Final Results

RNS Number : 5450W
Diploma PLC
22 November 2010
 



 

DIPLOMA PLC

12 CHARTERHOUSE SQUARE, LONDON EC1M 6AX

TELEPHONE: +44 (0)20 7549 5700

FACSIMILE: +44 (0)20 7549 5715

FOR IMMEDIATE RELEASE

 

 

22 November 2010

 

 

Audited

Audited



2010  

2009  



£m  

£m  






Revenue

183.5  

160.0  






Adjusted operating profit(1)

32.1  

25.6  






Adjusted operating margin(1)

17.5%

16.0%






Adjusted profit before tax(1), (2)

32.2  

25.5  






Profit before tax

26.7  

20.5  






Profit for the year(3)

23.0  

14.3  






Free cash flow

29.8  

23.5  











Pence

Pence






Adjusted earnings per share(1), (2)

18.9  

14.8  






Basic earnings per share

14.6  

10.8  






Total dividends per share

9.0  

7.8  






Free cash flow per share

26.3  

20.8  






(1) Before acquisition related charges.

(2) Before fair value remeasurements.

(3) Profit for the year is stated after tax and includes the profit on sale of the discontinued businesses.  All other reported results relate to the continuing businesses.

(4) Underlying revenue and adjusted operating profits is explained in the Finance Review.

 

 

·     Revenue increased 15% to £183.5m with a strengthening trend into the second half of  the year; adjusted profit before tax up 26% to £32.2m (2009: £25.5m).

 

·     Adjusted operating margin at record 17.5% (2009: 16.0%) reflecting the benefits of operational leverage after cost reductions in 2009, particularly in the Seals businesses.

 

·     Underlying revenue and adjusted operating profits increased 11% and 19%, respectively, after adjusting for currency translation effects, acquisitions and certain one-off items(4).

 

·     Free cash flow of £29.8m (2009: £23.5m), including net proceeds of £6.4m received on sale of businesses; cash funds of £30.1m (2009: £21.3m) at 30 September 2010.

 

·     More favourable environment for acquisitions; three small acquisitions completed towards end of financial year for cash of £8.1m; disposal of Anachem businesses completed.

 

·     Final dividends up 17% to 6.2p; total dividends for year up 15% at 9.0p (2009: 7.8p).

 

 

Commenting on the results for the year, Bruce Thompson, Diploma's Chief Executive said:

 

"Diploma has delivered good revenue and profit growth in the 2010 financial year, with a strengthening trend into the second half of the year.  These results demonstrate the resilience of the Group's business model and its ability to react swiftly to changes in market conditions. 

 

Robust underlying organic growth, strong cash generation and an active acquisition programme, provide the Board with confidence that the Group will achieve further progress in 2011".

                                                                        

Notes:

 

Diploma PLC uses alternative performance measures as key financial indicators to assess the underlying performance of the Group.  These include adjusted operating profit, adjusted profit before tax, adjusted earnings per share and free cash flow.  The narrative in this Announcement is based on these alternative measures and an explanation is set out in note 2 to the consolidated financial statements in this Preliminary Announcement.

 

 

For further enquiries please contact:




Bruce Thompson, Chief Executive Officer

020 7549 5700

Nigel Lingwood, Group Finance Director

020 7549 5705

Simon Bloomfield, Bankside Consultants

020 7367 8861

 

 

NOTE TO EDITORS:

 

Diploma PLC is an international group of businesses supplying specialised technical products and services to the Life Sciences, Seals and Controls industries.

 

Diploma achieves stable growth and attractive margins from its focus on supplying specialised technical products to markets which value high levels of customer service, technical support and value adding activities.  A high proportion of revenues are generated from essential products and services funded by operating, rather than capital budgets.

 

The Group employs ca. 850 employees and its principal operating businesses are located in the UK, Germany, US and Canada.

 

Over the last five years, the Group has grown adjusted earnings per share at an average of ca. 14% p.a. through a combination of organic growth and acquisitions.  The current market capitalisation is ca. £310m.

 

 

PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS

FOR YEAR ENDED 30 SEPTEMBER 2010

 

CHAIRMAN'S STATEMENT

 

Diploma has delivered good revenue and profit growth in the 2010 financial year, with a strengthening trend into the second half of the year.  In the face of the global recession in 2009, the Group quickly scaled back operating costs and working capital and reduced balance sheet exposure. These actions left the Group well placed to maintain performance during the downturn and then to capitalise on the opportunities presented by the recovery, which began to emerge in the second quarter of the 2010 financial year in most of the Group's key markets. Given continuing uncertainty in the major economies, management has continued to maintain close control over costs and working capital, which has resulted in a further strengthening of operating margins and continued strong cash flow.

Results

Group revenue increased in 2010 by 15% to £183.5m (2009: £160.0m). The combination of increased revenue and cost reductions implemented in 2009, contributed to an increase in adjusted operating profit of 25% to £32.1m (2009: £25.6m) and operating margins improved to 17.5% (2009: £16.0%).

 

Adjusted profit before tax increased by 26% to £32.2m (2009: £25.5m) and adjusted earnings per share increased by 28% to 18.9p (2009: 14.8p).

 

The Group generated free cash flow in the year of £29.8m (2009: £23.5m), including net proceeds of £6.4m received from the sale of the two Anachem businesses. After spending £11.0m on acquiring new businesses and certain minority shareholdings during the year, the Group ended the year with cash balances of £30.1m (2009: £21.3m). The strong balance sheet, together with renewed medium term bank facilities, will provide the resources to continue to exploit the acquisition opportunities which are now emerging.

 

Dividends

Diploma continues to generate attractive and growing dividends for its shareholders. The Board is recommending an increase in the final dividend of 17% to 6.2p per share (2009: 5.3p) which, subject to shareholder approval at the Annual General Meeting, will be paid on 19 January 2011 to shareholders on the register at 3 December 2010.

 

The total dividend per share for the year will be 9.0p which represents a 15% increase on 2009 and is consistent with the Board's policy to target dividends per share towards a cover ratio of 2.0 times adjusted earnings.

 

Five Years of Progress

The strength and resilience of the Group's business model is demonstrated by the consistent profitable growth of the Group over the past five years. Adjusted earnings per share has grown at 14% per annum through a combination of organic growth and carefully targeted acquisitions. This consistent growth in earnings, combined with a strong balance sheet and excellent cash flow has encouraged the Board to significantly increase the rate of dividends paid to shareholders from 4.0p in 2005 to 9.0p this year, an annual average increase of 18% per year. At the same time the Group's market capitalisation has increased from £161m in 2005 to over £300m.  Taken together, the Group has therefore delivered an average total shareholder return of 20% per year, over the past five years.

 

Board and Employees

There were no changes to the Board during the year, but we continue to evaluate performance thoroughly on an annual basis, as well as reviewing appropriate succession plans.

 

The requirement to reduce costs during the recession has largely had to be borne by our employees, through a combination of reduced headcount and constrained salary increases. The Board is very grateful for the way in which our employees have adapted to these difficult and challenging conditions and it again demonstrates that a key strength of Diploma is the proactive and responsive attitude of our employees. I wish to thank all of our employees for their exceptional efforts and dedication which are key to the success of the Group.

 

Outlook

In recent years, the Group has demonstrated both the resilience of its business model and its ability to react swiftly to changes in market conditions.  Robust underlying organic growth, together with strong cash generation and an active acquisition programme, provide the Board with confidence that the Group will achieve further progress in 2011.

 

CHIEF EXECUTIVE'S REVIEW

 

The Group comprises a number of high quality, specialised businesses supplying technical products and services to the Life Sciences, Seals and Controls industries. The businesses aim to achieve stable revenue growth and attractive margins by focusing on supplying essential products and services to customers who value high levels of customer service, technical support and value adding activities. The businesses target organic revenue growth over the economic cycle at a rate of "GDP plus growth" (5-6% p.a.), with higher growth rates achieved through carefully selected, value enhancing acquisitions.

 

This strategic model has been closely tested through the dramatic downturn in the global economy in 2009 and the subsequent recovery in the markets. During the recession, the businesses showed their resilience with revenues less impacted than competitors who were more dependent on capital equipment budgets or could offer less differentiated products and services. With the recovery taking hold in 2010, revenues have rebounded strongly, supporting our belief that the businesses have succeeded in further penetrating their markets by maintaining service levels through the downturn. Revenues increased by 15% in 2010 to £183.5m (2009: £160.0m) with underlying growth of 11% after adjusting for currency translation effects, acquisitions and certain one-off items.

 

Operating margins have also performed well under extreme market pressure, providing further evidence of the continuing value provided to customers and the success in achieving operational efficiency. During the recession, the businesses acted quickly and decisively to optimise performance and reduce costs to match the reduced revenue levels. As a result, operating margins were held at 16.0% of revenue. As revenues have rebounded, the businesses have been very controlled in adding back costs, given the uncertainty in the sustainability of the recovery. With the resulting benefits of operational leverage, operating margins have increased to 17.5% of revenue and adjusted operating profits have increased by 25% to £32.1m (2009: £25.6m); this increase is 19% after adjusting for currency translation effects, acquisitions and certain one-off items.

 

Performance against other key indicators has also been strong through the recession and into the subsequent recovery. In 2009, the businesses reduced working capital by £6.1m to match the reduced revenues and as revenues have recovered in 2010, the businesses have again been cautious about adding back inventory too quickly. Working capital as a percentage of revenue has decreased to 15.4% (2009: 17.6%), though it is likely to trend back to the target range of 16-17% if revenues continue to increase. Free cash flow, including proceeds from the disposal of the Anachem businesses, has been very strong at £29.8m (2009: £23.5m).  Finally, return on trading capital employed ("ROTCE") has increased to 22.1% (2009: 19.0%) with the improved operating margins and working capital ratios.

