DIPLOMA PLC
Annual Report & Accounts 2015
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Diploma PLC is an international
group of businesses supplying
specialised technical products and
services. We operate globally in
three distinct Sectors:
Life Sciences
Seals
Controls
Suppliers of consumables,
instrumentation and related
services to the healthcare and
environmental industries.
Suppliers of 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.
Financial Highlights
Contents
Strategic Report
01
02 Chairman’s Statement
04 Group at a Glance
06 Business Model
08 Growth Strategy
10
Objectives and Key
Performance Indicators
Chief Executive’s Review
Finance Review
Sector Review
Internal Control and Risk
Management
12
18
21
34
38 Corporate Responsibility
Governance
40 Board of Directors
42 Corporate Governance
47 Audit Committee Report
51 Nomination Committee Report
52
Remuneration Committee Report
Financial Statements
66 Directors’ Report
68 Consolidated Income Statement
69
Consolidated Statement of Income
and Other Comprehensive Income
Consolidated Statement of Changes
in Equity
69
70
71
72
Consolidated Statement
of Financial Position
Consolidated Cash Flow Statement
Notes to the Consolidated Financial
Statements
90 Group Accounting Policies
96
97
Parent Company Balance Sheet
Notes to the Parent Company
Financial Statements
Independent Auditor’s Report
98
101 Subsidiaries of Diploma PLC
102
Financial Calendar, Shareholder
Information and Advisors
103 Five Year Record
Financial Highlights
01
2015
Year ended 30 September
2014
Robust performance,
acquisition led
growth.”
Revenue
Adjusted operating profit1
Adjusted operating margin1
£333.8m 9% £305.8m
£60.3m 6% £56.7m
18.1%
£59.6m 6% £56.2m
£51.8m 4% £49.8m
£40.3m 7% £37.8m
18.5%
Adjusted profit before tax1,2
Profit before tax
Free cash flow3
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 on page 72.
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.
2015
pence
38.2
32.5
18.2
35.6
2014
pence
36.1
31.4
17.0
33.4
+6%
+4%
+7%
+7%
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Chairman’s Statement
02
I am pleased that with
the newly refreshed
Board, we have a strong
and experienced team
to support and guide
the Group.”
John Nicholas, Chairman
I was delighted to be appointed Chairman of
your Company in January of this year, following
the retirement of John Rennocks from the
Board. During his ten years as Chairman, John
guided the Company through an extended
period of strong and sustained growth which
delivered excellent returns to shareholders. I
hope that in the years ahead I will be able to
maintain this performance through executing
the Group’s strategy which is designed to
deliver strong, double-digit growth in earnings
and shareholder value over the economic cycle.
Shortly after my appointment, in June of this
year, the Board met at the facility of Kubo, our
newly acquired Seals business in Switzerland,
to review the Group’s strategy and to set
targets and objectives for each of the Group’s
Sectors to be delivered over the next three
years. After a number of presentations
and thorough and challenging reviews
with Executive management, the Board
was unanimous in supporting the Group’s
existing strategy of building larger, broader
based businesses in our three Sectors. This
strategy aims to generate stable “GDP plus”
organic revenue growth over the business
cycle, sustainable attractive margins and
strong cash flow. The Board also confirmed
the ambition of accelerating growth through
an active acquisition programme, utilising
the Group’s strong cash resources and
experienced management to enhance value.
In September, Iain Henderson informed us of
his decision to step down from the Board at the
conclusion of the AGM in January 2016 and
after an orderly handover of responsibilities, to
retire from the Company on 31 March 2016. Iain
has been a key member of the Board since
1998 and as Chief Operating Officer since 2005,
has played a significant role in developing and
implementing the strategy of the Group and in
particular, the Seals and Controls Sector
businesses. The Board will miss Iain’s wise
counsel and robust approach to the day-to-day
operational challenges that face all businesses.
All of us in the Group wish him a long, healthy
and well-earned retirement.
The Board is very supportive of the decision by
our CEO, Bruce Thompson to establish over
the coming year, a formal Executive
Management Group (“EMG”) which will report
to him. The EMG will comprise the key senior
managers of the main business clusters and
certain Group functions. Good progress has
already been achieved with this development
and two senior level recruits have recently
joined the Group to strengthen management
in key areas. The Board remains confident that
the formation of this EMG over the course of
2016 will provide Diploma PLC with a strong
and experienced group of senior business and
financial managers who have the potential to
provide leadership in the coming years.
Results
Group revenues increased in 2015 by 9% to
£333.8m (2014: £305.8m), with acquisitions
completed during the year contributing
£24.2m and adverse currency movements
reducing the results of the overseas
businesses when translated into UK sterling
by £8.1m, when compared with last year. After
adjusting for the contribution from these and
prior year acquisitions and for currency effects
on translation, Group revenues increased by
1% on an underlying basis. Steady underlying
revenue growth of ca.4% in both the Life
Sciences and Seals Sectors more than offset a
weaker performance from the Controls Sector
where underlying revenues declined by 5%
against a strong prior year comparative.
Adjusted operating margins remained robust
at 18.1% (2014: 18.5%) and adjusted operating
profit increased by 6% to £60.3m (2014:
£56.7m). Gross margins in the Canadian and
Australian Healthcare businesses were again
impacted by transactional currency effects,
but this was partly mitigated by a more
favourable product mix and strong control
over operating costs. Adjusted profit before
tax increased by 6% to £59.6m (2014: £56.2m)
and adjusted earnings per share (“EPS”) also
increased by 6% to 38.2p (2014: 36.1p).
The Group generated strong free cash
flow of £40.3m (2014: £37.8m), with tighter
control over working capital providing record
operating cash flow of £62.1m (2014: £55.0m).
Capital expenditure increased to £4.3m
(2014: £2.2m) with increased investment in
productive capital represented by facilities,
healthcare field equipment and seal cutting
machinery and tooling.
03
18.2
TSR growth (TSR index 2010 = 100)
ä
22% p.a.1
270
Dividend growth (pence)
ä
15% p.a.1
15
14
13
12
11
274
253
179
116
15
14
13
12
11
17.0
15.7
14.4
12.0
Adjusted EPS growth (pence)
ä15% p.a.1
15
38.2
14
13
12
11
36.1
34.8
33.1
27.9
1 Five year compound.
Building
momentum
It was a much stronger year for acquisition
activity with the Group investing £37.8m
(2014: £16.5m) in new businesses during the
financial year, extending the Group’s activities
into new products and geographies in line
with the Group’s strategic objectives. Shortly
after the year end the Group completed the
acquisition of WCIS, an established supplier
of sealing products and services in Australia
for a maximum consideration of £9.8m. The
WCIS acquisition is another example of how
the Group uses acquisitions to extend and
broaden its activities into new markets and
geographies.
The much higher spend on acquisitions in this
financial year, together with distributions of
£19.7m (2014: £18.2m) to shareholders during
the year, contributed to a reduction in net cash
funds of £18.3m in the year to £3.0m at 30
September 2015 (2014: £21.3m).
Dividends
The robust balance sheet and strong free
cash flow, together with a more favourable
acquisition environment, has led the Board to
recommend an increase in the final dividend
of 7% to 12.4p per share (2014: 11.6p). Subject
to shareholder approval at the Annual General
Meeting, this dividend will be paid on 27
January 2016 to shareholders on the register
at 27 November 2015.
The total dividend per share for the year will
be 18.2p (2014: 17.0p) which represents a 7%
increase on 2014. 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.
Governance
We have this year completed the process of
developing and refreshing the Board started
by my predecessor in 2013. In February we
strengthened the Board’s resources with
the appointment of Andy Smith as a non-
Executive Director. Andy brings excellent
experience to the Company having previously
held Group HR roles at Severn Trent PLC and
The Boots Company PLC.
I was also pleased that Anne Thorburn
accepted our invitation to join the Board in
September. Anne brings to the Company
many years of experience gained from Board
level finance roles in listed international
industrial companies. Anne will replace Marie-
Louise Clayton as Chairman of the Audit
Committee, when she retires from the Board
this month at the end of her term of office. I
wish to thank Marie-Louise for the support
and guidance she has provided to the Board
during the past three years.
I am pleased that with the newly refreshed
Board, we have a strong and experienced
team to support and guide the Group as it
pursues the successful implementation of the
Group’s growth strategy.
Employees
Since being appointed Chairman earlier this
year, I have endeavoured to visit the Group’s
businesses and meet our employees who
are so important to the success of the Group.
I have been impressed by the hard work and
loyalty that our employees demonstrate to
each of their businesses and I wish to thank
them for their efforts this year to deliver a high
level of service as they strive to meet targets
in the face of challenging markets.
Outlook
The Group’s strong and proven business model
delivered robust growth this year, benefitting
from a good contribution from acquisitions and
despite adverse exchange rate movements.
This balance is expected to continue into
the coming financial year as the economic
headwinds continue to constrain organic
growth in the Group’s principal markets in
North America and Europe, but prospects for
further acquisitions remain promising.
While the Board remains cautious on the
current macroeconomic backdrop, we remain
confident that the Group’s resilient business
model with a diverse geographic spread
of activities and strong financial position,
together with a more favourable environment
for acquisitions will provide a good platform to
deliver further growth in the coming year.
John Nicholas
Chairman
16 November 2015
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
Group at a Glance
04
We focus on supplying essential products
and services across a range of specialised
industry sectors.
Building
a broader base
Life Sciences
Seals
Controls
Healthcare (85% of revenues)
Medical devices and related consumables
and services supplied to hospital pathology
laboratories, operating rooms and
GI Endoscopy suites and clinics.
Environmental (15% of revenues)
Environmental analysers,
containment enclosures and
emissions monitoring systems.
Aftermarket (55% of revenues)
Next day delivery of seals, sealing products,
filters and cylinder components for the
repair of heavy mobile machinery.
Industrial OEMs (45% of revenues)
Sealing products and custom moulded and
machined parts supplied to manufacturers
of specialised industrial equipment.
Principal businesses
DHG, a1-group
of revenues
31%
387employees worldwide
Principal businesses
HFPG, EMEA Seals
of revenues
42%
764employees worldwide
Interconnect (75% of revenues)
Wiring, harness components and
fasteners used in specialised applications
in Aerospace, Defence, Motorsport, Energy,
Medical and Industrial.
Fluid Controls (25% of revenues)
Temperature, pressure and fluid control
products used in Food, Beverage and
Catering industries.
Principal businesses
IS-Group, Specialty Fasteners, Filcon, Hawco
of revenues
27%
334employees worldwide
PG22
PG26
PG30
05
The Group is well diversified by geographic
and business area.
North America
Europe
Rest of World
Life Sciences
Seals
Controls
North American revenues1
by sector
European revenues1
by sector
Rest of World revenues1
by sector
46%
of Group revenues
25%
US
21%
Canada
46%
of Group revenues
23%
UK
23%
Continental Europe
8%
of Group revenues
1 By destination
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Business Model
06
Our business model is designed to make us
essential to our customers.
Recurring income
and stable revenue
growth
Sustainable
and attractive
margins
Agility and
responsiveness
Acquire Build GrowBusiness Model Essential Products Essential Solutions Essential ValuesGrowth Strategy 07
What we put in
What we get out
Essential Products
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.
Essential Solutions
Our businesses design their individual business models to
provide solutions which closely meet the requirements of
their customers.
The solutions can be in the form of:
• Highly responsive customer service, such as the next
day delivery from stock of essential, but low value items;
• Deep technical support, where we work closely with our
customers in designing our products into their specific
applications;
• Added value services which, if we did not provide these
services, customers would have to pay others to provide
them or would require them to invest in additional
resources of their own.
Essential Values
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.
Recurring income and stable revenue growth
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.
Sustainable and attractive margins
By supplying solutions, not just products, we build strong
long term relationships with our customers and suppliers,
supporting sustainable and attractive margins.
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.
Agility and responsiveness
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.
Acquire Build GrowBusiness Model Essential Products Essential Solutions Essential ValuesGrowth StrategyStrategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Growth Strategy
08
The Group’s “Acquire, Build, Grow” strategy is
designed to deliver strong, double-digit growth.
Essential Products Essential Solutions Essential ValuesGrowth StrategyBusiness Model Acquire Build GrowRecurring income and stable revenue growthSustainableand attractive marginsAgility and responsiveness 09
Growth Strategy
Acquire
Clear business criteria have been established to guide the
Group’s acquisition programme:
• Fit with the Group’s business model.
• 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%+ pre-tax 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.
Essential Products Essential Solutions Essential ValuesGrowth StrategyBusiness Model Acquire Build GrowStrategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
Objectives and Key Performance Indicators
10
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 (organic) revenue is after adjusting
for the impact from acquisitions and
divestments and for currency movements on
the translation of overseas results.
Total revenue growth
ä13%p.a.
Five year compound
Underlying revenue growth
ä7%p.a.
Five year average
15
14
13
12
11
£333.8m
£305.8m
£285.5m
£260.2m
£230.6m
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
15
14
13
12
11
15
14
13
12
11
+1%
+8%
+4%
+6%
+17%
18.1%
18.5%
19.0%
20.3%
19.6%
Generate TSR growth in
the upper quartile of the
FTSE 250
Deliver progressive
dividend growth with two
times dividend cover
11
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.
Generate consistently
strong cash flow to fund
growth strategy and
dividends
Acquisition spend
£21mp.a.
Five year average
Free cash flow
£33mp.a.
Five year average
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.
15
14
13
12
11
£40.3m
£37.8m
£31.6m
£32.7m
£25.0m
ROATCE
26%
Five year average
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.
£37.8m
15
14
13
12
11
£16.5m
£2.2m
£22.3m
£28.2m
Working capital
16–17%
of revenue
15
14
13
12
11
15
14
13
12
11
17.0%
17.2%
16.7%
16.5%
16.1%
23.9%
25.8%
25.8%
26.6%
25.4%
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
Chief Executive’s Review
12
The Group delivered
a robust performance
with a good
contribution from
acquisitions”
Bruce Thompson, CEO
In 2015, the Group has delivered a robust
performance with a good contribution
from acquisitions completed during the last
eighteen months. The Group’s revenues
increased by 9% with the acquired businesses
adding 11% to revenues, but with adverse
currency movements reducing revenues
by 3% on translation to UK sterling. After
adjusting for acquisitions and currency,
underlying revenues increased by 1%.
Adjusted operating margins decreased
by 40bps to 18.1% of revenue, reflecting
transactional currency effects in the
Healthcare businesses and initial dilution
from the acquired businesses. Free cash flow
increased by 7% to £40.3m and return on
adjusted trading capital employed (“ROATCE”)
remained comfortably above the 20%
threshold at 23.9%.
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 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.
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.
Our year in review
13
Group
Life Sciences
Seals
Controls
Acquisitions
Strong proven
business model
delivered robust
performance
4% underlying
revenue growth
despite pressure on
Healthcare budgets
in Canada and
Australia
4% underlying
revenue growth as
trading activity in
North America
slowed in H2
Softer European
industrial markets
and strong prior year
comparatives;
5% underlying
revenue reduction
Acquisition spend
doubled over prior
year in positive
acquisition
environment
PG22
PG26
PG30
Building
shareholder value
Performance against objectives and KPIs
The Group’s principal corporate objectives
are to achieve double digit growth in adjusted
earnings per share (“EPS”) over the business
cycle, to generate total shareholder return
(“TSR”) growth in the upper quartile of the
FTSE 250 and to deliver progressive dividend
growth with two times dividend cover.
The compound growth in adjusted EPS has
been 15% p.a. over the last five years, with
growth this year at the more modest level of
6%. Over the last five years, the compound
growth in TSR has been 22% p.a. This year,
TSR has been broadly flat after a number of
years of very strong growth. Dividends have
increased progressively in each of the last
16 years and this year the dividend has
increased by 7%. Over the last five years,
the compound growth in dividends has
been 15% p.a.
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 organic
revenue growth over the business cycle. This
year, challenging markets within the three
Sectors meant that organic growth has been
hard won. In Life Sciences, underlying
revenues increased by 4% despite the
pressure on budgets throughout the
Healthcare system driven by the tougher
economic environments in Canada and
Australia. In Seals, underlying revenues
increased by 4% as trading activity in North
America slowed in the second half of the year,
impacted indirectly by cutbacks in the Oil &
Gas sector and lower demand for natural
resources. Controls revenues decreased by
5% on an underlying basis, reflecting softer
European industrial markets and strong prior
year comparatives.
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 18.1% which is at the lower end
of the five year average range of 18–19%.
As always there were a number of moving
parts, with margins negatively impacted by
the reduced gross margins in the Healthcare
businesses, initial dilution from acquired
businesses and one-off facility restructuring
costs in the US. However, the impact on
Group operating margins was limited to
40bps by Sector mix and by tight control of
operating costs across the businesses.
The Group continues to focus strongly on free
cash flow, which funds the growth strategy
and gives the resources to provide healthy
dividends to shareholders. In 2015, free cash
flow was £40.3m, compared with a five year
average of £33m p.a. and was equivalent to a
conversion rate of over 90% of adjusted after
tax earnings.
The principal determinant of free cash flow
conversion is the effective management of
working capital and the KPI used to measure
and monitor this performance is working
capital as a percentage of revenue. In 2015
this KPI remained stable at 17.0% comparing
well with the five year average level of 16–17%
which is also the longer term target.
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
comfortably exceeded the 20% target in each
of the last five years and this year was 23.9%.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
Chief Executive’s Review continued
14
“ Carefully selected,
value enhancing
acquisitions
accelerate growth
and facilitate entry
to related markets.”
Acquisitions
Acquisitions are an integral part of the Group’s
strategy, designed to accelerate growth and to
facilitate entry into related strategic markets.
To achieve the Group’s objective of strong
double-digit growth, acquisition spend at the
level of £25–30m p.a. is targeted. This year,
the Group continued to benefit from a positive
acquisition environment and invested £37.8m
in acquisitions, which was well above the
target annual level and was more than double
the level of expenditure in the prior year.
The acquisitions which have been completed
are natural extensions of the Group’s existing
businesses and have extended the scope of
the businesses into new product and market
segments and geographies.
In Life Sciences, DHG acquired 80% of
Technopath Distribution (“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
Acquisition spend (£)
of Ireland and the UK. In addition, TPD brings
important new products and suppliers to
the DHG group in the areas of rapid hygiene
testing in Food, Dairy and Pharmaceutical
industries as well as Digestive Health.
In Seals, the Group acquired Kubo, a leading
supplier of seals, ‘O’ rings, gaskets and
moulded rubber parts serving a diverse base
of industrial customers in Switzerland and
Austria. This acquisition opens up further
opportunities for cross-selling of products
with the Group’s other Industrial OEM Seals
businesses, giving them access to Kubo’s
high precision manufactured parts. In the
UK, FPE Seals acquired Swan Seals, a small
specialised supplier of machined seals based in
Aberdeen and serving customers’ operational
requirements.
The Group also acquired a further 10%
shareholding in Kentek, taking our ownership
to 90% with the balance held by the Managing
Director of the business. In October 2015,
shortly after the year end, the Group
acquired WCIS, a supplier of gaskets, seals
and associated products and services, with
operations in Australia and New Caledonia.
Management development
Iain Henderson, our Chief Operating Officer
(“COO”), decided during the year that he
would like to retire from the Group. Iain will
stand down from the Board at the January
2016 AGM but will stay fully involved with the
Group until the end of March 2016 to ensure a
smooth handover of responsibilities. Iain has
worked alongside me for 17 years at Diploma
and he has been a key driver of the growth and
development of the Group over this period.
We will all miss his insightful contributions on
strategy, keen business judgement and dry
humour, but at the same time we all wish him
well in his future endeavours.
Over the last few years, we have strengthened
the senior management team by giving
increased responsibility to existing managers
and through selective external recruitment.
We are intending to continue this process over
the coming year with the establishment of a
formal Executive Management Group (“EMG”)
reporting in to me. We will be retiring Iain’s
COO shirt and his responsibilities will be re-
allocated across this broader leadership team.
The introduction of the EMG will ensure that
we have a strong and broad based team in
place to support the next stage of our growth
strategy. Since the year end, we have made
good progress in building bench strength
in this evolving EMG, with the recruitment
of two experienced senior managers to
take leadership roles in North American
Industrial Distribution and in our International
Healthcare business.
£37.8m
• Life Sciences –
TPD (80%)
• Seals – Kubo (100%);
Swan Seals (100%);
Kentek (10%)
28.2m
22.3m
12.2m
11.0m
16.5m
2.2m
2009
2010
2011
2012
2013
2014
2015
Life Sciences
31%
of Group revenue
2015
2014
Revenue
£103.1m £91.4m
Adjusted operating
profit
£21.0m £19.7m
Adjusted operating
margin
20.4%
21.6%
Free cash flow
£15.6m £14.9m
• Sector revenue growth of 13%;
underlying growth of 4% after
adjusting for currency and TPD
acquisition
• Good revenue growth in DHG’s
Canadian and Australian
businesses despite pressure on
Healthcare budgets; stronger
second half of year as delayed
capital equipment orders
released
• Significant pressure on margins
from 20-25% depreciation of
Canadian and Australian dollars
against US dollar
• TPD acquisition extends DHG
into Ireland and the UK; strong
double-digit growth in first year
• Environmental businesses
maintained underlying revenues
and finished the year with solid
order book
15
Performance in the year
Reported revenues of the Life Sciences
businesses increased by 13% to £103.1m.
The acquisitions of TPD in October 2014 and
Chemzyme in July 2014 added 15% to Sector
revenues but this was partly offset by a
reduction of ca.6% in revenues from
currency translation to a strong UK sterling.
On a constant currency basis, underlying
revenues increased by 4%.
Gross margins in the Healthcare businesses
continued to be impacted significantly by
transactional currency effects. During the
financial year, the Canadian and Australian
businesses experienced further depreciation
in their domestic currencies of 20% and 25%
respectively relative to the US dollar, which
is the principal currency in which these
businesses mostly purchase their products.
The TPD business in Ireland and the UK has
not been impacted in the same way by
transactional currency effects, but joined the
Group with slightly lower operating margins.
Currency hedging contracts and supplier price
concessions have provided some mitigation,
but Healthcare gross margins have reduced by
370bps compared with the prior year.
Environmental gross margins improved and
operating costs as a percentage of revenue
reduced across the Life Sciences businesses;
Sector adjusted operating margins therefore
reduced by only 120bps to 20.4%. On a
reported basis, adjusted operating profit
increased in UK sterling terms by 7% to
£21.0m.
Free cash flow increased by 5% to £15.6m
reflecting a combination of the increased
operating profit and reduced cash flows into
working capital, offset by an increase in
capital expenditure.
Strategy development
The DHG group of Healthcare businesses
account for 85% of Life Sciences revenues.
The DHG 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 are secured under multi-year
customer contracts.
In Canada, the three principal businesses
delivered good revenue growth, despite
the softer economic environment putting
pressure on budgets throughout the
Healthcare system. There have been various
initiatives by the Provinces and regions to
restructure functions and these constrained
purchasing in the first half of the year; the
businesses had a stronger second half as
delayed capital equipment orders were
released. Somagen continued to grow in
the core areas of HbA1c diabetes testing,
electrophoresis, colorectal cancer screening
and assisted reproductive technology (“ART”),
while adding new suppliers in quality control
products and automation in microbiology
and theranostics. Revenue growth in AMT’s
core electrosurgery business was constrained
by Provincial and buying group tendering
processes, but further progress was made in
developing AMT’s minimally invasive surgery
business. Vantage delivered good double-
digit growth across its principal product lines
including endoscopes, reprocessors, argon
plasma and GI endoscopy accessories.
In Australia, the economies have faced
similar economic challenges to those
experienced in Canada and again Healthcare
budgets have come under pressure. Against
this background, the DHG businesses have
delivered a creditable double-digit growth in
revenues, with particularly strong growth in
smoke evacuation. BGS and DSL operate as
distinct sales and marketing businesses
under a single strong leadership team and
shared operations and back-office systems.
Chemzyme, acquired in July 2014, was fully
integrated into DHG’s operations in
Melbourne during the year.
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. TPD is an
important first step in extending the scope of
DHG’s business into Europe and adding new
products and suppliers in the Food, Dairy and
Pharmaceutical industries as well as Digestive
Health. TPD has performed very well since
acquisition, delivering strong double-digit
revenue growth on a like-for-like basis.
The a1-group of Environmental businesses
account for ca.15% of Sector revenues
and supply a range of products used in
Environmental testing and Health & Safety
applications. The a1-group businesses have
maintained underlying revenues in challenging
European markets and finished the year with
a solid order book. The a1-envirosciences
business saw strong demand for high-end
elemental and mercury analysers supplied to
the Petrochemical industry and Environmental
laboratories. The a1-CBISS business is
benefiting from supplying to the new Biomass
and Energy from Waste plants which are
forming an increasingly important part of the
UK’s energy portfolio.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Chief Executive’s Review continued
16
Seals
42%
of Group revenue
2015
2014
Revenue
£139.6m £119.8m
Adjusted operating
profit
£24.8m £21.7m
Adjusted operating
margin
17.8%
18.1%
Free cash flow
£17.8m £16.4m
• Sector revenue growth of 17%;
underlying growth of 4% after
adjusting for currency and
acquisitions
• In North America, slower trading
activity in second half, impacted
indirectly by cutbacks in Oil &
Gas and Mining industries
• Continued investment in
e-commerce and seal machining
centres; Bulldog operations
relocated to Tampa; new branch
operation in Houston
• In Europe, strong underlying
growth despite challenging
economic background; new
purpose built FPE Seals facility
established as core Aftermarket
hub in Europe
• EMEA Seals now 34% of Sector
revenues following acquisitions
of Kentek, Kubo and Swan Seals
• Acquisition of WCIS after year
end broadens product range and
extends Seals activities into
Australasia
Performance in the year
Reported revenues of the Seals businesses
increased by 17% to £139.6m. These revenues
included contributions from Kubo, Kentek,
and four smaller bolt-on acquisitions in the
UK completed during the last 18 months.
After adjusting for these acquisitions and for
currency translation, underlying revenues
increased by 4%.
Good progress has been made during the year
in establishing a more substantial presence
outside North America through a combination
of organic growth and acquisition. The
businesses based in the EMEA region
contributed £47.3m to Seals revenues in the
year and now account for 34% of Sector
revenues. In October 2015, shortly after the
year end, the acquisition was completed
of WCIS, a supplier of gaskets, seals and
associated products and services with
operations in Australia and New Caledonia.
