DIPLOMA PLC
Annual Report & Accounts 2017
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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
Contents
Financial Highlights
Strategic Report
01
02 Chairman’s Statement
04 Group at a Glance
06 Chief Executive’s Review
10 Our Business Model
12 Growth Strategy
14
16
28
32
Strategic Priorities and KPIs
Sector Review
Finance Review
Internal Control and Risk
Management
36 Corporate Responsibility
Executive Management Group
Governance
38 Board of Directors
38
40 Corporate Governance
45 Audit Committee Report
50 Nomination Committee Report
51
Remuneration Committee Report
Financial Statements
64 Directors’ Report
66 Consolidated Income Statement
67 Consolidated Statement of Income
and Other Comprehensive Income
67 Consolidated Statement of
Changes in Equity
68 Consolidated Statement
of Financial Position
69 Consolidated Cash Flow
Statement
70 Notes to the Consolidated
Financial Statements
88 Group Accounting Policies
93
Parent Company Statement
of Financial Position
Parent Company Statement
of Changes in Equity
93
94 Notes to the Parent Company
Financial Statements
Independent Auditor’s Report
95
102 Subsidiaries of Diploma PLC
103 Financial Calendar, Shareholder
Information and Advisors
104 Five Year Record
www.diplomaplc.com
For current information on Diploma PLC, including the
Annual Report & Accounts 2017, please visit our website.
Life Sciences
Suppliers of consumables,
instrumentation and related
services to the healthcare and
environmental industries.
For more information
See pages 16–19
Seals
Suppliers of seals,
gaskets, filters, cylinders,
components and kits for
heavy mobile machinery
and industrial equipment.
For more information
See pages 20–23
Controls
Suppliers of specialised
wiring, connectors,
fasteners and control
devices for technically
demanding applications.
For more information
See pages 24–27
STRATEGIC REPORT
HIGHLIGHTS
Financial Highlights
For the year ended 30 September 2017
Strong results with
double-digit growth in
revenue and earnings
Revenue
Adjusted operating profit1
Adjusted operating margin1
£451.9m
2016: £382.6m
+18%
£78.2m
2016: £65.7m
+19%
17.3%
2016: 17.2%
+10bps
Adjusted profit before tax1,2
Profit before tax
Free cash flow3
£77.5m
2016: £64.9m
+19%
£66.8m
2016: £54.0m
+24%
£55.7m
2016: £59.0m
–6%
Adjusted earnings per share1,2
Basic earnings per share
Total dividend per share
Free cash flow per share3
1 Before acquisition related charges.
2 Before fair value remeasurements and gain on disposal of assets.
3 Before cash payments on acquisitions and dividends.
2017
pence
49.8
42.0
23.0
49.3
+19%
+24%
+15%
–6%
2016
pence
41.9
33.9
20.0
52.2
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”). All references in this Annual
Report & Accounts to “underlying” revenues or
operating profits refer to reported results on a
constant currency basis and before any contributions
from acquired or disposed businesses. 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.
01
Diploma PLC Annual Report & Accounts 2017 STATEMENTS
Chairman’s Statement
Strong performance
in 2017
The Group reported another strong
performance in 2017 and delivered
robust underlying growth in more
confident global economies. The
Board remains focused on executing
the Group’s established strategy
which is designed to deliver strong
growth in earnings and shareholder
value over the economic cycle.
The Group has a long track record
of consistent delivery against its key
performance metrics by compounding
stable “GDP plus” underlying growth
with carefully selected, value enhancing
acquisitions, funded by the Group’s
free cash flow. This strategy has been
successfully designed and executed
under the outstanding leadership of
Bruce Thompson since he became
CEO of Diploma PLC in 1996. Over the
last 15 years, since emerging from a
major restructuring of the Group led
by Bruce, the Group has delivered
strong double-digit growth in earnings,
dividends and share price and has
grown market capitalisation from ca.
£60m to ca. £1.2bn today, without
any new equity having been issued.
In September of this year, the Board
received notice from Bruce of his
intention to retire as CEO before the
end of 30 September 2018. This notice
period ensures sufficient time to
complete a thorough search process and
a smooth transition of responsibilities.
Bruce will be leaving the Group with a
clearly defined and sustainable strategy,
with a substantial runway for future
growth and an experienced senior
John Nicholas, Chairman
The Group has a long track record of consistent delivery
against its key performance metrics.
Adjusted EPS growth (pence)
TSR growth (TSR index 2007 = 100)
Dividend growth (pence)
+14% p.a.1
.
8
9
4
9
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1
4
2
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8
3
1
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6
3
8
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4
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1
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9 3
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7
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4
1
672+21% p.a.1
2
7
6
3
4
5
6
0
4
1
0
4
5
7
3
5
6
2
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7
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23+16% p.a.1
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3
2
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2
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8
1
0
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7
1
7
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5
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8 9
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0.0
08 09 10 11 12 13 14 15 16 17
0
08 09 10 11 12 13 14 15 16 17
0
08 09 10 11 12 13 14 15 16 17
1 Ten-year compound.
02
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT
management team. We all wish him a
long, healthy and well-earned retirement.
Results
Group revenues increased in 2017 by
18% to £451.9m (2016: £382.6m), with
the Group’s results again boosted by
currency effects from translating the
results of the overseas businesses,
following the substantial depreciation
in UK sterling. After adjusting for the
contribution from acquisitions completed
both this year and last year, net of a small
disposal and for these currency effects on
translation, Group revenues increased by
7% on an underlying basis. The Controls
businesses delivered robust underlying
revenue growth of 14% and both the Life
Sciences and Seals businesses reported
a 4% growth in underlying revenues.
Adjusted operating profit increased by
19% to £78.2m (2016: £65.7m) reflecting
the strong growth in revenues and a
small increase of 10bps in adjusted
operating margins to 17.3% (2016: 17.2%).
Adjusted profit before tax increased
by 19% to £77.5m (2016: £64.9m) and
adjusted earnings per share (“EPS”) also
increased by 19% to 49.8p (2016: 41.9p).
The Group’s free cash flow remained
robust at £55.7m (2016: £59.0m) as
working capital increased by £4.0m
to support the stronger trading
environment across the Group. Last year’s
free cash flow included an inflow of £6.3m
from reduced working capital and £4.6m
of cash realised on the sale of assets.
Capital expenditure of £3.3m (2016: £3.7m)
remained at a similar level to last year.
The Group has invested ca. £90m
over three years in acquiring value
enhancing businesses. However,
expenditure on acquisitions slowed
this year to £20.1m (2016: £32.7m) as
some vendors postponed their exit
plans in the face of a more favourable
macroeconomic environment. There are
still a number of good quality businesses
in our acquisition pipeline which we
are confident of completing when the
vendors are ready to move forward.
The Group’s balance sheet remains
robust with cash funds at 30 September
2017 of £22.3m (2016: £10.6m), after
investing £20.1m in acquisitions and
making distributions to shareholders of
£23.5m (2016: £21.0m). The Group also
has renewed committed bank facilities
of £30m with an accordion option to
extend these facilities up to £60m.
Dividends
The combination of strong results and
free cash flow, supported by a robust
balance sheet has led the Board to
recommend an increase in the final
dividend of 16% to 16.0p per share
(2016: 13.8p). Subject to shareholder
approval at the Annual General Meeting
(“AGM”), this dividend will be paid on
24 January 2018 to shareholders on
the register at 1 December 2017.
The total dividend per share for the
year will be 23.0p (2016: 20.0p) which
represents a 15% increase on 2016.
With underlying adjusted earnings
increasing by 19%, the level of
dividend cover increases slightly to
2.2 times on an adjusted EPS basis,
from 2.1 times in recent years.
Governance
The Board’s Committees, led by the
non-Executive Directors, have had
a productive year. Anne Thorburn
led the Audit Committee through
an audit tender process which in
September resulted in a proposal to
appoint PricewaterhouseCoopers LLP
as Company and Group auditor from
next year. Andy Smith has also led the
Remuneration Committee through
a thorough review of the Company’s
Remuneration Policy, in advance of the
triennial vote by shareholders at the
AGM on 17 January 2018. I have worked
closely with Charles Packshaw as Senior
Independent Director and with the
Nomination Committee to commence
a search for a new CEO to lead the
Group, following the intended retirement
of Bruce Thompson later in 2018.
Employees
Our employees remain our most
important asset and their hard work
continues to be a driving force behind
our consistent and strong performance.
Diploma is very much a people business
and success is always a team effort.
I wish to thank all of our employees
for their support and contribution to
the success of the Group this year.
Outlook
Diploma reported another strong
performance in 2017, delivering
strong double-digit growth in
revenue and earnings. All of the
Group’s Sectors contributed to this
growth with a particularly strong
performance from Controls.
Principal corporate
objectives
Achieve double-
digit growth in
adjusted EPS over
the business cycle
Generate TSR
growth in the
upper quartile of
the FTSE 250
Deliver progressive
dividend growth
with two times
dividend cover
The Group’s performance in 2017
provides confidence in the Group’s
prospects for solid underlying growth in
the year ahead, which we aim to enhance
by unlocking value enhancing acquisition
opportunities. With a proven business
model, broad geographic spread of
businesses, robust balance sheet and
consistently strong free cash flow, the
Board is confident that further progress
will be made in the next financial year.
03
Diploma PLC Annual Report & Accounts 2017
OVERVIEW
Group at a Glance
Well diversified by geography
and business area
North American revenues
(by destination) by Sector
Life Sciences
23% US 18% Canada
22% UK 26% Continental
Europe
Group revenue
41%
European revenues
(by destination) by Sector
Group revenue
48%
Healthcare (84% of revenues)
Clinical diagnostic instrumentation, consumables and services
supplied to hospital pathology and life sciences laboratories for
the testing of blood, tissue and other samples.
Surgical medical devices and related consumables and services
supplied to hospital operating rooms, GI/Endoscopy suites
and clinics.
Environmental (16% of revenues)
Environmental analysers, containment enclosures and
emissions monitoring systems.
Rest of World revenues
(by destination) by Sector
Group revenue
28%
Employees
412
Group revenue
11%
Primary growth drivers
• Public and private healthcare spending
• Population ageing and increasing life expectancy
• Health & Safety and Environmental regulation
For more information
See pages 16–19
Life Sciences
Seals
Controls
04
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT Seals
Controls
North America – Aftermarket (32% of revenues)
Next day delivery of seals, sealing products and cylinder
components for the repair of heavy mobile machinery.
North America – Industrial OEM (29% of revenues)
Sealing products, custom moulded and machined parts supplied
to manufacturers of specialised industrial equipment.
International (39% of revenues)
Sealing products and filters supplied outside North America
to Aftermarket and Industrial OEM customers as well as
to Maintenance, Repair and Overhaul (“MRO”) operations.
Interconnect (59% of revenues)
Wiring, cable harness components and cable accessories used
in specialised technical applications in Aerospace, Defence,
Motorsport, Energy, Medical, Rail and Industrial.
Specialty Fasteners (18% of revenues)
Specialty aerospace-quality fasteners supplied to Civil
Aerospace, Motorsport, Industrial and Defence markets.
Fluid Controls (23% of revenues)
Temperature, pressure and fluid control products used in Food,
Beverage and Catering industries.
Group revenue
43%
Employees
862
Group revenue
29%
Employees
437
Primary growth drivers
• General economic growth
• Activity and spending levels in Heavy Construction
and Infrastructure
• Growth in industrial production
• MRO expenditure in Mining and process industries
For more information
See pages 20–23
Primary growth drivers
• General growth in the industrial economy
• Activity and spending levels in Aerospace, Defence,
Motorsport, Energy, Medical and Rail
• Equipment installation and maintenance in Food, Beverage
and Catering
For more information
See pages 24–27
05
Diploma PLC Annual Report & Accounts 2017 STATEMENTS
Chief Executive’s Review
Building larger,
broader-based
businesses
The Group’s strategy,
consistently applied, delivers
strong growth in earnings
and shareholder value.
Group strategy
The Group’s “compounding” strategy
is designed to generate strong growth
in earnings and shareholder value
over the business cycle, while building
larger, broader-based businesses
in the three Group Sectors of Life
Sciences, Seals and Controls.
The businesses target stable “GDP
plus” underlying revenue growth over
the business cycle with sustainable
attractive margins and then convert
the profit into strong free cash flow by
tightly managing working capital and
focused capital investments. The free
cash flow generated then funds healthy
growing dividends and selective value
enhancing acquisitions which accelerate
growth in revenues and profit to double-
digit levels. The strategy consistently
06
Bruce Thompson, Chief Executive Officer
delivers a return in excess of 20%
pre-tax on total capital invested and
steadily increasing shareholder value.
Business model and KPIs
Stable and resilient “GDP plus” underlying
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.
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.
The key performance indicators (“KPIs”)
we use to measure the success of the
business model relate to recurring
income and stable underlying revenue
growth, sustainable and attractive
margins and organisational health.
This year, underlying revenue growth,
after adjusting for currency movements
and acquisitions, has been a robust 7%
with the growth rate strengthening in
the second half of the year. Over five
years, the average underlying revenue
growth has been 5% p.a. which meets
the Group’s target of “GDP plus” growth.
Adjusted operating margins improved
this year by 10bps to 17.3% of revenue,
as transactional currency pressures
eased during the year in the Healthcare
businesses and improved operating
leverage with tight control of operating
costs has offset other pressures on
gross margins. Over five years the
average adjusted operating margin
has been ca. 18% against the Group’s
medium term target of 18–19%.
The agility and responsiveness of the
organisation is more difficult to measure
directly, but non-financial KPIs can
give an indication of the organisational
health. The number of working days
lost to sickness has consistently been
only ca. 1% a year and over the last five
years, the average length of service for all
employees has been ca. 6.5 years (ca. 11
years for the senior management cadre).
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT Growth strategy and KPIs
Overall growth is accelerated from
underlying “GDP plus” levels to the
corporate target of double-digit growth,
through carefully selected, value
enhancing acquisitions which fit the
business model and offer entry into
new but related 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 and improve operating margins.
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 objectives
for return on total investment.
Again we measure the success of the
growth strategy with KPIs, the first of
which is acquisition spend. To achieve the
Group’s objective of strong double-digit
growth, acquisition spend of at least £30m
p.a. is targeted, though year on year spend
will vary with the acquisition environment.
This year, the Group invested ca. £20m
in acquisitions, bringing the total over
three years to ca. £90m. The acquisitions
completed over the last three years have
contributed ca. 16% of 2017 revenues.
Strong cash flow funds our growth
strategy (and supports healthy, growing
dividends) and tight management of
working capital maximises the conversion
of profit to cash flow. This year, working
capital has been managed down to
a record low of 15.0% of revenue,
generating free cash flow of £55.7m
and representing a conversion rate of
99% of adjusted post tax earnings. Over
five years, the average working capital
to revenue ratio has been 16–17% and
average free cash flow has been £45m p.a.
with an average conversion ratio of 98%.
The Group’s return on total investment
measure is the pre-tax return on adjusted
trading capital employed, excluding
net cash, but including all goodwill and
acquired intangible assets (“ROATCE”).
This is used to measure the overall
performance of the Group and very
importantly, our success in creating value
for shareholders through our acquisition
programme. Over the last five years,
ROATCE has comfortably exceeded the
20% target and this year was 24.0%.
Our Year in Review
Financial performance
In 2017, the Group delivered strong
double-digit growth in revenue and
earnings with robust underlying
growth, a modest net contribution
from acquisitions and further
benefiting from the strong tailwind
from the depreciation in UK sterling.
The Group’s reported revenues
increased by 18%, with currency
movements increasing revenues by
9% and acquisitions contributing a
further 2% to the revenue growth,
net of a small prior year disposal.
On an underlying basis, after
adjusting for acquisitions and for
currency effects on translation,
Group revenues increased by 7%.
Group adjusted operating margins
improved by 10bps to 17.3%,
compared with 17.2% in the prior full
year and the first half of the current
year. Management gross margins have
reduced overall by 60bps with margin
pressures in several businesses from a
combination of the impact on product
costs from currency movements and
increases in other margin support
costs. These pressures have been
partly mitigated by the stronger
gross margins in recent acquisitions
and transactional currency pressures
in the Healthcare businesses have
eased during the year. Operating
costs as a percentage of revenue
have reduced by 70bps with improved
operating leverage from the
increase in revenues and generally
tight control of operating costs.
Working capital as a percentage of
revenue was managed down through
the year to 15.0%, although the
Group’s free cash flow reduced by
6% to £55.7m, reflecting the absence
of prior year proceeds from one-off
property sales and the divestment
of the Medivators business.
Sector performance
In Life Sciences, underlying revenues
increased by 4% after adjusting
for currency movements, the
acquisition of Abacus and the prior
year disposal of the Medivators
business. The Healthcare businesses
benefited from stronger capital
revenues as new technology was
introduced and delayed projects
were reactivated in the laboratory
diagnostic sector. The Environmental
businesses delivered steady growth in
instrumentation sales and increasing
service contract revenues.
In Seals, underlying revenues
increased by 4% after adjusting
for currency movements and the
acquisitions of PSP and Edco. In
North America, the improving trend in
industrial activity seen in the second
quarter, following the US election,
strengthened further as the year
progressed. In the International Seals
businesses, strong growth in the UK
and Scandinavia was offset by more
challenging market conditions in
Switzerland, Russia and Australia.
In Controls, underlying revenues
increased by 14% after adjusting for
currency movements and the prior
year acquisitions of Cablecraft and
Ascome. The Specialty Fasteners
business increased revenues strongly,
driven principally by a ramp-up in
demand from customers in the Civil
Aerospace sector. The Interconnect
and Fluid Controls businesses also
delivered good growth benefiting from
increased project work and targeted
investment in sales resources.
Acquisitions and disposals
Over the last three years, a total
of ca. £90m has been invested in
acquisitions which contributed ca.
16% of 2017 Group revenues.
During 2017, total acquisition spend
was ca. £20m, of which ca. £15m
was invested in the acquisition of
Abacus, a long established supplier
of diagnostics instrumentation and
consumables to the Pathology and
Life Sciences sectors in Australia and
New Zealand. Abacus adds critical
mass to our existing Healthcare
businesses in the region and opens
up new growth opportunities.
In addition, two smaller bolt-on
acquisitions were completed in the
Seals Sector during the year – PSP
in the US and Edco in the UK. After
the year end, a small acquisition was
completed in the Controls Sector
of Coast Fabrication Inc. (“Coast”),
a US specialty fastener distributor.
07
Diploma PLC Annual Report & Accounts 2017 STATEMENTS
Chief Executive’s Review
continued
Essential values and culture
We encourage an entrepreneurial
culture across our businesses, through
a decentralised management structure.
In specialised distribution businesses
it is essential that decisions are made
close to the customer and that the
businesses are agile and responsive to
changes in the market and competitive
environment. The success of the
Group is therefore built upon strong,
self-standing management teams
in the operating businesses who are
committed to and rewarded according
to the success of their businesses.
This culture is very attractive to
managers who join the Group in
acquired businesses and who are
used to a similar culture in their
privately owned businesses.
Managing business clusters
We also recognise that there are
significant synergy benefits which
can be achieved through managing
clusters of similar businesses. Typically
these synergies come in the form
of cross-selling and joint purchasing
between the businesses and shared
back office functions. There are
also best practices which can be
shared within the clusters in areas
such as IT and digital capabilities.
We have therefore introduced small
senior teams to manage the business
clusters in each Sector, while being
careful not to allow the build-up of
heavy divisional structures with their
associated costs and bureaucracy.
This ensures that we gain the
benefits of scale while retaining
agility in the operating businesses.
These senior management teams
are responsible for maximising the
potential of their business clusters and
also for identifying and progressing
acquisition opportunities.
Executive Management Group
As the Group grows larger and
becomes more broadly spread both
geographically and operationally, it
is important that we have in place a
strong and broad based executive
management team to drive the next
stage of the Group’s growth strategy.
The Executive Management Group
(“EMG”) was established in 2016,
comprising the Executive Directors
along with the executive managers who
are responsible for the major business
clusters and key Group functions. The
EMG members are a combination of
internally developed managers and
experienced senior managers who
have been recruited externally.
The EMG provides the opportunity for its
members to broaden their perspective
of the Group’s activities in order to
reinforce the key elements of the Group’s
culture and to identify best practices
which are transferable across the Group.
The EMG meets quarterly through a
combination of full group meetings
in London and sub-group meetings
held in the major business locations.
The EMG provides the senior
management bench strength to
manage a growing and broadly spread
Group while laying the groundwork for
succession in key executive positions.
08
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORTBuilding management strength The first objective was achieved in
an introductory presentation and
animation video which summarised the
development of the Group over the five
years, with strong double-digit growth
in adjusted EPS, TSR and dividends and
an increase in market capitalisation
from ca. £400m to ca. £1.2bn.
The other three objectives were
achieved in break-out sessions for each
of the three Sectors, where the EMG
members presented the key features
and resilient characteristics of their
businesses and demonstrated key
products. They also described the key
elements of competitive advantage
and barriers to entry which support
the attractive margins. Finally, they
detailed the substantial runway for
growth in each business in terms of
new product and market opportunities,
geographic expansion and acquisitions.
Capital Markets Day
In February 2017, the Group hosted a
Capital Markets Day (“CMD”) in London,
exactly five years to the day after the
previous CMD held in February 2012.
There were four key objectives for
the day:
1. Five-year track record – to show the
Group’s progress over the last five
years in executing its strategy and
delivering strong growth in earnings
and shareholder value.
2. Resilience and sustainable margins
– to demonstrate the resilience of the
Group’s businesses and the high
barriers to entry which protect the
Group’s stable and attractive margins.
3. Runway for growth – to give
confidence in the substantial further
“runway for growth” over the next five
years, through a combination of stable
underlying growth and value
enhancing acquisitions.
4. Senior management bench strength
– to introduce the strong and
experienced senior management team
which is in place to drive the next
phase of the Group’s development.
The various presentations and video material delivered at the CMD are on the Diploma PLC
website in the Investors section under the heading “Diploma PLC Investor Day 2017”.
09
Diploma PLC Annual Report & Accounts 2017 HOW WE GENERATE VALUE
Our Business Model
Making us essential
to our customers
e n t ial Products
s
E s
E
s
s
e
n
t
i
a
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S
o
l
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tions
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e
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al
s s e ntial V
E
Our Business Model is built on the three
“Essentials” – essential Products, Solutions
and Values.
What we put in
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:
• 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.
What we get out
How we have made progress
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 GDP plus levels of underlying
revenue growth, over the economic cycle, with higher
growth rates achieved at the Group level through
carefully selected value enhancing acquisitions.
Performance is measured by the underlying growth in
revenue, after adjusting for currency and acquisitions:
• This year, the underlying growth has been +7%.
• Over five years, the average has been +5% p.a..
For more information
See page 15
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.
Performance is measured by the level and stability over
time of gross and operating margins:
• Gross margins have remained broadly stable over many
years, excluding shorter term currency effects.
• This year, adjusted operating margin improved 10bps
• Over five years, the average adjusted operating margin
to 17.3%.
has been 18%.
For more information
See page 15
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.
Agility and responsiveness in the businesses ensure
close management of operating costs and working
capital and deliver strong free cash flow.
Performance is more difficult to measure directly, but
non-financial KPIs can give an indication of organisational
stability and health. Over the last five years:
• Average length of service for all employees has been
ca. 6.5 years (ca. 11 years for the senior management cadre).
• Number of working days lost to sickness has consistently
been only ca. 1% a year.
For more information
See page 15
10
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT
What we put in
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:
• 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.
What we get out
How we have made progress
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 GDP plus levels of underlying
revenue growth, over the economic cycle, with higher
growth rates achieved at the Group level through
carefully selected value enhancing acquisitions.
Performance is measured by the underlying growth in
revenue, after adjusting for currency and acquisitions:
• This year, the underlying growth has been +7%.
• Over five years, the average has been +5% p.a..
For more information
See page 15
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.
Performance is measured by the level and stability over
time of gross and operating margins:
• Gross margins have remained broadly stable over many
years, excluding shorter term currency effects.
• This year, adjusted operating margin improved 10bps
to 17.3%.
• Over five years, the average adjusted operating margin
has been 18%.
For more information
See page 15
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.
Agility and responsiveness in the businesses ensure
close management of operating costs and working
capital and deliver strong free cash flow.
Performance is more difficult to measure directly, but
non-financial KPIs can give an indication of organisational
stability and health. Over the last five years:
• Average length of service for all employees has been
ca. 6.5 years (ca. 11 years for the senior management cadre).
• Number of working days lost to sickness has consistently
been only ca. 1% a year.
For more information
See page 15
11
Diploma PLC Annual Report & Accounts 2017 HOW WE GENERATE VALUE
Growth Strategy
Compounding growth
through acquisitions
Acquire
B
u
i
l
d
Grow
Growth is accelerated by investing in value
enhancing acquisitions
12
What we put in
What we get out
How we have made progress
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; and
• capable management.
The principal financial criteria are:
• Track record of stable, profitable growth and
cash generation.
• Exceed post-tax IRR threshold of 13% to ensure
20%+ pre-tax return on investment.
Build
The acquisitions we make are of businesses 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.
Working with the management, we provide the
investment required to build a solid foundation to
allow the business to move to a new level of growth.
The investment we make in new acquisitions will
normally be in new facilities and IT systems, increased
but better managed working capital and additional
management resource.
Grow
Once the acquisition is integrated into the Group, with
a solid platform established, the focus is on delivering
stable, profitable growth.
The results of the Acquire, Build, Grow strategy can be
seen in the improving revenue growth and operating
margins post acquisition.
Acquisitions give entry into new but related markets and thereby
extend the reach of the existing businesses and bring new
Abacus
growth opportunities.
The Group applies a consistent level of effort and resources to
identifying and developing acquisition opportunities. However,
the output in terms of acquisitions completed, ebbs and flows
depending on the acquisition environment.
To achieve the Group’s objective of strong double-digit growth,
acquisition spend of at least £30m p.a. is targeted.
In April 2017, the DHG group acquired Abacus,
a long established supplier of specialised diagnostic
instrumentation and consumables in Australia and
New Zealand. Abacus has a good fit with our existing
DS business, adds attractive product lines, critical
mass and economies of scale in Clinical Diagnostics
and gives entry to new segments within the broader
Healthcare and Life Sciences sectors.
For more information
See pages 18–19
Except in the case of smaller bolt-on acquisitions, the acquired
companies maintain their distinct sales and marketing identity
and strong independent management teams.
Where there are opportunities for synergies with other Group
businesses, these are managed in larger business clusters.
Synergies typically include:
Cross-selling between the businesses
Joint purchasing between the businesses
Shared operational infrastructure and shared back-office
functions
US Industrial OEM Seals
In the second half of this year, a senior leadership team
was established to manage the cluster of Industrial OEM
Seals businesses in the US. While maintaining the distinct
identities of the businesses and close local contact with
the customers, key functions including Sales, Supply
chain, Technical and Finance will be managed centrally by
this team. Investment will also be made in implementing
a new ERP system to replace the disparate legacy
IT systems.
For more information
See pages 22–23
By the third year post-acquisition, underlying revenue growth
for the acquired businesses is typically higher than the Group
average and operating margins have improved by 200–300bps
Cablecraft
on average.
These improvements in financial performance ensure that the
Group creates value through its acquisition programme and
maintains ROATCE above the 20% threshold.
Cablecraft, in only its second year as part of the Group,
is already showing the benefits of investments made
post-acquisition in increasing management and sales
resources, expanding e-commerce capabilities and
refurbishing facilities.
Under the continued strong leadership of one of the former
owners, Cablecraft has increased revenues in 2017 by 7%
on a like-for-like basis and has improved operating margins
by ca. 300bps.
For more information
See pages 26–27
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT What we put in
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; and
• capable management.
The principal financial criteria are:
• Track record of stable, profitable growth and
cash generation.
• Exceed post-tax IRR threshold of 13% to ensure
20%+ pre-tax return on investment.
Build
The acquisitions we make are of businesses 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.
Working with the management, we provide the
investment required to build a solid foundation to
allow the business to move to a new level of growth.
The investment we make in new acquisitions will
normally be in new facilities and IT systems, increased
but better managed working capital and additional
management resource.
Grow
Once the acquisition is integrated into the Group, with
a solid platform established, the focus is on delivering
stable, profitable growth.
The results of the Acquire, Build, Grow strategy can be
seen in the improving revenue growth and operating
margins post acquisition.
What we get out
How we have made progress
Acquisitions give entry into new but related markets and thereby
extend the reach of the existing businesses and bring new
growth opportunities.
The Group applies a consistent level of effort and resources to
identifying and developing acquisition opportunities. However,
the output in terms of acquisitions completed, ebbs and flows
depending on the acquisition environment.
To achieve the Group’s objective of strong double-digit growth,
acquisition spend of at least £30m p.a. is targeted.
Abacus
In April 2017, the DHG group acquired Abacus,
a long established supplier of specialised diagnostic
instrumentation and consumables in Australia and
New Zealand. Abacus has a good fit with our existing
DS business, adds attractive product lines, critical
mass and economies of scale in Clinical Diagnostics
and gives entry to new segments within the broader
Healthcare and Life Sciences sectors.
For more information
See pages 18–19
Except in the case of smaller bolt-on acquisitions, the acquired
companies maintain their distinct sales and marketing identity
and strong independent management teams.
Where there are opportunities for synergies with other Group
businesses, these are managed in larger business clusters.
Synergies typically include:
Cross-selling between the businesses
Joint purchasing between the businesses
US Industrial OEM Seals
In the second half of this year, a senior leadership team
was established to manage the cluster of Industrial OEM
Seals businesses in the US. While maintaining the distinct
identities of the businesses and close local contact with
the customers, key functions including Sales, Supply
chain, Technical and Finance will be managed centrally by
this team. Investment will also be made in implementing
a new ERP system to replace the disparate legacy
IT systems.
Shared operational infrastructure and shared back-office
functions
For more information
See pages 22–23
By the third year post-acquisition, underlying revenue growth
for the acquired businesses is typically higher than the Group
average and operating margins have improved by 200–300bps
on average.
These improvements in financial performance ensure that the
Group creates value through its acquisition programme and
maintains ROATCE above the 20% threshold.
Cablecraft
Cablecraft, in only its second year as part of the Group,
is already showing the benefits of investments made
post-acquisition in increasing management and sales
resources, expanding e-commerce capabilities and
refurbishing facilities.
Under the continued strong leadership of one of the former
owners, Cablecraft has increased revenues in 2017 by 7%
on a like-for-like basis and has improved operating margins
by ca. 300bps.
For more information
See pages 26–27
13
Diploma PLC Annual Report & Accounts 2017 HOW WE GENERATE VALUE
Strategic Priorities and KPIs
Strategic Priority
GDP+ underlying
revenue growth
We focus on essential products
and services, funded by customers’
operating rather than capital budgets,
giving resilience to revenues.
Attractive margins
Our attractive operating margins
are sustained through the quality
of customer service, the depth
of technical support and value
adding activities.
Agile and responsive
organisation
We encourage an entrepreneurial
culture in our businesses through
our decentralised organisation.
Acquisitions to
accelerate growth
Carefully selected, value enhancing
acquisitions accelerate the underlying
growth and take us into related
strategic markets.
Strong cash flow
An ungeared balance sheet and strong
cash flow fund our growth strategy
while providing healthy and growing
dividends.
Value creation
We aim to create value by consistently
exceeding 20% ROATCE.
e n t ial Products
s
E s
E
s
s
e
n
t
i
a
l
S
o
l
u
tions
s
e
u
al
s s e ntial V
E
Acquire
B
u
i
l
d
Grow
14
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT
Key Performance Indicators
Total revenue growth (£m)
Underlying revenue growth (%)
17
16
15
14
13
451.9
382.6
333.8
305.8
285.5
+12% p.a.
Five-year compound
17
16
15
14
13
+3
+1
+4
+7
+5% p.a.
Five-year average
+8
Adjusted operating margins (%)
17
16
15
14
13
18%
Five-year average
17.3
17.2
18.1
18.5
19.0
Improvement in adjusted
operating margin of acquired
businesses three years after
acquisition
Adjusted operating margin (∆bps) +200–
300bps
Length of service (years)
Average working days lost to sickness (%)
17
16
15
14
13
6.5 years
Five-year average
6.7
6.7
6.6
6.3
6.2
17
16
15
14
13
1.3
1.2
1.2
1.2
0.9
1.2%
Five-year average
Acquisition spend (£m)
Revenue from acquisitions1 (% of total)
17
16
15
14
13
20.1
16.5
2.2
32.7
37.8
£22m p.a.
Five-year average
17
16
15
14
13
16
20
11
14
15
15%
Five-year average
1 Completed over the last (rolling) three years.
Free cash flow (£m)
Working capital (% of revenue)
17
16
15
14
13
55.7
59.0
£45m p.a.