 

 

LIFE SCIENCES

2010

2009



£m

£m


Revenue

49.9

+11%

Adjusted operating profit

10.6

+12%

Adjusted operating margin

     21.5%

    21.2%


 

The Life Sciences businesses increased revenues in 2010 by 11% to £55.4m (2009: £49.9m). Sector revenues benefited on translation from the stronger Canadian dollar relative to UK sterling and from the contribution from the newly acquired BGS business in Australia. On a comparable and constant currency basis, sector revenues increased by 1%. On a transaction basis, the stronger Canadian dollar, relative to both the US dollar and the Euro, had a positive effect on gross margins in the Canadian businesses.

 

Adjusted operating profits, which also benefited from the stronger Canadian dollar, increased by 12% to £11.9m (2009: £10.6m), with operating margins increasing to 21.5% (2009: 21.2%).

 

Capital expenditure in the sector was £0.7m, including £0.6m invested in field equipment for placement by the Canadian Healthcare businesses. The balance was invested in hire equipment to help service customers of the a1-group. Strong free cash flow of £10.1m was generated in the sector (2009: £7.6m) through higher profitability and lower tax payments.

 

Revenues from the DCHI Healthcare businesses increased by 13% in UK sterling terms but were unchanged in Canadian dollars against a strong prior year comparative. In 2009, revenues were boosted by an exceptional sale of face shields to protect against swine flu and there was also a full year's contribution from the sale of test kits from a supplier which was discontinued after the first quarter of this year.  After adjusting for these items, underlying revenues from the continuing product lines increased by 8% in Canadian dollars.

 

AMT, excluding the impact of the exceptional face shield sale in 2009, increased revenues by 13%. In its core electrosurgery business, AMT encouraged increased utilisation of its proprietary smoke evacuation products in existing accounts and also succeeded in penetrating key new installations. There were also strong sales of grounding pads and laparoscopic electrodes used in electrosurgery procedures and of other surgical instruments, such as disposable scissor tips and clips. AMT's endoscopy business saw good growth in its sales of consumable products, including argon probes and flexible endoscopic instruments.

 

Growth was also achieved in the sales of capital equipment, including several installations for a new instrument to treat Barrett's oesophagus, an early stage of oesophageal cancer. A number of other new product lines have also been added later in the year to extend the product offering in the growing endoscopy market.

 

In July 2010, the acquisition was completed of 80% of BGS in Australia. BGS is a specialised distributor of electrosurgery consumables and equipment and is a smaller version of AMT's electrosurgery business in Canada.  The Healthcare market in Australia shares many of the same attractive characteristics as that of Canada, with steadily growing Healthcare funding and structural market challenges which make the specialised distribution model attractive to manufacturers.  We believe there is a good opportunity to grow the business by investing in direct sales resource and leveraging from the experience of AMT in Canada.

 

Somagen, excluding the impact of the discontinued product line, increased revenues by 2%. There was continued growth in sales from Somagen's core suppliers of consumable products, delivered to hospital pathology laboratories under longer term reagent rental contracts. Somagen also had good success in placing newly developed instruments into existing accounts, taking the opportunity to sign up longer term contract extensions. Good growth was also achieved with new products for allergy testing and other new products introduced to strengthen further Somagen's position in the market for assisted reproductive technology ("ART").

 

The a1-group increased revenues by 7%, with a1-envirosciences revenues growing by 5% and CBISS revenues growing by 15%. The growth in the a1-envirosciences business was driven principally by large new contracts in Switzerland for the supply of customised stainless steel containment enclosures for the personal protection of technicians in the research laboratories of major pharmaceutical companies. 

 

Germany and the Benelux countries also remain strong markets for a1-envirosciences in the supply of elemental analysers to the petrochemical and bulk chemistry industries. Although constraints in customers' capital budgets held back demand earlier in the year, both prospects and order levels improved in the second half. During the year, the decision was made to consolidate the UK operations of a1-envirosciences into Germany. The UK market will now be serviced by home based sales and service resources and all purchasing, administrative and logistical support will be provided by the main German operation. The costs of this reorganisation of £0.1m were charged against operating profit in 2010.

 

CBISS experienced strong growth across its product range. The core emissions monitoring ("CEMS") business returned to growth as new power stations came on line and operators replaced out-dated monitoring equipment in existing installations. The value of active prospects also increased sharply during the year as funding became more readily available for alternative power plants (waste, biofuels, syngas) and concerted efforts were made to remove bottlenecks in the planning process. CBISS also had success with gas detection products designed to reduce greenhouse gas emissions and improve energy usage in supermarkets and other specialised applications.

 

SEALS

 

2010

2009



£m

£m


Revenue

48.2

+25%

Adjusted operating profit

5.5

+62%

Adjusted operating margin

11.4%


 

The Seals businesses saw revenues increase in UK sterling terms by 25% to £60.1m (2009: £48.2m). The results benefited from a full twelve months trading from RT Dygert compared to nine months in 2009, and a first month's contribution from All Seals.  After adjusting for these acquisitions and the impact of currency translation, underlying sector revenues increased by 20%. Adjusted operating profits increased by 62% to £8.9m (2009: £5.5m) and operating margins, through a combination of a strong increase in revenue and the impact of the prior year cost reduction programmes, increased to 14.8% (2009: 11.4%).

 

Capital expenditure in the sector was £0.5m with the major elements being the continued investment by HFPG in the new warehouse automation system at Clearwater and a new custom seal making machine in FPE.  Free cash flow of £7.9m was generated in the year compared with £8.6m in 2009 which benefited from a sharp reduction in working capital.

 

HFPG  saw underlying revenues, adjusted for the acquisitions of RT Dygert and All Seals, increase by 21% in US dollar terms. The core Hercules business in North America, with its focus on the Aftermarket, achieved ca. 12% growth for the year, with the recovery strengthening during the second half, which has traditionally been the seasonal peak period for construction activity, though not in 2009. Hercules continued to invest in the warehouse automation and picking carousel project, which will provide a further underpinning to the Hercules service proposition and add greater efficiency to the warehouse operations in Clearwater. Phase 1 was completed in 2010 and Phase 2 has now begun and is expected to be completed in 2011. The Seals-on-Demand business of custom machining of non-standard and out-of-production seals, delivered another year of substantial growth and investment in additional capacity is planned for 2011. Investment in e-commerce is also delivering results with ca. 7% of Hercules Clearwater revenues now processed through the new WebStore service.

 

Hercules Canada had an excellent year and delivered particularly strong growth in the second half of the year, with revenues improving across all regions and customer groups. Outside North America, the strategic development of the Aftermarket seal kit business in Europe continued to be a key focus for Hercules, with good progress being made in both direct sales in the Netherlands and Belgium and in the appointment of sub-distributors in other mainland European countries. Sales from the US to other international markets also grew with the key South American region recovering strongly.

 

Bulldog sells its products through a worldwide network of dealers that buy in relatively large quantities to take advantage of volume discounting and lower, consolidated, freight charges. Following destocking by the dealer network during the recession, confidence began to return in the final quarter of 2009 with demand being sustained throughout 2010, translating into 20% revenue growth for the year. Domestic US sales were strong across the board and the international business, which represents over 75% of Bulldog's sales, saw the return of large stocking orders from a range of countries.

 

In the Industrial OEM businesses, there was a strong rebound in demand from RT Dygert's core customers. Order levels began to recover at the end of 2009 as the OEM's regained confidence and moved back towards full working weeks and carried out some re-stocking. By March 2010, RT Dygert was experiencing demand comparable to pre-recession levels, with second half revenues up by ca. 50%, compared to the prior year. RT Dygert added new sales and product development resources during the year and qualified many new products and compounds for customer applications. In September 2010, HFPG acquired All Seals, a well established supplier of O-rings and custom manufactured parts to Industrial OEM customers across a range of specialist applications in aerospace, medical, filtration and general manufacturing industries. All Seals has a strong position in the important Californian market and the adjacent South Western States. The company has enjoyed strong growth in 2010 and plans are being developed to expand its product range and to penetrate new accounts.

 

HKX's traditional customers are the North American franchised dealers of the key excavator manufacturers. In 2009, sales of new excavators fell sharply (down by over 70% from the 2005 peak) and although the construction market stabilised in 2010, new excavator sales in North America remained subdued. In response, HKX has extended its business model to target the attachment retro-fit sector, as machine operators seek to make more flexible use of existing excavators. HKX also expanded internationally, finding new business in the South American and Middle Eastern markets and this contributed to overall revenue growth of 24% for HKX.

 

The FPE business in the UK recovered quickly from the worst effects of the downturn and delivered 18% revenue growth. In the domestic UK market, FPE expanded its range of cylinder components sold into the same customer base and also invested £0.2m in a third seal making machine to meet increasing demand from customers for low volume, non-standard seals. Exports to sub-distributors increased significantly as dealers began to restock their depleted inventories.  For M Seals, confidence was slower to return among its core Industrial OEM customers, with a return to steady growth only in the second half. This resulted in an increase in revenues of 12% for the full year.  M Seals continues to be a key supplier of large, bearing seals to the established, wind turbine manufacturers and achieved steady business throughout the year. In China, which is forecast to become the largest wind turbine market in the world, M Seals has established a small, specialist team to service the rapidly expanding Chinese wind turbine industry.

 

CONTROLS




Revenue

61.9

+10%

Adjusted operating profit

9.5

+19%

Adjusted operating margin

15.3%


 

The Controls businesses saw revenues increase in 2010 by 10% to £68.0m (2009: £61.9m) on both a UK sterling and a constant currency basis. Adjusted operating profits increased by 19% to £11.3m (2009: £9.5m). As with other sectors, improved sales combined with the impact of the cost reduction measures implemented in 2009, moved operating margins up to 16.6% (2009: 15.3%).  A combination of higher profitability, tight control over working capital and modest capital investment of £0.1m, combined to generate strong free cash flow of £9.9m (2009: £8.9m).

