DIPLOMA PLC
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COMPOUNDING
GROWTH
DIPLOMA PLC
ANNUAL REPORT & ACCOUNTS 2018
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
DIPLOMA PLC IS AN
INTERNATIONAL GROUP OF
BUSINESSES SUPPLYING
SPECIALISED TECHNICAL
PRODUCTS AND SERVICES
WE OPERATE GLOBALLY IN
THREE DISTINCT SECTORS
LIFE SCIENCES
SEALS
CONTROLS
Suppliers of consumables,
instrumentation and related
services to the healthcare and
environmental industries.
Suppliers of seals, gaskets, filters,
cylinders, components and kits for
heavy mobile machinery and
specialised industrial equipment.
Suppliers of specialised wiring,
cable, connectors, fasteners and
control devices for technically
demanding applications.
For more information
See pages 14-17
For more information
See pages 18-21
For more information
See pages 22-25
STR ATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
CONTENTS
01 Financial Highlights
02 Chairman’s Statement
04 Group at a Glance
06 Our Year in Review
08 Our Business Model
10 Growth Strategy
12 Strategic Priorities and KPIs
14 Sector Reviews
26 Finance Review
30 Internal Control and Risk Management
34 Corporate Responsibility
36 Board of Directors
36 Executive Management Committee
38 Corporate Governance
43 Audit Committee Report
48 Nomination Committee Report
49 Remuneration Committee Report
64 Directors’ Report
66 Consolidated Income Statement
67 Consolidated Statement of
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
89 Group Accounting Policies
94 Parent Company Statement of
Financial Position
94 Parent Company Statement of
Changes in Equity
95 Notes to the Parent Company
Financial Statements
96 Independent Auditors’ Report
102 Subsidiaries of Diploma PLC
103 Financial Calendar, Shareholder
Information and Advisors
104 Five Year Record
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
01
FINANCIAL HIGHLIGHTS
FOR THE YE AR ENDED 30 SEPTEMBER 2018
STRONG RESULTS WITH
DOUBLE-DIGIT
EARNINGS GROWTH
REVENUE
£485.1m
2017: £451.9m
+7%
1
ADJUSTED OPER ATING PROFIT
£84.9m
2017: £78.2m
+9%
STATUTORY PROFIT BEFORE TA X
£72.7m
2017: £66.8m
+9%
ADJUSTED PROFIT BEFORE TA X
1,2
£84.8m
2017: £77.5m
+9%
FREE CASH FLOW3
ACQUISITION SPEND
£60.5m
2017: £55.7m
+9%
£20.4m
2017: £20.1m
Adjusted earnings per share1,2
Basic earnings per share
Total dividend per share
Free cash flow per share3
2018
pence
56.4
47.5
25.5
53.5
+13%
+13%
+11%
+9%
2017
pence
49.8
42.0
23.0
49.3
1 Before acquisition related charges and Chief Executive Officer transition costs
2 Before fair value remeasurements
3 Before cash payments on acquisitions and dividends
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 and 3 to the consolidated financial statements.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSSTATUTORY OPERATING PROFIT£73.2m2017: £68.5m+7%ADJUSTED OPERATING MARGIN117.5%2017: 17.3%+20bpsROATCE24.5%2017: 24.0%+50bps DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
02
CHAIRMAN’S STATEMENT
JOHN NICHOL AS CHAIRMAN
RESILIENT BUSINESS,
CONSISTENT DELIVERY,
STRONG RESULTS
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
Diploma’s trading performance in 2018
was, once again, very strong. The Group
delivered another year of double-digit
growth in adjusted earnings per share
and generated free cash flow of over
£60m. The results demonstrate the
resilience of the Group’s businesses
and the consistent delivery against
the Group’s strategy that have allowed
Diploma to build a long track record of
strong financial performance despite
the vagaries of the macroeconomic
environment during any period.
During the year the Board appointed a
new Chief Executive Officer (“CEO”) to
succeed Bruce Thompson who retired
from the Board after leading the Group
for over 20 years. However, in August
it was announced that Richard Ingram
stepped down from his role as CEO and
that I had agreed to take over as interim
Executive Chairman until a new CEO is
appointed. This process is under way and
the Board is confident that we will find the
right CEO to lead the Group to continued
success. Over the course of this year,
I have been consistently impressed
by the capability and commitment of
the Group’s senior management team
and I am grateful for their continued
support and hard work during this period.
My particular thanks are extended to our
Group Finance Director, Nigel Lingwood,
for the strength and leadership he has
demonstrated throughout the year.
currency effects on translation, Group
revenues also increased by 7% on an
underlying basis. The Seals businesses
delivered strong underlying revenue
growth of 10% and both the Life Sciences
and Controls businesses reported a
5% growth in underlying revenues.
The Board has reviewed and reconfirmed
its support for the Group’s existing
strategy that we believe continues
to have excellent potential to create
shareholder value in the years ahead.
In addition to the underlying growth
achieved this year, two acquisitions
were completed during the year and
a further small acquisition was also
completed shortly after the year end.
RESULTS
Group revenues increased in 2018 by 7%
to £485.1m (2017: £451.9m), despite a
currency headwind of 3% from translating
the results of the overseas businesses,
following a small appreciation in UK
sterling this year. After adjusting for the
contribution from acquisitions completed
both this year and last year, net of a
small disposal this year and for these
Adjusted operating profit increased by
9% to £84.9m (2017: £78.2m) reflecting the
strong growth in revenues and a modest
increase of 20bps in adjusted operating
margins to 17.5% (2017: 17.3%). Adjusted
profit before tax also increased by 9%
to £84.8m (2017: £77.5m) and adjusted
earnings per share (“EPS”) increased by
13% to 56.4p (2017: 49.8p), reflecting
the benefit from the reduction in the
US Federal corporate income tax rate
during the year.
On a statutory basis, the Group’s
operating profit was 7% ahead of last
year at £73.2m (2017: £68.5m) after
£9.6m (2017: £9.7m) of acquisition related
charges, largely comprising amortisation
of acquired intangible assets and one-off
charges of £2.1m with respect to the
CEO change in the year. Statutory profit
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
03
“
THE GROUP HAS MAINTAINED ITS LONG
TRACK RECORD OF CONSISTENT DELIVERY
AGAINST ITS KEY PERFORMANCE METRICS
”
before tax increased by 9% to £72.7m
(2017: £66.8m) and statutory EPS was
13% up on last year at 47.5p (2017: 42.0p).
The Group’s free cash flow remained
robust at £60.5m (2017: £55.7m), which
included £4.0m from the sale of a
small non-core US gasket business.
The outflow of cash to support working
capital increased again this year by
£5.1m (2017: £4.0m) reflecting the
much stronger trading environment
across the Group. Capital expenditure
increased this year to £6.6m (2017:
£3.3m) with investment focused on
new facilities and IT infrastructure and
a large investment by the Healthcare
businesses in field equipment in
support of customer contracts.
As indicated in last year’s Annual
Report, the environment to complete
acquisitions continued to be challenging
as vendors postponed their exit plans
in the face of the continuing favourable
macroeconomic conditions. The Group
invested £20.4m (2017: £20.1m) in
acquisitions and there were tentative
signs towards the end of the year that this
environment was easing. The pipeline of
acquisition opportunities remains healthy
and we are confident that good quality
businesses in our acquisition pipeline will
be brought to market by their vendors.
The Group’s balance sheet remains
robust with cash funds at 30 September
2018 of £36.0m (2017: £22.3m), after
investing £20.4m in acquisitions and
making distributions to shareholders of
£26.8m (2017: £23.5m). The Group also
has unutilised 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 11% to 17.8p per share
(2017: 16.0p). Subject to shareholder
approval at the Annual General Meeting
(“AGM”), this dividend will be paid on
23 January 2019 to shareholders on
the register at 30 November 2018.
The total dividend per share for
the year will be 25.5p (2017: 23.0p),
which represents an 11% increase
on 2017, with the level of dividend
cover remaining unchanged at 2.2
times on an adjusted EPS basis.
GOVERNANCE
During the year, we completed an
external evaluation of the Board. The
results of the review were discussed
by the Board and an action plan to
implement suggested improvements has
been prepared. The review included an
in-depth analysis of the CEO recruitment
process with specific lessons to learn
for the new search. The Nomination
and Remuneration Committees
have been focused during the latter
part of the year on the leadership
change and search for a new CEO.
The Audit Committee has overseen
the transition of the audit to the new
auditor, PricewaterhouseCoopers LLP.
EMPLOYEES
We continue to foster an entrepreneurial
culture that encourages our employees
to take responsibility for their own
businesses. I would like to record my
thanks to all our employees whose
hard work and commitment has again
been a driving force behind the Group’s
performance and the achievement of
another year of strong financial results.
OUTLOOK
Diploma has a strong and resilient
business model with a broad geographic
spread of businesses supported by a
robust balance sheet and consistently
strong free cash flow. This model has
delivered another strong result this year
with double-digit growth in earnings per
share, benefiting from favourable trading
conditions in most of its major markets.
Despite the global macroeconomic
uncertainty, the Board remains
confident that the Group will continue
to make further progress in the
coming year from a combination of
steady “GDP plus” underlying growth
and from the Group’s proven value-
enhancing acquisition programme.
ADJUSTED EPS GROWTH (PENCE)
ADJUSTED EPS GROWTH (PENCE)
56.4+14% p.a.1
+13% p.a.1
.
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6
5
8
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9
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7
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09 10 11 12 13 14 15 16 17 18
TSR GROWTH (TSR INDEX 2008 = 100)
TSR growth (TSR index 2008 = 100)
1276+21% p.a.1
+29% p.a.1
6
7
2
,
1
9
3
9
0
6
7
7
0
1 2
2
1
5
2
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7
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4
2
8
6
5
0
6
5
0
09 10 11 12 13 14 15 16 17 18
DIVIDEND GROWTH (PENCE)
Dividend growth (pence)
25.6+16% p.a.1
+13% p.a.1
5
.
5
2
0
.
3
2
.
0
0
2
2
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09 10 11 12 13 14 15 16 17 18
1 Ten-year compound.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
04
GROUP AT A GLANCE
WELL DIVERSIFIED
BY GEOGRAPHY
AND BUSINESS AREA
LIFE SCIENCES
See pages 14-17
NORTH AMERICAN REVENUES
(BY DESTINATION) BY SECTOR
GROUP REVENUE
40%
23% US 17% CANADA
EUROPEAN REVENUES
(BY DESTINATION) BY SECTOR
GROUP REVENUE
48%
23% UK 25% EUROPE
REST OF WORLD REVENUES
(BY DESTINATION) BY SECTOR
GROUP REVENUE
12%
SEALS
See pages 18-21
CONTROLS
See pages 22-25
LIFE SCIENCES SEALS CONTROLS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
05
Healthcare (85% 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 (15% of revenues)
Environmental analysers,
containment enclosures and
emissions monitoring systems.
GROUP REVENUE
28%
EMPLOYEES
426
PRIMARY GROWTH DRIVERS
Public and private
healthcare spending
Population ageing
and increasing life
expectancy
Health & Safety and
Environmental regulation
North America – Aftermarket
(31% 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 (40% 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.
GROUP REVENUE
43%
EMPLOYEES
821
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
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 (21% of revenues)
Specialty aerospace-quality fasteners
supplied to Civil Aerospace, Motorsport,
Industrial and Defence markets.
Fluid Controls (20% of revenues)
Temperature, pressure and fluid control
products used in Food & Beverage and
Catering industries.
GROUP REVENUE
29%
EMPLOYEES
542
PRIMARY GROWTH DRIVERS
General growth in the
industrial economy
Activity and spending
levels in Aerospace,
Defence, Motorsport,
Energy, Medical and Rail
Equipment installation & maintenance
in Food & Beverage and Catering
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
06
OUR YEAR IN REVIEW
ANOTHER YEAR OF
ROBUST GROWTH IN REVENUE
AND EARNINGS
“
THE GROUP’S STRATEGY, CONSISTENTLY
APPLIED, DELIVERS STRONG GROWTH
IN EARNINGS AND SHAREHOLDER VALUE
”
the decision to focus on higher margin
business and from the absence of a large
one-off project delivered last year.
ACQUISITIONS AND DISPOSALS
Over the last five years, a total of
ca. £128m has been invested in
acquisitions and ca. £6m has been
realised from divesting businesses.
During 2018, the acquisition spend was
£20.4m of which £16.9m was invested in
the acquisition of FS Cables, a supplier
of specialist cable products to a range
of industries and based in St Albans, UK.
FS Cables fits well within the Controls
Sector alongside Cablecraft, which was
acquired in 2016 and provides growth
opportunities through cross-selling to
new and existing customers. The small
non-core US business, Bulldog, was sold
during 2018 for cash proceeds of £4.0m.
In addition, the Group completed
two smaller bolt-on acquisitions in
the Controls Sector: Coast, a small
specialty fastener distributor based
in California, US was acquired in
October 2017 and Gremtek, a supplier
of protective own-brand sleeving
products, based in France was acquired
after the year end in October 2018.
FINANCIAL PERFORMANCE
In 2018, the Group delivered another
year of robust growth in revenue
and earnings benefiting from strong
industrial economies in the US and
Europe and from the reduction in the
US Federal corporate income tax rate.
The Group’s reported revenues increased
by 7%, with currency headwinds decreasing
revenues by 3% and acquisitions, net of a
small disposal this year, contributing 3% to
revenue growth. On an underlying basis,
after adjusting for acquisitions, the disposal
and for the currency effects on translation,
Group revenues increased by 7%.
The Group’s adjusted operating margins
improved by 20bps to 17.5%, compared
with 17.3% in the prior year and the first
half of the current year. Gross margins
remained unchanged from last year,
despite pressures on supply chains in
most Sectors leading to increases in
product costs and other margin support
costs. These pressures were mitigated
during the second half of the year as
selective price increases began to take
effect and with increased availability of
inventory. Adjusted operating costs as a
percentage of revenue have reduced by
20bps 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 second half of the year to 15.1%.
The Group’s free cash flow increased
by 9% to £60.5m, reflecting very
strong cash generation in the second
half of the year and boosted by
proceeds of £4.0m from the disposal
of a small non-core US business.
SECTOR PERFORMANCE
In Life Sciences, underlying revenues
increased by 5% after adjusting for
currency movements and the prior
year acquisition of Abacus ALS. The
Healthcare businesses benefited from
strong diagnostic consumable revenues
and the introduction of new premium
Surgical and Endoscopy products. The
Environmental businesses had a mixed
year with stronger revenues in Germany,
offset by reduced UK revenues because
of delays in placement of orders. Both
Environmental businesses continued to
benefit from stronger service revenues.
In Seals, underlying revenues increased
by 10% after adjusting for currency
movements, the prior year acquisitions
of PSP and Edco and the disposal of the
small non-core Bulldog business this year.
In North America, both the Aftermarket
and Industrial OEM business benefited
from a buoyant US industrial economy.
In the International Seals businesses, a
strong improvement in industrial activity
in the second half of the year provided
good growth in European revenues. Solid
growth in Australian revenues was more
than offset by much weaker trading with
a major customer in New Caledonia.
In Controls, underlying revenues
increased by 5% after adjusting
for currency movements and the
acquisitions this year of FS Cables and
Coast. The Interconnect revenues
benefited from both broadening its
customer base deeper into Europe
and from stronger industrial markets.
The Specialty Fasteners business also
increased revenues from broadening its
range of customers in the Civil Aerospace
sector. The Fluid Controls businesses
reported lower revenues reflecting
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
07
STRONG EXECUTIVE MANAGEMENT
The Executive Management Committee
(“EMC”) comprises the Executive Directors
along with the Executive managers who
are responsible for the major business
clusters and key Group functions. The
EMC members are a combination of
internally developed senior managers and
experienced senior managers who have
been recruited externally.
The EMC has been strengthened
this year with experienced senior
management who will take responsibility
for overseeing and coordinating
additional Group functions, including IT
and ERP projects carried out across the
Group. A HR senior manager is also
being recruited and will join the EMC in
the new financial year.
The EMC provides the opportunity for
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 that are
transferable across the Group. The EMC
meets quarterly through a combination
of full group meetings in London and
sub-group meetings held in the major
business locations.
During this year, the EMC has
demonstrated its strength by providing
a significant level of stability and
support to the businesses in a period of
uncertainty caused by the change in
CEO. This has contributed to the strong
results reported this year.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
08
OUR BUSINESS MODEL
MAKING US ESSENTIAL TO
OUR CUSTOMERS
E s sential
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OUR BUSINESS MODEL IS BUILT ON THE
THREE “ESSENTIALS” – PRODUCTS,
SOLUTIONS AND VALUES
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
09
ESSENTIAL
PRODUCTS
ESSENTIAL
SOLUTIONS
ESSENTIAL
VALUES
Our businesses focus on supplying
essential products and services funded
by customers’ operating rather than
capital budgets and supplied across a
range of specialised industry segments.
The majority of the Group’s revenues are
generated from consumable products. In
many cases, the products will be used in
repair and maintenance applications and
refurbishment and upgrade programmes,
rather than supplied to original
equipment manufacturers.
Our businesses design their individual
business models to provide solutions that
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
or would require investment in
additional resources of their own.
We encourage an entrepreneurial
culture across our businesses, through a
decentralised management structure.
We want our 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.
Performance is measured by
the underlying growth in revenue, after
adjusting for currency
and acquisitions/disposals:
This year, the underlying
growth has been 7%.
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.
Over five years, the average underlying
growth has been 5% p.a.
This year, adjusted operating margin
improved 20bps to 17.5%.
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. 7 years (ca. 11
years for the senior management cadre).
Number of working days lost to sickness
has consistently been ca. 1% a year.
Over five years, the average adjusted
operating margin has been 17.7%.
For more information
See page 13
For more information
See page 13
For more information
See page 13
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.
SUSTAINABLE AND
ATTRACTIVE MARGINS
AGILITY AND
RESPONSIVENESS
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.
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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSWHAT WE PUT INHOW WE’VE MADE PROGRESSWHAT WE GET OUT DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
10
GROWTH STRATEGY
COMPOUNDING GROWTH
THROUGH ACQUISITIONS
Acquire
B
u
i
l
d
Grow
GROWTH IS ACCELERATED BY INVESTING
IN VALUE ENHANCING ACQUISITIONS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
11
ACQUIRE
BUILD
GROW
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.
The acquisitions we make are of
businesses that 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 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.
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 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.
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
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.
COAST
ABACUS dx
US INDUSTRIAL OEM SEALS
In October 2017, Clarendon Specialty
Fasteners acquired the business and
assets of Coast Fabrication Inc, a
small specialty fastener distributor
based in California, US. Coast has a
strong reputation in US Motorsport
which complements Clarendon’s
strong Motorsport presence in Europe.
Coast also provides a US base to
expand Clarendon’s existing aircraft
interiors business in this large market
and allows Clarendon to access
the major US fasteners suppliers.
Revenues of Clarendon, including
Coast, grew by 25% in 2018.
Since being acquired in 2017, the
business has been integrated with our
existing DS business and has invested
in expanded shared service facilities
in Melbourne, Sydney and Brisbane,
whilst cross-training technical and
applications support personnel at both
the global supplier and local level. As
a result Abacus dx was able to sell and
service over 90 diagnostic instrument
placements in 2018 and benefit from the
associated pull-through in consumable
sales. Revenues of Abacus dx grew by
9% on a like-for-like basis in 2018.
After clustering these businesses under
a single senior management team, an
ERP system was implemented in 2018
to replace a number of legacy systems.
This will allow the management team
to consolidate back-office processes to
improve visibility of customer activity,
inventory and supplier information, and
finance. Each location will continue to
maintain its own distinct identity, but
the ERP system will allow the business
to service customers using shared
knowledge and products that will increase
the value to the customer. Revenues of
this business cluster grew by 13% in 2018.
For more information
See pages 22-25
For more information
See pages 14-17
For more information
See pages 18-21
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSWHAT WE GET OUTHOW WE’VE MADE PROGRESSWHAT WE PUT IN
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
12
STRATEGIC PRIORITIES AND KPIs
STR ATEGIC PRIORIT Y
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 s sential
p r o ducts
l
a
nti
s
e
E sse
valu
E
s
s
o
s
l
e
u
n
t
i
o
t
i
al
n
s
Acquire
B
u
i
l
d
Grow
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
13
1
.
5
8
4
9
.
1
5
4
6
.
2
8
3
8
.
3
3
3
8
.
5
0
3
14 15 16 17 18
5
.
8
1
1
.
8
1
2
.
7
1
3
.
7
1
5
.
7
1
14 15 16 17 18
UNDERLYING RE VENUE GROW TH (%)
+5%
FIVE-YE AR AVER AGE
8
+
7
+
7
+
3
+
1
+
14 15 16 17 18
ADJUSTED OPER ATING MARGIN (ΔBPS)
Improvement in adjusted
operating margin of
acquired businesses three
years after acquisition
+200–
300bps
6
.
6
3
.
6
7
.
6
7
.
6
8
.
6
AVER AGE WORKING DAYS LOST
TO SICKNESS (%)
1%
FIVE-YE AR AVER AGE
5
.
1
3
.
1
2
.
1
2
.
1
2
.
1
14 15 16 17 18
RE VENUE FROM ACQUISITIONS (% OF TOTAL)
15%
FIVE-YE AR AVER AGE
4
1
1
1
0
2
6
1
2
1
WORKING CAPITAL (% OF REVENUE)
16%
FIVE-YE AR AVER AGE
14 15 16 17 18
2
.
7
1
0
.
7
1
6
.
6
1
0
.
5
1
1
.
5
1
14 15 16 17 18
14 15 16 17 18
8
.
7
3
7
.
2
3
1
.
0
2
.
4
0
2
5
.
6
1
14 15 16 17 18
0
.
9
5
7
.
5
5
5
.
0
6
3
.
0
4
8
.
7
3
14 15 16 17 18
8
.
5
2
9
.
3
2
1
.
1
2
.
0
4
2
5
.
4
2
14 15 16 17 18
KE Y PERFORMANCE INDICATORS
RE VENUE GROW TH (£M)
+11%
FIVE-YE AR COMPOUND
ADJUSTED OPER ATING MARGIN (%)
18%
FIVE-YE AR AVER AGE
LENGTH OF SERVICE (YE ARS)
6.6 years
FIVE-YE AR AVER AGE
ACQUISITION SPEND (£M)
£25.5m
FIVE-YE AR AVER AGE
FREE CASH FLOW (£ M)
£50.7m
FIVE-YE AR AVER AGE
ROATCE (%)
24%
FIVE-YE AR AVER AGE
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS THE LIFE SCIENCES
SECTOR BUSINESSES
SUPPLY A RANGE
OF CONSUMABLES,
INSTRUMENTATION
AND RELATED SERVICES
TO THE HEALTHCARE
AND ENVIRONMENTAL
INDUSTRIES
PRINCIPAL SEGMENTS
85% HEALTHCARE
15% ENVIRONMENTAL
GEOGR APHY
50% Canada
26% Europe
24% Australasia
CUSTOMERS
84% Clinical
9% Utilities
3% Chemical & Pharmaceutical
2% Life Sciences Research
2% Other Life Sciences
PRODUCTS
70% Consumables
21%
9% Service
Instrumentation
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
14
LIFE SCIENCES
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/Vantage comprises the
AMT Surgical and Vantage Endoscopy
(“Vantage”) divisions. AMT Surgical
supplies specialised equipment and
consumables for electrosurgery and
minimally invasive (“MI”) surgery use in
hospital operating rooms. Vantage
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 also
supplies to hospitals, private clinics and
pathology laboratories. In April 2017,
DHG acquired Abacus ALS, a long
established supplier of instrumentation
and consumables to the Pathology
and Life Sciences sectors. At the start of
the current financial year, Abacus ALS
was combined with Diagnostic Solutions
to form Abacus dx, a market leading
clinical diagnostics business supplying
to both public and private laboratories.
Big Green Surgical (“BGS”) supplies a
range of products to the Surgical
Products sector. Abacus dx and BGS
share several common suppliers with
DHG’s Canadian businesses.
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 several
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
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 that are
predominantly public sector funded.
Private sector funding, representing
ca. 30% of Healthcare expenditure in
Canada, is largely focused on areas where
DHG does not participate, specifically
dental, cosmetic, 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 10.4%
PRINCIPAL OPER ATIONS
Healthcare
Somagen Diagnostics
AMT/Vantage
Abacus dx
Big Green Surgical
Technopath Distribution
Environmental
a1-CBISS
a1-envirosciences
Edmonton, AB, 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 2018
15
of GDP (11.5% 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 growth, albeit at reduced levels. In
2017, public Healthcare spending in Canada
was ca. C$170bn, with the largest category
of expenditure (ca. C$70bn) being in the
hospital sector.
The Healthcare market in Australia shares
with Canada many of the same attractive
characteristics for specialised distribution.
While privately funded Healthcare is
more prevalent in areas such as surgery
and laboratory testing, public sector
Healthcare funding is still large and
supported by a stable, resource based
economy. As with Canada, Australia
has a large geography to be covered,
low population density and purchasing
processes that vary by State. These
characteristics necessarily demand a
significant investment by manufacturers
in technical sales and service resource,
which makes the specialised local
distribution model a very attractive
mechanism for manufacturers to serve
the local markets.
Since 2013, the Canadian and Australian
economies have come under pressure
from low oil prices and reduced demand
for the countries’ natural resources.
This tougher economic environment has
resulted in greater pressure on budgets
throughout the Healthcare systems in
both countries. In such periods,
Healthcare funding is tightly constrained
through targeted controls imposed on the
number of laboratory tests and operating
procedures as well as more rigorous
tendering and Group procurement
processes for expenditure on capital
equipment. Even with such pressures,
however, Healthcare funding has shown
positive growth in total Healthcare
expenditure of 3–4% and 4–6%
respectively in Canada and Australia.
The principal market driver for the TPD
business is Healthcare funding in the
UK and Ireland, which totals ca. £215bn,
representing ca. 10% of combined
GDP. The UK accounts for ca. 90%
of the total funding and ca. 80% is
provided by public funding and 20%
by private funding. Following the
2009 recession, annual growth in UK
Healthcare expenditure has slowed to
Canadian Healthcare expenditure1
(C$bn)
17
16
15
14
13
163.3
158.7
152.2
148.4
169.0
66.8
64.0
61.2
73.0
69.6
Public
Private
Source: Canadian Institute for Health Information.
1 Includes capital expenditure, forecast data 2016 and 2017.
Australian Healthcare expenditure1
(A$bn)
17
16
15
14
13
108.1
104.9
124.2
114.7
100.4
46.6
49.8
53.5
56.5
55.9
Public
Private
Source: Australian Institute of Health & Welfare.
1 Includes capital expenditure.
UK Healthcare expenditure1
(£bn)
16
15
14
13
12
125.6
119.5
116.3
129.5
135.5
29.9
28.8
27.2
25.8
24.2
% growth
3.9%
3.3%
4.3%
3.1%
1.9%
% growth
5.9%
5.5%
4.5%
5.2%
3.6%
% growth
4.5%
3.6%
5.2%
3.4%
2.0%
Public
Private
Source: UK Health Accounts (2017 data not available).
1 Excluding capital expenditure.
Total current Healthcare expenditure1 as a percentage of GDP
Canada
Australia
Ireland
UK
Source: OECD
1 Excluding capital expenditure.
2013
2014
2015
2016
2017
10.1%
8.8%
10.3%
9.8%
10.0%
9.1%
9.7%
9.7%
10.4%
9.3%
7.4%
9.8%
10.5%
9.3%
7.4%
9.8%
10.4%
9.1%
7.1%
9.7%
low single-digit levels, compared with
average growth of 8% p.a. over the
previous decade. In Ireland, Healthcare
expenditure saw reductions year-on-
year in 2010 and 2011, since then growth
has resumed 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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
16
LIFE SCIENCES
HIGHLIGHTS FROM THE YEAR
• Sector revenue growth of 7%;
underlying growth of 5% after
adjusting for currency and an
acquisition completed last year
• In Canada, DHG underlying revenues
increased by 8% with strong
consumable revenues from its leading
products; the Surgical and Endoscopy
products lines at the Vantage business
reported strong revenues from the
introduction of new premium products
• In Australia and New Zealand,
underlying revenues increased by 4%;
Abacus ALS acquired in April 2017
reported strong growth across its
portfolio of products, which more than
offset reduced revenues in the Surgical
Products business following the
acquisition of a key supplier by a large
industry player
• TPD revenues were broadly flat in
Ireland and the UK with new suppliers
and product segments replacing
suppliers moving to a direct
supply model
• The Environmental businesses reported
unchanged underlying revenues with
strong revenue growth in Germany,
offset by reduced revenues in the UK
from delays in order placement
SECTOR PERFORMANCE
Reported revenues of the Life Sciences
Sector businesses increased by 7%
to £134.7m (2017: £125.9m). The
acquisition of Abacus ALS, acquired in
April 2017, incrementally added £6.4m
or 5% to Sector revenues, which was
partly offset by a headwind of 3% from
currency movements on translation of
the results from overseas businesses
to UK sterling. After adjusting for
currency effects and this acquisition,
underlying revenues increased by 5%.