Five-year average
17
16
15
14
13
40.3
37.8
31.6
15.0
16.6
17.0
17.2
16.7
16–17%
Five-year average
ROATCE (%)
17
16
15
14
13
24.0
21.1
23.9
25.8
25.8
24%
Five-year average
15
Diploma PLC Annual Report & Accounts 2017 SECTOR REVIEW
Life Sciences
The Life Sciences Sector
businesses supply a
range of consumables,
instrumentation and
related services to the
Healthcare and
Environmental industries.
Principal segments
84% Healthcare
16% Environmental
Geography
52% Canada
28% Europe
20% Australasia
Customers
84% Clinical
9% Utilities
4% Chemical & Pharmaceutical
2% Life Sciences Research
1% Other Life Sciences
Products
74% Consumables
17%
9% Service
Instrumentation
16
Healthcare
The Diploma Healthcare Group (“DHG”)
operates in three principal geographies
– Canada, Australasia and Europe. In
Canada, DHG supplies to the ca. 600
public hospitals across the country as
well as to private clinics and pathology
laboratories. Somagen Diagnostics
(“Somagen”) supplies a range of
consumables and instruments used in
the diagnostic testing of blood, tissue
and other samples. It is also a leading
supplier to the growing cancer screening
and the assisted reproductive technology
(“ART”) markets. AMT surgical (“AMT”)
supplies specialised electrosurgery
equipment and consumables for use
in hospital operating rooms and is
also building a portfolio of specialised
surgical instruments and devices used
in minimally invasive (“MI”) surgery.
Vantage Endoscopy (“Vantage”), now
managed as a separate division within
AMT, supplies endoscopes and related
consumables, therapeutic devices
and services to GI Endoscopy suites in
hospitals and private clinics. Vantage
is also expanding its portfolio into the
Urology and Gynaecology surgical
segments with rigid and flexible scopes
and specialised instrument sets.
In Australia and New Zealand, DHG
expanded its operations with the
acquisition in April 2017 of Abacus
ALS, a long established supplier of
instrumentation and consumables
to the Pathology and Life Sciences
sectors. Abacus ALS is in the process
of being combined with Diagnostic
Solutions (“DS”) to form abacus dx, a
larger, broader based clinical diagnostics
business supplying to both public
and private laboratories. Big Green
Surgical (“BGS”) supplies a range of
products to the Surgical Products
sector and shares several common
suppliers with AMT in Canada.
In Europe, DHG operates through
Technopath Distribution (“TPD”), an
established supplier of products to the
Biotechnology, Clinical Laboratory and
Medical Device markets in Ireland and the
UK. Similar to the other DHG businesses,
TPD focuses on specialised laboratory
diagnostics and specialty medical
device segments, again leveraging
a number of common suppliers.
Environmental
The a1-group is a supplier to
Environmental testing laboratories
and to Health & Safety engineers. The
a1-envirosciences business, based in
Germany, supplies a range of specialised
environmental analysers and a range
of containment enclosures for potent
powder handling. The a1-CBISS business,
based in the UK, supplies equipment and
services for the monitoring and control
of environmental emissions, as well
as a range of gas detection devices.
Market drivers
The DHG businesses in Canada supply
into areas of Healthcare which are
predominantly public sector funded.
Private sector funding, representing
ca. 30% of Healthcare expenditure in
Canada, is largely focused on areas where
DHG do not participate, specifically
dental, cosmetic and eye surgery and
pharmaceuticals. The principal demand
driver for DHG in Canada is therefore the
sustainable level of Healthcare spending
funded by the Canadian Government.
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. A growing, ageing and well
educated population demands high
standards of service delivery, helping
to ensure ongoing growing demand.
The Provinces are responsible for the
delivery of the Healthcare services,
but the Federal Government partially
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 and current expenditure of
Principal operations
Healthcare
Somagen Diagnostics
AMT Surgical
Vantage Endoscopy
abacus dx
Big Green Surgical
Technopath Distribution
Environmental
a1-CBISS
a1-envirosciences
Edmonton, AB, Canada
Kitchener, ON, Canada
Kitchener, ON, Canada
Brisbane, QLD & Melbourne, VIC, Australia
Melbourne, VIC, Australia
Ballina, Co. Tipperary, Ireland
Tranmere, UK
Düsseldorf, Germany
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT 10.3% of GDP (11.1% including capital
expenditure) places Canada in the
top 20% of OECD countries.
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 has been slower,
Healthcare funding has still shown
positive growth, albeit at reduced levels.
In 2016, public Healthcare spending
in Canada was ca. C$160bn, with
the largest category of expenditure
(C$65bn) being in the hospital sector.
The Healthcare market in Australia
shares with Canada many of the same
attractive characteristics for specialised
distribution. While privately funded
Healthcare is more prevalent in areas
such as surgery and laboratory testing,
public sector Healthcare funding is
still large and supported by a stable,
resource based economy. As with
Canada, Australia has a large geography
to be covered, low population density
and purchasing processes that vary by
State. These characteristics necessarily
demand a significant investment by
manufacturers in technical sales and
service resource which makes the
specialised local distribution model
a very attractive mechanism for
manufacturers to serve the local markets.
Since 2013, the Canadian and Australian
economies have come under significant
pressure from the falling oil price and
reduced demand for the countries’
natural resources. This tougher economic
environment has resulted in greater
pressure on budgets throughout the
Healthcare systems in both countries.
In such periods, Healthcare funding is
tightly constrained through targeted
controls imposed on the number
of laboratory tests and operating
procedures as well as more rigorous
tendering and Group procurement
processes for expenditure on capital
equipment. Even with such pressures,
however, Healthcare funding has shown
positive growth in total Healthcare
expenditure of 2–3% and 4–5%
respectively in Canada and Australia.
The principal market driver for the
TPD business is Healthcare funding
in the UK and Ireland, which totals
ca. £200bn, representing ca. 10% of
combined GDP. The UK accounts for
ca. 90% of the total funding and ca.
80% is provided by public funding and
20% by private funding. Following the
2009 recession, annual growth in UK
Healthcare expenditure has slowed to
low single-digit levels, compared with
average growth of 8% p.a. over the
previous decade. In Ireland, Healthcare
Canadian Healthcare expenditure1 (C$bn) % growth
16
15
14
13
12
159.1
155.6
152.0
148.2
145.1
68.9
66.5
63.8
61.1
60.3
2.7%
2.9%
3.1%
1.9%
3.2%
Public
Private
Source: Canadian Institute for Health Information.
1 Includes capital expenditure.
Australian Healthcare expenditure1 (A$bn) % growth
16
15
14
13
12
114.6
55.8
108.1
104.9
100.4
99.3
53.5
49.8
46.6
42.6
5.4%
4.5%
5.2%
3.6%
7.8%
Public
Private
Source: Australian Institute of Health & Welfare.
1 Includes capital expenditure.
UK Healthcare expenditure1 (£bn)
% growth
15
14
13
12
11
129.4
28.2
125.6
27.3
119.4
116.3
113.7
26.2
25.7
24.0
3.1%
5.0%
2.5%
3.1%
2.9%
Public
Private
Source: UK Health Accounts (2016 data not yet available).
1 Excluding capital expenditure.
Total current Healthcare expenditure1 as a percentage of GDP
Canada
Australia
UK
Source: OECD.
1
Excluding capital expenditure.
2012
2013
2014
2015
2016
10.2%
8.7%
8.5%
10.1%
8.8%
9.9%
10.0%
9.1%
9.8%
10.3%
9.4%
9.9%
10.3%
9.6%
9.7%
expenditure saw reductions year-on-year
in 2010 and 2011, since when growth has
resumed again at low single digit levels.
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.
17
Diploma PLC Annual Report & Accounts 2017 SECTOR REVIEW
Life Sciences
Highlights from the year
• Sector revenue growth of 15%;
underlying growth of 4% after
adjusting for currency, an
acquisition and a disposal
• In Canada, DHG underlying
revenues increased by 6% with
strong capital revenues as projects
were reactivated; AMT and Vantage
combined into single Surgical
Products business
• In Australia, underlying revenues
increased by 4%; Abacus acquired
in April 2017 and being integrated
with DS to form a larger broader-
based business
• TPD revenues broadly flat in Ireland
and the UK with new suppliers and
products replacing suppliers moving
to direct supply model
• Environmental businesses increased
underlying revenues by 3%,
finishing the year with strong
order books
Revenue (£m)
(compound growth over five years)
Sector performance
Reported revenues of the Life Sciences
businesses increased by 15% to £125.9m
(2016: £109.9m). The acquisition of
Abacus ALS (“Abacus”), acquired in
April 2017, added £7.6m or 7% to Sector
revenues, but this was offset by the
prior year disposal of the Medivators
business. Currency movements,
on translation of the results from
overseas businesses to UK sterling,
contributed a further 11% to Sector
revenues. After adjusting for currency,
the acquisition and the disposal,
underlying revenues increased by 4%.
Sector adjusted operating margins
improved by 70bps benefiting from a
combination of stronger gross margins
in Abacus and from reduced operating
costs following the consolidation of the
AMT and Vantage business operations
into one facility at the beginning of the
year. Transactional currency pressures
on the Healthcare businesses also eased
towards the end of the year, following
a number of years when gross margins
were significantly impacted by the
progressive depreciation of the Canadian
and Australian dollars relative to the
US dollar and Euro. Operating margins
also strengthened in the Environmental
businesses, with an increase in gross
margins and with improved leverage
from the increased revenues. Sector
adjusted operating profits increased
by 19% to £23.3m (2016: £19.6m).
+10% p.a.
17
125.9
16
15
14
13
12
109.9
103.1
91.4
93.2
78.4
Revenue
£125.9m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
18
2017
2016
£125.9m £109.9m
£23.3m £19.6m
+15%
+19%
18.5%
17.8% +70bps
£17.0m £19.0m
–11%
19.7%
18.0% +170bps
The Life Sciences businesses invested
£2.0m in new capital during the year
(2016: £1.9m) of which £1.6m (2016:
£0.9m) was spent on acquiring field
equipment for both new placements in
hospitals and laboratories and for loan
equipment and demonstration models
to support existing placements. The
increase in spend on field equipment
was largely driven by the launch of
a new series of flexible endoscopes,
together with the addition of a range
of rigid endoscopes under a new
supplier agreement. A further £0.3m
was invested, in part on the AMT/
Vantage facility consolidation and in
part on the general IT infrastructure of
the Life Sciences businesses. Free cash
flow reduced to £17.0m (2016: £19.0m),
reflecting the slightly higher working
capital in the Healthcare businesses;
although last year’s free cash flow
also included £2.2m received on the
disposal of the Medivators business.
Healthcare
The DHG group of Healthcare businesses,
which account for 84% of Life Sciences
revenues, increased underlying revenues
by 4% after adjusting for currency,
the acquisition of Abacus and the
disposal of the Medivators business.
In Canada, underlying revenues increased
by 6% against the background of
continuing budget pressures throughout
the Provincial healthcare systems,
but with strong capital revenues as
new technology was introduced and
delayed projects were reactivated in
the diagnostic laboratory sector.
Somagen’s core Clinical Diagnostics
business in Canada delivered an increase
of 10% in revenues, with steady growth
in consumable and service revenues
boosted by strong growth in capital
revenues. Demand for diagnostic
testing remained robust, particularly
with the growth of cancer screening
tests and related diagnostics and capital
revenues increased strongly with new
technology introduced in the areas of
Allergy, Autoimmunity and Histology.
Capital revenues also benefited from
some relaxation in the policy of regional
consolidation of diagnostic laboratories
in Quebec despite the continued drive
for cost savings and efficiencies within
many public medical laboratories.
AMT and Vantage were combined into
a single, more efficient Surgical and GI
specialty medical device business in
Canada following the disposal of the
Medivators business in September
last year. Warehousing, logistics
and back office functions have been
integrated within AMT’s facility in
Kitchener, which has provided good
opportunities for operational leverage
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT from the increased scale of the combined
business. In its core electrosurgery
business, AMT continued to face
pricing pressures from the tender
and evaluation processes introduced
by shared service organisations and
national group purchasing organisations
(“GPOs”). These pricing pressures will
continue to be a factor as the GPOs
continue to consolidate in Canada.
However, AMT was able to maintain
revenues by increasing sales of
specialised surgical instruments and
devices used in laparoscopic and
other MI surgical procedures.
Vantage, operating now as a division
of AMT, increased revenues in its
core GI/endoscopy product lines and
successfully launched a new series of
flexible endoscopes with significantly
improved light imaging performance
and higher reliability. Vantage also
secured the exclusive distribution
rights for a premium range of rigid
and flexible endoscopes and surgical
instrument sets, which give entry into
the Urology and Gynaecology segments
and provide further opportunities for
growth in the Surgical products sector.
In Australia, the Healthcare sector in
recent years has experienced similar
healthcare budget pressures to Canada,
but has the added capacity of private
Healthcare spending to offset some
of the economic constraints. Against
this background, the BGS and DS
businesses have increased revenues
by 4% in local currency terms. BGS
increased revenues by 8%, with smoke
evacuation programmes in existing
and new accounts continuing to be
the principal driver to growth. DS also
delivered modest revenue growth, with
strong sales of Protein Electrophoresis
consumables following a number of
capital placements during the prior year.
In April 2017, DHG completed the
acquisition of Abacus, a long established
supplier of diagnostics instrumentation
and consumables to the Pathology and
Life Sciences sectors in Australia and
New Zealand. Abacus supplies to the
large private laboratories that dominate
the Clinical Diagnostic services industry
in the region as well as supplying
direct to certain hospitals and to the
regional laboratory service groups that
support hospital testing in the various
States. Abacus has particular strengths
in Immunology and Biochemistry
testing and also is developing a
niche specialty Patient Simulation
business in the Australian market.
Abacus has very complementary
clinical diagnostics products to the DS
business and these two businesses
are now in the process of being
integrated to form abacus dx, a larger
broader-based Clinical Diagnostics,
Life Science and Patient Simulation
business, supplying to both the public
and private pathology laboratories,
and to research and educational
institutions across Australasia.
The TPD business in Ireland and the UK
reported revenues broadly flat in Euro
terms, with business transacted in UK
sterling (ca. 40% of revenues) impacted
by the weaker currency. TPD continued
to achieve steady growth in supplying
clinical chemistry and serology products
used to control quality in Clinical
Diagnostics laboratories. TPD also
delivered revenue growth in specialty
medical devices used in digestive health
and rapid microbial testing products
used in industrial laboratories. However,
revenues reduced in the water testing
and interventional cardiology segments
as certain suppliers moved from
specialised distribution to a direct supply
model. TPD is introducing a number of
new suppliers and products to replace
these revenues and it is broadening its
service capability beyond diagnostic
instrumentation to extend into the blood
services sector. TPD has also established
a new Surgical Products division to bring
to market the electrosurgical and smoke
evacuation products similarly supplied by
AMT and BGS in Canada and Australia.
Environmental
The a1-group of Environmental
businesses in Europe, which account
for 16% of Life Sciences revenues,
saw revenues increase by 9% in
UK sterling terms and 3% growth
in constant currency terms.
The a1-envirosciences business based
in Germany increased revenues by 3%
in Euro terms against a strong prior year
comparative, which had benefited from
a large mercury detector order. Revenue
from high-end trace and elemental
analysers used in the Environmental
and Petrochemical industries delivered
good growth, with the second half
of the year being particularly strong
in the UK and the Benelux region.
Service revenue continued to grow
with the larger installed base and
with increasing demand from the
larger customers for faster response
times. Demand for containment
enclosures for the safe weighing of
hazardous materials remains robust.
The a1-CBISS business based in the UK
increased revenues by 2% with continued
growth in the installation of continuous
emissions monitoring systems (“CEMS”)
and increased service contract revenues
from CEMS projects delivered in the last
18 months. The sector remains buoyant
with new Energy from Waste (“EFW”)
Potential for growth
Increase share of specialised
segments of Healthcare
markets in Canada,
Australia and UK/Ireland
Leverage product portfolio
across existing businesses
and extend into other
medical disciplines
Pursue further acquisition
opportunities in Europe
and Asia-Pacific
Continue to develop product
and geographic spread of
Environmental businesses
plants playing an important role in
reducing landfill waste. The gas detection
sector has started to see increased
demand from Oil & Gas customers for
single-use gas detection tubes after a
number of years of lower activity levels.
19
Diploma PLC Annual Report & Accounts 2017 SECTOR REVIEW
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.
Principal segments
32% North America Aftermarket
29% North America Industrial OEM
39% International
Geography
57% North America
33% Europe
10% Rest of World
Customers
45% Industrial OEMs
32% Heavy Construction
18% MRO & Other Industrial
3% Dump & Refuse Trucks
2% Logging and Agriculture
Products
38% Seals & Seal Kits
17% O-rings
17% Cylinder & Other
11% Filters
11% Gaskets
6% Attachment Kits
20
North America
The Aftermarket businesses in North
America supply sealing and associated
products to support a broad range of
mobile machinery in applications which
include Heavy Construction, Mining,
Logging, 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 the
pre-used market. The main customers
are machinery and cylinder repair shops,
engine and transmission rebuilders and
other heavy equipment parts distributors.
The Industrial OEM businesses in
North America 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 design, material
and manufacturer for the application,
provide technical support and guidance
during the product development process
and deliver the logistics capabilities to
supply from inventory to support small
to medium sized production runs.
International
The International Seals businesses
outside North America supply a range
of seals, gaskets, filters, custom
moulded and machined parts and
hydraulic cylinder components to
both Aftermarket and Industrial OEM
customers. The businesses also supply
products to end users operating process
plants within the Mining, Oil & Gas,
Pharmaceutical, Chemical, Food and
Energy sectors, where products are
required to support Maintenance, Repair
and Overhaul (“MRO”) operations.
Principal operations
North America (HFPG)
Market drivers – North America
In the Aftermarket businesses in North
America, the principal drivers are the
general GDP growth and in particular,
activity and spending levels in the
Heavy Construction and Infrastructure
sectors. In 2017, the US economy is
forecast to show annual GDP growth
of 2.2% (2016: 1.6%) driven primarily
by strong consumer spending and
growth in business investments.
Total US Construction spend (including
non-residential and infrastructure spend,
as well as residential housing activity)
has continued to rise through 2017.
Unit sales in the US of Construction
Equipment (defined as heavy mobile
equipment including excavators
above 14 tonnes, crawler dozers and
wheeled loaders) is important as a
medium term indicator for Hercules’
replacement hydraulic seals activities,
as the new equipment will move out
of the dealer warranty period in the
following years. It is also a good short
term indicator for the HKX attachment
kit business. During 2016 and the
first half of 2017, the demand for new
equipment declined as the general
mobile machinery population is relatively
new and contractors continue to opt
for the rental model for their equipment
needs; rental fleet utilisation rates have
increased by ca. 10% year over year.
In Canada, 2017 GDP growth is forecast
to increase to 3% (2016: 1.5%) as a
stronger economy and stable oil prices
are expected to lead to expanding
exports and stable domestic demand.
In general, the economic conditions
in the South and Central American
economies served by the North
American Aftermarket businesses
continue to be challenging.
Aftermarket
Hercules US
Hercules Canada
Bulldog
HKX
Industrial OEM
J Royal
RT Dygert
All Seals
International
FPE Seals
Kentek
M Seals
Kubo
WCIS
Clearwater, FL, US
Barrie, ON & Montreal, QC, Canada
Tampa, FL, US
Monroe, WA, US
Winston-Salem, NC & Tallassee, AL, US; Shanghai, China
Minneapolis, MN, Chicago, IL & Seattle, WA, US
Lake Forest, CA, Denver, CO & Houston, TX, US
Darlington & Aberdeen, UK; Breda, The Netherlands
Helsinki, Finland; St. Petersburg, Russia; Riga, Latvia
Espergaerde, Denmark; Halmstad, Sweden; Beijing, China;
Gateshead & Leicester, UK
Effretikon, Switzerland; Linz, Austria
Perth & Brisbane, Australia; Noumea, New Caledonia
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT For the Industrial OEM Seals businesses
in North America, the principal market
driver is the growth rate in the general
industrial economy. US industrial
production reached a peak at the
end of calendar year 2014 and then
declined through 2015 and 2016. In
2017, the industrial economy returned
to steady growth as a general rise
in manufacturing was supported
by stabilised activity within the
Mining and Oil & Gas segments.
Market drivers – International
The International Seals businesses
operate in a range of countries and
diverse market sectors and each has
its own specific market drivers. The
most relevant market drivers and
indicators are therefore the general
GDP growth and Industrial sector
performance for the major geographies
in which the businesses operate.
In the UK, economic growth is forecast
to remain broadly flat in 2017 at
ca. 1.7% (2016: 1.8%). The weakened
UK sterling is providing short term
benefits to exporters, but this is offset
by uncertainty over the terms of any
future EU trade deal, which has led to
investment decisions being postponed
or deferred. The UK Construction sector,
which drives the Aftermarket business,
has been steadily growing since mid-
2012, driven mostly by new housing
work, but began to show signs of a
slow-down in the second half of FY2017.
In the Nordic region, all countries are
forecast to show positive GDP growth
in 2017. Average growth across the
region is forecast to be ca. 2.5% (2016:
2.0%) with Sweden forecast to show
the strongest growth and Finland
showing good recovery in 2016 and
2017 after several years of weakness.
In Switzerland, the economy continued
to be affected by the strength of the
Swiss Franc following its decoupling
from the Euro in 2015, making exports of
Swiss Industrial products less attractive.
However, during 2017, the Swiss Franc
has weakened against the Euro, resulting
in an increase in Industrial activity.
In Russia, the impact of low oil prices
and EU and US sanctions continues to
hinder economic growth. However,
the economy is benefiting from a
stabilisation of oil prices and foreign
exchange rates and lower levels of
inflation and, after having contracted
by 2.8% in 2015 and 0.2% in 2016, GDP
is forecast to grow by 1.8% in 2017.
US construction spend (US$bn)
600
500
400
300
200
100
08
09
10
11
12
13
14
15
16
Source: Cyclast Intercast.
US construction equipment units (’000)
60
50
40
30
20
10
08
09
10
11
12
13
14
15
16
Source: Cyclast Intercast.
US industrial production index
120
110
100
90
80
07
08
09
10
11
12
13
14
15
16
17
Source: US Federal Reserve (seasonally adjusted).
GDP growth in principal International Seals territories
Real GDP growth
UK
Nordic region
Switzerland
Russia
Australia
Source: IMF and Nordic Cooperation.
2012
2013
2014
2015
2016
+1.3%
+0.5%
+1.0%
+3.7%
+3.6%
+1.9%
+0.8%
+1.9%
+1.8%
+2.1%
+3.1%
+1.7%
+2.5%
+0.7%
+2.8%
+2.2%
+2.2%
+1.2%
–2.8%
+2.4%
+1.8%
+2.0%
+1.4%
–0.2%
+2.5%
In Australia, industrial activity has been
adversely affected by the downturn
in the Mining sector, but the broader
economy continues to be driven
by increased public and consumer
spending. GDP growth is forecast
to slow to ca. 2.2% in 2017 (2016:
2.5%), but is forecast to increase in
2018 supported by the recovery in
the Mining and Oil & Gas sectors.
21
Diploma PLC Annual Report & Accounts 2017 SECTOR REVIEW
Seals
Highlights from the year
• Sector revenue growth of 17%;
underlying growth of 4%
after adjusting for currency
and acquisitions
• In North America, Aftermarket
underlying revenues increased by
5% with a good performance in the
core Hercules business and a strong
recovery in the HKX business
• Industrial OEM underlying revenues
in North America increased by 7%
with an improving trend through
the year following the US election
• Senior leadership team established
to manage cluster of Industrial OEM
businesses in the US
• International Seals businesses
increased underlying revenues
by 1% with performances of the
businesses very dependent on
local market conditions
Revenue (£m)
(compound growth over five years)
+14% p.a.
17
195.3
16
15
14
13
12
166.6
139.6
119.8
106.1
99.9
Revenue
£195.3m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
22
Sector performance
Reported revenues of the Seals
businesses increased by 17% to £195.3m
(2016: £166.6m), with the acquisitions
of PSP and Edco completed during
the year contributing £2.1m or 1% to
Sector revenues. Currency movements,
on translation of the results from
overseas businesses to UK sterling,
contributed a further 12% to Sector
revenues. After adjusting for the
acquisitions and for currency effects,
underlying revenues increased by 4%.
Adjusted operating margins for the
Sector reduced by 60bps to 16.3%
(2016: 16.9%). Across the businesses,
gross margins reduced with product
margins under pressure from supplier
cost increases, but also reflecting an
increase in other margin support costs,
such as freight, discounts and stock
adjustments. This reduction in gross
margins was significantly mitigated
by a combination of tight control over
operating costs and improved operating
leverage through increased revenues.
Adjusted operating profits increased
by 13% to £31.9m (2016: £28.2m).
During the year, £1.1m (2016: £1.4m)
of capital expenditure was invested in
the Seals businesses which included
£0.6m to fit out new and expanded
facilities in J Royal, Hercules Canada
and Kentek. A further £0.2m was spent
on new warehouse equipment in the
Industrial OEM businesses, both in the
US and in Europe and £0.3m was spent in
connection with a major upgrade to the
IT facilities in the Hercules businesses.
The free cash flow generated in this
Sector was £24.9m, which remained
unchanged from last year with the
additional after tax operating cash
flow offsetting an increase in working
capital as trading strengthened
in the second half of the year.
North American Seals
The North American Seals businesses,
which account for 61% of Seals revenues,
reported revenues up 21% on the prior
year, benefiting from the weakening
of UK sterling against the US and
Canadian dollars and from the small
bolt-on acquisition of PSP. After excluding
2017
2016
£195.3m £166.6m
£31.9m £28.2m
+17%
+13%
16.3%
16.9% –60bps
£24.9m £24.9m
–
22.8%
20.1% +270bps
contributions from the acquired
businesses and currency effects,
underlying revenues increased by 6%.
The HFPG Aftermarket businesses
increased revenues by 5% on a
constant currency basis, driven by a
good performance in the core Hercules
Aftermarket Seals business in the US
and Canada and a strong recovery in
the HKX attachment kit business.
In the domestic US market, Hercules
revenues increased by 5% as utilisation
of heavy mobile machinery increased
substantially compared with the previous
year and expenditure levels in the
Construction sector showed steady
growth. The additional investment last
year in sales and marketing resources
also had a positive impact on revenues
and specific growth initiatives continued
to gain traction, including the focus
on national accounts and specialty
distributors. E-commerce continues
to deliver strong year on year growth
of ca. 20% p.a. in terms of both
revenues and invoices processed and
now accounts for 23% of Hercules
US revenues. Hercules continues to
add new products and to expand the
breadth of equipment supported, with
the new focus on Bobcat cylinders and
Aerial Lifts gaining good momentum.
In Canada, revenues increased by
5% in local currency terms, with the
strengthening Construction sector
driving growth in the repair market and
good growth in the Manufacturing sector,
particularly in Ontario and Quebec.
The modest recovery in the Oil & Gas
and Mining sectors has had a positive
impact and sales to hydraulic component
and attachment manufacturers have
also seen good growth. In markets
outside of North America, Hercules
and Bulldog revenues were broadly
flat with limited growth in Mexico and
the Middle East and reduced revenues
in South and Central America.
The HKX attachment kit business
returned to growth after two years of
significant revenue reductions, which
had reflected the severely depressed
market for new excavators. Revenues
increased by 11% with growth particularly
strong in sales to Canadian customers,
driven by recovery in the Oil & Gas sector,
increased pipeline construction and
strong sales of excavators ahead of new
emissions regulations. New attachment
kits have been developed to drive further
growth as well as quick coupler kits
with added safety features. The HKX
product line has also been extended
into higher tonnage equipment which
has seen good momentum supporting
large scale demolition projects.
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT The HFPG Industrial OEM businesses
in North America (J Royal, RT Dygert
and All Seals) increased revenues by
9% in US dollar terms, as the improving
trend in industrial activity seen in
the second quarter, following the US
election, strengthened further as the
year progressed. All three businesses
delivered double-digit revenue increases
in the second half of the year with
strong demand from key accounts
across a range of specialised industrial
applications in industries including
Water, Medical, Oil & Gas, Appliances
and Food Equipment. The businesses
continue to provide high levels of
customer service and technical support
to service existing projects while looking
for opportunities to deploy higher
specification, regulatory-compliant
compounds to target new projects
with higher levels of added-value.
In April 2017, J Royal relocated its
operations to a newly constructed,
purpose built facility in Winston-Salem,
North Carolina, which was then sold and
leased back to the business. At the same
time, the Group acquired PSP, a small
bolt-on acquisition to All Seals based in
Denver, Colorado which supplies O-rings
and custom rubber moulded products
and has strong customer relationships
in the semi-conductor and pneumatics
industries. PSP adds complementary new
products and strengthens the position
of the Industrial OEM Seals business
in the Mountain Region of the US.
The Industrial OEM Seal businesses
continue to pursue opportunities
to create synergies through joint
purchasing and through leveraging
the different product, material and
application skill-sets of the individual
businesses. In the second half of the
year, this was developed further by
establishing a senior leadership team
to manage this cluster of businesses in
North America. While maintaining the
distinct identity of the businesses and
close local contact with customers,
key functions including Sales, Supply
Chain, Technical and Finance will be
managed centrally by this team. The
team has also initiated a project to
implement a new ERP system across
the Industrial OEM Seals businesses
in the US, to replace the disparate
legacy IT systems in the businesses.
The new ERP system will be designed
to increase operational efficiency,
improve business intelligence and
deliver broader marketing capabilities.
International Seals
The International Seals businesses,
which account for 39% of Seals
revenues, reported a 12% increase
in UK sterling terms. After adjusting
for currency and the acquisition of
Edco, underlying revenues increased
by 1%, but with performances in the
individual businesses very dependent
on local market conditions.
Potential for growth
The FPE Seals and M Seals businesses,
with their principal operations in the
UK, Scandinavia and the Netherlands,
together delivered underlying growth
of 11% in revenues on a constant
currency basis. FPE Seals experienced
good growth in its core UK market
for Aftermarket hydraulic seals and
metal cylinder parts and benefited
from a recovery in demand from the
Oil & Gas sector for sealing products
used in Maintenance, Repair and
Overhaul (“MRO”) operations. FPE
Seals also benefited from strong
growth in several export markets.
M Seals delivered good growth in
revenues in its core markets, with
particularly strong growth in Sweden,
building on its strong customer
relationships to develop a number of
major new projects. M Seals has also
extended its activities into the Finnish
market for seals, by investing in a sales
resource based in Kentek’s facility
and making use of its operational
infrastructure. As with FPE Seals, M Seals
has also seen a recovery in demand
from the Oil & Gas sector in the UK
and is targeting specialised Industrial
OEMs in other sectors of the market.
In June 2017, the Group completed
the acquisition of Edco, a specialised
distributor of O-rings, seals and gaskets
based in Leicester and supplying to UK
OEMs and MRO companies operating
within the Oil & Gas and other process
industries. Edco’s success has been
built on deep technical knowledge,
high levels of customer service and
the ability to supply a wide range of
products from stock. Edco is being
managed as part of the M Seals group
with good opportunities for cross-selling
and improved purchasing power.
The Kentek business, with principal
operations in Finland and Russia,
increased revenues by 4% in Euro terms.
The revenues generated in Russia, which
account for ca. 65% of Kentek revenues,
slowed in the second half of the year after
strong revenue growth in Euro terms in
the first half. As selling prices for US and
European sourced filters are linked to the
Euro in this territory, the weakening of
the Russian Rouble against the Euro as
well as increasing competitive pressures
in this market contributed to the slow
down in revenue growth. However,
Kentek significantly increased sales of its
own-brand filters in Russia and the Baltics
and achieved good growth in Finland,
benefiting from a recovery in both the
Aftermarket and Industrial OEM sectors.
Kubo and WCIS saw combined underlying
revenues for the year reduce by 3%,
with a return to modest revenue growth
Continue to gain share
in Aftermarket Seals in
North America through
superior marketing,
“Webstore” E-commerce
and new products
Build and expand the group
of Industrial OEM Seals
businesses in North America
Explore opportunities
more broadly in Industrial
Distribution in North America
Build larger, broader-
based International Seals
business in the EMEA and
Asia-Pacific regions
in the second half of the year after a
9% reduction in the first half. Kubo has
been facing significant challenges in its
core industrial market in Switzerland,
where the strong currency has made
Swiss industrial manufacturers less
competitive. However, the strengthening
of the Euro through the year has
contributed to an increase in industrial
activity in Switzerland. In Austria,
Kubo’s improved sales focus has
introduced new customer revenues
in Pharmaceutical and Industrial
OEMs to replace a large prior year order
which was not repeated this year.