 

The UK Controls businesses grew revenues by 13%, with good growth in IS-Group revenues, boosted by a very strong performance from Hawco. The IS-Group's core Defence market benefited from on-going upgrade, refurbishment and maintenance programmes focused largely on ground equipment. Revenues were strong with components supplied into the Light Weight Mine Roller project and other military vehicle programmes. The marine sector benefited from work on gun systems and below-deck cabinet work on Type 45 destroyers and on radiation monitoring, periscope and sonar systems for Astute submarines. Sales into Military Aerospace have been softer, possibly reflecting the priority given to ground vehicles. In Civil Aerospace, demand picked up during the year as new aircraft deliveries began to gather momentum.

 

In Motorsport, the relative stability in the Formula One series enabled the IS-Group to maintain its leading position as a supplier of wiring and components to specialist electrical harness builders. Significant gains were also made in the supply of aerospace quality fasteners to the Formula One teams and engine manufacturers in the UK and Continental Europe.

 

There was a substantial increase in demand for IS-Group's products supplied to General Industrial customers.  In addition, the Energy market benefited from the returning confidence, with strong demand for components supplied to manufacturers of Uninterrupted Power Supply (UPS) batteries and Fuel Cells. Undersea cables for oil and gas exploration also provided good opportunities for the IS-Group's wire products.

 

Hawco delivered strong revenue growth as its core Industrial customers, in particular the manufacturers of commercial refrigeration products, responded to significantly increased demand from the large food retailing groups opening new stores or refurbishing existing outlets. Hawco has positioned itself as a specialist supplier of energy efficient components as many of the large food retailers implement energy reduction programmes and move to alternative coolant gases using natural refrigerants.

 

The German Controls businesses grew revenues by 4% in both UK sterling and constant currency terms. The market downturn came later to Germany than the UK and the US, but there was a strong rebound in demand in certain sectors in 2010. Sommer benefited from a sharp recovery in Germany's traditionally strong Industrial and specialist Automotive sectors where it achieved strong revenue increases. Sales to the specialist Satellite market were also strong with both Astrium and NASA adopting the Sommer backshells for scientific satellites. However, Defence and Aerospace sales declined as projects came to an end and were not replaced by new programmes and in Motorsport, the withdrawal of the Toyota and BMW Formula One teams in late 2009 had a significant impact on Motorsport revenues in Germany.

 

The Medical market had another strong year supplying protective sleeves for stents, laparoscopic and cardiovascular instruments and catheters. In order to develop the market further, Sommer invested in a new cut and slit machine which will allow the business to add significant value to products sold in this market. In August 2010, Sommer purchased the customer list and trading stock of Fischer, a small distributor of Tyco Energy products with sales in 2009 of ca. €0.4m. The sales and logistics activities have now been integrated and this small acquisition will boost Sommer's presence in this growing niche business.

 

The principal markets for Filcon's connector products are the Defence, Aerospace and Motorsport sectors. In common with many countries, Germany is reviewing its spending on Defence and there was a general slowdown in approvals for new projects during the year and delays in their commencement dates.  Nevertheless Filcon delivered increased sales as existing programmes such as the Eurofighter and four separate helicopter projects, the NH90, Eurocopter 135, CH53 and Tiger, continued to generate demand. Sales to the ManPack radio project were also very strong. Order levels were marginally down reflecting delays to programmes, but Filcon has its products designed-in to a wide range of applications and is therefore not over-dependant on single projects.

Summary and Outlook

The steady performance of the businesses through the dramatic economic downturn and subsequent period of uncertain recovery, have given added confidence in the resilience of the business model. Over the business cycle, we are looking for continued organic revenue growth at the "GDP plus" level, combined with sustained attractive operating margins.

 

The strategy remains to accelerate growth through carefully selected, value enhancing acquisitions. Over the last five years, we have invested ca. £70m in acquisitions which are delivering a pre-tax return of over 20%. Current cash balances of ca. £30m, combined with the renewed debt facility and strong continuing cash flow give the resources to continue to pursue this active acquisition strategy.

 

The environment for acquisitions has certainly improved and valuation gaps between Buyer and Seller are now closer. However, the general uncertainty in the economic environment means that transactions are taking longer to complete as Buyers and Sellers try to identify, quantify and limit any risk elements. Though more time consuming to bring to closure, three acquisitions were completed in the second half of the year and further opportunities are currently being pursued.

 

 

FINANCE REVIEW

 

Strong Increase in Operating Profits

 

Diploma achieved strong revenue and profit growth and excellent cash generation during 2010, as market conditions gradually improved during the year. Revenue increased by 15% to £183.5m (2009: £160.0m) and adjusted operating profit, which is before acquisition related charges, increased by 25% to £32.1m (2009: £25.6m). The adjusted operating margin increased to 17.5% from 16.0% in the 2009 financial year. The Group's principal markets began to show signs of recovery in the second quarter of the financial year and continued to strengthen throughout the year. Adjusted operating profits in the second half of the year of £17.5m were 28% ahead of the comparable period last year and represented 55% of the full year's operating profit.

 

These results demonstrate both the benefit of action taken in 2009 to reduce operating costs in the face of weak trading markets and the impact of operational leverage, particularly in the Seals businesses, as revenues increased.

 

Underlying Operating Profits

Acquisitions completed during both 2009 and 2010 incrementally contributed £3.4m and £0.5m to revenues and adjusted operating profit, respectively. In addition, with over 70% of the Group's results denominated in US dollars, Canadian dollars or Euros, the Group's revenues and adjusted operating profits benefited on translation to UK sterling by £3.5m (2%) and £1.1m (3%), respectively. The gross margin of the Canadian Healthcare businesses also benefited from the strength of the Canadian dollar against the US dollar, in which the majority of its inventory is purchased.  However this benefit in 2010 was matched by the benefit these businesses received in 2009 from the exceptional sale in AMT of face shields to protect against swine flu.  After adjusting for these items, underlying revenues and adjusted operating profits increased by 11% and 19%, respectively.

 

Adjusted Profit, Earnings per Share and Dividends

Adjusted profit before tax increased 26% to £32.2m (2009: £25.5m), after net interest income of £0.1m (2009: expense of £0.1m). IFRS profit before tax, which is after acquisition related charges of £3.5m (2009: £3.1m) and fair value remeasurements of £2.0m (2009: £1.9m), was £26.7m (2009: £20.5m).

 

The Group's adjusted effective tax charge represented 29.2% (2009: 29.8%) of adjusted profit before tax. This year's effective rate benefited from a reduction in the Canadian corporate tax rate following a change to the Provincial tax residence of Somagen. The Group's adjusted effective tax rate in any particular year also continues to depend on the geographic mix of profits made by the Group.

 

Adjusted earnings per share increased 28% to 18.9p compared with 14.8p last year, reflecting increased profits, a slightly lower effective tax rate and the buyout of certain minority interests this year. IFRS basic earnings per share were 14.6p (2009: 10.8p).

 

Diploma follows a progressive dividend policy and also targets a dividend cover of two times adjusted earnings per share; the recommended final dividend of 6.2p per share gives a total dividend per share for the year of 9.0p per share which represents a 15% increase on the prior year.

 

Successful Disposal of Anachem Businesses

The Group completed the disposal of the MLH business of Anachem on 7 January 2010 and Anachem Instruments on 29 April 2010. Cash proceeds of £7.9m were received on completion of these disposals of which £0.8m will be held in escrow until July 2011. The results of these businesses are classified as discontinued and the contribution to profit after tax from these businesses was £5.1m, including a profit on disposal of the businesses of £5.5m.

Excellent Free Cash Flow Generation

The Group generated excellent free cash flow in 2010 of £29.8m (2009: £23.5m), which is before expenditure on acquisitions or returns to shareholders, but includes £6.4m received from the sale of the Anachem businesses.

Operating cash flow remained broadly unchanged from last year at £34.3m (2009: £34.2m) as the businesses worked hard to constrain any increases in working capital, despite the underlying growth in trading. This led to a further improvement in the Group's key metric of working capital to sales to 15.4% from 17.6% reported in 2009. Group tax payments of £9.3m were also similar to last year's payments of £9.0m, although last year's payments were inflated by the impact of AMT moving to a monthly tax payment basis in 2009, as well as having to pay its 2008 annual tax liabilities. Capital expenditure was particularly modest in 2010 at £1.3m (2009: £1.8m), following completion during the year of a number of projects commenced in 2009. In Seals, HFPG spent £0.3m on completion of Phase 1 of the warehouse automation project at the Clearwater facility and FPE acquired a second custom seal machine for £0.2m; in Controls a new cut and slit machine was acquired for £0.1m to further enhance its product supplied to medical device companies. The Healthcare businesses continued to acquire field equipment in support of their customer contracts and spent £0.6m during the year.

The Group spent £11.0m (2009: £12.2m) of its cash resources on the acquisition of businesses during the year, including £2.5m on acquiring minority interests and £0.4m (2009: £1.1m) of deferred consideration.

Minority Shareholdings Acquired

On 12 January 2010 the Group acquired the remaining 8.2% of the outstanding shares in Somagen from the minority shareholders for consideration for £2.5m. These shares were acquired through the exercise of put/call options, agreed at the time of acquisition in July 2004. Dividends of £1.1m were also paid to the minority shareholders of Somagen, AMT and  M Seals during the year.

 

At 30 September 2010, the Group retains a liability to purchase the remaining minority shareholdings in AMT, M Seals and BGS. The liability for the outstanding 25% minority shareholding in AMT is estimated at £12.0m (2009: £10.1m) and it is now likely that the larger part of this will be paid in the first half of 2011. The remaining liability of £1.2m relates to M Seals and BGS and will be payable in the first half of 2013. These liabilities arise under put/call options entered into at the time of acquisition and are based on the Directors' estimate of the Earnings Before Interest and Tax of these businesses when the options crystallise.

 

Based on the expected performance of these businesses, the Directors have reassessed the potential liability at 30 September 2010 to acquire the remaining outstanding minority interests. The fair value remeasurement of these options results in a financial charge of £2.0m (2009: £1.9m) being made in the consolidated Income Statement.