Adjusted operating margins reduced
by 80bps to 17.7% largely reflecting
the investment made during the year
developing opportunities for the new
endoscopes introduced in Canada.
DHG margins were also diluted from
a full year contribution, together
with one-off integration costs, of the
combined diagnostic businesses in
Australia and New Zealand and weaker
revenues following a loss of a supplier
in BGS. In addition, an increase in
underlying costs in the Environmental
businesses on unchanged revenues led
to negative leverage. However gross
margins improved reflecting a more
favourable mix of revenues in both the
Healthcare and Environmental business.
Transactional currency pressures on the
Healthcare margins remained subdued,
but favourable currency hedges helped
offset some volatility of the Canadian and
Australian dollars relative to the US dollar
and Euro during the second half of the
year. Adjusted operating profits increased
by 3% to £23.9m (2017: £23.3m).
Revenue (£m)
(compound growth over five years)
+8% p.a.
18
17
16
15
14
109.9
103.1
91.4
134.7
125.9
REVENUE
£134.7m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
2018
2017
£134.7m £125.9m
£23.9m £23.3m
+7%
+3%
17.7%
18.5% –80bps
£17.3m
£17.0m
+2%
19.1%
19.7%
–60bps
The Life Sciences businesses invested
£3.5m (2017: £2.0m) in new capital during
the year of which £2.3m (2017: £1.6m)
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 £0.6m was invested in completing
the refurbishment of the AMT and
Vantage office and service facilities in
Kitchener and Markham, Canada and
on a new facility for a1-CBISS in the UK.
The balance of £0.6m was invested in
warehouse equipment and on upgrading
the IT infrastructure in both businesses.
Free cash flow increased marginally
to £17.3m (2017: £17.0m), reflecting
reduced cash flows into working capital,
offset by higher capital investment.
Healthcare
The DHG businesses, which account
for 85% of Life Sciences revenues,
increased underlying revenues by 6%
after adjusting for currency effects
and the incremental revenue from
the acquisition of Abacus ALS.
In Canada, underlying revenues
increased by 8% against the background
of continuing budget pressures
throughout the Provincial healthcare
systems, with Group Procurement
Offices (“GPOs”) continuing to
restructure and amalgamate,
both nationally and regionally.
Somagen’s core Clinical Diagnostics
business delivered an underlying increase
of 2% in revenues, with steady growth
in consumable and service revenues.
Capital sales decreased reflecting the
impact of laboratory centralisation and
reduced spending after a “catch-up” in
procurement last year, following the
2016 hospital spending freeze in some
Provinces. Demand for diagnostic
testing remained robust, particularly
with a combination of strong growth
and contract extensions for cancer
screening tests and growth from new
technology introduced in the areas of
Autoimmunity. A long term contract
was renewed with a major supplier
and an additional supply agreement
was gained during the year that will
provide opportunities for Somagen in
the Microbiology market. Somagen has
also secured large Provincial contracts
to provide colorectal cancer screening
products and services that are expected
to ramp up in the next financial year.
POTENTIAL FOR GROWTH
Increase share of specialised
segments of Healthcare markets in
Canada, Australia and UK/Ireland
Leverage DHG product portfolio
across existing businesses and
extend into other medical disciplines
Pursue further Healthcare
acquisition opportunities in
Northern Europe and Asia-Pacific
Continue to develop product
and geographic spread of
Environmental businesses
The a1-CBISS business based in the UK
reported an 8% decrease in revenues
reflecting significant delays during the
year in order placement for continuous
emissions monitoring systems
(“CEMS”). However the opportunities
in this sector remain encouraging
with new Energy from Waste (“EFW”)
plants playing an important role in
reducing landfill waste. Revenue from
service contracts continues to grow
as EFW plants supplied over the last
18 months become operational.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
17
AMT and Vantage, the Surgical and
Endoscopy businesses in Canada,
delivered strong growth in revenues,
primarily driven by the successful
introduction and rebranding of a
premium range of rigid and flexible
endoscopes and surgical instrument
sets in Vantage. These offer further
growth potential in the Urology and
Gynaecology segments of the surgical
market. The introduction of a new series
of endoscopes in early 2018 has also
provided Vantage with opportunities
to replace existing customer supply
contracts in several Provinces. Strong
growth was also achieved at AMT in the
supply of specialised instruments used
in laparoscopic and other minimally
invasive surgical procedures. These
growth initiatives have diversified
the revenue streams across both the
core surgical and GI businesses and
mitigated the continuing pressures
in the electrosurgery and smoke
evacuation businesses, where pricing
has now stabilised, albeit at lower
levels. In October 2018, AMT secured
a new five-year contract with a large
GPO to provide electrosurgical and
smoke evacuation products.
In Australia, Diagnostic Solutions has
been integrated into Abacus ALS 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 establishments across
Australasia. Abacus dx has delivered
strong growth in revenues on a like-
for-like basis, despite the continuing
consolidation of testing within Clinical
Diagnostics and expanded professional
procurement in the fragmented Life
Sciences market. Abacus dx is working
closely with key suppliers to position
itself strongly in response to the shift
towards track based laboratory systems.
BGS, the Surgical Products business,
reported a reduction in revenues as
it struggled with securing sales of
new products introduced to replace
electrosurgical products from a supplier
that had been acquired by a larger
industry player with its own channels
to market. However strong growth
from key suppliers of other Surgical
Products helped mitigate some of the
shortfall. In smoke evacuation, the
implementation of nursing guidelines
enforcing smoke evacuation compliance
will drive longer term growth, but
has also slowed evaluation and
decision processes during the year.
The TPD business in Ireland and the UK
reported revenues broadly flat in Euro
terms, as it managed the transition of a
number of suppliers who have moved
from specialised distribution to a direct
supply model. New suppliers have
been secured that will help mitigate this
transition, together with solid growth
within the Clinical segment supplying
clinical chemistry and serology control
products. New suppliers and businesses
providing agitators and separators used
in the NHS Blood and Transplant service
continued to diversify the breadth of
the portfolio. The Biotechnology and
Service segments also delivered good
growth from strong capital sales, which
reflected management’s efforts to forge
strong strategic partnerships with their
diverse customer base both in Ireland
and the UK. TPD is further broadening
its service capability beyond diagnostic
instrumentation and has established
a new Surgical Products division to
bring to market the electrosurgical and
smoke evacuation products similar
to those supplied by AMT and BGS in
Canada and Australia, respectively.
Environmental
The a1-group of Environmental
businesses in Europe, which account
for 15% of Life Sciences revenues, saw
revenues increase by 1% in UK sterling
terms, but remained unchanged
in constant currency terms.
The a1-envirosciences business based in
Germany increased revenues by 7% in
Euro terms driven by strong demand in
Germany for high-end halogen analysers
and increased sales of customised
containment enclosures. The increasing
environmental awareness and in
particular, the anticipated regulations on
toxic polyfluorinated compounds, found
in a range of man-made products, is
creating demand for these analysers in
R&D and Environmental control. Health
& Safety regulations continue to increase
demand for customised containment
enclosures for the safe weighing of
hazardous materials. The business is
also targeting investment in service
personnel to support the larger installed
base and demand from customers
for faster response times. In addition,
investment is being made in an IT based
field service management system to
enhance customer service and improve
efficiency of its growing service team.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
18
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
31% NORTH AMERICAN AFTERMARKET
29% NORTH AMERICAN INDUSTRIAL OEM
40% INTERNATIONAL
GEOGR APHY
57% North America
34% Europe
9% Rest of World
CUSTOMERS
47% Industrial OEMs
31% Heavy Construction
18% MRO & Other Industrial
3% Dump & Refuse Trucks
Logging & Agriculture
1%
PRODUCTS
38% Seals & Seal Kits
18% O-Rings
17% Cylinder & Other
12% Gaskets
11% Filters
4% Attachment Kits
NORTH AMERICA
The Aftermarket businesses in North
America supply seals and associated
products to support a broad range of
mobile machinery in applications that
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.
MARKET DRIVERS – NORTH AMERICA
In the Aftermarket businesses in North
America, the principal drivers are the
general GDP growth, and activity and
spending levels in the Heavy Construction
and Infrastructure sectors. In 2018, the US
economy is forecast to show annual GDP
growth of 2.9% (2017: 2.3%) driven
primarily by strong consumer spending,
growth in business investments fuelled by
major tax reforms and growth in exports.
Although the imposition of tariffs has
dampened its impact, export growth has
been underpinned by a pick-up in the
world economy. Total US Construction
spend (including non-residential and
infrastructure spend, as well as residential
housing activity) has continued to rise
through 2018.
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.
Demand for new equipment increased
by ca. 9% in 2017. However, the demand
for new equipment remains below 2015
levels as utilisation levels are high, the
general mobile machinery population is
relatively new, and contractors continue
to opt for the rental model for their
equipment needs.
In Canada, following a strong period of
expansion, GDP growth has slowed to a
more sustainable level, driven by smaller
increases in public consumption and
slower increases in exports resulting from
an adjustment in automobile production
and the outage of an Oil & Gas pipeline.
PRINCIPAL OPER ATIONS
North America (HFPG)
Aftermarket
Hercules US
Hercules Canada
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
Monroe, WA, US
Winston-Salem, NC & Tallassee, AL, US; Shanghai, China
Minneapolis, MN, Chicago, IL & Seattle, WA, US
Lake Forest, CA, & Denver, CO, 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 2018
19
In 2018, a gradual restoration of oil pipeline
capacity and strong US growth is forecast
to result in robust GDP growth of 2.1%.
In general, the economic conditions in the
South and Central American economies
served by the North American
Aftermarket businesses continue to be
challenging but are showing signs of
improvement with private consumption,
exports and earthquake related
reconstruction activities expected to have
a positive impact.
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 declined through 2015 and
2016 but, having achieved strong growth
in 2017 and 2018, has now risen back
above 2014 levels. Increases in Mining
output supported by substantial gains in
the Oil & Gas segment and continued
strength in the general Manufacturing
segment have been the primary drivers of
recent growth.
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
be marginally higher in 2018 at the modest
level of ca. 1.6% (2017: 1.8%), with stronger
export growth offset by uncertainties over
the outcome of Brexit negotiations and
reduced levels of investment. The UK
Construction sector, which drives the
Aftermarket business, had been steadily
growing since mid-2012 until growth
slowed in 2017. Construction output
contracted in the first quarter of 2018 but
began to recover through the year.
However, the environment remains highly
uncertain with new orders at a low level.
In the Nordic region, all countries are
forecast to show positive GDP growth in
2018. Average growth across the region is
forecast to be ca. 2.4% (2017: 2.3%).
In Switzerland, after years of subdued
growth, the manufacturing sector gained
momentum in 2017 as exporters benefited
from the depreciation of the Swiss franc
against the Euro making exports of Swiss
Industrial products more attractive. GDP
growth is forecast to increase to ca. 2.3%
in 2018 (2017: 1.1%), recovering to levels of
growth similar to those achieved prior to
the decoupling of the Swiss franc from
the Euro.
US construction spend (US$bn)
700
600
500
400
300
200
100
09
10
11
12
13
14
15
16
17
Source: Cyclast Intercast.
US construction equipment units (’000)
60
50
40
30
20
10
09
10
11
12
13
14
15
16
17
Source: Cyclast Intercast.
US industrial production index
120
110
100
90
80
08
09
10
11
12
13
14
15
16
17
18
Source: US Federal Reserve (seasonally adjusted).
GDP growth in principal International Seals territories
Real GDP growth
UK
Nordic region
Switzerland
Russia
Australia
2014
2015
2016
2017
2018
+3.1%
+1.7%
+2.5%
+0.7%
+2.6%
+2.3%
+2.5%
+1.2%
–2.5%
+2.5%
+1.9%
+2.3%
+1.4%
–0.2%
+2.6%
+1.8%
2.3%
+1.1%
+1.6%
+2.3%
+1.6%
+2.4%
+2.3%
+1.7%
+3.0%
Source: IMF and Nordic Statistics
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 2.5% in 2015 and 0.2% in
2016, GDP grew by 1.6% in 2017 with
further growth of 1.7% forecast in 2018.
In Australia, investment activity has been
adversely affected by the downturn in the
Mining sector, but the broader economy
has been driven by increased public and
consumer spending. In 2018, despite
expectations that consumption growth will
be more subdued, GDP growth is forecast to
increase to ca. 3.0% (2017: 2.3%), supported
by increases in resource sector capacity and
investment in public infrastructure.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
20
SEALS
SECTOR PERFORMANCE
Reported revenues of the Seals Sector
businesses increased by 7% to £208.0m
(2017: £195.3m). The acquisitions of
PSP and Edco completed in 2017, net of
a small disposal this year, contributed
£3.3m or 2% to Sector revenues, but
this was more than offset by currency
movements on translation of the
results from overseas businesses to
UK sterling, which reduced Sector
revenues by 5%. After adjusting for the
acquisitions and for currency effects,
underlying revenues increased by 10%.
Adjusted operating margins for the
Sector increased by 100bps to 17.3%
(2017: 16.3%) with stronger revenues
providing operating leverage. This
more than offset a small reduction in
gross margins arising from both a lag
in the first half of the year in passing on
supplier price increases and increased
freight costs from expediting inventories.
Adjusted operating profits increased
by 13% to £36.0m (2017: £31.9m).
During the year, £2.0m (2017: £1.1m)
of capital expenditure was invested
in the Seals businesses. This primarily
comprised £1.1m on implementing a
new single ERP system across the US
Industrial OEM businesses and a new
ERP system in Kentek. A further £0.9m
was spent on upgrading warehouse
equipment and facilities and on the
general IT infrastructure across the
Seals businesses. The free cash flow
generated in this Sector increased by
£1.0m to £25.9m, with stronger operating
cash flow being partly absorbed by
higher working capital to support
the strong trading environment.
North American Seals
The North American Seals businesses,
which account for 60% of Seals revenues,
reported revenues up 6% on the prior
year. Underlying revenues increased by
11%, after adjusting for the strengthening
of UK sterling against both the US and
Canadian dollar, for the disposal of a small
non-core business in June and the bolt-on
acquisition of PSP completed last year.
2018
2017
£208.0m £195.3m
£36.0m
£31.9m
+7%
+13%
17.3%
16.3% +100bps
£25.9m £24.9m
+4%
25.3%
22.8% +250bps
The HFPG Aftermarket businesses
increased revenues by 9% on a constant
currency basis, driven by strong trading
conditions in the core Hercules business
in both the US and Canada and continued
robust growth in the HKX attachment
kit business. There was significant
pick-up in activity in the Oil & Gas sector
and both new Construction and large
Infrastructure projects led to increased
demand for heavy machinery that
required increased servicing and repair.
The significant increase in activity has
led to extended lead times in the supply
chain and robust supplier price increases,
which HFPG has sought to mitigate
through increased catalogue prices.
In the domestic US market, Hercules
revenues increased by 9% with the
Repair and Distributor segments growing
steadily through the year reflecting
higher equipment levels. With seal
manufacturers struggling to keep up with
demand, Distributors turned to Hercules
for their superior service and inventory
availability. Hercules continue to add
products to their portfolio and broaden
the scope of equipment supported to
include Aerial-Lifts, Logging, Injection
Moulding and Agriculture. Investment
was also made to enhance existing
sales resources and extend into new
territories. New market opportunities
include seal kitting services for industrial
plants of OEMs. E-commerce continues
to deliver strong year-on-year growth
and now accounts for 30% of invoices
processed and 25% of Hercules US
revenues. Enhancements were made to
the E-commerce functionality to allow
customers to configure custom seals and
provide access via mobile applications.
The core Hercules business in the
US has also made good progress in
developing a major project to invest
ca. US$10m in a second warehouse
facility to provide capacity to meet the
growing demand for a broader range
of products, as well as gain greater
access to expanded territories in the US.
Potential facilities have been identified
and work on this project will commence
in 2019 with the aim of becoming fully
operational in the 2020 financial year.
In Canada, revenues increased by 7%
in local currency terms, supported
by a robust Construction sector with
increased residential housing starts
driving growth in the repair market.
Non-residential construction also grew
with several new mining projects and
demand for additional warehouse
facilities. Robust industrial markets had
a positive impact on revenues from
sales to OEM cylinder manufacturers.
In markets outside of North America,
Hercules achieved a double-digit
increase in revenues from sales in
Colombia and Chile and record sales
to the Rest of World, including China.
HIGHLIGHTS FROM THE YEAR
• Sector revenue growth of 7%;
underlying growth of 10% after
adjusting for currency and the net
impact from acquisitions and a
disposal completed during the past
two years
• In North America, Aftermarket
underlying revenues increased by 9%,
driven by strong markets in the core
Hercules business and continued
robust growth in the HKX business
• Industrial OEM underlying revenues in
North America increased by 13% in a
very strong US industrial market,
supported by healthy manufacturing
PMI data
• Implementation of a new ERP system
in the Industrial OEM businesses in the
US, following the establishment of a
senior management team last year to
manage this cluster of businesses
• International Seals businesses
increased underlying revenues by
7% with stronger trading across all
businesses in the second half of
the year
Revenue (£m)
(compound growth over five years)
+14% p.a.
18
208.0
195.3
166.6
139.6
119.8
17
16
15
14
REVENUE
£208.0m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
21
The HKX attachment kit business
has continued to benefit from tight
availability of OEM excavator equipment.
In this environment revenues increased
by 13%, with strong demand for Tier 3
machines in Canada (ahead of the
Tier 4 mandate on 1 January 2019).
In June 2018, Hercules sold its small
Bulldog gasket business at net
asset value for cash consideration
of £4.0m as it was no longer a core
part of the Hercules business.
The HFPG Industrial OEM businesses
in North America increased revenues by
13% in a very strong US industrial market,
supported by healthy Manufacturing
PMI data. The business has a number
of large key accounts across a range
of specialised industrial applications in
industries including Water, Medical, Oil &
Gas, Fluid Handling and Food Equipment.
Good double-digit growth was achieved
in all these accounts through deeper
and broader penetration to identify
additional value-adding opportunities.
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.
A constant challenge during the year
was managing supplier price increases
against a background of generally
annual customer supply agreements,
particularly with the larger key accounts.
The introduction of US tariffs towards the
end of the financial year has initially also
led to some pressure on gross margins,
as existing inventory works through.
Tariff charges are now being passed on to
customers in the form of a separate line
charge and selling prices will be updated
as supply agreements are renewed.
The Industrial OEM Seals businesses
now comprise a cluster of businesses
led by a single senior management team
directing the key functions of Sales,
Supply Chain, Technical and Finance,
while maintaining the distinct identity
of each business. This has provided the
opportunity to realign sales resources
and consolidate the supply chain and
finance functions within one back office.
A key and necessary part of this exercise
was the implementation of a new ERP
system to replace the disparate legacy
IT systems in the businesses. The new
ERP system, which went live shortly after
the year end, will increase operational
efficiency and improve business
intelligence to allow field sales to focus
on higher margin market segments
and products. These initiatives will be
supported by new branding and through
strategic advertising and trade shows.
International Seals
The International Seals businesses,
which account for 40% of Seals
revenues, reported a 7% increase in
UK sterling terms, benefiting from
substantially stronger revenues in the
second half of the year. After adjusting
for currency effects, the impact from
the disposal of the Bulldog business
on FPE revenues and the acquisition of
Edco completed last year, underlying
revenues were also up 7%. During the
year the International Seals cluster of
businesses strengthened management,
set up projects to implement new
ERP systems in 2019 and shared best
practice in developing E-commerce
functionality across the businesses.
The FPE Seals and M Seals businesses,
with their principal operations in the
UK, Scandinavia and the Netherlands,
together delivered underlying growth of
6% in revenues on a constant currency
basis and after adjustment for the
acquisition of Edco and disposal of
Bulldog. The FPE Seals business delivered
modest underlying revenue growth,
despite robust growth in its core UK
Aftermarket hydraulic seals and cylinder
parts business and a strong improvement
in the Oil & Gas market. This was offset
by weaker international sales reflecting
the absence of a large export order
delivered last year. Sales coverage
has now been realigned to focus on
account management and the existing
capacity for the production of machined
seals will be utilised to help penetrate
the small OEM and Repair businesses
outside the hydraulic cylinder market.
M Seals continued to deliver good growth
in revenues from its core markets driven
by strong customer relationships that
have provided a number of major new
projects, particularly in Sweden. As with
FPE Seals, M Seals has also benefited
in the UK from the recovery in the Oil &
Gas market with customers expanding
activities and providing good growth
in revenues. In its first full year with the
Group, Edco (now collectively branded
M Seals UK) delivered good growth in
revenues on a like-for-like basis, with
increased sales to key customers.
Kubo, which operates in Switzerland and
Austria, increased underlying revenues
by 13%, benefiting from strong industrial
production driven by increased exports
and supported by the depreciation of the
Swiss franc. Customers and suppliers
reported full order books with production
capacity at high levels. Kubo continues
to target smaller manufacturing
plants focused on Life Sciences,
Biotechnology and Microelectronics
where Kubo’s specialised products and
technical knowledge can add value to
the customer. During the year, Kubo
POTENTIAL FOR GROWTH
Continue to gain share in
Aftermarket Seals in North
America through superior
marketing and new products
Leverage E-commerce best practice
from North America across
International Seals businesses
Build and expand the group of
Industrial OEM Seals businesses
in North America and leverage
procurement activities with the
International Seals businesses
Explore opportunities more
broadly in Industrial Distribution
in North America
Build larger, broader-based
International Seals business in the
EMEA and Asia-Pacific regions
gained a large new distribution supply
contract representing a pan European
manufacturer that will provide further
opportunity for growth next year.
The market in Austria has also been
buoyant and Kubo has continued
to increase revenues from existing
and new customer contracts.
The Kentek business, with principal
operations in Finland and Russia,
increased revenues by 1% in Euro terms,
despite the significant impact on the
region from the EU/US sanctions regime.
Revenues generated in Russia, which
account for ca. 65% of Kentek revenues,
improved strongly in the second half of
the year, after a weak first half, supported
by stronger global Oil & Gas markets.
Kentek has also benefited significantly
from expanding its own-brand filter
range and from widening its geographical
coverage towards eastern Russia. In
Finland, revenues also increased with
sales targeted to support projects
in the large Industrial OEM sector.
WCIS has core capabilities in industrial
gaskets and mechanical seals used
in MRO operations in complex, high
specification and arduous conditions.
Revenues were negatively impacted this
year by cost reduction initiatives in the
nickel mining and processing operations
of its major customer in New Caledonia.
This more than offset strong growth in
Australian revenues as new contracts
were gained in the Power Generation
sector and as Mining activity continued to
improve with repairs of customer assets.
WCIS continues to broaden its coverage
across a wider range of products,
market sectors and regional territories.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
22
CONTROLS
THE CONTROLS SECTOR
BUSINESSES SUPPLY
SPECIALISED WIRING,
CABLE, CONNECTORS,
FASTENERS AND
CONTROL DEVICES
USED IN A RANGE
OF TECHNICALLY
DEMANDING
APPLICATIONS
PRINCIPAL SEGMENTS
59% INTERCONNECT
21% SPECIALT Y FASTENERS
20% FLUID CONTROLS
GEOGR APHY
57% UK
32% Continental Europe
11% Rest of World
CUSTOMERS
31% Aerospace & Defence
30% Industrial
13% Food & Beverage
14% Motorsport
5% Energy & Utilities
5% Medical & Scientific
2% Rail
PRODUCTS
45% Wire & Cable
22% Fasteners
11% Connectors
12% Equipment & Components
9% Control Devices
1% Other Controls
INTERCONNECT
The IS-Group, Filcon, Cablecraft and FS
Cables 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, cable,
protective sleeving, connectors and
harnessing products and customised
assemblies. A range of value adding
activities enhances the customer offering,
including marking of protective sleeves
and cables, 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 the 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
Principal operations
water and water cooling systems.
Products include fluid controllers,
compressors, valves, temperature and
pressure measurement devices and
specialised vending and liquid dispensing
components. The customer offering is
enhanced by value adding services
including kitting for production line flow
and the repair and refurbishment of soft
drinks dispensing equipment.
MARKET DRIVERS
Industrial economic background
The Controls businesses focus on
specialised, technical applications in a
range of industries, with ca. 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, except for a period of reduced
activity in 2015, since then there has been
slow, steady growth. However, the index
is still some 7% below pre-recession levels
and over the period 2012 to 2017,
economic growth has been primarily
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.
Interconnect
IS-Group
IS-Rayfast
IS-Cabletec
IS-Sommer
IS-Connect
Filcon
Cablecraft
FS Cables
Specialty Fasteners
Swindon, UK
Weston-super-Mare, UK
Stuttgart, Germany
Indianapolis, IN, US
Munich, Germany
Houghton Regis, Tewkesbury & Plymouth, UK
St Albans, UK
Clarendon
Leicester, Swindon & Totnes, UK; Huntington Beach, CA, US
Fluid Controls
Hawco Group
Godalming, Bolton & Faringdon, UK
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
23
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
demand from airlines in China and the rest
of 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 and defence
spending is forecast to increase by an
average of 1.3% p.a. in real terms through
to 2021. In Germany, in response to the
emergence of new perceived threats and
pressure to meet NATO’s spending target,
the government has pledged to increase
defence spending from ca. 1.2% of GDP in
2018 to ca. 1.5% of GDP in 2024.
In Motorsport, the major drivers of
demand in Formula 1 are the number of
races (which increased in the 2018 season)
and teams (which remained unchanged in
the 2018 season) and the level of
development work related to technology
and rule changes (which, after significant
changes in 2017, were not substantial in
the 2018 season). The businesses do
supply to other motor racing series,
however, the spend is relatively low in
these series compared to Formula 1.
In the UK, where the current five-year
funding control period runs until April
2019, investment in Rail infrastructure
continues with electrification projects,
station upgrades, line upgrades and
the final stages of the Crossrail project.
In addition, the design phase of the
first stage of the High Speed Two
(“HS2”) project has commenced, with
construction work expected to run
through to 2033. More generally, UK
infrastructure investment is expected
to continue with more than £240bn of
investment planned between 2017/18
and 2020/21 and a particular focus
on transport, 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 towns and cities.
Specific industry drivers – Fluid Controls
The Fluid Controls businesses generate
ca. 70% 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
UK index of production (value)
120
110
100
90
80
08
09
10
11
12
13
14
15
16
17
18
Source: UK Office for National Statistics.
Calendar and seasonally adjusted, reference year 2010 = 100.
German production sector output (including construction)
110
100
90
80
70
08
09
10
11
12
13
14
15
16
17
18
Source: Deutsche Bundesbank.
Calendar and seasonally adjusted, reference year 2015 = 100.
World passenger traffic (annual growth rate)
Revenue
passenger km
growth rate
17
16
15
14
13
12
11
10
09
08
7.6%
6.3%
7.1%
6.0%
5.5%
5.3%
6.6%
8.0%
–1.1%
2.0%
Source: International Civil Aviation Organisation.
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 to comply with EU F-Gas
regulations roadmap through to 2022. In
2018, as a first step to the implementation
of tighter regulation, the International
Electrotechnical Commission voted to
increase charge limits in flammable
refrigerants. These trends are driving
demand for smaller, more energy efficient
components as supplied by Hawco.
The Coffee market sector saw continued
growth of ca. 7% in 2017 and is forecast to
grow at ca. 5.5% p.a. over the next four
years 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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
24
CONTROLS
HIGHLIGHTS FROM THE YEAR
• Sector revenue growth of 9%;
underlying growth of 5% after adjusting
for currency and acquisitions completed
this year
• The Interconnect businesses
delivered underlying growth of 7%;
the FS Cables acquisition brings a
range of own-branded specialist wire
and cable products
• Clarendon increased underlying
revenues by over 8%, with growth
driven by broadening its range of
customers in Civil Aerospace; US
market targeted through the
acquisition of Coast
• Fluid Controls revenues reduced by
4% reflecting the decision to focus
on higher margin business and the
absence of a large one-off project
Revenue (£m)
(compound growth over five years)
+11% p.a.
