Final Results

Diploma PLC 13 November 2006 FOR IMMEDIATE RELEASE 13 November 2006 ANNOUNCEMENT OF PRELIMINARY RESULTS FOR YEAR ENDED 30 SEPTEMBER 2006 2006 2005 £m £m Revenue 128.2 111.3 +15% Operating profit* 19.4 16.5 +18% Profit before tax 31.2 17.2 +81% Adjusted profit before tax 20.4 17.2 +19% Free cash flow 24.3 11.9 +104% Pence Pence Basic earnings per share 105.5 52.4 +101% Adjusted earnings per share 62.8 53.7 +17% Dividends per share 23.0 20.0 +15% Free cash flow per share 108.2 52.9 +105% * before sale of property and amortisation of acquisition intangibles • Another year of strong growth in revenue and operating profit (before sale of property), up 15% and 18% respectively; underlying increase in both revenue and operating profit was 8%, excluding the contribution from HKX acquired in November 2005 and foreign exchange gains. • Results driven by strong growth in the North American businesses and by a focus on the more buoyant sectors in Europe, including Defence, Aerospace, Motorsport and Environmental. Operating margins increased to 15.1% (2005: 14.8%). • Acquisition of CBISS after the year end strengthens Environmental business in the UK. • Property profit of £11.1m realised on sale of Phase 3 of Stamford land; no further disposals expected in foreseeable future. • Final dividend of 15.0p per share (2005: 13.0p); total dividend for year up 15% at 23.0p (2005: 20.0p). • Strong free cash flow of £24.3m benefited from net cash proceeds of £11.0m from sale of Phase 3 Stamford land. Cash funds at 30 September 2006 of £36.7m. Commenting on the results for the year, Bruce Thompson, Diploma's Chief Executive said: ' The Group delivered another strong set of results in 2006, through a combination of organic growth and acquisition. With more modest organic growth likely in its core businesses this financial year, the continued strong growth of the Group will be more dependent on further high quality acquisitions.' Notes: The financial results for the year ended 30 September 2006 represents the Group's first full year financial statements prepared in accordance with IFRS. As a consequence, the 2005 results have been restated. Diploma PLC uses alternative performance measures as key financial indicators to assess the underlying performance of the Group. These include 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 7638 0934 Nigel Lingwood, Group Finance Director 020 7448 4875 Ian Seaton, Bankside Consultants 020 7367 8891 NOTE TO EDITORS: Diploma PLC is an international group of specialised distribution businesses operating in three sectors: Life Sciences - suppliers of consumables, instrumentation and related services to research, environmental and clinical diagnostic laboratories. Principal companies are Anachem, a1-envirosciences and CBISS in Europe and Somagen in Canada. Seals - Suppliers of hydraulic seals, gaskets, cylinders and attachment kits for heavy mobile machinery. Principal companies are Hercules Bulldog Sealing Products and HKX in North America and FPE in the UK. Controls - Suppliers of specialised wiring, connectors, control devices and fasteners for a range of technically demanding applications. Principal companies are IS Group in the UK and US, Sommer Filcon in Germany and Hawco in the UK. Within each of these sectors, the Diploma businesses serve industry segments with long term growth potential and with the opportunity for sustainable superior margins through the quality of customer service, depth of technical support and value adding activities. Further information on Diploma PLC can be found at www.diplomaplc.com PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2006 CHAIRMAN'S STATEMENT This has been another year of excellent performance for Diploma. The Group achieved another year of double digit profit growth and strong free cash flow. The successful sale of Phase 3 of the Stamford land provided a further boost to the Group's cash resources. These will be used to pursue the Group's strategy of building more substantial, broader based businesses through a combination of organic growth and acquisition. Strong Growth Group revenue increased by 15% to £128.2m (2005: £111.3m) largely driven by strong growth in the North American businesses and by a focus on the more buoyant sectors in Europe, including Defence, Aerospace, Motorsport and Environmental. Operating profit, before the sale of property and amortisation of acquisition intangibles, increased by 18% to £19.4m (2005: £16.5m) and operating margins strengthened to 15.1% (2005: 14.8%). Sales and operating profit benefited from contributions of £5.3m and £0.9m respectively from HKX, acquired on 29 November 2005. Adjusted profit before tax increased by 19% to £20.4m (2005: £17.2m), while headline IFRS profit before tax was £31.2m (2005: £17.2m), reflecting the profit of £11.1m realised from the sale of the Stamford land in February 2006. Adjusted earnings per share grew by 17% to 62.8p (2005: 53.7p) and headline IFRS earnings per share were 105.5p. The net cash proceeds of £11.0m received during the year from the sale of the Stamford land contributed to free cash flow in 2006 of £24.3m (2005: £11.9m). Underlying cash flow generated by the businesses also improved, reflecting the continuing active management of working capital. After investing a total of £8.0m in the acquisition of HKX and in payments of deferred consideration, the Group's cash funds increased by £11.0m during the year to £36.7m at 30 September 2006. Dividends The Directors are recommending an increased final dividend of 15.0p per share (2005: 13.0p). This increases the total dividend payment for the year to 23.0p (2005: 20.0p), an increase of 15%. Subject to approval at the Annual General Meeting, the final dividend will be paid on 17 January 2007 to shareholders on the register at the close of business on 1 December 2006. Management and Employees Lord Stewartby, who has served as a non-Executive Director of Diploma since 1990, intends to retire from the Board at the conclusion of the Annual General Meeting on 10 January 2007. Lord Stewartby has made a significant contribution to the Board over an extended period, as the Group has undergone a major restructuring of its operations and refocused on the core of growing, profitable businesses. We wish him a long and happy retirement. On behalf of shareholders and the Board, I would like to acknowledge