WCIS has core capabilities in gaskets
and mechanical seals used in MRO
operations in complex and arduous
conditions and has been significantly
impacted by cutbacks in the Mining
sector in recent years. In New Caledonia,
WCIS has come under substantial pricing
pressure from cost reduction initiatives
in the nickel mining and processing
operations of its major customer and
in Australia, it has also experienced
reduced revenues from its core Mining
customer base. WCIS has responded by
investing in additional sales resources to
broaden coverage across a wider range
of market sectors and territories and
this initiative is starting to gain some
traction, though as yet the revenues
are not sufficient to offset fully the
reductions in the Mining customer base.
23
Diploma PLC Annual Report & Accounts 2017
SECTOR REVIEW
Controls
The Controls Sector
businesses supply
specialised wiring,
connectors, fasteners
and control devices used
in a range of technically
demanding applications.
Principal segments
59% Interconnect
18% Specialty Fasteners
23% Fluid Controls
Geography
58% UK
33% Continental Europe
9% Rest of World
Customers
30% Aerospace & Defence
29% Industrial
15% Food & Beverage
14% Motorsport
5% Energy & Utilities
5% Medical & Scientific
2% Rail
Products
41% Wire & Cable
20% Fasteners
13% Connectors
12% Equipment & Components
10% Control Devices
4% Other Controls
24
Interconnect
The IS-Group, Filcon and Cablecraft
businesses supply high performance
electrical interconnect products used
in technically demanding applications
in a range of industries including
Aerospace & Defence, Motorsport,
Energy, Medical, Rail and Industrial. A
high proportion of the products supplied
are used in refurbishment, upgrade
and maintenance programmes for
equipment in service. Products include
electrical wiring, protective sleeving,
connectors and harnessing products
and customised assemblies. A range
of value adding activities enhances the
customer offering, including marking of
protective sleeves, customised labelling
solutions, 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,
cable markers, sleeving and trunking.
Specialty Fasteners
The Clarendon business supplies
specialty aerospace-quality fasteners to
Civil Aerospace (focus on aircraft seating
and cabin interiors), Motorsport and
Industrial & Defence markets. Clarendon
supports its key customers with its
automated inventory replenishment
solution (“Clarendon AIR”) utilising
bespoke dispensing racks located within
the customers’ production cells.
Fluid Controls
The Hawco Group businesses supply
a range of fluid control products used
broadly in the Food & Beverage sectors,
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
Principal operations
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.
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. Following the
2009 recession, gains in 2010 were
reversed in 2011 and 2012 and since
then there has been slow, steady
growth. However, the index is still some
8% below pre-recession levels and
economic growth is now more driven
by the Services and Retail sectors.
In Germany, the Production Sector
Output index tracks a strong period of
recovery through 2010 and 2011, since
when it has slowly increased and is now
ca. 5% above pre-recession levels.
Specific industry drivers –
Interconnect and Specialty Fasteners
Although influenced by the general
industrial economic cycles, there
are also more specific drivers
within the main market segments
served by the Interconnect and
Specialty Fasteners businesses.
The Civil Aerospace market continues
to grow steadily with growth in world
passenger traffic averaging over
6% p.a. over the last five years and
with continuing strong order books
at Boeing and Airbus. The demand
for new aircraft is being driven by the
need to replace ageing fleets with
more fuel efficient aircraft and the
Interconnect
IS-Group
IS-Rayfast
IS-Cabletec
IS-Sommer
IS-Connect
Filcon
Cablecraft
Swindon, UK
Weston-super-Mare, UK
Stuttgart, Germany
Indianapolis, IN, US
Munich, Germany & Le Mans, France
Houghton Regis, Tewkesbury & Plymouth, UK
Specialty Fasteners
Clarendon
Leicester, Swindon & Totnes, UK
Fluid Controls
Hawco Group
Godalming, Bolton & Faringdon, UK
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT demand from airlines in the Asia-Pacific
region. There is increased activity in
the cabin interiors market where the
wide range of complex seating and
entertainment systems is driving growth.
In the Defence sector, the UK remains
committed to maintaining the NATO
spend target of 2% of GDP through
to 2020. Despite this, the Ministry of
Defence’s budget is under pressure
from the weakness of sterling and
rising costs for ongoing new build
projects. In Germany, the government
has committed to increased defence
spending in response to the emergence
of new perceived threats and pressure
to meet NATO’s spending target.
In Motorsport, the major drivers of
demand in Formula 1 are the number of
races and teams (both of which reduced
in the 2017 season) and the level of
development work related to technology
and rule changes. These changes were
significant in the 2017 season and related
principally to bodywork design; the 2018
rule changes are not expected to be as
significant. The businesses do supply
to other motor racing series and the
Formula E series in particular continues
to gain momentum; however the spend
on Interconnect products is relatively low
in these series compared to Formula 1.
In the UK, investment in Rail
infrastructure continues with
electrification projects, station
upgrades, the Thameslink upgrade
and the final stages of the Crossrail
project. In addition, the first stages of
the High Speed Two (“HS2”) project
have received approval, with work
expected to run through to 2033. More
generally, UK infrastructure investment
is expected to continue with particular
focus on energy and utilities. In
Germany, electricity generation and
distribution remains a positive sector
due to the fragmented nature of the
local supply of electricity, where it is the
responsibility of the towns and cities.
Specific industry drivers – Fluid Controls
The Fluid Controls businesses generate
over 60% of their revenues from the Food
& Beverage sector in the UK. In Food
Retailing, the trend away from major out-
of-town stores to convenience stores and
home delivery continues. There is also
a drive in the Retail industry to reduce
energy consumption and to introduce
low Global Warming Potential (“GWP”)
refrigerants, in preparation for tighter
EU regulations over the next five years.
These trends are driving demand
for smaller, more energy efficient
components as supplied by Hawco.
UK index of production (value)
120
110
100
90
80
07
08
09
10
11
12
13
14
15
16
17
Source: UK Office for National Statistics.
Calendar and seasonally adjusted, reference year 2010 = 100.
German production sector output (including construction)
120
110
100
90
80
08
09
10
11
12
13
14
15
16
17
Source: Deutsche Bundesbank.
Calendar and seasonally adjusted, reference year 2010 = 100.
World passenger traffic (annual growth rate)
Revenue
passenger km
growth rate
6.3%
7.1%
6.0%
5.5%
5.3%
6.6%
8.0%
–1.0%
2.0%
8.0%
16
15
14
13
12
11
10
09
08
07
Source: International Civil Aviation Organisation.
The Coffee market sector continues to
grow at above 10% p.a., with Abbeychart
supplying both the coffee machine
manufacturers and the Aftermarket
sector, predominately in the UK but
also in Europe. The Vending market
sector continues to see modest growth,
driven by the sale of premium products,
particularly in the hot drinks segment.
25
Diploma PLC Annual Report & Accounts 2017 SECTOR REVIEW
Controls
Highlights from the year
• Sector revenue increased by 23%;
underlying increase of 14%
after adjusting for currency
and acquisitions
• The Interconnect businesses
benefited from increased project
work and delivered strong
underlying growth of 8%; Cablecraft
has expanded the range of products
supplied and markets served
• Clarendon increased revenues by
over 30%, with growth driven by
increased customer demand in Civil
Aerospace and Motorsport
• Fluid Controls increased revenues
by 14% with upturn in refrigeration
equipment sales and increased
export sales in Europe and the US
Revenue (£m)
(compound growth over five years)
+10% p.a.
17
130.7
16
15
14
13
12
106.1
91.1
94.6
86.2
81.9
Revenue
£130.7 m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
26
Sector performance
Reported revenues of the Controls
businesses increased by 23% to £130.7m
(2016: £106.1m). Full year contributions
from Cablecraft and Ascome, acquired
in the first half of last year, added £6.4m
or 6% to Sector revenues and currency
movements contributed a further 3%
to Sector revenues on translation to UK
sterling. On an underlying basis, after
adjusting for these acquisitions and
currency effects, revenues increased
by 14%, with growth moderating in the
second half (though still double-digit)
against stronger prior year comparatives.
Adjusted operating margins increased
by 70bps to 17.6% (2016: 16.9%).
Gross margins were broadly stable
overall, with stronger margins in the
Cablecraft business broadly offsetting
the impact of weaker UK sterling on
products purchased by the other
Controls businesses. Operating costs
remained tightly controlled across the
businesses and improved leverage from
the increased revenue more than offset
increased investment in sales resources.
Adjusted operating profits increased
by 28% to £23.0m (2016: £17.9m).
Capital expenditure in this Sector
remained very modest at £0.2m (2016:
£0.4m), with £0.1m invested in the
Clarendon business to upgrade its Totnes
facility to improve operational efficiency.
A further £0.1m was invested on general
IT infrastructure across the Controls
businesses. Free cash flow increased
strongly to £18.6m (2016: £16.4m)
reflecting stronger trading, including the
additional contribution from Cablecraft
and despite an increase in working
capital to support the growth in trading.
2017
2016
£130.7m £106.1m
£23.0m
£17.9m
+23%
+28%
17.6%
16.9% +70bps
£18.6m £16.4m
+13%
32.2%
27.0% +520bps
Interconnect
The Interconnect businesses (IS-
Group, Filcon and Cablecraft) account
for 59% of Controls revenues and
reported a revenue increase of 25%
in UK sterling terms. After adjusting
for the Cablecraft and Ascome
acquisitions and for currency effects,
underlying revenues increased by 8%.
The IS-Group continued to implement
the business development programmes
initiated last year, designed to position
the business as the European supplier
of choice for the full range of specialised
cable harnessing components. Field
sales resources have been realigned
to focus on sectors and customer
accounts with the highest growth
potential and internal sales processes
have been refocused to more efficiently
manage the baseline business. Further
investment has also been made in
broadening the product range and further
developing E-commerce capabilities.
The IS-Group UK businesses saw
revenues increase by 7% in UK sterling
terms. In Defence and Aerospace, the
IS-Group reported a small increase in
revenues, with the stronger growth
seen in the first half of the year offset
by slower trading in the second half.
The lower level of activity at UK
electrical harness customers towards
the end of the year is partly from a
tightening in Defence spending and
partly from certain key customers being
in between projects. In Motorsport,
IS-Group increased revenues strongly,
benefiting from regulation changes and
the increased level of competition in
races this year in the Formula 1 (“F1”)
series, development of new cars in the
World Rally Championship (“WRC”)
Series and upgrades to the GT500 cars
in Japan. The IS-Group also benefited
from good double-digit growth in
revenues from the Industrial sector in
the UK and more broadly in Europe, as
the business improved its competitive
position under new sales leadership,
following the appointment of a sales
director focused on the EMEA region.
In Germany, IS-Sommer and Filcon
reported a 14% increase in revenues
in Euro terms, with modest growth in
IS-Sommer boosted by major project
activity in Filcon. In the Aerospace sector,
IS-Sommer delivered good growth with
a particularly strong performance in the
Space market, supplying connectors
and backshells to the Meteosat Third
Generation (“MTG”) and Sentinel
satellites. Solid growth in the Industrial
market was driven by the stronger global
economy, which benefited German
exporters. Revenues were held back
in the important Energy market where
lower utility company budgets delayed
repair and maintenance of the electricity
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT network and Motorsport revenues
were impacted by the withdrawal
of VW from the WRC Rally Series
and Audi from the World Endurance
Championship (“WEC”) Series, which
includes the Le Mans race. Revenues in
the Medical sector performed strongly
with key medical device manufacturers
managing a solid pipeline of projects
on the back of new regulations.
Filcon delivered a very strong
performance, increasing revenues by
ca. 30% in Euro terms. There was a full
year contribution from the small Ascome
acquisition, but the primary driver of
growth came from major orders secured
in the final quarter of the prior year
from key Military Aerospace and Space
customers. These sectors have generally
seen increased activity, with projects
delivered for the Tornado aircraft, the
RAM missile programme and the Orion
Mars capsule. In the Motorsport sector,
the increased activity levels and demand
in the F1 series has offset the reduced
demand from the withdrawal by Audi
from Le Mans. The Industrial market
for connectors remains competitive
and generally more challenging.
Cablecraft is a leading supplier of
cable accessory products used to
identify, connect, secure and protect
electrical cables and has made a strong
contribution to the Group since its
acquisition in March 2016. Cablecraft
has extended the markets served by
the Interconnect businesses and has
added attractive ranges of own branded
and manufactured products. During the
year the business continued to focus
on its areas of specialism, including
the development of new own branded
identification products, the promotion
of its upgraded Identification Solutions
offering and the specialist sales resources
added to support sales growth. Revenues
have increased by 7% on a like-for-like
basis, with good growth generated
from the continued focus on end user
customers, especially electrical panel
builders and contractors upgrading the
UK rail network. Cablecraft continues
to benefit from the move by customers
towards E-commerce, with online
sales growing by ca. 30% in the year.
Specialty Fasteners
The Clarendon Specialty Fasteners
business accounts for 18% of Controls
revenues and increased revenues by over
30% compared with the prior year, with
growth driven principally by increased
demand from customers in the Civil
Aerospace sector. Revenues increased
strongly with the ramp up of the major
business class seating programme
at a key aircraft seating customer
which Clarendon supplies through its
automatic inventory replenishment
system (“Clarendon AIR”). Clarendon
also had success in increasing sales
to a range of other aircraft seating
and cabin interiors manufacturers and
their subcontractors across Europe
and introduced Clarendon AIR to a
number of new customer locations.
Good growth was also achieved in
Clarendon’s other major market of
Motorsport, where Clarendon supplies
aerospace-quality fasteners to the
F1 race teams, engine builders and
subcontractors and also supplies
the Aerocatch own-brand range of
aerodynamic bonnet latches for high
performance sports cars and offshore
powerboat racing. More modest growth
has been achieved in the supply of pre-
assembled and captive fasteners and
bespoke engineered solutions to the
Defence and general Industrial sectors.
After the year end, in October 2017,
Clarendon completed the acquisition
of Coast Fabrication Inc. (“Coast”), a
small US specialty fastener distributor
based in Huntington Beach, California.
Coast has a strong reputation in the
US Motorsport industry and also
provides a base in the US for supporting
Clarendon’s current Aerospace
customers as well as expanding its
aircraft interiors business in this large
market. A US presence is also a strategic
purchasing priority for Clarendon, giving
access to major fastener suppliers
that principally sell to US entities.
Fluid Controls
The Hawco Group of Fluid Controls
businesses (comprising Hawco and
Abbeychart) accounts for 23% of
Controls revenues and increased
revenues by 14% against the prior
year, in a market that remains highly
competitive and price sensitive.
Hawco reported a good upturn in activity
in the UK Refrigeration Equipment
market, as store refurbishment activity
in the UK increased and as the cabinet
display manufacturers targeted
opportunities outside the UK. Hawco
benefited in particular from supplying
scroll compressors into a significant
project with a major US retailer and
demand in the commercial Catering
and Home Delivery market remained
robust. In the Contractor market, strong
growth was achieved, as Hawco targeted
the independent trade counters and
medium sized contractors who value
Hawco’s stock holding, next-day delivery
and exclusive supplier relationships.
Revenues from the Industrial OEM market
reduced in the second half of the year,
as demand from UK manufacturers
softened, but this was partly offset
by an increase in export revenues.
Potential for growth
In Interconnect, create a
broader-based European
cable harnessing business
and extend product range
with own-branded products
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
Explore opportunities
outside the UK and Northern
Continental Europe
Abbeychart has continued to strengthen
its relationship with the large vending
machine operators in Europe and
during the year supplied products to
a large project to refresh a range of
vending machines for a major customer
in Switzerland. Abbeychart revenues
also benefited from a full year of sales
activity for a range of spare parts for
Wurlitzer vending machines and from
the introduction of a catalogue of
essential spare parts for the specialist
coffee market, which has offset
reduced revenues from one of its larger
coffee OEM customers. Abbeychart
has continued to take market share
in the soft drinks market by targeting
both the major and the independent
soft drink suppliers, with its bar gun
and pump refurbishment offering.
27
Diploma PLC Annual Report & Accounts 2017 STATEMENTS
Finance Review
Maintaining focus on
financial strength
the translation of the results of the
overseas businesses, when compared
with last year’s average exchange rates.
The environment for completing
acquisitions has been more challenging
over the past 12 months and the
contribution from acquisitions completed
both this year and last year, net of a
small disposal last year, was £8.5m
(2016: £26.6m) to revenue and £2.3m
(2016: £4.2m) to adjusted operating profit.
The stronger growth in underlying
revenues of 7% this year helped
compensate for this smaller contribution
from acquired businesses. Underlying
revenues are after adjusting for
the contribution from businesses
acquired during the year (and from
the incremental impact from those
acquired last year) and for the impact
on the translation of the results of
the overseas businesses from the
significant weakening in the UK sterling
exchange rate, against the currencies
of the Group’s overseas businesses.
Adjusted operating margin
The Group’s adjusted operating margin
improved by 10bps this year to 17.3%
(2016: 17.2%) as transactional currency
pressures finally eased in the Group’s
Healthcare businesses. These businesses
represent 23% of Group revenue and
since late in 2013, their gross margins
have been significantly impacted on a
transactional basis by the continuing
depreciation of the Canadian and
Australian dollars, against the US dollar in
particular which is the currency in which
most of their products are purchased.
The Canadian and Australian exchange
rates have remained more stable since
the early part of this year and after a
short period of weakness during the early
Summer, both currencies strengthened
sharply against the US dollar towards
the end of the financial year.
The transactional impact on the Group’s
adjusted operating margin from the
substantial depreciation in UK sterling has
been limited. The UK businesses (26%
of Group revenues) have faced higher
product costs from the depreciation
Nigel Lingwood, Group Finance Director
The businesses returned to
robust underlying revenue
growth delivering 7% on a
Group basis.
Results in 2017
Diploma delivered another strong
performance this year, increasing
revenues by 18% to £451.9m and
increasing adjusted operating profit by
19% to £78.2m. The Group’s reported
financial results benefited from strong
underlying growth, particularly in the
Controls businesses, following two
years of weaker end markets. The
significant depreciation in UK sterling
of ca. 11%, following the UK’s Brexit
vote on Europe led to increases in
revenues and adjusted operating profits
of £34.9m and £6.3m respectively on
Adjusted operating margin
Free cash flow
17.3%
£55.7m
24.0%
ROATCE
28
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT
in UK sterling, but they have generally
managed to mitigate these increases
by a combination of selling price
increases, support from suppliers and by
switching some key customer accounts
into Euro or US dollar invoicing.
The operating margins in those
businesses acquired in recent years
have, as anticipated, also made a slightly
stronger contribution to the Group
this year reflecting the benefits from
initiatives taken shortly after acquisition.
Adjusted profit before tax, earnings
per share and dividends
Adjusted profit before tax increased
by 19% to £77.5m (2016: £64.9m). The
interest expense this year was £0.7m
(2016: £0.8m) which included a £0.2m
(2016: £Nil) arrangement fee paid on
renewal of the bank facility during
the year. However interest costs on
borrowings decreased by £0.3m to
£0.1m this year reflecting a lower
level of acquisition activity in 2017,
compared with last year. The notional
interest expense on the Group’s
defined pension liabilities increased
to £0.3m (2016: £0.2m) reflecting the
larger deficit in the fund this year,
following the actuarial valuation
completed as at 30 September 2016.
Statutory profit before tax was £66.8m
(2016: £54.0m), after acquisition related
charges of £9.7m (2016: £10.3m), which
largely comprises the amortisation of
acquisition related intangible assets
and fair value remeasurements. These
remeasurements of £1.0m (2016:
£1.3m) relate to the put options held
over minority interests and the charge
this year reflects a small increase in
the liability to acquire these minority
interests and an unwinding of the
discount on the liability. Last year’s
statutory profit also included a one-off
gain of £0.7m from the disposal of the
Medivators business in Canada and
three small legacy properties in the UK.
The Group’s effective tax charge in
2017 was 80bps above the previous
year at 26.5% (2016: 25.7%) of adjusted
profit before tax. The increase this year
is despite a further reduction in the
effective UK corporation tax rate to 19.5%
(2016: 20.0%) which was insufficient to
offset the impact from higher tax rates
applied to the businesses acquired
in Australia and the US this year.
Revenue bridge – FY17 (£m)
500
450
400
350
300
250
200
+£34.9m
+£8.5m
£451.9m
+£25.9m
£382.6m
FY16
Translational FX
Acquisitions, net
FY16 and FY17
Underlying
FY17
Transactional impact-base currency (US$)
1.5
1.4
1.3
1.2
1.1
1.0
0.9
Change over Change over
three years
–12%
–12%
one year
+5%
+2%
C$
A$
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
GBP vs G10 currency basket securities
1,050
1,000
950
900
850
800
750
700
Sep 15
Sep 16
Sep 17
Adjusted earnings per share (“EPS”)
increased by 19% to 49.8p, compared
with 41.9p last year and statutory basic
EPS increased to 42.0p (2016: 33.9p).
The Board continues to pursue a
progressive dividend policy which
aims to increase the dividend each
year broadly in line with the growth in
adjusted EPS. In determining the dividend
in any one year in accordance with this
policy, the Board also considers a number
of factors which include the strength
of the free cash flow generated by the
Group, the future cash commitments
and investment needed to sustain the
Group’s long term growth strategy
and the target level of dividend cover.
The Board continues to target towards
two times dividend cover (defined
as the ratio of adjusted EPS to total
dividends paid and proposed for the year)
which provides a prudent buffer.
The ability of the Board to maintain
future dividend policy will be influenced
by the principal risks identified on
pages 33 to 35 that could adversely
impact the performance of the Group.
29
Diploma PLC Annual Report & Accounts 2017
STATEMENTS
Finance Review continued
For 2017, the Board has recommended
a final dividend of 16.0p per share
(2016: 13.8p) making the proposed
full year dividend 23.0p (2016: 20.0p).
This represents a 15% increase in
the proposed full year dividend with
dividend cover increasing slightly
to 2.2 times (2016: 2.1 times).
Free cash flow
The Group again generated strong
free cash flow this year of £55.7m
(2016: £59.0m). Last year’s free cash flow
included exceptional proceeds of £4.6m
from the sale of the Medivators business
in Canada and legacy properties and from
an unusually large cash inflow of £6.3m
from reduced working capital. Free cash
flow represents cash available to invest
in acquisitions or return to shareholders.
Free cash flow conversion was 99%
(2016: 124%) of adjusted earnings.
The Group’s operating cash flow
increased by £2.7m to £79.3m
(2016: £76.6m) this year, despite a
£4.0m outflow of cash into working
capital. The generally stronger trading
environment this year, together with
some earlier seasonal stock builds in
the Healthcare businesses contributed
to a £5.1m increase in stock levels at
the year end (2016: £1.3m) while the
inflow from net payables reduced
to £1.1m from £7.6m last year.
The Group’s KPI metric of working
capital to revenue at 30 September
2017 reduced to a record low of 15.0%
(2016: 16.6%) reflecting much stronger
revenues in the previous rolling 12
months, compared with last year.
Group tax payments increased by
£1.7m to £19.3m (2016: £17.6m). On an
underlying basis cash tax payments
represented ca. 24% (2016: 23%) of
adjusted profit before tax which was
broadly unchanged from last year.
Underlying tax payments are before
Free cash flow conversion (£m)
currency effects of translation and
exclude payments for pre-acquisition
tax liabilities in acquired businesses.
The Group’s tax strategy is to comply
with tax laws in all of the countries in
which it operates and to balance its
responsibilities for controlling the tax
costs with its responsibilities to pay tax
where it does business. The Group’s
tax strategy has been approved by
the Board and tax risks are regularly
reviewed by the Audit Committee.
The Group’s capital expenditure
this year was £3.3m, compared with
£3.7m last year. This expenditure
excludes £1.9m (2016: £0.5m) which
the Group paid for the construction
of a new expanded facility for J Royal,
a Seals business based in the US. On
completion in April 2017, the facility
was immediately sold and leased back
to the business. A similar transaction
was undertaken in 2015 in connection
with the new FPE Seals facility.
The Life Sciences businesses invested
£2.0m in new capital this year (2016:
£2.2m) most of which was invested
in field equipment in the Healthcare
businesses to support placements in
hospitals and diagnostic laboratories.
This investment was £1.6m (2016: £0.9m)
and included demonstration and loan
equipment in connection with new
capital equipment released in 2017 and
a new supply agreement for a range of
rigid endoscopes in Vantage. A further
£0.3m was spent on upgrading the IT
infrastructure in both the Healthcare
businesses and the a1-group and
£0.1m was spent on refurbishing a new
facility in Markham, Canada which is
used to service flexible endoscopes.
The Seals businesses invested £1.1m
during the year in its operations
with £0.5m being spent in the North
American Seals businesses and £0.6m
65
60
55
50
45
40
35
30
25
20
30
88%
2012
81%
2013
93%
2014
93%
2015
124%
2016
99%
2017
Free cash flow
Adjusted earnings
in the International Seals businesses.
Across these businesses, £0.6m was
invested to fit out new and expanded
facilities in J Royal, Hercules Canada and
Kentek. A further £0.2m was invested in
new warehouse equipment in M Seals
and Kubo and £0.3m was spent on
upgrading the IT infrastructure across
the Seals Sector. Capital expenditure
in the Controls businesses remained
modest at £0.2m (2016: £0.4m).
The Company paid the PAYE
income tax liability of £0.7m (2016:
£0.3m) on the exercise of LTIP share
awards, in exchange for reduced
share awards to participants.
The Group spent £20.1m of the free
cash flow on acquisitions, including
payment of deferred consideration,
as described below and £23.7m (2016:
£21.4m) on paying dividends to both
Company and minority shareholders.
Acquisitions completed during the year
The Group invested £19.5m in acquiring
new businesses this year and paid a
further £0.6m of deferred consideration
on a business acquired in the prior year.
This compares with an aggregate of
£32.7m invested last year in acquisitions,
minority shareholdings and deferred
consideration. The stronger economies
in the US and Continental Europe
contributed to a tougher environment
to make acquisitions as business
owners generally remained confident of
increasing profitability in the year ahead.
In April 2017, the Group was successful in
completing the acquisition of Abacus for
cash consideration of £15.0m, including
debt acquired and expenses. Abacus is
a long-established supplier of clinical
diagnostics instrumentation to the
Pathology and Life Sciences sectors in
Australia and New Zealand and provides
critical mass to the Group’s existing
Healthcare businesses in this region. A
further £4.5m in aggregate was invested
in June 2017 to acquire Edco, a small
hydraulic seal distributor in the UK and in
April 2017 to acquire PSP, a small supplier
of specialist seals based in the US.
These acquisitions added £10.1m to
the Group’s acquired intangible assets,
which represents the valuation of
customer and supplier relationships
which will be amortised over periods
ranging from five to ten years. At
30 September 2017, the carrying value of
the Group’s acquired intangible assets
was £54.0m. Goodwill at 30 September
2017 was £122.7m and included £7.5m
relating to those businesses acquired
during the year (including fair value
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT
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 was significant
headroom on the valuation of this
goodwill, compared with the carrying
value of goodwill at the year end.
Liabilities to minority shareholders
The Group’s liability to purchase
outstanding minority shareholdings
at 30 September 2017 increased to
£6.1m (2016: £5.1m) which comprise
put options the Group holds over
the outstanding minority interests
held in M Seals, Kentek and TPD.
The liabilities for these put options are
valued based on the Directors’ latest
estimate of the earnings before interest
and tax (“EBIT”) of these businesses
when these options crystallise. The
increase in this liability of £1.0m
reflects in part a slightly higher value
attributed to these businesses and in
part an unwinding of the discount on
the liability. Shortly after the year end
the Group agreed to pay cash of £1.0m
to acquire a further 5% shareholding in
TPD from the minority shareholder.
In addition to the liability to minority
shareholders, the Group also has a
small liability at 30 September 2017 for
deferred consideration of up to £0.5m
(2016: £1.7m) which comprises the
amount likely to be paid to the vendors
of businesses purchased during the year,
based on the Group’s best estimate of
the performance of these businesses
next year. During the year, £0.6m was
paid as deferred consideration relating
to the acquisition of WCIS completed
early in 2016 and a provision of £1.0m
relating to the acquisition of Cablecraft
was not required and was released to
the Consolidated Income Statement
as part of acquisition related charges.
Return on adjusted trading capital
employed and capital management
A key metric that the Group uses to
measure 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, including
goodwill previously written off against
retained earnings. At 30 September
2017, the Group ROATCE improved to
24.0% (2016: 21.1%) which reflects the
strong increase in adjusted operating
profits this year. Adjusted trading capital
employed is defined in note 3 to the
consolidated financial statements.
The Group continues to maintain a
strong balance sheet with cash funds of
£22.3m at 30 September 2017, compared
with net cash funds of £10.6m last
year. Surplus cash funds are generally
repatriated to the UK, unless they
are required locally to meet certain
commitments, including acquisitions.
On 1 June 2017 the Group renewed its
bank facility with a similar revolving
multi-currency credit facility for a further
three years and with an option to extend
the facility from three years up to five
years. The facility initially comprises
a £30m committed facility, but with
an accordion option which allows the
Group to increase the commitment up
to a maximum of £60m of borrowings.
These new facilities were provided
at a cost of 50bps and with a ratchet
margin ranging from 70bps to 115bps
over LIBOR depending on the ratio
of EBITDA to net debt. These bank
facilities are primarily used 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
2017 of £2.8m (2016: £2.5m).
The Group maintains a legacy small
closed defined benefit pension scheme
in the UK. During the year a formal
triennial funding valuation of this
scheme as at 30 September 2016 was
completed. This valuation reported an
increase in the funding deficit of £6.5m
to £9.2m with a 75% funding level which
reflected the impact of bond yields
falling to a record low of 1.5% at the
valuation date from 3.6% in the previous
funding valuation. However, bond
yields have increased slightly since the
valuation date and investment returns
have been strong again this year.
This recent improvement in market
conditions, together with the strength
of the employer covenant, helped
limit the increase in cash contributions
paid by the Company to £0.5m
from 1 October 2017, from £0.4m
of cash contributions paid this year.
This contribution rate will increase
annually by 2% with the objective of
eliminating the deficit within ten years.
In Switzerland, local law requires
Kubo to provide a contribution based
pension for all employees, which are
funded by employer and employee
contributions. This pension plan is
managed for Kubo through a separate
multi-employer plan of non-associated
Swiss companies which pools the
funding risk between participating
companies. In Switzerland, Kubo’s
annual cash contribution to the pension
scheme was £0.2m (2016: £0.3m).
Both the UK defined benefit scheme
and the Kubo contribution scheme
are accounted for in accordance with
IAS19 (Revised). At 30 September 2017
the aggregate accounting pension
deficit in these two schemes decreased
by £7.3m to £9.9m reflecting a small
increase in bond yields in both schemes,
combined with a strong increase in
the growth assets of the UK scheme
compared with last year. The gross
aggregate pension liability in respect of
these two schemes at 30 September
2017 decreased by £6.6m to £49.5m
which is funded by £39.6m of assets.
Potential impact of Brexit
The impact at an operational level on
the Group’s businesses from the current
uncertainty regarding the process and
timing of the UK’s exit from the European
Union is likely to be limited as only
26% of the Group’s overall revenues
are based in the UK. In addition, these
businesses, as well as those based in
Continental Europe, are substantially
“in country” industrial suppliers of
goods with limited sales activity being
carried out across country borders.
At a macroeconomic level however,
the Group’s financial results have been
impacted this year by the substantial
depreciation in UK sterling that followed
the Brexit vote. This has resulted in
an increase to the Group’s reported
revenues, operating profits and net
assets from translating the results
of the Group’s overseas businesses
into UK sterling. It has also led to
stronger inflation in supplier costs
for the Group’s UK based businesses
which they have had to manage
robustly to maintain gross margins.
The Group’s UK businesses closely
monitor developments in the Brexit
plans of HM Government and their
future investment plans include
contingencies to mitigate the impact
on their activities from a significant
disruption in cross border trade between
the UK and Continental Europe.
31
Diploma PLC Annual Report & Accounts 2017
RISKS
Internal Control and Risk Management
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 businesses 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 further 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.
The Group uses 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 a 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. In addition,
following the risk evaluation process carried out this year as
described above, a new principal risk has been added that relates
to ‘Cybersecurity/Information Technology/Business Interruption.’
The risks are each classified as either strategic, operational,
financial or accounting. The Group’s decentralised operations
with different Sectors and geographical spread reduces the
impact of these principal risks.
The Board has also considered the risks associated with the UK’s
Brexit vote to leave the European Union and this is explained
further on page 31 in the Finance Review.
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 2020. 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.
The Directors confirm that this robust assessment also
considers the principal risks facing the Group, as described
on pages 33 to 35 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.
