of businesses
On 13 January 2014, the Group acquired 80% of Kentek Oy (“Kentek”) for maximum consideration of £11.0m (€13.3m). The initial cash paid on
acquisition was £8.9m (€10.7m), with a further £0.8m (€1.0m) paid on 14 May 2014 relating to net assets at acquisition. Deferred consideration
of up to £1.3m (€1.6m) is also payable depending on the operating profit of Kentek in the 12 months ending 31 December 2014. The fair value
of the 20% minority interest in Kentek of £2.3m has been calculated based on the net present value of the projected performance of the
business between 2015 and 2018, when the put options become exercisable.
On 3 June 2014, the Group acquired SFC for a maximum consideration of £2.8m. The initial cash on acquisition was £2.7m and up to a
further £0.1m is payable based on the operating profit of the business in the 12 months ended 31 December 2014.
In addition, during the year the Group made a number of smaller acquisitions, all of which were paid for in cash, which were as follows:
17 October 2013
19 December 2013
28 February 2014
10 July 2014
31 July 2014
Sacee
Ramsay Services Limited (“Ramsay”)
AB Seals Limited (“AB Seals”)
Chemzyme Australia
Maxwell Seals
£0.3m (€0.3m)
£1.3m
£0.5m
£0.6m (A$1.2m)
£0.2m
Acquisition expenses of £0.8m were incurred on these acquisitions, of which £0.6m related to the acquisition of Kentek, including local
stamp duty taxation.
From the date of acquisition to 30 September 2014, the newly acquired Kentek business contributed £12.4m to revenue and £1.7m to adjusted
operating profit and the other newly acquired businesses contributed £3.0m to revenue and £0.6m to adjusted operating profit. If all of these
businesses had been acquired at the beginning of the financial year, they would have contributed £20.6m to revenue and £2.7m to adjusted
operating profit, in aggregate; however these amounts should not be viewed as indicative of the results of these businesses that would have
occurred, if these acquisitions had been completed at the beginning of the year.
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements 86
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2014
22. Acquisition of business continued
Set out below is an analysis of the provisional net book values and fair values relating to these acquisitions.
Acquisition intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Trade and other payables
Deferred tax
Net assets acquired
Goodwill
Minority share of net assets (including goodwill)
Cash paid
Cash acquired
Expenses of acquisition
Net cash paid, after acquisition expenses
Deferred consideration payable
Less: Expenses of acquisition
Total consideration
Kentek
Other
Total
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
–
0.2
2.9
1.0
(1.6)
–
2.5
–
–
2.5
6.5
0.2
2.7
0.9
(1.6)
(1.2)
7.5
4.3
(2.3)
9.5
9.7
(0.4)
0.6
9.9
0.2
(0.6)
9.5
–
0.1
1.5
1.1
(1.2)
–
1.5
–
–
1.5
2.5
0.1
1.3
1.1
(1.2)
(0.5)
3.3
1.7
–
5.0
5.6
(0.8)
0.2
5.0
0.2
(0.2)
5.0
–
0.3
4.4
2.1
(2.8)
–
4.0
–
–
4.0
9.0
0.3
4.0
2.0
(2.8)
(1.7)
10.8
6.0
(2.3)
14.5
15.3
(1.2)
0.8
14.9
0.4
(0.8)
14.5
Goodwill arising on these acquisitions of £6.0m represents the product know-how held by employees and the prospect for revenue growth
from new customers. Goodwill and acquisition intangible assets relating to these acquisitions of £0.2m will be allowable for a tax deduction
in future years.