18
17
16
15
14
142.4
130.7
106.1
91.1
94.6
REVENUE
£142.4m
Revenue
Adjusted operating profit
Adjusted operating margin
Free cash flow
ROATCE
Interconnect
The Interconnect businesses account
for 59% of Controls revenues and
reported an increase in revenues
of 9% in UK sterling terms. After
adjusting for the FS Cables acquisition
and for currency effects, underlying
revenues increased by 7% with good
growth in the IS-Group and Cablecraft,
more than offsetting the absence
of major project activity in Filcon.
The IS-Group’s UK businesses reported
a 18% increase in revenues reflecting
good success achieved in broadening
its customer base across the broader
European region, through directly
targeting cable harness houses, as well
as supplying the traditional network of
European sub-distributors. In Aerospace
and Defence, the UK businesses reported
a strong increase in revenues supported
by high value repeat orders and new
project wins to expand market share.
New projects included the design-in
of manufactured cables into the KC-46
refuelling tanker, as well as harness
components used on the “Crowsnest”
Merlin helicopter and the Ajax armoured
fighting vehicle. An active Industrial
sector also contributed to a strong
growth in revenues from a broad range
of end-users. In Energy, the recovery in
the oil price has led to renewed activity
with demand for products going into
subsea applications and Tier 4 engines
used in the global fracking and mining
industries. In Motorsport, revenues
were flat on the prior year with a
much quieter year for development
in Formula 1, WRC and the America’s
Cup, but were partly compensated
by additional activity in Formula E.
The IS-Group’s German business,
IS-Sommer, delivered 12% growth
in revenues with particularly strong
performances in the Aerospace, Defence
and Industrial markets. A new distribution
agreement was concluded during
the year with a leading manufacturer
of specialist aviation cables, which
boosted Aerospace growth. Defence
revenues benefited from supplying
into new programmes to refit and
refurbish Leopard II tanks and Boxer
armoured vehicles, as well as the
ongoing programme to produce Boxer
armoured vehicles for the Lithuanian
military. Industrial revenues benefited
from the strength of the export led
German economy. Medical revenues
continued to benefit from design-in
efforts initiated in earlier years to help
manufacturers manage strict new
European regulations for medical devices.
SECTOR PERFORMANCE
Reported revenues of the Controls
Sector businesses increased by 9% to
£142.4m (2017: £130.7m). The acquisitions
of Coast, acquired in October 2017
and FS Cables, acquired in August
2018, added £5.1m or 4% to Sector
revenues. After adjusting for negligible
currency movements on revenues from
translation to UK sterling and for these
acquisitions, underlying Sector revenues
increased by 5%, with activity in the
final quarter particularly robust in what
is normally a slower summer period.
Adjusted operating margins were
unchanged at 17.6% (2017: 17.6%). Gross
margins improved overall reflecting a
stronger customer mix in Clarendon,
the absence in Fluid Controls of a
large low margin project last year,
together with a focus away from lower
margin air conditioning business. In
Interconnect, stronger gross margins
in the Cablecraft business offset
the impact of strategic pricing used
selectively by the IS-Group to penetrate
new customers within the broader
European region. Investment in sales
resources to drive growth for Clarendon
in the US and to enhance E-commerce
at Cablecraft contributed to an increase
in operating costs ahead of revenue.
Adjusted operating profits increased
by 9% to £25.0m (2017: £23.0m).
Capital expenditure in Controls increased
to £1.1m (2017: £0.2m), with £0.7m
invested in the IS-Sommer freehold
facility to expand the existing warehouse
and office capacity. A further £0.4m was
invested in small refurbishment projects
at both Cablecraft and Clarendon’s
newly acquired US facility and in
product testing equipment in the UK
businesses. Free cash flow increased by
6% to £19.8m (2017: £18.6m) reflecting
stronger trading and the additional
contribution from the acquisitions, partly
offset by higher capital expenditure.
2018
2017
£142.4m £130.7m
£25.0m £23.0m
17.6%
17.6%
£19.8m
£18.6m
+9%
+9%
–
+6%
29.8%
32.2% –240bps
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
25
Motorsport sales remained depressed
as a result of the withdrawal of Audi
and Volkswagen from the German DTM
series. IS-Sommer was also successful
in extending its distribution contract
with its main supplier of Energy tubing
products to a much larger region
within Germany, which will provide
additional opportunities for growth.
Following over 30% revenue growth last
year, Filcon had a tough year with a 26%
decrease in revenues due to the absence
of major project activity, as well as much
lower Motorsport sales following the
withdrawal of Audi and Porsche from
the Le Mans series and Volkswagen
from the World Rally Championship.
Cablecraft reported a 5% increase in
revenues as it continued to target new
end-user customers including panel
builders, switchgear manufacturers,
Industrial OEMs and Contractors. During
the year the business also focused
on substantially refreshing its brand
offering and marketing strategy, to be
supported by the launch of an enhanced
E-commerce website in the first quarter
of the new financial year to target a
broader range of customers in both
the UK and overseas. The facility was
also upgraded, creating an expanded
and more efficient sales office and
relocating the Identification Solutions
department to an improved environment
that will help drive future growth.
In August 2018, the Group acquired
FS Cables, an established and leading
supplier of specialist cable products to
installers, end-users and wholesalers for
a range of industries including Electrical
Contracting, Home Automation and
Building Management, Rail, Marine and
Telecommunications. Based in St Albans,
UK, the business primarily supplies
own-branded products, which are
sourced from a portfolio of long-standing
suppliers. These products complement
Cablecraft’s range of cable accessory
products and will provide cross-selling
opportunities to both businesses.
After the year end, in October 2018,
the IS-Group acquired Gremtek, a
long established and leading supplier
of own branded protective sleeving
and cable identification products to
a broad range of industrial markets
principally in France, but also in Germany
and elsewhere in Europe. Gremtek’s
principal location is in Paris, France,
supported by a facility in Quickborn,
Germany. The business will be
integrated into the IS-Group to support
the strategy of developing a broader
Interconnect business across Europe.
Specialty Fasteners
The Clarendon Specialty Fasteners
business now accounts for 21% of
Controls revenues. The acquisition in the
US of Coast Fabrication Inc (rebranded
Clarendon Specialty Fasteners Inc) in
October 2017 contributed to a 25%
increase in revenues. After adjusting for
this acquisition, underlying revenues
increased by 8% with growth driven
principally from increased demand
from customers in a buoyant Civil
Aerospace sector. In this sector
Clarendon continued to broaden its
customer base of major aircraft seating
and cabin interior manufacturers and
their sub-contractors across Europe
and Asia. Clarendon supports its major
customers by supplying its product
through its automatic inventory
replenishment system (“Clarendon AIR”).
During the year, the number of sites
operating this system doubled, enabling
Clarendon to better service these
customers’ requirements and providing
opportunities for further growth.
In Clarendon’s other major market
of Motorsport, underlying revenue
growth from Formula 1 customers
was held back by the absence of any
major rule changes in 2018. However,
new revenue opportunities arose in
projects undertaken for “supercar”
development with major automotive
OEMs. Good revenue growth was
also achieved in the supply of pre-
assembled and captive fasteners and
bespoke engineered solutions to the
Defence and Industrial sectors.
The US business acquired at the
beginning of the year has made a good
contribution, with particular success
in the Space Technology sector. The
US business also provides a base to
build on the success Clarendon has
achieved in the aircraft cabin interiors
market in Europe by targeting the
US based manufacturers and their
subcontractors. The strong Motorsport
focus complements Clarendon’s existing
Motorsport customer base and provides
opportunities to increase market share
from a more focused sales approach.
During the year, investment was made
to strengthen sales resources, refurbish
the facility and upgrade IT systems
to provide a platform for growth.
Fluid Controls
The Hawco Group of Fluid Controls
businesses accounts for 20% of Controls
revenues and supplies temperature,
pressure and fluid control products,
principally to the Food & Beverage
industry. Revenues decreased by 4%
against the prior year reflecting the
absence of a large one-off project
delivered last year and the decision
to focus on higher margin products
and pull-back from the highly price
competitive air conditioning business.
POTENTIAL FOR GROWTH
In Interconnect, create a
broader-based European cable
harnessing components business
and extend product range with
own-branded products
In Interconnect develop cross-selling
opportunities between Cablecraft
and FS Cables to drive future growth
In Specialty Fasteners, build on
strong positions in Civil Aerospace
and Motorsport, with a particular
focus on the US and Asian markets
In Fluid Controls, target the
business to grow export markets
in the Food & Beverage industry
Hawco experienced a challenging
year with weaker activity in the OEM
Refrigeration equipment market as
key accounts suffered from a softer
UK Food Retail market, caused by the
low level of new store openings. Sales
to the hospitality trade also slowed as
chains embarked on programmes to
rationalise branches and cannibalise
equipment. In the Contractor market,
revenues decreased as Hawco focused
on the higher margin products and
pulled back from the lower margin air
conditioning and cold-room business.
However, revenues from the Industrial
OEM market increased through a
focus on core product lines and on
developing broader export markets.
Abbeychart reported strong trading
in its core markets, although revenue
growth was held back by the absence
of a large one-off project delivered
last year refreshing a range of vending
machines. After adjusting for this
project, Abbeychart achieved strong
revenue growth by focusing on its value
added services, such as refurbishment,
kitting and assemblies and through
improved marketing. In particular, good
growth was achieved in the Water,
Vending and Soft Drinks sectors where
Abbeychart continues to take market
share. Abbeychart also continues to
strengthen its relationships with key
vending machine operators in Europe
through the supply of its range of spare
parts for Wurlitzer vending machines.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
26
FINANCE REVIEW
NIGEL LINGWOOD GROUP FINANCE DIRECTOR
MAINTAINING FINANCIAL
DISCIPLINE
“
THE GROUP DELIVERED
ANOTHER YEAR OF STRONG
UNDERLYING REVENUE
GROWTH OF 7%
”
ADJUSTED OPERATING MARGIN
17.5%
FREE CASH FLOW
£60.5m
ROATCE
24.5%
REPORTED AND UNDERLYING
RESULTS IN 2018
Reported revenues increased by 7%
to £485.1m and adjusted operating
profit increased by 9% to £84.9m,
with each Sector benefiting from
a favourable macroeconomic
environment leading to robust
customer demand in all geographies.
A recovery this year in UK sterling,
particularly in the first half of the year,
led to a currency headwind of 3% on
the translation of the results of the
overseas businesses, when compared
with last year’s average exchange
rates. This currency headwind led to
a reduction in revenues and adjusted
operating profits of £13.1m and £2.4m,
respectively. Acquisitions completed this
year and last year, net of a small disposal
this year, incrementally contributed
£14.8m and £2.1m to revenue and
adjusted operating profit, respectively.
The underlying results present the
performance of the Group on a like-for-
like basis by 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 strengthening in the UK sterling
exchange rate, against most of the
currencies of the Group’s overseas
businesses. With the currency headwind
being broadly offset by the incremental
contribution from acquisitions (net of a
small disposal), underlying revenues and
underlying adjusted operating profits also
increased by 7% and 9%, respectively.
ADJUSTED OPER ATING MARGIN
The Group’s adjusted operating
margin improved by 20bps this year
to 17.5% (2017: 17.3%) reflecting the
benefit of operational leverage, with
Group gross margins remaining
unchanged from last year.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
27
In Life Sciences, gross margins
strengthened slightly, reflecting a more
favourable product mix and a small net
currency transactional benefit from
movements in exchange rates. The
Canadian and Australian exchange rates
have generally remained more stable
this year and the benefit of favourable
currency hedge contracts made a positive
contribution. In Seals, gross margins
slightly weakened as buoyant markets
led to supplier price increases and longer
product lead times. These price increases
were generally not passed through to
customers until the second quarter of
the financial year. Freight costs also
increased to mitigate longer lead times
and maintain service levels to customers.
In Controls, gross margins improved
reflecting the benefit from a favourable
product mix, proactive and targeted price
increases and a decision to pull back
from lower margin sales opportunities.
ADJUSTED AND STATUTORY PROFIT
BEFORE TA X
Adjusted profit before tax increased
by 9% to £84.8m (2017: £77.5m). The
interest expense this year was £0.1m
(2017: £0.7m) and comprised the interest
expense on the Group’s net pension
deficit, which had reduced from £0.3m
last year, reflecting the smaller deficit in
the fund at the beginning of this year.
There were no borrowing costs this
year (2017: £0.1m) as the Group held
cash funds for the majority of the
year and interest earned on these
cash funds of £0.1m offset bank
facility commitment fees of £0.1m
(2017: £0.3m). Last year’s facility fees
included a £0.2m arrangement fee
on renewal of the bank facility.
Statutory profit before tax was £72.7m
(2017: £66.8m) and is after charging
acquisition related charges of £9.6m
(2017: £9.7m) (which largely comprises
the amortisation of acquisition related
intangible assets) and fair value
remeasurements of £0.4m (2017: £1.0m).
In addition, one-off CEO transition costs
of £2.1m were incurred relating to the
change of the CEO in the current year.
The CEO transition costs comprise
those charges directly attributable to the
change, after 22 years, in the leadership
of the Group this year. In particular, it
includes the costs of recruitment, the
costs of employment of the new CEO
and the costs of the financial settlement
relating to his departure from the
Company on 28 August 2018, including
advisors costs. These costs are set out
REVENUE BRIDGE – FY2018 (£m)
–£13.1m
+£14.8m
£451.9m
–3%
+3%
+7%
+£31.5m
£485.1m
500
480
460
440
420
400
380
360
FY2017
Translational FX
Acquisitions, net
FY2017 and FY2018
Underlying
FY2018
GBP VS G10 CURRENCY BASKET SECURITIES
840
830
820
810
800
790
780
770
760
Sep 16
Sep 17
Sep 18
in note 28 to the consolidated financial
statements. The full year employment
costs of Bruce Thompson, the retiring
CEO, have been charged against
adjusted operating profit and are not
included in CEO transition costs.
The charge attributable to fair value
remeasurements relate to the put
options held over minority interests
as described further below.
TA X CHARGE, EARNINGS PER SHARE
AND DIVIDENDS
The Group’s effective tax charge on
adjusted profit reduced by 260bps in
2018 to 23.9%, compared with 26.5%
last year. This lower rate reflected the
impact from the reduction in the US
Federal corporate income tax rate to
21% from 35%, effective 1 January
2018. The adjusted profit before tax
earned in the US accounts for ca. 26%
of Group adjusted profit before tax.
Adjusted earnings per share (“EPS”)
increased by 13% to 56.4p, compared
with 49.8p last year and statutory EPS
increased by 13% to 47.5p (2017: 42.0p).
The Board continues to pursue a
progressive dividend policy that aims to
increase the dividend each year broadly
in line with the growth in adjusted EPS.
In determining the dividend in any one
year, 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
30 to 33 that could adversely impact
the performance of the Group.
For 2018, the Board has recommended
a final dividend of 17.8p per share
(2017: 16.0p) making the proposed
full year dividend 25.5p (2017: 23.0p).
This represents an 11% increase in the
proposed full year dividend with dividend
cover remaining unchanged at 2.2 times.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
28
FINANCE REVIEW CONTINUED
FREE CASH FLOW
Free cash flow represents cash available
to invest in acquisitions or return to
shareholders. The Group again generated
strong free cash flow this year of £60.5m
(2017: £55.7m), which benefited from
£4.0m received on the sale of the small
non-core US business. The free cash flow
conversion was 95% (2017: 99%) of
adjusted earnings.
The Group’s operating cash flow increased
by £5.0m to £84.3m (2017: £79.3m) this
year, broadly reflecting the increase in
operating profit. As anticipated in the
Half Year Report, the outflow of cash into
working capital reduced substantially
in the second half of the year to £5.1m
(2017: £4.0m) from £11.2m at 31 March
2018. Inventories increased by £8.3m
(2017: £5.1m) to meet the stronger trading
environment, particularly in the Seals
businesses. This was partly offset by an
inflow of £3.2m (2017: £1.1m) from an
increase in net payables at the year end.
The Group’s KPI metric of working capital
to revenue at 30 September 2018
remained broadly unchanged from last
year at 15.1% (2017: 15.0%), again reflecting
the robust revenues over the previous
rolling 12 months.
Group tax payments decreased by
£0.3m to £19.0m (2017: £19.3m). On an
underlying basis cash tax payments
represented ca. 23% (2017: 24%) of
adjusted profit before tax reflecting
the benefit from the lower US Federal
corporate income tax rate. Underlying
tax payments are before currency
effects from 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 managing tax, with
its responsibility to pay tax where it
does business. The Group’s tax strategy
and policies have been approved by the
Board this year and tax risks are regularly
reviewed by the Audit Committee.
The Group’s capital expenditure doubled
this year to £6.6m (2017: £3.3m) reflecting
in part the impact from new field
equipment introduced in the Healthcare
businesses and in part investment required
in facility and IT infrastructure across the
Group to support the increased trading
activity seen over the past two years.
The Life Sciences businesses invested
£3.5m in new capital this year (2017: £2.0m)
of which £2.3m (2017: £1.6m) was invested
in field equipment in the Healthcare
businesses to support placements of new
surgical equipment in hospitals and
diagnostic machines in laboratories. A
further £0.6m was invested in expanding
and refurbishing facilities and offices in
both the Healthcare and Environmental
businesses and the remaining £0.6m on
both warehouse equipment and on
upgrading the IT infrastructure.
The Seals businesses invested £2.0m
(2017: £1.1m), with £1.5m in the North
American Seals businesses and £0.5m in
the International Seals businesses. The
new ERP systems being implemented
in both the US Industrial OEM Seals
business and in Kentek accounted
for £1.1m and £0.8m was spent on
refurbishing facilities and on warehouse
equipment. The remaining £0.1m was
spent on upgrading the IT infrastructure
across the Seals Sector. In the Controls
businesses £1.1m (2017: £0.2m) was
invested primarily in expanding and
refurbishing existing facilities. In
particular the German business, IS-
Sommer, invested £0.7m on expanding
its existing warehouse and offices
in Stuttgart, which is expected to be
completed for a total cost of ca. £1.6m
in March next year. The remaining
£0.4m was spent on refurbishing the
facilities in Cablecraft and Coast.
The Company paid the PAYE income
tax liability of £1.0m (2017: £0.7m)
on the exercise of LTIP share awards
in November 2017, in exchange for
reduced share awards to participants.
In addition, £1.2m was paid to the
Employee Benefit Trust to fund the
FREE CASH FLOW AND NET CASH FUNDS (£m)
70
60
50
40
30
20
10
0
31.6
19.3
37.8
21.3
2013
2014
40.3
3.0
2015
Free cash flow
Net cash funds
59.0
10.6
60.5
36.0
55.7
22.3
2016
2017
2018
acquisition of 100,000 ordinary shares in
the Company to meet incentive awards.
The Group spent £20.4m (2017: £20.1m)
of free cash flow on acquisitions,
including £2.0m on acquiring outstanding
minority shareholdings, as described
below and £27.0m (2017: £23.7m) on
paying dividends to both Company and
minority shareholders.
ACQUISITIONS COMPLETED DURING
THE YEAR
The Group invested £18.1m on acquiring
new businesses this year and paid a
further £0.3m of deferred consideration
on businesses acquired in prior years.
The continuing favourable economic
markets in the US and Continental
Europe this year contributed again
to a much tougher environment to
persuade potential vendors to dispose
of their companies. However there were
tentative signs towards the end of the
year that, having enjoyed several years
of stronger trading and with uncertainty
about the future direction of global
economies, some of these vendors
were returning to the M&A market.
In August 2018 the Group completed
the acquisition of FS Cables, based in
St Albans, UK, for £16.9m on a debt/
cash free basis. FS Cables is a leading
supplier of specialist cable products to
installers, end-users and wholesalers
for a range of industries. The business
complements the Group’s existing
Cablecraft business acquired in 2016,
which supplies cable accessory
products used to identify, secure and
protect electrical cables. A further
£1.2m was spent in October 2017 to
acquire Coast, a small specialty fastener
distributor based in California, US.
These acquisitions added £9.1m to the
Group’s acquired intangible assets, which
represents the valuation of customer
and supplier relationships that will be
amortised over periods ranging from
five to ten years. At 30 September
2018, the carrying value of the Group’s
acquired intangible assets was £53.6m
and there was a £9.3m charge this
year to amortise these assets.
Goodwill at 30 September 2018 was
£128.5m and included £5.7m relating to
those businesses acquired during the
year (including fair value adjustments
to the assets acquired). Goodwill is not
amortised, but is assessed each year
at a Sector level to determine whether
there has been any impairment in the
carrying value of goodwill acquired. The
exercise to assess whether goodwill has
been impaired is described in note 10 to
the consolidated financial statements. It
was confirmed that there was significant
headroom on the valuation of this
goodwill, compared with the carrying
value of goodwill at the year end.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
29
Shortly after the year end, the IS-
Group acquired Gremtek, a supplier
of own-branded protective sleeving
products based in France for £7.4m.
This business will be integrated
into the IS-Group to support their
expansion into European markets.
LIABILITIES TO MINORITY SHAREHOLDERS
The Group’s liability to purchase
outstanding minority shareholdings at
30 September 2018 reduced to £4.5m
(2017: £6.1m) following the purchase
of the outstanding 10% minority
shareholding in TPD for £2.0m.
The minority shareholdings
outstanding at 30 September 2018
relate to a 10% interest held in both
M Seals and Kentek. The options are
exercisable in the next financial year.
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. A
charge of £0.4m (2017: £1.0m) has
been included in finance expense to
reflect in part a slightly higher expected
cost of purchasing these minority
interests and in part the unwinding
of the discount on the liability.
The Group also has a small liability at
30 September 2018 for deferred
consideration of up to £1.1m (2017: £0.5m),
which represents the Directors’ best
estimate of the amount likely to be paid to
the vendors of businesses purchased
during the year, based on the expected
performance of these businesses during
the measurement period. During the year,
£0.3m was paid as deferred consideration
relating to the acquisition of Ascome and
Edco in previous years and £0.2m, which
was no longer required, was released to
the Consolidated Income Statement as
part of acquisition related charges.
RETURN ON ADJUSTED TR ADING CAPITAL
EMPLOYED AND CAPITAL MANAGEMENT
A key metric used 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
that 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 2018, the Group
ROATCE remained comfortably ahead
of our 20% benchmark and improved to
24.5% (2017: 24.0%), which reflects the
strong increase in adjusted operating
profit this year. Adjusted trading capital
employed is defined in notes 2 and 3 to
the consolidated financial statements.
The Group continues to maintain a strong
balance sheet with cash funds of £36.0m
at 30 September 2018, compared with
£22.3m last year. Surplus cash funds are
generally repatriated to the UK, unless
they are required locally to meet certain
commitments, including acquisitions.
The Group also maintains a three year
revolving multi-currency credit facility
that expires on 1 June 2020, but has an
option to extend the facility up to 1 June
2022. The facility comprises a £30m
committed facility with an accordion
option that allows the Group to increase
the commitment up to a maximum of
£60m of borrowings. These facilities have
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
2018 of £3.1m (2017: £2.8m).
The Group maintains a small legacy
closed defined benefit pension scheme
in the UK. A formal triennial funding
valuation of this scheme was carried
out as at 30 September 2016 and
reported a funding deficit of £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. Since the valuation date, bond
yields have increased to 2.9% and
investment returns have been strong,
which has led to a lower funding deficit.
This deficit is being funded by cash
contributions of £0.5m (2017: £0.4m) paid
by the Company to the scheme. This
contribution rate increases annually on
1 October by 2% with the objective of
eliminating the deficit within ten years.
During the year, the scheme trustees,
with the support of the Company,
completed a buy-in of the pensioner
liabilities existing at 1 September
2018. The buy-in was completed on
28 September 2018 with Just Retirement
Limited for a premium of £13.0m, which
was funded by the scheme, utilising
substantial investment gains realised
on the scheme’s growth assets.
A recent decision by the High Court has
confirmed that pension schemes will
be required to equalise GMPs accrued
between 1990 and 1997, between
men and women. The UK scheme has
not yet equalised GMPs, although as
only ca. 25% of the members were
contracted out of SERPS prior to 1997,
the impact is unlikely to be material
to the schemes existing liabilities.
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 (2017: £0.2m).
Both the UK defined benefit scheme
and the Kubo contribution scheme are
accounted for in accordance with IAS19
(Revised). At 30 September 2018 the
aggregate accounting pension deficit in
these two schemes increased slightly
by £0.6m to £10.5m with a reduction of
the deficit in the Swiss scheme being
more than offset by an increase in the
UK scheme deficit. The larger deficit in
the UK scheme is because the buy-in
premium was larger than the valuation
of the corresponding liabilities; the
Swiss scheme benefited from a higher
discount rate, which led to a reduction
in the scheme deficit. The gross
aggregate pension liability in respect of
these two schemes at 30 September
2018 decreased by £0.4m to £49.1m,
which is funded by £38.6m of assets.
POTENTIAL IMPACT OF BREXIT
At an operational level, the impact on
the Group’s businesses from the current
uncertainty over the process and timing
of the UK’s exit from the European Union
is not expected to be significant in terms
of the Group’s overall profitability. UK
based revenues account for only 26%
of the Group’s overall revenues and the
UK businesses, as well as those based
in Continental Europe, are substantially
“in country” industrial suppliers of goods
with limited cross border sales activity.
The Group’s financial results may be
impacted by macroeconomic instability
arising from a delayed or disruptive exit
from the European Union, such as a
depressed UK economy or a substantial
depreciation in UK sterling. In such a
scenario, there may be a reduction in
the Group’s UK revenues and operating
profits, although Group net assets would
benefit from translating the results
of the Group’s overseas businesses
into UK sterling. It is also likely that a
depreciation in UK sterling would lead
to stronger inflation in supplier costs
for the Group’s UK based businesses,
which would need to be managed
robustly to maintain gross margins.
The Board will continue to monitor
closely developments in the Brexit
plans on its UK businesses. A prolonged
disruption at the UK’s borders has
the potential to impact the supply
chain of the Group’s UK businesses;
however the businesses maintain a
strong depth of inventories and have
begun to build inventory levels of their
faster moving product lines which
would mitigate the impact on their
activities from a significant disruption
in cross border trade between the
UK and Continental Europe.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
30
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 that 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; it ensures that risks are identified
and monitored and that 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 that
have been determined by the Board, based on a robust
risk evaluation process described above, to potentially
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. There were no new principal risks identified from
the review process carried out by the Board this year.
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
vote to leave the European Union and this is explained further on
page 29 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 2021. 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. In October 2018, the Board approved a report
on an update of the Group’s strategy for the three years
ending 30 September 2021, as described on page 40.
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 that 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 to reflect a reasonable worse case scenario, 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 31 to 33 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.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
31
RISK
RISK DESCRIPTION AND ASSESSMENT
MITIGATION
The businesses identify key market
drivers and monitor the trends and
forecasts, as well as maintaining
close relationships with key
customers who may give an early
warning of slowing demand.
Changes to cost levels and inventories
can then be made in a measured
way to mitigate the effects.
Significant global events are closely
monitored to determine any
potential impact on key markets.
STR ATEGIC RISK
DOWNTURN/
INSTABILITY IN
MAJOR MARKETS
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.
A number of characteristics of the Group’s businesses
moderate the impact of economic and business cycles
on the Group as a whole:
• The Group’s businesses operate in three differing Sectors
with different cyclical characteristics and across a number
of geographic markets.
• The global economic outlook was more uncertain towards
the end of the financial year.
• 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 comprise
consumable products that 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.
STR ATEGIC RISK
SUPPLIER
CONCENTRATION/
LOSS OF KEY
SUPPLIERS
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 that has
its own distribution channels in the relevant market. There is
also the risk of a supplier taking away exclusivity and either
setting up direct operations or appointing another distributor.
Long term, multi-year exclusive
contracts signed with suppliers with
change of control clauses, where
possible, included in contracts for
protection or compensation in the
event of acquisition.
CHANGE
Currently no single supplier represents more than 10% of
Group revenue and only five 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.
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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
32
INTERNAL CONTROL AND RISK
MANAGEMENT CONTINUED
RISK
RISK DESCRIPTION AND ASSESSMENT
MITIGATION
STR ATEGIC RISK
CUSTOMER
CONCENTRATION/
LOSS OF KEY
CUSTOMER(S)
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.
OPER ATIONAL RISK
CYBERSECURITY/
INFORMATION
TECHNOLOGY/
BUSINESS
INTERRUPTION
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.
Cyber threats to the businesses information systems have this
year reduced, following action taken to strengthen the IT
infrastructure environment across the Group’s businesses.