32
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT
Strategic risk – Downturn/instability in major markets
Risk description and assessment
Mitigation
Change
Adverse changes in the major markets in which the businesses
operate can have a significant impact on performance. The
effects of these changes can 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.
Changes to cost levels and inventories can then be
made in a measured way to mitigate the effects.
A number of characteristics of the Group’s businesses moderate
the impact of economic and business cycles on the Group as a
whole:
Significant global events are closely monitored to
determine any potential impact on key markets.
• 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,
which are often specific to their application; this offers a
degree of protection against customers quickly switching
business to achieve a better price.
• A high proportion of the Group’s revenues comprises
consumable products which are purchased as part of the
customer’s operating expenditure, rather than through
capital budgets.
In many cases the products are used in repair, maintenance
and refurbishment applications, rather than original
equipment manufacturer.
•
Strategic risk – Supplier concentration/loss of key suppliers
Risk description and assessment
Mitigation
Change
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.
Currently no single supplier represents more than 10% of Group
revenue and only six single suppliers represent more than 2%
each of Group revenue.
Relationships with suppliers have normally been built up over
many years and a strong degree of interdependence has been
established. The average length of the principal supplier
relationships in each of the Sectors is over ten years.
The strength of the relationship with each supplier and the
volume of activity generally ensures continuity of supply, when
there is shortage of product.
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.
Long term, multi-year exclusive contracts signed
with suppliers with change of control clauses,
where possible, included in contracts for protection
or compensation in the event of acquisition.
Collaborative projects 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.
Bundling and kitting of products and provision of
added value services.
Periodic research of alternative suppliers as part of
contingency planning.
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.
33
Diploma PLC Annual Report & Accounts 2017 RISKS
Internal Control and Risk Management
continued
Strategic risk – Customer concentration/loss of key customer(s)
Risk description and assessment
Mitigation
Change
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 4% of Sector revenue
or more than 2% of Group revenue.
Specific large customers are important to
individual operating businesses and a high level of
effort is invested in ensuring that these customers
are retained and encouraged not to switch to
another supplier.
In addition to providing high levels of customer
service and value added activities, close
integration is established where possible with
customers’ systems and processes.
Operational risk – Cybersecurity/information technology/business interruption
Risk description and assessment
Mitigation
Change
Group and operating business management depend critically on
timely and reliable information from their IT systems to run their
businesses. The Group seeks to ensure continuous availability,
security and operation of those information systems.
There is good redundancy and back-up built into
local IT systems and the spread of businesses with
their own stand alone IT systems also offers good
protection from individual events.
Cyber threats to the businesses information systems have
continued to show an increasing trend this year.
Any disruption or denial of service may delay or impact
decision making through lack of availability of reliable data.
Poor information handling or interruption of business may also
lead to reduced service to customers. Unintended actions of
employees caused by a cyber-attack may also lead to disruption,
including fraud.
In North American Seals, HFPG’s Aftermarket business is
operated from a single warehouse based in Tampa, Florida
which continues to be exposed to hurricanes during the season
from August to November.
A member of the Executive Management Group
maintains responsibility for ensuring each business
in the Group has a robust cybersecurity programme
and reports twice a year to the main Board on the
status of cybersecurity across the Group. In
addition, education/awareness of cyber threats
continues to ensure Group employees protect
themselves and Group assets.
Business continuity plans exist for each business
with ongoing testing. During September 2017, HFPG
successfully deployed their business continuity
plans to mitigate the impact of Hurricane Irma.
Operational risk – Loss of key personnel
Risk description and assessment
Mitigation
Change
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 an impact on performance, for a
limited time period.
The average length of service of the ca. 90 senior managers
in the Group is 11 years and for all personnel in the Group
is consistently ca. seven years.
Contractual terms such as notice periods and
non-compete clauses can mitigate the risk in the
short term. However, more successful initiatives
focus on ensuring a challenging work environment
with appropriate reward systems. The Group places
very high importance on planning the development,
motivation and reward for key managers in the
operating businesses including:
• Ensuring a challenging working environment
where managers feel they have control over,
and responsibility for, their businesses.
• Establishing management development
programmes to ensure a broad base of
talented managers.
• Offering a balanced and competitive
compensation package with a combination
of salary, annual bonus and long term cash
incentive plans targeted at the individual
business level.
• Giving the freedom, encouragement, financial
resources and strategic support for managers
to pursue ambitious growth plans.
34
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT Operational risk – Product liability
Risk description and assessment
Mitigation
Change
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.
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.
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
£30m across all Sectors.
The Group’s businesses have undergone product
liability training and are continually reviewed to
demonstrate compliance with Group policies and
procedures relating to product liability.
Financial risk – Foreign currency
Risk description and assessment
Mitigation
Change
The Group operates across a number of diverse
geographies but does not hedge translational
exposure of operating profit and net assets.
The Group’s businesses may hedge up to 80% of
forecast (being a maximum of 18 months) foreign
currency transactional exposures using forward
foreign exchange contracts.
The Group finance department monitors rolling
monthly forecasts of currency exposures.
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.
Foreign currency risk is the risk that currency rates will affect
the Group’s results. The Group is exposed to two types of
financial risk caused by currency volatility: translational
exposure, being the effect that currency movements have on
the Group’s financial statements on translating the results of
overseas subsidiaries into UK sterling; and transactional
exposure, being the effect that currency movements have on
the results of operating businesses because their revenues or
product costs are denominated in a currency other than their
local currency.
The Group operates internationally and is exposed to
translational 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 results and net
assets of the Group’s operations outside the UK are also exposed
to foreign currency translation risk.
A strengthening of UK sterling by 10% against all the currencies
in which the Group does business, would reduce adjusted
operating profit before tax by approximately £6.2m (8%), due to
currency translation. Similarly, a strengthening of UK sterling by
10% against all the non-UK sterling capital employed would
reduce shareholders’ funds by £19.1m.
The Group’s UK businesses are exposed to transactional foreign
exchange risk on those purchases that are denominated in a
currency other than their local currency, principally US dollars
and Euros. 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.
Accounting risk – Inventory obsolescence
Risk description and assessment
Mitigation
Change
Working capital management is critical to success in specialised
industrial businesses as this has a major impact on cash flow.
The principal risk to working capital is in inventory obsolescence
and write-off.
The charge against operating profit in respect of old or surplus
inventory in the year was £1.3m but inventories are generally not
subject to technological obsolescence.
Inventory write-offs are controlled and minimised
by active management of inventory levels based
on sales forecasts and regular cycle counts.
Where necessary, a provision is made to cover both
excess inventory and potential obsolescence.
35
Diploma PLC Annual Report & Accounts 2017 RESPONSIBILITY
Corporate Responsibility
Employees
Building and developing the skills, competencies, motivation
and teamwork of employees is recognised by the Board as being
essential to achieving the Group’s business objectives. The loss
of key personnel is also identified by the Board as a Principal Risk
as set out on page 34. The stability and commitment of the
employees is demonstrated by the average length of service
which is consistently high at ca. seven years. 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
2017
2016
2015
Average number of employees
in year
Females as percentage of total
Length of service (years)
Average staff turnover
Sick days lost per person
1,658
35%
6.7
20.6%
3.3
1,602
36%
6.7
24.9%
3.1
1,449
34%
6.6
23.0%
3.0
The Group encourages healthy lifestyles and the level of sick
days lost per person is heavily influenced by a small number of
employees who are on long term sick leave.
Set out below is an analysis of the number of employees by
gender at the year end:
2017
2016
Male
Female
Total
Male
Female
Total
5
1
6
5
1
6
73
1,044
19
92
586 1,630
72
950
21
549
93
1,499
Directors
Senior
managers
Employees
Total
1,122
606 1,728
1,027
571
1,598
The Board recognises the importance of gender diversity in the
Group and 35% of the Group’s employees are female. Some of
the Group’s operating companies have structured apprenticeship
schemes and of the five UK based apprenticeships started in 2017,
three of these were for females.
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 the 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.
36
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 2017, the Group employed
seven disabled employees.
Employment policies throughout the Group have been
established to comply with relevant local 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.
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 Market Abuse Regulation of the Financial
Conduct Authority, employees are required to seek approval of
the Group Company Secretary 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 Chief Executive Officer 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 ensure compliance with 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.
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 2017.
Following the implementation of near miss reporting in 2016,
the Group has now used its first full year of the system to
assist in ensuring that Health & Safety hazards are proactively
identified and appropriate mitigation put in place to ensure that
they do not result in Health & Safety incidents.
Minor injuries
Reportable lost time incidents1
Minor injuries per 1,000
employees
Reportable lost time incidents1
per 1,000 employees
2017
56
5
2016
87
11
33.8
54.3
3.0
6.9
2015
54
4
37.3
2.8
1 Three or more days’ absence from workplace.
Diploma PLC Annual Report & Accounts 2017STRATEGIC REPORT The absolute level of minor injuries has significantly reduced
this year and also reduced when normalised to a rate per 1,000
employees. The near miss reporting system has placed new
emphasis on the need to identify and implement corrective
actions prior to incidents occurring and this methodology
indirectly assists with reducing health and safety risk. The vast
majority of the minor injuries resulted in no lost time and were
considered low level. The number of reportable lost time
incidents has also reduced significantly.
All incidents are fully investigated and corrective actions and
preventative measures put in place to ensure that the incident
does not reoccur and future risks are mitigated.
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 to ensure the rights of every
employee are respected and to treat all stakeholders with
dignity and respect. The Group promotes employment practices
to ensure fair regard to diversity and equal opportunities. Staff
are provided with a safe, secure and healthy environment in
which to work. Employees have access to an independent
hotline to report any issues relating to Human Rights violations.
Modern slavery
The Group adopted a zero tolerance approach to slavery in all
its forms, including human trafficking, forced labour and child
labour. In 2017, each business assessed the risk of slavery taking
place either within the business itself or among its principal
suppliers. Group businesses carry out due diligence of suppliers
through questionnaires, audits and visits. Based on these
assessments and the initiatives implemented by the businesses
to counter slavery, the Board was assured that slavery is not
taking place within the Group and has published a Modern
Slavery statement on the steps taken to prevent slavery, which
is available on the Company’s website.
Environmental
The Group comprises sales and marketing focused businesses
which essentially receive products from suppliers and despatch
them to customers. The Group’s businesses do not operate
delivery fleets; they use third-party carriers to deliver their
products to customers and to provide much of their packaging
requirements. The Group’s ability to control the environmental
impact of its logistics partners is therefore limited. The primary
impact on the environment, which is entirely in the Group’s
control, is consumption of the normal business energy sources
such as heating and power, which the Group aims to minimise
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. The Group’s usage of water is minimal and relates
to cleaning, bathrooms and staff refreshments.
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
UK listed companies are required to report their global levels of
Greenhouse Gas (“GHG”) emissions in their Annual Report &
Accounts. This 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 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
2017
2016
Tonnes of CO2e
Direct emissions
(Scope 1)
Natural gas
Owned transport
Indirect emissions
(Scope 2)
Electricity
Gross emissions
Tonnes CO2e per
£1m revenue
657
68
2,955
3,680
714
100
2,732
3,547
8.1
9.3
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’s businesses participate within their local
communities on a number of charitable and fundraising
activities primarily in support of health and children’s charities.
The Group also contributes to local worthwhile causes and
charities and in 2017 the Group made donations to charitable
organisations of £54,418 (2016: £44,958). No political donations
were made.
37
Diploma PLC Annual Report & Accounts 2017 Board of Directors
John Nicholas1,3
Chairman
Appointed:
Joined the Board on 1 June 2013 and
appointed Chairman on 21 January 2015.
Skills and experience:
A Chartered Certified Accountant with a
Masters degree in Business Administration
from Kingston University, London. John
has a wealth of business and commercial
experience and spent much of his early
career in technology-focused international
manufacturing and service companies
involved in analytical instruments, fire
protection and food processing.
He has been Group Finance Director of
Kidde plc (on its demerger from Williams
Holdings) and of Tate & Lyle PLC.
External appointments:
John is currently non-Executive Director
and Chairman designate of Porvair plc
and non-Executive Director and Chairman
of the Audit Committee of Hunting
PLC (until April 2018). John is Senior
Independent Director of Mondi plc.
Bruce Thompson
Chief Executive Officer
Appointed:
Joined the Board in 1994 as a Group
Director and appointed Chief Executive
Officer in 1996.
Will retire from the Board before
30 September 2018.
Skills and experience:
Bruce started his career in the automotive
industry, first as a design engineer and
then in product marketing. He then spent
three years in international marketing
with a construction materials company,
developing new markets in Europe, the
Middle East and North Africa. Prior to
joining Diploma, he was a Director with
Arthur D Little Inc., the technology and
management consulting firm, initially
in the UK and then as Director of the
firm’s Technology Management Practice
based in Cambridge, Massachusetts.
External appointments:
None.
Executive Management Group
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.
Skills and experience:
Charles has over 30 years of City
experience, including 15 years at HSBC
where he was Head of UK Advisory and
Managing Director in HSBC’s global
banking business. Prior to that, he was
Head of Corporate Finance at Lazard
in London. Charles has been a non-
Executive Director of two listed companies
and he is also a Chartered Engineer.
External appointments:
Charles is a non-Executive Director
of BMT Group Limited.
Bruce Thompson
Chief Executive Officer
Nigel Lingwood
Group Finance Director
38
Dan Brown
Darin Clause
Joined the Group in October 2015 to
take responsibility for the Group’s
Healthcare businesses across all
international markets.
Joined the Group in November 2015
to take responsibility for the Seals
businesses in North America and more
broadly to develop new opportunities
in US Industrial Distribution.
Diploma PLC Annual Report & Accounts 2017GOVERNANCE Nigel Lingwood
Group Finance Director
Anne Thorburn1,2,3
Non-Executive Director
Andy Smith1,2,3
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 appointed Chairman of the Audit
Committee on 17 November 2015.
Appointed:
Joined the Board and appointed Chairman
of the Remuneration Committee on
9 February 2015.
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 multinational
environment and on a number of
large corporate transactions. Nigel
qualified as a Chartered Accountant
with Price Waterhouse, London.
Skills and experience:
Anne was 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.
External appointments:
None.
External appointments:
None.
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.
External appointments:
None.
Committee membership: 1 Remuneration Committee
2 Audit Committee
3 Nomination Committee
Gustav Röber
James Routh
Stuart Bell
Joined the Group in September 2004
initially as Finance Controller and then as
Corporate Development Director. Now
responsible for the Group’s Controls and
Environmental businesses.
Joined the Group in September 2012
initially as Business Development Director
and now responsible for the Group’s
International Seals businesses outside
North America.
Joined the Group in May 2013 in the Group
Finance department and appointed as
Group Financial Controller in June 2015.
39
Diploma PLC Annual Report & Accounts 2017 Corporate Governance
“With a proven strategy and
the support of an experienced
group of managers on the
EMG, the Board is confident
that it remains in a strong
position to meet the likely
challenges during this
transition year.”
John Nicholas, Chairman
Members of Board
Chairman
John Nicholas
Independent non-Executive Directors
Andy Smith
Charles Packshaw
Anne Thorburn
Executive Directors
Nigel Lingwood
Bruce Thompson
The Audit Committee completed a formal competitive tender
for the external audit engagement during this year. This
process is described in more detail in the Audit Committee
Report. After a thorough process, the Board has resolved,
on the recommendation of the Committee, to propose to
shareholders that PricewaterhouseCoopers be appointed
as auditor to the Company from 1 October 2017. On behalf
of the Board, I wish to thank Deloitte, the retiring auditor,
for their excellent service over the past ten years.
Attendance
7/7
7/7
7/7
7/7
7/7
7/7
The Remuneration Committee completed its review of the
Remuneration Policy for Directors during the year. Their review
was supported by Aon Hewitt and included consultation with
the Company’s largest shareholders who in aggregate represent
over 50% of the Company’s ordinary shares. The review resulted
in a tightening of some elements of the Policy to ensure the
Company remains up to date with current best practice,
as described further in the Remuneration Report. However the
Board was pleased that this review also confirmed that the core
principles of the existing Policy continued to provide a strong
basis for linking Diploma’s strategy to Director remuneration.
The Company’s Capital Markets Day held in February this
year provided an opportunity for shareholders and potential
investors to meet with senior management in the Group who
comprise the EMG. I thought it was an excellent morning which
demonstrated very well the breadth and depth of the Group’s
businesses and the growth opportunities that remain available
to each of the Group’s Sectors. I would recommend that
shareholders have a look at the videos and presentations that
were used at this event and which are available on the
Company’s website.
I hope that as shareholders in the Company you will be able to
find time to attend our AGM on Wednesday, 17 January 2018.
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
20 November 2017
Dear Shareholder
The Board and its Committees have enjoyed a productive year in
2017 guiding the Company through some important Governance
tasks set out in the Code, namely a formal review of the
Company’s Remuneration Policy and undertaking a tender for
the Company’s audit engagement. As these two exercises drew
to a close in September, the Board also embarked on a process
to recruit a new CEO, after Bruce Thompson had notified the
Board of his decision to retire from his role by 30 September
2018. Bruce has been an outstanding leader of the Group for
over 20 years and has been instrumental in developing and
executing the existing strategy that has underpinned the
tremendous success of the Group.
The Board, led by the Nomination Committee, has commenced
a formal process with a search agency to recruit a new CEO. I
look forward to updating shareholders on this process as soon
as we have identified a successor.
The Board recognises that the period of transition to the new
CEO is likely to be challenging, but it is confident that with a
proven strategy and the support of an experienced group of
managers on the EMG, it remains in a strong position to meet
the likely challenges during this transition year.
40
Diploma PLC Annual Report & Accounts 2017GOVERNANCE 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 Code”), issued by the Financial Reporting Council in April
2016. Set out on pages 41 to 63 is an explanation of how the
Company has complied with the Main Principles of the 2016
Code.
The Board confirms that throughout the financial year, the
Company applied all of the Principles set out in sections A to E
of the 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.
The Company’s auditor Deloitte LLP, is required to review
whether the statement reflects the Company’s compliance
with the Provisions of the Code specified for their review by
the Listing Rules of the UK Listing Authority and to report if it
does not reflect such compliance.
Framework of Corporate Governance
The Board
The Diploma PLC Board is accountable to the Company’s
shareholders for standards of Governance across the Group’s
businesses. Certain strategic decision-making powers and
authorities of the Company are reserved as matters for the
Board. The principal matters reserved for the Board are set out
below. Day-to-day operational decisions are managed by the
Chief Executive Officer.
• Setting the overall strategic direction and oversight of the
management of Diploma PLC.
• Recommending or declaring dividends.
• Approval of the Group and Company financial statements.
• All new bank facilities, or significant changes to
existing facilities.
• Assessment and approval of the principal risks facing
the Group and 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.
Audit Committee
Chaired by Anne Thorburn
Number of meetings in the year: Eight
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.
Nomination Committee
Chaired by John Nicholas
Number of meetings in the year: Three
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: Seven
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.
Leadership
Board composition
The Board currently comprises a Chairman, two Executive
Directors and three independent non-Executive Directors. The
non-Executive Directors are appointed for specified terms and
the details of their respective appointments are set out in the
Remuneration Committee Report on page 57. The biographical
details of the Board members are set out on pages 38 and 39.
John Nicholas is Chairman of the Board and the Nomination
Committee. Each of the three independent non-Executive
Directors performs additional roles: Charles Packshaw serves as
Senior Independent Director, Andy Smith is Chairman of the
Remuneration Committee and Anne Thorburn is Chairman of
the Audit Committee.
Activities of the Board
The Company’s governance framework is set out above
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.
41
Diploma PLC Annual Report & Accounts 2017 Corporate Governance
continued
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 for a formal review of the Company’s strategy at the end of
June 2015 in Zurich, Switzerland. The Board received a number
of presentations and had thorough and challenging reviews with
Executive management. In 2017 (as in 2016), the Board reviewed
progress against the objectives set at the Group strategy
session in June 2015.
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.
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 Nomination Committee Report
which is set out on page 50.
In normal circumstances, the Board would expect to hold the
next formal review of the Company’s strategy in 2018. However
in light of the impending retirement of the Chief Executive
Officer, this review is likely to be postponed until a new Chief
Executive Officer has been appointed.
Diversity
The Board is committed to a culture of equal opportunity
and diversity to attract and retain talented people to deliver
outstanding performance and further enhance the success
of the Group.
Meetings of the Board
The Board has seven scheduled meetings during the financial
year but will meet more frequently if required.
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.
The Board ensures that at least one of the scheduled meetings
is held on site at one of the Group’s facilities, where the Board
has an opportunity to both receive presentations from local
management and meet employees of that business. In March
2017, the Board’s scheduled meeting was held at Kentek’s new
facility in Helsinki. At this meeting the Board received
presentations from senior management in Kentek and had an
opportunity to view the new facility and meet with employees
to gain a better understanding of the products and operation
managed from this facility.
In September 2017 the Board’s scheduled meeting reviewed the
Group’s strategic objectives identified at the strategy session
held in 2015 and the Chief Executive Officer provided an update
on the progress achieved in implementing these objectives.
In that culture, diversity across a wide range of criteria is valued,
including skills, knowledge and experience as well as gender,
ethnicity, religion and sexual orientation. People are appointed
on merit, in an equal opportunities environment and without
any form of positive or negative discrimination. External
consultants, when used, are made aware of this policy.
The Nomination Committee reviews the structure, size,
diversity, balance and composition of the Board and makes
recommendations to the Board concerning the reappointment
of any non-Executive Director at the conclusion of their specified
term of office and in the identification and nomination of new
Directors. The principal objective of the Nomination Committee
is to ensure that all candidates have appropriate knowledge,
ability and experience for the role.
The Board supports the recommendations of the Davies review
on gender diversity but believes that other types of diversity are
equally important. The Board is currently diverse across a range
of criteria but it is committed to strengthen that diversity,
including gender and ethnic diversity, when appropriate
opportunities arise. The Board will also take account of its
objective to meet the Davies review targets before the end
of the next Board rotation of non-Executive Directors.
42
Diploma PLC Annual Report & Accounts 2017GOVERNANCE 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. In 2017, the Board
received presentations from senior management of the
Kentek business.
Following the new appointments to the Board in 2015, a
managed induction programme was set up which included a
visit by each of the new non-Executive Directors to the major
business units in each of the Group’s Sectors where they have
an opportunity to meet with senior management in these
businesses. Meetings were also 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.
The Chairman has reviewed and agreed the training and
development needs of individuals Directors and encourages
them to continually update their skills, together with knowledge
and familiarity with the Company to fulfil their role on the Board
and Board Committees.
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. The appointment and removal of the Group
Company Secretary and his remuneration are matters for the
Board as a whole.
Board evaluation
The Board undertakes an externally led evaluation of the
effectiveness of the Board every three years, in accordance with
the Code. This exercise encompasses an evaluation of the Board
as a whole, the Board Committee and of individual Directors.
The last externally led evaluation was carried out in July 2015
and the external facilitator concluded that the Board’s
effectiveness at that time was very strong. A similar external
evaluation exercise is scheduled to be carried out again in 2018.
In those years when an external evaluation is not performed,
the Board undertakes an internal evaluation of the Board’s
effectiveness using specially 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 performances is presented by the Chairman to the Board
and actions and objectives are agreed for the following year.
The internal Board evaluation was carried out in August 2017
and results of this review were again satisfactory.
The issues identified in this evaluation were more broadly
focused on matters that the Board believed should be further
developed for later discussion at meetings of the Board or in
the next review of Company strategy. There were no significant
issues identified that required immediate attention. There were
also no negative performance issues identified from the
evaluation that related to individual Directors or the
performance of the Board Committees.
The Board also received an update on progress made with
implementing those recommendations arising from the internal
evaluations carried out in 2016. These primarily related to the
non-Executive Directors wishing to receive more information on
the competitive factors facing the principal businesses in each
Sector, on a review of the potential impact of innovative and/or
disruptive technologies on the Group’s businesses and further
discussions on strategies to manage the Group in a post Brexit
and particularly lower growth environment.
The Board agenda during 2017 has included discussions to
address these recommendations more generally. However a
comprehensive review of each of these topics will be included
in the next Board meeting on Company strategy.
The Senior Independent Director, together with the non-
Executive Directors also carries out each year and has done so
in 2017, a performance evaluation of the Chairman, having taken
account of the views of all of the 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.
Liability insurance
In line with market practice, each Director is covered by
appropriate directors’ and officers’ liability insurance (“D&O”),
at the Company’s expense. The D&O insurance covers
the 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.
Professional advice
A policy is in place pursuant to which each Director may obtain
independent professional advice at the Company’s expense.
In furtherance of their duties as a Director of Diploma PLC.
No formal requests were made during the year, but post-year
end, advice was sought in relation to Board succession. In
addition, each of the Committees are authorised, through their
Terms of Reference, to seek advice at the Company’s expense.
During the year, advice was sought by the Remuneration
Committee in relation to the development of the Directors’
Remuneration Policy.
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 (“the Articles”) 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.
43
Diploma PLC Annual Report & Accounts 2017 The Group’s website contains up-to-date information for
shareholders which includes the Annual Report & Accounts
of the past eight years, current and historic share price
information, news releases and 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.
Through these processes, the Board is kept abreast of key
issues and the opportunity is available on request for
shareholders to meet the Chairman or Senior Independent
Director, separately from the Executive Directors.
Electronic communications to shareholders include the Notice
of the AGM which is sent at least 20 working days prior to the
meeting. The Company proposes a separate resolution on each
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 are 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 shareholder meetings, other than 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.
Corporate Governance
continued
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.
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 32 to 35 of the Strategic Report.
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 and Canada as well
as in the UK and formal investor presentations are made twice a
year to groups of private client fund managers.
The Company also engages with existing and potential new
investors through a formal Capital Markets Day at which
attendees have an opportunity to meet with senior
management in the Group to gain a better understanding
of the businesses’ product portfolios.
In February 2017, a Capital Markets Day was held in London
which was attended by over 50 members of the investment
community. This proved to be a very successful event for the
Company and further details are set out on page 9 in the Chief
Executive’s Review.
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.
44
Diploma PLC Annual Report & Accounts 2017GOVERNANCE Audit Committee Report
“I wish to thank Deloitte, the
retiring audit firm, for their
excellent service and wise
counsel to the Committee
over many years.”
Anne Thorburn, Chairman of the Audit Committee
Members of Committee:
Anne Thorburn (Chairman)
Charles Packshaw
Andy Smith
Attendance
8/8
8/8
8/8
Dear Shareholder
The Committee’s work this year has been largely focused on
carrying out a tender process for the Company and Group audit
engagement, as Deloitte will have completed ten years as
auditor at the end of the 2017 financial year.
The process was very thorough, beginning in January this year
and concluding in early September and is explained further on
page 47. The Committee was pleased with the strong quality of
presentations received from each of the participating audit
firms, but unfortunately there could only be one successful firm.
After a close contest, the Committee unanimously agreed to
recommend that the Board appoint PricewaterhouseCoopers as
auditor with effect from 2018. This appointment remains subject
to the approval of shareholders at the AGM in January 2018.
On behalf of the Committee, I wish to thank Ed Hanson and his
team at Deloitte, the retiring audit firm, for their excellent
service and wise counsel to the Committee over many years.
The breadth of the Group’s operations has expanded
substantially through acquisition in recent years. The
Committee was therefore pleased that the Group’s Internal
Audit function was strengthened during the year with the
recruitment of an experienced and multi-lingual auditor from
one of the “Big 4” firms. The Committee places strong reliance
on Internal Audit’s ability to visit each of the Group’s operating
businesses during the course of a year, particularly given the
Group’s decentralised operating model. As Chairman of the
Committee, I find it very helpful to meet regularly with members
of the team to discuss their reports. This provides me with
greater insight of the overall culture of the internal control
environment in the Group.
I am pleased to report that there were no significant control
deficiencies or accounting irregularities reported to the
Committee during the year. The Group continues to maintain
a strong culture of robust and effective systems of internal
control, overseen by strong and experienced finance
departments.
I look forward to meeting shareholders at the AGM on 17 January
2018 and will be happy to respond to any questions relating to
the activities of the Audit Committee.
Anne Thorburn
20 November 2017
45
Diploma PLC Annual Report & Accounts 2017 Audit Committee Report
continued
Key Duties
(Full terms of reference are available on the
Company’s website.)
• Monitors the integrity of the financial statements of the
Group and assists the Board in fulfilling its responsibilities
relating to external financial reporting and similar
announcements, including Half Year and Annual financial
statements and quarterly trading updates.
• Reviews key accounting, auditing and tax issues.
• Reviews effectiveness of the Group’s risk management
and internal control systems.
• Recommends appointment and/or reappointment of the
external auditor and approves their terms of engagement.
• Reviews and monitors independence of the external
auditor and the effectiveness of the audit process.
• Monitors policy on external auditor supplying
non-audit services.
• Monitors operation of the Company’s Whistleblowing
and anti-bribery/corruption policies and investigates
any reports of fraud within the Group.
• Reviews effectiveness of the Internal Audit function
and approves the Internal Audit work programme
and reviews the results of the work undertaken.
• Reviews the basis on which the Company and
its principal subsidiaries continue to prepare their
financial statements on a going concern basis.
• Reports to the Board on how it has discharged
its responsibilities.
Audit Committee
The Committee is chaired by Anne Thorburn and comprises
three independent non-Executive Directors. The Chair of the
Committee is a qualified accountant, who has recent and
relevant financial experience.
The Audit Committee is satisfied that as a whole, the
Committee has sufficient knowledge and competence in the
business sectors in which the Group operates in order to provide
appropriate challenge to management.
The Group Company Secretary acts as Secretary to the
Committee. The Executive Directors also attend Committee
meetings and the Internal Audit Manager also attended two
Committee meetings. The Committee met with the external
auditor during the year, without the Executive Directors
being present.
Engagement of the external auditor
The external auditor is engaged to express an opinion on the
financial statements of the Group and of the Company. The
audit includes the review and testing of the systems of internal
financial control and the data contained in the financial
statements, to the extent necessary for expressing an audit
opinion on the truth and fairness of the financial statements.
Deloitte LLP has been the Company’s auditor since its
appointment in 2008. Deloitte LLP provides the Committee with
relevant reports, reviews and advice throughout the year, as set
out in their terms of engagement.
In accordance with UK regulations, the Company’s auditor
adheres to a rotation policy based on best practice and a new
Group lead engagement partner was appointed in 2013 in place
of the previous lead engagement partner who had completed
a term of five years in that role.
During the year, the Committee carried out an assessment of
the effectiveness of the external audit process. The assessment
was led by the 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 was satisfied that Deloitte provided a robust
and effective audit and supports the work of the Committee
through clear and objective communication on developments
in financial reporting and governance.
46
Diploma PLC Annual Report & Accounts 2017GOVERNANCE Audit tender
During the year, with Deloitte approaching the end of their
ten-year term as the Group’s auditor at 30 September 2017,
the Company carried out a formal competitive tender for the
external audit engagement. The tender process began early in
2017 and was overseen by the Chair of the Committee, together
with the assistance of the Group Financial Controller. The tender
process was carried out in accordance with best practice
guidelines provided by the FRC and the Investment Association.
The Committee reviewed a potential list of audit firms to be
invited to tender for the audit and concluded that, in light of
the size and geographic spread of the Group’s businesses, an
audit firm from the “Big 4” would be most appropriate for the
Group audit engagement. In March 2017, formal invitations
to tender were sent to each of the audit firms, including the
incumbent firm, Deloitte. These letters set out a schedule
of matters to be addressed in the tender presentations, the
proposed timetable and a set of confidential documents relating
to the Group’s reporting processes and the key criteria that the
Committee would use to evaluate the tender process. Each
audit firm was also invited to visit the senior management
teams in the principal businesses, as part of the tender process.
The Committee received written proposals from each of
the four audit firms in May, which was followed in June
by a formal presentation by each firm to a meeting of the
Committee, which included the Chairman, the Executive
Directors and the Group Financial Controller. The Committee
scored each audit firm against criteria of capability, cultural fit,
audit quality, resource and proposed fees. These scores
were used to reduce the tender process to a shortlist of
two audit firms.
At the end of August, following further soundings and the
taking up of references, the Audit Committee recommended
to the Board the appointment of PricewaterhouseCoopers
LLP (“PwC”) as auditors for the year ending 30 September
2018 for a period of up to ten years. The final decision was
judged against the principal selection criteria of capability,
audit quality and cultural fit. The Board accepted and endorsed
this recommendation, which is now subject to shareholder
approval at the AGM to be held on 17 January 2018.