 

Improved Environment for Acquisitions

The environment for acquisitions improved during 2010, following a year when uncertainties caused by the recession had severely limited opportunities to acquire businesses. In the final quarter of the year, the Group completed three small acquisitions for an initial cash cost of £8.1m; further deferred consideration payable of £1.0m has also been provided at 30 September 2010 in respect of these acquisitions. Each of these acquisitions extends the geographic coverage of the Group's existing businesses, while continuing to focus on the core products and competencies developed in each business sector.

 

Acquisition intangible assets of £4.5m were recognised in connection with these acquisitions, as well as goodwill of £3.8m, reflecting the amount paid for the acquisitions during the year, in excess of the value of the net assets. This goodwill largely comprises the value in each of these businesses relating to the product know-how held by the employees, prospects for sales growth in the future (from both new customers and new products) and operating cost synergies.

 

Robust Balance Sheet and Strong Return on Trading Capital

The Group is highly cash generative and cash balances increased again in 2010 by £8.8m to £30.1m (2009: £21.3m). These funds are generally repatriated to the UK, unless they are required locally to meet certain commitments, including acquisitions. The Group also has substantial bank facilities available, having negotiated a new three year £20m revolving credit facility (with an option to extend to £40m) on competitive terms and shared between two banks.

 

The Group's trading capital employed ("TCE"), which is defined in note 2 to the consolidated financial statements, represents the amount of operational assets held by the businesses on which they are required to generate operating profits. At 30 September 2010 Group TCE increased by £6.2m to £122.3m (2009: £116.1m), most of which was accounted by goodwill which arose on acquisitions completed during the year. The Group's return on TCE, which is a pre-tax measure and includes all gross historic goodwill and intangible assets, represents an indication of the profitability of the Group and increased to 22.1% in 2010, from 19.0% last year. This increase arose from a combination of the growth in profits and from good management of working capital across the businesses.

 

Merger of Pension Schemes Completed

The Group retains a small number of defined benefit pension schemes in the UK which are closed to future accruals. In a drive to reduce the costs of administering these legacy schemes, the Group completed a merger of all these schemes as at 30 September 2010. An actuarial funding valuation of the merged scheme will now be undertaken and the benefits of having a single defined benefit pension will start to be realised.

 

During the year the Group increased its cash contribution to fund the deficit in these schemes to £0.4m pa (2009: £0.2m pa). In addition the Group made exceptional one-off contributions of £0.7m in connection with the Trustees' consents to both the scheme merger and to the transfer of the residual liabilities of the Anachem scheme to Diploma Holdings PLC, on sale of the Anachem businesses. Despite these higher cash contributions, the accounting deficit in the principal defined benefit schemes increased by £0.6m to £5.3m (2009: £4.7m) at 30 September 2010, largely because of the continuing reduction in bond yields.

 

Pension benefits to existing employees are provided through defined contribution schemes at an aggregate cost in 2010 of £0.7m (2009: £0.7m).

 

Land at Stamford

The Group continues to retain approximately 150 acres of farm and former quarry land in Stamford which relates to a legacy business.  This land is included in the Consolidated Statement of Financial Position at £Nil and in the opinion of the Directors, is unlikely to be worth more than £0.5m in its present condition. The Directors anticipate that this land will continue to be leased to a local farmer and there is no intention to dispose of this land in the foreseeable future.

 

Measuring Financial Performance

The implementation of a revised IFRS on Business Combinations this year has included the requirement for the Group to expense the costs of acquiring businesses against operating profit, rather than capitalise such costs as part of the investment. In order to allow the Board and Shareholders to continue to assess the underlying performance of the Group, this new Standard has prompted the introduction of Adjusted Operating Profit, which adds back to operating profit the expenses of acquiring businesses, as well as the amortisation of acquisition intangible assets (collectively, "acquisition related charges"). This new measure is one of a number of specific measures used when assessing the performance of the Group and these are referred to throughout this Preliminary Announcement in the discussion of the performance of the businesses. These measures are not defined in IFRS, but are used by the Board to assess the underlying operational performance of the Group and its businesses. As such the Board believes these performance measures are important and should be considered alongside the IFRS measures. The alternative performance measures, which have been used in this Preliminary Announcement, are described in note 2 to the consolidated financial statements.

 

Reported performance takes into account all the factors (including those which the Group cannot influence, principally currency exchange rates) that have affected the results of the Group's business and which are reflected in the consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union.

 

The Group has not been required to adopt any other new accounting standards during the year which have had a material impact on the consolidated financial statements.

 

 

RISKS AND UNCERTAINTIES

 

Risk Management Process

Risk assessment and evaluation is an integral part of the Group's annual planning cycle and market specific risks are evaluated as part of the budgetary process.

 

Each operating business is required each year to identify and document the significant strategic, operational and financial risks facing the business. For each significant risk, a number of scenarios are mapped out and an assessment is made of the likelihood and impact of each risk scenario. Finally, plans and processes are established, which are designed to control each risk and minimise its potential impact.

 

The risk assessments from each of the operating businesses are reviewed with the Executive Directors and a consolidated risk assessment is reviewed by the Board.

 

The risks and uncertainties which are currently judged to have the largest potential impact on the Group's long term performance are set out below. It should be recognised that additional risks not currently known to management, or risks that management currently regard as immaterial, could also have a material adverse effect on the Group's financial condition or the results of operations.

 

Strategic Risks

Downturn in major markets

Adverse changes in the major markets in which the businesses operate can have a significant impact on performance. The effects will either be seen in terms of slowing revenue growth, due to reduced or delayed demand for products and services, or pressure on margins due to increased competitive pressures.

To mitigate the effects of such adverse changes, 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.

In addition, there are a number of characteristics of the Group's businesses which moderate the impact of economic and business cycles on the Group as a whole:

 

●

The Group's businesses operate in three different sectors with different cyclical characteristics and across a number of geographic markets.



●

The businesses offer specialised products and services and this offers a degree of protection against customers quickly switching business to achieve better pricing.



●

A high proportion of the Group's sales comprise consumable products and service contracts which are purchased as part of customers' operating expenditure, rather than through capital budgets.



●

In many cases the products will be used in repair, maintenance and refurbishment applications, rather than original equipment manufacture.

 

Loss of key supplier(s)

The Group's businesses ensure that they have secure long term access to high quality, differentiated product offerings by combining:

 

●

Quality manufacturer-branded products, mostly sourced under long term distribution agreements.



●

Own-brand products, manufactured under contract.



●

Selective in-house manufacture and assembly.

 

For manufacturer-branded products, there are risks to the businesses if a major supplier decides to cancel the distribution agreement or if the supplier is acquired by a company which has its own distribution channels in the relevant market. There is also the risk of a supplier taking away exclusivity and either setting up direct operations or establishing another distributor.

 

The potential impact on an individual business may be high where a supplier represents a significant proportion of the revenues of the business. However, the potential impact on the Group is lower as no supplier represents more than 15% of Group revenue and only six 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 inter-dependence has been established. There are further actions planned and implemented by the operating businesses to control or to mitigate risks:

 

●

Where dependence is high, long term, multi-year exclusive contracts signed with suppliers.



●

Where possible, change of control clauses included in contracts for protection or compensation in the event of acquisition.



●

Collaborative projects and relationships maintained with individuals at many levels of the supplier organisation.



●

Regular review meetings and adherence to contractual terms.



●

Regular reviews of inventory levels.



●

Bundling and kitting of products and provision of added value services.



●

Periodic research of alternative suppliers as part of contingency planning.

 

Loss of major customer(s)

As with any businesses, the loss of one or more major customers can be a material risk.

 

Specific large customers are important to individual operating businesses and a high level of effort is invested in ensuring that these customers are retained and encouraged not to switch to another supplier. In addition to providing high levels of customer service, close integration is established where possible with customers' systems and processes.

 

The nature of the Group's businesses, however, ensures that there is not a high level of dependence on any individual customers. No customer represents more than 6% of sector revenue or more than 2% of Group revenue.

 

Technological change

The Group's businesses operate in specialised markets offering products which are often technical in nature. As a result, there is always the risk that a technological change will make specific products less competitive or in the worst case, obsolete. In addition to the write-off of unsaleable inventory, this can impact the sales performance of the business if replacement products are not available.

 

The Group's exposure to this risk is reduced by the spread of businesses and technologies, as well as by the fact that the products, though technical, are typically not subject to very rapid technological change.

 

The operating businesses monitor the key technologies to ensure early warning of changes in product competitiveness, so that plans can be developed with suppliers for replacement products. Also, the businesses, with sufficient lead time, mostly have the opportunity to change suppliers in the event of a major technology shift.

 

Product liability

There is always a risk that products supplied by a Group business may fail in service, which could lead to a claim under product liability.

 

To offset this risk, technically qualified personnel and control systems are in place to ensure products meet quality requirements. The businesses, in their Terms and Conditions of sale with customers, will typically mirror the Terms and Conditions of sale from their suppliers. In this way the liability can be limited and subrogated to the supplier.

 

However, if a legal claim is made it will typically draw in our business as a party to the claim and the business may be exposed to legal costs and potentially damages if the claim succeeds and the supplier fails to meet its liabilities for whatever reason. To mitigate this risk, the Group has established Group-wide product liability insurance which provides worldwide umbrella insurance cover of £10m in all sectors.

 

Loss of key personnel

The success of the Group is built upon strong, self-standing management teams in the operating businesses, committed to the success of their respective businesses. As a result, the loss of key personnel can have a significant impact on performance, at least for a time.

 

Contractual terms such as notice periods and non-compete clauses can mitigate the risk in the short term. However, the 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 of key managers in the operating businesses to mitigate this risk:

 

●

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 incentive plans targeted at the individual business level.



●

Giving the freedom, encouragement, financial resources and strategic support for managers to pursue ambitious growth plans.