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 25e)
Non-cash items
Operating cash flow before changes in working capital
Increase in inventories
Increase in trade and other receivables
Increase in trade and other payables
Increase in working capital
Cash flow from operating activities, before acquisition expenses
2014
£m
2.5
0.7
(0.3)
(4.6)
(3.1)
3.1
2014
£m
50.3
6.4
56.7
2.9
59.6
(4.6)
55.0
2013
£m
2.5
0.5
(0.3)
(0.9)
(2.5)
2.3
2013
£m
48.7
5.6
54.3
2.7
57.0
(1.1)
55.9
DIPLOMA PLCFinancial Statements 24. Net cash
The movement in net cash during the year is as follows:
Net increase in cash and cash equivalents
Decrease in borrowings
Effect of exchange rates
Movement in net cash
Net cash at beginning of year
Net cash at end of year
Comprising:
Cash and cash equivalents
Borrowings
Net cash at 30 September
87
2014
£m
2.9
–
2.9
(0.9)
2.0
19.3
21.3
21.3
–
21.3
2013
£m
8.3
3.5
11.8
(0.4)
11.4
7.9
19.3
19.3
–
19.3
The Group has a committed multi-currency £25m revolving bank facility with an accordion option to increase this facility to £50m, subject
to market pricing. This facility expires on 23 June 2017. Interest on this facility is payable between 120 and 170bps over LIBOR, depending on
the ratio of net debt to EBITDA.
25. Retirement benefit obligations
Diploma Holdings PLC (“the Company”) operates a defined benefit pension arrangement called the Diploma Holdings PLC UK Pension
Scheme (“the Scheme”). The Scheme provides benefits based on final salary and length of service on retirement, leaving service or death.
Defined contribution schemes operated by the Group’s businesses are not included in these disclosures.
The Scheme is subject to a Statutory Funding Objective under the Pensions Act 2004 which requires that a valuation of the Scheme is carried
out at least once every three years to determine whether the Statutory Funding Objective is met. As part of the process the Company must
agree with the trustees of the Scheme the contributions to be paid to address any shortfall against the Statutory Funding Objective. The most
recent triennial actuarial valuation carried out as at 30 September 2013 reported that the Scheme had a funding deficit of £2.7m and held
assets which covered 90% of its liabilities at that date. There were no Scheme amendments, curtailments or settlements during the year.
The Scheme is managed by a set of Trustees appointed in part by the Company and in part from elections by members of the Scheme.
The Trustees have responsibility for obtaining valuations of the fund, administering benefit payments and investing the Scheme’s assets.
The Trustees delegate some of these functions to their professional advisors where appropriate.
The Scheme exposes the Company and therefore the Group, to a number of risks:
•
Investment risk. The Scheme holds investments in asset classes, such as equities, which have volatile market values and while these
assets are expected to provide real returns over the long term, volatility over the short term can cause additional funding to be required
if a deficit emerges.
Interest rate risk. The Scheme’s liabilities are assessed using market yields on high quality corporate bonds to discount the liabilities.
As the Scheme’s assets include equities, the value of the assets and liabilities may not move in the same way.
Inflation risk. A significant proportion of the benefits under the Scheme are linked to inflation. The Scheme’s assets are expected to provide
a good hedge against inflation over the long term, however movements over the short term could lead to funding deficits emerging.
•
•
• Mortality risk. In the event that members live longer than assumed, a funding deficit may emerge in the Scheme.
a) Pension deficit included in the Consolidated Statement of Financial Position:
Market value of Scheme assets:
Equities
Bonds
Present value of Scheme liabilities
Pension scheme net deficit
2014
£m
2013
£m
19.7
5.2
24.9
(29.2)
(4.3)
18.6
4.7
23.3
(28.0)
(4.7)
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements 88
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2014
25. Retirement benefit obligations continued
b) Amounts charged to the Consolidated Income Statement:
Charged to operating profit
Interest cost on liabilities
Interest on assets (2013: Expected return on Scheme assets)
(Charged)/credited to financial expense, net (note 6)
Amount (charged)/credited to the Consolidated Income Statement
2014
£m
–
(1.3)
1.1
(0.2)
(0.2)
2013
£m
–
(1.2)
1.4
0.2
0.2
In the year ended 30 September 2014 the Group has adopted the amendments set out in IAS19 (revised) ‘Employee Benefits’. This revised
Standard has required the Group’s accounting policy on interest expense on the defined benefit obligation and expected return on Scheme
assets to be replaced with a single net interest cost, calculated by applying the Scheme’s discount rate to the net defined benefit liability.