Following the announcement to shareholders on 5 September
2017 of the Board’s proposal to appoint PwC, a transition
plan was agreed with PwC which highlights key milestones,
beginning with PwC shadowing Deloitte at the 2017 Group
audit close meeting with management and attendance
at the Audit Committee meeting held on 14 November
2017. PwC do not provide any non-audit services to the
Company or its subsidiaries and have confirmed their
independence as at 1 October to the Audit Committee.
The Audit Committee confirms that the Company has complied
with the provisions of the Competition & Markets Authority
Order throughout its financial year ended 30 September 2017
and up to the date of this report.
Audit Committee Agenda – 2017
• Reviewed and agreed the scope of audit 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 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 Trading Updates at meetings held in
January, March and August.
• 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.
•
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 effectiveness of the external audit
process and following a competitive tender process,
recommended the appointment of the Group’s
external auditor.
• Reviewed terms and implications of the Competition &
Markets Authority Order and the EU Audit Directive and
Audit Regulation.
• Reviewed the Group’s policy on anti-bribery/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 whistleblowing arrangements and the use
made by employees of a dedicated external independent
and confidential telephone hotline service for all
employees to raise concerns.
47
Diploma PLC Annual Report & Accounts 2017 Audit Committee Report
continued
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 auditor to assess them.
The main areas of focus reviewed in the year ended
30 September 2017 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 Sector being tested for impairment. These judgements
are primarily the calculation of the discount rate, the
achievability of strategic 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.
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 are to be amortised. The Committee also
discussed the fair value adjustments and the value attributed to
deferred consideration. The Committee also discussed with
the external auditor the work they had carried out to satisfy
themselves that the valuation assumptions were appropriate.
The Regulations substantially curtail those non-audit services
which can be provided by the auditor to the Company and in
particular, prohibits all tax related services, including compliance
services as well as general advice and all consultancy and
advisory services. The Regulations require that Board approval is
required if eligible non-audit services, such as due diligence and
similar assurance services exceed 30% of the prior year Group
audit fee and the Company may not allow eligible non-audit
services to exceed 70% of the Group audit fee, calculated on
a rolling three-year basis.
In Diploma PLC, taxation services are not provided by the
Group’s current or proposed audit firm; a separate firm is
retained to provide tax advice and any assistance with tax
compliance matters generally. In addition, due diligence
exercises on acquisitions and similar transactions are not
provided by the auditor, but are placed with other firms.
The Group auditor is retained to carry out assurance services
to the Committee in connection with carrying out “agreed
upon procedures” on the Group’s Half Year consolidated
financial statements.
The Group Finance Director does not have delegated authority
to engage the auditor to carry out any non-audit work, but must
seek approval from the Chairman of the Audit Committee.
The Committee assures itself of the auditor’s independence by
receiving regular reports from the external auditor 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.
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.
Details of the external auditor’s total fees, including non-audit
fees of £13,000 paid to Deloitte LLP during the year are set out
in note 27 to the consolidated financial statements.
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 32
to 35.
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 areas 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 in relation to
accounting for the Group’s two pension scheme arrangements,
(accounted for in accordance with IAS19 (Revised)) and the
Group’s taxation position.
Non-audit services
The Committee has reviewed its internal guidelines covering
the type of non-audit work that can be carried out by the
external auditor of the Company, in light of the new regulation
set out in the EU Audit Directive and Audit Regulation 2014
(“the Regulations”). These Regulations came into force on
17 June 2016 and applied to the Company from 1 October 2017.
The Committee is responsible for reviewing the effectiveness of
the Group’s system of internal control. The system of internal
control is designed to manage rather than eliminate the risk of
failure to achieve business objectives and can only provide
reasonable and not absolute assurance against material
misstatement or loss.
The Board has established a clear organisational structure
with defined authority levels. The day-to-day running of the
Group’s business is delegated to the Executive Directors of the
Company. The Executive Directors visit each operating unit on
a regular basis and meet with both operational and finance
management and staff.
Key financial and operational measures 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.
48
Diploma PLC Annual Report & Accounts 2017GOVERNANCE All financial data is taken directly from the trial balances of each
business held in their local ERP systems and reanalysed and
formatted in a separate Group management reporting system,
operated by the Group finance department. There is no rekeying
of financial data and very limited use is made of spreadsheets
by the Group businesses to report monthly financial results.
The Group finance department continues to develop the
functionality of this management reporting system to provide
greater insights into the activities of the Group’s businesses,
both financial and operational. The Group’s internal auditor
regularly audits the base data at each business to ensure
it is properly reported through to the Group 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. In
addition, senior management of each business are required
to confirm their adherence with Group accounting policies,
processes and systems of internal control by means of a
representation letter addressed to 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 2016 to the date of this Report. Taking into
account the matters set out on pages 32 to 35 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 maintains a small Internal Audit department which
reports directly to both the Group Finance Director and Chair of
the Audit Committee. The department comprises an Internal
Audit manager, based in one of the Group’s businesses in
Minneapolis, US and an experienced Senior Internal auditor
based in the Group’s offices in London.
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. Formal written
reports are prepared on the results of each Internal Audit visit
which set out weaknesses identified during their work, together
with recommendations to improve the control environment.
These reports are discussed with management of the business
visited and are reviewed by the appropriate member of the
Executive Management Group.
At the end of the financial year, the Internal Audit manager
formally reports to the Committee on the results of the Internal
Audit work carried out by his department during the year. The
Committee reviews management’s responses to matters raised,
including the time taken to resolve such matters. The Audit
Chair also meets separately with the Internal Audit manager at
least twice a year to review some of the department’s reports
and discuss their findings.
There were no significant or high risk matters identified in the
internal audits undertaken during the current financial year.
Several recommendations were made to the businesses with
regard to formalising and improving their inventory cycle count
procedures and improving the regularity and depth of credit
control assessments of customers with large credit balances.
The Internal Audit manager also reported that good progress
have been made with addressing those recommendations made
in 2016 in connection with inadequate inventory reconciliations
and more detailed employee expense reporting. It was also
identified that further work is still required in some businesses
to tighten up access controls in their ERP systems.
The work of the Internal Audit department was also extended
this year to review and report on progress made by Group
businesses in ensuring that their control environment was
sufficiently robust to resist cyber-attacks. This work identified
a number of instances where systems need to be upgraded and
strengthened and these results were reported to the member
of the EMG who has been given responsibility for managing and
reporting to the Board on the Group’s cybersecurity status.
The Internal Audit department also continues to monitor the
businesses compliance with Group policies on anti-bribery/
corruption and sanctions.
The Committee is satisfied that the Internal Audit department
is sufficiently independent of Executive management and has
sufficient resources and scope that is appropriate for the size
and nature of Diploma PLC.
Sanctions
The Audit Committee continued to work with senior
management of the Company, in conjunction with local
management of Kentek’s Russian operations, to ensure ongoing
compliance with EU and US led sanctions. 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 maintains a Group-wide policy on anti-bribery/
corruption which addresses the requirements of the Bribery Act
2010. The Committee periodically reviews this policy and the
procedures to ensure continued and effective compliance in its
businesses around the world. During the year, the Group rolled
out a refresher using an e-learning training programme to all its
business. This training has been undertaken by all senior
management and employees in customer or supplier facing
roles and in particular by management and employees from
companies that have recently joined the Diploma Group. The
e-learning training programme is being extended to encompass
other regulatory and compliance based topics, including a Code
of Conduct.
The Committee also monitors the Group’s Whistleblowing
policy, which provides the framework to encourage and give
employees confidence to “blow the whistle” and report
irregularities. The policy, together with Hotline posters are
placed on site noticeboards across the Group. Employees are
encouraged to raise concerns via the confidential Hotline which
is managed by an independent external company. Reports to
the hotline are investigated and reported to the Committee,
together with details of corrective action taken. The Group
received three Whistleblowing reports during the year. On
further review and investigation, the Committee concluded that
all three reports essentially related to grievance issues in the
workplace and the concerns reported to the Committee were
satisfactorily resolved under the business grievance policy
and procedures.
49
Diploma PLC Annual Report & Accounts 2017 Nomination Committee Report
Members of Committee
John Nicholas (Chairman)
Charles Packshaw
Andy Smith
Anne Thorburn
Attendance
3/3
3/3
3/3
3/3
The Committee has reviewed succession planning for the
non-Executive Directors. While the Board has been recently
refreshed, the Chairman’s intention is to stagger retirement
among the non-Executive Directors in order to maintain
continuity and to preserve Board balance.
As part of the review of the composition of the Board and the
succession planning process set out above, both the Board and
the Committee recognise the importance of both gender and
ethnic diversity throughout the Group.
Committee evaluation
During the year, an evaluation of the performance of the
Committee and its members was undertaken in line with
the Committee’s Terms of Reference. The evaluation of the
performance of the Committee concluded that the Committee
operates effectively.
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
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 2017
• Evaluated the balance of skills, knowledge and experience
on the Board and its diversity, including gender.
• Considered succession planning in relation to the
Executive Directors and senior management.
• Carried out a management mapping exercise.
• Commenced process to recruit a CEO to succeed Bruce
Thompson on his retirement by 30 September 2018.
• Reviewed and updated the Board diversity policy.
• Reviewed Board members’ register of conflicts of interest.
• Carried out a review of the Committee’s performance,
using an evaluation questionnaire.
The Nomination Committee is chaired by John Nicholas, the
Chairman of the Company. The Committee is chaired by the
Senior Independent Director on any matter concerning the
chairmanship of the Company. The Committee comprises the
non-Executive Directors and meets as necessary to discharge
its responsibilities.
The Group Company Secretary acts as Secretary to
the Committee.
Appointment of Directors
The Committee will always appoint an external search
consultancy, which does not have any connection with the
Company, to assess potential candidates to be considered as
prospective non-Executive Directors and where appropriate,
Executive Directors. As part of any appointment process, 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 closely with the external search consultancy
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 and Executive
Directors. Following these interviews, the Committee
recommends to the Board the appointment of a Director.
Retirement of the Chief Executive Officer (“CEO”)
On 26 September 2017, Bruce Thompson informed the Board of
his intention to retire as CEO of Diploma PLC before the end of
September 2018 and to terminate his employment with the
Company with effect from 30 September 2018. In compliance
with the Committee’s procedures on appointment of Directors,
the Committee, after appropriate consideration and review,
retained Ridgeway Partners (“Ridgeway”) a search consultancy
to lead a process to recruit a new CEO. Ridgeway does not
provide any other services to, or have any connection with
the Company.
The Committee is keen to find a successful senior business
executive with broad management experience of an international
industrial focused business. The Committee has considered the
challenges and opportunities facing the Group currently and in
the future. With this background, the Committee prepared and
agreed a detailed specification for the role with Ridgeway, which
identified the background, skills, knowledge and experience that
will be required of the Company’s CEO in the future. A list of
potential candidates has been prepared and provided to the
Committee and the search for a new CEO is progressing well.
Further details of the process will be set out in the 2018 Annual
Report & Accounts.
Succession planning
The Committee reviews succession planning, taking into
account the challenges and opportunities facing the Group and
the background skills and expertise that will be required by the
Board in the future. As part of this exercise development plans
are agreed to target potential successor senior management in
the Group over the next five years.
In January each year the Committee also reviews management
succession planning processes in relation to the Company’s
senior executives, which comprise a cadre of ca. 90 senior
managers across the Group’s businesses.
50
Diploma PLC Annual Report & Accounts 2017GOVERNANCE Remuneration Committee Report
“Our new Remuneration Policy
aligns with best practice
and provides a strong
basis for linking Diploma’s
strategy and performance
to Executive remuneration.”
Andy Smith, Chairman of the Remuneration Committee
Members of Committee:
Andy Smith (Chairman)
Anne Thorburn
John Nicholas
Charles Packshaw
Attendance
7/7
7/7
6/7
7/7
Dear Shareholder
The work of the Committee this year has been focused
on the review of the Remuneration Policy for Directors,
which is required by law to be resubmitted to shareholders
for approval at the Company’s AGM every three years.
The Committee’s view is that the existing Policy has served the
Company well and the fundamental design continues to provide
a strong basis for linking Diploma’s strategy and performance to
Executive remuneration. This was confirmed in a detailed
consultation exercise carried out by Aon Hewitt, who were
re-appointed by the Committee this year (see page 52) to advise
on the latest developments in best practice for Executive
remuneration. There were however, some areas identified
where changes could be made to adopt present best practice
and improve the Policy. The principal proposed changes are
as follows:
• Annual performance bonus deferral – to ensure shareholder
alignment, a requirement has been introduced to defer 50%
of any bonus awarded (net of tax) into shares until minimum
shareholding guideline levels have been achieved.
• Long term incentive awards – to reflect developments in best
practice and the Board’s continued focus on long term
shareholder alignment, a post-vesting holding period of two
years will now apply to new awards granted after the adoption
of the new Policy.
• Shareholder guidelines – an increase has been made to the
current guidelines so that all Executive Directors will be
required to hold 200% of base salary in shares (currently 200%
for the CEO and 100% for other Executive Directors).
• Clarification of the treatment of long term incentive awards
in a good leaver situation – the policy around vesting
timeframes has been clarified to ensure alignment with best
practice for new awards granted after the adoption of the
new Policy.
No other significant changes to the Policy are proposed and
the maximum incentive opportunity remains unchanged as
described on page 54. I wrote to the 12 largest shareholders in
October and to three proxy advisors to explain the proposed
changes and to ask for their feedback. The feedback I have
received has been supportive of the proposed changes. Subject
to shareholder approval at the AGM on 17 January 2018, it is
intended that the new Policy will apply until the next triennial
review due at the AGM in 2021.
This year’s Annual Report on Remuneration is set out on pages 58
to 63 of the Annual Report & Accounts. The current Remuneration
Policy, approved by shareholders in 2015, has been applied and no
discretion has been applied by the Committee.
Base salaries for Executive Directors for the new financial year
(that is, from 1 October 2017) will increase by 3.0% (2016: 2.5%)
taking into account the salary increases applying across the
senior management cadre and generally across the Group.
The financial element of the annual performance bonus paid
to the Executive Directors this year was at the maximum (2016:
ca. 95%) as determined by the targets set for the increase in
adjusted earnings per share. The Group delivered an increase of
19% in adjusted earning per share (“EPS”) which the Committee
considers to be an exceptional performance in the current
environment and which has helped underpin the strength
of the Company’s share price this year. In the year ending
30 September 2018, adjusted operating profit on a constant
currency basis will replace adjusted EPS as the primary measure
of financial performance in the annual performance bonus.
The LTIP awards for the three years ended 30 September 2017
vested at 89% of the maximum (2016: 45%), supported by an
upper quartile FTSE 250 performance in terms of total return to
shareholders (average 20% p.a. each year over three years) and
average compound growth of 11% p.a. in adjusted EPS. As much
of this period was during a global environment of sluggish
growth, the Committee considers the level of LTIP awards to
be appropriate.
I look forward to meeting shareholders at this year’s AGM on
17 January 2018 and will be pleased to answer any questions or
concerns they have on the Company’s remuneration policies.
Andy Smith
20 November 2017
51
Diploma PLC Annual Report & Accounts 2017 Remuneration Committee Report
continued
Remuneration Committee
The Remuneration Committee (“the Committee”) is chaired by
Andy Smith and comprises independent non-Executive Directors.
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 2017
• Reviewed policy on remuneration for Executive
Directors; receiving reports and advice from Aon Hewitt
and Stephenson Harwood LLP.
• Carried out a consultation with the Company’s major
shareholders on the proposed changes to the
Remuneration Policy for Executive Directors.
• Reviewed Executive Directors’ salaries, pensions
and benefits.
• Approved Annual Performance Bonus targets and the
subsequent bonus awards for 2017.
• Approved new PSP awards to Executive Directors and
confirmed the performance conditions for such awards.
• Confirmed the vesting percentages for the PSP awards
made in February 2015 which crystallised in 2017.
• Approved the exercise of nil cost options.
• Approved the 2017 Remuneration Committee Report.
• Reviewed the AGM 2017 votes on the 2016 Remuneration
Committee Report.
• Maintained watching brief on external reports on
Directors’ remuneration.
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 sets out the Director’s Remuneration Policy
(“the Policy”), which will be subject to a binding triennial vote
by shareholders at the AGM on 17 January 2018.
In preparation for the triennial approval by shareholders of the
Policy at the AGM on 17 January 2018, the Committee undertook
a review of its Policy for Directors to ensure that it remained
appropriate with the Company strategy and reflected the latest
developments in remuneration best practice.
Work began in January 2017 when meetings were held with four
remuneration consultancy firms to discuss their assessment
of the Group’s present Policy and to hear their proposals for
becoming remuneration advisors to the Committee. Aon Hewitt
was judged to offer the best service and value and consequently
was reappointed.
Following a detailed consultation exercise with Aon Hewitt,
the Committee concluded that the existing Policy continues
to provide a strong basis for linking Diploma’s strategy and
performance to Executive Remuneration. However, the
Committee also identified some areas where changes should
be made to apply current best practice and improve the Policy.
These changes are summarised in the letter from the Chairman
of the Committee on page 51 and are reflected in the new
revised Remuneration Policy Table set out on pages 53 and 54.
This revised new Policy, will, subject to shareholder approval
at the AGM on 17 January 2018, continue for a period of three
years until 16 January 2021, unless replaced or amended by a
new Policy.
The second section of this Report sets out the annual
remuneration paid to the Directors in the year ended 30 September
2017 in accordance with the existing Remuneration Policy approved
on 21 January 2015. This section of the Report will continue to
be subject to an advisory vote by shareholders at the AGM.
Remuneration principles and structure
The Committee has adopted remuneration principles which
are designed to ensure that senior executive remuneration:
•
is aligned to the business strategy and promotes the
long term success of the Company;
• supports the creation of sustainable long-term
shareholder value;
• provides an appropriate balance between remuneration
elements and includes 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.
52
Diploma PLC Annual Report & Accounts 2017GOVERNANCE Directors’ Remuneration Policy
The Remuneration Policy Table
The Remuneration Policy Table set out below summarises the components of reward for the Executive Directors of Diploma PLC that
will govern the Company’s intentions as regards future payments of remuneration.
This Policy, if approved by shareholders at the AGM on 17 January 2018, will apply from 17 January 2018 for a term of three years.
Any commitment made by the Company prior to the approval and implementation of the Policy set out in this Report which were
consistent with the Policy in force at the time, can be honoured, even if they would not be consistent with the Policy prevailing when
the commitment is fulfilled.
Executive Directors
Component
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Base salary
To attract and retain
people of the calibre
and experience
needed to develop
and execute the
Company’s strategy.
Salaries 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.
Salary increases will
generally be no higher
than those awarded
to other employees,
although the Committee
retains discretion to
award larger increases if it
considers it appropriate.
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
both for UK employees and
for the senior management
cadre more generally and
the competitiveness of
total remuneration against
companies of a similar
size and complexity.
No maximum limit set.
No performance metric.
Pension contributions up to
20% of base salary, which are
either paid into personal pension
savings schemes or paid as
a separate cash allowance.
Includes various cash/non-
cash benefits such as: payment
in lieu of a company car, life
assurance, income protection,
annual leave, medical insurance.
No maximum limit is
prescribed, but the
Committee monitors
annually the overall cost of
the benefit provision.
No performance metric.
Provides an opportunity for
additional reward based on
annual performance against
targets set and assessed
by the Committee.
Where shareholding guidelines
have not been met, half of any
annual bonus awarded (net of
tax) will be deferred in shares
for up to three years, but will
remain eligible for dividends.
The remaining bonus shall
be paid in cash following
the relevant year end.
Malus and clawback provisions
apply to bonus awards.
Maximum of 125% of base
salary for the Chief Executive
Officer and 100% for other
Executive Directors.
Performance below
threshold results in zero
payment. On-target bonus
is 50% of maximum bonus
and threshold performance
is 5% of base salary.
Performance metrics are
selected annually based
on the current business
objectives. The majority of
the bonus will be linked to
financial performance.
For FY18, bonuses will
be based on adjusted
operating profit on a
constant currency basis.
Discretion to reduce awards
if satisfactory threshold
levels are not achieved for
adjusted operating margin,
free cash flow or ROATCE.
Different performance
measures, including
personal objectives, may
be used for future cycles to
take into account changes
in the business strategy.
Personal objectives, if used,
will account for no more
than 20% of the bonus.
53
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
To incentivise and
reward Executive
Directors on the
achievement of
the annual budget
and other business
priorities for the
financial year.
Diploma PLC Annual Report & Accounts 2017 Remuneration Committee Report
continued
Directors’ Remuneration Policy continued
Component
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Long Term
Incentive Plan –
PSP Awards
Incentivise Executive
Directors to achieve
superior returns
and long term
value growth.
The maximum opportunity
as a percentage of salary is
175% for each award made
to the Executive Directors
under the 2011 Performance
Share Plan (“PSP”). The
Committee has discretion
to increase awards under
the PSP to 250% of salary in
exceptional circumstances.
No more than 25% of the
award will be payable at
threshold performance.
Awards will be granted
subject to a combination of
financial measures (including,
for example, adjusted EPS,
ROATCE and TSR), tested over
a period of at least three years.
The Committee may
change the weighting of the
performance measures or
introduce new performance
measures for future
awards, so that they are
aligned with the Company’s
strategic objectives.
Performance assessed
over rolling three-year
performance periods.
Awards are discretionary and
do not vest until the date
on which the performance
conditions are determined.
If employment ceases during
a three-year performance
period, other than in the
case of a “good leaver”,
awards will normally lapse.
For awards granted after the
adoption of this new Policy
on 17 January 2018, Executive
Directors will be required to
retain shares vesting under
the LTIP (net of tax) until the
fifth anniversary of grant.
Awards may include dividend
equivalents which are cash
bonuses or shares in lieu of
dividends forgone on vested
shares, from the time of award
up to the time of vesting.
Malus and clawback
provisions apply.
Chairman and non-Executive Directors
Component
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Chairman and
non-Executive
Directors’ fees
To attract and retain
a Chairman and
independent non-
Executive Directors
of the required calibre
and experience.
Paid quarterly in arrears
and reviewed each year.
Any reasonable business related
expenses (including tax thereon)
can be reimbursed if determined
to be a taxable benefit.
The Chairman’s and
non-Executive Directors’
fees are determined by
reference to the time
commitment and relevant
benchmark market data.
Annual Board evaluation.
Pay-for-performance: Executive Director’s potential value of 2018 remuneration package
Bruce Thompson (%)
Nigel Lingwood (%)
Minimum
On target
Maximum
38
7
23
25
5
29
84
16
32
41
£625,000
£1,376,000
£2,126,000
Minimum
On target
Maximum
40
8
19
26
5
25
84
16
33
£407,000
£852,000
44
£1,297,000
Fixed:
Variable:
Base salary and benefits
Annual performance bonus
Pension
Long term incentive plans
Base salary and benefits
Annual performance bonus
Pension
Long term incentive plans
1 Base salary is as at 1 October 2017; benefits are as set out on page 58.
On target remuneration assumes an Annual Performance Bonus of 50% of the maximum for the Executive Directors. It has been
assumed that a face value limit of 175% of base salary applies to each PSP award. On target vesting of PSP awards assumes
an adjusted EPS growth of 8% p.a. and TSR performance which is equivalent to 50% of the maximum vesting under the PSP.
Maximum remuneration assumes maximum annual performance bonus and maximum vesting of PSP awards. In all cases,
for simplicity, no share price growth or dividend equivalents are assumed.
54
Diploma PLC Annual Report & Accounts 2017GOVERNANCE Executive Directors
Base salary
In determining the annual base salary increases which apply
from 1 October, the Committee considers comparative salaries
in companies of a similar size and complexity and the range of
remuneration increases applying across the Group.
Long term incentive award
The Company operates a long term incentive award 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 Committee also takes into account the salary increases
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, as it provides a meaningful comparison
considering the global and diverse nature of the Group’s business.
Annual performance bonus
The Diploma PLC Annual Performance Bonus Plan is substantially
a cash based scheme designed to reward Executive Directors for
meeting stretching annual performance targets.
Under the new Policy proposed for adoption by shareholders at
the AGM on 17 January 2018, the financial performance target
of “adjusted EPS” will be replaced by “Group adjusted operating
profit” and this will be calculated on a basis that excludes the
impact of currency effects on the translation of Group adjusted
operating profit. If approved by shareholders, this amendment
will apply to the financial year ending 30 September 2018.
At the start of the financial year (1 October), the Board sets a
financial performance target principally focused on achievement
of a target Group adjusted operating profit (or for financial
year ending 30 September 2017 only, adjusted EPS). Adjusted
operating profit will be calculated on a constant currency basis
and full disclosure of the targets will continue to be published
on a retrospective basis. The level of bonus payable for achieving
the minimum target is 5% of base salary. No bonus is payable
if performance does not meet the minimum target.
The definition of adjusted operating profit (or for 2017 only,
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 adjusted 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 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 have also been set for the Group Finance
Director in the financial year ended 30 September 2017 relating
to factors including operating performance, business and
management development activities. While retaining that
flexibility under the new Policy, the bonus payable to the Group
Finance Director for the financial year ending 30 September 2018
will be based solely on adjusted operating profits.
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.
There will be a new requirement after the adoption of the new
Policy proposed at the AGM on 17 January 2018, to defer 50% of
any bonus awarded for the financial year ending 30 September
2018 or thereafter, on a net of tax basis into shares until minimum
shareholding guideline levels, set at 200% of base salary for
Executive Directors under this new Policy, have been met.
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 dealing day before the award. A face value limit
of 175% of base salary applies to each PSP award to Executive
Directors, although the Committee, at its discretion, may
increase the face value of an award to a maximum of 250%
in exceptional circumstances.
All awards will normally vest on the date on which the
performance conditions are determined and confirmed by
the Committee, following the end of the performance period.
The vesting of awards is conditional on:
• continued employment;
• the Company’s growth in adjusted EPS over a three-year
performance period; and
• the Company’s TSR performance over a three-year
performance period.
The latter two performance conditions apply to each award so
that the vesting of 50% of the award is based on growth in
adjusted EPS and 50% of the award is based on the relative TSR
performance. These measures align with our long-term goal of
value creation for shareholders through underlying financial
growth and above-market shareholder returns.
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 the performance metrics.
At the minimum performance threshold, 25% of the PSP awards
will vest.
The Committee will regularly monitor the continuing suitability
of the performance conditions and may impose different
performance conditions or targets for awards granted in
subsequent years, to align with the Company’s strategic
objectives and having regard to prevailing market practice.
The Committee may decide, on or before the grant of a share
incentive award, that on exercise of the award, the participants
may receive, in addition to the shares in which they then
become 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.
For awards granted after the adoption of this new Policy
proposed at the AGM on 17 January 2018, Executive Directors will
be required to retain shares vesting under the LTIP (net of tax)
until the fifth anniversary of grant (“the Holding Period”), to reflect
developments in best practice and the Committee’s continued
55
Diploma PLC Annual Report & Accounts 2017 Remuneration Committee Report
continued
Directors’ Remuneration Policy continued
focus on long term shareholder alignment. The Holding Period
shall expire on the earliest of:
• the fifth anniversary of the date of grant of an award;
• the date of a change of control event;
• the death of the participant; or
• such other date as determined by the Committee in
its discretion.
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, were updated in
March 2014 to recognise developments in law and best practice
relating to such contracts. 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.
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
Bruce Thompson
Nigel Lingwood
20 Mar 2014
20 Mar 2014
Rolling 1 year
Rolling 1 year
1 year
1 year
Other remuneration policies
Payment for loss of office
The Committee has considered the Company’s policy on
remuneration for Executive Directors leaving the Company
and is committed to applying a consistent approach to ensure
that the Company pays no more than is fair and reasonable
in the circumstances.
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 and the
length of time the awards have been held. Time prorating may
be disapplied if the Committee considers it appropriate, given
the circumstances. For awards granted under the current
Policy (i.e. prior to the adoption of the new Policy on 17 January
2018) performance will be measured to the date of cessation
of employment and, to the extent applicable, vest shortly
56
thereafter. For awards granted after the adoption of the new
Policy on 17 January 2018, performance will be measured to
the end of the normal performance period and, to the extent
applicable, vest on the normal vesting date, save in exceptional
circumstances when the Committee may determine that early
vesting should still apply.
• The Committee will 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.
The Committee reserves the right to make additional exit
payments where such payments are made in good faith in
discharge of an existing legal obligation (or by way of damages
for breach of such an obligation) or by way of settlement
or compromise of any claim arising in connection with the
termination of a Director’s office or employment.
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 an award of shares
under the Company’s PSP depends on the extent to which
performance conditions had been met at that time. Time
prorating 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 under the Company’s
long term incentive and annual bonus plans which give the
Committee the right to cancel or reduce unvested share awards
(or in the case of the Annual Performance Bonus Plan, cash
payments) in the event of material misstatement of the
Company’s financial results, miscalculation of a participant’s
entitlement or individual gross misconduct.
Clawback provisions apply to PSP and Annual Bonus Performance
Plan awards granted to Executive Directors after 1 October 2015.
The clawback arrangements permit the Committee to recover
amounts paid to Executive Directors in specified circumstances
and further safeguard shareholders’ interests.
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 Policy in force at the time of appointment.
The Committee has agreed the following principles that will apply
when arranging a remuneration package to recruit new Executive
Directors:
• The remuneration structure will be kept simple where
practicable, hence the use of base salary, benefits, pension
(or cash allowance in lieu), annual performance bonus and long
term incentives.
• The emphasis on linking pay with performance shall continue;
•
hence the use of variable pay in the form of an annual
performance bonus and a long term incentive award, which
will continue to be a significant component of the Executive
Directors’ total remuneration package.
Initial base salary will take into account the experience and
calibre of the individual and their existing remuneration
package. Where it is appropriate to offer a lower salary initially,
a series of increases to the desired salary positioning may be
given over subsequent years subject to individual performance.
• The structure of variable pay will be in accordance with
Diploma’s approved Policy detailed above with an exceptional
maximum aggregate variable pay opportunity of 375% of
salary. Different performance measures may be set in the first
Diploma PLC Annual Report & Accounts 2017GOVERNANCE year for the annual bonus, taking account of the responsibilities
of the individual and the point in the financial year that the
executive joined the Company.
•
• 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, 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, the mandated
shareholding guidelines, deferral of annual performance bonus
and the Holding Period for LTIP awards will apply in accordance
with the Policy and the relevant Plan rules.
• Fees for a new Chairman or non-Executive Director will be set
in line with the approved Policy.
Committee discretion
The Committee operates the Annual Performance Bonus Plan
and the LTIP in accordance with the relevant plan rules and
where appropriate, the Listing Rules and HMRC legislation. The
Committee also retains discretion over a number of areas relating
to the operation and administration of the plans. These include,
the timing of awards and of setting performance criteria each
year, dealing with leavers, discretion to waive or shorten the
Holding Period for shares acquired under the LTIP, the discretion
to retrospectively amend performance targets in exceptional
circumstances and in respect of share awards, to adjust the
number of shares subject to an award in the event of a variation
in the share capital of the Company. The Committee will exercise
its powers in accordance with the terms of the relevant plan
rules. The Committee also has discretions to set components
of remuneration within a range from time to time as set out
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
discretionary 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
or exercise of discretion, as appropriate, to explain their
approach and rationale fully and to understand shareholders’
views. Additionally, the Committee considers shareholder
feedback received in relation to each AGM alongside any views
expressed during the year. The Committee also reviews the
executive remuneration framework in the context of published
Investor Guidelines.
The Committee does not consult directly with employees when
formulating the Policy for Executive Directors.
Policy in respect of external board appointments for
Executive Directors
The Committee recognises that external non-executive
directorships may be beneficial for both the Company and
Executive Director. At the discretion of the Board, Executive
Directors are permitted to retain fees received in respect of any
such non-executive directorship.
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, each Executive Director should build up and then
retain a holding of shares with a value equivalent to 200% of base
salary. The guidelines also require that, in relation to long term
incentive awards, vested shares (net of tax) must be retained
by the individual until the required shareholding level is reached.
As at 20 November 2017, both Executive Directors exceeded
the applicable shareholding guidelines.
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
Charles Packshaw
Andy Smith
Anne Thorburn
Date of original
appointment
Date of election/
re-election
1 Jun 13
1 Jun 13
9 Feb 15
7 Sep 15
18 Jan 17
18 Jan 17
18 Jan 17
18 Jan 17
Expiry of term
20 Jan 18
1 Jun 19
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. If there is a temporary yet
material increase in the time commitments for non-Executive
Directors, the Board may pay extra fees on a pro rata basis to
recognise the additional workload.
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.
57
Diploma PLC Annual Report & Accounts 2017 Remuneration Committee Report
continued
Annual Report on Remuneration
The following section of this Report provides details of the implementation of the existing Remuneration Policy for both Executive
Directors for the years ended 30 September 2017 and 2016. All of the information set out in this section of the Report has been
audited, unless indicated otherwise.