 

Operational Risks

Major damage to premises

The Group's businesses mostly operate from combined office/ warehouse facilities which are dedicated to the business and not shared with other Group businesses. Major damage to the facility from fire, malicious damage or natural disaster would impact the business for a period until the damage is repaired or alternative facilities have been established.

 

The businesses have developed plans to prevent incidents, including fire and security alarms and regular fire drills. Insurance policies are also in place including property, contents and business interruption cover which would mitigate the financial impact.

 

However, the priority in such an event is to become operational as quickly as possible to minimise disruption to customers. Plans to ensure a quick and orderly recovery have been developed by the businesses and are periodically reviewed.

 

The business where the risk is greatest is Hercules in Clearwater, Florida which is most at risk from an environmental disaster caused by a hurricane or tornado. The building structure has been designed to withstand 150mph winds and a specific disaster plan has been drawn up and is regularly reviewed. This includes:

 

●

Back-up power generator.



●

Materials on hand to secure the facility.



●

Communications re-route to other branches or interim location.



●

IT recovery plan using back-up server in separate location.



●

Regular building inspection and weather monitoring.



●

Plans to drop-ship product from suppliers direct to customers.

 

Loss of information technology ("IT") systems

Computer systems are critical to the businesses since their success is built on high levels of customer service and quick response. A complete failure of IT systems, with the loss of trading and other records would be more damaging to the businesses than major physical damage to facilities. IT system failure could have a number of causes including power failure, fire and viruses.

 

Business interruption insurance cover is held across the Group and contingency plans have been drawn up in all businesses. The recovery plans differ by individual business, but will include some or all of the following elements:

 

 ●

Full data back-ups as a matter of routine.



 ●

Back-up tapes stored in fire proof safes.



 ●

Back-up servers identified.



 ●

Communication re-route options identified.



 ●

Service contracts with IT providers with access to replacement servers.



 ●

Uninterruptible power sources and back-up generators where required.



 ●

Virus checkers and firewalls.

 

Disruption by service providers

All the operating businesses use third party carriers to physically transport products. Disruption to this service is most critical in businesses such as Hercules where the business model requires rapid, often next day, delivery of products. Most businesses will have a principal carrier that is used, but they will monitor and maintain accounts with alternative carriers.

 

Financial Risks

The Group's activities expose it to a variety of financial risks; foreign currency, liquidity, interest rate and credit. The Group's overall management of these risks is carried out by a central treasury team (Group treasury) under policies and procedures which are reviewed and approved by the Board. Group treasury identifies, evaluates and where appropriate, hedges financial risks in close co-operation with the Group's operating businesses. The Group treasury team does not undertake speculative foreign exchange dealings for which there is no underlying exposure. The policies for managing these financial risks are set out below.

 

Foreign currency risk

Foreign currency risk is the risk that changes in currency rates will affect the Group's results. The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, the euro and the Canadian dollar (translational exposure). During the year ended 30 September 2010, ca. 70% of the Group's revenue and operating profits from continuing businesses were earned in currencies other than UK sterling. In comparison to the prior year, the net effect of currency translation was to increase revenue by £3.5m and to increase operating profit by £1.1m. It is estimated that a strengthening of UK sterling by 10% against all the currencies in which the Group does business, would reduce operating profit, before acquisition related costs and amortisation and tax, by approximately £2.4m (7.5%) due to currency translation.

 

The Group has certain investments in foreign operations whose net assets are also exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group's foreign operations are not hedged. At 30 September 2010, the Group's non-UK sterling trading capital employed in overseas businesses was £103.1m (2009: £87.7m), which represented 84% of the Group's trading capital employed. It is estimated that a strengthening of UK sterling of 10% against all the non UK sterling capital employed would reduce shareholders' funds by £9.8m.

 

The Group's UK businesses are also exposed to foreign currency risk on purchases that are denominated in a currency other than their local currency, principally US dollars, euro and Japanese yen (transactional exposure). 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.

 

These businesses may hedge up to 80% of forecast US dollar and euro foreign currency exposures using forward foreign exchange contracts. The Group classifies its forward foreign exchange contracts, hedging forecasted transactions, as cash flow hedges and states them at fair value.

 

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 14 to the consolidated financial statements.

 

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's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

 

The Group is highly cash generative and uses monthly cash flow forecasts to monitor cash requirements and to optimise its return on investments. Typically the Group ensures that it has sufficient cash on hand to meet foreseeable operational expenses, but the Group also has an undrawn committed £20m revolving bank facility which was renewed on 19 November 2010. Interest on this facility is payable at between 150 and 195 bps over LIBOR, depending on the ratio of net debt to EBITDA.

 

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.  The Group manages its interest-bearing funds in a manner designed to maximise interest income, while at the same time minimising any risk to these funds. Surplus funds are deposited with commercial banks that meet the credit criteria approved by the Board, for periods of between one to six months at rates that are generally fixed by reference to the relevant UK Base Rate, or equivalent rates. The Group does not undertake any hedging activity of interest rates.

 

It is estimated that an increase of 1% in interest rates would increase the Group's profit before tax by a maximum of £0.3m.

 

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.

 

Trade receivable exposures are managed locally in the operating units where they arise and credit limits are set as deemed appropriate for the customer. The Group 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.

 

The Group establishes an allowance for impairment that represents its estimate of incurred 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 allowance account is written off against the underlying receivable.

 

Exposure to financial counterparty credit risk is controlled by the Group treasury team in establishing and monitoring counterparty limits. Centrally managed funds are invested entirely with counterparties whose credit rating is 'A' or better.

 

Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure.

 

In order to maintain or adjust the capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.

 

 

Accounting Risks

 

Inventory obsolescence

Working capital management is critical to success in specialised distribution businesses as this has a major impact on cash flow. The principal risk to working capital, other than credit risk to trade receivables 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. Where necessary, a provision is made to cover excess inventory and potential obsolescence.

 

Fraud and theft

The Group's operating businesses are relatively straightforward businesses where a significant incidence of fraud or theft should become apparent relatively quickly. The risks are also moderated by the fact that the products are relatively specialised industrial products and therefore not particularly valuable or attractive on the open market. Finally, tangible fixed assets are not significant across the Group and generally comprise IT and warehouse equipment, where any loss would be quickly apparent.

 

As additional security, processes are in place to further reduce the opportunity for fraud or theft:

 

●

Specified signature levels and responsibilities.



●

Segregation of responsibilities.



●

Controls on shipping addresses.



●

Weekly flash reports of cash balances and regular bank reconciliations.



●

Regular review of supplier and creditor ledgers to identify fictitious suppliers.



●

Group-wide policy and procedures for "whistle-blowing".

 

The Audit Committee carries out an annual assessment of the fraud risks in the businesses and discusses these risks with management.

 

 

RESPONSIBILITY STATEMENT OF THE DIRECTORS

IN RESPECT OF THE ANNUAL REPORT 2010

 

The responsibility statement below has been prepared in connection with the Company's full Annual Report for the year ended 30 September 2010.  Certain parts thereof are not included within this Announcement.

 

The Directors confirm that to the best of their knowledge:

●   the Group consolidated financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and the undertakings included in the consolidation taken as a whole; and

●   the Annual Report 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.

The Directors of Diploma PLC and their respective responsibilities are listed in the Annual Reports for 2009 and 2010.  There have been no changes in the year.

 

This responsibility statement was approved by the Board of Directors on 22 November 2010 and is signed on its behalf by:

 

BM Thompson                                                                       NP Lingwood

Chief Executive Officer                                                       Group Finance Director

 

 

 

CONSOLIDATED INCOME STATEMENT

for the year ended 30 September 2010

 





2010

2009

Continuing businesses




     Note  

£m

£m

Revenue




3,4

183.5 

160.0 

Cost of sales





(115.5)

(101.7)

Gross profit





68.0 

58.3 

Distribution costs





(4.4)

(4.1)

Administration costs





(35.0)

(31.7)

Operating Profit




3 

28.6 

22.5 

Financial expense, net




5 

(1.9)

(2.0)

Profit before tax





26.7 

20.5 

Tax expense




6 

(8.8)

(7.1)

Profit for the year from continuing businesses




17.9 

13.4 

Profit from discontinued businesses




12

5.1 

0.9 

Profit for the year





23.0 

14.3 








Attributable to:








Shareholders of the Company




21.5 

13.0 


Minority interests




1.5 

1.3 






23.0 

14.3 

Earnings per share




7 




Basic and diluted earnings - continuing




14.6p

10.8p


Basic and diluted earnings - discontinued




4.5p

0.8p


Basic and diluted earnings - continuing and discontinued


19.1p

11.6p

  

 

Alternative Performance Measures (note 2)




    2010 

     2009





Note 

£m 

£m 

Operating profit




28.6 

22.5 

Add: 

Acquisition related charges




3.5 

3.1 

Adjusted operating profit



3,4

32.1 

25.6 

Add/(deduct): Net interest income/(expense)



5

0.1 

(0.1)

Adjusted profit before tax



32.2 

25.5 

 

Adjusted earnings per share



 

7 

 

18.9p

 

14.8p

 

 

 

CONSOLIDATED STATEMENT OF

COMPREHENSIVE INCOME

for the year ended 30 September 2010

 





2010

2009






£m

£m

Profit for the year



23.0 

14.3 

Exchange rate adjustments on foreign currency net investments



1.9 

10.7 

Losses on fair value of cash flow hedges





(0.4)

(0.4)

Actuarial losses on defined benefit pension schemes





(1.8)

(3.1)

Deferred tax on items recognised in equity





0.6 

1.0 

Other comprehensive income for the year





0.3 

8.2 

Total COMPREHENSIVE income for the YEAR



23.3 

22.5 








Attributable to:







  Shareholders of the Company





21.8 

21.2 

  Minority interests





1.5 

1.3 






23.3 

22.5 

 

 

 

CONSOLIDATED STATEMENT OF

CHANGES IN SHAREHOLDERS' EQUITY

for the year ended 30 September 2010

 