This amendment, the impact of which is not material to the Group, has been reflected in the 2014 consolidated financial statements, but
no restatement has been made to the comparative year.
c) Amounts recognised in the Consolidated Statement of Income and Other Comprehensive Income:
Investment gain on scheme assets in excess of interest (2013: Experience adjustments on Scheme assets)
Effect of changes in financial assumptions on Scheme liabilities
Effect of changes in demographic assumptions on Scheme liabilities
Experience adjustments on Scheme liabilities
Actuarial gains credited in the Consolidated Statement of Income and Other Comprehensive Income
2014
£m
0.8
(2.3)
0.8
1.0
0.3
2013
£m
1.9
(1.2)
–
(0.5)
0.2
The cumulative amount of actuarial losses recognised in the Consolidated Statement of Income and Other Comprehensive Income, since
the transition to IFRS, is £4.4m (2013: £4.7m).
Analysis of movement in the pension deficit:
At 1 October
Amounts charged/(credited) to the Consolidated Income Statement
Contributions paid by employer
Net effect of remeasurements of Scheme assets and liabilities
At 30 September
d) 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
e) Analysis of movements in the present value of the Scheme assets:
At 1 October
Interest on assets (2013: Expected return on assets)
Return on Scheme assets less interest (2013: Actuarial gain)
Contributions paid by employer
Benefits paid
At 30 September
The actual return on the Scheme assets during the year was a £1.9m gain (2013: £3.3m gain).
2014
£m
4.7
0.2
(0.3)
(0.3)
4.3
2014
£m
28.0
1.3
–
0.5
(0.6)
29.2
2014
£m
23.3
1.1
0.8
0.3
(0.6)
24.9
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
DIPLOMA PLCFinancial Statements 25. Retirement benefit obligations continued
Assets
The Scheme’s assets are held in passive unit funds managed by Legal & General Investment Management and at 30 September 2014,
the major categories of assets were as follows:
2014
%
North America equities
UK equities
European equities (non-UK)
Asia Pacific and Emerging Markets equities
Corporate bonds
Index-linked gilts
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
Demographic assumptions:
21
20
20
19
12
8
2013
3.3%
2.6%
2.6%
4.6%
22.5
24.9
2014
3.3%
2.5%
2.5%
4.1%
22.0
24.4
89
2013
%
20
20
20
19
8
13
2012
2.6%
1.9%
1.9%
4.6%
22.4
24.8
Mortality table used:
Year the mortality table was published:
Allowance for future improvements in longevity:
Allowance made for members to take a cash lump sum on retirement:
S1NxA
CMI 2013
Year of birth projections, with a long term improvement rate of 1.0%
Members are assumed to take 100% of their maximum cash sum
(based on current commutation factors)
The weighted average duration of the defined benefit obligation is around 18 years.
Sensitivities:
The sensitivity of the 2014 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 one year
Impact on pension liabilities
Estimated
increase
%
Estimated
increase
£m
9.1
3.7
2.0
2.7
1.1
0.6
Risk mitigation strategies
When setting the investment strategy for the Scheme, the Trustees, in conjunction with the employer, take into account the liability profile
of the Scheme. The current strategy is designed to broadly match assets and liabilities in respect of pensioner members, but to invest in
growth assets in respect of non-pensioners. Annuity policies have been taken out in respect of some historic pensioners, but the Scheme
has not purchased annuities for new retirements since 2005.
Effect of the Scheme on the Group’s future cash flows
The Company is required to agree a schedule of contributions with the Trustees of the Scheme following each triennial actuarial valuation.
Following the triennial actuarial valuation carried out as at 30 September 2013, the Company agreed to contribute £0.3m in cash annually
to the Scheme. The next valuation of the Scheme is due at 30 September 2016.