Across the Seals businesses, gross margins
continued to be resilient, underpinned by the
business model of superior product availability
and added value technical services. Adjusted
operating margins reduced by 30bps to 17.8%
as Kubo joined the Group with lower initial
operating margins and there were several
one-off costs in the reorganisation of facilities
in the US, including the relocation of the
Bulldog facility. Adjusted operating profits
increased by 14% to £24.8m.
Free cash flow increased by £1.4m to £17.8m,
benefiting from the increase in operating profit
and tight control of working capital, partially
offset by an increase in capital expenditure.
Strategy development
The Aftermarket Seals businesses account
for ca.55% 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
networks, offer higher levels of customer
service and more competitive pricing.
In North America, HFPG delivered a solid
performance in most territories, offset
by substantial declines in the resource
dependent States in the second half of the
year. Further progress was made in electronic
trading and two new seal machining centres
were added during the year. The Bulldog
operations in Reno were relocated to a new
facility in Tampa, close to the core Hercules
Clearwater site. HFPG revenues were also
impacted this year by a significant reduction
in demand for HKX’s attachment kits against
a very strong prior year comparative. HKX has
responded by introducing lower cost, entry
level kits which are upgradeable as required to
provide a fuller range of capabilities.
In Europe, FPE Seals increased revenues
strongly, benefiting from a full year of AB
Seals and the transfer from HFPG of sales
responsibility for the Bulldog range of
products in the EMEA region. Swan Seals, a
small specialised supplier of machined seals
based in Aberdeen, was acquired in July
2015. During the year, FPE Seals relocated its
principal UK operations to a new, purpose
built facility which will be the core Aftermarket
Seals hub for further expansion in the EMEA
region. Kentek delivered strong revenue
growth despite the significant economic and
market challenges in Russia, Finland and the
Baltic States.
The Industrial OEM businesses account for
ca.45% of Seals revenues and supply seals,
O-rings and custom moulded and machined
parts used in a range of specialised industrial
equipment. The businesses work closely with
their Industrial OEM customers to specify the
most appropriate sealing material and design
for the customer’s application and to select
the most suitable seal manufacturer from
which to source the parts. Once the part is
designed into the application, the businesses
provide the necessary logistical and technical
support, in most cases for the lifetime of the
OEM’s product.
In North America, the businesses delivered
solid GDP plus growth for the year, though
trading activity again slowed in the second
half, impacted indirectly by cutbacks in the
Oil & Gas and Mining sectors. During the
year a new branch operation was opened by
All Seals in Houston and J Royal strengthened
its operations by integrating its Rhode Island
operations into the main facility in North
Carolina.
In Europe, the Group completed the
acquisition of Kubo, a leading supplier of seals,
O-rings, gaskets and moulded rubber parts
to a diverse base of industrial customers in
Switzerland and Austria. M Seals delivered
solid underlying growth in Denmark, Sweden,
China and the UK.
17
Controls
27%
of Group revenue
2015
2014
Revenue
£91.1m £94.6m
Adjusted operating
profit
£14.5m £15.3m
Adjusted operating
margin
15.9%
16.2%
Free cash flow
£11.4m £11.4m
• Sector revenue reduced by 4%;
underlying reduction of 5% after
adjusting for currency and
acquisitions
• Interconnect businesses faced
challenging industrial markets in
the UK and Continental Europe
and strong comparatives in Civil
Aerospace and Motorsport
• Continued growth in specialised
segments in Germany, including
the Energy and the Space
satellite sectors
• In Specialty Fasteners, lineside
supply projects for aircraft seat
manufacturer constrained
business this year but will deliver
longer term revenue growth;
excellent performance from SFC
in first full year
• Fluid Controls businesses
repositioned towards growing
segments of the Food &
Beverage market in the UK, with
smaller more energy efficient
products
Performance in the year
Reported revenues of the Controls businesses
decreased by 4% to £91.1m, after including
a full year contribution from SFC, acquired in
July 2014. After adjusting for this acquisition
and for currency translation, underlying
revenues decreased by 5%. The Controls
businesses faced challenging industrial
markets in the UK and Continental Europe
and strong comparatives for the Specialty
Fasteners business in the Civil Aerospace and
Motorsport sectors.
Overall gross margins remained resilient in
the Controls businesses due to their focus on
specialised markets and added value services.
However, operating costs as a percentage of
revenue increased due to reverse operating
leverage and adjusted operating margins
reduced by 30bps to 15.9%. Adjusted
operating profits decreased by 5% to £14.5m.
Free cash flow remained unchanged at
£11.4m, with reduced cash flows into
working capital and lower capital expenditure
offsetting the impact of lower operating profit.
Strategy development
The Interconnect businesses account for
ca.75% 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 a range of
industries including Aerospace, Defence,
Motorsport, Energy and Medical as well as
in other specialised Industrial applications.
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 value-added services. A
high proportion of the products are used in
refurbishment, upgrade and maintenance
programmes for equipment in service.
The core Industrial markets in the UK have
been challenging, with demand from industrial
end-users muted and with a significant
reduction in the sales to other distributors in
the UK and in Eurozone countries which the
IS-Group serves as a Master distributor for
certain key suppliers. In Germany, again the
general industrial sector has suffered in the
wake of Russian sanctions and the slowing
Chinese manufacturing sector. In addition,
a number of IS-Sommer’s customers have
relocated all or part of their manufacturing to
lower cost regions outside Germany.
To offset the declines in the broader Industrial
markets, the Interconnect businesses have
focused on more specialised market sectors
which continue to show growth potential. In
the Energy sector, IS-Sommer has delivered
a strong increase in revenues from products
used in the repair and maintenance of
the medium-voltage infrastructure of the
Electricity distribution network. Filcon has also
had success supplying a focused portfolio
of specialised connectors to the developing
Space satellite segment.
A key element of the growth strategy within
Interconnect is also to broaden the range of
high performance products and added value
services offered. As part of this strategy, the
Specialty Fasteners group of businesses has
been formed and was strengthened through
the acquisition of SFC, which delivered an
excellent performance in its first full year with
the Group. Clarendon this year strengthened
its partnership with its major aircraft seating
customer, with the installation of an innovative
VMI (vendor managed inventory) solution
that utilises bespoke dispensing racks located
within the customer’s production cells.
Clarendon also consolidated its position with
the same customer by extending its supply
contract to an additional manufacturing site.
While these projects constrained revenue this
year during the implementation phases, they
will secure longer term growth in revenues.
The Fluid Controls businesses account for
ca.25% of Controls revenues and supply a
range of fluid control products used broadly
across the Food & 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 food retailing, where
the traditional UK majors have reduced
substantially their fit-outs of new stores
and Hawco’s immediate customers, the
commercial refrigeration manufacturers,
have now begun to win new business from
the European discount retailers. Hawco also
continues to leverage its expertise and access
to smaller, more efficient compressors and
ancillary components to penetrate the wider
Brewing and Catering sectors.
There are also significant changes taking place
in the hot drinks dispensing market where key
players are re-positioning their businesses
from “vending companies” to “coffee
specialists”. Abbeychart has responded by
building a portfolio of essential parts to service
the broad range of espresso-type machines
installed in an increasing number of outlets
from garages to high end restaurants.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Finance Review
18
The Group generated
strong free cash flow
helped by a good
contribution from the
acquired businesses
and tight control of
working capital.”
Nigel Lingwood, Group Finance Director
Building
financial strength
Results in 2015
Diploma achieved a creditable performance
this year with revenues increasing by 9% to
£333.8m and adjusted operating profit
increasing by 6% to £60.3m, bolstered by good
contributions from acquisitions completed
both this year and last year. Weaker industrial
markets, particularly in the second half of the
financial year, led to underlying revenues and
adjusted operating profits increasing by only
1% this year. However free cash flow was again
very strong at £40.3m and helped to finance
£37.8m of acquisition investment which should
provide a good base for earnings growth in
future years.
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, against most of
the currencies in which the Group operates.
With ca.75% of the Group’s businesses based
overseas, the impact on headline results from
currency translation has led to a reduction in
revenues and adjusted operating profits of
£8.1m and £1.6m respectively, when
compared with last year’s exchange rates. The
contributions from acquisitions completed in
the year were £24.2m to revenue and £3.4m
to adjusted operating profit, before £0.3m of
internal management charges.
Gross margins in the Healthcare businesses,
which represent ca.25% of Group revenues,
continued to be impacted on a transactional
basis by the continuing depreciation of the
Canadian and Australian dollars. These two
currencies have now depreciated in excess of
30% over the past two years against the
currencies in which they purchase their
products, predominantly the US dollar (see
chart on page 19).
Currency hedging contracts and supplier price
concessions have provided some mitigation,
but transactional currency effects reduced
Healthcare gross margins by 280bps in 2015.
With further depreciation of these two
currencies continuing through 2015, the
forward currency hedge contracts are being
replaced at more unfavourable exchange rates
which will maintain pressure on Healthcare
gross margins well into 2016. Transactional
currency exposures in the rest of the Group’s
businesses were not significant.
Underlying revenue bridge – FY 2015
The weaker gross margins in the Healthcare
businesses were largely mitigated by a
combination of stronger margin mix of
revenues across the Group’s businesses and
by operational leverage from continuing tight
control over operating costs. However, with
the businesses acquired during the past two
years joining the Group with initial operating
margins which are lower than the Group’s
average and with £0.8m being incurred on
one-off facility restructuring costs in the US
Seals businesses, the adjusted operating
margin declined by 40bps to 18.1% this year,
compared with 18.5% for the full year in 2014.
Adjusted profit before tax, earnings per
share and dividends
Adjusted profit before tax increased by 6% to
£59.6m (2014: £56.2m). There was a finance
expense this year of £0.7m (2014: net £0.5m)
which included £0.3m of interest costs on
borrowings drawn down during the year to help
finance acquisitions (2014: £Nil). The notional
£m
340
320
300
280
260
240
+£32.4m
+£3.7m
£333.8m
£305.8m
–£8.1m
FY14
Translational
FX
Acquisitions
FY14 & FY15
Underlying
FY15
Transactional currency impact – FY 2015
1.5
1.4
1.3
1.2
1.1
1.0
0.9
Change over Change over
3 years
–36%
–48%
1 year
–20%
–25%
CAD
AUD
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
CAD
AUD
Base currency – USD
interest expense on the Group’s defined
+174%
pension liabilities remained unchanged at
£0.2m and £0.2m (2014: £0.4m) was paid on
bank facility and commitment fees. Statutory
profit before tax was £51.8m (2014: £49.8m),
after acquisition related charges of £7.4m (2014:
£6.4m) and fair value remeasurements of
£0.4m (2014: £Nil) in respect of the put options
held over minority interests.
strong free cash flow provides the Directors
with confidence to recommend an increase in
the final dividend of 7% to 12.4p per share
(2014: 11.6p). This gives a total dividend per
share for the year of 18.2p per share which
represents a 7% increase on the prior year
dividend of 17.0p. The dividend remains 2.1
times covered by adjusted EPS as reported
last year.
The Group’s adjusted effective accounting tax
charge in 2015 remained unchanged from the
previous year at 26.3% of adjusted profit before
tax. The charge this year benefited from a
further reduction in UK corporation tax rates to
20.5% (2014: 22.0%) and from lower tax rates
applied to some of the businesses acquired
during the past two years; however the
effective tax rate in the US increased slightly
this year to 36% (2014: 35%) after the catch up
in prior year manufacturing tax relief claims
received last year.
Adjusted earnings per share (“EPS”) increased
by 6% to 38.2p, compared with 36.1p last year
and statutory basic earnings per share
increased to 32.5p (2014: 31.4p).
The Board’s policy is to increase 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). A combination of a
robust Group balance sheet and continuing
Free cash flow
The Group generated strong free cash flow
in 2015 of £40.3m (2014: £37.8m), helped
by a good contribution from the acquired
businesses and tight control of working capital.
Free cash flow represents cash available to
invest in acquisitions or return to shareholders
and represented a cash conversion of adjusted
earnings of 93% (2014: 93%).
The Group’s businesses worked hard in the
second half of the year to reduce working
capital and the cash outflow into working
capital was reduced from £6.8m at 31 March
2015 to £1.9m at 30 September 2015; this
compared with £4.6m in the last financial year.
The efforts to reduce working capital were
generally focused on inventory levels which
resulted in no cash outflow.
During the year, the DHG group of Healthcare
businesses represented by DHG reclassified
£1.2m of inventory as plant and equipment
within fixed tangible assets. These assets
Adjusted operating margin bridge – FY 2015
%
19.0
18.5
18.0
17.5
17.0
18.5%
+60bps
–50bps
+30bps
–20bps
18.1%
FY14
Transactional
FX
–60bps
Acquisitions
Sector
mix
Operating
leverage
Seals
reorganisation
FY15
19
comprise instruments used for demonstration
and for lending to hospitals while the existing
instruments are being serviced at DHG
service centres.
The combination of this adjustment and
reduced cash outflow in working capital has led
to the Group’s KPI metric of working capital as a
proportion of revenue reducing to 17.0% at 30
September 2015 from 17.2% reported last year
(16.8% when calculated on a comparable basis).
Group tax payments increased by £2.4m to
£15.4m (2014: £13.0m) and included £0.7m of
pre-acquisition tax liabilities from Kubo and TPD
and £0.4m of payments relating to prior year
liabilities. On an underlying basis and before
the currency effects of translation, cash tax
payments increased by £1.3m and represented
ca.24% of adjusted profit before tax compared
with an underlying rate of ca.23% last year.
Capital expenditure increased by £2.1m to
£4.3m compared with £2.2m last year. The
increase in capital expenditure was shared
equally between the Life Sciences and Seals
businesses. In Life Sciences, Vantage increased
its funding of equipment contracts on a cost
per procedure (“CPP”) basis to £1.0m (2014:
£0.4m) following the successful release of a
new version of endoscopes. A further £0.9m
(2014: £0.2m) of field equipment was also
acquired in support of customer contracts
with hospitals.
In Seals, £0.4m was spent on new seal and
gasket cutting machinery in the HFPG and
Kubo businesses and a further £0.5m was
invested in completing new vertical carousels
in the Hercules Bulldog facility in Clearwater
and in adding new tooling across the Seals
businesses. The relocation of the Bulldog
business from Reno to a new large leasehold
facility in Tampa was completed in September
and £0.4m was invested in refurbishing and
fitting out this facility.
Capital expenditure in the Controls businesses
was a modest £0.3m and related to tooling and
line-side equipment to support a supply project
in the Specialty Fasteners business. The
balance of capital expenditure in the year of
£0.8m was largely invested in supporting the IT
infrastructure across the Group.
In addition to the capital expenditure described
above, the Group also financed the
construction of a new purpose built facility for
FPE Seals in Darlington, UK. The construction
of the facility was completed in September
2015 and cost £2.9m, including fitting-out and
professional costs. At completion, the facility
was sold to an investment company and
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
Finance Review continued
20
leased back on a 15 year full repairing lease.
After providing for the potential costs of
disposing of the previous long leasehold facility,
no gain or loss was made on the disposal.
The Company paid the PAYE income tax
liability of £1.0m (2014: £1.8m) arising on the
exercise of LTIP share awards, in exchange for
reduced share awards to participants; the
Employee Benefit Trust also purchased a
further 100,000 shares in the Company during
the year at a cost of £0.7m in order to have
sufficient shares to meet future LTIP awards.
The Group spent £37.8m of the free cash flow
on acquisitions, as described below, and
£19.9m (2014: £18.4m) on paying dividends to
both Company and minority shareholders.
Acquisitions completed during the year
The Group invested a record £37.8m in
acquired businesses this year (2014: £16.5m),
including £0.6m on acquiring outstanding
minority interests and £0.6m of deferred
consideration.
The largest investment was £22.9m paid in
March 2015 to acquire Kubo, a leading supplier
of seals and related products, largely based in
Switzerland, but with a small business
operating in Austria. A further £11.2m was
invested in October 2014 to acquire 80% of
Technopath Distribution (“TPD”), an
established supplier of products to the Life
Sciences market and based in Ireland. In July
2015, the Group also acquired Swan Seals for
£2.5m, a small Seals Aftermarket business
based in Aberdeen to be managed by FPE
Seals in the UK.
These acquisitions added £19.8m to the
Group’s acquired intangible assets,
comprising a valuation of customer and
supplier relationships which will be amortised
over periods ranging from 5–10 years. At 30
September 2015, intangible assets were
£40.2m. Goodwill increased by £13.7m to
£89.3m at 30 September 2015, after making
fair value adjustments to the assets acquired.
Goodwill is not amortised but is assessed
each year at a Sector level to determine
whether there has been any impairment in
the carrying value of goodwill acquired. The
exercise to assess whether goodwill has
been impaired is described in note 10 to
the consolidated financial statements and
concluded that there has been no impairment
in the value of goodwill at the year end.
Shortly after the year end, the Group
completed the acquisition of WCIS, an
established supplier of sealing products and
services for maximum consideration of £9.8m.
Liabilities to minority shareholders
The Group’s liability to purchase outstanding
minority shareholdings at 30 September 2015
increased to £5.7m (2014: £3.5m), following
the purchase of 80% of TPD in October 2014.
This acquisition included put/call options
over the outstanding 20% of share capital
which were valued at £3.2m. During the
year, a further 10% shareholding in Kentek
was acquired from the previous vendor for
consideration of £1.4m, of which £0.6m was
paid during the year, leaving £0.8m to be
paid in December 2015. The remaining 10%
minority shareholding in Kentek is held by the
Managing Director of this business.
At 30 September 2015, the put options over
the outstanding minority interests held in
M Seals, Kentek and TPD were valued at
£5.7m, based on the Directors’ latest estimate
of the Earnings before Interest and Tax (“EBIT”)
of these businesses when these options
crystallise.
In addition to the liability to minority
shareholders, the Group also has a liability at
30 September 2015 for deferred consideration
of up to £0.9m (2014: £0.5m) which includes
£0.8m owing to the former minority
shareholder in Kentek.
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”). At a Group level,
this is a pre-tax measure which is applied
against the fixed and working capital of the
Group, together with all gross intangible assets
and goodwill. At 30 September 2015, the Group
ROATCE had reduced to 23.9% (2014: 25.8%)
which in part reflected the impact of acquiring a
freehold property valued at £7.2m, as part of
the acquisition of Kubo. Adjusted trading
capital employed is defined in note 3 to the
consolidated financial statements.
The Group continues to maintain a strong
balance sheet with net cash funds of £3.0m
(2014: £21.3m) at 30 September 2015,
comprising bank borrowings of £20.0m offset
by cash funds of £23.0m. These cash funds
were largely utilised shortly after the year end in
completing the purchase of WCIS and in
repaying some of the bank borrowings. Surplus
cash funds are generally repatriated to the UK,
unless they are required locally to meet certain
commitments, including acquisitions.
On 11 March 2015, the Group exercised part
of the accordion option within its existing
revolving multi-currency credit facility and
increased its committed bank facilities to
£40m; there remains a further £10m in the
accordion option for the Group to extend this
facility to £50m, subject to market pricing.
These additional funds were provided at
a cost of 50bps and were used to assist in
financing the acquisition of Kubo. These bank
facilities are committed until June 2017 and will
continue to be utilised to meet any shortfall in
cash to fund acquisitions.
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 2015 of £2.1m (2014: £1.7m).
The Group also maintains a small closed
defined benefit pension scheme in the
UK which at 30 September 2013 had a
funding deficit of £2.7m. The next funding
actuarial valuation will be carried out as at
30 September 2016. 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
seven years.
Following the acquisition of Kubo in March
2015, the Group has also been required to
account for Kubo’s pension scheme in
accordance with IAS19 (Revised). In
accordance with Swiss law, Kubo is required to
provide a contribution based pension for all
employees. The pension liability for these
employees is funded by employer and
employee contributions which are managed
by a large multi-employer fund manager, with
the underfunding risk insured with a major
global insurance company. Although this
scheme is a contribution based scheme,
certain technical factors relating to the funding
of the scheme determines that it must be
accounted for as a defined benefit pension
scheme under IAS19 (Revised).
The addition of the Kubo pension scheme
this year has led to the aggregate pension
deficit held in the Group’s balance sheet
at 30 September 2015 increasing to £9.8m
from £4.3m last year. The actuarial pension
deficit under IAS19 (Revised) in the Kubo
scheme is £3.7m and the pension deficit
in the UK scheme increased by £1.8m to
£6.1m. The increase in the UK pension
deficit arose because of a further reduction
of 30bps in bond yields to 3.8% since last
year, together with weaker equity returns
during the year. The gross aggregate pension
liability in respect of these two schemes at
30 September 2015 is now £44.5m which is
funded by £34.7m of assets.
0.6
Sector Review
21
Life Sciences
Seals
Controls
% of Group revenue
% of Group revenue
% of Group revenue
31%
Geography1
59% Canada
28% Europe
13% Rest of World
42%
Geography1
63% North America
30% Europe
7% Rest of World
6%
Customers
84% Clinical
10% Utilities
3% Chemical & Petrochemical
2% Life Sciences Research
1% Other Life Sciences
Customers
41% Industrial OEMs
28% Heavy Construction
17% Other Industrial
10% Industrial Aftermarket
3% Dump & Refuse Trucks
1% Logging & Agriculture
Products
71% Consumables
19% Instrumentation
10% Service
387Employees
Products
43% Seals & Seal Kits
16% O-rings
15% Cylinders & Other
10% Filters
9% Gaskets
7% Attachment Kits
764Employees
Principal businesses
Diploma Healthcare Group (DHG)
a1-group
Principal businesses
Hercules Fluid Power Group (HFPG)
EMEA Seals (FPE Seals, Kentek,
M Seals, Kubo, WCIS)
1 By destination.
27%
Geography1
60% UK
32% Continental Europe
8% Rest of World
Customers
29% Aerospace & Defence
27% Industrial
18% Food & Beverage
15% Motorsport
7% Energy & Utilities
4% Medical & Scientific
Products
38% Wire & Cable
18% Fasteners
14% Equipment & Components
14% Connectors
11% Control Devices
5% Other Controls
334Employees
Principal businesses
IS-Group
Specialty Fasteners
Filcon
Hawco
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Sector Review continued
22
Life Sciences
The Life Sciences Sector businesses supply
a range of consumables, instrumentation
and related services to the healthcare and
environmental industries.
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 Surgical (“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 endoscopes, reprocessors and
related consumables and services to GI Endoscopy suites in hospitals
and private clinics.
DHG also operates in Australia and New Zealand through Diagnostic
Solutions (“DSL”) and Big Green Surgical (“BGS”) which are both located in
Melbourne. BGS and DSL focus on similar markets respectively to the AMT
and Somagen businesses and share a number of common suppliers.
In October 2014, DHG extended its operations into Europe with the
acquisition of Technopath Distribution (“TPD”), an established supplier
of products to the Biotechnology, Clinical Laboratory and Medical
markets in Ireland and the UK.
Environmental
The a1-group is a supplier to Environmental testing laboratories and to
Health & Safety engineers. The a1-envirosciences business, based in
Germany, supplies a range of specialised environmental analysers and a
range of containment enclosures for potent powder handling. The
a1-CBISS business, based in the UK, supplies equipment and services
for the monitoring and control of environmental emissions, as well as a
range of gas detection devices.
Principal operations
Healthcare
Somagen Diagnostics
AMT Surgical
Vantage Endoscopy
Big Green Surgical
Diagnostic Solutions
Technopath Distribution
Environmental
a1-CBISS
a1-envirosciences
Edmonton, AB, Canada
Kitchener, ON, Canada
Markham, ON, Canada
Melbourne, VIC, Australia
Melbourne, VIC, Australia
Ballina, Co. Tipperary, Ireland
Tranmere, UK
Dusseldorf, Germany
Revenue growth (compound over five years)
13%p.a.
15
£103.1m
14
13
12
11
10
£91.4m
£93.2m
£78.4m
£74.4m
£55.4m
Principal segments
85% Healthcare
15% Environment
Geography
59% Canada
28% Europe
13% Rest of World
23
Canadian healthcare expenditure (C$bn)
% growth
14
13
12
11
10
09
08
151.5
148.6
145.1
140.8
63.4
61.8
60.3
58.6
136.0
129.0
57.3
53.1
121.3
50.8
2.1%
2.4%
3.0%
3.1%
6.1%
5.8%
7.4%
Public Private
Source: Canadian Institute for Health Information
Australian healthcare expenditure (A$bn)
% growth
14
13
12
11
10
09
08
104.8
100.4
99.3
49.8
46.6
42.6
91.2
40.4
84.9
36.8
78.7
35.7
71.2
32.3
5.2%
3.5%
7.9%
8.1%
6.4%
10.5%
9.1%
Public Private
Source: Australian Institute of Health & Welfare
Total health expenditure as a percentage of GDP
2010
2011
2012
2013
2014
11.6% 11.3% 11.3% 11.2% 11.1%
9.8%
9.5%
9.4%
9.3%
9.7%
Canada
Australia
Sources: As above
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 do 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 2014 and 2015, healthcare funding may
be constrained. The funding constraints 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. Over the last two years, the Canadian and Australian
economies have come under significant pressure from the falling oil
price and reduced demand for the countries’ natural resources. This
tougher economic environment has resulted in greater pressure on
budgets throughout the Healthcare systems in Canada and Australia.
The market drivers for the TPD business are Healthcare funding in
Ireland and the UK and activity levels in the Food, Dairy, Water and
Pharmaceutical industries in Ireland.
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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Sector Review continued
24
Life Sciences
Sector performance
£103.1m
Revenue
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
2015
2014
£103.1m £91.4m
£21.0m
£19.7m
20.4%
21.6%
£15.6m
£14.9m
21.1%
21.9%
Reported revenues of the Life Sciences businesses increased by 13% to
£103.1m (2014: £91.4m). The acquisitions of TPD in October 2014 and
Chemzyme in July 2014 added £13.3m, or 15%, to Sector revenues but
this was partly offset by a reduction of ca.6% in revenues from the
translational currency impact from the continued weakening in the
Canadian and Australian dollars and the Euro relative to UK sterling.
On a constant currency basis, underlying revenues increased by 4%.