Executive Directors
Total remuneration in 2017 and 2016
Salary
Benefits
Pension
Annual performance bonus
Short term remuneration (cash)
Long term incentive plans – dividend equivalent (cash)
Long term incentive plans – performance element
Long term incentive plans – share appreciation element
Long term share price based remuneration (non-cash)
Total
Bruce Thompson
Nigel Lingwood
2017
£000
486
24
97
607
2016
£000
474
24
95
565
1,214
1,158
43
714
287
1,001
2,258
6
374
96
470
2017
£000
314
18
63
310
705
28
461
186
647
1,634
1,380
2016
£000
306
19
61
288
674
4
242
62
304
982
The aggregate short term remuneration paid to the Executive Directors in the year ended 30 September 2017 was £1.9m (2016: £2.1m).
Nigel Lingwood was Senior Independent Director and Chairman of the Audit Committee at Creston plc until his resignation on
22 December 2016 and received £20,000 as fees during the year ended 30 September 2017.
Base salary
The average base salary increase for Executive Directors which applied from 1 October 2016 was 2.5%, compared with 4% for the
Group’s senior management cadre. On 14 November 2017, the Committee approved an increase of 3.0% in base salaries for the
Executive Directors which will apply in respect of the year beginning 1 October 2017.
Benefits
Bruce Thompson
Nigel Lingwood
2017
2016
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
13
11
7
6
4
1
24
18
13
11
10
7
Medical
insurance
£000
1
1
Total
benefit
£000
24
19
Pension
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% (2016: 20%) of base salary were applied as follows:
2017
Paid as
pension
contribution
£000
Total cash
paid
£000
Paid as cash
allowance
£000
2016
Paid as
pension
contribution
£000
–
–
97
63
95
61
–
–
Paid as cash
allowance
£000
97
63
Total cash
paid
£000
95
61
Bruce Thompson
Nigel Lingwood
58
Diploma PLC Annual Report & Accounts 2017GOVERNANCE Annual performance bonus
The following table summarises the performance assessment by the Committee in respect of 2017 with regard to the following
performance measures:
(1) Group financial objectives – Bruce Thompson: 100% of bonus; Nigel Lingwood: 75% of bonus
Performance measure
Performance in 2017
Adjusted EPS
The minimum performance target was 100% of 2016 adjusted EPS of 41.9p,
the on-target performance was 45.9p (which was equivalent to 10% above
2016 adjusted EPS) and the maximum target was at least 15% growth above
2016 adjusted EPS at 48.2p. Adjusted EPS grew by 19% to 49.8p. Minimum
thresholds were exceeded for adjusted operating margins, free cash flow
and ROATCE.
Overall assessment against targets
100% of maximum
(2) Individual objectives – Nigel Lingwood: 25% of bonus
The performance of Nigel Lingwood was assessed against a range of specific individual objectives under the following headings:
Performance measure
Performance in 2017
Nigel Lingwood
Strong level of achievement across a range of specific individual objectives,
including re-negotiating bank facilities on significantly improved terms;
strengthening and extending scope of internal audit and improving general
control environment; developing and executing successful Capital Markets
Day; establishing a robust cybersecurity programme across the Group;
managing several facility relocations and related investments.
Overall assessment against targets
95% of maximum
Based on the performance set out above, the resulting bonus for each Executive Director relating to 2017 is as follows:
Bruce Thompson
Nigel Lingwood
2017 actual bonus – as a percentage of 2017 base salary
Minimum
On-target
Maximum
Financial
objectives
Individual
performance
objectives
5%
5%
63%
50%
125% 125.0%
75.0%
100%
23.8%
Total bonus
125.0%
98.8%
£000
607
310
2017 bonus
delivered as
cash
The Annual Performance Bonus for the financial year beginning 1 October 2017 will be in accordance with the new revised Policy set
out on page 53. The financial performance targets set for the Annual Performance Bonus will be disclosed in next year’s Annual
Report & Accounts.
Long term incentive awards
Performance conditions
Set out below is a summary of the performance conditions that apply to both the long-term incentive awards which vest in 2017 and
the outstanding PSP awards, including those granted in December 2015 and December 2016. PSP awards since 1 October 2014 have
been granted at 175% of base salary. The performance conditions applying to these awards made under the PSP are set out below.
The Committee has confirmed that the same performance conditions will be applied to PSP awards made in December 2017.
The first performance condition for the PSP 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 specified
absolute figures. The performance conditions are as follows:
% of
awards
vesting
Adjusted EPS growth (over three years)
14% p.a.
5% p.a.
Below 5% p.a.
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.
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:
% of
awards
vesting
Upper quartile
Median
Below median
PSP
100
25
Nil
59
Diploma PLC Annual Report & Accounts 2017 Remuneration Committee Report
continued
Annual Report on Remuneration continued
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 2017
The PSP awards made to the Executive Directors on 5 February 2015, were subject to operating performance conditions as set out in
the table above, independently assessed over a three-year period ended 30 September 2017. The outcome of each award is shown in
the table below:
Adjusted earnings per share:
PSP (5 February 2015)
Base EPS
EPS at
30 Sep 2017
CAGR
in EPS
Maximum
target
Maximum
award
Vested
award
36.1p
49.8p
11.3%
14.0%
50%
38.8%
TSR growth against FTSE 250 (excluding Investment Trusts):
PSP (5 February 2015)1
TSR at
30 Sep 2017
Median
Maximum
target
Maximum
award
Vested
award
20.1% p.a.
7.3% p.a. 19.4% p.a.
50%
50.0%
As a result of the above performance conditions, 88.8% of the shares awarded as nil cost options vested to each Director under the
PSP award made on 5 February 2015. Set out below are the shares which vested to each Executive Director at 30 September 2017 in
respect of these awards.
Share price
at date
of grant
pence
Share
price at
30 Sep 2017
pence
Proportion
of award
vesting
Shares
vested
Number
Performance
element1
£000
Share
appreciation
element2
£000
Bruce Thompson – PSP
Nigel Lingwood – PSP
755.5p
755.5p
1059.0p
1059.0p
88.8%
88.8%
94,565
61,056
714
461
287
186
Total
£000
1,001
647
1 The performance element represents the face value of awards 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 2017.
Dividend equivalent payments
There were no dividend equivalent payments paid in respect of outstanding nil cost options which vested in the prior year on
30 September 2016. Dividend equivalent payments of £42,743 and £27,597 will be payable to Bruce Thompson and Nigel Lingwood
respectively, in respect of awards which vested on 30 September 2017 and these are accounted for in this year’s Annual Report on
Remuneration.
Long term incentive plan – awards granted in the year
The CEO and Group Finance Director received grants of PSP awards on 22 December 2016, in the form of nil-cost options. These
awards were based on a share price of 997.5p, being 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 page 59.
Outstanding share-based performance awards
Set out below is a summary of the share-based awards outstanding at 30 September 2017, 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 175% of base salary at December 2016. No awards will vest unless the performance
conditions set out on page 59 are achieved over a three-year measurement period.
Diploma PLC 2011 Performance Share Plan
Market price
at date of
award
Face value of
the award at
date of grant
£000
End of
performance
period
Maturity date
Shares
over which
awards
held at
1 Oct 2016
Shares
over which
awards
granted
during the
year
Vested
during the
period
Lapsed
during the
period
Shares
over which
awards
held at
30 Sep 2017
Bruce Thompson
5 February 2015
17 December 2015
22 December 2016
Nigel Lingwood
5 February 2015
17 December 2015
22 December 2016
755.5p
730.0p
997.5p
755.5p
730.0p
997.5p
805
829
850
520
535
549
30 Sep 2017
30 Sep 2018
30 Sep 2019
30 Sep 2017
30 Sep 2018
30 Sep 2019
106,552
113,630
–
–
–
85,263
94,565
–
–
11,987
–
–
–
113,630
85,263
30 Sep 2017
30 Sep 2018
30 Sep 2019
30 Sep 2017
30 Sep 2018
30 Sep 2019
68,795
73,356
–
–
–
55,035
61,056
–
–
7,739
–
–
–
73,356
55,035
60
Diploma PLC Annual Report & Accounts 2017GOVERNANCE The PSP awards vest on the date on which the performance conditions are determined and confirmed by the Committee, following
the end of the performance period.
The PSP 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 2017 are set out on page 62.
Services from external advisors (unaudited)
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 Directors’ Remuneration Policy.
The Committee also received advice and assistance from Aon Hewitt in connection with the Committee’s review of the Company’s
Remuneration Policy this 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
Aon Hewitt
MEIS
Committee
Committee
Committee
Legal advice
Remuneration advice
Data analysis
Other services
provided to the
Company
Fees
£8,000
£15,000
£7,000
None
None
None
Shareholder voting at previous Annual General Meeting (unaudited)
The Remuneration Committee’s Annual Report (“Report”) for the year ended 30 September 2016 was approved by shareholders at
the AGM held on 18 January 2017, with the following votes being cast:
Votes for
Votes against
Withheld
88,141,059
3,077,684
1,642,882
96.63%
3.37%
There was no requirement to propose a resolution on the Policy at the AGM held in 2017 and shareholders will be asked to vote
on the revised proposed Remuneration Policy at the AGM on 17 January 2018, as set out in the Policy Table on pages 53 and 54.
The votes in favour of the Policy at the AGM held on 21 January 2015 was 94.6%.
Aligning pay with performance (unaudited)
The graph below shows the Total Shareholder Return (“TSR”) performance of Diploma PLC for the nine-year period ended
30 September 2017 against the FTSE 250 Index as the Company is a member of this Index.
Growth in the value of a hypothetical £100 holding over nine years
1,200
1,000
800
600
400
200
0
30 Sep 08
30 Sep 09
30 Sep 10
30 Sep 11
30 Sep 12
30 Sep 13
30 Sep 14
30 Sep 15
30 Sep 16
30 Sep 17
Diploma PLC
FTSE 250 (excluding 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.
61
Diploma PLC Annual Report & Accounts 2017 Remuneration Committee Report
continued
Annual Report on Remuneration continued
Chief Executive Officer remuneration compared with annual growth in TSR
Annual growth in TSR
Salary, pensions and benefits
Annual performance bonus
Short term remuneration
Long term incentive plans
(including dividend equivalent)
CEO total remuneration
Actual bonus as a percentage of
the maximum
Actual share award vesting as a
percentage of the maximum
2017
2016
+24%
+36%
£000
607
607
£000
593
565
1,214
1,158
1,044
2,258
100%
89%
476
1,634
95%
45%
2015
–1%
£000
575
294
869
270
2014
+8%
£000
523
339
862
984
1,139
1,846
2013
2012
2011
2010
2009
+42%
+54%
+16%
+71%
+21%
£000
504
164
668
1,733
2,401
£000
484
367
851
979
1,830
£000
454
360
814
887
1,701
£000
435
345
780
507
1,287
51%
25%
65%
33%
95%
100%
100%
61%
100%
100%
100%
100%
£000
429
102
531
303
834
30%
91%
Set out below is the change over the prior year in base salary, benefits, pension, annual performance bonus and short term
remuneration of the Chief Executive Officer and the Group’s senior management cadre.
Change in
base salary
%
Change in
pension
%
Change in
benefits
%
Change
in annual
performance
bonus
%
Chief Executive Officer
Senior management cadre
+3
+4
+3
+2
–
–
+7
+15
The Committee chose the senior management cadre for pay comparisons with the Chief Executive Officer as it provided the most
closely aligned comparator group, considering the global and diverse nature of the Group’s business.
Relative importance of Executive Director remuneration (unaudited)
Total employee remuneration
Total dividends paid
2017
£m
86.4
23.5
2016
£m
75.8
21.0
Change
£m
10.6
2.5
Executive Directors’ interest in options over shares
In respect of nil cost options granted under the PSP, the remuneration receivable by an Executive Director is calculated on the date
that the options first vest. The remuneration of the Executive Director is the difference between the amount the Executive Director
is required to pay to exercise the options to acquire the shares and the total value of the shares on the vesting date.
If the Executive Director chooses not to exercise the nil cost options on the vesting date (he may exercise the options at any time up
to the day preceding the tenth anniversary of the date of grant), any subsequent increase or decrease in the amount realised will be
due to movements in the underlying share price between the initial vesting date and the date of exercise of the option. This increase
or decrease in value reflects an investment decision by the Executive Director and, as such, is not recorded as remuneration.
The nil cost options outstanding at 30 September 2017 and the movements during the year are as follows:
Bruce Thompson
Nigel Lingwood
Year of
vesting
Options as at
1 Oct 2016
Exercised in
year
2016
2017
2016
2017
53,436
–
34,599
–
53,436
–
34,599
–
Vested
during the
year
–
94,565
–
61,056
Options
unexercised
as at
30 Sep 20174
–
94,565
–
61,056
Exercise
price
Earliest normal
exercise date
£1
£1
£1
£1
Nov 2016
Nov 2017
Nov 2016
Nov 2017
Expiry date
Dec 2023
Feb 2025
Dec 2023
Feb 2025
1 Bruce Thompson exercised 53,436 options on 30 November 2016, at a market price of 924.0p per share and the total proceeds before tax were £493,748.
2 Nigel Lingwood exercised 34,599 options on 30 November 2016, at a market price of 924.0p per share and the total proceeds before tax were £319,694.
3 On 30 November 2016, the aggregate number of shares received by the participants was reduced by 41,376 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 924.0p.
4 The closing price of an ordinary share on 30 September 2017 was 1059.0p (2016: 879.0p).
62
Diploma PLC Annual Report & Accounts 2017GOVERNANCE Executive Directors’ interests in ordinary shares
The Executive Directors’ interests in ordinary shares of the Company were as follows:
Bruce Thompson
Nigel Lingwood
As at 30 Sep 2017
As at 30 Sep 2016
Ordinary
shares
Options
vested but
unexercised
Interest in
shares with
performance
measures
Ordinary
shares
Options
vested but
unexercised
Interest in
shares with
performance
measures
570,000
200,000
94,565
61,056
198,893
128,391
850,000
275,000
53,436
34,599
220,182
142,151
Interests in ordinary shares include shares held through personal saving vehicles. As of 20 November 2017, there have been no
changes to these interests in ordinary shares of the Company.
At 30 September 2017 the ordinary shares held by Bruce Thompson and Nigel Lingwood represented 1,242% and 675% of their base
salaries respectively. As set out on page 57, the Committee has set a minimum shareholding guideline of 200% for the Executive Directors.
Chairman and non-Executive Directors’ remuneration
Individual remuneration for the year ended 30 September was as follows:
John Nicholas
Charles Packshaw
Andy Smith
Anne Thorburn
Total fees
2017
£000
140
54
54
54
2016
£000
137
52
52
52
The non-Executive Directors received a basic annual fee of £48,600 during the year and there were additional fees paid in 2017 of
£5,000 (2016: £5,000) 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 on 14 November 2017, the Board approved an increase of 3% in the Chairman’s fee to £144,600 p.a. and in the
total annual fee paid to non-Executive Directors to £55,000, both to take effect from 1 October 2017.
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:
Interest in ordinary shares
John Nicholas
Charles Packshaw
Andy Smith
Anne Thorburn
As at
30 Sep 2017
As at
30 Sep 2016
5,000
1,500
5,500
3,000
5,000
1,500
5,500
3,000
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. Members of the Executive Management Group (“EMG”) participate in the Diploma PLC 2011 Performance Share
Plan described further on page 55. Senior management outside the EMG participate in cash based long term incentive plans which
are focused on the operating profit growth of their businesses over rolling three-year periods.
Set out below is a summary of the share-based awards outstanding at 30 September 2017 which have been granted to members
of the EMG, including share awards which have vested during the year based on performance and share awards which have been
granted both last year and during this year. The awards set out below were granted based on a face value limit that varied between
30% and 60% of base salary. No awards will vest unless the performance conditions set out on page 59 are achieved over a three-
year measurement period.
Diploma PLC 2011 Performance Share Plan
Market price
at date of
award
Face value of
the award at
date of grant
£000
End of
performance
period
5 February 2015
17 December 2015
22 December 2016
755.5p
730.0p
997.5p
161
159
390
30 Sep 2017
30 Sep 2018
30 Sep 2019
Shares
over which
awards
held at
1 Oct 2016
21,364
21,781
–
Shares
over which
awards
granted
during the
year
–
–
39,126
Vested
during the
period
Lapsed
during the
period
Shares
over which
awards held
at 30 Sep
2017
18,961
–
–
2,403
–
–
–
21,781
39,126
Maturity date
30 Sep 2017
30 Sep 2018
30 Sep 2019
63
Diploma PLC Annual Report & Accounts 2017 Directors’ Report
This section contains information which the Directors are
required by law and regulation to include within the Annual
Report & Accounts.
Shareholders
Incorporation and principal activity
Diploma PLC is domiciled in England and registered in England
and Wales under Company Number 3899848. At the date of this
Report there were 113,239,555 ordinary shares of 5p each in
issue, all of which are fully paid up and quoted on the London
Stock Exchange.
The principal activity of the Group is the supply of specialised
technical products and services. A description and review of the
activities of the Group during the financial year and an indication
of future developments is set out on pages 4 to 37; the Strategic
Report on pages 1 to 37 incorporates the requirements of the
Companies Act 2006 (“the Act”).
Annual General Meeting
The Annual General Meeting (“AGM”) will be held at midday on
Wednesday, 17 January 2018 in the Brewers Hall, Aldermanbury
Square, London EC2V 7HR. The Notice of the AGM, which is a
separate document, will be sent to all shareholders and will be
published on the Diploma PLC website.
Substantial shareholdings
At 17 November 2017, the Company had been notified of the
following interests amounting to 3% or more of the voting rights
in its ordinary share capital:
Percentage
of ordinary
share capital
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 Performance Share Plan (“the
PSP”), who have yet to meet shareholding guidelines, have
vested PSP shares held in trust until the earlier occurrence of
them meeting their required shareholder guideline or for a
period of two years, during which period these shares cannot be
transferred to them. 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 PLC Employee Benefit Trust
While ordinary shares are held within the Diploma PLC 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 PLC Employee Benefit Trust
also waive dividends on all shares held for the purposes of the
Company’s long term incentive arrangements.
Fidelity Management & Research Co.
Mondrian Investment Partners Limited
Mawer Investment Management Limited
Standard Life Aberdeen plc
Royal London Asset Management Limited
BlackRock, Inc.
Norges Bank Investment Management
9.26
7.26
6.49
6.41
4.95
3.30
3.03
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 18 January 2017.
In the year ended 30 September 2017, the Company has not
allotted any shares. These powers will expire at the conclusion
of the 2018 AGM and resolutions to renew the Directors’ powers
are therefore included within the Notice of the AGM in 2018.
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. 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
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 18 January 2017. In the year to 30 September 2017 the
Company has not acquired any of its own shares. This authority
will expire at the conclusion of the 2018 AGM and a resolution to
renew the authority is therefore included within the Notice of
the AGM in 2018.
Financial
Results and dividends
The profit for the financial year attributable to shareholders
was £47.5m (2016: £38.3m). The Directors recommend a final
dividend of 16.0p per ordinary share (2016: 13.8p), to be paid, if
approved, on 24 January 2018. This, together with the interim
dividend of 7.0p (2016: 6.2p) per ordinary share paid on 14 June
2017 amounts to 23.0p for the year (2016: 20.0p).
The results are shown more fully in the consolidated financial
statements on pages 66 to 94 and summarised in the Finance
Review on pages 28 to 31.
Independent auditor
The Company held a competitive tender process during 2017 for
its statutory audit contract, which was overseen by the Audit
Committee. On completion of this process the Board, on the
recommendation of the Audit Committee, proposed that
PricewaterhouseCoopers LLP (“PwC”) shall be appointed
64
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS auditor. The appointment of PwC is subject to approval of
shareholders at the Annual General Meeting on 17 January 2018.
Deloitte LLP (“Deloitte”), the current external auditor, have
undertaken the audit of the Group and Company for the financial
year ended 30 September 2017.
Directors’ assessment of going concern
The Group’s business activities, together with the factors likely
to affect its future development, performance and position are
set out in the Strategic Report on pages 1 to 37. The financial
position of the Group, its cash flows, liquidity position and
borrowing facilities are described in the Finance Review on
pages 28 to 31. In addition, pages 79 to 81 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 32 to 35.
The Group also has a committed multi-currency revolving bank
facility of £30.0m with an accordion option to increase the
committed facility by a further £30.0m up to a maximum of
£60.0m. This facility expires on 31 May 2020, with an option
to extend the facility to 31 May 2022. At 30 September 2017,
the Group had cash funds of £22.3m and had no borrowings.
After making enquiries, the Directors have a reasonable
expectation that the Company and the Group have adequate
resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the
going concern basis in preparing the Annual Report & Accounts.
Statement of disclosure
Each of the Directors has reviewed this Annual Report &
Accounts and confirmed that so far as he is aware, there is no
relevant audit information of which the Company’s auditor is
unaware and that he has taken all the steps that he ought to
have taken as a Director in order to make himself aware of any
relevant audit information and to establish that the Company’s
auditor is aware of that information. This confirmation is given
and should be interpreted in accordance with the provisions of
the Companies Act 2006.
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 IFRS 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)
including FRS101 (“Reduced Disclosures Framework”).
The Group financial statements are required by law and IFRS as
adopted by the EU, to present fairly the financial position and
the performance of the Group; the Act 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 IFRS, 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; and
• prepare the financial statements on the going concern basis,
unless it is inappropriate to presume that the Group and the
Parent Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Parent Company and
enable them to ensure that the financial statements comply with
the Act. They are also responsible for safeguarding the assets of
the Parent Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The 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 IFRS 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, are 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 20 November 2017 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
65
Diploma PLC Annual Report & Accounts 2017 Consolidated Income Statement
For the year ended 30 September 2017
Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Operating profit
Gain on disposal of assets
Financial expense
Profit before tax
Tax expense
Profit for the year
Attributable to:
Shareholders of the Company
Minority interests
Earnings per share
Basic and diluted earnings
Note
3,4
2017
£m
2016
£m
451.9
(290.8)
382.6
(245.4)
161.1
(10.6)
(82.0)
68.5
–
(1.7)
66.8
(18.6)
48.2
47.5
0.7
48.2
137.2
(8.4)
(73.4)
55.4
0.7
(2.1)
54.0
(14.9)
39.1
38.3
0.8
39.1
3
6
7
21
9
42.0p
33.9p
Alternative Performance Measures (Note 2)
Operating profit
Add: Acquisition related charges
Adjusted operating profit
Deduct: Interest expense
Adjusted profit before tax
Adjusted earnings per share
Note
11
3,4
6
2017
£m
68.5
9.7
78.2
(0.7)
77.5
2016
£m
55.4
10.3
65.7
(0.8)
64.9
9
49.8p
41.9p
The notes on pages 70 to 92 form part of these consolidated financial statements.
66
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS Consolidated Statement of Income and
Other Comprehensive Income
For the year ended 30 September 2017
Profit for the year
Items that will not be reclassified to the Consolidated Income Statement
Actuarial gains/(losses) in the defined benefit pension schemes
Deferred tax on items that will not be reclassified
Items that may be reclassified to Consolidated Income Statement
Exchange rate (losses)/gains on foreign currency net investments
(Losses)/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
7
19
19
7
2017
£m
48.2
7.1
(1.3)
5.8
(0.8)
(1.0)
(0.2)
0.3
(1.7)
52.3
51.6
0.7
52.3
2016
£m
39.1
(6.6)
1.0
(5.6)
31.7
0.2
(1.5)
0.3
30.7
64.2
62.7
1.5
64.2
Consolidated Statement of Changes in Equity
For the year ended 30 September 2017
At 1 October 2015
Total Comprehensive Income
Share-based payments
Minority interests acquired
Tax on items recognised directly in equity
Notional purchase of own shares
Dividends
At 30 September 2016
Total Comprehensive Income
Share-based payments
Minority interests acquired
Tax on items recognised directly in equity
Notional purchase of own shares
Dividends
At 30 September 2017
Note
5
21
7
8,21
5
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
(0.5)
31.0
–
–
–
–
–
30.5
(0.8)
–
–
–
–
–
29.7
1.2
(1.0)
–
–
–
–
–
0.2
(0.9)
–
–
–
–
–
183.2
32.7
0.4
2.0
0.1
(0.3)
(21.0)
197.1
53.3
0.8
–
0.3
(0.7)
(23.5)
189.6
62.7
0.4
2.0
0.1
(0.3)
(21.0)
233.5
51.6
0.8
–
0.3
(0.7)
(23.5)
(0.7)
227.3
262.0
5.2
1.5
–
(2.0)
–
–
(0.4)
4.3
0.7
–
–
–
–
(0.2)
4.8
Total
equity
£m
194.8
64.2
0.4
–
0.1
(0.3)
(21.4)
237.8
52.3
0.8
–
0.3
(0.7)
(23.7)
266.8
The notes on pages 70 to 92 form part of these consolidated financial statements.
67
Diploma PLC Annual Report & Accounts 2017 Consolidated Statement of Financial Position
As at 30 September 2017
Non-current assets
Goodwill
Acquisition intangible assets
Other intangible assets
Investment
Property, plant and equipment
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Current liabilities
Trade and other payables
Current tax liabilities
Other liabilities
Borrowings
Net current assets
Total assets less current liabilities
Non-current liabilities
Retirement benefit obligations
Other liabilities
Deferred tax liabilities
Net assets
Equity
Share capital
Translation reserve
Hedging reserve
Retained earnings
Total shareholders’ equity
Minority interests
Total equity
Note
2017
£m
2016
£m
10
11
11
12
13
14
15
16
18
17
7
20
24
25
20
14
21
122.8
54.0
0.7
0.7
22.6
0.2
201.0
73.2
68.9
22.3
115.2
54.6
1.0
0.7
23.7
0.2
195.4
66.8
59.9
20.6
164.4
147.3
(69.7)
(4.0)
(2.5)
–
(76.2)
88.2
289.2
(9.9)
(4.1)
(8.4)
(60.6)
(2.7)
(1.7)
(10.0)
(75.0)
72.3
267.7
(17.2)
(5.1)
(7.6)
266.8
237.8
5.7
29.7
(0.7)
227.3
262.0
4.8
266.8
5.7
30.5
0.2
197.1
233.5
4.3
237.8
The consolidated financial statements were approved by the Board of Directors on 20 November 2017 and signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
The notes on pages 70 to 92 form part of these consolidated financial statements.
68
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS Consolidated Cash Flow Statement
For the year ended 30 September 2017
Operating profit
Acquisition related charges
Non-cash items
(Increase)/decrease in working capital
Cash flow from operating activities
Interest paid
Tax paid
Net cash from operating activities
Cash flow from investing activities
Acquisition of businesses (including expenses)
Deferred consideration paid
Proceeds from sale of business (net of expenses)
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
Notional purchase of own shares on exercise of share options
Repayment of borrowings, net
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of year
Note
23
23
23
23
22
20
13
11
20
8
21
24
18
Alternative Performance Measures (Note 2)
Net increase/(decrease) in cash and cash equivalents
Add: Dividends paid to shareholders
Dividends paid to minority interests
Acquisition of businesses (including expenses)
Acquisition of minority interests
Deferred consideration paid
Repayment of borrowings, net
Free cash flow
Cash and cash equivalents
Borrowings
Net cash
Note
8
21
22
20
20
24
18
24
24
The notes on pages 70 to 92 form part of these consolidated financial statements.
2017
£m
68.5
9.7
5.1
(4.0)
79.3
(0.4)
(19.3)
59.6
(19.5)
(0.6)
–
(3.1)
(0.2)
0.1
(23.3)
–
(23.5)
(0.2)
(0.7)
(10.0)
(34.4)
1.9
20.6
(0.2)
22.3
2017
£m
1.9
23.5
0.2
19.5
–
0.6
10.0
55.7
22.3
–
22.3
2016
£m
55.4
10.3
4.6
6.3
76.6
(0.6)
(17.6)
58.4
(30.1)
(0.7)
2.2
(3.5)
(0.2)
2.4
(29.9)
(1.9)
(21.0)
(0.4)
(0.3)
(10.0)
(33.6)
(5.1)
23.0
2.7
20.6
2016
£m
(5.1)
21.0
0.4
30.1
1.9
0.7
10.0
59.0
20.6
(10.0)
10.6
69
Diploma PLC Annual Report & Accounts 2017
Notes to the Consolidated Financial Statements
For the year ended 30 September 2017
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
20 November 2017. These statements are presented in UK sterling, with all values rounded to the nearest 100,000, except where
otherwise indicated.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”),
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 FRS101 “Reduced
Disclosure Framework” and are set out in a separate section of the Annual Report & Accounts on pages 93 and 94.
2. Alternative performance measures
The Group uses a number of alternative (non-Generally Accepted Accounting Practice (“non-GAAP”)) performance measures which
are not defined within IFRS. The Directors use these measures for internal management reporting in order to assess the operational
performance of the Group on a comparable basis 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 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 IAS39 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 operational
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 including the
tax impact on the items included in the calculation of adjusted profit, 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 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 Sector 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 profitability of the Group.
3. Business Sector analysis
The Chief Operating Decision Maker (“CODM”) for the purposes of IFRS8 is the Chief Executive Officer. The financial performance of
the Sectors are reported to the CODM on a monthly basis and this information is used to allocate resources on an appropriate basis.
For management reporting purposes, the Group is organised into three main reportable 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 37. 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, acquisition
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.
70
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 3. Business Sector analysis continued
Life Sciences
Seals
Controls
Group
Revenue – existing
Revenue – acquisitions
Revenue
Adjusted operating profit – existing
Adjusted operating profit – acquisitions
Adjusted operating profit
Acquisition related charges
Operating profit
Operating assets
Investment
Goodwill
Acquisition intangible assets
Unallocated assets:
– Deferred tax assets
– Cash and cash equivalents
– Corporate assets
Total assets
Operating liabilities
Unallocated liabilities:
– Deferred tax liabilities
– Retirement benefit obligations
– Acquisition liabilities
– Corporate liabilities
– Borrowings
Total liabilities
Net assets
2017
£m
118.3
7.6
125.9
22.1
1.2
23.3
(3.2)
20.1
2016
£m
109.9
–
109.9
19.6
–
19.6
(2.9)
16.7
2017
£m
193.2
2.1
195.3
31.5
0.4
31.9
(5.5)
26.4
2016
£m
166.6
–
166.6
28.2
–
28.2
(5.0)
23.2
2017
£m
130.7
–
130.7
23.0
–
23.0
(1.0)
22.0
Life Sciences
Seals
Controls
2017
£m
42.2
–
59.5
15.4
117.1
2016
£m
35.1
–
52.8
10.6
98.5
2017
£m
74.6
0.7
39.9
27.0
2016
£m
70.3
0.7
39.1
30.4
142.2
140.5
2017
£m
48.1
–
23.4
11.6
83.1
2016
£m
106.1
–
106.1
17.9
–
17.9
(2.4)
15.5
2016
£m
44.4
–
23.3
13.6
81.3
2017
£m
442.2
9.7
451.9
76.6
1.6
78.2
(9.7)
68.5
Group
2017
£m
164.9
0.7
122.8
54.0
342.4
0.2
22.3
0.5
2016
£m
382.6
–
382.6
65.7
–
65.7
(10.3)
55.4
2016
£m
149.8
0.7
115.2
54.6
320.3
0.2
20.6
1.6
117.1
(21.3)
98.5
(17.9)
142.2
140.5
83.1
81.3
365.4
342.7
(26.6)
(22.9)
(21.1)
(18.8)
(69.0)
(59.6)
(21.3)
95.8
(17.9)
80.6
(26.6)
115.6
(22.9)
117.6
(21.1)
62.0
(18.8)
62.5
(98.6)
(104.9)
266.8
237.8
(8.4)
(9.9)
(6.6)
(4.7)
–
(7.6)
(17.2)
(6.8)
(3.7)
(10.0)
Alternative Performance Measures (Note 2)
Life Sciences
2017
£m
95.8
2016
£m
80.6
Seals
2017
£m
2016
£m
115.6
117.6
Controls
2017
£m
62.0
2016
£m
62.5
Group
2017
£m
2016
£m
266.8
237.8
Net assets
Add/(less):
– Deferred tax, net
– Retirement benefit obligations
– Acquisition liabilities
– Net cash funds
Reported trading capital employed
– Historic goodwill and acquisition related
charges, net of deferred tax
28.8
28.0
28.1
22.7
Adjusted trading capital employed
Pro-forma adjusted operating profit1
124.6
24.6
108.6
19.6
143.7
32.8
140.3
28.2
9.4
71.4
23.0
8.5
71.0
19.2
ROATCE
19.7%
18.0%
22.8%
20.1%
32.2%
27.0%
24.0%
21.1%
1 After annualisation of adjusted operating profit of acquisitions and disposals.
71
8.2
9.9
6.6
(22.3)
7.4
17.2
6.8
(10.6)
269.2
258.6
66.3
59.2
335.5
80.4
317.8
67.0
Diploma PLC Annual Report & Accounts 2017 Notes to the Consolidated Financial Statements
continued
For the year ended 30 September 2017
3. Business Sector analysis continued
Other Sector information
Capital expenditure
Depreciation and amortisation
4. Geographic segment analysis by origin
Life Sciences
Seals
Controls
Group
2017
£m
2.0
2.2
2016
£m
1.9
2.0
2017
£m
1.1
1.9
2016
£m
1.4
1.9
2017
£m
0.2
0.6
2016
£m
0.4
0.6
2017
£m
3.3
4.7
2016
£m
3.7
4.5
Revenue
Adjusted operating profit
Non-current assets1
Trading capital employed
Capital expenditure
United Kingdom
Rest of Europe
North America
Rest of World
2017
£m
118.4
112.8
188.3
32.4
451.9
2016
£m
97.4
98.3
165.2
21.7
382.6
2017
£m
20.6
17.2
36.3
4.1
78.2
2016
£m
16.1
15.0
32.3
2.3
65.7
2017
£m
42.3
58.6
70.9
28.3
2016
£m
42.3
62.7
74.0
15.5
2017
£m
60.1
76.9
99.9
32.3
200.1
194.5
269.2
2016
£m
59.6
79.2
101.3
18.5
258.6
1 Non-current assets exclude the investment and deferred tax assets.
5. Group employee costs
Average number of employees
Life Sciences
Seals
Controls
Corporate
Number of employees – average
Number of employees – year end
Group employee costs, including key management
Wages and salaries
Social security costs
Pension costs
Share-based payments
Key management short term remuneration, including Directors
Salaries and short term employee benefits
Pension costs
Share-based payments
2017
£m
0.3
0.6
1.9
0.5
3.3
2017
382
830
430
16
1,658
1,728
2017
£m
75.7
7.1
2.8
0.8
86.4
2017
£m
3.2
0.3
0.8
4.3
2016
£m
0.5
1.0
1.8
0.4
3.7
2016
387
813
388
14
1,602
1,598
2016
£m
66.5
6.4
2.5
0.4
75.8
2016
£m
3.2
0.2
0.4
3.8
The Group considers key management personnel as defined in IAS24 “Related Party Disclosures” to be the Directors of the Company
and the members of the Executive Management Group (“EMG”) as set out on pages 38 and 39.