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements
90
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2014
26. Commitments
At 30 September 2014 the Group has outstanding aggregate commitments for future 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 £2.5m (2013: £2.1m).
27. Auditor’s remuneration
During the year the Group paid fees for the following services from the auditor:
Fees payable to the auditor for the audit of:
– the Company’s Annual Report & Accounts
– the Company’s subsidiaries
Audit fees
2014
£m
2.3
4.7
1.4
8.4
2014
£m
0.1
0.2
0.3
Non-audit fees of £12,000 (2013: £11,000) were paid to the Group’s auditor for reviewing the Half Year Announcement, which is unaudited.
In 2013 a further £60,000 was paid in connection with a tax assignment.
28. Exchange rates
The exchange rates used to translate the results of the overseas businesses are as follows:
US dollar (US$)
Canadian dollar (C$)
Australian dollar (A$)
Euro (€)
Average
Closing
2014
1.66
1.80
1.81
1.23
2013
1.56
1.59
1.58
1.19
2014
1.62
1.81
1.85
1.28
2013
£m
1.8
4.0
1.1
6.9
2013
£m
0.1
0.2
0.3
2013
1.62
1.66
1.73
1.20
29. Subsequent events
On 6 October 2014 the Group completed the acquisition of 80% of Technopath Distribution Limited (“TPD”) for consideration of £11.1m
(€14.1m) including acquired debt of £1.5m (€1.9m). Put and call options have been included in the transaction to allow the Group to acquire
the outstanding 20% of shares over a period of up to five years. The TPD business is based in Ballina, County Tipperary in Ireland and is an
established supplier of products to the Biotechnology, Clinical Laboratory and Medical markets in Ireland and in the UK.
A review to determine fair values of the net assets acquired will be completed during the next financial year.
DIPLOMA PLCFinancial Statements 91
Group Accounting Policies
For the year ended 30 September 2014
The consolidated financial statements have been prepared in accordance with IFRS as endorsed by the EU 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 2014 and the comparative year with the exception of accounting for interest on the assets in the defined benefit pension scheme.
For the year ended 30 September 2014 the Group adopted amendments to IAS 19 (revised) “Employee Benefits” for the first time. In
accordance with the revised Standard, the Group’s accounting policy has been changed to replace interest on the defined benefit obligation
and expected return on scheme assets with a single net interest cost, calculated by applying the discount rate to the net defined benefit
liability. This amendment, which is not material to the Group, has been reflected in the 2014 consolidated financial statements, but not in
the comparative year. IFRS 13 “Fair Value Measurement” became effective during the year, however this Standard does not materially impact
the Group’s consolidated financial statements. There were no other new Standards, amendments or interpretations to existing Standards
which have been published and endorsed by the EU and which have a significant impact on the results, financial position or presentation of
the consolidated financial statements for the year ended 30 September 2014.
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 69.
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 PLCAnnual Report & Accounts 2014Financial Statements 92
Group Accounting Policies continued
For the year ended 30 September 2014
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 net deficit in the scheme – calculated by applying the discount rate to the net defined benefit liability at the start
of the annual reporting period.
(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.
(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.
(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.
DIPLOMA PLCFinancial Statements
93
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.
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.
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements
94
Group Accounting Policies continued
For the year ended 30 September 2014
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 IAS38 “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.
Fair values on larger acquisitions are assessed as follows; customer relationships are valued using a discounted cash flow model;
databases are valued using a replacement cost model; the amount in respect of supplier relationships and trade names are valued on a
relief from royalty method. For smaller acquisitions, intangible assets are assessed using historical experience of similar transactions.
(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.
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 Group’s three Sectors 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.
DIPLOMA PLCFinancial Statements
95
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.
(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
market price at the balance sheet date.