Gross margins in the Healthcare businesses continued to be impacted
significantly by transactional currency effects. During the financial year,
the Canadian and Australian businesses experienced further
depreciation in their domestic currencies of 20% and 25% respectively
relative to the US dollar, which is the principal currency in which these
businesses mostly purchase their products. The TPD business in Ireland
and the UK has not been impacted in the same way by transactional
currency effects, but joined the Group with slightly lower operating
margins. Currency hedging contracts and supplier price concessions
have provided some mitigation, but Healthcare gross margins have
reduced by 370bps compared with the prior year. Environmental gross
margins improved and operating costs as a percentage of revenue
reduced across the Life Sciences businesses; Sector adjusted operating
margins therefore reduced by only 120bps to 20.4% (2014: 21.6%). On a
reported basis, adjusted operating profit increased in UK sterling terms
by 7% to £21.0m (2014: £19.7m).
Capital expenditure in the Sector increased to £2.5m (2014: £1.2m),
which included £1.9m invested in field equipment for placement in
hospitals and clinics by the Canadian Healthcare businesses and
£0.4m invested in IT infrastructure, including £0.1m in a new ERP
system in Vantage which completed its installation in November 2015.
Free cash flow increased to £15.6m (2014: £14.9m), reflecting a
combination of the increased operating profit and reduced cash flows
into working capital, offset by the increase in capital expenditure.
Healthcare
Revenues from the DHG group of Healthcare businesses increased by
5% after adjusting for the acquisitions of TPD and Chemzyme and for
translational currency effects.
The Canadian Healthcare businesses increased revenues by 5% in
local currency, with consumable and service revenues accounting for
ca.90% of revenues. The tougher economic environment in Canada,
caused largely by the falling oil prices and reduced demand for the
country’s natural resources, has put greater pressure on budgets
throughout the Healthcare system. There have also been various
initiatives to restructure functions within several Provinces and
regions, which have constrained purchasing and slowed down capital
purchases. In particular there has been a freeze in capital spending
in Quebec, while the Province completes the centralisation of its
Health regions.
Against this background, Somagen achieved good growth in sales of
consumable products across its key suppliers, in particular HbA1c
diabetes testing and electrophoresis, colorectal cancer screening and
assisted reproductive technology (“ART”). Capital equipment sales in
the first half of the year were slow due to the reorganisation of testing
services in certain Provinces; however a number of the delayed orders
were released in the second half of the year with sales of histology
instrumentation finishing strongly. Investments have been made during
the year in establishing new suppliers in the areas of quality control
products and automation in microbiology and theranostics, which
focuses on the patient’s response to specific biotherapeutic drugs.
AMT’s core electrosurgery business has continued to grow unit
volumes with increasing smoke evacuation compliance in existing
accounts and penetration into new accounts. However, tender and
evaluation processes introduced by the Provincial SSOs (shared services
organisations) and the GPOs (general purchasing organisations) have
put pressure on unit prices and constrained revenue growth. AMT
has responded by introducing lower cost product options alongside
premium products to ensure competitive pricing in major tenders.
AMT has continued to make progress in its supply of specialised surgical
instruments and devices used in laparoscopic and other MI (minimally
invasive) Surgery procedures.
Vantage posted a very strong second half to the year and delivered
double-digit growth in revenues for the full year. In the first half of the
year, the main consumable product lines performed to expectation
with modest growth in revenues from argon plasma probes,
endoscope reprocessor chemicals and other accessories including
specialist retrieval devices. Capital equipment revenues however were
underperforming due to delayed budget approvals. In the second half,
consumable and service revenues continued to grow steadily and
results were boosted by strong capital equipment sales as the delayed
orders were released and by new CPP (cost per procedure) placements.
By the end of the year, Vantage was able to deliver double-digit growth
across all of its principal capital product lines including endoscopes,
reprocessors and argon plasma units.
25
Highlights from the Year
• Sector revenue growth of 13%; underlying growth
of 4% after adjusting for currency and TPD
acquisition
• Good revenue growth in DHG’s Canadian and
Australian businesses despite pressure on
Healthcare budgets
• Stronger second half of year as delayed capital
equipment orders released; significant pressure
on margins from 20-25% depreciation of
Canadian and Australian dollars against US dollar
• TPD acquisition extends DHG into Ireland and
the UK; strong double-digit growth in first year
• Environmental businesses maintained underlying
revenues and finished the year with solid order
book
Potential for Growth
• Increase share of specialised segments of
Healthcare markets in Canada and Australia
• Build presence in the UK and Ireland from TPD
base and explore opportunities more broadly
in Europe
• Extend into other specialised medical disciplines
with new products and technologies
• Continue to develop product and geographic
spread of Environmental businesses
In Australia and New Zealand, the economies have faced similar
challenges to those experienced in Canada and Healthcare budgets
have come under the same pressures. Against this background,
revenues from DSL and BGS increased by a creditable 11% in local
currency terms (7% growth after adjusting for the acquisition of
Chemzyme). BGS continued to grow revenues strongly, with smoke
evacuation programmes in existing and new accounts providing the
main driver for growth and with steady growth in sales of electrosurgical
grounding pads and laparoscopic electrodes. DSL consumable and
service revenues trended in line with expectations and delivered
modest growth, but capital equipment sales were slower due to budget
pressures and delayed projects. DSL and BGS operate 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. The
Chemzyme business, acquired in July 2014, was fully integrated into
DHG’s Melbourne operations during the year.
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 acquisition of TPD represents an important
first step in extending the scope of the Group’s Healthcare businesses
into these new markets in Europe. In addition, TPD brings important
new products and suppliers to the DHG group in the areas of rapid
hygiene testing in Food, Dairy and Pharmaceutical industries as well as
Digestive Health. TPD has performed very well since acquisition,
delivering strong double-digit revenue growth on a like-for-like basis.
Environmental
Revenues from the Environmental businesses in Europe increased by
1% in constant currency terms. The a1-envirosciences business based
in Germany increased revenues by 6% in Euro terms and ended the year
with an encouraging book-to bill ratio. There was strong demand for
high-end elemental analysers supplied to Petrochemical industry
customers and Environmental laboratories. There was also
considerable customer interest in the range of recently introduced
mercury analysers for fuel analysis. The a1-CBISS business based in the
UK saw revenues reduce by 4% against a very strong prior year
comparative. Reduced revenues from CEMS (continuous emissions
monitoring systems) were against very strong comparatives (20%
growth in 2014) and the sector remains buoyant with new Biomass and
Energy from Waste plants forming an important part of the UK’s energy
portfolio with the reduction in coal fired power stations. A solid order
book is carried into the new fiscal year including the completion of a
large order from Drax related to the conversion of its plant to biofuels.
The gas detection sector had a strong first half but was then impacted
by the slowdown in sales to Oil & Gas customers. Across both
Environmental businesses, there was strong double-digit growth in
revenues from Service programmes, which now represent ca.35% of
combined revenues.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Sector Review continued
26
Seals
The Seals Sector businesses supply a
range of seals, gaskets, filters, cylinders,
components and kits used in heavy mobile
machinery and specialised industrial
equipment.
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. The Aftermarket businesses also supply products to end
users operating process plants within the Pharmaceutical, Chemical,
Food and Energy sectors.
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 operations
Aftermarket
Hercules Fluid Power Group (HFPG)
Hercules Bulldog
Hercules Canada
HKX
FPE Seals
Kentek
WCIS
Industrial OEM
HFPG
All Seals
J Royal
RT Dygert
M Seals
Kubo
Clearwater & Tampa, FL, US
Barrie, ON & Dorval, QC, Canada
Monroe, WA, US
Darlington, Doncaster, Gravesend &
Aberdeen, UK; Breda, The Netherlands
Helsinki, Finland; St. Petersburg, Russia;
Tallinn, Riga & Vilnius, Baltic States
Perth & Brisbane, Australia; Noumea,
New Caledonia
Lake Forest, CA & Houston, TX, US
Clemmons, NC & Tallassee, AL, US;
Shanghai, China
Minneapolis, MN, Chicago, IL & Seattle,
WA, US
Espergaerde, Denmark; Halmstad,
Sweden; Beijing, China; Gateshead, UK
Effretikon, Switzerland & Linz, Austria
Revenue growth (compound over five years)
ä18%p.a.
15
£139.6m
14
13
12
11
10
£119.8m
£106.1m
£99.9m
£80.0m
£60.1m
Principal segments
55% Aftermarket
45% Industrial OEM
Geography
63% North America
30% Europe
7% Rest of World
27
US construction spend ($bn)
600
500
400
300
200
08
09
10
11
12
13
14
Source: Cyclast Intercast
US construction equipment units (’000)
60
50
40
30
20
10
0
08
09
10
11
12
13
14
Source: Cyclast Intercast
US industrial production index
120
110
100
90
80
08
09
10
11
12
13
14
Source: US Federal Reserve (seasonally adjusted)
Market drivers
In North America (where ca.65% of Sector revenues are generated), the
principal market drivers for both the Aftermarket and Industrial OEM Seals
businesses is the growth rate in the general industrial economy. In 2015,
the US economy is forecast to show annual GDP growth of 2.5% (2014:
2.4%), driven primarily by strong consumer spending. The US economy
and industrial production contracted in the first quarter which was in
part attributable to port closures, but in the second quarter GDP growth
resumed as house prices increased and customer confidence returned.
However, the significant reduction in oil price and lower demand for
natural resources weighed down the resource dependent States.
In Canada, 2015 GDP growth is forecast to decline to 1.5% (2014: 2.4%)
due again to the dependence of the Canadian economy on the Oil &
Gas and Mining sectors. In general, the economic conditions in the
principal South and Central American economies served by the North
American Aftermarket businesses have remained challenging.
For the Aftermarket businesses, activity and spending levels in the US
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. Overall US Construction Spend has risen
steadily during 2014 and 2015 as contractors completed the build-out
phases of construction projects. However, these phases generally
require lower usage of heavy mobile equipment than the ground
clearance and preparation phases and there has been a reduction in
activity in the States most impacted by the slowdown in the Oil & Gas
and Mining sectors.
Unit sales in the US of Construction Equipment (defined as heavy
mobile equipment including excavators above 14 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 following years. Unit sales grew strongly in 2014 as dealers,
contractors and rental fleets bought ahead of the introduction of tighter
emissions standards. During the first half of 2015, the demand for new
equipment declined sharply as the general machine population is
relatively new and equipment, previously used in the Oil & Gas and
Mining sectors, was released back through auction houses into the
Heavy Construction sector.
For the Industrial OEM Seals businesses, the most appropriate indicator
is the Industrial Production Index, which moved ahead strongly in 2014
when the US enjoyed a strong oil price and a more competitive
exchange rate for its exports. The Index has been essentially flat during
2015 as the stronger dollar and a significant slowdown in the natural
resources sector offset stronger domestic consumer demand.
In Europe, the economies have been highly variable in 2014 and 2015,
driven by a number of contributing economic and geopolitical factors.
Although overall GDP growth in Europe is forecast to recover modestly
to 1.5% (2014: 0.8%), the economies have been negatively impacted by
the Greek debt crisis, the EU and US sanctions against Russia as well as
reductions in exports as a result of the global economic slowdown. The
UK and German economies have remained more buoyant than other
European countries, but growth is forecast to slow to 2.4% (2014: 2.9%)
in the UK and to remain broadly flat at 1.7% (2014: 1.6%) in Germany.
The Industrial Production indices in these countries have generally
lagged the overall economic growth.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
Sector Review continued
28
Seals
Sector performance
£139.6m
Revenue
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
2015
2014
£139.6m £119.8m
£24.8m
£21.7m
17.8%
18.1%
£17.8m £16.4m
23.7%
26.0%
Reported revenues of the Seals businesses increased by 17% to
£139.6m (2014: £119.8m). These revenues included contributions from
Kubo (acquired in March 2015), Kentek (acquired in January 2014) and
four smaller bolt-on acquisitions in the UK completed during the last
18 months. After adjusting for these acquisitions and for currency
translation, underlying revenues increased by 4%.
Good progress has been made during the year in establishing a more
substantial presence outside North America through a combination of
organic growth and acquisition. The businesses based in the EMEA
region contributed £47.3m to Seals revenues in the year (2014: £29.9m)
and now account for 34% of Sector revenues. In October 2015, shortly
after the year end, the acquisition was completed of WCIS, a supplier of
gaskets, seals and associated products and services with operations in
Australia and New Caledonia.
Across the Seals businesses, gross margins continued to be resilient,
underpinned by the business model of superior product availability and
added value technical services. Adjusted operating margins reduced
by 30bps to 17.8% (2014: 18.1%) as Kubo joined the Group with lower
initial operating margins and there were several one-off costs in the
reorganisation of facilities in the US, including the relocation of the
Bulldog facility, which added incremental costs of ca.£0.8m. Adjusted
operating profits increased by 14% to £24.8m (2014: £21.7m).
Free cash flow increased by £1.4m to £17.8m (2014: £16.4m), benefiting
from the increase in operating profit and tight control of working capital.
Capital expenditure increased to £1.5m (2014: £0.5m), which included
£0.4m expenditure on leasehold improvements for the new Bulldog
facility and further investment of £0.6m in seal manufacturing
equipment and new vertical storage carousels. In Europe, Kubo
invested £0.2m in additional gasket cutting equipment in Switzerland
and Austria. FPE Seals also completed the move to a new leasehold
facility, which was constructed to our specifications and then sold and
leased back shortly before the year end.
Aftermarket
The Aftermarket businesses, which account for ca.55% of Sector
revenues, reported a 4% increase in overall revenues. After adjusting for
currency translation and the acquisitions of Kentek, AB Seals and Swan
Seals, underlying revenues increased by 2%.
In the US, Hercules Bulldog grew domestic sales by 1% on a like-for-like
basis, as a generally solid performance in most territories was offset by
substantial declines in the resource dependent States including Texas,
Oklahoma, Pennsylvania, Colorado and Montana. Further progress was
made in electronic trading and the number of sales orders processed
online now accounts for 21% of Hercules Bulldog orders in the US. The
seal machining centres also continued to deliver good growth, with a
fourth machine added during the year. Revenues from exports outside
the US, which account for 15% of Hercules Bulldog sales, increased by
2% with good growth rates in Mexico and Central America more than
offsetting reductions in other South American markets. In September
2015, the Bulldog gasket manufacturing and kit assembly operations
in Reno were relocated to a new facility in Tampa, close to the core
Hercules Clearwater site. The new facility has improved international
port and air carrier links and is expected to deliver ca.£0.2m p.a. in
annual cost savings.
Hercules Canada increased revenues by 10% in local currency terms,
with solid sales to the traditional mobile equipment repair sector
boosted by the installation of an additional seal making machine. There
were also increased sales to Canadian cylinder manufacturers, serving
US equipment OEM customers and benefiting from the weak Canadian
dollar. Hercules Canada has its principal distribution centres in Ontario
and Quebec and has limited direct exposure to the depressed Oil & Gas
sector in Western Canada.
HKX’s revenues decreased by ca.20% from its record performance
in 2014, when there was strong demand from rental fleets for new
excavators and OEM engineering resources were focused on the
transition to new Tier 4 Final emissions regulations. In 2015, the higher
pricing of the new Tier 4 Final machines has dampened demand for
new excavators and excavator OEMs have been supplying a higher
proportion with factory-fitted attachment kits. HKX has also been
negatively impacted by the downturn in the Oil & Gas and Mining
industries in Western Canada. HKX has responded by targeting sales
of attachment kits for used machines and introducing lower cost, entry
level kits which are upgradeable as required to provide a fuller range of
capabilities. HKX has trimmed its operating costs to match the reduced
revenues and still maintains a healthy operating profit margin.
In Europe, FPE Seals increased reported revenues by ca.50% with solid
underlying growth boosted by the transfer from Hercules Bulldog to FPE
Seals of responsibility for the sale of Bulldog products in the wider EMEA
region. FPE Seals also benefited from two small acquisitions which
provide it with excellent geographical coverage of the UK. AB Seals in
Kent was acquired in February 2014 and Swan Seals, a small specialised
supplier of machined seals based in Aberdeen, was acquired in July 2015.
During the year, FPE Seals relocated its principal operations in the UK to a
new, purpose built 34,000 square foot building in Darlington, which
consolidates smaller less efficient facilities and will be the core Seals
Aftermarket hub for further expansion into the EMEA region.
Kentek has faced significant economic and political challenges since its
acquisition in January 2014, with the Russian economy (and those of
Finland and the Baltic States) significantly impacted by lower Oil & Gas
prices, the downturn in Mining industries and the sanctions imposed
following the conflicts in Ukraine and the Crimea. Kentek has responded
well to these challenges and delivered a strong increase in underlying
revenues in 2015. Diploma acquired a further 10% shareholding in
Kentek, taking our ownership to 90% and with the continuing 10%
minority shareholder now appointed as Managing Director. In Russia,
the Saint Petersburg operation now acts as the sole Russian corporate
entity and the sales team has been reorganised to focus on specific
geographical territories and market sectors.
29
Highlights from the Year
• Sector revenue growth of 17%; underlying
growth of 4% after adjusting for currency and
acquisitions
• In North America, slower trading activity in
second half, impacted indirectly by cutbacks in
Oil & Gas and Mining industries
• Continued investment in e-commerce and
seal machining centres; Bulldog operations
relocated to Tampa; new branch operation
in Houston
• In Europe, strong underlying growth despite
challenging economic background; new purpose
built FPE Seals facility established as core
Aftermarket hub in Europe
• EMEA Seals now 34% of Sector revenues
following acquisitions of Kentek, Kubo and
Swan Seals
• Acquisition of WCIS after year end broadens
product range and extends Seals activities into
Australasia
Potential for Growth
• Continue to gain share in Aftermarket Seals in
North America through superior marketing and
product development
• Build and expand group of Industrial OEM Seals
businesses in North America and internationally
• Build larger, broader-based Seals business in the
EMEA and Asia Pacific regions
• Explore opportunities more broadly in Industrial
Distribution in North America
Industrial OEM
The Industrial OEM businesses, which account for ca.45% of Sector
revenues, reported a 35% increase in revenues. After adjusting for
currency translation and the acquisitions of Kubo, Ramsay Services and
Maxwell Seals, underlying revenue growth was 6%.
In North America, the Industrial OEM businesses delivered underlying
revenue growth of 6% in an economy that showed signs of flattening
off in the second half of the year. RT Dygert delivered another year of
solid growth in its core industrial customer base as it continued to
benefit from its development of regulatory-compliant elastomer
compounds for the Pharmaceutical and Water industries and for fuel
dispensing applications. During the year, RT Dygert also successfully
launched a new online Webstore which acts as a B2B portal for
existing distribution customers. In July 2014, RT Dygert acquired the
outstanding 49% shareholding in the HPS business in Seattle. The HPS
back office and logistics processes have been successfully integrated
into RT Dygert and the business delivered another record sales year.
All Seals delivered more modest growth in 2015, as demand flattened
out in the Water, Military Aerospace and Industrial sectors. All Seals
opened a small branch operation in Houston in November 2014 and
while sales to the Oil & Gas sector increased, further gains were held
back by the downturn in this sector. J Royal delivered another year of
excellent growth in 2015 with strong demand from its water meter and
gas boiler customers more than offsetting lower sales to manufacturers
of swimming pool equipment. J Royal continued to strengthen its
operations by closing its Rhode Island facility and relocating key
development resources to its main facility in North Carolina.
In Europe, the expanded M Seals group reported increased revenues
of 4%, with solid underlying growth boosted by the bolt-on acquisition
in the UK of Ramsay Services in December 2013. There was solid
organic growth in Denmark with steady demand from the traditional
pump and valve manufacturers and from wind turbine customers and
the Swedish operation delivered another year of strong double-digit
growth. The Chinese operation also saw a rebound in revenues after a
softer prior year, as confidence returned to the Wind Power sector in
China. In the UK, M Seals delivered a solid performance despite the
slowdown in the Oil & Gas sector in which the acquired companies had
traditionally specialised.
In March 2015, the Group completed the acquisition of Kubo, a leading
supplier of seals, O-rings, gaskets and moulded rubber parts to a
diverse base of industrial customers in Switzerland and Austria. The
Swiss franc strengthened during the year following its de-coupling from
the Euro and this has made it more difficult for Swiss OEMs to export
their products. However, most of Kubo’s purchases are from outside
Switzerland allowing price reductions to customers without impacting
margins. The trading environment for Kubo in Switzerland is now
stabilising although growth has been constrained. The Austrian
operation was not impacted by the currency issue and performed well
during the year. In August 2015, the previous owner of Kubo stepped
down as planned and a new Managing Director with significant
industrial experience has been appointed.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Sector Review continued
30
Controls
The Controls Sector businesses supply
specialised wiring, connectors, fasteners
and control devices used in a range of
technically demanding applications.
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.
Fluid Controls
The Hawco Group businesses supply a range of fluid control products
used broadly in the Food & Beverage industry, in applications including
food retailing and transportation, catering equipment, vending machines,
coffee brewing, pure water and water cooling systems. Products include
fluid controllers, compressors, valves, temperature and pressure
measurement devices and specialised vending and liquid dispensing
components. The customer offering is enhanced by value adding
services including kitting for production line flow and the repair and
refurbishment of soft drinks dispensing equipment.
Principal operations
Interconnect
IS-Group
IS-Rayfast
IS-Cabletec
IS-Sommer
IS-Connect
Specialty Fasteners
Clarendon
SFC
Filcon
Fluid Controls
Hawco Group
Hawco
Abbeychart
Swindon, UK
Weston-super-Mare, UK
Stuttgart, Germany
Indianapolis, US
Leicester & Swindon, UK
Totnes, UK
Munich, Germany
Guildford & Bolton, UK
Faringdon, UK
Revenue growth (compound over five years)
6%p.a.
15
£91.1m
£94.6m
£86.2m
£81.9m
£76.2m
£68.0m
14
13
12
11
10
Principal segments
75%
Interconnect
25% Fluid Controls
Geography
60% UK
32% Continental Europe
8% Rest of World
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 a short period of growth in 2010,
followed by a steady decline through 2011 and 2012. Towards the end of
2012, the index returned to growth and increased steadily through 2014.
This reflects increased confidence in the UK economy in general,
although the economic growth is more driven by the Services and Retail
sectors and industrial activity remains below pre-recession levels.
Similarly, the German Production Sector Output index tracks a good
period of recovery through 2010 and 2011, before stabilising and slowly
moving towards pre-recession levels by early 2015.
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. and with strong order
books at Boeing, Airbus and the manufacturers of smaller, regional
aircraft. There is a trend towards replacing ageing fleets with more fuel
efficient wider bodied aircraft and there is increased activity in the cabin
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. However, the continuing activity in
Syria and Iraq and an increase in other perceived threats may prompt a
review of defence spending.
In Motorsport, following the introduction of the new 1.6 litre V6 turbo
engine and the new ERS (Energy Recovery System) technology in 2013
and 2014, there were no major technology changes or upgrades to
the series during the current Formula 1 season. The Formula E series
continues to gain momentum but the relative spend in this series
is low compared to Formula 1. In Energy, electricity generation and
distribution in Germany remains a positive sector as the responsibility
for the local supply of electricity continues to be returned to cities
and towns.
Specific industry drivers – Fluid Controls
The Fluid Controls businesses generate almost 70% of their revenues
from the Food & Beverage sector in the UK. In Food Retailing, there
continue to be 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 delivery. These
trends 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.
UK index of production
120
110
100
90
80
08
09
10
11
12
13
14
15
Source: UK Office for National Statistics
Calendar and seasonally adjusted, reference year 2011=100
German production sector output index (including construction)
120
110
100
90
80
08
09
10
11
12
13
14
15
Source: Deutsche Bundesbank
Calendar and seasonally adjusted, reference year 2010=100
World passenger traffic – annual growth rate
14
13
12
11
10
09
08
Source: International Civil Aviation Organisation
Revenue
passenger km
growth rate
6.0%
5.5%
5.3%
6.6%
8.0%
–1.0%
2.0%
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Sector Review continued
32
Controls
Sector performance
£91.1m
Revenue
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
power, is also a key supplier to other sub-distributors in Europe that
support military programmes. However, the demand from these
sub-distributors also fell sharply as programmes in other territories
were completed or delayed. Beyond the large equipment programmes,
there are still many successful UK manufacturers continuing to build
highly specialised control and monitoring sub-systems for defence use.
While major programme expenditure may be lower, the number of
more focused projects and operators combine to produce a sustainable
customer base for the IS-Group in the UK.
2015
2014
£91.1m £94.6m
£14.5m
£15.3m
15.9%
16.2%
£11.4m
£11.4m
30.5%
33.2%
In Motorsport, there was reduced demand from Formula 1 (“F1”), where
two teams exited the competition and there were fewer technological
changes than last year, when the new V6 turbo engine was introduced,
along with upgraded energy recovery systems. However, the growth
of supercars for road use, the Formula E series and the resurgence of
high performance motorbikes in Japan have all provided new growth
opportunities. Less conventionally, the growing sophistication of sensor
control systems on racing yachts has provided the opportunity to
supply components to the Americas Cup teams.
Reported revenues of the Controls businesses decreased by 4% to
£91.1m (2014: £94.6m), after including a full year contribution from SFC,
acquired in July 2014. After adjusting for this acquisition and for currency
translation, underlying revenues decreased by 5%.
Overall gross margins remained resilient in the Controls businesses
due to their focus on specialised markets and added value services.
However, operating costs as a percentage of revenue increased due to
reverse operating leverage and adjusted operating margins reduced by
30bps to 15.9% (2014: 16.2%). Adjusted operating profits decreased by
5% to £14.5m (2014: £15.3m).
Free cash flow remained unchanged at £11.4m, with reduced cash flows
into working capital and lower capital expenditure offsetting the impact
of lower operating profit. Capital expenditure reduced to £0.3m (2014:
£0.5m) with the largest expenditure during the year being ca.£0.1m
on customised bins for the Specialty Fasteners business to support
production in a major customer facility.
Interconnect
The Interconnect businesses, which account for ca.75% of Sector
revenues, reported a revenue decrease of 3% in UK sterling terms; after
adjusting for the acquisition of SFC and for currency effects, underlying
revenues decreased by 5%. The revenue reduction reflects a
combination of weak overall activity levels in UK and European industrial
markets and strong comparatives for the Specialty Fasteners business
in the Motorsport and Civil Aerospace sectors.
In the IS-Group businesses in the UK, revenues decreased by 9%,
with challenging industrial markets in the UK and also in the Eurozone
countries which the IS-Group serves as a Master Distributor for certain
key suppliers. Sales direct to industrial end-users in the UK were
generally muted, but the most significant reductions were in sales to
other distributors in the UK and Continental Europe. Management
remains confident that these revenues were not lost to competitors
since the IS-Group companies are often the single source for several
key products. The lower demand from both broad range catalogue
distributors and the smaller, more specialised distributors suggests
that both smaller and larger OEMs have been impacted by slower
order books and some de-stocking.