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.
OPER ATIONAL RISK
LOSS OF KEY
PERSONNEL
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. 100 senior managers
in the Group is 11 years and for all personnel in the Group is
consistently ca. 7 years.
The uncertainty this year relating to the appointment and
subsequent departure of the Chief Executive Officer has
led to some instability in management and employees within
the Group.
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.
There is good support 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. The majority of businesses
back-up online data at least once a
day to an offsite data storage centre.
A member of the Executive Management
Committee is responsible 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. At 30 September 2018, the
majority of businesses had achieved the
UK Government endorsed Cyber
Essentials accreditation; it is expected
that all businesses will be fully accredited
within the next six months.
Business continuity plans exist for each
business with ongoing testing.
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 or share incentive
plans targeted at the individual
business level.
• Giving the freedom, encouragement,
financial resources and strategic
support for managers to pursue
ambitious growth plans.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
33
RISK
RISK DESCRIPTION AND ASSESSMENT
MITIGATION
OPER ATIONAL RISK
PRODUCT
LIABILITY
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.
In situations where a Group business is selling own-branded
products and cannot subrogate the liability to a supplier, the
business will be liable for failure of the product. A Group
business may also be liable for the associated costs of a
subsequent customer recall arising directly from failure of an
own-branded product.
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
CHANGE
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 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 29 to
the consolidated financial statements.
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 £6.5m
(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 £20.4m.
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
Working capital management is critical to success in
specialised industrial distribution businesses as this has a
major impact on cash flow. The principal risk to working
capital is in inventory obsolescence and write-off.
Inventory write-offs are controlled and
minimised by active management of
inventory levels based on sales
forecasts and regular cycle counts.
CHANGE
The charge against operating profit in respect of old or surplus
inventory in the year was £1.5m but inventories are generally
not subject to technological obsolescence.
Where necessary, a provision is made
to cover both excess inventory and
potential obsolescence.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
34
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 32. 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
Average number of employees
in year
Females as percentage of total
Length of service (years)
Average staff turnover
Sick days lost per person
2018
2017
2016
1,765
35%
6.8
19.7%
3.6
1,658
35%
6.7
20.6%
3.3
1,602
36%
6.8
24.9%
3.1
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:
2018
2017
Male
Female
Total
Male
Female
Total
Directors
Senior managers
Employees
4
78
1,092
1
18
5
5
96
73
614 1,706 1,048
1
19
6
92
586 1,634
Total
1,174
633 1,807 1,126
606 1,732
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 ten UK based apprenticeships, three of these
were for females.
The Group values the commitment of its employees and
recognises the importance of communication to foster 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.
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
2018, the Group employed ten disabled employees (2017: seven).
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 assisted by a member of the
Executive Management Committee 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 2018.
Following the implementation of near miss reporting in 2016, the
Group has now used its second 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.
Near misses
Minor injuries
Reportable lost time incidents1
Minor injuries per 1,000 employees
Reportable lost time incidents1 per 1,000
employees
1 Three or more days’ absence from workplace.
2018
73
71
1
40.2
0.6
2017
70
56
5
33.8
3.0
The absolute level of minor injuries has increased this year
primarily due to a low level reported in the prior year. The near
miss reporting system has placed 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 are 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
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
35
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 adopts a zero tolerance approach to slavery in all its
forms, including human trafficking, forced labour and child labour.
Annually, each business assesses the risk of slavery taking place
either within the business itself or among its principal suppliers.
Group businesses continuously monitor and 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
Direct emissions (Scope 1)
Natural gas
Owned transport
Indirect emissions (Scope 2)
Electricity
Gross emissions
Tonnes CO2e per £1m revenue
Tonnes of CO2e
2018
2017
726
65
2,682
3,473
7.2
657
68
2,955
3,680
8.1
TASK FORCE ON CLIMATE-RELATED FINANCIAL
DISCLOSURES (“TCFD”)
In June 2017 the TCFD published a voluntary framework to
encourage businesses to disclose climate-related risks.
As part of the Group’s annual risk management process the Group’s
businesses consider climate-related risk and where significant,
reports these to the Board for review and monitoring. The broad
geographic and industrial sector spread of the Group’s businesses
provide a high degree of resilience to climate-related risks.
The Board has identified that in the shorter term the principal
risk from climate change on the Group’s businesses arises from
extreme weather events that may significantly impact our
facilities. In particular the North American Seals Aftermarket
business is almost wholly reliant on its central warehouse located
in Tampa, Florida. This geography is exposed to hurricanes,
generally during the period from August to November each year.
In addition, a significant increase in energy costs caused by
carbon taxation, regulation or limited resource would lead to
higher costs from external freight and handling costs of delivering
product to, or from our facilities.
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 2018 the Group made donations to charitable organisations of
£47,221 (2017: £54,418). No political donations were made.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
36
BOARD OF DIRECTORS
JOHN NICHOLAS 3
Chairman
NIGEL LINGWOOD
Group Finance Director
CHARLES PACKSHAW1,2,3
Senior Independent Non‑Executive Director
Appointed
Joined the Board on 1 June 2013 and
appointed Chairman on 21 January 2015.
Following the departure of Richard Ingram
as Chief Executive Officer on 28 August
2018, John Nicholas was appointed interim
Executive Chairman.
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.
Appointed
Joined the Company in June 2001 and
appointed Group Finance Director in
July 2001.
Appointed
Joined the Board on 1 June 2013 and
appointed Senior Independent Director on
27 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
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
John is non-Executive Chairman of
Porvair plc.
External appointments
None.
External appointments
Charles is Senior Independent non-
Executive Director of BMT Group Limited,
non-Executive Director at Fram Farmers
Limited and Chair of Prostate Cancer UK.
EXECUTIVE MANAGEMENT COMMITTEE
JOHN NICHOLAS
Chairman
NIGEL LINGWOOD
Group Finance Director
STUART BELL
DAN BROWN
DARIN CLAUSE
Joined the Group in May 2013 in the
Group Finance department, became
Group Financial Controller in June 2015
and appointed as Finance Director,
International Seals in October 2018.
Joined the Group in October 2015 to take
responsibility for the Group’s Healthcare
businesses across all international
markets. Now responsible for the Life
Sciences Sector.
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. Now
responsible for the Seals Sector.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
37
ANDY SMITH 1,2,3
Non‑Executive Director
ANNE THORBURN 1,2,3
Non‑Executive Director
Appointed
Joined the Board and appointed Chairman
of the Remuneration Committee on
9 February 2015.
Appointed
Joined the Board on 7 September 2015 and
appointed Chairman of the Audit
Committee on 17 November 2015.
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.
Skills and experience
Anne was Chief Financial Officer
of Exova Group plc 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
Anne is a non-Executive Director of
BTG plc.
Director Changes During the Year
Bruce Thompson
Appointed Chief Executive Officer in 1996
and retired from the Board on 8 May 2018.
Richard Ingram
Joined the Board on 23 April 2018 and
appointed Chief Executive Officer on 8 May
2018. Stood down as Chief Executive
Officer and as Executive Director on
28 August 2018.
Committee membership
1 Remuneration Committee
2 Audit Committee
3 Nomination Committee
CAROLYNE DICK
GUSTAV RÖBER
NEIL YAZDANI
Joined the Group in August 2003 in the
Group Finance department. Appointed
Group FP&A Director in June 2015 with
responsibility for the Group’s management
reporting system and appointed as Group
FP&IS Director in October 2018 responsible
for the Group-wide Information Systems.
Joined the Group in September
2004 initially as Group Financial
Controller and appointed Corporate
Development Director in 2012. Now
responsible for the Controls Sector.
Neil is currently a Director at Deloitte
LLP and will join the Group in January
2019 as Group Financial Controller.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
38
CORPORATE GOVERNANCE
“
WITH A PROVEN STRATEGY
AND THE SUPPORT OF AN EXPERIENCED
GROUP OF MANAGERS ON THE EMC,
THE BOARD IS CONFIDENT THAT IT
REMAINS IN A STRONG POSITION TO MEET
THE LIKELY CHALLENGES DURING THIS
TRANSITION YEAR
John Nicholas, Chairman
”
The Remuneration Committee has also spent considerable time on
CEO succession matters relating to the recruitment of Richard
Ingram and then after the year end in relation to the financial
settlement when he departed the Group. Further details of this
work are included in the Committee report on pages 56 and 57.
2018 has been the first year for the new Group auditor,
PricewaterhouseCoopers (“PwC”) and the Audit Committee
has worked closely with both PwC and the Group’s finance
departments to ensure a smooth transition from Deloitte LLP
and an effective audit. Further details of this work are in the
Committee report on pages 44 and 45.
In line with the UK Corporate Governance Code, the Board held an
externally facilitated evaluation towards the end of this year. The
review was facilitated by Clare Chalmers leading to a report on her
observations which in October was discussed by the Board. I am
pleased to report that this report confirmed that the Board and
Committees were operating effectively, but I recognise there is
always scope for improvement. I am working with the Company
Secretary on the suggestions arising from the report and will report
on progress next year.
John Nicholas
19 November 2018
Members of Board
Chairman
John Nicholas
Independent non‑Executive Directors
Andy Smith
Charles Packshaw
Anne Thorburn
Executive Directors
Nigel Lingwood
Bruce Thompson (retired on 8 May 2018)
Richard Ingram (23 April 2018 to 28 August 2018)
Attendance
10/10
10/10
10/10
9/10
10/10
4/5
3/3
DEAR SHAREHOLDER
The Board and its Committees have had a busy year in 2018. At the
start of the year, the Nomination Committee was focused on the
recruitment of a new CEO to succeed Bruce Thompson. That
process concluded in January 2018 with the announcement that
Richard Ingram would join the Group in the Spring. I reported last
year that the Board recognised that the period of transition to a
new CEO was likely to be challenging but I had not anticipated that
these challenges would lead to Richard being asked to leave the
Group at the end of August. The Committee is again conducting a
search for a suitable successor and is working with a different
search firm with a revised specification. In the interim, my
colleagues have asked me to assume the role of interim Executive
Chairman which I have agreed to do.
The Board also reviewed the appropriateness and future potential
of the Group’s strategy during the year. The current strategy has
proven to be resilient and successful over several years and the
Board had no hesitation in confirming continued support.
Membership of the Executive Management Committee has
recently been broadened to reflect the future requirements of the
Group, further appointments, including that of an HR professional
are planned for this year. Details of the Committee are set out on
pages 36 and 37.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
39
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.
• Approval of 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/governance/
constitutional-documents.
AUDIT COMMITTEE
Chaired by Anne Thorburn
Number of meetings in the year: five
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: four
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.
REMUNER ATION COMMITTEE
Chaired by Andy Smith
Number of meetings in the year: six
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 comprises a Chairman, one Executive Director 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 55. The biographical details of the Board members are set
out on pages 36 and 37.
John Nicholas is Chairman of the Board and Chairman of 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 Chair 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.
COMPLIANCE WITH THE CODE
Diploma PLC is required to state how it has applied the Main
Principles of the UK Corporate Governance Code (“the Code”),
issued by the Financial Reporting Council in April 2016. Set out on
pages 40 to 42 is an explanation of how the Company has applied
the Main Principles of the 2016 Code.
Committee has appointed an external search agency to assist the
Board with the appointment of a new Chief Executive Officer. On
appointment of a new Chief Executive Officer, John Nicholas will
relinquish his role as interim Executive Chairman and revert to his
previous role as non-Executive Chairman.
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, with the
single exception of A.2.1 as explained below:
The Company’s auditor PricewaterhouseCoopers LLP, is required
to review whether this statement reflects the Company’s
compliance with the Provisions of the Code specified for their
review by the Listing Rules of the FCA and to report if it does not
reflect such compliance.
The Code requires that the role of Chairman and Chief Executive
Officer should not be exercised by the same individual. While this
is ordinarily the case for the Company, following the departure of
Richard Ingram, Chief Executive Officer, on 28 August 2018, the
Board appointed John Nicholas as interim Executive Chairman
until a new Chief Executive Officer is appointed. The Nomination
In July 2018, the FRC issued a new Code which will be mandatory
for the Company in respect of the year ending September 2020.
The Board will assess its governance practices against the
provisions of the new Code during 2019 and will report on its
implementation in next year’s Annual Report & Accounts.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
40
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 their
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
that 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 in October
2018 and reviewed an update of the Company’s strategy. A more
structured and formal review will be undertaken by a new Chief
Executive Officer, in the year following appointment.
Meetings of the Board
The Board has seven scheduled meetings during the financial year
but will meet more frequently if required. In 2018 the Board had an
additional three meetings largely as a consequence of matters
relating to the appointment and subsequent departure of the Chief
Executive Officer.
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.
Bruce Thompson and Anne Thorburn were unable to attend the
Board meeting on 11 December 2017 and 25 September 2018,
respectively. Both meetings were called at short notice.
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 August 2018, the Board’s
scheduled meeting was held at Cablecraft’s facility in Houghton
Regis, UK. At this meeting the Board received presentations from
senior management in Cablecraft and had an opportunity to view
the facility and meet with employees to gain a better understanding
of the products and operations managed from this facility.
In October 2018, the Board approved a report on an update of
the Group’s strategic objectives for the three years ending
30 September 2021. This report was prepared on a top down basis
with substantial input from the Executive Management Committee
(“EMC”) and supported by a detailed financial model which was
used to assess different scenarios over the strategy period. As part
of this exercise members of the EMC met for two days in London in
July 2018 to review their business strategy and the opportunities to
develop their Sectors, including their acquisition strategy. Based on
the output from this meeting, a report was prepared by the interim
Executive Chairman and Group Finance Director and was
presented to and approved by the Board on 2 October 2018.
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 that 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. John Nicholas was appointed interim Executive
Chairman on 28 August 2018 following the departure of Richard
Ingram, Chief Executive Officer, until a permanent Chief Executive
Officer is appointed.
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 appointment 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 48.
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.
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 Hampton-
Alexander 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 Hampton-Alexander review targets before the end of
the next Board rotation of non-Executive Directors. Additional
information on diversity can be found on page 34.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
41
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 2018, the Board
received presentations from senior management of the
Cablecraft business.
Following a new appointment to the Board, a managed induction
programme is arranged that includes a visit by the Director 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 are also held individually between each of
the non-Executive Directors and the Executive Directors and with
some of the principal advisors to the Company. A managed and
thorough induction programme was also arranged following the
appointment of the Chief Executive Officer in May 2018. This
programme provided for one-to-one meetings with members of
the Board, members of the EMC and key advisors to the
Company, together with substantive visits to the Group’s
principal businesses.
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 individual 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 Committees and of individual Directors
of the Company.
The most recent evaluation was carried out in August 2018 and
was externally led by Clare Chalmers, who had no other connection
with the Company. The external facilitator interviewed all Directors
who had served during the year, with the exception of Richard
Ingram who had stepped down from his role as Chief Executive
Officer and as a Director of the Company, together with the Group
Company Secretary. The evaluation also included a review of the
Annual Report & Accounts, with particular focus on the section on
corporate governance. There was also a review of the Board and
Committee meeting papers, including minutes of each meeting.
A written report was provided to all Board members that
concluded that the Board had a collegiate culture led by a
capable and experienced Chairman; it added that there were
sound governance and Board processes, with a successful and
well-supported remuneration policy and that there was good
and detailed financial reporting.
The report also set out 16 suggestions for the Board to consider
relating to Board Dynamics and Culture, Board and Executive Skills
and Succession, Strategic Focus, Communication & Stakeholders,
Risk, Committees and Information Quality and Board Papers.
The Board met in early October to discuss the report and Clare
Chalmers was invited to the meeting to facilitate an in-depth
discussion of these sixteen suggestions. Following this meeting,
the Chairman and the Group Company Secretary were tasked with
producing an action list and timetable for the Board to implement
the salient recommendations, details and progress against which
will be reported on in next year’s Annual Report & Accounts.
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 under
the direction of the Chairman. This exercise encompasses an
evaluation of the performance of the Board as a whole, as well as
of each of the Committees and individuals. Feedback on Board
performance is presented by the Chairman to the Board and
actions and objectives are agreed for the following year.
The Senior Independent Director, together with the non-Executive
Directors also carries out each year (and has done so in 2018),
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 substantial
advice was sought by the Chairman of the Remuneration
Committee in relation to the appointment and subsequent
financial settlement in connection with the departure of the Chief
Executive Officer.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
42
CORPORATE GOVERNANCE CONTINUED
The Group’s website contains up-to-date information for
shareholders, which includes the Annual Report & Accounts of the
past ten 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 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.
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.
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. The Board
receives a detailed Report from the Group Finance Director which
sets out the key matters that impact, or could impact the Group’s
financial statements and Annual Report and highlights areas of the
financial statements where it has been necessary to rely upon a
significant level of subjectivity. The Board also has access to all
relevant information and reviews other periodic management
information and RNS announcements. The draft Annual Report &
Accounts are circulated to each member of the Board in sufficient
time to allow challenge of the disclosures where necessary. The
Directors’ responsibilities statement is set out on page 65.
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 30 to 33 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, with the support of the Company’s brokers. Through this
programme, the Company maintains regular contact with major
shareholders to communicate clearly the Group’s objectives and
monitors movements in significant shareholdings.
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. The last Capital Markets Day was held in February 2017
in London.
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.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
43
AUDIT COMMITTEE REPORT
“
THE GROUP CONTINUES TO MAINTAIN
A CULTURE OF ROBUST AND EFFECTIVE
SYSTEMS OF INTERNAL CONTROL,
OVERSEEN BY STRONG AND EXPERIENCED
FINANCE DEPARTMENTS
Anne Thorburn, Chairman of the Audit Committee
”
Members of Committee
Anne Thorburn (Chairman)
Charles Packshaw
Andy Smith
Attendance
5/5
5/5
5/5
DEAR SHAREHOLDER
The Committee welcomed Christopher Burns of PwC to the
Company as the new auditor this year, following the formal
appointment at the AGM of PwC as auditor to the Company after a
competitive tender process last year. After attending last year’s
audit close meeting, alongside the retiring auditor, they worked
diligently during the first half of the year to complete their audit
transition process. At the close of this process PwC met with the
Committee to confirm that they had completed their handover
with the retiring auditor, had met with senior finance staff across
the business and they had no significant concerns to bring to the
Committee’s attention.
In March this year, the Committee received a report from the Group
finance team that set out a detailed evaluation of the potential
impact that the new IFRS15 standard on Revenue may have on the
Group’s financial statements. The report was based on detailed
discussions that the Group finance team had with each of the
individual businesses. As expected, given the nature of the Group’s
business, this work confirmed that the impact on the financial
statements from adopting IFRS15 was negligible. A similar exercise
will be carried out in 2019 to assess the potential impact of
adopting IFRS16 on Leases, and it is likely that the impact on the
financial statements may be significant, as explained further on
page 93 in the notes to the consolidated financial statements.
The Committee was pleased to welcome during the year the
appointment of an experienced tax professional as Head of Group
Tax & Treasury. The tax environment and tax demands on business
have become increasingly more complex in recent years,
particularly where the Group has significant operations based
outside the UK. This appointment will ensure that the Group
businesses both maintain compliance with local tax legislation and
focus on good tax governance.
I also look forward to Neil Yazdani joining the Group in January 2019
as Group Financial Controller. Neil will replace Stuart Bell who has
now moved to International Seals to support Darin Clause as
Finance Director of those businesses.
As Chairman of the Committee, I continue to meet regularly with
members of the Internal Audit team to discuss their reports,
prepared following each of their visits to the businesses. This
provides me with greater insight of the culture of the internal
control environment in the Group and provides assurance that
controls are both in place and are tested, which is particularly
important given the Group’s decentralised operating model.
I am pleased to report that again there have been no significant
control deficiencies or accounting irregularities reported to the
Committee this year. The Group continues to maintain
a 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 16 January
2019 and will be happy to respond to any questions relating to the
activities of the Audit Committee.
Anne Thorburn
19 November 2018
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
44
AUDIT COMMITTEE REPORT CONTINUED
KEY DUTIES AND FOCUS IN 2018
The Audit Committee is responsible for ensuring that the
Company maintains a strong control environment. It provides
effective governance over the Group’s financial reporting,
including oversight and review of the systems of internal control
and risk management, the performance of internal and external
audit functions, as well as the behaviours expected of Diploma
PLC’s employees through the whistleblowing policy and similar
codes of conduct. The Committee’s role and responsibilities are
set out in its Terms of Reference, which are reviewed every two
years and are approved by the Board.
The Terms of Reference are available at www.diplomaplc.com/
governance/constitutional-documents. The Committee’s key
responsibilities and focus during the year have been:
• 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 a report from the Group finance department setting
out the impact of new IFRSs on the Group’s financial
statements, including in particular IFRS15 (revenue from
contracts with customers).
• Reviewed and approved the classification and presentation of
the costs incurred on the CEO transition.
• 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 Director of Internal Audit to attend meetings 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 transition to PwC following their appointment as
the Group’s external auditor.
• Approved the Committee work programme for 2018.
• Reviewed the report on compliance with the UK corporate
governance Code and reports on the provision of information
to the auditor.
• Reviewed the scope of new sanctions issued by the European
Union and the US and the procedures being followed by the
Group’s businesses to monitor compliance.
• 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 whistleblowing arrangements and the use of a
dedicated external independent and confidential telephone
hotline service for all employees to raise concerns.
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 of the business model
and 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 Director also attended Committee
meetings to present the Internal Audit plan for the following year
and to report on progress against that plan. The Committee met
with the external auditor during the year, without the Executive
Directors being present.
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 2018 and up to
the date of this report.
AUDIT TR ANSITION
The Audit Committee completed an audit tender process in 2017
(as described more fully in the Annual Report & Accounts 2017) and
recommended to the Board the appointment of Christopher Burns,
PricewaterhouseCoopers LLP (“PwC”) as auditor. The Board
accepted and endorsed this recommendation, which was
approved by shareholders at the AGM held on 17 January 2018.
The Audit Committee agreed an audit transition plan with PwC
which identified key milestones, beginning with PwC shadowing
Deloitte LLP (“Deloitte”), the retiring auditor, at the 2017 Group audit
close meeting with management and the Audit Committee meeting
held on 14 November 2017. During the first half of this year, PwC met
with both members of the Group finance department and senior
finance personnel of the larger businesses in the Group. At these
meetings, work was carried out by PwC to plan their audit approach
and prepare their audit strategy for the 2018 audit. In May, PwC
reported to the Audit Committee that they had completed their
audit transition plan and that there were no substantive matters to
report to the Committee.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
45
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.
As explained above, the Company’s Annual Report & Accounts this
year has been audited by PwC. In their first year as auditor, PwC
has met with the Audit Chair and has agreed its audit strategy and
audit fees with the Audit Committee. As part of its audit, PwC will
continue to provide the Committee with relevant reports, reviews
and advice throughout the coming year.
In accordance with UK regulations, PwC also assured the
Committee that it adheres to a rotation policy based on best
practice and the Group engagement partner will serve a period of
no longer than five years.
During the year, the Committee carried out an assessment of the
effectiveness of the external audit process for the previous year
ended 30 September 2017, which was carried out by Deloitte. 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 the Deloitte audit of the
Company and Group had provided a robust and effective audit and
supported the work of the Committee through clear and objective
communication on developments in financial reporting and
governance.
NON-AUDIT SERVICES
The Committee has reviewed the Company’s 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 regulation set out in
the EU Audit Directive and Audit Regulation 2014 (“the Regulations”).
The Regulations substantially curtail those non-audit services that
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.
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 Chair of the Audit Committee.
Taxation services are not provided by the Group’s current 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 “agreed upon procedures” on the
Group’s Half Year consolidated financial statements. With the
exception of this work, PwC has not provided any non-audit
services to the Company or its subsidiaries and has confirmed their
independence to the Audit Committee. The fees for carrying out
this work comprises the total non-audit fees of £15,000 set out in
note 27 to the consolidated financial statements.
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. PwC has reconfirmed its
independence for the current financial year.
FINANCIAL REPORTING AND SIGNIFICANT
FINANCIAL 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 Committee considered the matters set out below as being
significant in the context of the consolidated financial statements
for the year ended 30 September 2018. These were discussed and
reviewed with management and the external auditor and the
Committee challenged judgements and sought clarification where
necessary. The Committee received a report from the external
auditor on the work they had performed to arrive at their
conclusions and discussed in detail all material findings contained
within the report.
Provisions for excess and slow moving 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. Following their review, which also
included consideration of the external audit findings, the
Committee concluded that the provision for excess and slow
moving inventory is appropriate.
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 Cash
Generating Unit (“CGU”) being tested for impairment. These
judgements are primarily the calculation of the discount rate, the
achievability of management’s forecasts in the medium term and
the use of the long term growth rate. Following their review which
also included consideration of the external audit findings, the
Committee concurred with the conclusion that no impairment of
goodwill is required.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
46
AUDIT COMMITTEE REPORT CONTINUED
In addition to the above the Committee also seeks confirmation
from the auditor that the Group’s businesses follow appropriate
policies to recognise material streams of revenue and their 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 reported to the Committee on other less material
matters in relation to the recoverability of trade receivables,
acquisition accounting, the valuation of the Group’s defined
benefit schemes and the classification and presentation of
the CEO transition costs.
CHANGES IN ACCOUNTING STANDARDS
The Audit Committee reviewed the likely impact of adopting
IFRS15 (revenue from contracts with customers) ahead of the
implementation across the Group, which will be applicable for the
year ending 30 September 2019. A report prepared by the Group
Finance department on the potential impact of this standard on the
Group’s consolidated financial statements was submitted to the
Committee during the year. This report was based on a detailed
review carried out in conjunction with the Heads of Finance of the
major businesses. This report identified that the new standard may
affect some contracts for bundled goods and services in relation to
reagent rental agreements in Diploma Healthcare Group, as well as
preventive maintenance service and CEMS revenues in a1-CBISS. The
amounts relating to these revenue streams were in aggregate less
than 1% of total Group revenues. The bases applied to revenue
recognition across the Group will continue to be monitored to
ensure compliance with IFRS15.
The Audit Committee also noted initial project work being carried
out by the Group Finance department on the impact of IFRS16
(leases) on the Group’s consolidated financial statements, which
will be applicable for the year ending 30 September 2020. This
standard will affect Diploma in that all material operating leases
(including properties) will be capitalised on the Balance Sheet and
depreciated. The Group Finance department will again report
formally in 2019 to the Committee on the potential implications on
the consolidated financial statements from adopting this standard.
Further information on the impact of IFRS15 and IFRS16 is set out
on pages 92 and 93.
TA X STR ATEGY
The Committee noted that during the year, the Group tax strategy,
including detailed tax policies, had been updated by the Head of
Tax and Treasury and has been reviewed and approved by the
Board.
RISK MANAGEMENT AND INTERNAL CONTROL
The principal risks and uncertainties that 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 30 to 33.
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
Group has the necessary procedures in place to ensure that there is
an ongoing process for identifying, evaluating and managing the
principal risks to the Group. These procedures are in line with the
Financial Reporting Council’s guidance.
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
who are supported by members of the Executive Management
Committee (“EMC”) comprising of the heads of each business
Sector and functional heads of Group FP&IS and Group Finance.
The EMC and 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 revenue, 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
management.
All financial data is taken directly from the trial balance 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 that evaluates their financial control
environment in their business, which is designed to identify
weaknesses in controls. These assessments are critically reviewed
by the Group’s Director of Internal Audit 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 2017 to the date of this Report. Taking into account the
matters set out on pages 30 to 33 relating to principal risks and
uncertainties and the reports from the Director of Internal Audit,
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 a Group Director of
Internal Audit, based at one of the Group’s businesses in
Minneapolis, US and a Group Senior Internal Auditor based at 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, but
was expanded this year to include regulatory & compliance
reviews and business process improvement. In January, the
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
47
ANTI-BRIBERY AND CORRUPTION
Diploma PLC maintains a Group-wide policy on anti-bribery/
corruption that 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 Group.
WHISTLEBLOWING
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 multilingual hotline, which is managed
by an independent external company and is available 24/7, 365
days a year. Reports to the hotline are investigated and reported to
the Committee, together with details of corrective action taken.
The Group received three such whistleblowing reports during the
year, which on further investigation were found to be personal
grievance matters. On further review and investigation, the
Committee concluded that two of these reports related to
grievance issues in the workplace and the third report comprised
concerns that on investigation were not substantiated. All three
cases reported to the Committee were satisfactorily resolved.
Group Director of Internal Audit presented 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
that set out internal control weaknesses/risks identified during
their work, together with recommendations to improve the
internal control environment and mitigate these weaknesses/
risks. These reports are discussed with management of
the business visited and are reviewed by the appropriate
member of the Executive Management Committee.