Under IAS39, hedging relationships are categorised by type and must meet strict criteria to qualify for hedge accounting. At the inception of
the transaction the Group documents the relationship between the hedging instrument and the hedged item. The Group also documents its
assessment, both at hedge inception and on an ongoing basis, of whether the financial instruments that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged items. The Group uses cash flow hedges (e.g. 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).
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements
96
Group Accounting Policies continued
For the year ended 30 September 2014
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 IAS39
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.
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 AGM; 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. 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 2014. Set out below are those which are considered
most relevant to the Group:
•
IFRS 15 “Revenue from Contracts with Customers”: comprehensive framework for determining whether, how much and when revenue is
recognised. IFRS 15 is effective for the Group for the year ended 30 September 2018. The Group is assessing the potential impact on the
consolidated financial statements.
IFRS 9 “Financial Instruments”
IFRS 10/11/12 “Consolidated Financial Statements”, “Joint Arrangements” and “Disclosure of Interests in Other Entities”
The following new or amended standards are not expected to have a significant impact on the Group’s consolidated financial statements:
•
•
• Annual Improvements to IFRS’s 2010–2012 Cycle
• Annual Improvements to IFRS’s 2011–2013 Cycle
DIPLOMA PLCFinancial Statements 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 1.1 to 1.19 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 a five year period and using a perpetuity 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 a market derived 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 and
equity returns and 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 PLCAnnual Report & Accounts 2014Financial Statements 98
Parent Company Balance Sheet
As at 30 September 2014
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
2014
£m
2013
£m
c
72.0
72.0
(33.6)
38.4
5.7
32.7
38.4
(37.4)
34.6
5.7
28.9
34.6
d
The financial statements of Diploma PLC, company number 3899848, were approved by the Board of Directors on 17 November 2014 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 2013
Retained profit for the year
Dividends
Transfers of own shares (net)
At 30 September 2014
Share capital
£m
Profit and
loss account
£m
5.7
–
–
–
5.7
28.9
20.3
(18.2)
1.7
32.7
Total
£m
34.6
20.3
(18.2)
1.7
38.4
The notes on page 99 form part of these financial statements.
DIPLOMA PLCFinancial Statements 99
Notes to the Parent Company Financial Statements
For the year ended 30 September 2014
a) Accounting policies
a.1 Basis of accounting
These financial statements have been prepared on a going concern basis, as discussed on page 69, 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 £20.3m
(2013: £22.7m).
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 (2013: £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 52 to 67. The Company had no employees (2013: none).
c) Investments
Shares in Group undertakings
At 30 September 2014 and 1 October 2013
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
£m
5.7
2014
Number
2013
Number
113,239,555 113,239,555
2014
£m
5.7
During the year 293,539 ordinary shares in the Company (2013: 675,450) were transferred from the Trust to participants in connection with
the exercise of options in respect of awards which have vested under the 2011 Long Term Incentive Plan. At 30 September 2014 the Trust
held 293,348 (2013: 586,887) ordinary shares in the Company representing 0.3% of the called up share capital. The market value of the
shares at 30 September 2014 was £2.0m (2013: £3.8m).
DIPLOMA PLCAnnual Report & Accounts 2014Financial 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 2014
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 69 that the Group is a going concern. We confirm that:
• we have concluded that the directors’ use of the going concern basis of
accounting in the preparation of the financial statements is appropriate;
and
• we have not identified any material uncertainties that may cast
significant doubt on the Group’s ability to continue as a going concern.
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 remain the
same as the prior year end 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.
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 below,
and we do not express an opinion on these individual matters.
Risk
How the scope of our audit responded to the risk
Carrying value of Goodwill, tangible and
intangible assets
The key assumptions used in the assessment of the
carrying value of goodwill, tangible and intangible
assets are determined with reference to judgemental
factors such as forecast cash flows and the appropriate
discount rate.
Valuation of inventory including appropriateness of
judgements applied within the obsolescence provision
Management judgement is required in determining the
completeness of the inventory provisions and making
an assessment of its adequacy, considering the age and
volumes relative to expected usage.