In Defence & Aerospace, revenues reduced as several major projects
had been completed in 2014, including the build phase of the
Astute class submarines and there were no major projects to replace
this demand. The IS-Group, because of its experience and buying
In the Energy industry in the UK, IS-Group serves an attractive but
narrow customer base comprising sub-sea cable manufacturers for the
Oil & Gas industry, specialised manufacturers of portable generators
and manufacturers of batteries for use in UPS (Uninterrupted Power
Supplies) applications. The demand from these customers has always
been somewhat cyclical and in 2015 each segment was down.
In Germany, IS-Sommer and Filcon reported flat revenues in Euro
terms (9% reduction in UK sterling terms) with a significant reduction
in revenues from general Industrial customers offset by growth in
more specialised sectors. In the Industrial sector, revenues reduced as
industrial output in Germany remained volatile from one month to the
next and exports suffered in the wake of the Russian sanctions and the
slowing Chinese manufacturing sector. During the year, revenues were
also impacted by certain IS-Sommer customers relocating all or part
of their manufacturing to lower cost regions outside of Germany.
In the final quarter, the industrial economy stabilised somewhat and
IS-Sommer also found new business in the Construction industry
to partly offset the downturn in its more traditional industrial
customer base.
In Defence & Aerospace, revenues were broadly flat, although activity
on Military Aerospace projects has picked up pace following several
years of cautious production levels and with the growing pressure on
Germany to upgrade its military capabilities. Uncertainty over various
tank programmes to be built for the US Army dampened demand from
the specialist engine manufacturers, but the decision to upgrade the
electronics on the German Leopard II tank and to develop the next
generation Leopard III tank has now been confirmed. Filcon also had
success in the developing Space satellite niche where it has built a
focused portfolio of the specialised connectors that have been qualified
for use on satellites.
In the Energy sector, IS-Sommer delivered a strong increase in revenues
from products used in the repair and maintenance of the medium-
voltage infrastructure of the Electricity distribution network. IS-Sommer
has been appointed a Master Distributor for these specialised products
by its principal supplier and has steadily built its reputation with
the public authorities and utilities that are responsible for the local
distribution networks. In the Medical sector, IS-Sommer primarily serves
German and Swiss medical equipment manufacturers and delivered
revenues comparable to the prior year.
The Specialty Fasteners business (Clarendon and SFC) increased
revenues by 16% over the prior year; after adjusting for the acquisition
of SFC, underlying revenues decreased by 7%.
33
Highlights from the Year
• Sector revenue reduced by 4%; underlying
reduction of 5% after adjusting for currency
and acquisitions
• Interconnect businesses faced challenging
industrial markets in the UK and Continental
Europe and strong comparatives in Civil
Aerospace and Motorsport
• Continued growth in specialised segments in
Germany, including the Energy and the Space
satellite sectors
• In Specialty Fasteners, lineside supply projects
for aircraft seat manufacturer constrained
business this year but will deliver longer term
revenue growth; excellent performance from
SFC in first full year
• Fluid Controls businesses repositioned towards
growing segments of the Food & Beverage
market in the UK, with smaller more energy
efficient products
Potential for Growth
• Extend Interconnect product line and further
penetrate specialised markets in Europe
• In Specialty Fasteners, build on strong positions
in Civil Aerospace and Motorsport and expand in
niche industrial markets
• Continue to reposition Fluid Controls business
towards growth segments of the Food &
Beverage industry
• Expand geographic reach outside UK and
Northern Continental Europe
Although overall revenues in Aerospace reduced, this was against
a very strong comparative with record prior year sales in the aircraft
seating segment. This year, customer changes to aircraft seat
designs and delays to build schedules impacted demand. In addition,
Clarendon’s deliveries to its largest customer were reduced during the
implementation of a large new lineside supply project. This project
involves the installation of an innovative VMI (vendor managed
inventory) solution that utilises bespoke dispensing racks that are
located within the customer’s production cells and equipped with RFID
(radio frequency identification) technology. In the UK, the company also
consolidated its position with the same customer by extending its
supply contract to an additional manufacturing site. The requirement
for aircraft seating remains exceptionally high with demand continuing
to outstrip short term capacity and Clarendon broadened its business
with new customers across the EMEA region.
In Motorsport, a combination of reduced engine development budgets,
some changes in purchasing practices and a reduction in the number
of F1 teams, all contributed to reduced revenues against a strong prior
year comparative. However, SFC’s portfolio of own-brand fastener
products for the wider racing fraternity in the UK and the US brought
increased penetration of several lower-tier racing series. The lead product
is the proprietary “Aerocatch” bonnet fastener used to secure bodywork
panels on high performance race cars. More broadly, SFC delivered
an excellent performance in the supply of standard and own-brand
fastening solutions to a wide range of smaller, niche UK manufacturers.
Fluid Controls
The Hawco group of Fluid Controls businesses, which account for
ca.25% of Sector revenues, reported a 6% reduction in revenues. The
greater part of the shortfall was attributable to just two customers that
had been heavily involved in new build programmes for major food
retailers in the prior year. As has been widely reported, the traditional
UK food retailers have reduced substantially their fit-outs of new stores.
In response to this, Hawco’s immediate customers, the commercial
refrigeration manufacturers, have now begun to win new business from
the discount retailers that had previously sourced their refrigeration
needs in Continental Europe. Hawco also continues to leverage its
expertise and access to smaller, more efficient compressors and
ancillary components to penetrate the wider Brewing and Catering
sectors. As pubs continue to expand their food offerings and a
greater variety of convenience foods are served by retailers, there
are challenges to keep drinks and food cool in more confined spaces.
Hawco is well positioned to support these retailers with Greenhouse
Gas compliant, low energy solutions.
Abbeychart began a measured realignment of its business to match
the significant changes taking place in the UK hot drinks dispensing
market. Key players are repositioning their businesses from “vending
companies” to “coffee specialists”, with a broad range of espresso-type
machines being installed in an increasing number of outlets from
garages to top class restaurants. Abbeychart recently completed an
exercise to map the components used in the broad range of espresso
machines to build a portfolio of essential parts. The change in customer
focus from traditional bulk coffee brewers to users of the newer
equipment led to a decline in revenues during the first half of the year,
but sales volumes in recent months have recovered. There was a
further reduction in the demand for components used in the installation
of plumbed water dispensers in offices which are now favouring
individual bottled water. This was mostly offset by increased revenues
from the repair and rebuilding of bar guns for soft drinks and funnel
units used to dispense more solid slush-type drinks.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Internal Control and Risk Management
34
The Board is committed to protecting and enhancing Diploma’s
reputation and assets, while safeguarding the interests of shareholders.
It has overall responsibility for the Group’s system of risk management
and internal control.
Diploma’s businesses are affected by a number of risks and
uncertainties. These may be impacted by internal and external factors,
some of which we cannot control. Many of the risks are similar to those
found by comparable companies in terms of scale and operations.
Our approach
Risk management and maintenance of appropriate systems of control
to manage risk is the responsibility of the Board and is integral to the
ability of the Group to deliver on its strategic priorities. The Board has
developed a framework of risk management which is used to establish
the culture of effective risk management throughout the business by
identifying and monitoring the material risks, setting risk appetite and
determining the overall risk tolerance of the Group. This framework of
risk management has been substantially enhanced this year and
additional processes have been developed which will assist the Board to
monitor and assess the principal risks throughout the year.
The Group’s risk management systems are monitored by the Audit
Committee, under delegation from the Board. The Audit Committee is
responsible for overseeing the effectiveness of the internal control
environment of the Group. An internal audit function has been
established for many years to provide independent assurance that the
Group’s risk management, governance and internal control processes
are operating effectively.
Identifying and monitoring material risks
Material risks are identified through a detailed analysis of individual
processes and procedures (bottom up approach) and a consideration
of the strategy and operating environment of the Group (top down
approach).
The detailed risk evaluation process begins in the operating
businesses with an annual exercise undertaken by management to
identify and document the significant strategic, operational, financial
and accounting risks facing the businesses. This process is both robust
and challenging and ensures risks are identified and monitored and
management controls are embedded in the business’ operations.
This year the Group has developed a quantitative method to
determine a Risk Score for each risk which is based on both the
likelihood of each identified risk occurring and the consequence of an
adverse outcome and its impact on the business. Each business will
then identify processes established to control each risk and minimise
its potential impact.
The risk assessments from each of the operating businesses are then
considered by the Board who evaluate the principal risks of the Group
with reference to the Group’s strategy and operating environment.
Our principal risks and uncertainties
Set out in this section of the Strategic Report are the principal risks and
uncertainties affecting the Group which have been determined by the
Board, based on the robust risk evaluation process described above, to
have the potential to have the greatest impact on the Group’s future
viability. These risks are similar to those reported last year, although
with some movement on the relative ranking of these risks and one
new risk added relating to supplier strategy change.
The risks are each classified as strategic, operational and financial or
accounting. The Group’s decentralised operations with different sectors
and geographical spread reduces the impact of these principal risks.
Viability Statement – Diploma PLC
The Directors confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for
the next three years to September 2018. The Directors’ assessment has been made with reference to the resilience of the Group and its strong
financial position, the Group’s current strategy, the Board’s risk appetite and the Group’s principal risks and how these are managed, as described
in the Strategic Report.
The Group has a broad spread of customers and suppliers across different geographic areas and independent market sectors, often secured with
longer term agreements. The Group is supported by a robust Balance Sheet and strong operational cash flows.
The assessment period of three years has been chosen as it is consistent with the Board’s triennial review of the Group’s strategy at which the
prospects of each business are discussed; assumptions are made regarding entering into new markets and geographies, about future growth
rates of the existing businesses and about the acceptable performance of existing businesses. A robust financial model of the Group is built on a
business by business basis and the metrics for the Group’s KPIs are reviewed for the assessment period. These metrics are also subject to
sensitivity analysis which includes flexing a number of the main assumptions, namely, future revenue growth, gross margins, operating costs and
working capital management. The results of flexing these assumptions, both individually and in aggregate, are used to determine whether
additional bank facilities will be required during this period.
This review and analysis also considers the principal risks facing the Group, as described on pages 35 to 37 and the potential impacts these risks
would have on the Group’s business model, future performance, solvency or liquidity over the assessment period. The Board considers that the
diverse nature of the Sectors and geographies in which the Group operates acts significantly to mitigate the impact any of these risks might have
on the Group.
.
35
Strategic Risk
1 Downturn in major markets
Risk description & assessment
Relative movement within Group principal risks
Increased
Mitigation
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.
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.
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 differing 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.
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.
Strategic Risk
2 Loss of key suppliers
Risk description & assessment
Relative movement within Group principal risks
Unchanged
Mitigation
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.
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.
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 products can
become very long. Currently no single supplier represents more than 10% of
Group revenue and only seven single suppliers represent more than 2% each
of Group revenue.
Collaborative projects and relationships maintained with
individuals at many levels of the supplier organisation,
together with regular review meetings and adherence to
contractual terms.
Regular review of inventory levels.
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.
Bundling and kitting of products and provision of added value
services.
The strength of the relationship with each supplier and the volume of activity
generally ensures continuity of supply, when there is shortage of product.
Periodic research of alternative suppliers as part of
contingency planning.
Strategic Risk
3 Loss of key customer(s)
Risk description & assessment
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 customer and no single customer represents
more than 5% of Sector revenue or more than 2% of Group revenue.
Relative movement within Group principal risks
Unchanged
Mitigation
Specific large customers are important to individual operating
businesses and a high level of effort invested in ensuring that
these customers are retained and encouraged not to switch
to another supplier. However, although important to
individual operating businesses, loss of any single customer
does not present a material risk to the Group.
In addition to providing high levels of customer service and
value added activities, close integration is established where
possible with customers’ systems and processes.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Internal Control and Risk Management continued
36
Strategic Risk
4 Supplier strategy change
Risk description & assessment
The success of the businesses depends significantly on representing suppliers
whose products are recognised in the marketplace as the leading competitive
brand. If suppliers fail to support these products with new development and
technologies, then our businesses will suffer from reduced demand for their
products and services.
Each of the Group’s businesses supply established and leading products and
related services to customers operating in specialised markets.
Relative movement within Group principal risks
New
Mitigation
The businesses work very closely with each of their suppliers
and regularly attend industry exhibitions to keep abreast of
the latest technology and market requirements/trends. The
businesses also meet with key customers on a regular basis to
gain insight into their product requirements and market
developments.
Operational Risk
5 Product liability
Risk description & assessment
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.
Operational Risk
6 Loss of key personnel
Risk description & assessment
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, for a limited time period.
As set out on page 38, the average length of service for all personnel in the
Group is consistently over six years.
Relative movement within Group principal risks
Unchanged
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.
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 have undergone further product
liability training during the year and are continually reviewed to
demonstrate compliance with Group policies and procedures
relating to product liability.
Relative movement within Group principal risks
Unchanged
Mitigation
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.
37
Financial Risk
7 Foreign currency – Translational exposure
Relative movement within Group principal risks
Increased
Risk description & assessment
Mitigation
The Group operates across a number of diverse geographies
but does not hedge translational exposure.
Foreign currency risk is the risk that changes in currency rates will affect the
Group’s results. The Group operates internationally and is exposed to foreign
exchange risk arising from various currency exposures, primarily with respect
to the US dollar, the Canadian dollar, the Australian dollar and the Euro. The net
assets of the Group’s operations outside the UK are also exposed to foreign
currency translation risk.
During the year ended 30 September 2015, 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 £8.1m and decrease adjusted operating profit by £1.6m. 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 £4.6m (8%), due to currency
translation.
Currency exposures also arise from the net assets of the Group’s foreign
operations. At 30 September 2015, the Group’s non-UK sterling trading capital
employed in overseas businesses was £171.4m (2014: £137.9m), which
represented 80% of the Group’s trading capital employed. It is estimated that
a further strengthening of UK sterling of 10% against all the non-UK sterling
capital employed would reduce shareholders’ funds by £15.6m.
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.
Financial Risk
8 Foreign currency – Transactional exposure
Relative movement within Group principal risks
Increased
Risk description & assessment
Mitigation
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, Euros 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.
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 finance department monitors rolling monthly
forecasts of currency exposures.
Accounting Risk
9 Inventory obsolescence
Risk description & assessment
The Group classifies its forward foreign exchange contracts,
which hedge forecast transactions, as cash flow hedges and
state them at fair value at each reporting period.
Relative movement within Group principal risks
Unchanged
Mitigation
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.
Inventory write-offs are controlled and minimised by active
management of inventory levels based on sales forecasts and
regular cycle counts.
The charge against operating profit in respect of old or surplus inventory in the
year was £1.5m but inventories are generally not subject to technological
obsolescence.
Where necessary, a provision is made to cover both excess
inventory and potential obsolescence.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Corporate Responsibility
38
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
2015
2014
2013
1,449
34%
6.6
23.0%
3.0
1,264
35%
6.3
21.5%
3.0
1,145
35%
6.2
20.4%
2.2
The similar level of sick days lost per person in 2015 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
Total
2015
2014
Male
Female
Male
Female
6
71
910
987
2
19
497
518
6
67
788
861
1
17
445
463
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 2015 the Group employed four disabled employees.
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”) to maintain any relevant
professional accreditations.
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 policies and 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.
2015
2014
Minor injuries
Reportable lost time incidents1
Minor injuries per 1,000
employees
Reportable lost time incidents1
per 1,000 employees
54
4
37.3
2.8
55
5
43.5
4.0
2013
54
1
47.2
0.9
1 Three or more days’ absence from workplace.
The overall level of minor injuries has remained broadly constant, but when
normalised to a rate per 1,000 employees there is a marked decrease in the
overall number of minor injuries. The absolute number of reportable lost
time incidents has reduced slightly with only one of the injuries resulting in
greater than five days’ lost time. Again, when normalised to a rate per
1,000 employees, the reportable lost time incidents have reduced in 2015.
Owing to the nature of the Group’s operations, 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 2015.
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.
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
39
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
In 2014, the UK Government introduced a requirement that UK
listed companies should report their global levels of Greenhouse Gas
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 has considered the six main Greenhouse Gases (“GHGs”)
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.
An intensity ratio of CO2e per £1m revenue has been selected, which
will allow a comparison of performance over time and with other similar
types of business.
Source of emissions
Direct emissions (Scope 1) Natural gas
Owned transport
Indirect emissions (Scope 2) Electricity
Gross emissions
Tonnes CO2e per £1m
revenue
Tonnes of CO2e
2015
2014
824.4
94.0
2,226.2
3,144.6
822.0
63.2
2015.1
2900.3
9.4
9.5
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
• Somagen Diagnostics supported the Canadian Blood Services in
their Partners for Life programme which involves a corporate pledge
for blood donation through staff, family and friends.
• Various charitable events at Hercules US including support to local
charities such as United Way, Clothes To Kids, The Haven (domestic
abuse charity), Paul B. Stephens Exceptional School for Disabled
Children and Metropolitan Ministries (food bank).
• Somagen funds two academic awards each year in two universities
in the fields of histotechnology and biomedical engineering.
• J Royal took part in a charity cycle ride for a multiple sclerosis charity.
• Hercules Canada took part in an Earth Day Clean Up and a golf
tournament to raise funds for a local cancer care centre and cystic
fibrosis research.
In Europe
• Specialty Fasteners held a fundraising day for Breast Cancer Now
charity.
• FPE Seals supported Downs Syndrome by entering a team into the
Great North Run, supported a breast cancer charity and sponsored
a new strip for a local junior football team.
• A Hawco employee completed a 190 mile cycle ride from Hawco’s
offices in Surrey to Paris to support Macmillan Cancer Research and
the Anaphylaxis Campaign.
• Various charitable events at IS-Rayfast including running the London
Marathon, a charity sky dive, supporting Movember and a 72 hole
charity golf challenge.
The Group also contributes to local worthwhile causes and charities
and in 2015 the Group made donations of £35,504 (2014: £42,698).
No political donations were made.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Board of Directors
40
John Nicholas1,3
Chairman
Bruce Thompson
Chief Executive Officer
Appointed:
Joined the Board on 1 June
2013 and appointed Chairman
on 21 January 2015.
Appointed:
Joined the Board in 1994 as a
Group Director and appointed
Chief Executive Officer in 1996.
Charles Packshaw1,2,3
Senior Independent
Non-Executive Director
Appointed:
Joined the Board on 1 June
2013 and appointed Senior
Independent Director on
27 February 2015.
Nigel Lingwood
Group Finance Director
Anne Thorburn1,2,3
Non-Executive Director
Iain Henderson
Andy Smith1,2,3
Chief Operating Officer
Non-Executive Director
Marie-Louise Clayton1,2,3
Non-Executive Director
Appointed:
Joined the Company in June
2001 and appointed Group
Finance Director in July 2001.
Appointed:
Joined the Board on 7
September 2015 and will be
appointed Chairman of the
Audit Committee with effect
from 17 November 2015.
Appointed:
Appointed:
Appointed:
Joined the Board as a Director
Joined the Board and appointed
Joined the Board on 13
in 1998 and appointed Chief
Operating Officer in 2005.
Chairman of the Remuneration
November 2012 and appointed
Committee on 9 February 2015.
Chairman, Audit Committee on
Will retire from the Board on
20 January 2016.
21 March 2013.
Will retire from the Board on
16 November 2015.
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.
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.
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.
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:
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.
External appointments:
None.
External appointments:
Charles is a non-Executive
Director of BMT Group Limited.
External appointments:
Nigel is Senior Independent
Director and Chairman
of the Audit Committee of
Creston plc.
Skills and experience:
Skills and experience:
Skills and experience:
Skills and experience:
Anne is Chief Financial Officer of
Iain qualified as a Chartered
Andy is Managing Director, Severn
Marie-Louise is a Chartered
Exova Group plc (until 30
Management Accountant and
Trent Business Services with
Certified Accountant with
November 2015) and has many
began his career in the food
responsibility for the company’s
some 30 years’ experience in
years of experience at Board level
industry, progressing to be an
non-regulated businesses. He has
commerce and industry, who
in listed international groups.
operations general manager with
many years of plc Board level
H J Heinz. Since 1988, Iain has
experience having previously
has held senior positions at
Alstom (formerly, Alsthom
specialised in the acquisition and
served on the Boards of The
GEC) and was previously Group
Polythene Industries PLC. Anne is
development of small to medium
Boots Company PLC as Group HR
Finance Director of Venture
a member of the Institute of
sized enterprises within group
Director and Severn Trent PLC as
Production plc. She has also
Chartered Accountants in
structures. This was firstly within
Water Services Director. Andy is a
been a non-Executive Director
Scotland.
the privately owned Bricom MBO,
Mechanical Engineering graduate
of Forth Ports PLC and Ocean
Anne was previously Group
Finance Director at British
where he ran ANC Holdings and
and has significant operational
Rig ASA.
from 1994 in a public company
and HR experience. He has
environment as a Director
of Glenchewton plc.
worked in the UK and overseas
previously with global businesses
including BP, Mars and Pepsi.
External appointments:
External appointments:
External appointments:
None.
None.
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.
41
John Nicholas1,3
Chairman
Bruce Thompson
Chief Executive Officer
Charles Packshaw1,2,3
Senior Independent
Non-Executive Director
Nigel Lingwood
Group Finance Director
Anne Thorburn1,2,3
Non-Executive Director
Iain Henderson
Chief Operating Officer
Andy Smith1,2,3
Non-Executive Director
Marie-Louise Clayton1,2,3
Non-Executive Director
Appointed:
Appointed:
Appointed:
Joined the Board on 1 June
Joined the Board in 1994 as a
Joined the Board on 1 June
2013 and appointed Chairman
Group Director and appointed
2013 and appointed Senior
on 21 January 2015.
Chief Executive Officer in 1996.
Independent Director on
Appointed:
Joined the Company in June
2001 and appointed Group
Finance Director in July 2001.
27 February 2015.
Skills and experience:
Skills and experience:
Skills and experience:
Skills and experience:
A Chartered Certified Accountant
Bruce started his career in the
Charles is Head of UK Advisory
Prior to joining the Company,
with a Masters degree in
automotive industry, first as
and Managing Director in HSBC’s
Nigel was the Group Financial
Business Administration from
a design engineer and then in
global banking business. Over 30
Controller at Unigate PLC
Kingston University. John
has a wealth of business and
commercial experience and
product marketing. He then
years of City experience, including
where he gained experience
spent three years in international
18 years at Lazard in London,
of working in a large
marketing with a construction
where he was Head of Corporate
multi-national environment
spent much of his early career in
materials company, developing
Finance, prior to joining HSBC in
and on a number of large
technology-focused international
new markets in Europe, the
2002. Charles has been a non-
corporate transactions.
manufacturing and service
Middle East and North Africa.
Executive Director of two listed
Nigel qualified as a Chartered
companies involved in analytical
Prior to joining Diploma, he was a
companies and he is also
instruments, fire protection and
Director with Arthur D Little Inc.,
a Chartered Engineer.
Accountant with Price
Waterhouse, London.
food processing.
He has been Group Finance
Director of Kidde plc (on its
the technology and management
consulting firm, initially in the
UK and then as Director of the
firm’s Technology Management
demerger from Williams Holdings)
Practice based in Cambridge,
and of Tate & Lyle PLC.
Massachusetts.
External appointments:
External appointments:
John is currently non-Executive
None.
Director and Chairman of the Audit
Committees of Mondi plc and
Hunting PLC. John is Senior
Independent Director of Rotork plc.
External appointments:
Charles is a non-Executive
External appointments:
Nigel is Senior Independent
Director of BMT Group Limited.
Director and Chairman
of the Audit Committee of
Creston plc.
Appointed:
Joined the Board on 7
September 2015 and will be
appointed Chairman of the
Audit Committee with effect
from 17 November 2015.
Skills and experience:
Anne is Chief Financial Officer of
Exova Group plc (until 30
November 2015) and has many
years of experience at Board level
in listed international groups.
Anne was previously Group
Finance Director at British
Polythene Industries PLC. Anne is
a member of the Institute of
Chartered Accountants in
Scotland.
Appointed:
Joined the Board as a Director
in 1998 and appointed Chief
Operating Officer in 2005.
Appointed:
Joined the Board and appointed
Chairman of the Remuneration
Committee on 9 February 2015.
Will retire from the Board on
20 January 2016.
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.
Skills and experience:
Andy is Managing Director, Severn
Trent Business Services with
responsibility for the company’s
non-regulated businesses. He has
many years of plc Board level
experience having previously
served on the Boards of The
Boots Company PLC as Group HR
Director and Severn Trent PLC as
Water Services Director. Andy is a
Mechanical Engineering graduate
and has significant operational
and HR experience. He has
worked in the UK and overseas
previously with global businesses
including BP, Mars and Pepsi.
Appointed:
Joined the Board on 13
November 2012 and appointed
Chairman, Audit Committee on
21 March 2013.
Will retire from the Board on
16 November 2015.
Skills and experience:
Marie-Louise is a Chartered
Certified Accountant with
some 30 years’ experience in
commerce and industry, who
has held senior positions at
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.
External appointments:
None.
External appointments:
None.
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.
Member of:
1 Remuneration Committee
2 Audit Committee
3 Nomination Committee
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Corporate Governance
42
The effectiveness of the Board
was already reasonably good and
this provides a good platform
moving forward.”
John Nicholas, Chairman
Members of Board
Attendance
Chairman
John Nicholas
John Rennocks (retired on 21 January 2015)
Independent non-Executive Directors
Marie-Louise Clayton
Andy Smith (appointed on 9 February 2015)
Charles Packshaw
Anne Thorburn (appointed on 7 September 2015)
Executive Directors
Iain Henderson
Nigel Lingwood
Bruce Thompson
7/7
1/1
6/7
5/5
7/7
1/1
7/7
7/7
7/7
Dear Shareholder
In my first year as Chairman of the Company, I have tried to provide
sufficient opportunity for both myself and my independent colleagues
on the Board, all of whom are relatively new to their roles, to gain a
thorough understanding of the culture and values of the Company.
An important step in this process was the Board’s formal review of Group
strategy held in Switzerland over two days and combined with a visit to
Kubo, which the Group acquired earlier in the year. As well as reviewing
Group strategy with the Executive Directors, the Board also had an
opportunity to meet senior management in the Group’s EMEA Seals
businesses, to receive formal presentations from these businesses and
to have a more informal dinner with these managers.