The Directors’ remuneration and their interests in shares of the Company are given in the Remuneration Committee Report on
pages 51 to 63. The EMG’s interests in the Group’s LTIP is set out on page 63. The charge for share-based payments of £0.8m
(2016: £0.4m) relates to the Group’s LTIP, described in the Remuneration Committee Report.
Directors’ short term remuneration
Non-executive Directors:
Executive Directors:
72
2017
£m
0.3
1.9
2.2
2016
£m
0.3
2.1
2.4
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 6. Financial expense
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 scheme (note 25b)
Interest expense and similar charges
– fair value remeasurement of put options (note 20)
Financial expense
2017
£m
(0.3)
(0.1)
(0.3)
(0.7)
(1.0)
(1.7)
2016
£m
(0.2)
(0.4)
(0.2)
(0.8)
(1.3)
(2.1)
The fair value remeasurement of £1.0m (2016: £1.3m) comprises £0.5m (2016: £0.5m) which relates to the unwinding of the discount
on the liability for future purchases of minority interests and a movement in the fair value of the put options of £0.5m debit
(2016: £0.8m debit).
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
2017
£m
2016
£m
3.7
17.2
20.9
(0.5)
0.2
20.6
(1.9)
(0.1)
(2.0)
18.6
2.9
13.7
16.6
(0.2)
(0.2)
16.2
(1.6)
0.3
(1.3)
14.9
In addition to the above credit for deferred tax included in the Consolidated Income Statement, a net deferred tax debit relating to
the retirement benefit scheme and cash flow hedges of £1.0m was debited (2016: £1.3m credit) directly to the Consolidated
Statement of Income and Other Comprehensive Income. A further £0.3m of current tax (2016: £0.1m) was credited to the
Consolidated Statement of Changes in Equity which relates to share-based payments made during the year.
Factors affecting the tax charge for the year
The difference between the total tax charge calculated by applying the effective rate of UK corporation tax of 19.5% to the profit
before tax of £66.8m and the amount set out above is as follows:
2017
£m
2016
£m
Profit before tax
Tax on profit at UK effective corporation tax rate of 19.5% (2016: 20.0%)
Effects of:
– change in UK tax rates
– higher tax rates on overseas earnings
– adjustments to current tax charge in respect of previous years
– other permanent differences
Total tax on profit for the year
66.8
13.0
–
5.3
(0.3)
0.6
18.6
54.0
10.8
(0.1)
4.1
(0.4)
0.5
14.9
The Group earns its profits in the UK and overseas. The UK corporation tax rate was reduced from 20.0% to 19.0% on 1 April 2017. 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 2017 was 19.5% (2016: 20.0%) 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 profits earned in the US, Canada and
Australia are taxed at significantly higher rates than the UK.
The UK deferred tax assets and liabilities at 30 September 2017 have been calculated based on the future UK corporation tax rate of
17.0%, substantively enacted at 30 September 2017.
At 30 September 2017, the Group had outstanding tax liabilities of £4.0m (2016: £2.7m) of which £1.6m related to UK tax liabilities and
£2.4m related to overseas tax liabilities. These amounts are expected to be paid within the next financial years.
73
Diploma PLC Annual Report & Accounts 2017 Notes to the Consolidated Financial Statements
continued
For the year ended 30 September 2017
8. Dividends
Interim dividend, paid in June
Final dividend of the prior year, paid in January
2017
pence per
share
2016
pence per
share
7.0
13.8
20.8
6.2
12.4
18.6
2017
£m
7.9
15.6
23.5
2016
£m
7.0
14.0
21.0
The Directors have proposed a final dividend in respect of the current year of 16.0p per share (2016: 13.8p) which will be paid on
24 January 2018, subject to approval of shareholders at the Annual General Meeting on 17 January 2018. The total dividend for the
current year, subject to approval of the final dividend, will be 23.0p per share (2016: 20.0p).
The Diploma PLC Employee Benefit Trust holds 92,898 (2016: 172,577) shares, which are ineligible 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 113,133,341 (2016: 113,058,835) and the profit for the year attributable to shareholders of £47.5m
(2016: £38.3m). 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
Gain on disposal of assets
Tax effects on acquisition related charges and fair value remeasurements
Adjusted earnings
10. Goodwill
At 1 October 2015
Acquisitions
Exchange adjustments
At 30 September 2016
Acquisitions (note 22)
Exchange adjustments
At 30 September 2017
2017
pence per
share
2016
pence per
share
42.0
8.6
0.9
–
(1.7)
49.8
Life Sciences
£m
44.9
–
7.9
52.8
6.1
0.6
59.5
33.9
9.1
1.1
(0.6)
(1.6)
41.9
Seals
£m
29.6
4.0
5.5
39.1
1.4
(0.6)
39.9
2017
£m
66.8
(18.6)
(0.7)
47.5
9.7
1.0
–
(1.9)
56.3
Controls
£m
14.8
7.8
0.7
23.3
–
0.1
23.4
2016
£m
54.0
(14.9)
(0.8)
38.3
10.3
1.3
(0.7)
(1.8)
47.4
Total
£m
89.3
11.8
14.1
115.2
7.5
0.1
122.8
The Group tests goodwill for impairment at least once 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 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 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 revenue growth rates used in the cash flow forecasts for the next five years represent the
budgeted rates for 2018 and thereafter, average growth rates for each Sector; these annual growth rates then reduce to 2% over the
longer term.
The cash flow forecasts are discounted to determine a current valuation using a single market derived pre-tax discount rate of
ca. 12% (2016: 11%). 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.
74
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 10. Goodwill continued
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 2015
Additions
Acquisitions
Disposals
Exchange adjustments
At 30 September 2016
Additions
Acquisitions (note 22)
Disposals
Exchange adjustments
At 30 September 2017
Amortisation
At 1 October 2015
Charge for the year
Disposals
Exchange adjustments
At 30 September 2016
Charge for the year
Disposals
Exchange adjustments
At 30 September 2017
Net book value
At 30 September 2017
At 30 September 2016
Customer
relationships
£m
Supplier
relationships
£m
Trade
names and
databases
£m
Total
acquisition
intangible
assets
£m
Other
intangible
assets
£m
52.3
–
18.4
(0.9)
8.8
78.6
–
2.3
–
(0.7)
80.2
23.1
6.9
(0.5)
3.8
33.3
7.8
–
(0.4)
40.7
39.5
45.3
22.1
–
–
(3.6)
3.3
21.8
–
7.8
–
–
29.6
11.6
2.2
(2.6)
1.7
12.9
2.3
–
0.1
15.3
14.3
8.9
2.6
–
–
–
0.3
2.9
–
–
–
(0.1)
2.8
2.1
0.2
–
0.2
2.5
0.2
–
(0.1)
2.6
0.2
0.4
77.0
–
18.4
(4.5)
12.4
103.3
–
10.1
–
(0.8)
112.6
36.8
9.3
(3.1)
5.7
48.7
10.3
–
(0.4)
58.6
54.0
54.6
3.8
0.2
–
(0.2)
1.8
5.6
0.2
–
(0.1)
(0.1)
5.6
2.6
0.5
–
1.5
4.6
0.4
(0.1)
–
4.9
0.7
1.0
Acquisition related charges are £9.7m (2016: £10.3m) and comprise £10.3m (2016: £9.3m) of amortisation of acquisition intangible
assets, £0.4m of acquisition expenses (2016: £1.2m) and a credit of £1.0m relating to adjustments to deferred consideration
(2016: £0.2m credit).
Acquisition intangible assets relate to items acquired through business combinations which are amortised over their useful
economic life.
Economic life
Customer relationships
Supplier relationships
Databases and trade names
5–15 years
7–10 years
5–10 years
Other intangible assets comprise computer software that is separately identifiable from IT equipment and includes software licences.
75
Diploma PLC Annual Report & Accounts 2017 Notes to the Consolidated Financial Statements
continued
For the year ended 30 September 2017
12. Investment
Investment
2017
£m
0.7
2016
£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 2017, 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 2015
Additions
Acquisitions of businesses
Disposals
Transfers
Exchange adjustments
At 30 September 2016
Additions1
Acquisitions of businesses (note 22)
Disposals
Exchange adjustments
At 30 September 2017
Depreciation
At 1 October 2015
Charge for the year
Disposals
Exchange adjustments
At 30 September 2016
Charge for the year
Disposals
Exchange adjustments
At 30 September 2017
Net book value
At 30 September 2017
At 30 September 2016
Freehold
properties
£m
Leasehold
properties
£m
Plant and
equipment
£m
Hospital field
equipment
£m
15.8
0.5
–
(2.2)
(1.5)
2.4
15.0
0.2
–
(0.5)
(0.2)
14.5
2.8
0.5
(0.2)
0.8
3.9
0.5
–
–
4.4
10.1
11.1
2.8
0.9
0.2
(0.9)
–
0.6
3.6
0.1
–
–
0.1
3.8
1.2
0.4
(0.9)
0.8
1.5
0.4
–
0.1
2.0
1.8
2.1
12.8
1.2
0.7
(1.5)
1.5
4.6
19.3
1.2
0.2
(0.8)
1.2
21.1
8.3
1.7
(1.4)
4.1
12.7
1.8
(0.8)
1.3
15.0
6.1
6.6
7.4
0.9
–
(0.8)
–
1.9
9.4
1.6
0.8
(0.5)
0.2
11.5
3.7
1.4
(0.4)
0.8
5.5
1.6
(0.4)
0.2
6.9
4.6
3.9
Total
£m
38.8
3.5
0.9
(5.4)
–
9.5
47.3
3.1
1.0
(1.8)
1.3
50.9
16.0
4.0
(2.9)
6.5
23.6
4.3
(1.2)
1.6
28.3
22.6
23.7
1 The Group spent £1.9m during the financial year on completing the construction of a new facility for J Royal in Winston-Salem, US. On completion in April 2017, the facility was
immediately sold to a third party and leased back to J Royal on a 15 year full repairing list. 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.
Land included within freehold properties above, but which is not depreciated, is £3.4m (2016: £3.4m). Capital commitments
contracted, but not provided, were £1.1m (2016: £1.9m) relating to the planned extension of the facility at IS-Sommer.
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 2017 is £1.0m (2016: £1.0m), with a book value
of £Nil.
76
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 14. Deferred tax
The movement on deferred tax is as follows:
At 1 October
Credit for the year (note 7)
Acquisitions (note 22)
Disposals
Accounted for in Other Comprehensive Income
Exchange adjustments
At 30 September
2017
£m
(7.4)
2.0
(2.0)
–
(1.0)
0.2
(8.2)
2016
£m
(5.9)
1.3
(3.7)
0.5
1.3
(0.9)
(7.4)
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.
Assets
Liabilities
Net
Property, plant and equipment
Goodwill and intangible assets
Retirement benefit obligations
Inventories
Share-based payments
Trading losses
Other temporary differences
Deferred tax offset
2017
£m
0.5
–
1.8
1.8
0.2
0.1
1.6
6.0
(5.8)
0.2
2016
£m
0.4
–
3.1
1.4
0.2
0.2
0.8
6.1
(5.9)
0.2
2017
£m
(1.7)
(12.3)
–
(0.1)
–
–
(0.1)
(14.2)
5.8
(8.4)
2016
£m
(1.8)
(11.4)
–
–
–
–
(0.3)
(13.5)
5.9
(7.6)
2017
£m
(1.2)
(12.3)
1.8
1.7
0.2
0.1
1.5
(8.2)
–
(8.2)
2016
£m
(1.4)
(11.4)
3.1
1.4
0.2
0.2
0.5
(7.4)
–
(7.4)
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 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 £5.5m (2016: £4.5m).
15. Inventories
Finished goods
2017
£m
73.2
2016
£m
66.8
Inventories are stated net of impairment provisions of £8.3m (2016: £7.8m). During the year £1.3m (2016: £1.1m) 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
2017
£m
64.2
(0.8)
63.4
2.3
3.2
68.9
2017
£m
20.4
13.9
10.2
10.3
9.4
64.2
2016
£m
55.5
(0.7)
54.8
2.4
2.7
59.9
2016
£m
18.2
11.7
8.5
9.8
7.3
55.5
77
Diploma PLC Annual Report & Accounts 2017 Notes to the Consolidated Financial Statements
continued
For the year ended 30 September 2017
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 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
2017
£m
52.3
11.1
0.8
64.2
2017
£m
9.2
1.4
0.5
–
11.1
2017
£m
0.7
0.1
–
–
0.8
2017
£m
42.5
3.3
4.6
19.3
69.7
2017
£m
10.7
18.0
0.6
10.8
2.4
42.5
18. Cash and cash equivalents
Cash at bank
Short term deposits
UK
£m
6.0
3.0
9.0
US$
£m
4.1
0.2
4.3
C$
£m
2.3
0.5
2.8
Euro
£m
3.2
–
3.2
Other
£m
2.7
0.3
3.0
2017
Total
£m
18.3
4.0
22.3
UK
£m
6.9
3.0
9.9
US$
£m
3.5
0.2
3.7
C$
£m
1.8
0.2
2.0
Euro
£m
2.6
–
2.6
Other
£m
2.1
0.3
2.4
The short term deposits and cash at bank are both interest bearing at rates linked to the UK base rate, or equivalent rate.
2016
£m
45.6
9.2
0.7
55.5
2016
£m
7.6
1.2
0.3
0.1
9.2
2016
£m
0.6
0.1
–
–
0.7
2016
£m
35.8
2.7
4.3
17.8
60.6
2016
£m
9.2
14.8
0.9
8.7
2.2
35.8
2016
Total
£m
16.9
3.7
20.6
78
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 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 cooperation 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 number of forward foreign currency contracts, comprise cash and short
term deposits, investments, trade and other receivables and trade and other payables, borrowings and other liabilities. Trade and
other receivables and trade and other payables arise directly from the Group’s day-to-day operations.
The financial risks to which the Group is exposed are those of credit, liquidity, foreign currency, interest rate and capital
management. An explanation of each of these risks, how the Group manages these risks and an analysis of sensitivities is set out
below and on page 35 within 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 no significant unrecoverable trade
receivables; there have been no other significant trade receivables written off in the past five years other than £0.2m written off
in 2015.
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
2017
£m
63.4
2.3
22.3
88.0
2016
£m
54.8
2.4
20.6
77.8
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 2017 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 shorter term deposits. Typically the Group ensures that it has sufficient cash on hand to meet foreseeable operational expenses,
but the Group also maintains a committed revolving bank facility. On 1 June 2017, the Group replaced its existing facility that was due
to expire on 23 June 2017 with a similar committed three year facility for £30.0m with an accordion option to increase the committed
facility by a further £30.0m up to a maximum of £60.0m and to extend the term up to five years. Interest on this facility is payable
at between 70 and 115bps over LIBOR, depending on the ratio of net debt to EBITDA. None of the facility had been drawn down
(2016: £10.0m) at 30 September 2017.
The undrawn committed facilities available at 30 September are as follows:
Expiring within one year
Expiring after two years
2017
£m
–
30.0
2016
£m
40.0
–
79
Diploma PLC Annual Report & Accounts 2017 Notes to the Consolidated Financial Statements
continued
For the year ended 30 September 2017
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
2017
£m
42.5
3.3
6.6
52.4
48.3
4.5
–
52.8
(0.4)
52.4
2016
£m
35.8
2.7
6.8
45.3
40.2
2.0
3.9
46.1
(0.8)
45.3
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 and Euros. 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 £0.5m (2016: £0.8m)
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 primarily in the US dollar and Euro. These forward foreign exchange contracts are classified as cash flow hedges and
are stated at fair value. The notional value of forward contracts as at 30 September 2017 was £33.0m (2016: £25.9m). The net fair
value of forward foreign exchange contracts used as hedges at 30 September 2017 was £0.7m liability (2016: £0.2m asset). The
amount removed from Other Comprehensive Income and taken to the Consolidated Income Statement in cost of sales during the
year was £0.2m (2016: £1.5m). The change in the fair value of cash flow hedges taken to Other Comprehensive Income during the
year was £1.0m debit (2016: £0.2m credit).
Management considers that the most significant foreign exchange risk relates to the US dollar, Canadian dollar and Euro. The Group’s
sensitivity to a 10% strengthening in UK sterling against each of these currencies (with all other variables held constant) is as follows:
Decrease in adjusted operating profit (at average rates)
US dollar: UK sterling
Canadian dollar: UK sterling
Euro: UK sterling
Decrease in total equity (at spot rates)
US dollar: UK sterling
Canadian dollar: UK sterling
Euro: UK sterling
2017
£m
2.1
1.7
1.1
4.1
5.0
2.8
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.
80
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 19. Financial instruments continued
e) Fair values
There are no material differences between the book value of financial assets and liabilities and their fair value. The basis for
determining fair values are as follows:
Derivatives
Forward exchange contracts are valued at year end 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.
f) Capital management risk
The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern and to maintain robust
capital ratios to support the development of the business and provide strong returns to shareholders. The Group’s capital structure
comprises cash funds and medium term bank borrowing facilities.
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
Unwinding of discount
Fair value remeasurements
At 30 September
2017
£m
6.1
0.5
6.6
2.5
4.1
2017
£m
5.1
–
0.5
0.5
6.1
2016
£m
5.1
1.7
6.8
1.7
5.1
2016
£m
5.7
(1.9)
0.5
0.8
5.1
At 30 September 2017, the Group retained put options to acquire minority interests in TPD, Kentek and M Seals.
The estimate of the financial liability at 30 September 2017 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 2017. This led to a remeasurement of the fair value of these put options and the liability was increased by £0.5m
(2016: £0.8m) reflecting a revised estimate of the future performance of the businesses and by a further £0.5m (2016: £0.5m) charge
which arises from unwinding the discount on the liability. In aggregate £1.0m (2016: £1.3m) has been charged to the Consolidated
Income Statement.
The put options to acquire the remaining minority interest of 10% held in both M Seals and in Kentek are exercisable from November
2018. Subsequent to the year end, the option to acquire an outstanding 5% minority interest in TPD has been exercised for cash
consideration of £1.0m. The remaining 5% is exercisable within the next 12 months.
Deferred consideration comprises the following:
WCIS
Cablecraft
Ascome
Edco
At 30 September
2017
£m
–
–
0.1
0.4
0.5
2016
£m
0.6
1.0
0.1
–
1.7
81
Diploma PLC Annual Report & Accounts 2017 Notes to the Consolidated Financial Statements
continued
For the year ended 30 September 2017
20. Other liabilities continued
The amounts outstanding at 30 September 2017 are expected to be paid within the next 12 months and will largely be based on the
performance of these businesses in the period following their acquisition by the Group.
During the year, outstanding deferred consideration of £0.6m (A$1.0m) was paid to the vendors of WCIS in respect of the
performance of the business in the year ended 30 September 2016. The deferred consideration of £1.0m relating to Cablecraft was
not required and has been released to the Consolidated Income Statement as part of acquisition related charges in note 11.
21. Minority interests
At 30 September 2015
Share of minority net assets acquired of TPD
Share of profit
Dividends paid
Exchange adjustments
At 30 September 2016
Share of profit
Dividends paid
Exchange adjustments
At 30 September 2017
£m
5.2
(2.0)
0.8
(0.4)
0.7
4.3
0.7
(0.2)
–
4.8
External shareholders, represented by management in each business hold a 10% minority interest in M Seals, TPD and Kentek.
22. Acquisition of businesses
On 19 April 2017 the Group acquired 100% of Abacus ALS Pty Ltd based in Brisbane, Australia and its wholly owned subsidiary
Abacus ALS Limited based in Auckland, New Zealand (together “Abacus”) for total cash consideration of £14.1m (A$23.3m). This
comprised initial consideration of £12.4m (A$20.4m), together with £1.7m (A$2.9m) of deferred consideration based on the
performance of the business for the year ended 30 June 2017. The initial consideration of £13.6m (A$22.5m) was before adjustments
relating to working capital and net debt on completion of £1.2m (A$2.1m), but before acquisition expenses of £0.3m (A$0.5m).
On 19 April 2017, the Group acquired 100% of Problem Solving Products, Inc (“PSP”), based in Colorado US, for total cash
consideration of £1.4m (US$1.9m).
On 16 June 2017, the Group acquired 100% of Edco Seal & Supply Limited (“Edco”) based in Leicester, England, for initial cash
consideration of £3.2m, which included £0.2m of surplus cash and was before acquisition expenses of £0.1m. Maximum deferred
consideration of up to £0.7m is payable based on the performance of Edco for the 12 months ended 30 April 2018, of which £0.4m
has been provided at 30 September 2017.
Set out below is an analysis of the net book values and fair values relating to these acquisitions:
Acquisition intangible assets
Deferred tax
Property, plant and equipment
Inventories
Trade and other receivables
Trade and other payables
Net assets acquired
Goodwill
Cash paid
Net debt acquired
Cash acquired
Expenses of acquisition
Net cash paid, after acquisition expenses
Deferred consideration payable
Less: expenses of acquisition
Total consideration
Abacus
PSP
Edco
Total
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
–
–
–
0.2
0.3
(0.2)
0.3
–
0.3
–
0.2
1.0
1.6
2.4
(1.8)
3.4
–
3.4
7.8
(1.7)
0.9
1.0
2.4
(1.8)
8.6
6.1
14.7
14.1
0.6
–
0.3
15.0
–
(0.3)
14.7
0.8
–
–
0.1
0.3
(0.2)
1.0
0.4
1.4
1.4
–
–
–
1.4
–
–
1.4
–
–
0.1
0.5
1.4
(0.7)
1.3
–
1.3
1.5
(0.3)
0.1
0.4
1.4
(0.7)
2.4
1.0
3.4
3.2
–
(0.2)
0.1
3.1
0.4
(0.1)
3.4
–
0.2
1.1
2.3
4.1
(2.7)
5.0
–
5.0
10.1
(2.0)
1.0
1.5
4.1
(2.7)
12.0
7.5
19.5
18.7
0.6
(0.2)
0.4
19.5
0.4
(0.4)
19.5
Goodwill of £7.5m recognised on these acquisitions represents the amount paid for future sales growth from both new customers
and new products, for operating cost synergies and for employee know-how.
82
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 22. Acquisition of businesses continued
From the date of acquisition to 30 September 2017, the newly acquired Abacus business contributed £7.6m to revenue and £1.2m to
adjusted operating profit, the newly acquired PSP business contributed £1.0m to revenue and £0.2m to adjusted operating profit and
the newly acquired Edco business contributed £1.1m to revenue and £0.2m 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 £21.6m to revenue and
£3.8m 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.
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 (note 5)
Cash paid into defined benefit schemes (note 25)
Non-cash items
Operating cash flow before changes in working capital
Increase in inventories
Increase in trade and other receivables
Increase in trade and other payables
(Increase)/decrease 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/(decrease) in cash and cash equivalents
Decrease in borrowings
Effect of exchange rates
Movement in net cash
Net cash at beginning of year
Net cash at end of year
Comprising:
Cash and cash equivalents
Borrowings
Net cash at 30 September
2017
£m
4.7
0.8
(0.4)
(5.1)
(6.6)
7.7
2017
£m
68.5
9.7
78.2
5.1
83.3
(4.0)
79.3
2016
£m
4.5
0.4
(0.3)
(1.3)
(0.3)
7.9
2017
£m
1.9
10.0
11.9
(0.2)
11.7
10.6
22.3
22.3
–
22.3
2016
£m
55.4
10.3
65.7
4.6
70.3
6.3
76.6
2016
£m
(5.1)
10.0
4.9
2.7
7.6
3.0
10.6
20.6
(10.0)
10.6
On 1 June 2017, the Group replaced its existing facility that was due to expire on 23 June 2017 with a similar committed three year
facility for £30.0m with an accordion option to increase the committed facility by a further £30.0m up to a maximum of £60.0m and
an option to extend the facility up to five years. At 30 September 2017, none of the facility had been drawn down (2016: £10.0m).
Interest on this facility is payable at between 70 and 115bps over LIBOR, depending on the ratio of net debt to EBITDA.
25. Retirement benefit obligations
The Group maintains two 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 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
Kubo pension scheme is a defined contribution based scheme, which for technical reasons, is required under IFRS to be accounted
for in accordance with IAS19 (Revised).
The amount of pension deficit included in the Consolidated Statement of Financial Position in respect of these two pension
arrangements is:
2017
£m
Diploma Holdings PLC UK Pension Scheme
Kubo Pension Scheme
Pension scheme net deficit
5.4
4.5
9.9
2016
£m
10.0
7.2
17.2
83
Diploma PLC Annual Report & Accounts 2017 Notes to the Consolidated Financial Statements
continued
For the year ended 30 September 2017
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
2017
£m
(0.3)
(0.2)
(0.5)
2016
£m
(0.2)
(0.3)
(0.5)
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 2016 reported that the Scheme had a
funding deficit of £9.2m and held assets which covered 75% of its liabilities at that date. The next triennial actuarial valuation of the
Scheme will be carried out as at 30 September 2019. 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 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 gains/(losses) charged in the Consolidated Statement of Income and Other Comprehensive Income
2017
£m
2016
£m
24.8
6.0
0.1
30.9
(36.3)
(5.4)
2017
£m
–
(0.9)
0.6
(0.3)
(0.3)
2017
£m
2.7
3.2
(1.3)
(0.1)
4.5
22.0
6.1
–
28.1
(38.1)
(10.0)
2016
£m
–
(1.1)
0.9
(0.2)
(0.2)
2016
£m
5.0
(9.3)
0.3
–
(4.0)
The cumulative amount of actuarial losses recognised in the Consolidated Statement of Income and Other Comprehensive Income,
since the transition to IFRS, is £5.8m (2016: £10.3m).
84
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 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 on liabilities
Impact from 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
Contributions paid by employer
Benefits paid
At 30 September
The actual return on the Scheme assets during the year was a £3.3m gain (2016: £5.9m gain).
2017
£m
10.0
0.3
(0.4)
(4.5)
5.4
2017
£m
38.1
0.9
(1.8)
(0.9)
36.3
2017
£m
28.1
0.6
2.7
0.4
(0.9)
30.9
2016
£m
6.1
0.2
(0.3)
4.0
10.0
2016
£m
30.5
1.1
9.0
(2.5)
38.1
2016
£m
24.4
0.9
5.0
0.3
(2.5)
28.1
Assets
The Scheme’s assets are held in passive unit funds managed by Legal & General Investment Management and at 30 September 2017,
the major categories of assets were as follows:
2017
%
2016
%
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
Demographic assumptions
20
20
20
20
12
8
0
2016
%
3.2
2.4
2.4
2.3
20
19
19
20
13
9
0
2015
%
3.1
2.3
2.3
2.3
2017
%
3.4
2.4
2.4
2.8
Mortality table used:
Year the mortality table was published:
Allowance for future improvements in longevity:
Allowance made for members to take a cash lump sum
on retirement:
S1NxA
CMI 2016
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.
85
Diploma PLC Annual Report & Accounts 2017 Notes to the Consolidated Financial Statements
continued
For the year ended 30 September 2017
25. Retirement benefit obligations continued
Sensitivities
The sensitivities of the 2017 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
9.3
3.8
2.6
3.4
1.4
0.9
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 deferred pensioners. Annuity policies have been taken out in respect of some historic
pensioners, but the Scheme has not purchased annuities for 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 2016, the Company agreed to increase the annual
cash contribution to the scheme to £0.5m (from £0.4m). The next valuation of the Scheme will be carried out as at 30 September 2019.
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 ASGA Pensionskasse, a multi-employer plan of non-associated companies which pools risks between
participating companies. As at 30 September 2017 the ASGA Pensionskasse had a local coverage ratio of 110.7%.
Set out below is a summary of the key features of the Kubo Scheme.
a) 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 ASGA Pensionskasse.
b) Amounts charged to the Consolidated Income Statement
Service cost
Amount charged to operating profit in the Consolidated Income Statement
c) 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 Kubo Scheme assets and liabilities
Exchange adjustments
At 30 September
2017
£m
8.7
(13.2)
(4.5)
2016
£m
10.8
(18.0)
(7.2)
2017
£m
(0.2)
(0.2)
2017
£m
7.2
0.2
(0.2)
(2.6)
(0.1)
4.5
2016
£m
(0.3)
(0.3)
2016
£m
3.7
0.3
(0.3)
2.6
0.9
7.2
86
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 2017
2016
0%
1.0%
0.7%
1.0%
0%
1.0%
0.15%
0.50%
BVG2015 BVG2015
Impact on pension liabilities
Estimated
increase
%
Estimated
increase
£m
10.6%
7.0%
1.4
0.9
£m
0.4
0.3
2016
£m
4.4
8.7
3.2
16.3
25. Retirement benefit obligations continued
Principal actuarial assumptions for the Kubo Scheme at balance sheet dates
Expected rate of pension increase
Expected rate of salary increase
Discount rate
Interest credit rate
Mortality
Sensitivities
The sensitivities of the 2017 pension liabilities to changes in assumptions are as follows:
Factor
Discount rate
Life expectancy
Assumption
Decrease by 0.5%
Increase by one year
Effect of the Kubo Scheme on the Group’s future cash flows
Best estimate of employer’s contribution in 2018
Best estimate of employees’ contribution in 2018
The weighted average duration of the defined benefit obligation is approximately 20 years.
26. Commitments
At 30 September 2017 the Group had outstanding aggregate commitments for future lease payments (under non-cancellable
operating leases) in respect of the following years:
Land and buildings
Other
Total
Within one year
For years two to five
After five years
2017
£m
4.1
9.7
4.2
2016
£m
3.4
7.4
3.2
18.0
14.0
2017
£m
1.3
1.6
–
2.9
2016
£m
1.0
1.3
–
2.3
2017
£m
5.4
11.3
4.2
20.9
Other commitments comprise plant and machinery, motor vehicles and office equipment. Operating lease payments made during
the year in respect of land and buildings and other commitments were £4.2m (2016: £4.2m) and £1.5m (2016: £1.1m), respectively.