The recoverability of trade debtors and
appropriateness of the bad debt provision
Management judgement is required in determining the
completeness of the trade receivables provision and
making an assessment of its adequacy, considering the
expected recoverability of the year end receivables
We assessed the assumptions used in the impairment model, specifically including the cash flow
projections, cash-generating unit allocation, discount rates, perpetuity growth rates and the sensitivities
applied. Our procedures included reviewing forecast cash flows with reference to historical trading
performance, consulting with our valuation specialists who benchmarked assumptions such as the
perpetual growth rate and discount rate to external macro-economic and market data.
Having ascertained the extent of change in those assumptions that either individually or collectively
would be required for the assets to be impaired by performing sensitivity analysis on the key
assumptions, we considered the likelihood of such a movement in those assumptions arising and the
adequacy of the disclosures within the financial statements.
We have considered the provision at each business unit level. We evaluated the recorded provision,
specifically checking the discontinued dates of those relevant stock lines to assess whether they have
been aged correctly and the appropriate provision percentage has been applied. We have assessed
the net realisable value of inventory and challenged management’s assumptions with regards to the
completeness of the inventory provisions and made an assessment of its adequacy, considering the
age and volumes relative to expected usage. We also compared the actual sales value of a sample of
inventory items to their book value to ascertain that the carrying value of inventories does not exceed
their net realisable value.
We have challenged Management’s assumptions in calculating the bad debt provision, including
reviewing the ageing of receivables in comparison to previous years, reviewing the level of bad debt
write-offs in the current year and against the prior year and checking the recoverability of outstanding
debtors through examination of subsequent cash receipts.
The Audit Committee’s consideration of these risks is set out on page 49.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial
statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced.
We use materiality both in planning the scope of our audit work and in
evaluating the results of our work. We determined materiality for the Group
to be £2.5 million (2013: £2.5 million), which is approximately 5% of profit
before tax (2013: 5%).
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of £50,000 (2013: £50,000), as
well as differences below that threshold that, in our view, warranted
reporting on qualitative grounds. We also report to the Audit Committee
on disclosure matters that we identified when assessing the overall
presentation of the financial statements.
DIPLOMA PLCFinancial Statements An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group
and its environment, including Group-wide controls, and assessing the risks
of material misstatement at the Group level. Based on that assessment,
we focused our Group audit scope primarily on the audit work at 7 (2013:
7) locations. Each of these 7 locations was subject to a full scope audit. An
additional 4 (2013: 5) locations were subject to specified audit procedures
which address each of the significant balances and significant risks within these
entities. Together the work at these locations represents the principal business
units of the Group and accounts for 71% (2013: 79%) of the Group’s revenues
and 78% (2013: 86%) of the Group’s operating profit.
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 and attends close out
meetings. Each year this programme of visits includes the three most significant
territories (being the US, Canada and UK).
Where no visits are carried out the Senior Statutory Auditor or another
senior member of the team has held discussions with the lead partner in the
current year. In years when we do not visit a significant component we have
discussed with the component audit team their risk assessment, and reviewed
documentation of the findings from their work.
At the parent entity level we also tested the consolidation process and
carried out analytical procedures to confirm our conclusion that there were
no significant risks of material misstatement of the aggregated financial
information of the remaining components not subject to audit or specified
audit procedures.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion:
•
the part of the Directors’ Remuneration Report to be audited has been
properly prepared in accordance with the Companies Act 2006; and
the information given in the Strategic Report and the Directors’ Report
for the financial year for which the financial statements are prepared is
consistent with the financial statements.
•
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.
•
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. We have nothing to
report arising from these matters.
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.
101
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.
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. We also
comply with International Standard on Quality Control 1 (UK and Ireland).
Our audit methodology and tools aim to ensure that our quality control
procedures are effective, understood and applied. Our quality controls and
systems include our dedicated professional standards review team and
independent partner review.