Later in the year, the Board experienced its first externally facilitated
evaluation of effectiveness, which had been postponed from last year
to allow the more recently appointed Directors to gain more insight into
the workings of the Board. This evaluation exercise was based on
confidential one-to-one interviews with an external facilitator. I was
pleased that the facilitator was able to confirm that the effectiveness of
the Board was already reasonably good as this will provide a good
platform moving forward. There were some minor recommendations
that came out of this exercise which are identified further in this Report
on Corporate Governance and we plan to implement these in the next
financial year.
The changes introduced in 2014 to the UK Corporate Governance Code
and the FRC guidance on risk management in particular, were very timely
in supporting one of the Board’s key objectives identified last year to
review the Group’s risk management and internal control processes.
During the year, the Board reviewed the Group’s risk management
framework in light of the Board’s risk appetite. This process concluded
with a robust assessment of the Group’s principal risks, together with an
agreed form of reports which the Board will use to ensure that it regularly
monitors these risks throughout the year.
The other updates to the Code have also been considered by the Board
and its respective Committees and some refinements have been made
to existing practices where appropriate to ensure full compliance.
Further refreshing of the Board took place in 2015 following the
retirement of John Rennocks as Chairman in January 2015. In addition
with Marie-Louise Clayton’s term of office expiring in November 2015,
we needed to recruit a new non-Executive Director.
As well as having to fill these vacancies, it provided a good opportunity
to refresh the Chairs of the Board Committees. The recruitment of
Andy Smith in February with significant experience of HR policies and
practices makes him a good Chair to replace me on the Remuneration
Committee. Similarly, I was pleased that Anne Thorburn decided to join
us in September as she brings good experience gained in Board level
finance roles in international industrial companies. This will allow her to
be particularly effective as Chair of the Audit Committee. I was also
pleased that Charles Packshaw agreed to become Senior Independent
Director of the Company, following my appointment as Chairman.
Finally, we were all sad to learn that Iain will be leaving the Group in March
2016 after many years as an Executive Director on the Board and we wish
him well in his retirement. As indicated in the announcement of Iain’s
departure in September, the Board will not seek to directly replace his
Board role as Chief Operating Officer. However the Chief Executive
Officer will set up an Executive Management Group of senior
management drawn from across the businesses, including the PLC
Office. This Group will be accountable to the Board, through the Chief
Executive Officer, which will provide the Board with good insight of senior
management as it develops its plans for succession.
Finally, I would hope that as shareholders in the Company you will be
able to find time to attend our AGM on Wednesday, 20 January 2016.
It provides an excellent opportunity to meet the Board of Directors
and challenge them on any matters you feel are important to the
development of the Company.
John Nicholas
16 November 2015
43
Compliance with the Code
Diploma PLC is required to state whether it has complied with the Main
Principles of the UK Corporate Governance Code. The previous Code
published in 2012 was revised and re-issued by the Financial Reporting
Council in September 2014. Set out on pages 43 to 65 is an explanation
of how the Company has complied with the Main Principles of the
Code.
A.4.1 – There was no Senior Independent Director (“SID”) appointed for
the period from 21 January 2015 when John Nicholas resigned as SID
until the appointment of Charles Packshaw as SID on 27 February 2015.
Following his appointment as Chairman, John Nicholas was keen to
follow a fair and structured appointment process for the role of SID.
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 .
There were four cases of non-compliance with the Provisions of the
Code during the year. These related to timings of appointments
following the retirement of John Rennocks as Chairman and the
appointment of John Nicholas as his successor.
B.1.2 – At least half the Board did not comprise independent non-
Executive Directors during the period from 21 January 2015 until the
appointment of Andy Smith as an independent non-Executive Director
on 9 February 2015. The recruitment process had commenced in
December 2014, but had not been completed by 21 January 2015.
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.
C.3.1 and D.2.1 – There were only two members of the Audit
Committee for the period from 21 January 2015, when John Nicholas
resigned as a member, until the appointment of Andy Smith as an
independent non-Executive Director on 9 February 2015. Similarly,
there was no Chairman of the Remuneration Committee during the
same period. There were no meetings of either the Audit or
Remuneration Committee during this period.
The Company’s auditor Deloitte LLP, is required to review whether the
above statement reflects the Company’s compliance with the
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.
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, anti-bribery and corruption, sanctions and whistleblowing.
• Approval of the Group and Company financial statements.
• All new bank facilities, or significant changes to existing facilities.
• Assessment and approval of the principal risks facing the Group and
Nomination Committee
Chaired by John Nicholas
Number of meetings in the year: three
how they are being managed.
• Approval of the Viability Statement.
• Maintaining sound internal control and risk management systems.
• Approval of major corporate transactions and commitments.
• Succession planning and appointments to the Board.
• 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 Chief Executive Officer and the terms of reference of all
Committees of the Board.
Where appropriate, matters are delegated to a Committee which will
consider them in accordance with its terms of reference. Details of each
Committee’s terms of reference are available on the Diploma PLC
website at www.diplomaplc.com
Role of the Committee
The Nomination Committee regularly reviews the structure, size and
composition of the Board and its Committees. It identifies and
nominates suitable candidates to be appointed to the Board (subject
to Board approval) and considers succession generally.
Remuneration Committee
Chaired by Andy Smith
Number of meetings in the year: three
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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Corporate Governance continued
44
Leadership
Board composition
The Board currently comprises a Chairman, three Executive Directors and
four independent non-Executive Directors. The non-Executive Directors
are appointed for specified terms and the details of their respective
appointments are set out in the Remuneration Committee Report on
page 57. The biographical details of the Board members are set out on
pages 40 and 41.
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.
As previously reported, John Rennocks retired from the Board at the
conclusion of the AGM on 21 January 2015 and John Nicholas
succeeded him as Chairman. The recruitment of another non-Executive
Director commenced late in 2014 and completed on 9 February 2015
with the appointment of Andy Smith as an independent non-Executive
Director. Andy was also appointed as Chairman of the Remuneration
Committee (which John Nicholas had vacated on becoming Chairman
of the Company on 21 January 2015) and a member of the Audit and
Nomination Committees.
In November 2015, Marie-Louise Clayton’s three year term of office
expired. Anne Thorburn was appointed an independent non-Executive
Director on 7 September 2015 and was also appointed a member of the
Audit, Remuneration and Nomination Committees. Anne Thorburn will
be appointed Chairman of the Audit Committee on 17 November 2015.
On appointment as Chairman, John Nicholas vacated the role of Senior
Independent Director and was replaced by Charles Packshaw who was
appointed Senior Independent Director on 27 February 2015.
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 Officer.
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 Officer and monitors his
performance in leading the Company and providing operational and
performance management in delivering the agreed strategy. The Chief
Executive Officer is responsible for developing, for the Board’s approval,
appropriate values, culture 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 Officer the
responsibility for such activities to a specified level of authority. Similarly,
there are authority levels covering capital expenditure which can be
exercised by the Chief Executive Officer. Beyond these levels of
authority, projects are referred to the Board for approval.
Other matters reserved to the Board include treasury policies, internal
control and risk management.
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
three yearly basis. The Board met with its key advisors in early June
2015, to set the scene for a formal review of the Company’s strategy at
the end of June 2015 in Zurich, Switzerland. The location also provided
an opportunity to visit the facilities of the recently acquired Kubo, based
at Effretikon, Switzerland and to receive presentations from the senior
management of Diploma’s EMEA Seals businesses (Kubo, M Seals,
Kentek and FPE Seals). The Board received a number of presentations
and had thorough and challenging reviews with Executive
management. The Board will review progress annually against the
objectives set at the Group strategy and will undertake the next formal
review in 2017/18.
Meetings of the Board
The Board has decided to increase its scheduled meetings from
six to seven in the next financial year so as to provide more time to
address the substantial additional regulatory matters that it is now
required to consider on a more formal basis.
The Board will however meet more frequently if required and this
year met on seven occasions, including the Strategy Review, as
set out on page 42.
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 Nicholas was considered independent
by the Board both at the time of his appointment as Director on 1 June
2013 and as Chairman on 21 January 2015. In accordance with the
Code, the ongoing test of independence for the Chairman is not relevant.
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.
45
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.
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 includes a visit by each of the
new non-Executive Directors to the major business units in each of the
Group’s Sectors where they have 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 Officer 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 Officer 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, risk management, 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.
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 the Board and actions and objectives
are agreed for the following year.
Following the internal evaluation of the effectiveness of the Board
carried out in September 2014, the Board identified three areas to
address in particular in 2015. These objectives and the progress
achieved in 2015 are set out below:
• To strengthen the Board’s competencies through the appointment
of a new non-Executive Director with broad industrial experience
gained in an international environment – this was achieved by the
appointment of Andy Smith as a non-Executive Director.
• To seek more regular presentations at Board meetings from senior
management across the Group – during the year, senior
management from DHG and the EMEA Seals businesses made
presentations to the Board. In March 2016, the Board will also be
holding one of their formal meetings at another Group business
location and will have an opportunity to meet with local
management in that business.
• To focus on the management of risk – the Board discussed and
developed the Group’s risk management framework over several
meetings. These discussions included the development of an
updated risk management framework and consideration of the
Board’s risk appetite. As part of this exercise the Board carried out a
robust assessment of the principal risks facing the Group and the
key controls in place to manage these risks. The results of this work
are summarised in a separate section of the Strategic Report on
Internal Control and Risk Management on page 34.
As indicated in last year’s Annual Report & Accounts, the Board this year
completed an annual evaluation of the Board’s effectiveness using an
external facilitator to carry out this exercise. A member of the Institute
of Chartered Secretaries and Administrators was appointed to carry out
this evaluation.
The evaluation was conducted by means of confidential interviews
with each individual member of the Board. The exercise encompassed
an evaluation of the Board as a whole and of the Board Committees.
The evaluation of the Board covered seven topics: Board role and
responsibilities, oversight, arrangements for Board meetings, support
for the Board, Board composition, working together and outcome and
achievements.
The external facilitator prepared a detailed report on the results of his
evaluation which was circulated to all members of the Board and the
Chairman invited the facilitator to present his report at the meeting of
the Board on 24 September 2015.
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.
The facilitator concluded that, based on his evaluation, the Board’s
effectiveness was strong with an average score of 73% across each of
the seven topics assessed, as identified above. There were no negative
performance issues identified from the evaluation that related to
individual Directors or the performance of the Board Committees.
However, the facilitator recommended a small number of items that
the Board should address with the aim of strengthening the Board’s
effectiveness. The principal matters were:
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
Corporate Governance continued
46
•
•
the Board should formally review the Group’s policies on cyber risk
on a more regular basis; and
the Board should agree to a timetable for circulating Board papers
and minutes to all members of the Board.
The Chairman undertook to consider these recommendations and
will report back to the Board on actions required, where appropriate,
to address these matters. The Board will report on progress made
with implementing these recommendations in next year’s Annual
Report & Accounts.
The Senior Independent Director, together with the non-Executive
Directors also carried out a performance evaluation of the Chairman,
having taken account of the views of Directors.
Re-election
All Directors of 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.
Relations with shareholders
The Company has a well-developed investor relations programme
managed by the Chief Executive Officer 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 several 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.
The Group’s website contains up to date information for shareholders
which includes the Annual Reports of the past five years, current and
historic share price information, news releases, presentations to analysts
and key shareholders. The website also contains factual data on the
Group’s businesses, products and services.
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.
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.
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.
Charles Packshaw, the Company’s Senior Independent Director, is also
Head of UK Advisory and Managing Director in HSBC’s global banking
businesses which is one of the principal banks that provide bank
facilities and ancillary banking services to the Group and its businesses.
The Board remains satisfied that this relationship does not provide a
conflict of interest.
Accountability
The Board is responsible for ensuring that the Annual Report &
Accounts taken as a whole present a fair, balanced and understandable
assessment of the Group and provides the information necessary to
shareholders to assess the Group’s position and performance, business
model and strategy. This is achieved through this Annual Report &
Accounts, the Annual Review and through other periodic financial
statements and announcements.
The Board is responsible for determining the nature and extent of the
principal risks it is willing to take in achieving its strategic objectives
and for maintaining sound risk management and internal control
systems. The Board is also responsible for monitoring the Group’s
risk management and internal control systems and it reviews the
effectiveness of these systems through the work of the Audit
Committee.
The principal risks which the Board has identified this year are set out in
the section on Internal Control and Risk Management on pages 34 to 37
of the Strategic Report.
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 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 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.
With regard to other shareholder meetings, other than Annual General
Meetings (“AGMs”), the Board will continue, in ordinary circumstances,
to provide as much notice as possible and certainly no less than
14 working days. However, the Board considers that it should still
retain the flexibility to reduce the timescale to 14 clear days in the
case of non-routine business and where it is merited by the business
of the meeting. For this reason, the Board has again proposed a
resolution at the AGM to reduce the notice period for General
Meetings from 21 to no less than 14 clear days.
Audit Committee Report
47
The Group comprises a set of
well managed businesses with
a healthy focus on monitoring
risks and maintaining robust and
effective systems of control.”
Marie-Louise Clayton, Chairman of the Audit Committee
Members of Committee:
Attendance
Marie-Louise Clayton (Chairman)
John Nicholas (retired on 21 January 2015)
Charles Packshaw
Andy Smith (appointed on 9 February 2015)
Anne Thorburn (appointed on 7 September 2015)
6/6
2/2
6/6
4/4
1/1
There were no particularly subjective accounting issues for the
Committee to consider this year; those matters that do entail a higher
degree of judgement are set out later in this Report of the Audit
Committee and remain unchanged from last year. The Committee
discussed these matters with the auditor and was satisfied that the
Group’s approach remained prudent and conservative.
Dear Shareholder
In my final report to you as Chair of the Committee, I am pleased to
report that the Committee made good progress in carrying out a
comprehensive work programme to ensure that it meets the increasing
depth of review and reporting that is now required of Audit Committees.
This year’s work was focused on working with the Board to develop
the risk framework of the Group, in light of the new provisions in the
UK Corporate Governance Code and in particular on challenging
management on the effectiveness of the internal systems of control.
The Committee, with the help of reports from the Internal Audit
Manager, remains satisfied that the control systems operating within
the businesses are generally strong. As importantly, the Committee
was also pleased to learn from reports from both the Internal Audit
Manager and external auditor that there is a culture across the
businesses to “get things right first time” and where possible improve
processes, controls and reporting efficiencies.
Key Duties
The Committee continued to liaise closely with the Company’s auditor
and met him alone several times to review the results of the Group
and discuss meetings they had held with Group businesses and PLC
management as part of their audit of the financial statements. The
Committee also met regularly with the Internal Audit Manager and was
closely involved in recruiting his successor during the summer.
I am pleased that in passing my role to Anne I can be confident that the
Group comprises a set of well managed businesses with a healthy focus
on monitoring risks and a keen interest in maintaining robust and
effective systems of control.
Marie-Louise Clayton
16 November 2015
(Full terms of reference are available on the Company’s website.)
• Monitors policy on external auditor supplying non-audit services.
• 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 and quarterly trading updates.
• Monitors fraud reports and operation of the Company’s
Whistleblowing and anti-Bribery and Corruption policies.
• Reviews effectiveness of the Internal Audit function and makes
recommendations to the Board.
• Reviews key accounting and auditing issues.
• Approves the Internal Audit work programme and reviews the
• Reviews the Group’s internal control systems and risk management
results of the work undertaken.
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.
• 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.
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48
Audit Committee
The Committee is chaired by Marie-Louise Clayton and comprises
independent non-Executive Directors. The Chair of the Committee and
Anne Thorburn are both qualified accountants, who have recent and
relevant financial experience.
On appointment as the Chairman of the Company, John Nicholas
resigned from the Audit Committee on 21 January 2015 in accordance
with good governance practice, but continues to attend meetings at the
invitation of the Committee. Andy Smith was appointed to the
Committee on 9 February 2015 and Anne Thorburn was appointed on
7 September 2015. Anne will become Chair of the Committee on
17 November 2015, when Marie-Louise Clayton retires from the Board.
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 and Internal Audit Manager 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 Chair 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. In 2016, 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
was effective from 1 January 2015 and in preparation for the audit tender
which will likely be carried out before the end of 2017.
Audit Committee Agenda – 2015
• 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 Trading Updates at meetings held in January, March
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, where appropriate, made
recommendations to the Board on areas for improvement.
• Reviewed the Group’s policy on anti-Bribery and Corruption and
the procedures in place to ensure compliance across the Group.
• Reviewed the scope of sanctions issued by the European Union
and the US and the procedures being followed by the Group’s
businesses to monitor compliance.
• Reviewed the effectiveness of the external audit process and
recommended the reappointment of the Group’s external
auditors.
• Reviewed the Group’s policy on whistleblowing.
• Reviewed the Group’s policy on non-audit services which may be
provided by the auditor.
• Reviewed the Audit Committee terms of reference.
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.
The main issues reviewed in the year ended 30 September 2015 are set
out below:
Impairment of goodwill:
The Committee considered the carrying value of goodwill and the
assumptions underlying the impairment review. The judgements in
relation to goodwill impairment largely relate to the assumptions
underlying the calculations of the value in use of the business 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.
the Group’s two pension scheme arrangements, accounted for in
accordance with IAS19 (Revised) and the Group’s taxation position.
Risk management and internal control
The principal risks and uncertainties which are currently judged to
have the most significant impact on the Group’s long term performance
are set out in a separate section of the Strategic Report on Internal
Control and Risk Management on pages 34 to 37.
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.
Accounting for acquisitions:
The Committee reviewed the accounting for acquisitions completed
during the year and the assumptions underlying the valuation of
intangible assets. They discussed the nature of the intangible assets
with the Group Finance Director and the period over which these assets
were to be amortised. The Committee also discussed with the external
auditor the work they had carried out to satisfy themselves that the
valuation assumptions were appropriate.
Key financial and operational measures relating to revenues, cash and
receivables are reported on a weekly basis. Detailed management
accounts and KPIs are prepared monthly using a robust proprietary
reporting system to collect and analyse financial data in a consistent
format. Monthly results are measured against both budget and half year
reforecasts which have been approved and reviewed by the Board. All
capital expenditure above predefined amounts must be supported by a
paper prepared by business management.
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. This matter was also
discussed with the external auditor.
Recoverability of trade receivables:
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
All financial data is taken directly from the trial balances of each business
held in their local ERP systems and re-analysed and formatted for Group
reporting purposes. There is no re-keying of financial data and very
limited use is made of spreadsheets by Group businesses to report
monthly financial results. The Group’s internal auditor regularly audits
the base data at each business to ensure it is correctly collected by the
management reporting system.
As part of the year end close process each business is required to complete
a self-assessment which evaluates their financial control environment in
the business designed to identify weaknesses in controls. These
assessments are critically reviewed by the Group’s Internal Audit Manager
and a summary for each business is prepared for the Audit Committee.
The Committee has reviewed the effectiveness of the Group’s risk
management and internal control systems for the period from 1
October 2014 to the date of this Report. Taking into account the
matters set out on pages 34 to 37 relating to principal risks and
uncertainties 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.
Internal audit
The Group’s finance department includes a separate Internal Audit
function. This function is managed by a qualified internal auditor who is
based in one of the Group’s businesses in Minneapolis in the US. The
internal auditor remains a member of the Group management team in
Diploma PLC and reports directly to both the Group Finance Director
and Chair of the Audit Committee. During the year, the previous Internal
Audit Manager transferred to a new finance role in the Group and was
replaced by an experienced qualified internal auditor recruited from
outside the Group.
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50
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
formalising month end close procedures, policies for inventory
provisioning and controls over supplier master file data. As well as
carrying out the normal work on financial contracts, the scope of
internal audit work this year was extended to include controls operating
over ERP systems recently implemented, over foreign currency hedging
policies and procedures being followed to ensure compliance with
international sanctions.
The Internal Audit Manager also continues to assist the Committee in
its oversight of the Group’s controls designed to ensure compliance
with the policy on anti-Bribery and Corruption.
The Internal Audit Manager reported to the Committee that good
progress had been made by the Group’s businesses in implementing
recommendations communicated last year and in particular in
improving procedures operating over the completeness and sufficiency
of cycle counts of inventories and to ensuring that the procedures for
chasing older receivable balances remained robust.
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.
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
Following the acquisition of Kentek in 2014, a specialised distributor of
filters with substantial operations in Russia and the Baltic States, the
Audit Committee worked with senior management of the Company, in
conjunction with local management of Kentek, to determine the scope
and reach of EU and US led sanctions and 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 rolled out an e-learning training programme to
all its businesses. This training has been undertaken by all senior
management and employees in customer or supplier facing roles. It is
intended that these training programmes will be regularly carried out and
that the e-learning training programme will be extended to encompass
other regulatory and compliance based topics, including Code of
Conduct.
During the year, the Committee updated the Group’s Whistleblowing
Policy, which provides the framework to encourage and give employees
confidence to “blow the whistle” and report irregularities. Employees are
encouraged to raise concerns with designated individuals, including the
Executive Directors, the Group Company Secretary or the Chair 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.
In September, the Committee initiated action to introduce a dedicated
telephone hotline service to be provided by an independent service
provided across the Group’s businesses, with the aim of further
encouraging whistleblowing.
Nomination Committee Report
51
Members of Committee
Attendance
Key Duties
(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
ensures 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 2015
• Completed the process for Chairman succession.
• Evaluated the balance of skills, knowledge and experience on the
Board and its diversity, including gender.
• Carried out searches with Norman Broadbent LLP and with JCA
Group for two further non-Executive Directors 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.
John Rennocks (retired on 21 January 2015)
John Nicholas (appointed Chairman on 21 January 2015)
Marie-Louise Clayton
Charles Packshaw
Andy Smith (appointed on 9 February 2015)
Anne Thorburn (appointed on 7 September 2015)
1/1
3/3
3/3
3/3
1/1
–
The Nomination Committee is chaired by John Nicholas, the Chairman
of the Company who succeeded John Rennocks on his retirement on 21
January 2015. 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 Secretary to the Committee.
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. As part of this process the Committee ensures that it
follows the Board’s policy on diversity, described on page 45.
In anticipation of the succession of the Chairman, Norman Broadbent
LLP were appointed to search for a new non-Executive Director with the
remit from the Committee that the candidate should have broad
industrial experience gained in an international environment. Following
the appointment process described above, the Board appointed Andy
Smith as an independent non-Executive Director. Andy’s induction is
substantially complete, having met with each of the main businesses in
Europe and the US and participated in the Board Strategy meeting.
During the year under review Marie-Louise Clayton’s three year term of
office expired. An external search for a new non-Executive Director
commenced with JCA Group, again with a remit from the Committee
that the candidate should have strong Board level finance experience
gained in international industrial businesses. Having followed the
appointment process described above, Anne Thorburn joined the
Board on 7 September 2015 as an independent non-Executive Director
and will become Chairman of the Audit Committee on 17 November
2015 on the retirement of Marie-Louise Clayton. Anne has begun her
induction programme and will complete this with visits to the larger
businesses in 2016.
Norman Broadbent LLP and JCA Group have no other connection with
the Company.
Succession planning
At the strategy meeting held in June 2015, the Board reviewed
succession planning for the Executive Directors and for the senior
management cadre comprising ca.90 senior managers across the
Group’s businesses. At this meeting the Board agreed with the Chief
Executive Officer to establish an Executive Management Group of key
senior managers who will have the potential to provide leadership in the
future. This initiative forms a key part of the Board’s succession planning
and will be pursued further in 2016.
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52
The remuneration environment
has remained relatively stable
and this has allowed me to take
a more gradual and considered
review.”
Andy Smith, Chairman of the Remuneration Committee
Members of Committee:
Attendance
Andy Smith (appointed Chairman on 9 February 2015)
Anne Thorburn (appointed on 7 September 2015)
John Nicholas
Marie-Louise Clayton
Charles Packshaw
John Rennocks (retired on 21 January 2015)
2/2
1/1
3/3
3/3
3/3
1/1
Dear Shareholder
I have been fortunate that in my first year as Chairman of this Committee,
the remuneration environment has remained relatively stable after many
years of constant regulatory change. This has allowed me to take a more
gradual and considered review of the Company’s remuneration policies in
the context of the wider debate on the appropriate structure of Directors’
remuneration.
My initial thoughts are that the current Remuneration Policy (“Policy”),
approved by shareholders in January 2015 is well designed and remains
appropriate to the current strategic challenges facing the Group and I see
no reason to make any substantive further changes until we are required
to review the policy in 2017.
The Committee has this year carried out a careful review of the
additional recommendations introduced this year in the revised 2014
UK Corporate Governance Code. The Committee generally did not feel
that these recommendations should lead to any substantive change
to the Company’s existing Policy. The remuneration paid to the
Executive Directors includes transparent and stretching targets which
will only pay out if the Company continues to be successful over the
longer term. Short term remuneration in terms of salary and bonus
remain competitive and targeted toward the median of comparable
peer companies.
shareholders, however it deduced from these comments and from those
made by various proxy agencies that these objections related to the use
of discretion, as allowed under the rules of the Scheme, to increase the
bonus paid to the Chief Executive Officer by 10% of the amount payable.
Whilst the Committee feels that it is important to retain discretion to
amend on occasion awards to Executive Directors, both downwards and
upwards, it notes shareholders’ concerns and commits to appropriate
consultation before exercising such discretion in future.
The Report on Remuneration this year is set out on pages 58 to 65 and
the salaries and awards paid to the Executive Directors this year remain
within the parameters of the Policy approved by shareholders at the
AGM. After last year’s repositioning of base salaries through a one-off
increase of 8% plus inflation, this year’s increases in base salaries of 3%
for the Executive Directors have been decided with reference to general
levels of pay inflation and the range of remuneration increases applying
across the Group’s cadre of ca.90 senior managers. Annual bonuses of
51% of the maximum for the Chief Executive Officer and 61% of the
maximum for the Group Finance Director and the Chief Operating Officer
reflect the robust performance of the Group this year.
The longer term awards under the LTIP were also substantially below
those earned in previous years and amounted to ca.34% and 17% of the
maximum awards payable for the PSP and the SMP respectively. The
reduced awards reflected the more modest earnings growth reported
this year, as well as the impact of a broadly flat TSR relative to the FTSE
250 index.