At the end of the financial year, the Group Director of Internal Audit
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 Group Director of Internal Audit 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 in regards to
implementing adequate and effective internal controls and
procedures within the key processes related to their general IT and
cybersecurity framework. The Group Director of Internal Audit also
reported that good progress has been made with addressing those
recommendations made in 2017 in connection with establishing
and maintaining adequate segregation of duties within key process
areas and more detailed employee expense reporting. It was also
identified that further work is still required at some businesses to
formalise and improve their inventory cycle count procedures.
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 internal control environment was sufficiently
robust to resist cyber-attacks and that businesses have obtained
or are seeking to obtain the Cyber-Essentials Basic certification.
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 EMC 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 conducted the annual review of the effectiveness
of the Internal Audit department, including its terms of reference,
audit plan, general performance and relationship with the external
auditors. Based on its review the Committee was satisfied with
the effectiveness of the Group’s Internal Audit function, specifically
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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
48
NOMINATION COMMITTEE REPORT
Members of Committee
Attendance
John Nicholas (Chairman)
Charles Packshaw
Andy Smith
Anne Thorburn
4/4
4/4
4/4
4/4
The Nomination Committee is chaired by John Nicholas, Chairman
of the Company. The Committee is chaired by the Senior
Independent Director on any matters concerning the Chairman
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.
RETIREMENT AND APPOINTMENT OF CHIEF EXECUTIVE
OFFICER (“CEO”)
The Committee has focused this year on the appointment of a new
CEO, following the announcement on 26 September 2017 that
Bruce Thompson intended to retire as CEO of Diploma PLC during
2018 and leave the Company on 30 September 2018. The
recruitment process to appoint a new CEO commenced in the
second half of 2017 and was described in last year’s Committee
report. In summary, a thorough process was undertaken with the
assistance of Ridgeway Partners (“Ridgeway”), a search consultancy
which did not have any other connections with the Company.
In particular:
• a detailed specification for the role was prepared against which
potential candidates were considered;
• Ridgeway provided a long list of potential candidates to the
Committee in October 2017;
• a shortlist of candidates was then selected based on both their
desire to be considered for the role and on the Committee’s
assessment of their career background and experience;
• after an initial interview with the Chairman, three preferred
candidates were selected by the Committee to go forward for
formal interview;
• the interview process was led by the Chairman and Senior
Independent Director; the candidates were also interviewed by
the other non-Executive Directors and by the outgoing CEO and
the Group Finance Director. Character references and
psychometric tests were also undertaken on each candidate;
• a preferred candidate recommendation was made by the
Committee in December 2017; and
• a sub-Committee met with the preferred candidate, to negotiate
a remuneration package within the Directors’ Remuneration
Policy and the range recommended by the Remuneration
Committee. The Committee subsequently made a
recommendation to the Board to appoint Richard Ingram, which
the Board approved. Richard Ingram joined the Board as Chief
Executive Officer designate on 23 April 2018 and became Chief
Executive Officer on 8 May 2018.
Richard Ingram stepped down as CEO and Executive Director on
28 August 2018 and left the Company. John Nicholas was
appointed by the Board as interim Executive Chairman and will
remain in this role until a new CEO is appointed.
Following Richard Ingram’s departure, the Nomination Committee
commenced a new process to find a permanent replacement CEO.
Korn Ferry, a search consultancy, was appointed to assist with the
process. Korn Ferry does not provide any other services to and has
no other connection with the Company. The Committee will follow a
similar appointment process as adopted in 2017, amended to reflect
shareholder feedback and Committee review. As at the date of this
report, the process remains ongoing and the Board will make an
announcement when an appointment decision has been finalised.
SUCCESSION PLANNING
The Committee formally reviews succession planning for the
Executive Board at least once each year, 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 also discussed and
agreed to identify potential successors considered for appointment
to the Board from within senior management within the Group.
In January each year, the Committee also reviews succession
planning risks and opportunities in relation to the Company’s
senior executives, which comprise a cadre of ca. 100 senior
managers across the Group’s businesses.
The Committee regularly reviews the succession planning for
non-Executive Directors. The Committee is committed to a
programme of reviewing and refreshing the non-Executive
Directors on the Board to ensure there is sufficient balance
between the introduction of fresh perspectives and maintaining
continuity and stability. The Committee intends to pursue a
phased transition of non-Executives in order to avoid wholesale
changes to the make-up of the Board over the next few years.
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 pursuing opportunities for
both gender and ethnic diversity throughout the Group. The
Board’s commitment to gender and ethnic diversity is set out on
page 40.
Non-Executive tenure as at 30 September 2018
Charles Packshaw
Andy Smith
Anne Thorburn
Years
0
1
2
3
4
5
6
COMMITTEE EVALUATION
As explained on page 41, an external evaluation of the
performance of the Committee and its members was
undertaken during the year. The Chairman and Company
Secretary were asked to prepare an action list and timetable
for the Committee to implement key recommendations
arising from this exercise, although the evaluation
confirmed that the Committee was operating effectively.
KEY DUTIES AND FOCUS IN 2018
The Committee reviews the composition of the Board
and principal Committees, considering skills, knowledge,
experience and diversity requirements before making
appropriate recommendations to the Board as to any changes.
It also manages succession planning for Directors and other
Senior Executives and is responsible for reviewing the Group’s
senior leadership needs.
The Committee’s role and responsibilities are set out in its
Terms of Reference, which are reviewed every two years and
approved by the Board. The Terms of Reference are available at
www.diplomaplc.com/governance/constitutional-documents.
The Committee’s key focus areas during the year have been
the CEO succession, leadership development and executive
succession planning.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
49
REMUNERATION COMMITTEE REPORT
“
OUR 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
Attendance
Andy Smith (Chairman)
Anne Thorburn
John Nicholas (until 31 August 2018)
Charles Packshaw
6/6
6/6
6/6
6/6
DEAR SHAREHOLDER
This is the first year of the new Remuneration Policy (“the Policy”)
that shareholders adopted at this year’s AGM. I am pleased to
report that the Policy has worked well and continues to align with
latest best practice. Company performance has once again been
very strong this year as management continue to successfully
execute the Company’s strategy.
The Committee set the trigger for maximum payment under the
annual performance bonus plan at 10% adjusted operating profit
growth on a constant currency basis. In the year, the Company
delivered an impressive 11.7% on this measure. Accordingly,
Executives were awarded maximum payment.
Long term performance has been impressive too. The long term
incentive plan targets relate to annual growth in earnings per share
(“EPS”) and relative total shareholder returns (“TSR”) compared
with the FTSE250 (excluding investment trusts) over a three-year
period. To achieve the maximum award, Executives needed to
achieve a minimum 14% EPS growth and 14.4% TSR in each of the
three years of the performance period. They achieved 13.9% and
25.9% respectively, which translated into a payment of 99.6% of the
maximum award under the long term incentive plan. The
Committee is content that there is a strong alignment between
performance delivery and these awards.
This year’s Annual Report on Remuneration is set out in full on
pages 51 to 63 of the Annual Report & Accounts and reflects the
Remuneration Policy approved by shareholders in 2018. There
were three matters, both relating to CEO remuneration that
required careful judgement of the Committee in its application
of the Policy.
The Company said farewell this year to Bruce Thompson, former
CEO, after 22 years. The Committee had no hesitation in
acknowledging Bruce’s long and outstanding service for the
Company during which he shaped Diploma into the Company it is
today and consistently delivered excellent value for shareholders.
Full details are available on page 56 but, in summary, the
Committee treated him as a good leaver and approved early-
vesting of his long term incentives, appropriately performance-
tested and pro-rated for time served.
The Committee developed and approved a competitive package
for Richard Ingram to attract him to join the Company as CEO. In
line with the Policy, this took account of the remuneration package
he had received in his former employment. When he stepped
down from the Company, the Committee carefully and thoroughly
considered its obligations to shareholders with specific reference
to the Policy and the legal and contractual commitments made to
Richard Ingram. The Committee approved payments to him under
a settlement agreement that were in line with the Policy and were
no more than was fair and reasonable in the circumstances.
Details are set out on pages 56 and 57.
The Committee also considered the exceptional circumstances
that will prevail whilst the Company works through the
recruitment, appointment and on-boarding of a new CEO and in
particular, the significant additional load and responsibility that will
fall to the Group Finance Director. The Committee believes that it is
in shareholders’ interests to grant an LTIP award in 2019 of 225% of
salary as allowed by Policy in such exceptional circumstances.
Base salaries for the new financial year (that is, from 1 October
2018) will increase by 3.0% (2017: 3.0%) for Executive Directors and
by 4.5% across the senior management cadre. This reflects general
pay inflation in the geographies the Company operates in.
Executive remuneration continues to attract attention, analysis and
debate. The Committee will continue to note emerging views and
trends and take an active role in reviewing the overall remuneration
at senior levels in the organisation to ensure that they remain
consistent with the actual performance delivered and are effective
in attracting and retaining talent for the Group.
The Report of the Remuneration Committee was approved by the
Board on 19 November 2018.
I look forward to meeting shareholders at this year’s AGM on
16 January 2019 and will be pleased to answer any questions or
concerns they have on the Company’s remuneration policies.
Andy Smith
19 November 2018
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
50
REMUNERATION COMMITTEE REPORT CONTINUED
REMUNER ATION COMMITTEE
The Remuneration Committee (“the Committee”) is chaired by
Andy Smith and comprises independent non-Executive Directors.
John Nicholas stepped down from the Committee on 31 August
2018, following his appointment as interim Executive Chairman.
The interim Executive Chairman/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 REMUNER ATION COMMITTEE REPORT
The Report has again been presented this year in two sections.
The first section repeats the key elements of the Director’s
Remuneration Policy, which was approved by shareholders at the
AGM on 17 January 2018. This Policy, which was set out in the 2017
Annual Report, will 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
2018 in accordance with the Policy approved on 17 January 2018.
This section of the Report will continue to be subject to an advisory
vote by shareholders at the AGM.
REMUNER ATION 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 that are
transparent, stretching and rigorously applied;
• provides an appropriate balance between immediate and
deferred remuneration; and
• encourages a high-performance culture by ensuring
performance-related remuneration constitutes a substantial
proportion of the remuneration package and by linking
maximum payout opportunity to outstanding results.
The Policy Table set out on the next page summarises the
components of reward for the Executive Directors of Diploma PLC
that will govern the Company’s intentions as regards future
payments. More detailed descriptions of the incentive plans are
given in the following sections.
There have been no changes made to this Policy since it was
approved by shareholders at the AGM on 17 January 2018.
KEY DUTIES AND FOCUS IN 2018
The Remuneration Committee agrees, on behalf of the Board,
all aspects of the remuneration of the Executive Directors and
the Executive Committee, and agrees the strategy, direction
and policy for the remuneration of the senior executives who
have a significant influence over the Group’s ability to meet its
strategic objectives.
The Committee’s role and responsibilities are set out in its
Terms of Reference, which are reviewed annually and approved
by the Board. The Terms of Reference are available on Diploma
PLC’s website at www.diplomaplc.com/governance/
constitutional-documents.
The Committee’s key responsibilities and focus during the year
have been:
• Reviewed Executive Directors’ salaries, pensions and
benefits.
• Approved Annual Performance Bonus targets and the
subsequent bonus awards for 2018.
• Approved new PSP awards to Executive Directors and
confirmed the performance conditions for such awards.
• Approved Recruitment Award Agreement and Long Term
Incentive Award for new CEO.
• Approved retirement arrangements for Bruce Thompson.
• Approved remuneration aspects relating to the termination
of Richard Ingram’s employment.
• Accepted resignation of John Nicholas from the Remuneration
Committee and approved interim Executive Chairman fees.
• Confirmed the vesting percentages for the PSP awards made
in December 2015 which crystallised in 2018.
• Approved the exercise of nil cost options.
• Approved the 2018 Remuneration Committee Report.
• Reviewed the AGM 2018 votes on the 2017 Remuneration
Committee Report and the 2018 Policy.
• Reviewed remuneration of senior management in the
operating businesses.
• Approved updates to the rules of the Long Term Incentive
Plan, required by the adoption of the new Policy and for new
legislation (i.e. General Data Protection Regulation).
• Maintained watching brief on external reports on Directors’
remuneration.
• Approved Remuneration Committee work programme
for 2018.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
51
DIRECTORS’ REMUNERATION POLICY
THE REMUNER ATION 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 until 16 January 2021, unless replaced or amended by a new Policy.
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Executive Directors
Component
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.
Pensions
Designed to be
competitive within the
market to reward
sustained contribution by
Executive Directors.
Benefits
To provide a competitive
package of benefits.
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.
Annual Performance
Bonus Plan
To incentivise and reward
Executive Directors on the
achievement of the annual
budget and other business
priorities for the financial
year.
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.
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.
No maximum limit is
prescribed, but the
Committee monitors
annually the overall cost of
the benefit provision.
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.
No performance metric.
Performance metrics are
selected annually based
on the current business
objectives. The majority
of the bonus will be linked
to financial performance.
For FY2018, bonuses
are based on adjusted
operating profit (as
defined in note 2 to the
consolidated financial
statements) 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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
52
REMUNERATION COMMITTEE REPORT CONTINUED
Maximum opportunity
Performance metrics
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.
DIRECTORS’ REMUNERATION POLICY CONTINUED
Component
Purpose and link to strategy
Operation
Long Term Incentive
Plan – PSP Awards
Align Executive Directors
to the Company’s long
term strategy and
incentivise Executive
Directors to achieve
superior returns and long
term value growth for
shareholders.
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 the 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.
The Chairman’s and
non-Executive Directors’
fees are determined by
reference to the time
commitment and relevant
benchmark market data.
Annual Board evaluation.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
53
EXECUTIVE DIRECTORS
Base salary
In determining the annual base salary increases that 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.
The Committee also takes into account the salary increases
applying across the senior management cadre. This comparator
group comprises ca. 100 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 approved by shareholders at the AGM on
17 January 2018, the previous financial performance target of
“adjusted EPS” was replaced by “Group adjusted operating profit”
that is calculated on a basis that excludes the impact of currency on
the translation of Group adjusted operating profit. The replacement
performance target applies to the financial year ended
30 September 2018 and thereafter.
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. Adjusted operating
profit is calculated on a constant currency 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 is consistent with the
Group’s financial statements (see note 2). 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.
While retaining flexibility under the Policy, in relation to the setting
of individual objectives, the bonus payable for the financial year
ending 30 September 2018 and thereafter is based solely on
adjusted operating profit on a constant currency basis.
At the end of the financial year, the Committee meets to assess
the performance of each Executive Director against the bonus
targets. Bonuses are normally paid in cash in December.
The Policy requires that 50% of any bonus awarded for the financial
year ending 30 September 2018 or thereafter, is deferred on a net
of tax basis into shares until minimum shareholding guideline
levels, set at 200% of base salary for Executive Directors under the
Policy, have been met.
Long term incentive award
The Company operates a long term incentive award plan for
Executive Directors, the Diploma PLC 2011 Performance Share Plan
(“PSP”). The PSP is designed to promote the long term success of
the Company, while also aligning the Directors’ interests with
those of Diploma PLC shareholders.
The PSP provides for a grant of conditional awards of a specified
number of ordinary shares in the Company, or an option to acquire
a specified number of shares at an exercise price determined by the
Committee (which may be nil or a nominal amount). No payment is
required for the grant of an award.
Awards, which are normally granted annually, must generally be
made within 42 days after the announcement of the Company’s
annual results. When making the decision on the level of award,
the Committee takes into consideration a number of factors,
including the face value of the award and plan dilution limits.
The face value of an award is equal to the number of shares, or
shares under option, multiplied by the relevant share price. The
relevant share price will be the mid-market closing share price on
the 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 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
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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
54
REMUNERATION COMMITTEE REPORT CONTINUED
DIRECTORS’ REMUNERATION POLICY CONTINUED
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 contract, a copy of which is held
at the Company’s registered office, was updated in March 2014 to
recognise developments in law and best practice relating to such
contracts. This service contract, together with any service contract
for new appointments, contains 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
Compensation
payable
upon early
termination
Notice
period
Bruce
Thompson 20 Mar 2014
Richard
Ingram
John
Nicholas1
Nigel
Lingwood
29 Aug 2018
29 Jan 2018
20 Mar 2014
Retired,
8 May 2018
Left,
28 Aug 2018
1 year
1 year
1 year
1 year
Rolling 1 month
1 month
Rolling
1 year
1 year
1 John Nicholas was appointed interim Executive Chairman following the departure of
Richard Ingram as Chief Executive Officer on 28 August 2018.
OTHER REMUNER ATION 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 LTIP 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 pro-rating may be disapplied if the Committee
considers it appropriate, given the circumstances. For awards
granted prior to 17 January 2018, performance will be measured
to the date of cessation of employment and, to the extent
applicable, vest shortly 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 pro-rating
may be disapplied if the Committee considers it appropriate, given
the circumstances of the change of control.
Malus and clawback
Malus provisions apply to all 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 arrangements, which also apply to all awards made
under the Company’s long term incentive and annual bonus
plans, permit the Committee to recover amounts paid to
Executive Directors in specified circumstances to 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.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
55
• The structure of variable pay will be in accordance with
Diploma’s approved Policy, set out above, with an exceptional
maximum aggregate variable pay opportunity of 375% of
salary. Different performance measures may be set in the first
year for the annual bonus, taking account of the responsibilities
of the individual and the point in the financial year that the
executive joined the Company.
• Benefits will generally be provided in accordance with the
approved Policy, with relocation expenses and 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. As a matter of
course, the Committee will normally seek to avoid the use of
discretion. However in order to ensure that outcomes are always in
the interests of shareholders, the Committee retains discretion
over a number of areas relating to the operation and administration
of the plans. These include, the timing of awards and of the setting
of 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 that 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 the
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.
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 that 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. John Nicholas was appointed interim Executive
Chairman on 28 August 2018.
Chairman and non-Executive Directors’ letters of appointment:
John Nicholas
Charles Packshaw
Andy Smith
Anne Thorburn
Date of original
appointment
Date of
re-election
Expiry of term
1 Jun 13
1 Jun 13
9 Feb 15
7 Sep 15
17 Jan 18
17 Jan 18
17 Jan 18
17 Jan 18
20 Jan 21
1 Jun 19
9 Feb 21
7 Sep 21
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 non-Executive Directors
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.
In 2018, the Board approved an additional fee of £144,600 per
annum to be payable to the Chairman, while he serves as interim
Executive Chairman.
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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
56
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 the Executive Directors
for the years ended 30 September 2018 and 2017. All of the information set out in this section of the Report has been audited, unless
indicated otherwise.
EXECUTIVE DIRECTORS
Total remuneration in 2018 and 2017
Fees/Salary
Benefits
Pension
Annual performance bonus
Short term remuneration (cash)
Long term incentive plans – dividend equivalent (cash)
Long term incentive plans – performance element (non-cash)
Long term incentive plans – share appreciation element (non-cash)
Total long term share price based remuneration (non-cash)
John
Nicholas1
Richard
Ingram2
Bruce Thompson3
Nigel Lingwood
2018
£000
14
–
–
–
14
–
–
–
–
2018
£000
191
9
35
–
235
–
–
–
–
2018
£000
303
15
61
625
2017
£000
486
24
97
607
1,004
1,214
102
1,677
1,059
2,736
43
714
287
1,001
2,258
2018
£000
323
18
65
323
729
46
534
501
1,035
1,810
2017
£000
314
18
63
310
705
28
461
186
647
1,380
Total
14
235
3,842
1 John Nicholas was appointed interim Executive Chairman on 28 August 2018. The fees above relate to his Executive service from 28 August to 30 September 2018; as interim
Executive Chairman, John Nicholas is not entitled to benefits, pension, annual bonus or an LTIP. John Nicholas’s fees for his role as non-Executive Chairman are set out on page 63.
2 Richard Ingram’s salary, benefits and pension are for the period from appointment as Chief Executive Officer (designate) on 23 April 2018 to 28 August 2018, when he stood down as
Chief Executive Officer and Executive Director and left the Company. Further details regarding his remuneration are set out below.
3 Bruce Thompson’s salary, benefits and pension are for the period from 1 October 2017 to 8 May 2018, while he served as Chief Executive Officer and Executive Director of the
Company. The table above includes his annual performance bonus and the full value of all long term incentive awards that vested at 30 September 2018. Bruce Thompson’s salary for
the period from 9 May 2018 to 30 September 2018 was £197,000.
The aggregate short term remuneration paid to Executive Directors in the year ended 30 September 2018 was £2.0m (2017: £1.9m).
RETIREMENT OF BRUCE THOMPSON
Bruce Thompson retired as Chief Executive Officer and as an Executive Director of the Company on 8 May 2018; he retired as an employee
of the Company on 30 September 2018. Bruce Thompson was treated as a “good leaver” as he had played the leading role in developing and
implementing the successful growth strategy of the Group over many years. Bruce Thompson’s long term incentive awards vested to the
extent to which the applicable performance conditions were met. These awards were pro-rated for time served, (that is, two out of three
years and one out of three years for awards that would, but for his retirement, have vested at 30 September 2019 and 30 September 2020,
respectively). The vesting of these awards was based on the testing of the performance criteria for the year ended 30 September 2018.
REMUNER ATION ARR ANGEMENTS FOR RICHARD INGR AM
Appointment
On 23 April 2018, Richard Ingram joined the Board as Chief Executive Officer (designate). Bruce Thompson retired from the Board and
handed over his Chief Executive Officer responsibilities to Richard Ingram at the close of the Board meeting on 8 May 2018.
Richard Ingram was to receive an annual salary of £535,000 and a pension allowance of 15% of base salary. Richard Ingram was also
eligible to participate in both the Annual Bonus Plan (up to a maximum of 125% of base salary) and in the LTIP up to 175% of base salary.
All of these remuneration arrangements are consistent with the terms of the Directors’ Remuneration Policy approved by shareholders
on 17 January 2018.
The Board also agreed in accordance with the Remuneration Policy to compensate Richard Ingram on his appointment as Chief
Executive Officer to replace the balance of his existing incentives from his previous employment. To replace incentives relating to the
year ended 30 September 2018, Richard Ingram was eligible for a performance bonus of £1.0 million before tax, of which up to 40% was
payable in cash and the balance in the form of a nil cost option over Company shares. To replace incentives relating to the years ending
September 2019 and September 2020, Richard Ingram was also eligible to receive a long term incentive award (nil cost option) over
shares in the Company, on terms similar to the Company’s LTIP, representing 116.7% and 175% of his base salary with vesting
dependent upon performance conditions.
Departure and payment for loss of office
Richard Ingram stepped down from his role as Chief Executive Officer and Executive Director and left the Company on 28 August 2018.
The financial terms below were agreed with Richard Ingram in a settlement agreement dated 8 November 2018. These payments are in
accordance with the shareholder approved Remuneration Policy and the Company is honouring its contractual commitments.
The following arrangements will apply in respect of Richard Ingram’s notice period:
• Richard Ingram will receive the sum of £507,200 as a payment in lieu of his unworked contractual notice period. A 20% deduction was
applied to the full 12 month notice entitlement (£634,137) by way of mitigation.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
57
Other terms agreed with Richard Ingram in November 2018, which were the subject of careful consideration by the Remuneration
Committee were as follows:
• an additional exit payment of £360,000 by way of settlement of potential claims by Richard Ingram for loss of bonus and incentive
opportunities; and
• a contribution of £20,000 (plus VAT) towards Richard Ingram’s legal fees incurred in connection with the above arrangement.
No other payments were made to Richard Ingram under either the annual performance bonus plan, the long term incentive award or the
recruitment award, all of which lapsed as at 30 September 2018.
EXECUTIVE DIRECTORS’ OTHER ROLES
John Nicholas is non-Executive Chairman of Porvair plc and received fees of £8,804 for the period from 28 August 2018 to 30 September
2018. Bruce Thompson was appointed non-Executive Director of DiscoverIE Group plc on 26 February 2018 and received fees of £8,914
during the period from 26 February 2018 to 8 May 2018.
Base salary
The average base salary increase for Executive Directors which applied from 1 October 2017 was 3.0%, compared with 6.5% for the
Group’s senior management cadre. On 13 November 2018, the Committee approved an increase of 3.0% in base salary for the interim
Executive Chairman and the Group Finance Director that will apply in respect of the year commencing 1 October 2018 which compares
with 4.5% for the Group’s senior management cadre.
Benefits
John Nicholas1
Richard Ingram2
Bruce Thompson3
Nigel Lingwood
2018
2017
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
–
5
9
11
–
3
4
6
–
1
2
1
–
9
15
18
–
–
13
11
–
–
7
6
Medical
insurance
£000
Total benefit
£000
–
–
4
1
–
–
24
18
1 John Nicholas is not entitled to benefits in his role as interim Executive Chairman.
2 Richard Ingram’s benefits are for the period from 23 April 2018 to 28 August 2018.
3 Bruce Thompson’s benefits are for the period from 1 October 2017 to 8 May 2018; his benefits for the period from 9 May 2018 to 30 September 2018 were £9,000.
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 were applied as follows:
John Nicholas1
Richard Ingram2
Bruce Thompson3
Nigel Lingwood
2018
Contribution
rate % of
base salary
Paid as cash
allowance
£000
Paid as
pension
contribution
£000
Total cash
paid
£000
Paid as cash
allowance
£000
–
15
20
20
–
35
61
65
–
–
–
–
–
35
61
65
–
–
97
63
2017
Paid as
pension
contribution
£000
–
–
–
–
Total cash
paid
£000
–
–
97
63
1 John Nicholas is not entitled to a pension contribution in his role as interim Executive Chairman.
2 Richard Ingram’s pension contributions are for the period from 23 April 2018 to 28 August 2018.
3 Bruce Thompson’s pension contributions are for the period from 1 October 2017 to 8 May 2018; his pension contributions for the period from 9 May 2018 to 30 September 2018
were £39,000.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
58
REMUNERATION COMMITTEE REPORT CONTINUED
ANNUAL REPORT ON REMUNERATION CONTINUED
Annual performance bonus
The following table summarises the performance assessment by the Committee in respect of 2018 with regard to the Group financial
objectives:
Performance measure
Performance in 2018
Adjusted Operating Profit
(on a constant currency
basis)
The minimum performance target was equal to the 2017 adjusted
Operating Profit (as defined in note 2 to the consolidated financial
statements) on a constant currency basis. The on-target performance
was equal to the FY2018 budget (4% growth on 2017). The maximum
target was at least 10% growth above 2017 adjusted Operating Profit.
Adjusted Operating Profit (on a constant currency basis) grew by
11.7%. Minimum thresholds were exceeded for adjusted operating
margins, free cash flow and ROATCE.
Overall assessment against targets
100% of the maximum award
Based on the performance set out above, the resulting bonus for each Executive Director relating to 2018 is as follows:
John Nicholas1
Richard Ingram2
Bruce Thompson3
Nigel Lingwood
1 John Nicholas is not entitled to a bonus in his role as interim Executive Chairman.
2 Richard Ingram was not awarded a bonus for the year ended 30 September 2018.
3 Bruce Thompson’s bonus is for the period from 1 October 2017 to 30 September 2018.
2018 actual bonus – as a percentage of 2018 base salary
Minimum
On-target
Maximum
Financial
objectives
Total bonus
–
5%
5%
5%
–
63%
63%
50%
–
–
–
–
125.0%
125%
125%
125.0%
125.0%
100% 100.0% 100.0%
2018 bonus
delivered
as cash
£000
–
–
625
323
The Annual Performance Bonus for the financial year beginning 1 October 2018 will be based solely on adjusted operating profit, measured
on a constant currency basis. 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 the PSP awards that vest in 2018 and the outstanding PSP awards,
including those granted in December 2016 and December 2017. 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. In determining the 2019 long term
incentive award for the Executive Director, the Committee considered the exceptional circumstances that will prevail whilst the Company
works through the recruitment, appointment and on-boarding of a new CEO. During this period, a significant additional load and
responsibility will fall to the Group Finance Director, Nigel Lingwood. The Committee believes that it is in shareholders’ interests in these
exceptional circumstances to provide him with additional incentivisation. Accordingly and as allowed under the Policy, a grant of 225% of
salary for the 2019 long term incentive was approved.
The performance condition for the first half of 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:
Adjusted EPS growth (over three years)
14% p.a.
5% p.a.
Below 5% p.a.