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
17 November 2014
DIPLOMA PLCAnnual Report & Accounts 2014Financial Statements 102
Principal Subsidiaries
Life Sciences
a1-CBISS Limited
a1-envirosciences GmbH
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
All Seals Inc
RTD Seals Corp
M Seals A/S
FPE Seals Limited
Hercules Europe BV
Kentek Oy
Ramsay Services Limited
A B Seals Limited1
Controls
IS Rayfast Limited
IS Motorsport Inc
Amfast Limited
Clarendon Engineering Supplies Limited
Cabletec Interconnect Components Systems Limited
Sommer GmbH
Filcon Electronic GmbH
Hawco Limited
Abbeychart Limited
Specialty Fasteners Limited1 (formerly, Specialty Fasteners and Components 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%
100%
100%
100%
100%
100%
90%
100%
100%
80%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
England
Germany
Canada
Canada
Canada
Australia
Australia
USA
USA
USA
USA
USA
Denmark
England
Netherlands
Finland
England
England
England
USA
England
England
England
Germany
Germany
England
England
England
England
USA
1 These subsidiaries, both of which are incorporated in England, are exempt from the requirements of the UK Companies Act 2006 relating to the audit of individual accounts by
virtue of section 479A of the Act.
The Company has taken advantage of the exemption under Section 410 of the Companies Act 2006 by providing information only in
relation to subsidiary undertakings whose results or financial position, in the opinion of the Directors, principally affected the financial
statements. A full list of subsidiaries will be annexed to the next Annual Return of Diploma PLC filed with the Registrar of Companies.
DIPLOMA PLCFinancial Statements Financial Calendar and Shareholder Information
Announcements (provisional dates):
First Quarter Statement released
Annual General Meeting (2014)
Half Year Results announced
Third Quarter Statement released
Preliminary Results announced
Annual Report posted to shareholders
Annual General Meeting (2015)
Dividends (provisional dates):
Interim announced
Paid
Final announced
Paid (if approved)
103
21 January 2015
21 January 2015
11 May 2015
29 July 2015
16 November 2015
4 December 2015
20 January 2016
11 May 2015
17 June 2015
16 November 2015
27 January 2016
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. Its 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.
Group Company 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 PLCAnnual Report & Accounts 2014Financial 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/(deduct): cash and cash equivalents
borrowings
retirement benefit obligations
acquisition liabilities
deferred tax, net
Reported trading capital employed
Add: historic goodwill and acquisition related charges, net of deferred tax
Adjusted 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 adjusted trading capital employed (“ROATCE”)
Working capital: revenue
Operating margin
Continuing and discontinued businesses
Revenue
Adjusted profit before tax
Adjusted earnings per ordinary share (pence)
2014
£m
305.8
2013
£m
285.5
2012
£m
2011
£m
260.2
230.6
56.7
(0.5)
56.2
(6.4)
–
49.8
(13.7)
36.1
–
36.1
184.4
2.9
(21.3)
–
4.3
4.0
3.3
177.6
49.6
227.2
2.9
18.4
16.5
37.8
31.4
36.1
17.0
163
2.1
%
25.8
17.2
18.5
£m
305.8
56.7
36.1
54.3
–
54.3
(5.6)
(0.2)
48.5
(13.7)
34.8
–
34.8
176.9
1.4
(19.3)
–
4.7
3.0
1.7
168.4
43.1
211.5
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
3.8
1.6
170.1
37.4
207.5
(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
3.1
2.0
150.2
32.1
182.3
(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
14.2
1.3
129.9
16.8
146.7
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
Notes
1 Return on adjusted trading capital employed (“ROATCE”) represents adjusted operating profit, before acquisition related charges, as a percentage of adjusted trading capital
employed (adjusted for the effect of the timing of major acquisitions and disposals). Trading capital employed and adjusted trading capital employed are 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 The Group disposed of Anachem Limited in the financial year ended 30 September 2010 and this business was reclassified as a discontinued business.
DIPLOMA PLCFinancial Statements 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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