The Committee continues to allocate one meeting each year to
review the remuneration and awards paid to the senior management
cadre in the Group and takes time to ensure that the remuneration
structure for this important group of managers remains both appropriate
and competitive.
During the year the Committee did resolve to amend the existing policy
on malus in respect of share awards and bonuses to comply with the
revised 2014 UK Corporate Governance Code and extended the policy to
include clawback, that is the recovery of cash bonuses or share awards
already paid.
I hope shareholders will find this Report helpful and will support the
advisory vote on remuneration at the AGM in January. I would be
delighted to meet shareholders at this year’s AGM and answer any
questions or concerns they have on the Company’s remuneration
policies.
At last year’s AGM in January 2015 a significant number of shareholders
voted against approval of the Company’s Report on Remuneration.
The Committee was able to obtain only limited specific feedback from
Andy Smith
16 November 2015
53
Remuneration Committee
The Remuneration Committee (”the Committee”) is chaired by Andy
Smith and comprises independent non-Executive Directors.
On appointment as Chairman of the Company, John Nicholas
retired as Chairman of the Committee and Andy Smith was
appointed Chairman on joining the Board on 9 February 2015. Anne
Thorburn was appointed to the Committee on joining the Board on
7 September 2015.
Bruce Thompson, Chief Executive Officer, 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 Remuneration Committee Report
The Report has again been presented this year in two sections. The first
section repeats the key elements of the Director’s Remuneration Policy
which was approved by shareholders at the AGM earlier this year on
21 January 2015. This Policy will continue for a period of three years until
21 January 2018, unless replaced or amended by a new policy.
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 2015
The second section of this Report sets out the annual remuneration paid
to the Directors in the year ended 30 September 2015. This section of
the Report will continue to be subject to an advisory vote by
shareholders at the AGM.
• Reviewed Executive Directors’ salaries, pensions and benefits.
• Approved Annual Performance Bonus targets for 2015 and the
subsequent Bonus awards for 2015.
• Approved new PSP awards to Executive Directors under the LTIP
and confirmed the performance conditions for such awards.
• Confirmed the vesting percentages for the PSP and SMP awards
made in 2012 which matured in 2015.
• Approved the exercise of nil cost options.
• Approved the 2015 Remuneration Committee Report.
• Approved clawback arrangements for variable remuneration
plans.
• Reviewed the AGM 2015 votes on the 2014 Remuneration
Committee Report.
• Approved updates to the Committee’s terms of reference.
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;
• provides an appropriate balance between immediate and deferred
remuneration; 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 Policy table set out on the next page summarises the components
of reward for the 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.
There have been no changes made to this Policy since it was approved by
shareholders earlier this year, with the exception that the Committee has
now approved the introduction of clawback provisions to new LTIP
awards and the annual bonus plan granted to Executive Directors after 1
October 2015. This recommendation was included in the revised 2014 UK
Corporate Governance Code.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Remuneration Committee Report continued
Directors’ Remuneration Policy
54
Policy Table
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.
There is no maximum limit set.
Salaries are targeted at a mid-
market range for equivalent roles
in similar companies.
To reflect the individual’s
experience and role within
the Group.
Performance metrics
Salary levels and increases are
determined based on a number
of factors, including individual
and business performance,
level of experience, scope of
responsibility, salary increases
for employees more generally
and the competitiveness of total
remuneration against companies
of a similar size and complexity.
No maximum limit set.
As for Base salary.
Pensions
Benefits
Annual
Performance
Bonus Plan
Designed to be
competitive within
the market to reward
sustained contribution by
Executive Directors.
To provide a competitive
package of benefits.
A cash based scheme
designed to focus
Executive Directors on
achievement of the annual
budget and other business
priorities for the financial
year.
Pension contributions at 20% of base
salary, which are either paid into
personal pension savings schemes or
paid as a separate cash allowance.
Payment in lieu of a company car.
Life assurance, income protection,
annual leave and medical insurance.
Dependent on adjusted EPS of the
Group for the Chief Executive Officer.
For other Executive Directors, 75%
of bonus opportunity is based on
the same financial criteria as the
Chief Executive Officer, with the
remaining 25% of bonus opportunity
subject to achievement of specific
personal objectives.
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.
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.
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.
Opportunity as a percentage
of salary is 175% for each award
made to the Executive Directors
under the 2011 Performance
Share Plan. The Committee
has discretion to increase
awards under the Performance
Share Plan to 250% of salary in
exceptional circumstances.
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.
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).
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.
55
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.
Service contracts
The Executive Directors’ service contracts, including arrangements for
early termination, are carefully considered by the Committee and are
designed to recruit, retain and motivate directors of the calibre required
to manage the Company and successfully deliver its strategic
objectives.
The Committee considers that a rolling contract with a notice period
of one year is appropriate for existing and newly appointed directors.
The Executive Directors’ service contracts, copies of which are held
at the Company’s registered office, have been updated 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 Director’s
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.
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.90 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 (“LTIP”)
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.
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
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Remuneration Committee Report continued
Directors’ Remuneration Policy
56
Details of the service contracts of the Executive Directors who served
during the year are set out below:
Contract date
Unexpired
term
Notice
period
Compensation
payable
upon early
termination
During the year, the Committee considered and approved the
introduction of clawback provisions to new LTIP and Annual Bonus
Performance Plan awards granted to Executive Directors after
1 October 2015. The clawback arrangements will permit the Committee
to recover amounts paid to Executive Directors in specified
circumstances and will further safeguard shareholders’ interests.
Bruce Thompson
Iain Henderson
Nigel Lingwood
24 March
2014
24 March
2014
24 March
2014
Rolling 1 year
1 year
Rolling 1 year
Rolling 1 year
1 year
1 year
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.
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.
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.
Change of control
Change of control provisions provide for compensation equal to
the value of salary and contractual benefits for the notice period.
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 and clawback
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 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.
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.
57
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 the 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 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.
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.90 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.
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 Nicholas was appointed Chairman on 21 January 2015, having
previously been the Senior Independent Director. His appointment is
subject to annual re-election by shareholders at the AGM.
Chairman and non-Executive Directors’ letters of appointment
John Nicholas
Marie-Louise Clayton
Charles Packshaw
Andy Smith
Anne Thorburn
Date of
original
appointment
1 Jun 13
12 Nov 12
1 Jun 13
9 Feb 15
7 Sep 15
Date of
election/
re-election Expiry of term
21 Jan 15
21 Jan 15
21 Jan 15
–
–
1 Jun 16
12 Nov 15
1 Jun 16
9 Feb 18
7 Sep 18
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.
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Annual Report on Remuneration
58
The following section of this Report provides details of the implementation of the Remuneration Policy for all Directors for the year ended
30 September 2015. All of the information set out in this section of the Report has been audited, unless indicated otherwise.
Executive Directors
Total remuneration in 2015 and 2014
Salary
Benefits
Pensions
Annual performance bonus
Short term remuneration (cash)
Long term incentive plan – performance element
Long term incentive plan – share appreciation element
Long term incentive plan – dividend equivalent
Long term share price based remuneration (non-cash)
Bruce Thompson
Iain Henderson
Nigel Lingwood
2015
£000
2014
£000
2015
£000
2014
£000
2015
£000
2014
£000
460
23
92
294
869
204
66
–
270
417
23
83
339
862
474
510
–
984
286
17
57
174
534
127
41
–
168
702
260
17
52
172
501
295
318
–
613
1,114
297
18
59
181
555
132
43
–
175
730
270
18
54
179
521
308
331
–
639
1,160
Total
1,139
1,846
The aggregate short term remuneration paid to the Executive Directors in the year ended 30 September 2015 was £2.0m (2014: £1.9m).
Base salary
The average base salary increase for Executive Directors which applied from 1 October 2014 was 10%, compared with 8% for the Group’s senior
management cadre. On 10 November 2015, the Committee approved an inflation increase of 3% in base salaries for the Executive Directors which
will apply in respect of the year beginning 1 October 2015.
Benefits
Bruce Thompson
Iain Henderson
Nigel Lingwood
2015
2014
Cash
allowance
in lieu of
a car
£000
Life
assurance
and
income
protection
£000
Medical
insurance
£000
Total
benefit
£000
Cash
allowance
in lieu of
a car
£000
Life
assurance
and
income
protection
£000
Medical
insurance
£000
Total
benefit
£000
13
10
11
9
6
6
1
1
1
23
17
18
13
10
11
9
6
6
1
1
1
23
17
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% (2014: 20%) of base salary were applied as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
2015
2014
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
92
57
59
–
–
–
92
57
59
83
52
54
–
–
–
83
52
54
59
Annual performance bonus
The following table summarises the performance assessment by the Committee in respect of 2015 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 2015
Adjusted EPS
The minimum performance target was 0% growth in adjusted EPS, on target
performance was 6.0% growth and the maximum target was at least 18.0% growth.
Adjusted EPS grew by 6% in reported terms. Minimum thresholds were exceeded for
adjusted operating margins, free cash flow and ROATCE.
Overall assessment against targets
51% of maximum
(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:
Performance measure
Performance in 2015
Iain Henderson
Nigel Lingwood
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.
Maintain strong control environment and develop finance capabilities across the
Group.
Maximise value to the Group from management of tax, pensions and property
exposures.
Manage and develop Investor Relations programme.
Overall assessment against targets
90% of maximum
90% of maximum
Based on the performance set out above, the resulting bonus for each Executive Director relating to 2015 is as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
2015 actual bonus – as a % of 2015 base salary
On
target Maximum
63%
50%
50%
125%
100%
100%
Financial
objectives
Individual
performance
objectives
64%
38%
38%
23%
23%
Total
bonus
64%
61%
61%
2015 bonus
delivered
as cash
£000
294
174
181
The annual performance bonus for the financial year beginning 1 October 2015 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 2015 and the outstanding LTIP awards,
including those granted in December 2013 and February 2015.
With effect from 1 October 2014, new LTIP awards were granted under the PSP at 175% of base salary; no further awards have been 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 have been revised from those set out below for existing awards granted in 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 (2012 and 2013)
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
PSP
100
100
30
Nil
SMP
100
50
15
Nil
New awards (from 2014)
Adjusted EPS growth (over 3 years)
14% p.a.
5% p.a.
Below 5% p.a.
% of new
awards
vesting
PSP
100
25
Nil
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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Remuneration Committee Report continued
Annual Report on Remuneration
60
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 (2012 and 2013)
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 (from 2014)
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 2015
The PSP and SMP awards made to the Executive Directors on 19 December 2012 and 20 December 2012 respectively, were subject to operating
performance conditions, independently assessed over a three year period ended 30 September 2015, 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*
32.8p
32.8p
EPS at
30 Sept
2015
38.2p
38.2p
TSR at
30 Sept
2015
75.8%
75.8%
CAGR
in EPS
RPI
+12%/15%
Maximum
award
5.2%
5.2%
14.1%
17.1%
50%
50%
Vested
award
30.8%
15.4%
Median
70.7%
70.7%
Median
+12%/15%
Maximum
award
127.4%
143.3%
50%
50%
Vested
award
36.9%
18.5%
As a result of meeting the above performance conditions, 33.9% and 17.0% respectively of the shares awarded as nil cost options under the 2011
PSP and SMP vested to each Executive Director as follows:
Bruce Thompson
– PSP
– SMP
Share price
at date of
grant
pence
502.0p
502.0p
Share
price at
30 Sep
2015
pence
665.0p
665.0p
Proportion
of award
vesting
33.9%
17.0%
Iain Henderson
– PSP
– SMP
502.0p
502.0p
665.0p
665.0p
33.9%
17.0%
Nigel Lingwood
– PSP
– SMP
502.0p
502.0p
665.0p
665.0p
33.9%
17.0%
Shares
vested
Number
Performance
element1
£000
Share
appreciation
element2
£000
27,039
13,540
40,579
16,858
8,441
25,299
17,532
8,779
26,311
136
68
204
85
42
127
88
44
132
44
22
66
27
14
41
29
14
43
Total
£000
180
90
270
112
56
168
117
58
175
1 The performance element represents the face value of awards granted on 19 and 20 December 2012 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 2015.
Dividend equivalent payments
There were no dividend equivalent payments paid in respect of outstanding nil cost options which were exercised during the year.
61
Long term incentive plan – awards granted in the year
The Executive Directors received grants of PSP awards on 5 February 2015, 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 normal circumstances, the options will not become exercisable until the performance conditions are determined after the end of the
three-year measurement period which begins on the first day of the financial year in which the award is made, and provided the Director remains
in employment. The level of vesting is dependent on the achievement of specified performance criteria at the end of the three-year measurement
period. The performance conditions for these awards are set out on pages 59 and 60.
Outstanding share-based performance awards
Set out below is a summary of the share-based awards outstanding at 30 September 2015, including both share awards which have vested during
the year based on performance and share awards which have been granted during the year. The awards set out below were granted based on a face
value limit of 100% of base salary for December 2012 and December 2013 and 175% of base salary for February 2015. No awards will vest unless the
performance conditions set out on pages 59 and 60 are achieved over a three year measurement period.
Diploma PLC 2011 Performance Share Plan
Market
price
at date
of award
502.0p
700.0p
755.5p
502.0p
700.0p
755.5p
502.0p
700.0p
755.5p
Bruce Thompson
19 December 2012
9 December 2013
5 February 2015
Iain Henderson
19 December 2012
9 December 2013
5 February 2015
Nigel Lingwood
19 December 2012
9 December 2013
5 February 2015
Face
value
of the
award
at date
of grant
£000
End of
performance
period
Maturity date
Shares
over which
awards
held at
1 Oct 2014
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 2015
401
417
460
250
260
286
260
270
297
30 Sep 2015
30 Sep 2016
30 Sep 2017
30 Sep 2015
30 Sep 2016
30 Sep 2017
30 Sep 2015
30 Sep 2016
30 Sep 2017
30 Sep 2015
30 Sep 2016
30 Sep 2017
30 Sep 2015
30 Sep 2016
30 Sep 2017
30 Sep 2015
30 Sep 2016
30 Sep 2017
79,880
59,571
–
49,801
37,143
–
51,793
38,571
–
–
–
106,552
(27,039)
–
–
(52,841)
–
–
–
59,571
106,552
–
–
66,248
(16,858)
–
–
(32,943)
–
–
–
–
68,795
(17,532)
–
–
(34,261)
–
–
Diploma PLC 2011 Share Matching Plan
Face
value
of the
award at
date of
grant
£000
Market
price
at date
of award
502.0p
700.0p
502.0p
700.0p
502.0p
700.0p
401
417
250
260
260
270
Bruce Thompson
20 December 2012
9 December 2013
Iain Henderson
20 December 2012
9 December 2013
Nigel Lingwood
20 December 2012
9 December 2013
Pledged
investment
shares
End of
performance
period
Maturity date
Shares
over
which
awards
held at
1 Oct 2014
Shares
over
which
awards
granted
during
the year
Vested
during
the period
Lapsed
during
the period
19,171
30 Sep 2015
15,786 30 Sep 2016
30 Sep 2015
30 Sep 2016
79,880
59,571
11,952
9,843
30 Sep 2015
30 Sep 2016
30 Sep 2015
30 Sep 2016
49,801
37,143
12,430 30 Sep 2015
30 Sep 2016
10,221
30 Sep 2015
30 Sep 2016
51,793
38,571
–
–
–
–
–
–
(13,540)
–
(66,340)
–
–
59,571
(8,441)
–
(41,360)
–
–
37,143
(8,779)
–
(43,014)
–
–
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 2015 are set out on page 64.
–
37,143
66,248
–
38,571
68,795
Shares
over
which
awards
held as at
30 Sep
2015
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Remuneration Committee Report continued
Annual Report on Remuneration
62
Services from external advisors
Stephenson Harwood LLP provide legal advice to the Remuneration Committee on remuneration matters and Ashurst LLP provide advice on
employment matters. During the year Stephenson Harwood LLP provided advice to the Remuneration Committee on matters relating to the LTIP and
to clawback.
The Committee also received general advice from New Bridge Street on remuneration matters during the year. 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
Appointed by
Services provided to the Committee
Stephenson Harwood LLP
Committee
Legal advice
New Bridge Street
Committee
General advice on Remuneration Policy
MEIS
Committee
Data analysis
Other services provided
to the Company
None
None
None
Fees
£3,750
£9,413
£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 2014 were approved by shareholders at the AGM held on 21 January 2015, with the following votes being cast:
Votes for
Votes against
Withheld
Policy
88,893,601
5,050,268
21,500
94.6%
5.4%
Report
46,632,263
35,126,131
12,206,975
57.0%
43.0%
At last year’s AGM in January 2015 a significant number of shareholders voted against approval of the Company’s Report on Remuneration. The
Committee was able to obtain only limited specific feedback from shareholders, however it deduced from these comments and from those made
by various proxy agencies that these objections related to the use of discretion, as allowed under the rules of the Scheme, to increase the bonus
paid to the Chief Executive Officer by 10% of the amount payable. Whilst the Committee feels that it is important to retain discretion to amend on
occasion awards to Executive Directors, both downwards and upwards, it notes shareholders’ concerns and commits to appropriate consultation
before exercising such discretion in future.
Aligning pay with performance (unaudited)
The graph below shows the Total Shareholder Return (“TSR”) performance of Diploma PLC for the seven year period ended 30 September 2015
against the FTSE 250 Index.
Growth in the value of a hypothetical £100 holding over seven years
700
600
500
400
300
200
100
+560%
+560%
560.34 274.03
+174%
+174%
0
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
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.
63
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)
2015
–1%
£000
575
294
869
270
2014
+8%
£000
523
339
862
984
CEO total remuneration
Actual bonus as a percentage of the maximum
Actual share award vesting as a percentage of the
1,139
51%
1,846
65%
2013
2012
+42%
+54%
2011
+16%
2010
+71%
£000
504
164
668
1,733
2,401
33%
£000
484
367
851
979
£000
454
360
814
887
£000
435
345
780
507
1,830
95%
1,701
100%
1,287
100%
2009
+21%
£000
429
102
531
303
834
30%
maximum
25%
61%
100%
100%
100%
100%
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
%
10%
8%
10%
6%
0%
0%
–13%
–7%
+1%
+5%
The Committee chose the senior management cadre for pay comparisons with the Chief Executive Officer as it provided the most closely aligned
comparator group whereas comparisons with employees drawn from across the globe and by differing roles, skills, experience and qualifications
would reduce the scope for meaningful comparisons.
Relative importance of Executive Director remuneration (unaudited)
Total employee remuneration
Total dividends paid
2015
£m
63.8
19.7
2014
£m
57.1
18.2
Change
£m
+6.7
+1.5
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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Remuneration Committee Report continued
Annual Report on Remuneration
64
The nil cost options outstanding at 30 September 2015 and the movements during the year are as follows:
Bruce Thompson
Iain Henderson
Nigel Lingwood
Year of
vesting
Options
as at 1 Oct
2014
Exercised
in year
Vested
during
the year
Options
unexercised
as at 30 Sep
20155
Exercise
price
Earliest
normal
exercise date
2014
2015
2014
2015
2014
2015
142,717
–
142,717
–
88,967
–
92,675
–
88,967
–
92,675
–
–
40,579
–
25,299
–
26,311
–
40,579
–
25,299
–
26,311
£1
£1
£1
£1
£1
£1
Nov 2014
Nov 2015
Nov 2014
Nov 2015
Nov 2014
Nov 2015
Expiry date
Dec 2021
Dec 2022
Dec 2021
Dec 2022
Dec 2021
Dec 2022
1 Bruce Thompson exercised 142,717 options on 25 November 2014, at a market price of 685.0p per share and the total proceeds before tax were £977,611.
2
Iain Henderson exercised 88,967 options on 25 November 2014, at a market price of 685.0p per share and the total proceeds before tax were £609,424.
3 Nigel Lingwood exercised 92,675 options on 25 November 2014, at a market price of 685.0p per share and the total proceeds before tax were £634,824.
4 On 25 November 2014, the aggregate number of shares received by the participants was reduced by 152,449 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. The market price at that time was 685.0p.
5 The closing price of an ordinary share on 30 September 2015 was 665.0p (2014: 689.5p).
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 2015
As at 30 Sep 2014
Ordinary
shares
993,385
517,912
275,000
Options
vested but
unexercised
Interest in shares with
performance measures
PSP
SMP
40,579
25,299
26,311
166,123
103,391
107,366
59,571
37,143
38,571
Ordinary
shares
1,060,462
559,727
275,000
Options
vested but
unexercised
Interest in shares with
performance measures
PSP
SMP
142,717
88,967
92,675
139,451
86,944
90,364
139,451
86,944
90,364
Interests in ordinary shares include investment shares pledged under the Company’s 2011 SMP and shares held through personal saving vehicles. As of
13 November 2015 there have been no changes to these interests in ordinary shares of the Company.
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
16 November 2015, all Executive Directors exceeded the applicable shareholding guidelines.
Shareholdings at 30 September 2015 against guidelines
%
1600
1200
800
400
0
1,436%
1,204%
200%
100%
100%
Bruce Thompson
Iain Henderson
Nigel Lingwood
Directors’ shareholding
Committee guideline
616%
Nigel Lingwood was appointed a non-Executive Director on 5 June 2014 and subsequently appointed as Senior Independent Director and Chairman
of the Audit Committee at Creston plc and received £9,000 as fees during the period ended 30 September 2015.
Chairman and non-Executive Directors’ remuneration
Individual remuneration for the year ended 30 September was as follows:
John Nicholas
John Rennocks
Marie-Louise Clayton
Charles Packshaw
Andy Smith
Anne Thorburn
65
Total fees
2015
£000
2014
£000
106
41
46
46
29
4
45
130
45
45
–
–
The non-Executive Directors received a basic annual fee during the year and there were no additional fees paid in 2015 and 2014 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 2015, the Board approved an
increase of 3% in the Chairman’s fees to £137,000 per annum and in the annual fees paid to non-Executive Directors to £47,400, both to take effect
from 1 October 2015. In addition the Board approved a supplement of £5,000 payable from 1 October 2015 to the Senior Independent Director and
the Chair of Committees.
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 Nicholas
John Rennocks
Marie-Louise Clayton
Charles Packshaw
Andy Smith
Anne Thorburn
Interest in ordinary
shares
As at
30 Sep
2015
5,000
–
1,500
5,500
3,000
As at
30 Sep
2014
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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 Directors’ Report
This section contains information which the Directors are required by law and regulation to include within the Annual Report & Accounts.
66
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, 20 January 2016 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 13 November 2015 the Company had been notified of the following
interests amounting to 3% or more of the voting rights in its ordinary
share capital:
Fidelity Management & Research Co.
Mondrian Investment Partners Ltd.
Brown Brothers Harriman & Co.
Royal London Asset Management Ltd.
BlackRock, Inc.
Standard Life Investments Ltd.
Mawer Investment Management Ltd.
Percentage
of ordinary
share
capital
8.41%
8.19%
5.20%
4.95%
4.54%
4.47%
4.15%
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 21 January 2015. In the year ended
30 September 2015, the Company has not allotted any shares. These
powers will expire at the conclusion of the 2016 AGM and resolutions to
renew the Directors’ powers are therefore included within the Notice of
the AGM in 2016.
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
21 January 2015. In the year to 30 September 2015 the Company has
not acquired any of its own shares. This authority will expire at the
conclusion of the 2016 AGM and a resolution to renew the authority is
therefore included within the Notice of the AGM in 2016.
Financial
Results and dividends
The profit for the financial year attributable to shareholders was £36.7m
(2014: £35.5m). The Directors recommend a final dividend of 12.4p per
ordinary share (2014: 11.6p), to be paid, if approved, on 27 January 2016.
This, together with the interim dividend of 5.8p (2014: 5.4p) per ordinary
share paid on 17 June 2015 amounts to 18.2p for the year (2014: 17.0p).
The results are shown more fully in the consolidated financial
statements on pages 68 to 95 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.
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
Governance
Financial Statements
67
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 Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation in
other jurisdictions.
Directors’ Responsibility Statement
The Directors confirm that to the best of their knowledge:
•
•
•
the Group’s consolidated financial statements, prepared in
accordance with IFRSs as adopted by the EU, and the Parent
Company financial statements, prepared in accordance with UK
Accounting Standards, give a true and fair view of the assets,
liabilities, financial position and profit of the Group and Parent
Company and the undertakings included in the consolidation taken
as a whole;
the Annual Report & Accounts includes a fair review of the
development and performance of the business and the position
of the Group and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks
and uncertainties faced by the Group; and
the Annual Report & Accounts, taken as a whole, is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the Company’s performance, business
model and strategy.
This responsibility statement was approved by the Board of Directors
on 16 November 2015 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
the Finance Review on pages 18 to 20. In addition, pages 81 to 83 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 as described further on pages 34 to 37.
The Group also has a committed multi-currency revolving bank facility
of £40m and an accordion option for a further £10m, both of which
expire on 23 June 2017. At 30 September 2015, the Group had cash
funds of £23.0m and had borrowings of £20.0m.
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.
• 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.
Strategic ReportDiploma PLC Annual Report & Accounts 2015 68
Consolidated Income Statement
For the year ended 30 September 2015
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
2015
£m
2014
£m
333.8
(212.8)
305.8
(194.2)
121.0
(6.8)
(61.3)
52.9
(1.1)
51.8
(14.4)
37.4
36.7
0.7
37.4
111.6
(6.4)
(54.9)
50.3
(0.5)
49.8
(13.7)
36.1
35.5
0.6
36.1
3
6
7
21
9
32.5p
31.4p
Note
11
3,4
6
2015
£m
52.9
7.4
60.3
(0.7)
59.6
2014
£m
50.3
6.4
56.7
(0.5)
56.2
9
38.2p
36.1p
The notes on pages 72 to 95 form part of these consolidated financial statements.