% of awards
vesting
PSP
100
25
Nil
Where the Company’s adjusted EPS performance is between these percentage bands, vesting of the award is on a straight-line basis. For
the purposes of this condition, EPS is adjusted EPS as defined in note 2 to the consolidated financial statements and this definition remains
consistent with the definition of adjusted EPS approved by the Committee in previous years.
The performance condition for the second half of the PSP awards 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:
Upper quartile
Median
Below median
% of awards
vesting
PSP
100
25
Nil
Where the Company’s TSR performance is between these percentage bands, vesting of the award is on a straight-line basis. The FTSE 250
Index was chosen because this is a recognised broad equity market index of which the Company is a member.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
59
Awards vesting in 2018
The PSP awards made to the Executive Directors on 17 December 2015, and the PSP awards made to Bruce Thompson on 22 December
2016 and 28 December 2017, were subject to operating performance conditions as set out in the table on page 58, independently assessed
over a three-year period ended 30 September 2018 and for the 2016 and 2017 awards to Bruce Thompson only, over the two and one-year
period ended 30 September 2018, respectively. The outcome of each award is shown in the table below:
Adjusted earnings per share:
PSP (17 December 2015)
PSP (22 December 2016)1
PSP (28 December 2017)1
Base EPS
38.2p
41.9p
49.8p
EPS at
30 Sep
2018
56.4p
56.4p
56.4p
CAGR
in EPS
Maximum
target
Maximum
award
13.9%
16.0%
13.3%
14.0%
14.0%
14.0%
50%
50%
50%
Vested
award
49.6%
50.0%
47.1%
1 Award vesting to Bruce Thompson only, following his retirement from the Board on 8 May 2018, on the basis explained on page 56.
TSR growth against FTSE 250 (excluding Investment Trusts):
PSP (17 December 2015)
PSP (22 December 2016)1
PSP (28 December 2017)1
TSR at
30 Sep
2018
Median
Maximum
target
Maximum
award
25.9% 5.3% p.a.
28.5% 12.1% p.a.
28.4% 3.75% p.a.
14.4% p.a.
23.3% p.a.
19.2% p.a.
50%
50%
50%
Vested
award
50.0%
50.0%
50.0%
1 Award vesting to Bruce Thompson only, following his retirement from the Board on 8 May 2018, on the basis explained on page 56.
As a result of the above performance conditions, 99.6% of the shares awarded as nil cost options vested to each Director under the PSP
award granted on 17 December 2015. In addition, 100% and 97.1% of the shares awarded as nil cost options under the PSP awards granted
on 22 December 2016 and on 28 December 2017 respectively, vested to Bruce Thompson.
Set out below are the shares that vested to each Executive Director at 30 September 2018 in respect of these awards. The shares vesting
to Bruce Thompson are stated after each of the awards have been time pro-rated to reflect his retirement as explained on page 56.
Bruce Thompson3 – PSP
– PSP (2016)
– PSP (2017)
– PSP
Nigel Lingwood
John Nicholas4
Share price at
date of grant
pence
Share price at
30 Sep 2018
pence
Proportion
of award
vesting
Shares
vested
number
Performance
element1
£000
730p
997.5p
1,221p
730p
–
1,416p
1,416p
1,416p
1,416p
–
99.6%
100.0%
97.1%
99.6%
–
113,175
56,842
23,195
73,063
–
827
567
283
534
–
Share
appreciation
element2
£000
776
238
45
501
–
Total
£000
1,603
805
328
1,035
–
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 2018, and additionally in the case of Bruce Thompson, the two and one-year periods ended 30 September 2018 respectively.
3 The awards for Bruce Thompson have been pro-rated for two of three years for the 2016 PSP and pro-rated for one of three years for the 2017 PSP. These awards vested based on the
testing of performance criteria for the period to 30 September 2018.
4 John Nicholas is not eligible for any LTIPs.
Dividend equivalent payments
Dividend equivalent payments of £117,516 (2017: £70,340) will be payable to Bruce Thompson and Nigel Lingwood in respect of the 2015
PSP awards which vested on 30 September 2018. These payments are included in this year’s Annual Report on Remuneration. Dividend
equivalent payments of £25,352 and £5,520 will be payable to Bruce Thompson in respect of awards which vested on 30 September 2018
relating to the 2016 PSP and 2017 PSP awards respectively.
Long term incentive plan – awards granted in the year
Bruce Thompson and Nigel Lingwood received grants of PSP awards on 28 December 2017, in the form of nil-cost options as set out on
page 60. These awards were based on a share price of 1,221p, 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 award granted on 28 December 2017 to Bruce Thompson vested to the extent to which the applicable performance conditions
were met for the year ended 30 September 2018. The award was pro-rated for time served, that is on the basis of one out of three
years completed.
The performance conditions for these awards are set out on page 58.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
60
REMUNERATION COMMITTEE REPORT CONTINUED
ANNUAL REPORT ON REMUNERATION CONTINUED
Outstanding share‑based performance awards
Set out below is a summary of the share-based awards outstanding at 30 September 2018, 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 for each award. No awards will vest unless the performance conditions set
out on page 58 are achieved.
Diploma PLC 2011 Performance Share Plan
Market price
at date of
award
Face value of
the award at
date of grant
£000
End of
performance
period
Vesting date
Shares over
which
awards held
at 1 Oct
2017
Shares over
which
awards
granted
during
the year
Vested
during the
period
Lapsed
during the
period
Shares over
which
awards held
at 30 Sep
2018
Bruce Thompson1
17 December 2015
22 December 2016
28 December 2017
Nigel Lingwood
17 December 2015
22 December 2016
28 December 2017
730p
997.5p
1,221p
730p
997.5p
1,221p
829
850
875
535
549
565
30 Sep 2018
30 Sep 2019
30 Sep 2020
30 Sep 2018
30 Sep 2018
30 Sep 2018
113,630
85,263
–
–
–
71,664
113,175
56,842
23,195
455
28,421
48,469
–
–
–
30 Sep 2018
30 Sep 2018
30 Sep 2019
30 Sep 2019
30 Sep 2020 30 Sep 2020
73,356
55,035
–
–
–
46,294
73,063
–
–
293
–
–
–
55,035
46,294
1 The awards for Bruce Thompson have been pro-rated for two of three years for the 2016 PSP award (85,263 shares awarded and pro-rated to 56,842 shares) and pro-rated for one
of three years for the 2017 PSP award (71,664 shares awarded and pro-rated to 23,888 shares). These awards vested based on the testing of performance criteria for the period
to 30 September 2018, as explained on page 56.
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; a good leaver must exercise his awards
within 12 months of leaving the Company. Details of options exercised during the year and outstanding at 30 September 2018 are
set out on page 62.
Long Term Incentive Award (on recruitment)
Market price
at date of
award
Face value of
the award at
date of grant
£000
End of
performance
period
Vesting date
Shares over
which
awards held
at 1 Oct
2017
Shares over
which
awards
granted
during
the year
Vested
during the
period
Lapsed
during the
period
Shares over
which
awards held
at 30 Sep
2018
Richard Ingram1
15 May 2018
15 May 2018
1,233p
1,233p
30 Sep 2019
30 Sep 2019
624
936 30 Sep 2020 30 Sep 2020
–
–
50,618
75,932
–
–
50,618
75,932
–
–
1 Richard Ingram received a Long Term Incentive Award on 15 May 2018 in the form of nil-cost options. The award was made in accordance with Listing Rule 9.4.2R(2) and comprised
50,618 award shares with a two-year performance period to 30 September 2019 and 75,932 award shares with a three-year performance period to 30 September 2020. Both of these
awards lapsed when Richard Ingram stood down as Chief Executive Officer and Executive Director on 28 August 2018.
SERVICES FROM EXTERNAL ADVISORS (UNAUDITED)
Stephenson Harwood LLP provide legal advice to the Committee on remuneration matters and on the Directors’ Remuneration Policy.
Ashurst LLP provide legal advice on employment matters.
The Committee also received advice and assistance from Aon on market practice, governance trends and the application of Policy during
the year. The Committee also engaged 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. None of the advisors have any relationships with the Company.
Advisor
Appointed by
Services provided to the Committee
Aon
MEIS
Stephenson Harwood LLP
Ashurst
Committee
Committee
Committee
Committee
Remuneration advice
Data analysis
Legal and remuneration advice
Legal advice
Other services
provided to the
Company
None
None
None
None
Fees (£)
32,404
7,000
35,833
118,423
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
61
SHAREHOLDER VOTING AT PREVIOUS ANNUAL GENER AL MEETING (UNAUDITED)
The Remuneration Committee’s Annual Report (“the Report”) and the Remuneration Committee’s Report on Directors’ Remuneration
Policy (“the Policy”) for the year ended 30 September 2017 was approved by shareholders at the AGM held on 17 January 2018, with the
following votes being cast:
Votes for
Votes against
Withheld
Policy
91,393,536
1,941,428
12,500
97.92%
2.08%
Report
90,383,863
2,951,100
12,500
96.84%
3.16%
ALIGNING PAY WITH PERFORMANCE (UNAUDITED)
The graph below shows the Total Shareholder Return (“TSR”) performance of Diploma PLC for the ten-year period ended 30 September
2018 against the FTSE 250 Index as the Company is a member of this Index.
Growth in the value of a hypothetical £100 holding over ten years
1,400
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
30 Sep 18
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.
CHIEF EXECUTIVE OFFICER REMUNER ATION COMPARED WITH ANNUAL GROWTH IN TSR
Year
2018
2018
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Name
John Nicholas1
Richard Ingram2
Bruce Thompson2
Bruce Thompson
Bruce Thompson
Bruce Thompson
Bruce Thompson
Bruce Thompson
Bruce Thompson
Bruce Thompson
Bruce Thompson
Bruce Thompson
1 John Nicholas is not eligible for an Annual Bonus or share award.
2 These amounts are pro-rated for the period served as CEO, as explained on page 56.
Chief Executive
Officer single
figure of total
remuneration
(£’000)
Annual Bonus
against maximum
opportunity
Actual share
award vesting
Annual
growth in TSR
14
235
3,842
2,258
1,634
1,139
1,846
2,401
1,830
1,701
1,287
834
–
–
100%
100%
95%
51%
65%
33%
95%
100%
100%
30%
–
–
99%
89%
45%
25%
61%
100%
100%
100%
100%
91%
+36%
+36%
+36%
+24%
+36%
–1%
+8%
+42%
+54%
+16%
+71%
+21%
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
62
REMUNERATION COMMITTEE REPORT CONTINUED
ANNUAL REPORT ON REMUNERATION CONTINUED
Set out below is the change over the prior year in base salary, benefits, pension, annual performance bonus and short-term remuneration
of the Chief Executive Officer and the Group’s senior management cadre.
Chief Executive Officer1
Senior management cadre
1 Based solely on amounts paid to Bruce Thompson while he was Chief Executive Officer.
Change in
base salary
%
Change in
pension
%
Change in
benefits
%
Change in
annual
performance
bonus
%
+3
+6
+3
+3
–
–
+3
+16
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 REMUNER ATION (UNAUDITED)
Total employee remuneration
Total dividends paid
2018
£m
92.7
26.8
2017
£m
86.4
23.5
Change
£m
+6.3
+3.3
EXECUTIVE DIRECTORS’ INTERESTS
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 2018 and the movements during the year are as follows:
Bruce Thompson
Nigel Lingwood
Year of
vesting
2017
2018
2017
2018
Options
as at 1 Oct
2017
94,565
–
61,056
–
Exercised
in year
94,565
–
61,056
–
Vested
during the
year
–
193,212
–
73,063
Options
unexercised
as at 30 Sep
2018
–
193,212
–
73,063
Exercise
price5
Earliest normal
exercise date
£1
£1
£1
£1
Nov 2017
Nov 2018
Nov 2017
Nov 2018
Expiry date
Dec 2024
Dec 2025
Dec 2024
Dec 2025
1 Bruce Thompson exercised 94,565 options on 24 November 2017, at a market price of 1,196p per share and the total proceeds before tax were £1,130,997.
2 Nigel Lingwood exercised 61,056 options on 24 November 2017, at a market price of 1,196p per share and the total proceeds before tax were £730,230.
3 On 24 November 2017, the aggregate number of shares received by the participants was reduced by 73,141 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 1,196p.
4 The closing price of an ordinary share on 30 September 2018 was 1,416p (2017: 1,059p).
5 All awards have a notional exercise price of £1 per award.
In ordinary shares
The Executive Directors’ interests in ordinary shares of the Company were as follows:
Bruce Thompson at 8 May 2018
Richard Ingram at 28 August 2018
Nigel Lingwood
As at 30 Sep 20181
As at 30 Sep 2017
Ordinary shares
Options vested
but unexercised
516,450
–
180,000
–
–
73,063
Interest
in shares with
performance
measures
270,557
126,550
101,329
Ordinary shares
570,000
–
200,000
Options vested
but unexercised
Interest in shares
with performance
measures
94,565
–
61,056
198,893
–
128,391
1 Bruce Thompson’s interests are shown as at the date of his retirement from the Board on 8 May 2018 and are before vesting of the PSP option awards. Richard Ingram’s interests are
shown as at 28 August 2018 when he stood down from the Board.
Interests in ordinary shares include shares held through personal saving vehicles. As of 19 November 2018, there have been no changes to
the interests in ordinary shares of the Company held by Nigel Lingwood.
At 30 September 2018 the ordinary shares held by Nigel Lingwood represented 789% of his base salary. The Committee has set a
minimum shareholding guideline of 200% for the Executive Directors.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
63
CHAIRMAN AND NON-EXECUTIVE DIRECTORS’ REMUNER ATION
Individual remuneration for the year ended 30 September was as follows:
John Nicholas
Charles Packshaw
Andy Smith
Anne Thorburn
Total fees
2018
£000
145
55
55
55
2017
£000
140
54
54
54
The non-Executive Directors received a basic annual fee of £50,000 during the year and there were additional fees paid in 2018 of £5,000
(2017: £5,000) for chairing a Committee of the Board or for acting as Senior Independent Director. No additional fee for chairing a
Committee of the Board is payable to the Chairman of the Company. 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 13 November 2018, the
Board approved an increase of 3.0% in the Chairman’s fee to £148,950 p.a. and in the basic annual fee paid to non-Executive Directors to
£51,500. The additional fee for chairing a Committee of the Board will increase to £12,000 and for acting as Senior Independent Director will
increase to £10,000. All these fee increases will take effect from 1 October 2018.
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
2018
7,000
1,500
5,500
3,000
As at
30 Sep
2017
5,000
1,500
5,500
3,000
SENIOR EXECUTIVES BELOW THE BOARD (UNAUDITED)
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 Committee (“EMC”) participate in the Diploma PLC 2011 Performance Share
Plan. Senior management outside the EMC participate in cash based long term incentive plans that 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 2018 which have been granted to members of the
EMC, including share awards which have vested during the year based on performance and share awards that 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 58 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 2017
Shares over
which
awards
granted
during the
year
Vested
during the
period
Lapsed
during the
period
Shares over
which
awards held
at 30 Sep
2018
17 December 2015
22 December 2016
28 December 2017
730p
997.5p
1,221p
30 Sep 2018
159 30 Sep 2018
390 30 Sep 2019
30 Sep 2019
430 30 Sep 2020 30 Sep 2020
21,781
39,126
–
–
–
35,206
13,917
–
–
7,864
18,045
16,708
–
21,081
18,498
In November 2017, 18,961 nil cost options, in respect of awards which vested at 30 September 2017, were exercised by participants.
The Committee anticipates making similar awards to members of the EMC in December 2018.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
64
DIRECTORS’ REPORT
This section contains information which the Directors are
required by law and regulation to include within the Annual
Report & Accounts. The Directors who held office during the
year are set out on pages 36 and 37.
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 35; the Strategic
Report on pages 1 to 35 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, 16 January 2019 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 16 November 2018, the Company had been notified of the
following interests amounting to 3% or more of the voting rights
in its ordinary share capital:
Standard Life Aberdeen plc
Mondrian Investment Partners Ltd
Mawer Investment Management Ltd
Royal London Group
Blackrock, Inc
Fidelity Management & Research Co
Norges Bank Investment Management
Percentage
of ordinary
share capital
8.01
7.26
6.49
5.44
3.30
3.16
3.03
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.
(i) lodged, duly stamped (if necessary), at the registered office
of the Company or any other place as the Board may decide
accompanied by the certificate for the share(s) to be transferred
and/or such other evidence as the Directors may reasonably
require to show the right of the transferor to make the transfer;
(ii) in respect of only one class of shares; (iii) in favour of a person
who is not a minor, infant, bankrupt or a person of unsound mind;
or (iv) in favour of not more than four persons jointly.
Transfers of uncertificated shares must be carried out using
CREST and the Directors can refuse to register a transfer of an
uncertified share in accordance with the regulations governing
the operation of CREST.
Participants in the Company’s 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.
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 17 January 2018. In
the year ended 30 September 2018, the Company has not allotted
any shares. These powers will expire at the conclusion of the 2019
AGM and resolutions to renew the Directors’ powers are therefore
included within the Notice of the AGM in 2019.
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 17 January 2018. In the year to 30 September 2018 the
Company has not acquired any of its own shares. This authority
will expire at the conclusion of the 2019 AGM and a resolution to
renew the authority is therefore included within the Notice of the
AGM in 2019.
Disclosures required under Listing Rule 9.8.4R
There is no information to be disclosed by the Company in
respect of Listing Rule 9.8.4R, except for:
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:
• Long Term Incentive Plan (details of the LTIP awarded to
Richard Ingram on 15 May 2018 in connection with his
appointment as Chief Executive Officer is set out on page 56
of the Remuneration Committee Report. This award lapsed on
28 August 2018 when Richard Ingram stood down as Chief
Executive Officer and left the Company; and
• The Employee Benefit Trust has waived dividends on all
shares held.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
65
FINANCIAL
Results and dividends
The profit for the financial year attributable to shareholders was
£53.8m (2017: £47.5m). The Directors recommend a final dividend
of 17.8p per ordinary share (2017: 16.0p), to be paid, if approved,
on 23 January 2019. This, together with the interim dividend of
7.7p (2017: 7.0p) per ordinary share paid on 13 June 2018 amounts
to 25.5p for the year (2017: 23.0p).
The results are shown more fully in the consolidated financial
statements on pages 66 to 93 and summarised in the Finance
Review on pages 26 to 29.
Auditor
Each of the persons who is a Director at the date of approval of
this Annual Report & Accounts confirms that so far as the Director
is aware, there is no relevant audit information of which the
Company’s Auditor is unaware; and the Director has taken all the
steps that he/she ought to have taken as a Director in order to
make himself/herself 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 Section 418 of the
Companies Act 2006.
PricewaterhouseCoopers LLP (“PwC”) has expressed its
willingness to continue in office as Independent Auditor and a
resolution to re-appoint PwC will be proposed at the Annual
General Meeting to be held on 16 January 2019.
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 35. The financial position
of the Group, its cash flows, liquidity position and borrowing
facilities are described in the Finance Review on pages 26 to 29. 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 30 to 33.
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 2018, the
Group had cash funds of £36.0m 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 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.
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 provide the information
necessary for shareholders to assess the Company’s position
and performance, business model and strategy.
This responsibility statement was approved by the Board of
Directors on 19 November 2018 and is signed on its behalf by:
NP Lingwood
Group Finance Director
JE Nicholas
Chairman
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
Registered office:
12 Charterhouse Square
London
EC1M 6AX
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
66
CONSOLIDATED INCOME STATEMENT
FOR THE YE AR ENDED 30 SEPTEMBER 2018
Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Operating profit
Financial expense, net
Profit before tax
Tax expense
Profit for the year
Attributable to:
Shareholders of the Company
Minority interests
Earnings per share
Basic and diluted earnings
Note
3,4
3
6
7
21
2018
£m
485.1
(312.2)
172.9
(10.8)
(88.9)
73.2
(0.5)
72.7
(18.3)
54.4
53.8
0.6
54.4
2017
£m
451.9
(290.8)
161.1
(10.6)
(82.0)
68.5
(1.7)
66.8
(18.6)
48.2
47.5
0.7
48.2
9
47.5p
42.0p
ALTERNATIVE PERFORMANCE MEASURES (NOTE 2)
Operating profit
Add: Acquisition related charges
Add: CEO transition costs
Adjusted operating profit
Deduct: Interest expense
Adjusted profit before tax
Adjusted earnings per share
The notes on pages 70 to 93 form part of these consolidated financial statements.
Note
11
28
3,4
6
2018
£m
73.2
9.6
2.1
84.9
(0.1)
84.8
2017
£m
68.5
9.7
–
78.2
(0.7)
77.5
9
56.4p
49.8p
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
67
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YE AR ENDED 30 SEPTEMBER 2018
Profit for the year
Items that will not be reclassified to the Consolidated Income Statement
Actuarial (losses)/gains 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 gains/(losses) on foreign currency net investments
Gains/(losses) 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
25
7,14
19
19
7,14
2018
£m
54.4
(1.0)
0.2
(0.8)
0.1
0.7
0.9
(0.4)
1.3
54.9
54.2
0.7
54.9
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
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YE AR ENDED 30 SEPTEMBER 2018
At 1 October 2016
Total Comprehensive Income
Share-based payments
Tax on items recognised directly in equity
Notional purchase of own shares
Dividends
At 30 September 2017
Total Comprehensive Income
Share-based payments
Minority interests acquired
Minority interest contribution
Tax on items recognised directly in equity
Notional purchase of own shares
Dividends
At 30 September 2018
Note
5
7
8,21
5
21
21
7
8,21
Share
capital
£m
Translation
reserve
£m
Hedging
reserve
£m
Retained
earnings
£m
Shareholders’
equity
£m
Minority
interests
£m
Total equity
£m
5.7
–
–
–
–
–
5.7
–
–
–
–
–
–
–
5.7
30.5
(0.8)
–
–
–
–
29.7
0.1
–
–
–
–
–
–
29.8
0.2
(0.9)
–
–
–
–
(0.7)
1.2
–
–
–
–
–
–
0.5
197.1
53.3
0.8
0.3
(0.7)
(23.5)
227.3
52.9
1.0
2.5
–
0.5
(2.2)
(26.8)
255.2
233.5
51.6
0.8
0.3
(0.7)
(23.5)
262.0
54.2
1.0
2.5
–
0.5
(2.2)
(26.8)
291.2
4.3
0.7
–
–
–
(0.2)
4.8
0.7
–
(2.5)
0.3
–
–
(0.2)
3.1
237.8
52.3
0.8
0.3
(0.7)
(23.7)
266.8
54.9
1.0
–
0.3
0.5
(2.2)
(27.0)
294.3
The notes on pages 70 to 93 form part of these consolidated financial statements.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
68
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 2018
Non-current assets
Goodwill
Acquisition intangible assets
Other intangible assets
Investment
Property, plant and equipment
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Current liabilities
Trade and other payables
Current tax liabilities
Other liabilities
Net current assets
Total assets less current liabilities
Non-current liabilities
Retirement benefit obligations
Other liabilities
Deferred tax liabilities
Net assets
Equity
Share capital
Translation reserve
Hedging reserve
Retained earnings
Total shareholders’ equity
Minority interests
Total equity
Note
2018
£m
2017
£m
10
11
11
12
13
14
15
16
18
17
7
20
25
20
14
21
128.5
53.6
1.8
0.7
23.0
0.3
207.9
82.9
77.6
36.0
122.8
54.0
0.7
0.7
22.6
0.2
201.0
73.2
68.9
22.3
196.5
164.4
(80.5)
(4.8)
(5.6)
(90.9)
105.6
313.5
(10.5)
–
(8.7)
(69.7)
(4.0)
(2.5)
(76.2)
88.2
289.2
(9.9)
(4.1)
(8.4)
294.3
266.8
5.7
29.8
0.5
255.2
291.2
3.1
294.3
5.7
29.7
(0.7)
227.3
262.0
4.8
266.8
The consolidated financial statements were approved by the Board of Directors on 19 November 2018 and signed on its behalf by:
NP Lingwood
Group Finance Director
JE Nicholas
Chairman
The notes on pages 70 to 93 form part of these consolidated financial statements.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
69
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YE AR ENDED 30 SEPTEMBER 2018
Operating profit
Acquisition related charges
CEO transition costs, unpaid
Non-cash items
Increase in working capital
Cash flow from operating activities
Interest paid, net
Tax paid
Net cash from operating activities
Cash flow from investing activities
Acquisition of businesses (including expenses, net of cash acquired)
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
Purchase of own shares by Employee Benefit Trust
Notional purchase of own shares on exercise of share options
Repayment of borrowings, net
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of year
Note
23
23,28
23
23
23
22
20
22
13
11
20
8
21
24
18
ALTERNATIVE PERFORMANCE MEASURES (NOTE 2)
Net increase in cash and cash equivalents
Add: Dividends paid to shareholders
Dividends paid to minority interests
Acquisition of businesses (including expenses, net of cash acquired)
Acquisition of minority interests
Deferred consideration paid
Repayment of borrowings, net
Free cash flow
Cash funds
Note
8
21
22
20
20
24
24
2018
£m
73.2
9.6
1.3
5.3
(5.1)
84.3
–
(19.0)
65.3
(18.1)
(0.3)
4.0
(5.3)
(1.3)
–
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
(21.0)
(23.3)
(2.0)
(26.8)
(0.2)
(1.2)
(1.0)
–
–
(23.5)
(0.2)
–
(0.7)
(10.0)
(31.2)
(34.4)
13.1
22.3
0.6
36.0
2018
£m
13.1
26.8
0.2
18.1
2.0
0.3
–
60.5
36.0
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
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YE AR ENDED 30 SEPTEMBER 2018
1. GENER AL 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
19 November 2018. 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 94 and 95.
2. ALTERNATIVE PERFORMANCE MEASURES
The Group uses a number of alternative (non-Generally Accepted Accounting Practice (“non-GAAP”)) financial measures which are
not defined within IFRS. The Directors use these measures for internal management reporting in order to assess the operational
performance of the Group on a comparable basis, and as such these measures 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 (including the incremental cost related directly to the change of the Chief
Executive Officer in 2018) 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” (“adjusted 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 full year 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 (or interim Executive Chairman).
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 25 (unaudited). 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.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
71
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
CEO transition costs
Operating profit
Operating assets
Investment
Goodwill
Acquisition intangible assets
Unallocated assets:
– Deferred tax assets
– Cash and cash equivalents
– Corporate assets
2018
£m
134.7
–
134.7
23.9
–
23.9
(2.4)
2017
£m
125.9
125.9
23.3
23.3
(3.2)
2018
£m
208.0
–
208.0
36.0
–
36.0
(5.0)
2017
£m
195.3
195.3
31.9
31.9
(5.5)
2018
£m
137.3
5.1
142.4
24.6
0.4
25.0
(2.2)
2017
£m
130.7
130.7
23.0
23.0
(1.0)
21.5
20.1
31.0
26.4
22.8
22.0
2018
£m
480.0
5.1
485.1
84.5
0.4
84.9
(9.6)
(2.1)
73.2
Life Sciences
Seals
Controls
Group
2018
£m
43.5
–
59.0
12.9
115.4
2017
£m
42.2
–
59.5
15.4
117.1
2018
£m
80.1
0.7
40.3
21.8
2017
£m
74.6
0.7
39.9
27.0
2018
£m
59.3
–
29.2
18.9
142.9
142.2
107.4
2017
£m
48.1
–
23.4
11.6
83.1
2018
£m
182.9
0.7
128.5
53.6
365.7
0.3
36.0
2.4
2017
£m
451.9
451.9
78.2
78.2
(9.7)
–
68.5
2017
£m
164.9
0.7
122.8
54.0
342.4
0.2
22.3
0.5
Total assets
115.4
117.1
142.9
142.2
107.4
(21.6)
(21.3)
(32.2)
(26.6)
(25.5)
83.1
(21.1)
404.4
365.4
(79.3)
(69.0)
(8.7)
(10.5)
(5.6)
(6.0)
(8.4)
(9.9)
(6.6)
(4.7)
(21.6)
93.8
(21.3)
95.8
(32.2)
110.7
(26.6)
115.6
(25.5)
81.9
(21.1)
62.0
(110.1)
(98.6)
294.3
266.8
Operating liabilities
Unallocated liabilities:
– Deferred tax liabilities
– Retirement benefit obligations
– Acquisition liabilities
– Corporate liabilities
Total liabilities
Net assets
ALTERNATIVE PERFORMANCE MEASURES (NOTE 2)
Net assets
Add/(deduct):
– Deferred tax, net
– Retirement benefit obligations
– Acquisition liabilities
– Cash and cash equivalents
Reported trading capital employed
– Historic goodwill and acquisition related
charges, net of deferred tax
Adjusted trading capital employed
Pro-forma adjusted operating profit1
ROATCE
31.4
125.2
23.9
19.1%
1 After annualisation of adjusted operating profit of acquisitions and disposals.
Life Sciences
Seals
Controls
Group
2018
£m
93.8
2017
£m
95.8
2018
£m
2017
£m
110.7
115.6
2018
£m
81.9
2017
£m
62.0
2018
£m
2017
£m
294.3
266.8
28.8
124.6
24.6
33.0
143.7
36.3
28.1
143.7
32.8
10.2
92.1
27.4
9.4
71.4
23.0
8.4
10.5
5.6
(36.0)
8.2
9.9
6.6
(22.3)
282.8
269.2
74.6
357.4
87.6
66.3
335.5
80.4
19.7%
25.3%
22.8%
29.8%
32.2%
24.5%
24.0%
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
3. BUSINESS SECTOR ANALYSIS CONTINUED
Other Sector information
Capital expenditure
Depreciation and amortisation
4. GEOGR APHIC SEGMENT ANALYSIS BY ORIGIN
Life Sciences
Seals
Controls
Group
2018
£m
3.5
2.4
2017
£m
2.0
2.2
2018
£m
2.0
1.8
2017
£m
1.1
1.9
2018
£m
1.1
0.6
2017
£m
0.2
0.6
2018
£m
6.6
4.8
2017
£m
3.3
4.7
Revenue
Adjusted operating profit
Non-current assets1
Trading capital employed
Capital expenditure
United Kingdom
Rest of Europe
North America
Rest of World
2018
£m
130.2
115.2
202.3
37.4
485.1
2017
£m
118.4
112.8
188.3
32.4
451.9
2018
£m
23.5
17.6
39.5
4.3
84.9
2017
£m
20.6
17.2
36.3
4.1
78.2
2018
£m
54.1
57.0
70.5
25.3
2017
£m
42.3
58.6
70.9
28.3
2018
£m
79.2
76.9
97.1
29.6
2017
£m
60.1
76.9
99.9
32.3
206.9
200.1
282.8
269.2
1 Non-current assets exclude investments 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
2018
£m
0.6
1.5
4.0
0.5
6.6
2018
420
857
471
17
1,765
1,803
2018
£m
81.2
7.4
3.1
1.0
92.7
2018
£m
3.6
0.3
1.0
4.9
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
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 Committee (“EMC”) as set out on pages 36 and 37.