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 Group’s Annual Report & Accounts
– the Company’s subsidiaries
Audit fees
2017
£m
0.1
0.5
0.6
2016
£m
0.1
0.4
0.5
Non-audit fees of £13,000 (2016: £13,000) 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$)
Euro (€)
Swiss franc (CHF)
Australian dollar (A$)
Average
Closing
2017
1.27
1.67
1.15
1.26
1.67
2016
1.41
1.87
1.28
1.40
1.92
2017
1.34
1.68
1.13
1.30
1.71
2016
1.30
1.71
1.16
1.26
1.70
29. Subsequent events
On 16 October 2017, the Group completed the acquisition of 100% of Coast Fabrication, Inc. (“Coast”), a supplier of specialist
fasteners based in California, US, for initial cash consideration of £1.0m (US$1.3m) and maximum deferred consideration of £0.3m
(US$0.4m). A review to determine fair values of the net assets acquired will be completed during the next financial year.
87
Diploma PLC Annual Report & Accounts 2017 Group Accounting Policies
For the year ended 30 September 2017
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 2017 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 2017.
1.1 Basis of preparation
The consolidated financial statements have been prepared
under the historical cost convention, except for derivative
financial instruments which are held at fair value. The
consolidated financial statements have been prepared
on a going concern basis, as discussed on page 65.
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 assets,
liabilities and 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 tangible and intangible
assets, liabilities and contingent liabilities acquired.
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.
There were no discontinued operations in either 2017 or 2016.
88
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 ca. 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 plan is operated by Diploma Holdings PLC and 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 plan 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 plan – 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 (“Other Comprehensive Income”):
– Actuarial gains and losses arising on the assets and
liabilities of the plan arising from actual experience and
any changes in assumptions at the end of the year.
The Group has adopted a policy of recognising all actuarial
gains and losses for its defined benefit plan in the period in
which they occur, outside the Consolidated Income
Statement, but in Other Comprehensive Income.
c) Share-based payments: Equity-settled transactions
(which are where the Executive Directors and certain senior
employees receive a part of their remuneration in the form of
shares in the Company, or rights over shares) 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.
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 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.
1.8 Taxation
The tax expense relates to the sum of current tax and
deferred tax.
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.
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.
iii) All resulting exchange differences are recognised in 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 Other Comprehensive
Income as a separate component of equity and subsequently
recognised in the Consolidated Income Statement on
disposal of the net investment.
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.
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
Property, plant and equipment are stated 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 repairs
and maintenance expenditure is charged to the Consolidated
Income Statement in the period in which it is incurred.
89
Diploma PLC Annual Report & Accounts 2017
Group Accounting Policies
continued
For the year ended 30 September 2017
1.9 Property, plant and equipment continued
Freehold land is not depreciated. 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 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
– between 20 and 50 years
– term of the lease
– plant and machinery between 3 and
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. Transaction costs
are expensed and are not included in the cost of acquisition.
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 (”CGU”) exceeds its
recoverable amount.
The recoverable amount of an asset or CGU 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 CGU, 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
CGU; CGUs 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. CGUs 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 CGU is less than the carrying
amount of the unit, the impairment loss is allocated first to
reduce the goodwill attributable to the CGU. Impairment losses
cannot be subsequently reversed.
b) Impairment of other tangible and intangible assets
Other tangible and intangible assets are reviewed for
impairment when events or changes in circumstances indicate
the carrying value may not be recoverable. Impairment losses
and any subsequent reversals are recognised 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.
7 years
– IT hardware between 3 and 5 years
– fixtures and fittings between 5 and
15 years
Hospital field equipment – 5 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 unless forecast revenues for a
particular project exceed attributable forecast development
costs in which case they are capitalised 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 may be acquired as a result of a business
combination, include, but are not limited to, customer lists,
supplier lists, databases, technology and software and patents
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 of customer and supplier relationships on larger
acquisitions 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.
90
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS 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 nominal 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.
f) Borrowings
Borrowings are initially recognised at the fair value of the
consideration received. They are subsequently measured at
amortised cost. Borrowings are classified as non-current when
the repayment date is more than 12 months from the period-end
date or where they are drawn on a facility with more than 12
months to expiry.
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 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.
e) Derivative financial instruments and hedge accounting
The Group holds derivative financial instruments in the form
of forward foreign exchange contracts to hedge its foreign
currency exposure. These derivatives are designated as cash
flow hedges.
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:
Derivatives are initially recognised at fair value on the date
a derivative contract is entered into and subsequent changes
in the fair value of foreign currency derivatives which are
designated and effective as hedges of future cash flows are
recognised in equity in the hedging reserve and in Other
Comprehensive Income and are reclassified to profit or loss on
maturity of the derivative. Changes in the fair value of foreign
currency derivatives which are ineffective or do not meet the
criteria for hedge accounting in accordance with IAS39 are
recognised immediately in the Consolidated Income Statement.
The Group documents, at the inception of the transaction, the
relationship between hedging instruments and hedged items,
as well as its risk management objectives and strategy for
undertaking various hedging transactions. The Group also
documents its assessment, both at hedge inception and on an
ongoing basis, of whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes
in cash flows of hedged items.
No derivative contracts have been designated as fair value
hedges or net investment hedges.
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.
91
Diploma PLC Annual Report & Accounts 2017 Group Accounting Policies
continued
For the year ended 30 September 2017
1.18 Share capital and reserves continued
Where any Group company purchases the Company’s equity
share capital and holds that share either directly as treasury
shares or indirectly within an ESOP trust, the consideration paid,
including any directly attributable incremental costs (net of
income taxes), is deducted from equity attributable to the
Company’s equity holders until the shares are cancelled,
reissued or disposed of. Where such shares are subsequently
sold or reissued, any consideration received, net of any directly
attributable incremental transaction costs and the related
income tax effects, is included in equity attributable to the
Company’s equity holders. These shares are used to satisfy
share awards granted to Directors under the Group’s share
schemes. The Trustee purchases the Company’s shares on the
open market using loans made by the Company or a subsidiary
of the Company.
1.19 Related parties
There are no related party transactions (other than with the key
management) that are required to be disclosed in accordance
with IAS24. Details of their remuneration are given in note 5 to
the consolidated financial statements.
1.20 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 2017.
Set out below are those which are considered most relevant
to the Group:
•
•
IFRS15 “Revenue from Contracts with Customers”: IFRS15 is
effective for the Group for the year ended 30 September
2019. The Group reviewed its revenue recognition policies
and concluded that for substantially all of its sales to
customers the performance obligation is the delivery of
goods and it is therefore appropriate to recognise revenue
at a single point of time, on delivery of goods, which is
consistent with the current accounting policies. The review
has identified specific contracts within Life Sciences where
goods and services are sold together which in aggregate
account for less than 5% of Group consolidated revenues.
The impact of the application of IFRS15 to these contracts
is unlikely to have a material impact on Group revenues or
adjusted operating profit.
IFRS16 “Leases”: IFRS16 is effective for the Group for the
year ended 30 September 2020 and the Group has begun an
impact assessment on the consolidated financial statements
in 2018.
The following new or amended standards are not expected
to have a significant impact on the Group’s consolidated
financial statements:
•
•
IAS12 “Recognition of Deferred Tax Assets for Unrealised
Losses”; and
IFRS9 “Financial Instruments”.
1.21 Accounting estimates and judgements
The preparation of the Group’s consolidated financial
statements does not require management to make any critical
accounting judgements, assumptions or estimates with regard
to assets or liabilities that could potentially have a material
adjustment to the carrying amount of assets or liabilities in
the next 12 months.
Management however are required to make judgements,
assumptions and estimates relating to certain assets and
liabilities that could potentially have a material impact over
the longer term. These relate to:
1.21.1 Acquisition accounting and goodwill impairment
When the Group makes an acquisition it recognises the
identifiable assets and liabilities, including intangible assets,
at fair value with the difference between the fair value of net
assets acquired and the fair value of consideration paid
comprising goodwill. Acquisitions are accounted for using the
acquisition method as described in note 1.3 and 1.10 of Group
Accounting Policies the key assumptions and estimates used
to determine the valuation of intangible assets acquired are the
forecast cash flows, the discount rate and customer/supplier
attrition. Customer and supplier relationships are valued using
a discounted cash flow model. Acquisitions often comprise an
element of deferred consideration and may include a minority
interest, which are subject to put options. These put options
are valued at fair value at the date of acquisition. Deferred
consideration is fair valued based on the Directors’ estimate
of future performance of the acquired entity.
The Group’s growth strategy is to grow through acquisitions.
This results in material amounts of goodwill and intangible
assets (principally customer and supplier relationships) being
recognised in the Consolidated Statement of Financial Position.
As set out in note 1.11 of Group Accounting Policies, goodwill
is tested annually to determine if there is any indication of
impairment. Assumptions are then used to determine the
recoverable amount of each CGU, principally based on the
present value of estimated future cash flows to derive the
“value in use” to the Group of the capitalised goodwill.
The key estimates made and assumptions used in performing
impairment testing this year are set out in note 10 to the
consolidated financial statements.
1.21.2 Inventory provisions
Inventories are stated at the lower of cost and net realisable
value as set out in note 1.12 of Group Accounting Policies.
In the course of normal trading activities, judgement is used to
establish the net realisable value of inventory and impairment
charges are made for obsolete or slow-moving inventories and
against excess inventories.
The decision to make an impairment charge is based on a
number of factors including management’s assessment of the
current trading environment, aged profiles and historical usage
and other matters which are relevant at the time the
consolidated financial statements are approved.
1.21.3 Defined benefit pension
Defined benefit pensions are accounted for as set out in note 1.6
of Group Accounting Policies. Determining the value of the
future defined benefit obligation requires estimates in respect of
the assumptions used to calculate present values. These include
discount rate, future mortality and inflation. Management
makes these estimates in consultation with an independent
actuary. Details of the estimates and key sensitivities made in
calculating the defined benefit obligation at 30 September 2017
are set out in note 25 to the consolidated financial statements.
92
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS Parent Company Statement of Financial Position
As at 30 September 2017
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
2017
£m
2016
£m
c
72.0
72.0
(17.1)
54.9
5.7
49.2
54.9
(20.5)
51.5
5.7
45.8
51.5
d
The financial statements of Diploma PLC, company number 3899848, were approved by the Board of Directors on 20 November 2017
and signed on its behalf by:
BM Thompson
Chief Executive Officer
NP Lingwood
Group Finance Director
Parent Company Statement of Changes in Equity
For the year ended 30 September 2017
At 1 October 2015
Total Comprehensive Income
Dividends paid
Settlement of LTIP awards
At 30 September 2016
Total Comprehensive Income
Dividends paid
Settlement of LTIP awards
At 30 September 2017
Share capital
£m
Note
Shareholders’
equity
£m
Total equity
£m
a
d
a
d
5.7
–
–
–
5.7
_
_
_
5.7
37.1
29.3
(21.0)
0.4
45.8
26.2
(23.5)
0.7
49.2
42.8
29.3
(21.0)
0.4
51.5
26.2
(23.5)
0.7
54.9
93
Diploma PLC Annual Report & Accounts 2017 Notes to the Parent Company Financial Statements
For the year ended 30 September 2017
a) Accounting policies
a.1) Basis of accounting
The Parent Company financial statements (“Financial Statements”) have been prepared in accordance with the Companies Act 2006
and FRS101 “Reduced Disclosures Framework”. The Directors confirm they have a reasonable expectation that the Company has
adequate resources to continue in operational existence for the foreseeable future and accordingly, they continue to adopt the going
concern basis in preparing the Financial Statements. The Financial Statements are presented in UK sterling and all values are rounded
to the nearest million pounds (£m) except when otherwise indicated.
As permitted by section 408 of the Companies Act 2006, no separate profit and loss account is presented for the Company. There were
no gains or losses either in the current or preceding years recognised in other comprehensive income.
The following disclosures have not been provided as permitted by FRS101:
• a cash flow statement and related notes;
• a comparative period reconciliation for share capital;
• disclosures in respect of transactions with wholly owned
subsidiaries;
• disclosures in respect of capital management;
• the effects of new but not yet effective IFRS;
• disclosures in respect of the compensation of key
management personnel as required.
The Company has also taken the exemption under FRS101 available in respect of the requirements of paragraphs 45(b) and 46 to 52
of IFRS2 “Share-based Payment” in respect of group settled share-based payments as the consolidated financial statements of the
Company include the equivalent disclosures.
a.2) Total Comprehensive Income
Total Comprehensive Income comprises dividends received from subsidiaries, interest payable on inter-company balances, net of
tax. Total Comprehensive Income is distributable to shareholders.
a.3) Dividends
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.
The capacity of the Company to make dividend payments is primarily determined by the availability of retained distributable reserves
and cash resources. As at 30 September 2017 the Company had distributable reserves of £49.2m (2016: £45.8m) and the total
external dividends declared in 2017 amounted to £26.0m. When required the Company can receive dividends from its subsidiaries to
further increase distributable reserves.
a.4) Diploma PLC Employment Benefit Trust and employee share schemes
Shares held by the Diploma PLC 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.5) Auditor’s remuneration
Fees payable to the auditor for the audit of the Company’s accounts of £3,500 (2016: £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 51 to
63. The Company had no employees (2016: none).
c) Investments
Shares in Group undertakings
At 30 September 2017 and 1 October 2016
£m
72.0
A full list of subsidiary and other related undertakings are set out on page 102.
d) Share capital
Allotted, issued and fully paid ordinary shares of 5p each
At 30 September
2017
Number
2016
Number
2017
£m
2016
£m
113,239,555
113,239,555
5.7
5.7
During the year 79,679 ordinary shares in the Company (2016: 48,861) 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 pages
60 and 63 in the Remuneration Committee Report. At 30 September 2017, the Trust held 92,898 (2016: 172,577) ordinary shares in
the Company representing 0.1% of the called up share capital. The market value of the shares at 30 September 2017 was £1.0m
(2016: £1.5m).
94
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS Independent Auditor’s Report to the Members of
Diploma PLC
Report on the audit of the financial statements
Opinion
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 2017 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 including Financial Reporting Standard 101 “Reduced Disclosure Framework”; 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.
We have audited the financial statements of Diploma plc (“the Parent Company”) and its subsidiaries (“the Group”) which comprise:
• the Consolidated Income Statement;
• the Consolidated Statement of Income and Other Comprehensive Income;
• the Consolidated and Parent Company Statement of Financial Position;
• the Consolidated and Parent Company Statements of Changes In Equity;
• the Consolidated Cash Flow Statement;
• the Group Accounting Policies; and
• the related notes 1 to 29 and notes (a) to (d) to the Parent Company Financial Statements.
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, including FRS101 “Reduced Disclosure
Framework” (United Kingdom Generally Accepted Accounting Practice).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements
section of our report.
We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit
of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities and we have
fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited
by the FRC’s Ethical Standard were not provided to the Group or the Parent Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
recoverability of goodwill and assessment for impairment;
•
• accounting for acquisitions; and
• appropriateness of inventory obsolescence provisioning.
Within this report, any new key audit matters are identified with
which are the same as the prior year identified with
and any key audit matters
The materiality that we used in the current year was £3.2m which was determined on the basis
of approximately 5% of profit before tax.
We have performed full scope audits at 13 locations, with an additional nine locations subject to
specified audit procedures which address each of the significant balances and key audit risks
within these entities. Together, the work at these locations represents the principal business
units of the Group and accounts for 81% of the Group’s revenues and 83% of the Group’s
operating profit.
There have been no other significant changes in our approach in the year.
Materiality
Scoping
Significant changes
in our approach
95
Diploma PLC Annual Report & Accounts 2017 Independent Auditor’s Report to the Members of
Diploma PLC continued
Report on the audit of the financial statements continued
Conclusions relating to principal risks, going concern and viability statement
We have reviewed the Directors’ statement regarding the appropriateness of the going concern
basis of accounting contained within page 65 to the financial statements and the Directors’
statement on the longer-term viability of the Group contained within the Strategic Report on
page 32.
We confirm that we have
nothing material to add
or draw attention to in
respect of these matters.
We are required to state whether we have anything material to add or draw attention to in
relation to:
• the disclosures on pages 32 to 35 that describe the principal risks and explain how they are
being managed or mitigated;
• the Directors’ confirmation on page 32 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 Directors’ statement on page 65 to the financial statements 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 and the Parent Company’s
ability to continue to do so over a period of at least 12 months from the date of approval of
the financial statements;
• the Directors’ explanation on page 32 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
Group 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; or
• whether the Directors’ statements relating to going concern and the prospects of the
company required in accordance with Listing Rule 9.8.6R(3) are materially inconsistent with
our knowledge obtained in the audit.
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 Group’s ability to
continue as a going concern.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on: the overall 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.
Recoverability of goodwill and assessment for impairment
Key audit matter description
How the scope of our
audit responded to the
key audit matter
96
As at the year end, the Group held an aggregate of £122.8m of goodwill (2016: £115.2m) on the
Statement of Financial Position and, as such, it is the most significant asset class. This goodwill
has been recognised in respect of acquisitions that the Group has undertaken in the current and
previous years.
We consider that the carrying value of goodwill is a key area due to the judgemental inputs
involved in the assessment for impairment. There are a number of such inputs used when
assessing for impairment, including the determination of the discount rate, the determination
of projected cash flows which includes assumptions relating to medium and long term growth
rates and gross margins and the sensitivities applied.
Refer also to page 45 (Audit Committee Report), page 88 for the Group Accounting Policies and
note 10 of the consolidated financial statements (page 74).
We have obtained management’s goodwill impairment review calculations and assessed the
mechanical accuracy of the model. Furthermore, we challenged the assumptions and inputs
used in the impairment model including the revenue growth rates and margins, discount rates,
long term growth rates and the sensitivities applied and disclosed.
Our procedures included reviewing forecast cash flows with reference to historical trading
performance and the Board-approved budgets and consulting with our valuation specialists
who benchmarked assumptions such as the discount rate to external macroeconomic and
market data.
The long term growth rate used in the cash flow projections was assessed to check that
it did not materially differ to the average long term growth rate in any territories in which
the Group operates.
We have also performed sensitivity analysis on the impairment model to determine if a
reasonable possible adverse change in the key assumptions, results in the carrying amount
exceeding the recoverable amount for any cash generating unit.
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS Key observations
We concluded that the assumptions and judgements set out in management’s model are
reasonable and we concur with the Directors’ assessment that there is no impairment. We also
considered the disclosures within the consolidated financial statements to be appropriate.
Accounting for acquisitions
Key audit matter description
The Group has made one material acquisition in the year, being Abacus. The total combined
consideration for this acquisition was £14.1m and an additional £6.1m of goodwill and £7.8m of
intangible assets were recognised. The judgements used in determining the value of the
goodwill and intangible assets and the allocation between these asset classes could, if
performed inaccurately, lead to a material misstatement.
There is significant judgement and complexity involved in the allocation of excess consideration
over net assets of the acquiree between the fair value of intangible assets and remaining
goodwill. For the fair value of intangible assets, this includes estimates for growth rates,
discount rates and retention rates for supplier relationships.
Management must exercise judgement to accurately measure the fair value of the acquired
assets and liabilities as at the acquisition date. This includes, for example, assessing the
amounts required for any additional inventory or receivables provisions.
Refer also to page 45 (Audit Committee Report), page 88 for the Group Accounting Policies and
note 22 of the consolidated financial statements (page 82).
How the scope of our
audit responded to the
key audit matter
We have obtained management’s calculations for the accounting for the acquisition and we
checked the mathematical accuracy of each acquisition model. We also assessed the
adjustments to assets and liabilities in order to bring them to fair value and have held
discussions with management in order to challenge the completeness of these adjustments.
Key observations
In order to assess the accuracy of the acquired intangible assets valuation, we have reviewed
the methodology applied in management’s calculation and challenged the assumptions behind
the calculation including the growth rates, discount rates and supplier retention rates. We have
involved our own internal specialists to assist in our assessment. We have reviewed the
disclosures included within note 11 of the consolidated financial statements (page 75).
We are satisfied that the assumptions and judgements used to determine the value of
intangible assets acquired and the fair value adjustments made to the assets and liabilities of
the acquired entity are reasonable.
We have not identified any material misstatements in the accounting for acquisitions and
consider the disclosures in the consolidated financial statements to be appropriate.
97
Diploma PLC Annual Report & Accounts 2017 Independent Auditor’s Report to the Members of
Diploma PLC continued
Report on the audit of the financial statements continued
Appropriateness of inventory obsolescence provisioning
Key audit matter description
How the scope of our
audit responded to the
key audit matter
The valuation of inventory as at 30 September 2017 is £76.1m (2016: £66.8m), recorded net of a
provision of £8.3m (2016: £7.8m). High levels of inventory are held across the Group, which gives
rise to a greater risk of there being slow moving or obsolete lines of inventory. Therefore, we
have determined that there is a key risk that inventory is recorded below its net realisable value
due to insufficient obsolescence provisions.
Management judgement is required in determining the completeness of inventory provisions
and making an assessment of their adequacy, considering the age and volumes of inventory
relative to expected usage. We have identified a risk of fraud in relation to this judgement.
Changes to these assumptions could result in a material change in the carrying value of
inventory and the associated movement recorded in the income statement.
Refer also to page 45 (Audit Committee Report), page 88 for the Group Accounting Policies and
note 15 of the consolidated financial statements (page 77).
We evaluated the recorded inventory obsolescence provision by obtaining management’s
workings and independently recalculating the provision in line with their stated policy.
We challenged the underlying assumptions and completeness of the provision by considering
the age and volumes of inventory relative to expected usage. Any aged inventory lines which
were excluded from management’s calculation were also challenged in order to further verify
completeness of the provision.
Management’s historical ability to estimate the required inventory obsolescence provision was
assessed by comparing write-offs during the period to the prior period provision.
Furthermore, we 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.
Key observations
We are satisfied that the provision for inventory obsolescence is not materially misstated.
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.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group materiality
We determined materiality for the Group to be £3.2m (2016: £2.7m).
Basis for determining
materiality
Rationale for the
benchmark applied
Materiality is based on a calculation of approximately 5% (2016: 5%) of profit before tax (“PBT”).
PBT has been chosen as the basis for materiality as this is the measure by which stakeholders
and the market assess the wider performance of the entity and is the key metric that current
and potential investors monitor when making their financial decisions.
98
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS
Audit of components are performed at a materiality level not exceeding 50% (2016: 50%) of Group materiality (£1.6m, 2016: £1.35m).
4.96
0.00
£3.2m Group materiality
£1.6m Component materiality up to
£0.16m Audit Committee reporting threshold
£66.8m PBT
Group materiality
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £160,000 (2016:
£130,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. Having assessed
the facts and circumstances of the Group and the prior history of misstatements, we determined that an increase in this threshold
from prior year was appropriate. We also report to the Audit Committee on disclosure matters that we identified when assessing the
overall presentation of the financial statements.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and it environment, including Group-wide controls and
assessing the risks of material misstatement at the Group level and where these are most likely to occur in the business. Based on
this assessment, we focused our Group audit scope primarily on the audit work at 13 (2016: 12) locations, with the increase from the
prior year due to the inclusion of DHG Australia as a full scope audit following the acquisition of Abacus by the Group during the
period. Each of these 13 locations was subject to a full scope audit. An additional nine (2016: eight) locations were subject to specified
audit procedures which address each of the significant balances and key audit risks within these entities. Together the work at these
locations represents the principal business units of the Group and accounts for 81% (2016: 75%) of the Group’s revenue and 83%
(2016: 80%) of the Group’s operating profit.
The Group audit team has designed and implemented a country visit programme so 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 an 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 in the aggregated financial information of the remaining components
not subject to audit or specified audit procedures.
Revenue
Operating
profit
50% Full audit scope
52% Full audit scope
31% Specified audit procedures
31% Specified audit procedures
19% Desktop preview
17% Desktop preview
99
Diploma PLC Annual Report & Accounts 2017
Independent Auditor’s Report to the Members of
Diploma PLC continued
Report on the audit of the financial statements continued
Other information
The Directors are responsible for the other information. The other information comprises the
information included in the Annual Report other than the financial statements and our auditor’s
report thereon.
We have nothing to report in
respect of these matters.
Our opinion on the financial statements does not cover the other information and, except to the
extent otherwise explicitly stated in our report, we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required
to determine whether there is a material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material
misstatements of the other information include where we conclude that:
• Fair, balanced and understandable – the statement given by the Directors that they consider
the Annual Report and Financial Statements taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to assess the
Group’s performance, business model and strategy, is materially inconsistent with our
knowledge obtained in the audit; or
• Audit Committee reporting – the section describing the work of the Audit Committee does
not appropriately address matters communicated by us to the Audit Committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of
the Directors’ statement required under the Listing Rules relating to the Company’s
compliance with the UK Corporate Governance Code containing provisions specified for
review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a
departure from a relevant provision of the UK Corporate Governance Code.
Responsibilities of Directors
As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view and for such internal control as the Directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of
accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s
website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s Report.
Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to
state to them in an 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.
100
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Remuneration Committee Report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
• the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course
of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report.
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 nothing to report in
respect of these matters.
• 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.
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 in
respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Board to audit the financial statements for the
year ending 30 September 2008 and subsequent financial periods. The period of total uninterrupted engagement including previous
renewals and reappointing of the firm is ten years, covering the years ended 2008 to 2017. Following a full tender process the Board
intends to appoint PricewaterhouseCoopers LLP as its auditor for the financial year ending 30 September 2018, subject to
shareholder approval at the 2018 AGM.
Consistency of the Audit Report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with
ISAs (UK).
Edward Hanson (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
20 November 2017
101
Diploma PLC Annual Report & Accounts 2017 Subsidiaries of Diploma PLC
Registered
Office
Address*
Registered
Office
Address*
Krempfast Limited2
Betaduct Limited1
Hawco Limited
Abbeychart Limited1
HA Wainwright Limited1
Microtherm Limited1
Hawco Refrigeration Limited1
Microtherm UK Limited1
IS Group (Europe) Limited1
Specialty 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
A
A
A
A
A
A
A
A
A
A
A
A
A
A
C
A
A
A
A
A
A
A
H
F
X
X
1 Dormant company.
2 These subsidiaries, both of which are incorporated in England, are exempt from
the requirements of the UK Companies Act 2006 relating to the audit of individual
accounts by virtue of section 479A of the Act.
3 These subsidiaries are 90% owned, all other subsidiaries are wholly owned.
All subsidiaries are owned through ordinary shares.
3400 First Canadian Centre, 350-7th Avenue SW, Calgary, Alberta T2P 3N9, Canada.
Laki tn 16, Kristiine linnaosa, Tallinn, Harju maakond, 10621, Estonia.
Rotwandweg 5, D-82024, Taufkirchen/Munchen, Germany.
Fort Henry Business Park, Ballina, Co. Tipperary, Ireland.
* Registered Office address
A 12 Charterhouse Square, London, EC1M 6AX, UK.
B 5716 Corsa Avenue, Ste 110, Westlake Village, CA 91362-7354, USA.
C 1201 Orange Street, Ste 600 One Commerce Center, Wilmington, DE 19899, USA.
D 17888 67th Court North, Loxahatchee, FL 33470-2525, USA.
E 4505 Pacific Highway East, Ste C2, Fife, WA 98424-2638, USA.
F
G Eichsfelder Strasse 1, 40595, Düsseldorf, Germany.
H Kraichgaustrasse 5, D-73765 Neuhausen, Germany.
I
J
K Nuolikuja 8, FI-01740, Vantaa, Finland.
L
M Maskavas iela 459, Riga, LV-1063, Latvija.
N Vilniaus r. sav., Bukiškio k., Bičiulių g. 29, Lithuania.
O Dom 2, Liter B, Proezd Mebeljyj, 197374 , St. Petersburg, Russia.
P
Q
R Lederergasse 67, AT-4020 Linz, Austria.
S Bybjergvej 13, DK 3060, Espergaerde, Denmark.
T
Industrivagen 17, SE-302, 41 Halmstad, Sweden.
U 10, allee du Vivier, 72700 Allonnes, France.
V 333 Bay St., Suite 2400, Toronto, Ontario M5H 2T6, Canada.
W 226 Lockhart Road, Barrie, Ontario, L4N 9G8, Canada.
X 46 Albert Street, Preston, Victoria, 3072, Australia.
Y 72 Platinum Street, Crestmead, Queensland, 4132, Australia.
Z Office of Bendall & Cant Ltd, Southern Cross Building, 61 High Street, Auckland,
Industrieterrein Dombosch 1, Effweg 38, 4941 VP Ramsdonksveer, the Netherlands.
Im Langhag 5, 8307 Illnau-Effretikon, Switzerland.
New Zealand.
AA 22 Avenue des Géomètres Pionniers, ZAC PANDA – 98835, Dumbéa,
New Caledonia.
AB 18 Fuyuandao Road, Wuqing Development Area, Tianjin, China.
Life Sciences
Somagen Diagnostics Inc.
AMT Electrosurgery Inc.
Vantage Endoscopy Inc.
Big Green Surgical Company Pty Limited
Diagnostic Solutions Pty Limited
Diploma Healthcare Group NZ Limited
Techno-Path (Distribution) Limited3
Abacus ALS Pty Limited
Abacus ALS Limited
A1-CBISS Limited
a1-envirosciences GmbH
a1-Envirosciences Limited1
Hitek Limited1
Hitek Group Limited1
Seals
HB Sealing Products Inc.
J Royal US, Inc.
HKX Inc.
All Seals Inc.
RTD Seals Corp.
HB Sealing Products Limited
M Seals A/S3
M Seals AB3
M Seals NCL Limited2
EDCO Seal and Supply Limited2
Diploma (Tianjin) Trading Co. Limited
FPE Seals Limited
A.B. Seals Limited1
Swan Seals (Aberdeen) Limited1
FPE Seals BV
Kentek Oy3
ZAO Kentek3
Kentek Eesti Ou3
SIA Kentek Latvija3
UAB Kentek Lietuva3
Kubo Tech AG
Kubo Form AG
Kubo Tech GmbH
West Coast Industrial Supplies Pty Limited
West Coast Industrial Supplies New Caledonia SAS
Controls
IS Rayfast Limited
IS Motorsport Inc.
Amfast Limited1
Clarendon Specialty Fasteners Limited
Clarendon Specialty Fasteners, Inc.
Clarendon Engineering Supplies Limited1
Cabletec Interconnect Component Systems Limited1
Sommer GmbH
Filcon Electronic GmbH
Ascome SARL
Cablecraft Limited
Birch Valley Plastics Limited2
F
V
V
X
X
Z
J
X
Z
A
G
A
A
A
D
C
E
B
C
W
S
T
A
A
AB
A
A
A
P
K
O
L
M
N
Q
Q
R
Y
AA
A
C
A
A
B
A
A
H
I
U
A
A
102
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS Financial Calendar and Shareholder Information
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.
Announcements (provisional dates)
First Quarter Statement released
Annual General Meeting (2017)
Half Year Results announced
Third Quarter Statement released
Preliminary Results announced
Annual Report posted to shareholders
Annual General Meeting (2018)
Dividends (provisional dates)
Interim announced
Paid
Final announced
Paid (if approved)
17 January 2018
17 January 2018
14 May 2018
29 August 2018
19 November 2018
7 December 2018
16 January 2019
14 May 2018
13 June 2018
19 November 2018
23 January 2019
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.
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
103
Diploma PLC Annual Report & Accounts 2017 Five Year Record
Year ended 30 September
Revenue
Adjusted operating profit
Finance expense
Adjusted profit before tax
Acquisition related charges
Gain on disposal of assets
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 increase/(decrease) in net funds
Add: dividends paid
acquisition of businesses
Free cash flow
Per ordinary share (pence)
Basic earnings
Adjusted earnings
Dividends
Total shareholders’ equity
Dividend cover
Ratios
Return on adjusted trading capital employed (“ROATCE”)
Working capital: revenue
Operating margin
2017
£m
2016
£m
2015
£m
2014
£m
2013
£m
451.9
382.6
333.8
305.8
285.5
78.2
(0.7)
77.5
(9.7)
–
(1.0)
66.8
(18.6)
48.2
262.0
4.8
(22.3)
–
9.9
6.6
8.2
269.2
66.3
335.5
11.9
23.7
20.1
55.7
42.0
49.8
23.0
232
2.2
%
24.0
15.0
17.3
65.7
(0.8)
64.9
(10.3)
0.7
(1.3)
54.0
(14.9)
39.1
233.5
4.3
(20.6)
10.0
17.2
6.8
7.4
258.6
59.2
317.8
4.9
21.4
32.7
59.0
33.9
41.9
20.0
206
2.1
%
21.1
16.6
17.2
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
1 Acquisition related charges comprise the amortisation and impairment of acquisition intangible assets, acquisitions expenses and adjustments to deferred consideration.
2 Acquisition liabilities comprise amounts payable for the future purchases of minority interests and deferred consideration.
3 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.
104
Diploma PLC Annual Report & Accounts 2017FINANCIAL STATEMENTS
DIPLOMA PLC
www.diplomaplc.com
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12 Charterhouse Square
London EC1M 6AX
T +44 (0)20 7549 5700
F +44 (0)20 7549 5715