Consolidated Statement of Income and Other Comprehensive Income
For the year ended 30 September 2015
69
Profit for the year
Items that will not be reclassified to the Consolidated Income Statement
Actuarial gains in the 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
2015
£m
37.4
(1.9)
0.4
(1.5)
(8.2)
1.5
(0.3)
(0.3)
(7.3)
28.6
28.1
0.5
28.6
Consolidated Statement of Changes in Equity
For the year ended 30 September 2015
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
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 2015
Note
5
20
21
7
8,21
5
21
20
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
16.2
(8.7)
–
–
–
–
–
–
–
7.5
(8.0)
–
–
–
–
–
–
–
(0.5)
–
0.3
–
–
–
–
–
–
–
0.3
0.9
–
–
–
–
–
–
–
1.2
155.0
36.1
0.7
–
(2.3)
0.9
0.5
(1.8)
(18.2)
170.9
35.2
0.5
–
(3.2)
1.2
–
(1.7)
(19.7)
183.2
176.9
27.7
0.7
–
(2.3)
0.9
0.5
(1.8)
(18.2)
184.4
28.1
0.5
–
(3.2)
1.2
–
(1.7)
(19.7)
189.6
1.4
0.3
–
2.3
–
(0.9)
–
–
(0.2)
2.9
0.5
–
3.2
–
(1.2)
–
–
(0.2)
5.2
2014
£m
36.1
0.3
–
0.3
(8.7)
0.4
–
(0.1)
(8.4)
28.0
27.7
0.3
28.0
Total
equity
£m
178.3
28.0
0.7
2.3
(2.3)
–
0.5
(1.8)
(18.4)
187.3
28.6
0.5
3.2
(3.2)
–
–
(1.7)
(19.9)
194.8
The notes on pages 72 to 95 form part of these consolidated financial statements.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 70
Consolidated Statement of Financial Position
As at 30 September 2015
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
Borrowings
Retirement benefit obligations
Other liabilities
Deferred tax liabilities
Net assets
Equity
Share capital
Translation reserve
Hedging reserve
Retained earnings
Total shareholders’ equity
Minority interests
Total equity
Note
10
11
11
12
13
14
15
16
18
17
20
24
25
20
14
21
2015
£m
89.3
40.2
1.2
0.7
22.8
0.4
2014
£m
80.2
28.6
0.8
0.7
13.1
0.9
154.6
124.3
56.6
51.3
23.0
130.9
(45.1)
(2.9)
(2.5)
(50.5)
80.4
235.0
(20.0)
(9.8)
(4.1)
(6.3)
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)
194.8
187.3
5.7
(0.5)
1.2
183.2
189.6
5.2
194.8
5.7
7.5
0.3
170.9
184.4
2.9
187.3
The consolidated financial statements were approved by the Board of Directors on 16 November 2015 and signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
The notes on pages 72 to 95 form part of these consolidated financial statements.
Consolidated Cash Flow Statement
For the year ended 30 September 2015
71
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 by Employee Benefit Trust
Notional purchase of own shares on exercise of share options
Proceeds of borrowings, net
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
Acquisition of minority interests
Deferred consideration paid
Proceeds of borrowings, net
Free cash flow
Cash and cash equivalents
Borrowings
Net cash
The notes on pages 72 to 95 form part of these consolidated financial statements.
Note
11
23
23
23
22
20
13
11
20
8
21
24
18
Note
8
21
22
20
20
24
18
24
24
2015
£m
52.9
7.4
3.7
(1.9)
62.1
(0.5)
(15.4)
46.2
(36.6)
(0.6)
(4.0)
(0.3)
0.1
(41.4)
(0.6)
(19.7)
(0.2)
(0.7)
(1.0)
20.0
(2.2)
2.6
21.3
(0.9)
23.0
2015
£m
2.6
19.7
0.2
36.6
0.6
0.6
(20.0)
40.3
23.0
(20.0)
3.0
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
14.9
1.5
0.1
–
37.8
21.3
–
21.3
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 72
Notes to the Consolidated Financial Statements
For the year ended 30 September 2015
1. General information
Diploma PLC is a public limited company registered and domiciled in England and Wales and listed on the London Stock Exchange. The address
of the registered office is 12 Charterhouse Square, London EC1M 6AX. The consolidated financial statements comprise the Company and its
subsidiaries (together referred to as “the Group”) and were authorised by the Directors for publication on 16 November 2015. 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 Generally Accepted Accounting Practice (“UK GAAP”),
and are set out in a separate section of the Annual Report & Accounts on pages 96 and 97.
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 a
material 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 (but 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 or distribution to shareholders.
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.
3. Business sector analysis continued
Revenue – existing businesses
– acquisitions
Revenue
Adjusted operating profit – existing businesses
– acquisitions
Adjusted operating profit
Acquisition related charges (note 11)
Operating profit
Life Sciences
Seals
Controls
Group
2015
£m
90.2
12.9
103.1
19.2
1.8
21.0
(3.1)
17.9
2014
£m
91.4
–
91.4
19.7
–
19.7
(2.3)
17.4
2015
£m
128.3
11.3
139.6
23.5
1.3
24.8
(3.6)
21.2
2014
£m
119.8
–
119.8
21.7
–
21.7
(3.2)
18.5
2015
£m
91.1
–
91.1
14.5
–
14.5
(0.7)
13.8
2014
£m
94.6
–
94.6
15.3
–
15.3
(0.9)
14.4
2015
£m
309.6
24.2
333.8
57.2
3.1
60.3
(7.4)
52.9
Life Sciences
Seals
Controls
Group
Operating assets
Investment
Goodwill
Acquisition intangible assets (note 11)
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 (note 20)
– Corporate liabilities
– Borrowings
Total liabilities
Net assets
Other Sector information
Capital expenditure
Depreciation and amortisation
2015
£m
31.4
–
44.9
13.0
89.3
2014
£m
29.3
–
44.2
10.1
83.6
2015
£m
60.0
0.7
29.6
25.4
115.7
2014
£m
45.0
0.7
21.0
15.8
82.5
2015
£m
36.0
–
14.8
1.8
52.6
2014
£m
37.2
–
15.0
2.7
54.9
2015
£m
127.4
0.7
89.3
40.2
257.6
0.4
23.0
4.5
89.3
(14.7)
83.6
(14.7)
115.7
(16.2)
82.5
(14.6)
52.6
(13.5)
54.9
285.5
246.0
(14.9)
(44.4)
(44.2)
(14.7)
74.6
(14.7)
68.9
(16.2)
(14.6)
(13.5)
99.5
67.9
39.1
2.5
1.7
1.2
1.3
1.5
1.3
0.5
0.7
0.3
0.5
(6.3)
(9.8)
(6.6)
(3.6)
(20.0)
(90.7)
194.8
4.3
3.5
(14.9)
40.0
0.5
0.5
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
– Net cash funds
Reported trading capital employed
– Historic goodwill and acquisition related
charges, net of deferred tax
Adjusted trading capital employed
2015
£m
74.6
2014
£m
68.9
2015
£m
99.5
2014
£m
67.9
2015
£m
39.1
2014
£m
40.0
25.0
99.6
22.3
91.2
20.2
119.7
19.6
87.5
8.4
47.5
7.7
47.7
2015
£m
194.8
5.9
9.8
6.6
(3.0)
214.1
53.6
267.7
ROATCE1
21.1%
21.9%
23.7%
26.0%
30.5%
33.2%
23.9%
25.8%
1 ROATCE is calculated after adjusting for the timing of acquisitions completed during the year.
73
2014
£m
305.8
–
305.8
56.7
–
56.7
(6.4)
50.3
2014
£m
111.5
0.7
80.2
28.6
221.0
0.9
21.3
2.8
(4.2)
(4.3)
(4.0)
(2.0)
–
(58.7)
187.3
2.2
2.5
2014
£m
187.3
3.3
4.3
4.0
(21.3)
177.6
49.6
227.2
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
74
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2015
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
2015
£m
87.7
77.1
169.0
333.8
2014
£m
85.7
53.2
166.9
305.8
2015
£m
14.5
11.7
34.1
60.3
2014
£m
13.8
7.9
35.0
56.7
2015
£m
25.2
57.1
71.2
2014
£m
23.8
22.0
76.9
2015
£m
42.7
71.6
99.8
153.5
122.7
214.1
2014
£m
39.7
32.2
105.7
177.6
2015
£m
0.4
0.5
3.4
4.3
2014
£m
0.5
0.1
1.6
2.2
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’ remuneration and their interests in shares of the Company are given in the Remuneration
Committee Report on pages 52 to 65. The amount charged against operating profit in the year in respect of Director short term remuneration was
in aggregate £2.3m (2014: £2.2m). The charge for share-based payments of £0.5m (2014: £0.7m) 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 £Nil (2014: £0.2m).
Group staff costs, including Directors’ remuneration, were as follows:
Wages and salaries
Social security costs
Pension costs – defined contribution
Pension costs – defined benefit (note 25ii)
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 expense and similar charges
– bank facility and commitment fees
– interest payable on bank and other borrowings
– notional interest expense on the defined benefit pension schemes (note 25b)
Net interest expense
– fair value remeasurement of put options (note 20)
Financial expense, net
2015
£m
55.9
5.1
2.1
0.2
0.5
63.8
2014
£m
49.5
5.2
1.7
–
0.7
57.1
2015
Number
2014
Number
379
722
335
13
1,449
1,505
334
604
312
14
1,264
1,324
2015
£m
2014
£m
–
0.1
(0.2)
(0.3)
(0.2)
(0.7)
(0.7)
(0.4)
(1.1)
(0.4)
–
(0.2)
(0.6)
(0.5)
–
(0.5)
The fair value remeasurement of £0.4m (2014: £Nil) comprises £0.5m (2014: £0.1m) which relates to an unwinding of the discount on the liability for
future purchases of minority interests, net of a movement in fair value of the put options of £0.1m credit (2014: £0.1m credit).
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
75
2015
£m
2014
£m
2.6
12.5
15.1
(0.1)
0.4
15.4
(1.0)
–
(1.0)
14.4
2.6
12.1
14.7
(0.1)
(0.4)
14.2
–
(0.5)
(0.5)
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 credited (2014: £0.1m charge) directly to the Consolidated Statement of Income and Other
Comprehensive Income. A further £Nil (2014: £0.5m) 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 £Nil (2014: £1.0m credit) less a deferred tax charge of £Nil (2014: £0.5m 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 20.5% to the profit before tax of
£51.8m and the amounts set out above is as follows:
2015
£m
Profit before tax
Tax on profit at UK effective corporation tax rate of 20.5% (2014: 22.0%)
Effects of:
– 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
51.8
10.6
3.7
0.3
(0.2)
14.4
2014
£m
49.8
11.0
3.2
(0.5)
–
13.7
The Group earns its profits in the UK and overseas. The UK corporation tax rate was reduced from 21.0% to 20.0% on 1 April 2015; 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 2015 was 20.5% (2014: 22.0%) 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%.
The UK deferred tax assets and liabilities at 30 September 2015 have been calculated based on the rate of 20.0% substantively enacted at
30 September 2015. On 8 July 2015, HM Government announced a reduction in the rate of corporation tax to 19% with effect from 1 April 2017 and
to 18% with effect from 1 April 2020. The impact of remeasuring the Group’s UK deferred tax assets and liabilities at these new rates has not been
recognised in these consolidated financial statements as the Finance Bill had not been substantively enacted at 30 September 2015.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 76
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2015
8. Dividends
Interim dividend, paid in June
Final dividend of the prior year, paid in January
2015
pence
per share
2014
pence
per share
5.8
11.6
17.4
5.4
10.7
16.1
2015
£m
6.6
13.1
19.7
2014
£m
6.1
12.1
18.2
The Directors have proposed a final dividend in respect of the current year of 12.4p per share (2014: 11.6p) which will be paid on 27 January 2016,
subject to approval of shareholders at the Annual General Meeting (“AGM”) on 20 January 2016. The total dividend for the current year, subject to
approval of the final dividend, will be 18.2p per share (2014: 17.0p).
The Diploma Employee Benefit Trust holds 221,438 (2014: 293,348) shares, which are not eligible for dividends.
9. Earnings per share
Basic and diluted earnings per share
Basic and diluted earnings per ordinary 5p share are calculated on the basis of the weighted average number of ordinary shares in issue during the
year of 113,007,084 (2014: 112,893,129) and the profit for the year attributable to shareholders of £36.7m (2014: £35.5m). 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 30 September 2013
Acquisitions
Exchange adjustments
At 30 September 2014
Acquisitions (note 22)
Adjustment to acquisitions in prior year
Exchange adjustments
At 30 September 2015
2015
pence
per share
2014
pence
per share
32.5
6.5
0.4
(1.2)
38.2
Life
Sciences
£m
47.3
0.3
(3.4)
44.2
5.6
–
(4.9)
44.9
31.4
5.7
–
(1.0)
36.1
Seals
£m
16.6
5.0
(0.6)
21.0
8.1
0.1
0.4
29.6
2015
£m
51.8
(14.4)
(0.7)
36.7
7.4
0.4
(1.3)
43.2
Controls
£m
14.6
0.7
(0.3)
15.0
–
–
(0.2)
14.8
2014
£m
49.8
(13.7)
(0.6)
35.5
6.4
–
(1.1)
40.8
Total
£m
78.5
6.0
(4.3)
80.2
13.7
0.1
(4.7)
89.3
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 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 within 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 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, revenue growth rates and the discount rate. The gross
margins are assumed to remain sustainable, which is supported by historical experience; revenue 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 rates for 2016 and thereafter, average growth
rates for each Sector; these annual growth rates then reduce to 2% over the longer term.
77
10. Goodwill continued
The cash flow forecasts are discounted to determine a current valuation using a single market derived pre-tax discount rate of ca.12% (2014: 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 adverse
change” in any of these assumptions would result in an impairment of goodwill. The analysis indicates that a “reasonably possible adverse change”
would not give rise to an impairment charge to goodwill in any of the three Sectors.
11. Acquisition and other intangible assets
Cost
At 1 October 2013
Additions
Acquisitions
Disposals
Exchange adjustments
At 30 September 2014
Additions
Acquisitions (note 22)
Adjustment to acquisitions in prior year
Exchange adjustments
At 30 September 2015
Amortisation
At 1 October 2014
Charge for the year
Disposals
Exchange adjustments
At 30 September 2014
Charge for the year
Exchange adjustments
At 30 September 2015
Net book value
At 30 September 2015
At 30 September 2014
Customer
relationships
£m
Supplier
relationships
£m
Trade
names and
databases
£m
Total
acquisition
intangible
assets
£m
Other
intangible
assets
£m
33.8
–
9.0
–
(1.5)
41.3
–
11.5
0.2
(0.7)
52.3
15.2
3.9
–
(0.6)
18.5
4.8
(0.2)
23.1
29.2
22.8
16.7
–
–
–
(1.1)
15.6
–
8.3
–
(1.8)
22.1
9.4
1.6
–
(0.5)
10.5
2.0
(0.9)
11.6
10.5
5.1
2.5
–
–
–
–
2.5
–
–
–
0.1
2.6
1.7
0.1
–
–
1.8
0.1
0.2
2.1
0.5
0.7
53.0
–
9.0
–
(2.6)
59.4
–
19.8
0.2
(2.4)
77.0
26.3
5.6
–
(1.1)
30.8
6.9
(0.9)
36.8
40.2
28.6
2.9
0.3
–
(0.2)
(0.1)
2.9
0.3
0.6
–
–
3.8
2.1
0.3
(0.2)
(0.1)
2.1
0.4
0.1
2.6
1.2
0.8
Acquisition related charges are £7.4m (2014: £6.4m) and comprise £6.9m (2014: £5.6m) of amortisation of acquisition intangible assets and £0.5m of
acquisition expenses (2014: £0.8m).
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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 78
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2015
12. Investment
Investment
2015
£m
0.7
2014
£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 2015, there was no material difference between the book value
of this investment and its fair value.
13. Property, plant and equipment
Cost
At 1 October 2013
Additions
Acquisitions
Disposals
Exchange adjustments
At 30 September 2014
Additions1
Acquisitions
Disposals
Transfers2
Exchange adjustments
At 30 September 2015
Depreciation
At 1 October 2013
Charge for the year
Disposals
Exchange adjustments
At 30 September 2014
Charge for the year
Disposals
Exchange adjustments
At 30 September 2015
Net book value
At 30 September 2015
At 30 September 2014
Freehold
properties
£m
Leasehold
properties
£m
Plant and
equipment
£m
Hospital
field
equipment
£m
8.8
–
–
–
(0.2)
8.6
–
7.3
–
–
(0.1)
15.8
2.4
0.1
–
0.1
2.6
0.3
–
(0.1)
2.8
13.0
6.0
2.9
0.2
–
(0.1)
(0.2)
2.8
0.3
0.2
(0.4)
–
(0.1)
2.8
1.0
0.2
(0.1)
–
1.1
0.3
(0.2)
–
1.2
1.6
1.7
12.1
1.0
0.3
(2.5)
(0.4)
10.5
1.8
0.8
(0.9)
–
0.6
12.8
9.2
1.1
(2.6)
(0.4)
7.3
1.4
(0.9)
0.5
8.3
4.5
2.8
6.1
0.7
–
(0.8)
(0.5)
5.5
1.9
–
(0.4)
1.2
(0.8)
7.4
3.4
0.8
(0.6)
(0.3)
3.3
1.1
(0.3)
(0.4)
3.7
3.7
2.6
Total
£m
29.9
1.9
0.3
(3.4)
(1.3)
27.4
4.0
8.3
(1.7)
1.2
(0.4)
38.8
16.0
2.2
(3.3)
(0.6)
14.3
3.1
(1.4)
–
16.0
22.8
13.1
1 During the year, the Group spent £2.9m on constructing and fitting out a new facility in Darlington, UK for FPE Seals Limited. On completion on 23 September 2015, the facility
was sold to a third party and leased back on a 15 year full repairing lease. No profit or loss was recorded on the sale of the facility. This expenditure has not been included as an
addition and disposal in the above analysis.
2 During the year, £1.2m of inventory relating to hospital field equipment held in DHG in support of customer contracts was transferred from inventory to hospital field
equipment.
Land included within freehold properties above, but which is not depreciated, is £4.2m (2014: £2.0m). Capital commitments contracted, but not
provided, were £0.1m (2014: £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 2015 is £1.0m (2014: £1.0m), 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
79
2015
£m
(3.3)
1.0
(4.0)
–
0.1
0.3
(5.9)
2014
£m
(1.7)
0.5
(1.7)
(0.5)
(0.1)
0.2
(3.3)
Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances 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
2015
£m
0.3
–
2.0
1.1
0.2
0.3
0.6
4.5
(4.1)
0.4
2014
£m
0.3
–
0.9
1.0
0.2
0.3
0.6
3.3
(2.4)
0.9
2015
£m
(1.8)
(8.0)
–
–
–
–
(0.6)
(10.4)
4.1
(6.3)
2014
£m
(0.8)
(5.7)
–
–
–
–
(0.1)
(6.6)
2.4
(4.2)
2015
£m
(1.5)
(8.0)
2.0
1.1
0.2
0.3
–
(5.9)
–
(5.9)
2014
£m
(0.5)
(5.7)
0.9
1.0
0.2
0.3
0.5
(3.3)
–
(3.3)
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 £3.2m
(2014: £3.0m).
15. Inventories
Finished goods
2015
£m
56.6
2014
£m
54.1
Inventories are stated net of impairment provisions of £5.9m (2014: £5.3m). During the year £1.5m (2014: £1.3m) 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
2015
£m
45.4
(0.6)
44.8
4.0
2.5
51.3
2015
£m
14.5
9.9
8.2
8.1
4.7
45.4
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
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
80
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2015
16. Trade and other receivables continued
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
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
4.5
6.0
10.5
US$
£m
4.7
–
4.7
C$
£m
1.5
0.2
1.7
Euro
£m
Other
£m
3.2
–
3.2
2.6
0.3
2.9
2015
Total
£m
16.5
6.5
23.0
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
The short term deposits and cash at bank are both interest bearing at rates linked to the UK base rate, or equivalent rate.
2015
£m
36.9
8.4
0.1
45.4
2015
£m
6.2
1.4
0.5
0.3
8.4
2015
£m
0.5
0.3
0.1
(0.3)
0.6
2015
£m
25.8
2.0
3.1
14.2
45.1
2015
£m
6.8
10.5
0.5
6.8
1.2
25.8
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
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
2014
Total
£m
14.0
7.3
21.3
81
19. Financial instruments
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. 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 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 34 within Internal
Control and Risk Management, 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. During the year, the Group had an unrecoverable receivable of £0.2m; there have been no other significant trade receivables
written off 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
2015
£m
44.8
4.0
23.0
71.8
2014
£m
41.8
2.6
21.3
65.7
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.
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 2015 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
£40m revolving bank facility (with an option to increase its facility to £50m, subject to market pricing) which expires on 23 June 2017. During the year
the Group exercised the accordion option in respect of £15m and increased the committed bank facility to £40m in order to provide cash resources
to complete an acquisition during the year. At 30 September 2015, the remaining accordion option available is £10m. 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 2015, £20m of the facility had
been drawn down (2014: £Nil).
The undrawn committed facilities available at 30 September are as follows:
Expiring within one year
Expiring within two years
Expiring after two years
2015
£m
–
20.0
–
2014
£m
–
–
25.0
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
82
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2015
19. Financial instruments continued
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
Carrying amount
2015
£m
25.8
2.0
6.6
34.4
30.5
0.6
4.7
35.8
(1.4)
34.4
2014
£m
26.1
1.2
4.0
31.3
28.9
–
3.3
32.2
(0.9)
31.3
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 principal 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 £0.2m (2014: £0.1m) 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, 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 2015 was £25.2m (2014: £31.0m). The net fair value of forward foreign exchange
contracts used as hedges at 30 September 2015 was £1.2m (2014: £0.3m). The amount removed from Other Comprehensive Income and taken to
the Consolidated Income Statement in cost of sales during the year was a £0.3m credit (2014: negligible). The change in the fair value of cash flow
hedges taken to Other Comprehensive Income during the year was £1.5m (2014: £0.4m).
The currency risk arising from both translational and transactional risks are described further on page 37 within Internal Control and Risk Management.
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 and 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.
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 forward rates, adjusted for the forward points to the contract’s value date with 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.
83
19. Financial instruments continued
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 good returns to
shareholders which will support the future development of the business. The capital structure of the Group comprises cash and cash equivalents,
longer 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 on exercise of option
Put options entered into during the year
Unwinding of discount
Fair value remeasurements
At 30 September
2015
£m
5.7
0.9
6.6
2.5
4.1
2015
£m
3.5
(1.4)
3.2
0.5
(0.1)
5.7
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
At 30 September 2015, the Group retained put options to acquire minority interests in TPD, Kentek and M Seals. As described in note 22, a put/call
option was recognised during the period at a value of £3.2m (€4.1m) in respect of the 20% minority interest in TPD, acquired on 6 October 2014. On
19 December 2014 and following the exercise of a put option, the Group acquired 10% of the minority interest outstanding in Kentek for an initial
consideration of £0.6m (€0.8m) with a further amount payable of £0.8m (€1.0m), which is based on the performance of the business in the year
ended 30 September 2015.
At 30 September 2015, 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 2015.
This led to a remeasurement of the fair value of these put options and the liability was reduced by £0.1m (2014: reduced by £0.1m). This reduction
was offset by the charge from unwinding the discount on the liability and in aggregate £0.4m (2014: £Nil) has been charged to the Consolidated
Income Statement.
The put options to acquire the minority interest of 20% held in TPD are exercisable in tranches between 2016 and 2019; the put option to acquire the
minority interest of 10% held in M Seals is exercisable in October 2018 and the put option relating to the remaining Kentek 10% minority interest is
exercisable in two tranches in 2016 and 2018.
At 30 September 2015, deferred consideration of £0.9m included £0.8m (€1.0m) payable to the vendor of Kentek in respect of the outstanding
amount relating to the purchase of his minority interest. In addition, £0.1m (US$0.2m) is payable to the vendor of HPS in respect of the performance
of the business in the year ended 30 September 2015. Both these amounts are expected to be paid within the next twelve months. During the year,
aggregate deferred consideration of £0.6m was paid which comprised £0.3m (€0.5m) to the vendor of Kentek relating to final consideration payable
based on the performance of the business in the year ended 31 December 2014, the final instalment of deferred consideration of £0.1m (A$0.2m)
was paid to the vendor of BGS and £0.2m was paid to the vendor of Specialty Fasteners & Components.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 84
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2015
21. Minority interests
At 30 September 2013
Acquisition of Kentek
Share of net assets acquired
Share of profit
Dividends paid
Exchange adjustments
At 30 September 2014
Acquisition of TPD (note 22)
Share of net assets acquired of Kentek
Share of profit
Dividends paid
Exchange adjustments
At 30 September 2015
£m
1.4
2.3
(0.9)
0.6
(0.2)
(0.3)
2.9
3.2
(1.2)
0.7
(0.2)
(0.2)
5.2
22. Acquisition of businesses
On 6 October 2014, the Group acquired 80% of Techno-Path (Distribution) Limited (“TPD”) for initial and maximum consideration of £11.0m
(€14.0m), including net debt at acquisition of £1.4m (€1.9m) and before acquisition expenses of £0.2m. The fair value of the 20% minority interest in
TPD and the related put/call option of £3.2m (€4.1m) has been calculated based on the net present value of the projected performance of the
business in the financial years 2016 to 2019, when the options becomes exercisable.
On 13 March 2015, the Group acquired 100% of Rutin AG, the Swiss holding company of Kubo group (“Kubo”) of companies based in Switzerland and
Austria for consideration of £22.7m (CHF33.1m), net of cash acquired of £4.6m (CHF6.8m) and before acquisition expenses of £0.2m.
On 13 July 2015, the Group acquired 100% of Swan Seals (Aberdeen) Limited (“Swan”) for initial consideration of £2.4m and before acquisition
expenses of £0.1m.
Set out below is an analysis of the provisional net book values and fair values relating to these acquisitions.
Kubo
TPD
Swan
Total
Acquisition intangible assets
Deferred tax
Property, plant and equipment
Inventories
Trade and other receivables
Trade and other payables
Retirement benefit obligations
Net assets acquired
Goodwill
Minority share of net assets (including
goodwill)
Cash paid
Debt acquired
Cash acquired
Expenses of acquisition
Net cash paid, after acquisition expenses
Less: Expenses of acquisition
Total consideration
Book
value
£m
–
(0.4)
4.8
4.8
5.0
(4.3)
–
9.9
7.9
–
17.8
Book
value
£m
–
(0.4)
4.4
2.6
3.3
(2.9)
–
7.0
7.9
Fair
value
£m
11.0
(2.8)
8.5
2.5
3.2
(3.1)
(3.7)
15.6
7.1
–
–
14.9
22.7
27.3
–
(4.6)
0.2
22.9
(0.2)
22.7
Book
value
£m
Fair
value
£m
Book
value
£m
Fair
value
£m
–
–
0.4
2.1
1.5
(1.2)
–
2.8
–
–
2.8
7.2
(0.9)
0.4
2.0
1.5
(1.6)
–
8.6
5.6
(3.2)
11.0
9.6
1.5
(0.1)
0.2
11.2
(0.2)
11.0
–
–
–
0.1
0.2
(0.2)
–
0.1
–
–
0.1
1.6
(0.3)
–
0.1
0.2
(0.2)
–
1.4
1.0
–
2.4
2.4
–
–
0.1
2.5
(0.1)
2.4
Fair
value
£m
19.8
(4.0)
8.9
4.6
4.9
(4.9)
(3.7)
25.6
13.7
(3.2)
36.1
39.3
1.5
(4.7)
0.5
36.6
(0.5)
36.1
Goodwill of £13.7m recognised on these acquisitions represents the amount paid for future sales growth from both new customers and new
products, operating cost synergies and employee know-how.