 

 

 

Share capital

Translation reserve

Hedging reserve

Retained earnings

Total


Note

£m 

£m 

£m 

£m 

£m

At 1 October 2008


5.7 

8.0 

0.7 

93.7 

108.1 

Total comprehensive income


- 

10.7 

(0.4)

10.9 

21.2 

Share-based payments


- 

- 

- 

0.5 

0.5 

Dividends

13

- 

- 

- 

(8.4)

(8.4)

At 30 September 2009


5.7 

18.7 

0.3 

96.7 

121.4 

Total comprehensive income


- 

1.9 

(0.4)

20.3 

21.8 

Share-based payments


- 

- 

- 

0.5 

0.5 

Purchase of minority interests

10

- 

- 

- 

2.5 

2.5 

Future purchase of minority interests

10

- 

- 

- 

(0.6)

(0.6)

Purchase of own shares


- 

- 

- 

(0.4)

(0.4)

Dividends

13

- 

- 

- 

(9.1)

(9.1)

 

At 30 September 2010


 

5.7 

 

20.6 

 

(0.1)

 

109.9 

 

136.1 

 

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 30 September 2010

 





2010

2009





Note 

£m

£m

Non-current assets







Goodwill




9

67.3 

59.6 

Acquisition intangible assets





22.7 

21.2 

Other intangible assets





0.6 

0.8 

Property, plant and equipment





11.1 

11.6 

Deferred tax assets





2.4 

2.1 






104.1 

95.3 

Current assets







Inventories





32.0 

28.0 

Trade and other receivables





30.5 

25.2 

Assets held for sale





- 

5.4 

Cash and cash equivalents





30.1 

21.3 






92.6 

79.9 

Current liabilities







Trade and other payables





(32.3)

(23.3)

Current tax liabilities





(2.0)

(1.8)

Other liabilities




10

(13.0)

(3.1)

Liabilities associated with assets held for sale





- 

(3.5)






(47.3)

(31.7)

 

Net current assets





 

45.3 

 

48.2 

Total assets less current liabilities





149.4 

143.5 

Non-current liabilities







Retirement benefit obligations





(5.3)

(4.7)

Other liabilities




10

(1.2)

(10.6)

Deferred tax liabilities





(3.7)

(4.1)

 

Net assets





 

139.2 

 

124.1 

 

Equity





 

 


Share capital





5.7 

5.7 

Translation reserve





20.6 

18.7 

Hedging reserve





(0.1)

0.3 

Retained earnings





109.9 

96.7 

Total shareholders' equity





136.1 

121.4 

Minority interests





3.1 

2.7 

 

Total equity





 

139.2 

 

124.1 

 

 

 

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 30 September 2010

 








2010

2009

Continuing businesses


Note

£m

£m

Cash flow from operating activities





Cash flow from operations


8

34.3 

34.2 

Interest income received, net



0.1 

- 

Tax paid



(9.3)

(9.0)

Net cash from operating activities



25.1 

25.2 

Cash flow from investing activities





Acquisition of subsidiaries (net of cash acquired)


11

(8.1)

(11.1)

Acquisition of minority interests


11

(2.5)

- 

Disposal of subsidiaries (net of cash disposed)


12

6.4 

- 

Deferred consideration paid


10

(0.4)

(1.1)

Proceeds from the sale of property, plant and equipment


- 

0.1 

Purchase of property, plant and equipment



(1.2)

(1.5)

Purchase of other intangible assets



(0.1)

(0.3)

Net cash used in investing activities



(5.9)

(13.9)

Cash flow from financing activities





Dividends paid to shareholders


13

(9.1)

(8.4)

Dividends paid to minority interests



(1.1)

(0.7)

Purchase of own shares



(0.4)

- 

Net cash used in financing activities



(10.6)

(9.1)

Net cash (used in)/from discontinued businesses

 

 

(0.5)

1.7 

Net increase in cash and cash equivalents



8.1 

3.9 

Cash and cash equivalents at beginning of year



21.3 

15.7 

Effect of exchange rates on cash and cash equivalents



 

0.7 

 

1.7 

 

Cash and cash equivalents at end of year


 

 

 

30.1 

 

21.3 

  

Alternative Performance Measures (note 2)


2010 

2009 






£m 

£m 

Net increase in cash and cash equivalents


8.1 

3.9 

Add:

Dividends paid to shareholders




9.1 

8.4 


Dividends paid to minority interests




1.1 

0.7 


Acquisition of subsidiaries/minority interests




10.6 

11.1 


Deferred consideration paid




0.4 

1.1 

Free cash flow - continuing and discontinued businesses


29.3 

25.2 

Add/(deduct): Free cash flow - discontinued businesses



0.5 

(1.7)

Free cash flow - continuing businesses



29.8 

23.5 

 

 

1.         GENERAL INFORMATION

 

Diploma PLC is a public limited company registered and domiciled in England and Wales and listed on the London Stock Exchange.  The address of the registered office is 12 Charterhouse Square, London, EC1M 6AX.  The consolidated financial statements comprise the Company and its subsidiaries (together referred to as the "Group") and were authorised by the Directors for publication on 22 November 2010.  The statements are presented in UK sterling, with all values rounded to the nearest one hundred thousand, except where otherwise indicated.

 

The consolidated financial statements, which have been prepared on a going concern basis, have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union, and in accordance with the Companies Act 2006, as applicable to companies reporting under IFRS.  The accounting policies have been consistently applied in 2010 and the comparative period.  There has been no material impact on the Group's consolidated financial statements in 2010 from the issue of IFRS or interpretations to existing Standards during the year. 

 

The financial information set out in this Preliminary Announcement, which has been extracted from the audited consolidated financial statements, does not constitute the Group's statutory financial statements for the years ended 30 September 2010 and 2009.  Statutory financial statements for the year ended 30 September 2009 have been delivered to the Registrar of Companies.  The statutory financial statements for the year ended 30 September 2010, which were approved by the Directors on 22 November 2010, will be sent to shareholders on 6 December 2010 and delivered to the Registrar of Companies, following the Company's Annual General Meeting.

 

The auditors have reported on the consolidated financial statements for the years ended 30 September 2010 and 2009.  The reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

 

The Company's Annual General Meeting will be held at 12.00 midday on 12 January 2011 in the Brewers' Hall, Aldermanbury Square, London, EC2V 7HR.  The Notice of Meeting will be sent out in a separate Circular to shareholders.

 

2.         ALTERNATIVE PERFORMANCE MEASURES

 

The Group uses a number of alternative (non-Generally Accepted Accounting Practice ("non-GAAP")) financial measures which are not defined within IFRS. The Directors use these measures in order to assess the underlying operational performance of the Group and as such, these measures are important and should be considered alongside the IFRS measures. The following non-GAAP measures are referred to in this Preliminary Announcement.

 

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 costs and adjustments to deferred consideration (collectively, "acquisition related charges"). The Directors believe that adjusted operating profit is an important measure of the underlying operational performance of the Group.

 

2.2    Adjusted profit before tax

At the foot of the consolidated income statement, "adjusted profit before tax" is separately disclosed, being defined as profit before tax and before the costs of restructuring or rationalisation of operations, the profit or loss relating to the sale of property, fair value remeasurements under IAS 32 and IAS 39 in respect of future purchases of minority interests, and acquisition related charges. The Directors believe that adjusted profit before tax is an important measure of the underlying performance of the Group.

 

2.3    Adjusted earnings per share

"Adjusted earnings per share" is calculated as the total of adjusted profit, less income tax costs, but excluding the tax impact on the items included in the calculation of adjusted profit and the tax effects of goodwill in overseas jurisdictions, less profit attributable to minority interests, divided by the weighted average number of ordinary shares in issue during the year. The Directors believe that adjusted earnings per share provides an important measure of the underlying earning capacity of the Group.

 

2.4    Free cash flow

At the foot of the consolidated cash flow statement, "free cash flow" is reported, being defined as net cash flow from operating activities, after net capital expenditure on fixed assets and including proceeds received from business disposals, but before expenditure on business combinations and dividends paid to both minority shareholders and the Company's shareholders. The Directors believe that free cash flow gives an important measure of the cash flow of the Group, available for future investment.

 

2.5    Trading capital employed

In the segment analysis in note 3, "trading capital employed" is reported, being defined as net assets less cash and cash equivalents and after adding back retirement benefit obligations, deferred tax, amounts in respect of future purchases of minority interests and adjusting goodwill in respect of the recognition of deferred tax on acquisition intangible assets. Return on trading capital employed is defined as being adjusted operating profit, divided by trading capital employed plus all historic goodwill and as adjusted for the timing effect of major acquisitions and disposals. Return on trading capital employed at the sector level does not include historic goodwill. The Directors believe that return on trading capital employed is an important measure of the underlying performance of the Group.

 

3.         BUSINESS SEGMENT ANALYSIS

 

For management reporting purposes, the Group is organised into three main business segments: Life Sciences, Seals and Controls.  These segments form the basis of the primary reporting format disclosures below.  Segment revenue represents revenue to external customers; there is no inter-segment revenue.  Segment results, assets and liabilities include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis.

 

 

Life Sciences

Seals

Controls

Total


2010

£m

2009

£m

2010

£m

2009

£m

2010

£m

2009

£m

2010

£m

2009

£m

Revenue










- existing businesses

55.0 

49.9 

59.6 

48.2 

68.0 

61.9 

182.6 

160.0 


- acquisitions

0.4 

- 

0.5 

- 

- 

- 

0.9 

- 

Revenue

55.4 

49.9 

60.1 

48.2 

68.0 

61.9 

183.5 

160.0 

Adjusted operating profit





 





- existing businesses

11.8 

10.6 

8.8 

5.5 

11.3 

9.5 

31.9 

25.6 


- acquisitions

0.1 

- 

0.1 

- 

- 

- 

0.2 

- 

Adjusted operating profit

Acquisition related charges

11.9 

(1.6)

10.6 

(1.4)

8.9 

(1.5)

5.5 

(1.3)

11.3 

(0.4)

9.5 

(0.4)

32.1 

(3.5)

25.6 

(3.1)

 

operating Profit

 

10.3 

 

9.2 

 

7.4 

 

4.2 

 

10.9 

 

9.1 

 

28.6 

 

22.5 

 

Segment assets exclude cash and cash equivalents, deferred tax assets and corporate assets that cannot be allocated on a reasonable basis to a business segment.  Segment liabilities exclude retirement benefit obligations, deferred tax liabilities and corporate liabilities that cannot be allocated on a reasonable basis to a business segment. These items are shown collectively in the following analysis as "unallocated assets" and "unallocated liabilities", respectively.