The Executive Directors’ remuneration and their interests in shares of the Company are given on pages 56 to 62 in the Remuneration
Committee Report. The EMC’s interests in the Group’s LTIP is set out on page 63. The charge for share-based payments of £1.0m
(2017: £0.8m) relates to the Group’s LTIP, described in the Remuneration Committee Report.
Directors’ short term remuneration
Non-executive Directors
Executive Directors
2018
£m
0.3
2.0
2.3
2017
£m
0.3
1.9
2.2
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
73
6. FINANCIAL EXPENSE, NET
Interest (expense)/income and similar charges
– bank facility and commitment fees
– interest income on bank deposits
– interest expense on bank borrowings
– notional interest expense on the defined benefit pension scheme (note 25b)
Net interest expense and similar charges
– fair value remeasurement of put options (note 20)
Financial expense, net
2018
£m
(0.1)
0.1
–
(0.1)
(0.1)
(0.4)
(0.5)
2017
£m
(0.3)
–
(0.1)
(0.3)
(0.7)
(1.0)
(1.7)
The fair value remeasurement of £0.4m (2017: £1.0m) comprises £0.2m (2017: £0.5m) that 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 £0.2m
debit (2017: £0.5m debit).
7. TA X 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
2018
£m
2017
£m
3.9
16.1
20.0
–
(0.1)
19.9
(0.4)
(1.2)
(1.6)
18.3
3.7
17.2
20.9
(0.5)
0.2
20.6
(1.9)
(0.1)
(2.0)
18.6
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 £0.2m was debited (2017: £1.0m debit) directly to the Consolidated Statement of
Comprehensive Income. A further £0.5m of current tax (2017: £0.3m) 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 19.0% to the profit before
tax of £72.7m and the amount set out above is as follows:
Profit before tax
Tax on profit at UK effective corporation tax rate of 19.0% (2017: 19.5%)
Effects of:
– 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
2018
£m
72.7
13.8
4.0
(0.1)
0.6
18.3
2017
£m
66.8
13.0
5.3
(0.3)
0.6
18.6
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 2018 was 19.0% (2017: 19.5%) and this rate has been used for tax on profit in the
above reconciliation.
The reduction in the effective rate of taxation reflects the impact from the reduction in the US Federal corporate income tax rate to 21%
from 35%, effective from 1 January 2018. There was no material impact from the revaluation of US deferred tax balances at the reduced
tax rate. The Group’s US businesses account for ca. 26% of Group revenues and adjusted operating profit before tax.
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 higher rates than the UK.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
7. TA X EXPENSE CONTINUED
The UK deferred tax assets and liabilities at 30 September 2018 have been calculated based on the future UK corporation tax rate of
17.0%, as substantively enacted at 30 September 2018.
At 30 September 2018, the Group had outstanding tax liabilities of £4.8m (2017: £4.0m) of which £2.1m related to UK tax liabilities and
£2.7m related to overseas tax liabilities. These amounts are expected to be paid within the next financial year.
8. DIVIDENDS
Interim dividend, paid in June
Final dividend of the prior year, paid in January
2018
pence per
share
2017
pence per
share
7.7
16.0
23.7
7.0
13.8
20.8
2018
£m
8.7
18.1
26.8
2017
£m
7.9
15.6
23.5
The Directors have proposed a final dividend in respect of the current year of 17.8p per share (2017: 16.0p), which will be paid on
23 January 2019, subject to approval of shareholders at the Annual General Meeting on 16 January 2019. The total dividend for the
current year, subject to approval of the final dividend, will be 25.5p per share (2017: 23.0p).
The Diploma PLC Employee Benefit Trust holds 100,368 (2017: 92,898) 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 113,140,435 (2017: 113,133,341) and the profit for the year attributable to shareholders of £53.8m (2017: £47.5m). There
are no potentially dilutive shares. Further description of the Company’s share capital is set out in note e to the Parent Company
Financial Statements on page 95.
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
CEO transition costs
Tax effects on above adjustments
Adjusted earnings
10. GOODWILL
At 1 October 2016
Acquisitions
Exchange adjustments
At 30 September 2017
Acquisitions (note 22)
Exchange adjustments
At 30 September 2018
2018
pence per
share
2017
pence per
share
47.5
8.4
0.4
1.8
(1.7)
56.4
Life Sciences
£m
52.8
6.1
0.6
59.5
–
(0.5)
59.0
42.0
8.6
0.9
–
(1.7)
49.8
Seals
£m
39.1
1.4
(0.6)
39.9
–
0.4
40.3
2018
£m
72.7
(18.3)
(0.6)
53.8
9.6
0.4
2.1
(2.0)
63.9
2017
£m
66.8
(18.6)
(0.7)
47.5
9.7
1.0
–
(1.9)
56.3
Controls
£m
Total
£m
23.3
–
0.1
23.4
5.7
0.1
29.2
115.2
7.5
0.1
122.8
5.7
–
128.5
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.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
75
10. GOODWILL CONTINUED
The cash flow forecasts are discounted to determine a current valuation using a single market derived pre-tax discount rate of ca. 11%
(2017: 12%). This single rate is based on the characteristics of lower risk, non-technically driven, distribution businesses operating
generally in well developed markets and geographies and with robust capital structures. As these features are consistent between each
of the Group’s Sectors, the Board considers that it is more appropriate to use a single discount rate applied to each Sector’s cash flow
forecasts.
Based on the criteria set out above, no impairment in the value of goodwill in any of the Sectors was identified.
The Directors have also carried out sensitivity analysis on the key assumptions noted above to determine whether a “reasonably
possible adverse change” in any of these assumptions would result in an impairment of goodwill. The analysis indicates that a
“reasonably possible adverse change” would not give rise to an impairment charge to goodwill in any of the three Sectors.
11. ACQUISITION AND OTHER INTANGIBLE ASSETS
Cost
At 1 October 2016
Additions
Acquisitions
Disposals
Exchange adjustments
At 30 September 2017
Additions
Acquisitions (note 22)
Disposals
Exchange adjustments
At 30 September 2018
Amortisation
At 1 October 2016
Charge for the year
Disposals
Exchange adjustments
At 30 September 2017
Charge for the year
Disposals
Exchange adjustments
At 30 September 2018
Net book value
At 30 September 2018
At 30 September 2017
Customer
relationships
£m
Supplier
relationships
£m
Trade
names and
databases
£m
Total
acquisition
intangible
assets
£m
Other
intangible
assets
£m
78.6
–
2.3
–
(0.7)
80.2
–
9.1
–
0.3
89.6
33.3
7.8
–
(0.4)
40.7
7.1
–
0.4
48.2
41.4
39.5
21.8
–
7.8
–
–
29.6
–
–
–
(0.1)
29.5
12.9
2.3
–
0.1
15.3
2.0
–
–
17.3
12.2
14.3
2.9
–
–
–
(0.1)
2.8
–
–
–
–
2.8
2.5
0.2
–
(0.1)
2.6
0.2
–
–
2.8
–
0.2
103.3
–
10.1
–
(0.8)
112.6
–
9.1
–
0.2
121.9
48.7
10.3
–
(0.4)
58.6
9.3
–
0.4
68.3
53.6
54.0
5.6
0.2
–
(0.1)
(0.1)
5.6
1.3
–
(0.2)
0.1
6.8
4.6
0.4
(0.1)
–
4.9
0.3
(0.2)
–
5.0
1.8
0.7
Acquisition related charges are £9.6m (2017: £9.7m) and comprise £9.3m (2017: £10.3m) of amortisation of acquisition intangible assets,
£0.5m of acquisition expenses (2017: £0.4m) and a credit of £0.2m relating to adjustments to deferred consideration (2017: £1.0m credit).
Acquisition intangible assets relate to items acquired through business combinations which are amortised over their useful
economic life.
Customer relationships
Supplier relationships
Databases and trade names
Economic life
5–15 years
8–10 years
5–10 years
Other intangible assets comprise computer software that is separately identifiable from IT equipment and includes software licences.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
12. INVESTMENT
Investment
2018
£m
0.7
2017
£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 2018, 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 2016
Additions
Acquisitions of businesses
Disposals
Exchange adjustments
At 30 September 2017
Additions
Acquisitions of businesses (note 22)
Disposals1
Exchange adjustments
At 30 September 2018
Depreciation
At 1 October 2016
Charge for the year
Disposals
Exchange adjustments
At 30 September 2017
Charge for the year
Disposals1
Exchange adjustments
At 30 September 2018
Net book value
At 30 September 2018
At 30 September 2017
Freehold
properties
£m
Leasehold
properties
£m
Plant and
equipment
£m
Hospital field
equipment
£m
Total
£m
47.3
3.1
1.0
(1.8)
1.3
50.9
5.3
–
(3.3)
0.4
19.3
1.2
0.2
(0.8)
1.2
21.1
1.2
–
(2.3)
0.4
9.4
1.6
0.8
(0.5)
0.2
11.5
2.3
–
(0.7)
(0.2)
20.4
12.9
53.3
12.7
1.8
(0.8)
1.3
15.0
1.8
(2.2)
0.3
14.9
5.5
6.1
5.5
1.6
(0.4)
0.2
6.9
1.8
(0.4)
(0.1)
8.2
4.7
4.6
23.6
4.3
(1.2)
1.6
28.3
4.5
(2.8)
0.3
30.3
23.0
22.6
15.0
0.2
–
(0.5)
(0.2)
14.5
1.0
–
–
0.4
15.9
3.9
0.5
–
–
4.4
0.5
–
0.3
5.2
10.7
10.1
3.6
0.1
–
–
0.1
3.8
0.8
–
(0.3)
(0.2)
4.1
1.5
0.4
–
0.1
2.0
0.4
(0.2)
(0.2)
2.0
2.1
1.8
1 Includes £0.3m at net book value relating to the disposal of Bulldog (note 22).
Land included within freehold properties above, but which is not depreciated, is £3.4m (2017: £3.4m). Capital commitments contracted,
but not provided, were £0.7m (2017: £1.1m) relating to the extension of the facility at IS-Sommer.
Freehold properties includes ca. 150 acres of land at Stamford (“the Stamford land”) that comprises mostly farm land and former quarry
land. In the Directors’ opinion the current value of this land at 30 September 2018 is £1.0m (2017: £1.0m), with a book value of £Nil.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
77
14. DEFERRED TA X
The movement on deferred tax is as follows:
At 1 October
Credit for the year (note 7)
Acquisitions (note 22)
Accounted for in Other Comprehensive Income
Exchange adjustments
At 30 September
2018
£m
(8.2)
1.6
(1.6)
(0.2)
–
(8.4)
2017
£m
(7.4)
2.0
(2.0)
(1.0)
0.2
(8.2)
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
2018
£m
0.6
–
2.0
1.5
0.2
0.1
0.9
5.3
(5.0)
0.3
2017
£m
0.5
–
1.8
1.8
0.2
0.1
1.6
6.0
(5.8)
0.2
2018
£m
(1.4)
(11.7)
–
(0.1)
–
–
(0.5)
(13.7)
5.0
(8.7)
2017
£m
(1.7)
(12.3)
–
(0.1)
–
–
(0.1)
(14.2)
5.8
(8.4)
2018
£m
(0.8)
(11.7)
2.0
1.4
0.2
0.1
0.4
(8.4)
–
(8.4)
2017
£m
(1.2)
(12.3)
1.8
1.7
0.2
0.1
1.5
(8.2)
–
(8.2)
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
from overseas businesses of £122.1m was £6.3m (2017: £5.5m).
15. INVENTORIES
Finished goods
2018
£m
82.9
2017
£m
73.2
Inventories are stated net of impairment provisions of £8.7m (2017: £8.3m). During the year £1.5m (2017: £1.3m) was recognised as a
charge against operating profit, comprising the write-down of inventories to net realisable value.
16. TR ADE 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
2018
£m
71.5
(0.7)
70.8
3.5
3.3
77.6
2018
£m
23.8
16.0
10.2
12.3
9.2
71.5
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
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
16. TR ADE 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. TR ADE 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
2018
£m
59.2
11.6
0.7
71.5
2018
£m
9.8
1.4
0.4
–
11.6
2018
£m
0.8
(0.1)
–
–
0.7
2018
£m
48.3
3.6
4.9
23.7
80.5
2018
£m
11.2
20.2
0.9
13.2
2.8
48.3
18. CASH AND CASH EQUIVALENTS
Cash at bank
Short term deposits
UK
£m
4.7
16.0
20.7
US$
£m
4.3
4.1
8.4
C$
£m
1.1
1.0
2.1
Euro
£m
Other
£m
2.9
–
2.9
1.6
0.3
1.9
2018
Total
£m
14.6
21.4
36.0
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
The short term deposits and cash at bank are both interest bearing at rates linked to the UK base rate, or equivalent rate.
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
2017
Total
£m
18.3
4.0
22.3
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
79
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 33 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
2018
£m
70.8
3.5
36.0
110.3
2017
£m
63.4
2.3
22.3
88.0
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 2018 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. This facility, which expires on 1 June 2020, is a committed three year
multi-currency revolving 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 at 30 September 2018 (2017: £Nil).
The undrawn committed facilities available at 30 September are as follows:
Expiring within one year
Expiring after two years
2018
£m
–
30.0
2017
£m
–
30.0
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
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
2018
£m
48.3
3.6
5.6
57.5
57.5
–
–
57.5
–
57.5
2017
£m
42.5
3.3
6.6
52.4
48.3
4.5
–
52.8
(0.4)
52.4
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 £0.1m (2017: £0.5m) 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 2018 was £39.7m (2017: £33.0m). The net fair value of
forward foreign exchange contracts used as hedges at 30 September 2018 was a £0.7m asset (2017: £0.9m liability). The amount
removed from Other Comprehensive Income and taken to the Consolidated Income Statement in cost of sales during the year was a
£0.9m credit (2017: £0.2m debit). The change in the fair value of cash flow hedges taken to Other Comprehensive Income during the
year was a £0.7m credit (2017: £1.0m debit).
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
2018
£m
2.4
1.7
1.0
2.2
5.4
2.3
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 profit before tax. An analysis of cash and cash equivalents at the reporting
dates is set out in note 18.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
81
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 designated as level 1 assets (in the “fair value hierarchy”) and 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 maturity 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 capital structure comprises cash funds and medium term bank borrowing facilities. The Group’s objective when managing
capital is 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.
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 options
Unwinding of discount
Fair value remeasurements
At 30 September
2018
£m
4.5
1.1
5.6
5.6
–
2018
£m
6.1
(2.0)
0.2
0.2
4.5
2017
£m
6.1
0.5
6.6
2.5
4.1
2017
£m
5.1
–
0.5
0.5
6.1
At 30 September 2018, the Group retained put options to acquire minority interests in Kentek and M Seals.
On 17 November 2017 and 30 March 2018, the Group completed the acquisition of the outstanding 10% minority interest in TPD for
cash consideration of £2.0m (€2.3m). At 30 September 2018, the Group retained put options to acquire minority interests of 10% held
in each of M Seals and Kentek which are both exercisable from November 2018.
At 30 September 2018, the estimate of the financial liability to acquire the outstanding minority shareholdings was reassessed by
the Directors, based on their current estimate of the future performance of these businesses and to reflect foreign exchange rates
at 30 September 2018. This led to a remeasurement of the fair value of these put options and the liability was increased by £0.2m
(2017: £0.5m) reflecting a revised estimate of the future performance of the businesses and by a further £0.2m (2017: £0.5m) charge
which arises from unwinding the discount on the liability. In aggregate £0.4m (2017: £1.0m) has been charged to the Consolidated
Income Statement.
Deferred consideration comprises the following:
Ascome
Edco
Coast
FS Cables
At 30 September
2018
£m
–
–
0.1
1.0
1.1
2017
£m
0.1
0.4
–
–
0.5
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
20. OTHER LIABILITIES CONTINUED
The amounts outstanding at 30 September 2018 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 £0.2m was paid to the vendors of Edco in respect of the performance of the
business in the year ended 30 April 2018 and £0.1m was paid to the vendor of Ascome. A further £0.2m has been released to the
Consolidated Income Statement as part of acquisition related charges in note 11.
21. MINORITY INTERESTS
At 1 October 2017
Share of profit
Dividends paid
At 30 September 2017
Minority interest contribution
Share of minority net assets acquired of TPD
Share of profit
Dividends paid
Exchange adjustments
At 30 September 2018
£m
4.3
0.7
(0.2)
4.8
0.3
(2.5)
0.6
(0.2)
0.1
3.1
External shareholders, represented by management in each business hold a 10% minority interest in M Seals and Kentek.
22. ACQUISITION AND DISPOSAL OF BUSINESSES
On 16 October 2017, the Group acquired the trade and net assets of Coast Fabrications Inc. (“Coast”), based in California, US, for total cash
consideration of £1.2m (US$1.5m), which included £0.1m of acquisition expenses. The Company now trades as Clarendon Specialty Fasteners Inc.
On 21 August 2018, the Group acquired 100% of Caplink Limited and FSC Global Limited (collectively “FS Cables”) based in St. Albans,
UK, for the initial consideration of £24.3m, which included £7.3m of surplus cash and was before acquisition expenses of £0.4m.
Maximum deferred consideration of £1.0m is payable based on the performance of FS Cables for the 12 months ended 31 October 2018.
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
Cash acquired
Expenses of acquisition
Net cash paid, after acquisition expenses
Deferred consideration payable (note 20)
Less: expenses of acquisition
Total consideration
FS Cables
Coast
Total
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
–
–
–
0.5
0.3
(0.3)
0.5
–
0.5
–
–
0.3
3.8
2.5
(0.4)
6.2
–
6.2
8.6
(1.6)
–
3.3
2.5
(0.8)
12.0
5.5
17.5
24.3
(7.8)
0.4
16.9
1.0
(0.4)
17.5
0.5
–
–
0.5
0.3
(0.3)
1.0
0.2
1.2
1.1
–
0.1
1.2
0.1
(0.1)
1.2
–
–
0.3
4.3
2.8
(0.7)
6.7
–
6.7
9.1
(1.6)
–
3.8
2.8
(1.1)
13.0
5.7
18.7
25.4
(7.8)
0.5
18.1
1.1
(0.5)
18.7
The fair values set out above are provisional and will be finalised in the next financial year. Goodwill of £5.7m recognised on these
acquisitions represents the amount paid for future sales growth from both new customers and new products, operating cost synergies
and employee know-how.
From the date of acquisition to 30 September 2018, the newly acquired Coast business contributed £4.0m to revenue and £0.2m to
operating profit, the newly acquired FS Cables business contributed £1.1m to revenue and £0.2m to 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 £17.6m to revenue
and £2.8m to 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.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
83
22. ACQUISITION AND DISPOSAL OF BUSINESSES CONTINUED
On 30 June 2018, Hercules Fluid Power Group, based in the US, sold the Bulldog Hydraulics and Gaskets business and trading assets at
net asset value for net cash consideration of £4.0m (US$5.4m), comprising tangible assets of £0.3m and net working capital of £3.7m.
The business contributed revenues of £4.7m and an operating loss of £0.3m for the nine months ended 30 June 2018.
23. RECONCILIATION OF OPER ATING PROFIT TO CASH FLOW FROM OPER ATING ACTIVITIES
Operating profit
Acquisition related charges (note 11)
CEO transition costs (note 28)
Adjusted operating profit
CEO transition costs paid (note 28)
Depreciation or amortisation of tangible and other intangible assets
Share-based payments expense (note 5)
Defined benefit scheme expense (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 in working capital
Cash flow from operating activities, before acquisition expenses
24. CASH FUNDS
The movement in cash during the year is as follows:
Net increase in cash and cash equivalents
Decrease in borrowings
Effect of exchange rates
Movement in net cash
Net cash at beginning of year
Cash funds at end of year
Comprising:
Cash and cash equivalents
Borrowings
Cash funds at 30 September
2018
£m
4.8
1.0
(0.5)
(8.3)
(5.2)
8.4
2018
£m
73.2
9.6
2.1
84.9
(0.8)
84.1
5.3
89.4
(5.1)
84.3
2017
£m
4.7
0.8
(0.4)
(5.1)
(6.6)
7.7
2018
£m
13.1
–
13.1
0.6
13.7
22.3
36.0
36.0
–
36.0
2017
£m
68.5
9.7
–
78.2
–
78.2
5.1
83.3
(4.0)
79.3
2017
£m
1.9
10.0
11.9
(0.2)
11.7
10.6
22.3
22.3
–
22.3
The Group has a committed three year multi-currency revolving facility of £30.0m which expires on 1 June 2020 with an accordion
option to increase the committed facility by a further £30.0m up to a maximum of £60.0m and a further option to extend the term up to
five years. At 30 September 2018, the Group has utilised none of this facility (2017: £Nil). Interest on this facility is payable 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
2018
£m
Diploma Holdings PLC UK Pension Scheme
Kubo Pension Scheme
Pension scheme net deficit
6.8
3.7
10.5
5.4
4.5
9.9
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
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
2018
£m
(0.1)
(0.2)
(0.3)
2017
£m
(0.3)
(0.2)
(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.
On 28 September 2018 the Trustees completed a Buy-In of the pensioner liabilities in the Scheme with Just Retirement Limited. The Scheme
paid £12.3m to Just Retirement Limited on 28 September 2018 to fund 95% of the Buy-In premium and £0.7m was paid on 22 October 2018 to
fund the remaining 5% of the premium. The impact of this transaction has been reflected in the pension disclosures set out below.
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
Buy-In policy
Bonds
Cash
Present value of Scheme liabilities
Pension scheme net deficit
2018
£m
2017
£m
20.0
9.5
–
–
29.5
(36.3)
(6.8)
24.8
–
6.0
0.1
30.9
(36.3)
(5.4)
The pension scheme net deficit includes £3.5m of historic annuities and related assets on a net basis, rather than on a gross basis.
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
2018
£m
–
(1.0)
0.9
(0.1)
(0.1)
2017
£m
–
(0.9)
0.6
(0.3)
(0.3)
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
85
25. RETIREMENT BENEFIT OBLIGATIONS CONTINUED
c) Amounts recognised in the Consolidated Statement of Comprehensive Income
Investment (loss)/gain on Scheme assets in excess of interest
Effect of changes in financial assumptions on Scheme liabilities
Effect of changes in demographic assumptions on Scheme liabilities
Experience adjustments on Scheme liabilities
Actuarial (losses)/gains charged in the Consolidated Statement of Comprehensive Income
2018
£m
(1.8)
0.6
(0.6)
–
(1.8)
2017
£m
2.7
3.2
(1.3)
(0.1)
4.5
The cumulative amount of actuarial losses recognised in the Consolidated Statement of Comprehensive Income, since the transition to
IFRS, is £7.6m (2017: £5.8m).
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
2018
£m
5.4
0.1
(0.5)
1.8
6.8
2018
£m
36.3
1.0
–
(1.0)
36.3
2018
£m
30.9
0.9
(1.8)
0.5
(1.0)
29.5
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
The actual return on the Scheme assets during the year was a £0.9m loss (2017: £3.3m gain).
Assets
The Scheme’s assets are held in passive unit funds managed by Legal & General Investment Management and at 30 September 2018,
the major categories of assets were as follows:
North America equities
UK equities
European equities (non-UK)
Asia-Pacific and Emerging Markets equities
Buy-In policy
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
2018
%
3.4
2.4
2.4
2.9
2017
%
3.4
2.4
2.4
2.8
2018
%
2017
%
17
17
17
17
32
–
–
–
2016
%
3.2
2.4
2.4
2.3
20
20
20
20
–
12
8
–
2015
%
3.1
2.3
2.3
2.3
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
25. RETIREMENT BENEFIT OBLIGATIONS CONTINUED
Demographic assumptions
Mortality table used:
Year the mortality table was published:
Allowance for future improvements in longevity:
Allowance made for members to take a cash lump sum
on retirement:
S2NxA
CMI 2017
Year of birth projections, with a long term improvement rate of 1.0%
Members are assumed to take 100% of their maximum cash sum
(based on current commutation factors)
The weighted average duration of the defined benefit obligation is around 18 years.
Sensitivities
The sensitivities of the 2018 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
8.6
3.7
2.7
3.1
1.3
1.0
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 contribute £0.5m
in cash to the scheme annually. 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 2018 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
2018
£m
9.1
(12.8)
(3.7)
2018
£m
(0.2)
(0.2)
2018
£m
4.5
0.2
(0.2)
(0.8)
–
3.7
2017
£m
8.7
(13.2)
(4.5)
2017
£m
(0.2)
(0.2)
2017
£m
7.2
0.2
(0.2)
(2.6)
(0.1)
4.5
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
87
25. RETIREMENT BENEFIT OBLIGATIONS CONTINUED
d) Amounts recognised in the Consolidated Statement of Comprehensive Income
The actuarial gain credited to the Consolidated Statement of Comprehensive Income is £0.8m (2017: £2.6m).
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 2018 pension liabilities to changes in assumptions are as follows:
Factor
Assumption
Discount rate
Life expectancy
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 2019
Best estimate of employees’ contribution in 2019
2018
2017
0%
1.0%
1.0%
1.0%
0%
1.0%
0.7%
1.0%
BVG2015 BVG2015
Impact on pension liabilities
Estimated
increase
%
Estimated
increase
£m
10.6%
7.0%
1.4
0.9
£m
0.4
0.3
The weighted average duration of the defined benefit obligation is approximately 20 years.
26. COMMITMENTS
At 30 September 2018 the Group had outstanding aggregate commitments for future lease payments (under non-cancellable operating
leases) in respect of the following years:
Within one year
For years two to five
After five years
Land and buildings
Other
Total
2018
£m
4.4
11.1
5.0
2017
£m
4.1
9.7
4.2
20.5
18.0
2018
£m
1.5
2.1
–
3.6
2017
£m
1.3
1.6
–
2.9
2018
£m
5.9
13.2
5.0
24.1
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 £4.6m (2017: £4.2m) and £1.6m (2017: £1.5m), respectively.