22. Acquisition of businesses continued
From the date of acquisition to 30 September 2015, the newly acquired TPD business contributed £12.9m to revenue and £1.8m to adjusted
operating profit and the newly acquired Kubo and Swan businesses contributed £11.3m to revenue and £1.3m to adjusted operating profit. If these
businesses had been acquired at the beginning of the financial year, they would in aggregate have contributed on a pro-rata basis £34.4m to revenue
and £4.4m to adjusted operating profit. 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.
85
23. Reconciliation of operating profit to 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 25d)
Non-cash items
Operating cash flow before changes in working capital
Increase in inventories
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables
Increase in working capital
Cash flow from operating activities, before acquisition expenses
24. Net cash
The movement in net cash during the year is as follows:
Net increase in cash and cash equivalents
Increase 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
2015
£m
3.5
0.5
(0.3)
–
0.2
(2.1)
2015
£m
52.9
7.4
60.3
3.7
64.0
(1.9)
62.1
2014
£m
2.5
0.7
(0.3)
(4.6)
(3.1)
3.1
2015
£m
2.6
(20.0)
(17.4)
(0.9)
(18.3)
21.3
3.0
23.0
(20.0)
3.0
2014
£m
50.3
6.4
56.7
2.9
59.6
(4.6)
55.0
2014
£m
2.9
–
2.9
(0.9)
2.0
19.3
21.3
21.3
–
21.3
The Group has a committed multi-currency £40m revolving bank facility with an accordion option to increase this facility to £50m, subject to market
pricing. During the year the Group exercised part of the accordion option in respect of £15m and increased the committed bank facility to £40m.
At 30 September 2015, the remaining accordion option available is £10m. This bank 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
The Group maintains two defined benefit pension arrangements which are accounted for under IAS19 (Revised) “Employee Benefits”. The principal
arrangement is the defined benefit pension scheme in the UK, maintained by Diploma Holdings PLC and called the Diploma Holdings PLC UK
Pension Scheme (“the Scheme”). This Scheme provides benefits based on final salary and length of service on retirement, leaving service or death
and has been closed to further accrual since 5 April 2000.
The second and smaller defined benefit pension arrangement is operated by Kubo in Switzerland and provides benefits on retirement, leaving
service or death for the employees of Kubo in accordance with Swiss law. Kubo was acquired by the Group on 13 March 2015.
The amount of pension deficit included in the Consolidated Statement of Financial Position in respect of these two pension arrangements is:
Diploma Holdings PLC UK Pension Scheme
Kubo Pension Scheme
Pension scheme net deficit
2015
£m
6.1
3.7
9.8
2014
£m
4.3
–
4.3
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 86
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2015
25. Retirement benefit obligations continued
The amounts included in the Consolidated Income Statement in respect of these two pension arrangements are:
Diploma Holdings PLC UK Pension Scheme
Kubo Pension Scheme
Amounts charged to the Consolidated Income Statement
2015
£m
(0.2)
(0.2)
(0.4)
2014
£m
(0.2)
–
(0.2)
Defined contribution schemes operated by the Group’s businesses are not included in these disclosures.
Diploma Holdings PLC UK Pension Scheme
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 larger 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
Cash
Present value of Scheme liabilities
Pension scheme net deficit
b) Amounts charged to the Consolidated Income Statement:
Charged to operating profit
Interest cost on liabilities
Interest on assets
Charged to financial expense, net (note 6)
Amounts charged to the Consolidated Income Statement
c) Amounts recognised in the Consolidated Statement of Income and Other Comprehensive Income:
Investment (loss)/gain on Scheme assets in excess of interest
Effect of changes in financial assumptions on Scheme liabilities
Effect of changes in demographic assumptions on Scheme liabilities
Experience adjustments on Scheme liabilities
Actuarial (losses)/gains charged in the Consolidated Statement of Income and Other Comprehensive Income
2015
£m
18.6
5.6
0.2
24.4
(30.5)
(6.1)
2015
£m
–
(1.2)
1.0
(0.2)
(0.2)
2015
£m
(0.8)
(1.1)
–
–
(1.9)
2014
£m
19.7
5.2
–
24.9
(29.2)
(4.3)
2014
£m
–
(1.3)
1.1
(0.2)
(0.2)
2014
£m
0.8
(2.3)
0.8
1.0
0.3
The cumulative amount of actuarial losses recognised in the Consolidated Statement of Income and Other Comprehensive Income, since the
transition to IFRS, is £6.3m (2014: £4.4m).
25. Retirement benefit obligations continued
d) Analysis of movement in the pension deficit:
At 1 October
Amounts charged to the Consolidated Income Statement
Contributions paid by employer
Net effect of remeasurements of Scheme assets and liabilities
At 30 September
e) Analysis of movements in the present value of the Scheme liabilities:
At 1 October
Interest cost
Loss on changes in actuarial assumptions
Benefits paid
At 30 September
f) Analysis of movements in the present value of the Scheme assets:
At 1 October
Interest on assets
Return on Scheme assets less interest
Contributions paid by employer
Benefits paid
At 30 September
The actual return on the Scheme assets during the year was a £0.2m gain (2014: £1.9m gain).
87
2015
£m
4.3
0.2
(0.3)
1.9
6.1
2015
£m
29.2
1.2
1.1
(1.0)
30.5
2015
£m
24.9
1.0
(0.8)
0.3
(1.0)
24.4
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
Assets
The Scheme’s assets are held in passive unit funds managed by Legal & General Investment Management and at 30 September 2015, the major
categories of assets were as follows:
2015
%
2014
%
North America equities
UK equities
European equities (non-UK)
Asia Pacific and Emerging Markets equities
Corporate bonds
Index-linked gilts
Cash
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
20
19
19
18
13
10
1
2014
3.3%
2.5%
2.5%
4.1%
22.0
24.4
21
20
20
19
12
8
–
2013
3.3%
2.6%
2.6%
4.6%
22.5
24.9
2015
3.1%
2.3%
2.3%
3.8%
22.1
24.5
Demographic assumptions
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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
88
Notes to the Consolidated Financial Statements continued
For the year ended 30 September 2015
25. Retirement benefit obligations continued
Sensitivities
The sensitivities of the 2015 pension liabilities to changes in assumptions are as follows:
Factor
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
9.2
3.6
2.0
2.8
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.
The Kubo Pension Scheme (“the Kubo Scheme”)
In accordance with Swiss law, Kubo’s pension benefits are contribution based with the level of benefits varying according to category of
employment. Swiss law requires certain guarantees to be provided on such pension benefits. Kubo finances its Swiss pension benefits through
the Axa Stiftung Berufliche Vorsorge, a pension fund which administers the pension plans of various unrelated employers and reinsures the
risks associated with providing guarantees with Axa Winterthur. Despite the existence of this insurance, IFRS requires such pension schemes in
Switzerland to be accounted for as defined pension arrangements, primarily because the insurer has some ability to vary premiums and to decline
to continue to provide cover in the future.
Set out below is a summary of the key features of the Kubo Scheme.
i) Pension deficit included in the Consolidated Statement of Financial Position:
Assets of the Kubo Scheme1
Actuarial liabilities of the Kubo Scheme
Pension scheme net deficit
1 The assets of the Kubo Scheme are held as part of the funds managed by Axa Stiftung Berufliche Vorsorge.
ii) Amounts charged to the Consolidated Income Statement:
Service cost
Past service credit
Charged to operating profit
Net interest cost charges to finance expenses
Amount charged to the Consolidated Income Statement
iii) Analysis of movement in the pension deficit:
At acquisition
Amounts charged to the Consolidated Income Statement
Contributions paid by employer
Net effect of remeasurements of Scheme assets and liabilities
At 30 September
£m
10.3
(14.0)
(3.7)
£m
(0.3)
0.1
(0.2)
–
(0.2)
2015
£m
3.7
0.2
(0.2)
–
3.7
25. Retirement benefit obligations continued
Principal actuarial assumptions for the Scheme at 30 September 2015
Expected rate of pension increase
Expected rate of salary increase
Discount rate
Interest credit rate
Mortality
Sensitivities
The sensitivities of the 2015 pension liabilities to changes in assumptions are as follows:
Factor
Discount rate
Life expectancy
Assumption
Decrease by 0.25%
Increase by one year
Effect of the Scheme on the Group’s future cashflows
Best estimate of employer’s contribution in 2016
Best estimate of employees’ contribution in 2016
89
0%
1.0%
0.75%
1.50%
BVG2010 Generational
Impact on pension
liabilities
Estimated
increase
%
Estimated
increase
£m
4.1
1.6
0.6
0.2
£m
0.4
0.3
The weighted average duration of the defined benefit obligation is around 16 years.
26. Commitments
At 30 September 2015 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 £2.9m (2014: £2.0m).
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
2015
£m
2.6
5.8
3.7
12.1
2015
£m
0.1
0.3
0.4
2014
£m
2.3
4.7
1.4
8.4
2014
£m
0.1
0.2
0.3
Non-audit fees of £12,000 (2014: £12,000) were paid to the Group’s auditor for carrying out “agreed upon procedures” on the Half Year Announcement,
which is unaudited.
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
2015
1.54
1.91
1.99
1.35
2014
1.66
1.80
1.81
1.23
2015
1.51
2.03
2.16
1.36
2014
1.62
1.81
1.85
1.28
29. Subsequent events
On 12 October 2015 the Group completed the acquisition of 100% of West Coast Industrial Supplies Pty Limited based in Perth Australia and its affiliate
company, West Coast Industrial Supplies New Caledonia SAS based near Noumea in New Caledonia (together “WCIS” ) for an aggregate maximum
consideration of £9.8m (A$20.5m). The initial cash paid on acquisition was £8.5m (A$17.6m) but is subject to further adjustment for actual net assets at
completion. Deferred consideration is also payable based on the performance of WCIS over the next twelve months and on the renewal of specific
customer contracts. The WCIS businesses are established suppliers of gaskets, seals and associated products and services with a focus on the mining
and power generation markets. A review to determine fair values of the net assets acquired will be completed during the next financial year.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
90
Group Accounting Policies
For the year ended 30 September 2015
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 2015 and the
comparative year.
There were no 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
2015.
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 pages 66 to 67.
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.
(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.
91
1.6 Employee benefits continued
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 Consolidated Income Statement in the separate financial statements of the reporting entity or the foreign operation as appropriate. In the
consolidated financial statements such exchange differences are initially recognised in the Consolidated Statement of Income and Other
Comprehensive Income as a separate component of equity and subsequently recognised in the Consolidated Income Statement on disposal of
the net investment.
1.8 Taxation
The tax expense relates to the sum of current tax and deferred tax.
Current tax is based on taxable profit for the year, which differs from profit before taxation as reported in the Consolidated Income Statement.
Taxable profit excludes items of income and expense that are taxable (or deductible) in other years and also excludes items that are never taxable or
deductible. The Group’s liability for current tax, including UK corporation tax and overseas tax, is calculated using rates that have been enacted or
substantively enacted at the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method. Deferred tax is recognised on differences between the carrying amounts of
assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are
generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits
will be available against which deductible temporary differences can be utilised. Temporary differences arise primarily from the recognition of the
deficit on the Group’s defined benefit pension scheme, the difference between accelerated capital allowances and depreciation and for short term
timing differences where a provision held against receivables or inventory 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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
92
Group Accounting Policies continued
For the year ended 30 September 2015
1.8 Taxation continued
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 charge 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
Plant and equipment
Hospital field equipment
– between 20 and 50 years
– term of the lease
– plant and machinery between 3 and 7 years
– IT hardware between 3 and 5 years
– fixtures and fittings between 5 and 15 years
– five years
The depreciation method used, residual values and estimated useful lives are reviewed and changed, if appropriate, at least at each financial year
end. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over
the term of the relevant lease. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is
greater than its estimated recoverable amount. Gains and losses arising on disposals are determined by comparing sales proceeds with carrying
amount and are recognised in the Consolidated Income Statement.
1.10 Intangible assets
All intangible assets, excluding goodwill arising on a business combination, are stated at their amortised cost or fair value less any provision for
impairment.
(a) Research and development costs
Research expenditure is written off as incurred. Development costs are written off as incurred until it can be demonstrated that the conditions for
capitalisation as described in 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 and supplier relationships are valued using a discounted cash flow model;
databases are valued using a replacement cost model. 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.
93
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.
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 Consolidated 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 Consolidated 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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015
94
Group Accounting Policies continued
For the year ended 30 September 2015
1.13 Financial instruments continued
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).
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 Directors’ 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.
95
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 2015. 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 2019. 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 IFRSs 2010–2012 Cycle
• Annual Improvements to IFRSs 2011–2013 Cycle
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.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 96
Parent Company Balance Sheet
As at 30 September 2015
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
2015
£m
2014
£m
c
72.0
72.0
(29.2)
42.8
(33.6)
38.4
d
5.7
37.1
42.8
5.7
32.7
38.4
The financial statements of Diploma PLC, company number 3899848, were approved by the Board of Directors on 16 November 2015 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 2014
Retained profit for the year
Dividends
Transfers of own shares (net)
At 30 September 2015
Share
capital
£m
Profit
and loss
account
£m
5.7
–
–
–
5.7
32.7
23.9
(19.7)
0.2
37.1
Total
£m
38.4
23.9
(19.7)
0.2
42.8
The notes on page 97 form part of these financial statements.
Notes to the Parent Company Financial Statements
For the year ended 30 September 2015
97
a) Accounting policies
a.1 Basis of accounting
These financial statements have been prepared on a going concern basis, as discussed on pages 66 to 67, 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 £23.9m (2014: £20.3m).
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 the Group 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 other
interests of the Group which qualify as related parties. There were related party transactions with the pension trustees of the Diploma Holdings PLC
UK Pension Scheme, referred to in note 25.
a.6 Auditor’s remuneration
Fees payable to the auditor for the audit of the Company’s accounts of £3,500 (2014: £3,500) were borne by a fellow Group undertaking.
b) Directors’ and employees’ remuneration
No remuneration is paid directly by the Company; information on the Directors’ remuneration (which is paid by an immediate holding company)
and their interests in the share capital of the Company are set out in the Remuneration Committee Report on pages 52 to 65. The Company had
no employees (2014: none).
c) Investments
Shares in Group undertakings
At 30 September 2015 and 1 October 2014
Details of all of the subsidiaries of the Group are set out on page 101.
d) Share capital
Allotted, issued and fully paid ordinary shares of 5p each
At 30 September
£m
72.0
2015
Number
2014
Number
2015
£m
2014
£m
113,239,555 113,239,555
5.7
5.7
During the year 171,910 ordinary shares in the Company (2014: 293,539) were transferred from the Trust to participants in connection with the
exercise of options in respect of awards which had vested under the 2011 Long Term Incentive Plan, as set out on page 64 in the Annual Report on
Remuneration. The Trust also purchased 100,000 ordinary shares in the Company for £0.7m (2014: £Nil) during the year. At 30 September 2015 the
Trust held 221,438 (2014: 293,348) ordinary shares in the Company representing 0.2% of the called up share capital. The market value of the shares
at 30 September 2015 was £1.5m (2014: £2.0m).
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 98
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 2015 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 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 and the directors’ assessment of the principal risks that
would threaten the solvency or liquidity of the company
As required by the Listing Rules we have reviewed the Directors’
statement on pages 66 and 67 that the Group is a going concern.
We have nothing material to add or draw attention to in relation to:
•
the Directors’ confirmation on page 34 that they have carried out a robust
assessment of the principal risks facing the Group, including those that
would threaten its business model, future performance, solvency or
liquidity;
the disclosures on pages 35 to 37 that describe those risks and explain
how they are being managed or mitigated;
•
•
•
the Directors’ statement in the Directors’ Report about whether they
considered it appropriate to adopt the going concern basis of accounting
in preparing them and their identification of any material uncertainties to
the Group’s ability to continue to do so over a period of at least twelve
months from the date of approval of the financial statements; and
the Director’s explanation on page 34 as to how they have assessed the
prospects of the Group, over what period they have done so and why
they consider that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the company will be
able to continue in operation and meet its liabilities as they fall due over
the period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
We agreed with the Directors’ adoption of the going concern basis of
accounting and we did not identify any such material uncertainties.
However, because not all future events or conditions can be predicted,
this statement is not a guarantee as to the company’s ability to continue
as a going concern.
Independence
We are required to comply with the Financial Reporting Council’s Ethical
Standards for Auditors and we confirm that we are independent of the
company and we have fulfilled our other ethical responsibilities in
accordance with those standards. We also confirm we have not provided
any of the prohibited non-audit services referred to in those standards.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that
had the greatest effect on our audit strategy, the allocation of resources in
the audit and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon and we do not
provide a separate opinion on these matters.
Risk
How the scope of our audit responded to the risk
Carrying value of goodwill
The key assumptions used in the assessment of the carrying value of goodwill
are determined with reference to judgemental factors such as projected cash
flows and the appropriate discount rate. As at the year-end the Group held an
aggregate of £89.3 million of goodwill (2014: £80.2 million). Refer to note 10 for
details of these balances.
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 and consulting with our valuation specialists
who benchmarked assumptions such as the 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.
Accounting for acquisitions
There is a risk that the acquisition accounting for the businesses acquired in the
year, as set out in note 22, has not been correctly applied. Specifically, there is a
risk that incorrect judgements are made which results in inaccurate valuations
of intangible assets.
We have challenged the key assumptions made by management in
accounting for the acquisitions. Specifically, we have reviewed the
discount, tax and growth rates and in doing so we involved our own
valuation specialists to assist us in our assessment.
There is also a risk the valuation of any liability for future purchases of minority
interests, as set out in note 20, is incorrectly recorded.
We have also re-calculated the liability of future purchases of minority
interests and agreed this back to supporting forecasts.
99
Risk
How the scope of our audit responded to the risk
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. At the year-end the Group
held inventories of £56.6 million net of impairment provisions of £5.9 million
provision (2014: £54.1 million net of impairment provisions of 5.3 million
provision). Refer to note 15 for details of these balances.
The recoverability of trade receivables 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. At the
year-end the Group held trade receivables of £44.8 million net of impairment
provisions of £0.6 million (2014: £41.8 million net of impairment provisions of
£0.5 million). Refer to note 16 for details of these balances.
We evaluated the recorded provision, specifically checking those relevant
inventory 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 receivables 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 £2.7 million (2014: £2.5 million), which is approximately 5% of profit
before tax (2014: 5%).
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of £53,000 (2014: £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.
Audit of all components are performed at a materiality level not exceeding
50% of Group materiality.
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 11 (2014: 8)
locations. Each of these 11 locations was subject to a full scope audit. An
additional 8 (2014: 6) 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 75% (2014: 71%) of the Group’s revenues
and 80% (2014: 78%) of the Group’s operating profit.
The Group audit team has designed and implemented a country visit
programme to ensure that the Senior Statutory Auditor or another senior
member of the Group audit team visits the component locations to hold
discussions with the lead partner, review their working papers, conclude on
any findings and attend close out meetings with local management. 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 and attended
close out meetings by phone.
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 eleven provisions of the UK Corporate Governance Code. We have
nothing to report arising from our review.
Our duty to read other information in the Annual Report
Under the ISAs (UK and Ireland), we are required to report to you if,
in our opinion, information in the annual report is:
• materially inconsistent with the information in the audited financial
statements; or
• apparently materially incorrect based on, or materially inconsistent with,
our knowledge of the Group acquired in the course of performing our
audit; or
is otherwise misleading.
•
In particular, we are required to consider whether we have identified any
inconsistencies between our knowledge acquired during the audit and the
Directors’ Statement that they consider the annual report is fair, balanced
and understandable and whether the annual report appropriately discloses
those matters that we communicated to the Audit Committee which we
consider should have been disclosed. We confirm that we have not identified
any such inconsistencies or misleading statements.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 100
Independent Auditor’s Report to the members of Diploma PLC continued
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). 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 reviews.
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
16 November 2015
Subsidiaries of Diploma PLC
101
Group
percentage
of equity
capital
Country of
incorporation
or registration
Group
percentage
of equity
capital
Country of
incorporation
or registration
Microtherm UK Limited1
IS Group (Europe) Limited1
Hymec Aerospace Fasteners Limited1
Specialty Fasteners & Components
Limited1
Interconnect Components Services
Group Limited1
Cabletec Flexibles Limited1
Intermediate Holding Companies
Diploma Holdings PLC
Diploma Holdings Inc
Pride Limited
Diploma Australia Holdings Limited
Diploma Canada Holdings Limited
Diploma Overseas Limited
Napier Group Limited
Williamson Cliff Limited
Newlandglebe Limited
Diploma Germany Holding GmbH
Diploma Canada Healthcare Inc
Diploma Australia Healthcare Pty
Limited
Diploma Australia Seals Pty Limited
a1-Envirosciences Limited1
HB Sealing Products Limited
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
England
England
England
England
England
England
England
USA
England
England
England
England
England
England
England
Germany
Canada
Australia
Australia
England
Canada
Life Sciences
Somagen Diagnostics Inc
AMT Surgical Inc
Vantage Endoscopy Inc
Big Green Surgical Company Pty
Limited
Diagnostic Solutions Pty Limited
Diploma Healthcare Group NZ
Limited
Techno-Path (Distribution) Limited
A1-CBISS Limited
a1-envirosciences GmbH
Hitek Limited1
Hitek Group Limited1
Seals
HB Sealing Products Inc
J Royal US, Inc
HKX Inc
All Seals Inc
RTD Seals Corp
M Seals A/S
M Seals AB
M Seals NCL Limited
Diploma (Tianjin) Trading Co. Limited
FPE Seals Limited
A.B. Seals Limited1
Swan Seals (Aberdeen) Limited
FPE Seals Europe BV
Kentek Oy
ZAO Kentek
AO Kentek
Kentek Eesti Ou
SIA Kentek Latvija
UAB Kentek Lietuva
Rutin AG
Kubo Tech AG
Kubo Form AG
Kubo Tech GmbH
Kubo Immo AG
Johannsen AG
West Coast Industrial Supplies Pty
Limited
West Coast Industrial Supplies New
100%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
100%
100%
100%
100%
90%
90%
100%
100%
100%
100%
100%
100%
90%
90%
90%
90%
90%
90%
100%
100%
100%
100%
100%
100%
100%
Canada
Canada
Canada
Australia
Australia
New Zealand
Ireland
England
Germany
England
England
USA
USA
USA
USA
USA
Denmark
Sweden
England
China
England
England
Scotland
Netherlands
Finland
Russia
Russia
Estonia
Lativa
Lithuania
Switzerland
Switzerland
Switzerland
Austria
Switzerland
Switzerland
Australia
Caledonia SAS
100% New Caledonia
Controls
IS Rayfast Limited
IS Motorsport Inc
Amfast Limited1
Specialty Fasteners Limited
Clarendon Engineering Supplies
Limited1
Cabletec Interconnect Component
Systems Limited1
Sommer GmbH
Filcon Electronic GmbH
Hawco Limited
Abbeychart Limited1
HA Wainwright Limited1
Microtherm Limited1
Hawco Refrigeration Limited1
1 Dormant company.
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
England
USA
England
England
England
England
Germany
Germany
England
England
England
England
England
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 102
Financial Calendar, Shareholder Information and Advisors
Announcements (provisional dates):
First Quarter Statement released
Annual General Meeting (2015)
Half Year Results announced
Third Quarter Statement released
Preliminary Results announced
Annual Report posted to shareholders
Annual General Meeting (2016)
Dividends (provisional dates):
Interim announced
Paid
Final announced
Paid (if approved)
20 January 2016
20 January 2016
16 May 2016
31 August 2016
21 November 2016
2 December 2016
18 January 2017
16 May 2016
15 June 2016
21 November 2016
25 January 2017
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
Advisors
Investment Bankers
Lazard
50 Stratton Street
London W1J 8LL
Corporate Stockbrokers
Numis Securities
10 Paternoster Square
London EC4M 7LT
Solicitors
Ashurst LLP
Broadwalk House
5 Appold Street
London EC2A 2HA
Auditor
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Bankers
Barclays Bank PLC
1 Churchill Place
London E14 5HP
HSBC Bank plc
City Corporate Banking Centre
60 Queen Victoria Street
London EC4N 4TR
Five Year Record
Year ended 30 September
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
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 (decrease)/increase 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
103
2015
£m
2014
£m
2013
£m
2012
£m
2011
£m
333.8
305.8
285.5
260.2
230.6
60.3
(0.7)
59.6
(7.4)
(0.4)
51.8
(14.4)
37.4
189.6
5.2
(23.0)
20.0
9.8
6.6
5.9
214.1
53.6
267.7
(17.4)
19.9
37.8
40.3
32.5
38.2
18.2
167
2.1
%
23.9
17.0
18.1
56.7
(0.5)
56.2
(6.4)
–
49.8
(13.7)
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
54.3
–
54.3
(5.6)
(0.2)
48.5
(13.7)
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
52.8
(0.2)
52.6
(6.4)
(0.2)
46.0
(14.4)
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
45.2
(0.3)
44.9
(4.8)
(0.9)
39.2
(11.6)
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
Notes
1 Acquisition related charges comprise the amortisation and impairment of acquisition intangible assets, aquisitions expenses and adjustments to deferred consideration.
2 Acquisition liabilities comprise amounts payable for the future purchases of minority interests and deferred consideration.
3 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.
4 Adjusted earnings per share is calculated in accordance with note 9 to the consolidated financial statements.
5 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.
6 Dividend cover is calculated on adjusted earnings as defined in note 2 to the consolidated financial statements.
Strategic ReportGovernanceFinancial StatementsDiploma PLC Annual Report & Accounts 2015 104 Notes
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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