 

 

Life Sciences

Seals

Controls

Total


2010

£m 

2009

£m 

2010

£m 

2009

£m 

2010

£m 

2009

£m 

2010

£m 

2009

£m 

Operating assets

17.6 

15.6 

27.1 

23.6 

25.9 

23.3 

70.6 

62.5 

Goodwill

38.2 

32.5 

14.2 

12.0 

14.9 

15.1 

67.3 

59.6 

Acquisition intangible assets

9.9 

10.9 

11.5 

8.8 

1.3 

1.5 

22.7 

21.2 


65.7 

59.0 

52.8 

44.4 

42.1 

39.9 

160.6 

143.3 

Unallocated assets:









- Deferred tax assets







2.4 

2.1 

- Cash and cash equivalents







30.1 

21.3 

- Assets held for sale







- 

5.4 

- Corporate assets







3.6 

3.1 

Total assets







196.7 

175.2 

Operating liabilities

(11.3)

(9.0)

(8.0)

(4.8)

(12.2)

(9.3)

(31.5)

(23.1)

Unallocated liabilities: 









- Deferred tax liabilities







(3.7)

(4.1)

- Retirement benefit obligations







(5.3)

(4.7)

- Future purchases of 
  minorities   






 

(13.2)

 

(13.1)

- Liabilities associated with

   assets held for sale







 

- 

 

 (3.5)

- Corporate liabilities







(3.8)

(2.6)

Total liabilities







(57.5)

(51.1)

Net assets







139.2 

124.1










Other segment information









Capital expenditure

0.7 

0.6 

0.5 

1.1 

0.1 

0.1 

1.3 

1.8 

Depreciation (including software)

0.8 

0.8 

0.9 

0.8 

0.4 

0.6 

2.1 

2.2 










 

 

 

ALTERNATIVE PERFORMANCE

Life Sciences

Seals

Controls

Total

MEASURES (note 2)

2010

£m

2009

£m

2010

£m

2009

£m

2010

£m

2009

£m

2010

£m

2009

£m

Net assets







139.2

124.1 

Add/(less):









- Deferred tax, net







1.3

2.0 

- Retirement benefit obligations







5.3

4.7 

- Future purchases of minorities   







13.2

13.1 

- Cash and cash equivalents







(30.1)

(21.3)

- Adjustment to goodwill

(4.7)

(4.5)

(1.3)

(1.4)

(0.6)

(0.6)

(6.6)

(6.5)

GROUP TRADING CAPITAL EMPLOYED







 

122.3

 

116.1

Assets held for sale, net







- 

(1.9)

Corporate liabilities/(assets), net







0.2 

(0.5)

SEGMENT TRADING CAPITAL EMPLOYED

 

49.7

 

45.5

 

43.5

 

38.2

 

29.3

 

30.0

 

122.5 

 

113.7

 

 

4.         GEOGRAPHIC SEGMENT ANALYSIS BY ORIGIN

 

Revenue

Adjusted

Operating profit

Gross assets

Trading capital

employed

Capital expenditure


2010

2009

2010

2009

2010

2009

2010

2009

2010

2009


£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

United Kingdom

55.9

50.1

8.4

6.8

50.0

49.3

19.2

28.4

0.3

0.1

Rest of Europe

35.1

32.6

4.5

3.9

33.2

34.8

19.6

21.0

0.1

0.2

North America

92.5

77.3

19.2

14.9

113.5

91.1

83.5

66.7

0.9

1.5


 

183.5

 

160.0 

 

32.1

 

25.6

 

196.7

 

175.2 

 

122.3

 

116.1 

 

1.3

 

1.8 

 

 

5.         FINANCIAL EXPENSE, NET

 



2010 

2009 




£m 

£m 

Interest and similar income





- interest receivable on short term deposits



0.2 

0.1 

- net finance income from defined benefit pension scheme



0.1 

-  




0.3 

0.1 

Interest expense and similar charges





- bank commitments fees



(0.1)

(0.1)

- unwinding of discount on provisions



(0.1)

- 

- net finance expense from defined benefit pension scheme



- 

(0.1)




(0.2)

(0.2)

Net interest income/(expense)



0.1 

(0.1)

- fair value remeasurement of put options (note 10)



(2.0)

(1.9)

 

FINANCIAL EXPENSE, NET



 

(1.9)

 

(2.0)

 

The fair value remeasurement of £2.0m (2009: £1.9m) includes £1.1m (2009: £1.1m) which relates to the unwinding of the discount on the liability for future purchases of minority interests.

 

 

6.         TAX EXPENSE

 




2010 

2009 





£m 

£m 

Current tax






The tax charge is based on the profit for the year of the continuing

businesses and comprises:



- UK corporation tax




2.2 

2.4 

- Overseas tax




7.0 

5.2 

- deferred tax (UK and Overseas)




(0.3)

(0.5)

- prior year adjustments (UK and Overseas)




(0.1)

- 











8.8 

7.1 

 

The Group earns its profits in the UK and Overseas.  The UK corporation tax rate is 28%; the Group's overseas tax rates are higher than those in the UK, primarily because the profits earned in North America are taxed at rates varying from 28% to 40%.  The tax relating to the discontinuing business is £0.2m credit (2009: £0.3m expense) as set out in note 12.

 

7.         EARNINGS PER SHARE

 

Basic and diluted earnings per share

Basic and diluted earnings per ordinary 5p share are calculated on the basis of the weighted average number of ordinary shares in issue during the year of 112,577,283 (2009: 112,316,906) and the profit for the year attributable to shareholders of £21.5m (2009: £13.0m). There were no potentially dilutive shares. 

 

Adjusted earnings per share

Adjusted earnings per share, which is defined in note 2, is calculated as follows:

 



2010

2009

2010

2009




pence

pence






per share

per share

£m

£m

Profit before tax - continuing businesses



26.7 

20.5 

Tax expense





(8.8)

(7.1)

Minority interests





(1.5)

(1.3)




14.6 

10.8 

16.4 

12.1 

Profit from discontinued businesses



4.5 

0.8 

5.1 

0.9 

Earnings for the year attributable to shareholders of the Company

 

19.1 

 

11.6 

 

21.5 

 

13.0 

Acquisition related charges

3.1 

2.7 

3.5 

3.1 

Fair value remeasurements

1.8 

1.7 

2.0 

1.9 

Tax effects on goodwill, acquisition intangible assets and fair value remeasurements

 

(0.6)

 

(0.4)

 

(0.6)

 

(0.5)

Profit from discontinued businesses

(4.5)

(0.8)

(5.1)

(0.9)

 

Adjusted earnings - continuing businesses

 

18.9 

 

14.8

 

21.3 

 

16.6 

 

 

8.         RECONCILIATION OF CASH FLOW FROM OPERATING ACTIVITIES

 




2010 

2009 





£m 

£m 

Profit for the year from continuing businesses




17.9 

13.4 

Depreciation/amortisation of tangible and other intangible assets

2.1 

2.2 

Acquisition related charges




3.5 

3.1 

Share-based payments expense




0.5 

0.5 

Financial expense, net




1.9 

2.0 

Tax expense




8.8 

7.1 

Operating cash flow before changes in working capital




34.7 

28.3 

(Increase)/decrease in inventories




(3.2)

6.0 

(Increase)/decrease in trade and other receivables




(4.0)

2.4 

Increase/(decrease) in trade and other payables




7.3 

(2.3)

Cash paid into defined benefit schemes




(0.5)

(0.2)

 

CASH FLOW FROM OPERATING ACTIVITIES




 

34.3 

 

34.2 

 

 

9.         GOODWILL

 


Life Sciences

Seals

Controls

Total

 



£m

£m

£m

£m

At 1 October 2008


30.6 

8.9 

12.1 

51.6 

Acquisitions


1.4 

2.1 

- 

3.5 

Reclassification


(2.4)

- 

2.4 

- 

Exchange adjustments


2.9 

1.0 

0.6 

4.5 

At 30 September 2009


32.5 

12.0 

15.1 

59.6 

Acquisitions (note 11)


3.7 

2.5 

- 

6.2 

Adjustment to prior year goodwill


- 

(0.2)

- 

(0.2)

Exchange adjustments


2.0 

(0.1)

(0.2)

1.7 

 

AT 30 SEPTEMBER 2010


 

38.2 

 

14.2 

 

14.9 

 

67.3 

 

The Directors carry out an impairment test on all goodwill generally twice a year.  Goodwill is ascribed to a business which, for the purpose of these impairment tests, is referred to as a cash generating unit.

 

The impairment test requires each cash generating unit to prepare "value in use" valuations from discounted cash flow forecasts.  The cash flow forecasts are initially based on the annual budgets and five year strategic plans, prepared by each business.

 

The key assumptions used to prepare the cash flow forecasts relate to gross margin, growth rates and discount rates.  The gross margins are assumed to remain sustainable, which is supported by historical experience; growth rates generally approximate to the long term average rates for the markets in which the business operate, unless there are particular factors relevant to a business, such as start-ups.  The growth rates used in the cash flow forecasts vary between 2-5% across all sectors over the next five years and trend down towards 2.0% over the longer term. 