27. AUDITOR’S REMUNER ATION
During the year the Group paid fees for the following services from the auditor:
Fees payable to the auditor for the audit of:
– the Company’s Annual Report & Accounts
– the Company’s subsidiaries
Audit fees
2018
£m
0.1
0.5
0.6
2017
£m
0.1
0.5
0.6
Non-audit fees of £15,000 (2017: £13,000) were paid to the Group’s auditor for carrying out “agreed upon procedures” on the Half Year
Announcement, which is unaudited.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
28. CHIEF EXECUTIVE OFFICER TR ANSITION COSTS
Richard Ingram joined the Board on 23 April 2018 and was appointed Chief Executive Officer (“CEO”) on 8 May 2018. Bruce Thompson
retired as both CEO and Executive Director on 8 May 2018, but remained available to support an orderly transition until his retirement
from the Company on 30 September 2018. Accordingly for a period of time during the year, the Company was bearing the costs of two
CEO roles.
On 28 August 2018, Richard Ingram stepped down from his role as both CEO and as Executive Director and left the Company with
immediate effect.
The one-off and incremental costs associated with the transition of the CEO comprise a significant restructuring cost to the Group and
have been excluded in determining adjusted operating profit to present, the operational performance of the Group on a consistent
basis. The costs relating to the CEO transition of £2.1m comprise:
Employment costs
– as CEO
– in lieu of notice
Compensation on loss of office
Recruitment costs1
Other related costs, including advisors
1 Includes recruitment costs relating to new recruitment search project that commenced in August 2018.
29. EXCHANGE R ATES
The exchange rates used to translate the results of the overseas businesses are as follows:
US dollar (US$)
Canadian dollar (C$)
Euro (€)
Swiss franc (CHF)
Australian dollar (A$)
Charged in
year
£m
Paid in
year
£m
Outstanding
at 30
September
£m
0.3
0.5
0.4
0.6
0.3
2.1
(0.3)
(0.1)
–
(0.3)
(0.1)
(0.8)
Average
Closing
2018
1.35
1.73
1.13
1.31
1.78
2017
1.27
1.67
1.15
1.26
1.67
2018
1.30
1.69
1.12
1.27
1.80
–
0.4
0.4
0.3
0.2
1.3
2017
1.34
1.68
1.13
1.30
1.71
30. SUBSEQUENT EVENTS
On 12 October 2018, the Group completed the acquisition of Actios SAS, the parent company of the Gremtek Group (“Gremtek”)
of companies. Gremtek is a leading supplier of own-branded protective sleeving and cable identification products to a broad range
of industrial markets, principally in France, but also in Germany and elsewhere in Europe. The initial consideration was £7.4m (€8.4m)
with deferred consideration payable of up to £0.5m (€0.6m), based on performance in the year ending 31 December 2018. A review
to determine fair values of the net assets acquired will be completed during the next financial year.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
89
GROUP ACCOUNTING POLICIES
FOR THE YE AR ENDED 30 SEPTEMBER 2018
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 2018 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 2018.
1.1 BASIS OF PREPAR ATION
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
is exposed or has rights to variable returns from its involvement
with the entity and has the ability to affect those returns through
its power over the entity. 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 2018 or 2017.
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.
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 Comprehensive
Income (“Other Comprehensive Income”):
– Actuarial gains and losses arising on the assets and
liabilities of the plan related to actual experience and any
changes in assumptions at the end of the year.
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.
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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
90
GROUP ACCOUNTING POLICIES CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
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.
1.8 TA X ATION
The tax expense relates to the sum of current tax and deferred tax.
Current tax is based on taxable profit for the year, which differs
from profit before taxation as reported in the Consolidated
Income Statement. Taxable profit excludes items of income and
expense that are taxable (or deductible) in other years and also
excludes items that are never taxable or deductible. The Group’s
liability for current tax, including UK corporation tax and overseas
tax, is calculated using rates that have been enacted or
substantively enacted at the balance sheet date.
Deferred tax is accounted for using the balance sheet liability
method. Deferred tax is recognised on differences between
the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the
computation of taxable profit. Deferred tax liabilities are generally
recognised for all taxable temporary differences and deferred tax
assets are recognised to the extent that it is probable that taxable
profits will be available against which deductible temporary
differences can be utilised. Temporary differences arise primarily
from the recognition of the deficit on the Group’s defined benefit
pension scheme, the difference between accelerated capital
allowances and depreciation and for short term timing differences
where a provision held against receivables or inventory is not
deductible for taxation purposes. However, deferred tax assets
and liabilities are not recognised if the temporary difference arises
from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a
transaction that affects neither the taxable 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.
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
7 years
– IT hardware between 3 and 5 years
– fixtures and fittings between 5 and
Hospital field equipment
15 years
– 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
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
91
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 at
initial recognition 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.
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 FIFO and weighted average cost basis) and net realisable value,
after making due allowance for any obsolete or slow moving
inventory. Cost comprises direct materials, duty and freight-in
costs.
Net realisable value represents the estimated selling price less all
estimated costs of completion and the estimated costs
necessary to make the sale.
1.13 FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognised in the Group balance
sheet when the Group becomes a party to the contractual
provisions of the instrument.
a) Trade receivables
Trade receivables are initially measured at fair value, do not carry
any interest and are reduced by a charge for impairment for
estimated irrecoverable amounts. Such impairment charges are
recognised in the Consolidated Income Statement.
b) Trade payables
Trade payables are non-interest bearing and are initially measured
at their 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.
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.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
92
GROUP ACCOUNTING POLICIES CONTINUED
FOR THE YE AR ENDED 30 SEPTEMBER 2018
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.
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.
1.18 SHARE CAPITAL AND RESERVES
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares are shown in equity as a
deduction, net of tax, from the proceeds. The Group also
maintains the following reserves:
a) Translation reserve – The translation reserve comprises all
foreign exchange differences arising from the translation of the
financial statements of foreign businesses.
b) Hedging reserve – The hedging reserve comprises the
effective portion of the cumulative net change in the fair value
of cash flow hedging instruments that are determined to be an
effective hedge.
c) Retained earnings reserve – The retained earnings reserve
comprises total cumulative recognised income and expense
attributable to shareholders. Bonus issues of share capital and
dividends to shareholders are also charged directly to this
reserve. In addition the cost of acquiring shares in the
Company and the liability to provide those shares to
employees, is accounted for in this reserve.
Where any Group company purchases the Company’s equity
share capital and holds that share either directly as treasury
shares or indirectly within an ESOP trust, the consideration paid,
including any directly attributable incremental costs (net of
income taxes), is deducted from equity attributable to the
Company’s equity holders until the shares are cancelled, reissued
or disposed of. Where such shares are subsequently sold or
reissued, any consideration received, net of any directly
attributable incremental transaction costs and the related income
tax effects, is included in equity attributable to the Company’s
equity holders. These shares are used to satisfy share awards
granted to Directors under the Group’s share schemes. The
Trustee purchases the Company’s shares on the open market
using loans made by the Company or a subsidiary of the
Company.
1.19 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 IFRSs (“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 2018.
An assessment of the impact of these new standards and
interpretations is set out below:
IFRS15 Revenue from contracts with customers
IFRS15 replaces IAS18 and introduces a single, principles-based
approach to recognition and measurement of revenue from
sales contracts with customers. The new approach requires the
identification of performance obligations in a sales contract and
sets out when revenue is recognised based upon when those
performance obligations have been met.
During 2018, a full analysis of the Group’s significant revenue
streams was undertaken with the assistance of key finance and
management in each of the Group’s businesses. The analysis
performed enabled management to assess the impact of the
new standard on the 2017 and 2018 financial statements.
This analysis confirmed that the majority of Group revenue
is derived from the sale of products which generally have one
performance obligation. Within the Life Sciences Sector there
are a small number of contracts where goods and services are
delivered and there is more than one performance obligation; in
the majority of instances revenue for these contracts is already
being separately recognised. Where revenue has been recognised
for the delivery of goods, revenue recognition will be amended
to ensure the element of revenue attributable to the service is
separately recognised. The financial impact on revenues is
not expected to be material.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
93
The Group will adopt IFRS15 for the year commencing on
1 October 2018. As the anticipated impact of applying IFRS15 is
not expected to be material, the Group will not restate the prior
year consolidated financial statements.
IFRS9 Financial Instruments
IFRS9 replaces IAS39 and concerns the classification,
measurement and de-recognition of financial assets and financial
liabilities, introduces an expected credit loss model for the
impairment of financial assets and sets out changes to the hedge
accounting relationships.
During 2018, the Group completed an assessment of the impact
of IFRS9 and concluded that adoption of this standard will not
have a material impact on the Consolidated statement of
Financial Position, as the categories of financial instruments are
already being accounted for on the same measurement and
valuation techniques as set out in IFRS9. The Group also
determined that all existing hedge relationships will continue to
qualify for hedge accounting under IFRS9.
An initial assessment of applying the expected credit loss model
for the potential impairment of financial assets indicates that
there is unlikely to be a material impact on the consolidated
financial statements. The Group will adopt IFRS9 for the year
commencing 1 October 2018. As the anticipated impact of
adopting IFRS9 is not expected to be material, the Group will not
restate the prior year financial statements on adoption.
IFRS16 Leases
IFRS16 replaces IAS17 and prescribes a single lessee accounting
model that requires the recognition of an asset and a
corresponding liability for all leases with terms over 12 months.
The liability is measured at the present value of future lease
payments for the lease term; depreciation of the assets and
interest on the corresponding lease liabilities is recognised in the
Income Statement over the lease term.
The Group anticipates that on implementation of IFRS16, there
will be a material increase in the amount of the Group’s lease
liabilities, along with a corresponding increase in tangible
property assets. The charge for operating leases in the Income
Statement is unlikely to change materially, but the classification of
this charge will change reflecting the new depreciation and
interest cost respectively, in place of the existing lease cost. The
Group’s most significant operating leases relate to property as
shown in note 26 to the consolidated financial statements.
The Group expects to adopt the modified retrospective approach
with a cumulative adjustment to equity as at 1 October 2019 and
as such will not restate the prior year financial statements. The
Group will complete a full analysis of the likely impact of the
standard during 2019 and will report this impact in next years’
Annual Report & Accounts.
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 The 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 underpinned by the successful
execution of 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 The 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 The 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 The 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 rate. 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 2018
are set out in note 25 to the consolidated financial statements.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
94
PARENT COMPANY STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 2018
Fixed assets
Investments
Creditors: amounts falling due within one year
Amounts owed to subsidiary undertakings
Net assets
Capital and reserves
Called up share capital
Profit and loss account1
Total shareholders’ equity
1 Includes profit for the year of £4.1m (2017: £2.8m).
Note
2018
£m
2017
£m
d
72.0
72.0
(14.4)
57.6
5.7
51.9
57.6
(17.1)
54.9
5.7
49.2
54.9
e
The financial statements of Diploma PLC, company number 3899848, were approved by the Board of Directors on 19 November 2018
and signed on its behalf by:
NP Lingwood
Group Finance Director
JE Nicholas
Chairman
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YE AR ENDED 30 SEPTEMBER 2018
At 1 October 2016
Total Comprehensive Income
Dividends paid
Settlement of LTIP awards
At 30 September 2017
Total Comprehensive Income
Dividends paid
Settlement of LTIP awards
At 30 September 2018
Note
Share capital
£m
Retained
earnings
£m
Total
Shareholders’
equity
£m
a
e
a
e
5.7
–
–
–
5.7
_
_
_
5.7
45.8
26.2
(23.5)
0.7
49.2
30.9
(26.8)
(1.4)
51.9
51.5
26.2
(23.5)
0.7
54.9
30.9
(26.8)
(1.4)
57.6
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
95
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
FOR THE YE AR ENDED 30 SEPTEMBER 2018
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, which are prepared on a historical cost basis, are
presented in UK sterling and all values are rounded to the nearest million pounds (£m) except when otherwise indicated.
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
• disclosures in respect of capital management;
• the effects of new but not yet effective IFRS;
• disclosures in respect of the compensation of key management
subsidiaries;
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 at the UK
Base Rate, plus 1.5% and that are repayable on demand. 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 2018 the Company had distributable reserves of £51.9m (2017: £49.2m) and the total external
dividends declared in 2018 amounted to £26.8m. 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’ equity in accordance with IAS32, as applied by FRS101. 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 financial statements of £3,500 (2017: £3,500) were borne by a fellow Group
undertaking.
B) DIRECTORS’ AND EMPLOYEES’ REMUNER ATION
No remuneration is paid directly by the Company; information on the Directors’ remuneration (which is paid by a subsidiary company)
and their interests in the share capital of the Company are set out in the Remuneration Committee Report on pages 49 to 63. The
Company had no employees (2017: none).
C) COMPANY PROFIT AND LOSS ACCOUNT
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 movement in the
Company’s profit and loss account reserves include a profit for the year of £4.1m (2017: £2.8m), before settlement of LTIP awards.
D) INVESTMENTS
Shares in Group undertakings
At 30 September 2018 and 1 October 2017
£m
72.0
A full list of subsidiary and other related undertakings is set out on page 102.
E) CALLED UP SHARE CAPITAL
Allotted, issued and fully paid ordinary shares of 5p each
At 30 September
2018
Number
2017
Number
2018
£m
2017
£m
113,239,555
113,239,555
5.7
5.7
During the year 92,530 ordinary shares in the Company (2017: 79,679) were transferred from the Trust to participants on an after income
tax basis 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 59 and 63 in the Remuneration Committee Report. The Trust also purchased 100,000 ordinary shares in the Company
for £1.2m (2017: £Nil) during the year. At 30 September 2018, the Trust held 100,368 (2017: 92,898) ordinary shares in the Company
representing 0.1% of the called up share capital. The market value of the shares at 30 September 2018 was £1.4m (2017: £1.0m).
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
96
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF DIPLOMA PLC
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
OPINION
In our opinion:
• Diploma PLC’s Group financial statements and Parent Company financial statements (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 2018 and of the Group’s profit and cash flows
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 (United Kingdom Accounting Standards, comprising FRS101 “Reduced Disclosure Framework”, and applicable
law); 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, included within the Annual Report & Accounts (the “Annual Report”), which comprise: the
consolidated and Parent Company statements of financial position as at 30 September 2018; the consolidated income statement and
consolidated statement of comprehensive income, the consolidated cash flow statement, and the consolidated and Parent Company
statements of changes in equity for the year then ended; the accounting policies; and the notes to the financial statements.
Our opinion is consistent with our reporting to the Audit Committee.
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of
our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided
to the Group or the Parent Company.
Other than those disclosed in note 27 to the financial statements, we have provided no non-audit services to the Group or the Parent
Company in the period from 1 October 2017 to 30 September 2018.
OUR AUDIT APPROACH
Context
In this first year of our audit tenure, our planning procedures involved meetings with Group and local business management, and the
Board, to understand the business, its challenges, opportunities and associated risks.
Overview
• Overall Group materiality: £3.6 million, based on 5% of profit before tax.
• Overall Parent Company materiality: £0.7 million, based on 1% of total assets.
• We conducted audit work over 23 reporting units across nine countries in which the Group has
significant operations
• The reporting units where we performed an audit of their complete financial information accounted
for 79% of Group revenue and 83% of Group profit before tax
• The Group engagement team performed the audit work on five of the reporting units and visited, in
person, two component teams who were responsible for the audit of eight reporting units across two
countries. The visits included attendance at audit clearance meetings and discussions on the audit
approach and findings with those local teams
• For those countries not visited in person we attended their clearance meetings via conference call or
video conference
• We maintained regular contact with the local teams and evaluated the outcome of their audit work
• Provisions for impairment of inventories (Group).
• Recoverability of goodwill and the impairment assessment (Group).
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
97
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates
that involved making assumptions and considering future events that are inherently uncertain.
We gained an understanding of the legal and regulatory framework applicable to the Group and the industries in which it operates, and
considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. We designed audit
procedures at Group and significant component level to respond to the risk, recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment
by, for example, forgery or intentional misrepresentations, or through collusion. We focused on laws and regulations that could give rise
to a material misstatement in the Group and Parent Company financial statements, including, but not limited to, the Companies Act
2006, the Listing Rules, UK tax legislation and equivalent local laws and regulations applicable to component teams. Our tests included,
but were not limited to, review of the financial statement disclosures to underlying supporting documentation, enquiries of
management, review of certain component auditors’ work and review of internal audit reports in so far as they related to the financial
statements. There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws
and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk of
management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the Directors
that represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the 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)
identified by the auditors, including 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, and any comments we make on the results of our procedures
thereon, 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. This is not a complete list of all risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Provisions for impairment of inventories
Refer to page 45 (Financial reporting and significant financial
judgements) and note 15 (Inventories).
Our audit procedures included understanding and evaluating the
controls and systems related to the inventory provision process,
together with substantive audit procedures.
The Group holds significant levels of inventory with total
inventory, at 30 September 2018, of £82.9m which is recorded
net of a provision of £8.7m.
There is a risk associated with the valuation of slow moving and
excess stock for which each business within the Group provides.
There are different inventory provision methodologies, specific
to the individual business, across the Group. There is significant
management judgement and estimation involved in assessing
the accuracy of the provision based upon the ageing and
expected demand for the inventory.
Therefore, we have determined that there is a significant risk
that the inventory provision is not appropriate and therefore
that inventory is recorded above its net realisable value.
The substantive audit procedures performed for each individual
component varied, depending upon the component team and the
nature of the businesses and the inventory provision methodology,
including the following procedures:
• We obtained management’s inventory provision and checked the
mathematical accuracy of the provision based upon the provision
methodology in place for that component.
• We tested where applicable and on a sample basis, the accuracy
of the ageing and demand reports used.
• We evaluated the appropriateness of each businesses inventory
provision methodology and the key assumptions within the
provision model based upon the nature of the business and its
inventory and the historic accuracy of the provision compared to
actual write-offs.
• We compared the actual sales value of a sample of inventory
items to their book value to confirm that the carrying value of
inventory does not exceed its net realisable value.
As the Group engagement team, we were specifically involved in
reviewing and assessing the appropriateness of the audit approach
for each component in this area. This satisfied us that sufficient
focus was placed on the more judgemental areas and that, whilst
complex, the area was well understood and sufficient focus was
placed on the risk area.
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
98
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS
OF DIPLOMA PLC CONTINUED
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS CONTINUED
Key audit matter
How our audit addressed the key audit matter
Risk of impairment of goodwill
Refer to page 45 (Financial reporting and significant financial
judgements) and note 10 (Goodwill).
The Group has goodwill of £128.5m as at 30 September 2018,
the most significant asset on the statement of financial
position, which is required to be tested for impairment on an
annual basis. Management has allocated the goodwill to three
individual cash-generating units (“CGUs”): Life Sciences, Seals
and Controls.
We focused on this area due to the size of the goodwill balance
and the level of judgement and estimation around the
determination of the recoverable amount, being the higher of
value in use and fair value less costs of disposal. Recoverable
amounts are based on management’s view of the future results
and prospects of the business, the appropriate discount rates to
be applied and specific risk factors applied to the CGUs.
The key judgements in determining the recoverable amount of
these CGUs relate to the forecast cash flows, long-term growth
rates and the discount factor applied.
We did not consider there to be a significant risk associated with
any of the individual CGUs due to the continued growth in the
business in the year and the historic levels of headroom.
We evaluated the process by which management prepared its cash
flow forecasts and compared them against the latest Board
strategy paper. We evaluated the historical accuracy of the plans,
for example by comparing the forecasts used in the prior year
model to the actual performance in the current year. These
procedures enabled us to determine the accuracy of the forecasting
process and apply appropriate sensitivities to the cash flows.
We obtained management’s goodwill impairment review
calculations and checked the mechanical accuracy of the model.
We assessed the appropriateness of management’s discount rates,
future cash flows and long-term growth rates. We benchmarked
assumptions against industry and peer group comparators and
metrics such as country inflation rates.
Based upon our assessments described above, we challenged
management on the appropriateness of its calculations by applying
our own sensitivity analysis to the forecast cash flows, long-term
growth rates and discount rates to ascertain the extent to which
reasonable changes would, either individually or in aggregate,
require an impairment of the goodwill.
We determined that no impairment charges were required, based
on the results of our work.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements
as a whole, taking into account the structure of the Group and the Parent Company, the accounting processes and controls, and the
industry in which they operate.
The Group is focused on three core sectors; Life Sciences, Seals and Controls with operations primarily geographically located in
Canada, the USA, the UK and continental Europe. Within the aforementioned Sectors are a number of businesses/management
reporting entities which are consolidated by Group management. The Group financial statements are a consolidation of multiple
reporting units representing the operating businesses within these three core sectors.
The reporting units vary in size and we identified 23 reporting units across nine countries in which the Group has significant operations
that required an audit of their complete financial information due to their individual size. The components where we performed an audit
of their complete financial information accounted for 83% of the Group’s profit before tax, and 79% of the Group’s revenue. Included
within these 23 reporting units were five components that were audited by the Group engagement team, including four UK Controls
trading businesses and the company which holds the UK pension scheme.
The reporting units, excluding those audited by the Group team, are audited by nine component teams. The Group engagement
team visited two of the nine component teams, who were responsible for the audit of eight reporting units, to meet with local
management, attend audit clearance meetings and discuss the audit approach and audit findings. For those components not visited we
attended their clearance meetings either via conference call or video conference.
Our attendance at the clearance meetings, review and discussion of the audit results at overseas locations, together with the
additional procedures performed at a Group level, gave us the evidence we needed for our opinion on the Group financial statements
as a whole. Our audit procedures at the Group level included the audit of the consolidation, the goodwill impairment review and certain
tax procedures.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
99
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
£3.6 million.
£0.7 million.
How we determined it
5% of profit before tax.
1% of total assets.
Group financial statements
Parent Company financial statements
Rationale for benchmark applied
We consider PBT to be an appropriate
measure for a listed group and one of the key
measures used by the shareholders in
assessing the performance of the Group.
We believe that total assets is the primary
measure used by the shareholders in assessing
the performance of a holding company and is
a generally accepted auditing benchmark.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range
of materiality allocated across components was between £3.2 million and £0.3 million. Certain components were audited to a local
statutory audit materiality that was less than our allocated component materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £184,000
(Group audit) and £36,000 (Parent Company audit) as well as misstatements below those amounts that, in our view, warranted
reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw attention to in
respect of the Directors’ statement in the financial statements about whether the
Directors considered it appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the Directors’ identification of any material
uncertainties to the Group’s and the Parent Company’s ability to continue as a going
concern over a period of at least 12 months from the date of approval of the financial
statements.
We have nothing material to add or to draw
attention to. However, because not all future
events or conditions can be predicted, this
statement is not a guarantee as to the Group’s
and Parent Company’s ability to continue as
a going concern.
We are required to report if the Directors’ statement relating to going concern in
accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge
obtained in the audit.
We have nothing to report.
REPORTING ON OTHER INFORMATION
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’
report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the
other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report,
any form of assurance 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 an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material misstatement of 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. We have nothing to report based on these responsibilities.
With respect to the Strategic Report, Directors’ Report and Corporate Governance Statement, we also considered whether the
disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs
(UK) and the Listing Rules of the Financial Conduct Authority (“FCA”) require us also to report certain opinions and matters as described
below (required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’
Report for the year ended 30 September 2018 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the
audit, we did not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
100
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS
OF DIPLOMA PLC CONTINUED
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS CONTINUED
Corporate Governance Statement
In our opinion, based on the work undertaken in the course of the audit, the information given in the Governance section (on page 46)
about internal controls and risk management systems in relation to financial reporting processes and about share capital structures in
compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance and Transparency Rules sourcebook of the FCA (“DTR”) is consistent
with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06).
In light of the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the
audit, we did not identify any material misstatements in this information. (CA06).
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement
(on pages 39 to 42) with respect to the Parent Company’s corporate governance code and practices and about its administrative,
management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06).
We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the
Parent Company. (CA06).
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity
of the Group
We have nothing material to add or draw attention to regarding:
• The Directors’ confirmation on page 30 of the Annual Report that they have carried out a robust assessment of the principal risks
facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The Directors’ explanation on page 30 of the Annual Report 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.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the
principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in
scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements;
checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the “Code”); and
considering whether the statements are consistent with the knowledge and understanding of the Group and Parent Company and their
environment obtained in the course of the audit. (Listing Rules)
Other Code provisions
We have nothing to report in respect of our responsibility to report when:
• The statement given by the Directors, on page 65, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the Group’s and Parent Company’s position and
performance, business model and strategy is materially inconsistent with our knowledge of the Group and Parent Company obtained
in the course of performing our audit.
• The section of the Annual Report on page 44 describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
• The Directors’ statement relating to the Parent Company’s compliance with the Code does not properly disclose a departure from a
relevant provision of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT
Responsibilities of the Directors for the financial statements
As explained more fully in the Directors’ Responsibility Statement set out on page 65, the Directors are responsible for the preparation
of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The
Directors are also responsible for such internal control as they 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.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
101
Auditors’ 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 auditors’ 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 FRC’s website at:
www.frc.org.uk/auditorsresponsibilities This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the Parent Company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
OTHER REQUIRED REPORTING
COMPANIES ACT 2006 EXCEPTION REPORTING
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received
from branches not visited by us; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with
the accounting records and returns.
We have no exceptions to report arising from this responsibility.
APPOINTMENT
Following the recommendation of the Audit Committee, we were appointed by the members on 1 March 2018 to audit the financial
statements for the year ended 30 September 2018 and subsequent financial periods. This is therefore our first year of uninterrupted
engagement.
Christopher Burns (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
19 November 2018
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
102
SUBSIDIARIES OF DIPLOMA PLC
Registered
Office
address*
Registered
Office
address*
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) Limited
Abacus dx Pty Limited
Abacus dx 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 UK Limited2 (formerly, M Seals NCL Limited)
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 Limited1
Krempfast Limited2
Betaduct Limited1
Hawco Limited
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
A
A
A
Abbeychart Limited1
HA Wainwright Limited1
Hawco Refrigeration Limited1
Microtherm UK Limited1
IS Group (Europe) Limited1
Specialty Fasteners Limited1
Specialty Fasteners & Components Limited1
FSC UK Limited1
FS Cables limited1
FSC Global Limited2
Caplink Limited
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
C
A
A
A
A
A
A
A
H
F
X
X
1 Dormant company.
2 These subsidiaries, 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.
Laki tn 16, Kristiine linnaosa, Tallinn, Harju maakond, 10621, Estonia.
3400 First Canadian Centre, 350-7th Avenue SW, Calgary, Alberta T2P 3N9, Canada.
Rotwandweg 5, D-82024, Taufkirchen/München, 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.
Industrivagen 17, SE-302, 41 Halmstad, Sweden.
T
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, Elftweg 38, 4941 VP Raamsdonksveer, 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.
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
103
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.
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 (2018)
Second Quarter Statement released
Half Year Results announced
Third Quarter Statement released
Preliminary Results announced
Annual Report posted to shareholders
Annual General Meeting (2019)
Dividends (provisional dates)
Interim announced
Paid
Final announced
Paid (if approved)
16 January 2019
16 January 2019
27 March 2019
13 May 2019
28 August 2019
18 November 2019
6 December 2019
15 January 2020
13 May 2019
12 June 2019
18 November 2019
22 January 2020
Annual Report & Accounts
Copies can be obtained from the Group Company Secretary
at the address shown above.
Share Registrar – Computershare Investor Services PLC
The Company’s Registrar is Computershare Investor Services
PLC, The Pavilions, Bridgwater Road, Bristol BS99 6ZZ.
Telephone: 0370 7020010. Its website for shareholder enquiries
is www.computershare.co.uk.
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
ADVISORS
Independent Auditor
PricewaterhouseCoopers LLP
1 Embankment Place
London WC2N 6RH
Bankers
Barclays Bank PLC
1 Churchill Place
London E14 5HP
HSBC Bank plc
City Corporate Banking Centre
60 Queen Victoria Street
London EC4N 4TR
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIPLOMA PLC ANNUAL REPORT & ACCOUNTS 2018
104
FIVE YEAR RECORD
Year ended 30 September
Revenue
Adjusted operating profit
Finance expense, net
Adjusted profit before tax
Acquisition related charges
CEO transition costs
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
Adjusted operating margin
2018
£m
2017
£m
2016
£m
2015
£m
2014
£m
485.1
451.9
382.6
333.8
305.8
84.9
(0.1)
84.8
(9.6)
(2.1)
–
(0.4)
72.7
(18.3)
54.4
291.2
3.1
(36.0)
–
10.5
5.6
8.4
282.8
74.6
357.4
13.1
27.0
20.4
60.5
47.5
56.4
25.5
257
2.2
%
24.5
15.1
17.5
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
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 (adjusted for the full year effect of acquisitions and disposals), as a percentage of adjusted trading
capital employed. 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.
DIPLOMA PLC
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