 

The cash flow forecasts are discounted to determine a current valuation, using a pre-tax discount rate of ca. 13% (2009: 13%).  This rate is based on the characteristics of lower risk non-technically driven, distribution businesses with robust capital structures, which is broadly consistent with each of the Group's businesses.

 

Based on the criteria set out above, no impairment of the value of goodwill was identified.

 

The Directors have also carried out sensitivity analysis on the key assumptions to determine whether a "reasonably possible change" in any of these assumptions would result in an impairment of goodwill.  This analysis indicates that a "reasonably possible change" in these key assumptions would be unlikely to give rise to an impairment charge to goodwill in any of the businesses in the Controls or Life Sciences segments.  However, a reduction of 2% in revenue growth in the medium term in some of the businesses in the Seals sector would result in an impairment charge of up to £1.0m.  The headroom in the cash flow forecasts, based on the original assumptions, in respect of these businesses in the Seals sector is £2.0m.

 

 

 

10.       OTHER LIABILITIES

 




2010 

2009 





£m 

£m 

Future purchases of minority interests




13.2 

13.1 

Deferred consideration




1.0 

0.6 





 

14.2 

 

13.7 

Analysed as:






Due within one year




13.0 

3.1 

Due after one year




1.2 

10.6 







The movement in the liability for future purchases of minority interests is as follows:










2010

£m

2009

£m

At 1 October




13.1 

11.2 

Released to retained earnings on acquisition (note 11)




(2.5)

- 

Put options entered into during the year




0.6 

- 

Unwinding of discount




1.1 

1.1 

Fair value remeasurements




0.9 

0.8 

 

AT 30 SEPTEMBER




 

13.2 

 

13.1 

 

The Group retains put/call options to acquire the outstanding minority shareholdings in AMT, BGS and    M Seals, which are exercisable between 1 October 2010 and 31 December 2013.  The Group is engaged in discussions with the minority shareholders in AMT with a view to acquiring all of the outstanding 25% shareholding in AMT in 2011.  This would be earlier than anticipated in the original put/call option agreements and therefore the liability to acquire these interests of £12.0m has been shown as falling due within one year. 

 

At 30 September 2010, 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 the businesses and to reflect foreign exchange rates at 30 September 2010.  This led to a remeasurement of the fair value of these put options and the liability was increased by £0.9m (2009: £0.8m) by a charge to the consolidated Income Statement.

 

At 30 September 2010, deferred consideration of £1.0m comprised £0.8m payable to the vendors of All Seals, £0.1m payable to the vendors of the Fischer business and £0.1m payable to the vendors of BGS.  Deferred consideration of £0.3m was paid on 17 December 2009 to the vendors of Meditech in final settlement of their performance payment and £0.1m was paid on 19 May 2010 to the vendors of the trade and assets of RT/Dygert International Inc, in final settlement of their performance payment.

 

11.       ACQUISITION of subsidiaries and minority interests

 

On 12 January 2010, the Group acquired the remaining 8.2% of the ordinary share capital of Somagen Diagnostics Inc ("Somagen") for £2.5m (C$4.3m) from the minority shareholders of Somagen, pursuant to put/call option agreements entered into at the time of the original acquisition in July 2004.  As a consequence, the future purchase of minority interest liability of £2.5m that was recognised in the consolidated financial statements at 30 September 2009 has been released to retained earnings.

 

On 30 July 2010, the Group acquired 80% of Big Green Surgical Company Pty Limited ("BGS") for maximum consideration of £1.5m (A$2.5m), before expenses.  The initial cash paid on acquisition was £1.4m (A$2.4m) and the balance of £0.1m (A$0.1m) was paid on 29 October 2010, based on the net assets at completion. The outstanding 20% of shares are subject to put/call options, exercisable in 2013, based on an agreed multiple of operating profit.

 

On 3 August 2010, Sommer GmbH purchased the stock and customer list of ET Fischer Elektrotechnik ("Fischer") for maximum consideration of £0.2m (€0.3m), before expenses.  The initial cash paid on acquisition was £0.1m (€0.2m) and a further amount up to £0.1m (€0.1m) is payable, based on the revenue generated from those customers in the eighteen month period from the date of acquisition.

 

On 8 September 2010, the Group acquired 100% of All Seals Inc ("All Seals") for maximum consideration of £7.8m (US$11.9m), before expenses.  The initial cash paid on acquisition was £6.8m (US$10.5m); a further amount up to £1.0m (US$1.4m) is payable in March 2011, based on a number of factors, including principally, the results of All Seals in the year ending 31 December 2010.  At 30 September 2010, £0.8m (US$1.3m) has been provided for as deferred consideration.

 

The consideration for all of the acquisitions set out above was paid in cash and met from the Group's existing cash resources.

 

Set out below is an analysis of the net book value and fair value of the net assets acquired and the consideration payable in respect of the acquisitions completed during the year.

 

 






Book value

Fair value







£m 

£m

Acquisition intangible assets






- 

4.5 

Inventories






0.9 

0.8 

Trade and other receivables






1.0 

1.0 

Trade and other payables






(0.9)

(1.0)







1.0 

5.3 

Minority's share of net assets







0.1 

Net assets acquired by the Group







5.4 

Goodwill arising on acquisitions completed during the year





6.2 
















11.6 









Satisfied by:








Cash paid, before acquisition expenses







 

10.8 

Cash acquired







(0.2)

Net cash paid







10.6 

Provision for deferred consideration payable






1.0 

 

TOTAL CONSIDERATION







 

11.6 

 

Goodwill of £6.2m which arose on acquisitions completed during the year represents the product know-how held by employees, prospects for sales growth from new customers and operating cost synergies.  Goodwill and acquisition intangible assets acquired during the year of £10.7m, includes £7.1m that is allowable for a tax deduction.

 

Acquisition costs incurred during the year of £0.2m were expensed to the consolidated Income Statement.

 

From the date of acquisition to 30 September 2010, the newly acquired businesses contributed £0.9m to revenue and £0.2m to operating profit.  If the acquisition of these businesses had been made at the beginning of the financial year, these businesses would have contributed £5.2m to revenue and £0.5m to profit after tax.  Profit after tax 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.

 

12.       DISCONTINUED BUSINESSES

 

On 7 January 2010, the Group completed the disposal of the Manual Liquid Handling ("MLH") business of Anachem Limited for a maximum consideration of £8.5m, before disposal costs.  Initial cash proceeds of £7.7m were received, of which £0.8m is held in escrow; a further £0.8m may be receivable, depending on the revenues generated in the 12 months to 31 December 2010.

 

The remainder of the business in Anachem Limited comprised the Instruments division which supplied laboratory automation products.    This was transferred to a separate entity, Anachem Instruments Limited, prior to completion of the sale of the MLH business.

 

On 29 April 2010, the Group completed the disposal of Anachem Instruments Limited for a maximum consideration of £0.4m, before disposal costs.  Initial proceeds of £0.2m were received in cash with a further £0.2m due to be received over the next two years.

 

There is no tax payable on the profit on disposal of these businesses of £5.5m.

 

Anachem Limited and Anachem Instruments Limited were both classified as discontinued businesses in 2009 and their net assets were classified as "held for sale" as at 30 September 2009.

 

The results of the MLH business, until it was sold on 7 January 2010, and the results of Anachem Instruments, until it was sold on 29 April 2010, are set out below:

 





2010

2009






£m

£m

Revenue



5.3 

15.7 

Cost of sales





(4.3)

(10.2)

Gross Profit





1.0 

5.5 

Distribution costs





(0.2)

(0.6)

Administration costs





(1.4)

(3.7)

(Loss)/profit before tax





(0.6)

1.2 

Tax credit/(expense)





0.2 

(0.3)

(Loss)/profit after tax





(0.4)

0.9 

Profit on disposal





5.5 

- 

profit attributable to discontinued businesses



5.1 

0.9 

 

 

The assets and liabilities of Anachem Limited and Anachem Instruments Limited sold during the year ended 30 September 2010 were as follows:

 





£m

Other intangible assets



0.3 

Property, plant and equipment





0.3 

Deferred tax





0.1 

Inventories





1.6 

Trade and other receivables





1.8 

Trade and other payables





(2.7)

Net assets disposed of





1.4 

Profit on disposal





5.5 

CONSIDERATION



6.9 

 

 






£m

Satisfied by:







Cash received on completion




7.1 

Less:

Expenses of sale



(0.2)


Related disposal costs



(0.4)


Cash disposed



(0.1)

Net cash proceeds received at 30 September 2010




6.4 

Add:

Cash held in escrow, net



0.5 

CONSIDERATION






6.9 

 

As part of the agreement to dispose of the MLH business of Anachem Limited, the Trustees of the Anachem Limited Retirement Benefit Scheme ("Scheme") consented to the transfer of the residual liabilities in the Scheme to Diploma Holdings PLC ("DHPLC").  In return for their consent, a cash sum of £625,000 was paid directly into the Scheme and is included in the net cash outflow of £0.5m from the discontinued businesses in the year ended 30 September 2010.

 

 

13.       DIVIDENDS

 

2010

2009

2010

2009


pence

per share

pence

per share

 

£m

 

£m






Interim dividend, paid in June

2.8

2.5

3.1

2.8

Final dividend of the prior year, paid in January

5.3

5.0

6.0

5.6







8.1

7.5

9.1

8.4

 

The Directors have proposed a final dividend in respect of the current year of 6.2p (2009: 5.3p) which will be paid on 19 January 2011, subject to approval of shareholders at the Annual General Meeting on 12 January 2011.  The total dividend for the current year, subject to approval of the final dividend, will be 9.0p (2009: 7.8p).

 

 

14.       EXCHANGE RATES

 

The following exchange rates have been used to translate the results of the overseas businesses:

 

 

Average

Average

Closing

Closing


2010

2009

2010

2009






US Dollar

1.56

1.54

1.58

1.60

Canadian Dollar

1.63

1.82

1.62

1.72

Euro

1.15

1.14

1.15

1.09






 

 

 

 

 

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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