the dedication of our employees across all our operations whose hard work and commitment have been the critical factors in achieving another year of strong growth and improvement for the Group. Outlook The new financial year has started positively, with the Group trading in line with internal budgets. The European Defence, Aerospace, Motorsport and Environmental markets in which the Group operates continue to be relatively buoyant, although there are signs of caution in North American markets. The Group continues to achieve growth by a combination of organic growth and acquisitions. With more modest organic growth likely in its core businesses this financial year, the continued strong growth of the Group will be more dependent on further high quality acquisitions. CHIEF EXECUTIVE'S REVIEW OF OPERATIONS LIFE SCIENCES The Life Sciences businesses made further advances in 2006. Sector sales increased by 13% to £39.2m (2005: £34.7m) and operating profits increased by 20% to £6.1m (2005: £5.1m). Operating margins increased to 15.6% (2005: 14.7%). The main drivers of growth in the sector were Somagen and a1-envirosciences. Somagen maintained its market position and achieved steady sales growth in Canadian dollar terms. Sales and particularly operating profit were then further boosted by the ca. 10% appreciation of the Canadian dollar against both the pound Sterling (translation benefits) and the US dollar (purchasing benefits). a1-envirosciences again achieved strong double digit sales growth and improved operating margins significantly as it achieved greater critical mass in its operations. Somagen Somagen achieved sales growth of ca. 6% in Canadian dollar terms with good performances in each of the three segments of consumables, capital and service. The majority of consumable product sales are supplied as part of multi-year reagent rental contracts, funded through the operating budgets within hospitals. Fully serviced and maintained instruments are supplied in return for a commitment to minimum annual purchases of reagent kits. Sales within these contracts grew steadily, with particularly good progress in the sale of allergy and immunology kits. Instruments are also supplied outside of reagent rental contracts, funded through the capital expenditure budgets within hospitals. These capital product sales were again strong, boosted by the success in winning a large tender for infectious disease testing instruments in Ontario. Service sales benefited from the high levels of capital product sales in recent years and the service team was strengthened further during the year to meet the increased demand. In June 2006, Somagen's distribution agreement with GeneOhm for MRSA kits was terminated early, following GeneOhm's acquisition by Becton, Dickinson and Company. In compensation for the early termination, Somagen received a payment of £0.3m (C$0.5m). The lost revenues and profit from this supplier will largely be offset by the Trinity Biotech range of coagulation products. Somagen was awarded the exclusive distribution rights to these products towards the end of the financial year. Anachem Anachem showed modest progress in its core Bioscience business, maintaining its market leading position in pipettes, tips and service. This was achieved by a combination of extensive field sales coverage and relentless direct marketing. The increased sales coverage had the greatest impact in the more price sensitive University sector, where Anachem extended its presence during the year. The new range of filtration products has now been fully launched and although early in the process, is showing encouraging signs of success. Sales in Eire have also moved forward following the appointment of further direct sales and service personnel to the territory. During the year, £0.2m was invested in a new calibration system to support the service activities. Sales in the Instrumentation business declined, but there was an improvement in the second half of the year as new software and new instrument models were introduced to customers. The change to the new Trilution software for HPLC instruments has provided a significant boost as the previous software had become uncompetitive. Product line extensions included the launch of a new generation of HPLC instruments, the GX range of injectors and fraction collectors, to replace the existing ten year old technology. The Reactarray team continued to introduce product enhancements and delivered a particularly strong performance in the US. a1-envirosciences a1-envirosciences grew strongly in the year and accounts for 20% of sector sales. Operating margins, though not yet at the sector average levels, improved significantly as increased scale was achieved in the operations in the UK, Eire, Germany and Switzerland. The a1-envirotech analyser business performed well in the UK, Germany and Eire. Highlights include the supply of portable analysers to the UK National Grid to monitor sulphur hexafluoride (SF6) gases and strong demand from the German petrochemical industry for elemental analysers to measure sulphur content in fuels. There was also the continued success of a1-envirotech's own brand automation products within environmental laboratories. The a1-safetech business also grew strongly, boosted by a large order from Roche in Switzerland for more than 100 potent powder enclosure units. The safety enclosure range now accounts for over £2m of sales, an excellent example of organic growth within this expanding business. After the year end, the acquisition of CBISS was completed for a maximum cost of £6.0m. CBISS is the leading UK supplier of bespoke Continuous Emission Monitoring Systems (CEMS) for waste incineration plants and is extending into Power, Chemicals and other industries. It also supplies systems for gas leak detection and process and toxic gas monitoring. Systems are supported by CBISS under comprehensive service contracts and analyser hire is also available through EIM, a subsidiary of CBISS. This acquisition will add scale and critical mass to the a1-envirosciences operations in the UK and offer opportunities for growth, both in the UK and more broadly in Europe. SEALS The Seals businesses delivered further strong growth in 2006. Sector sales increased by 30% to £35.9m (2005: £27.6m) and operating profits, before amortisation of acquisition intangibles, increased by 34% to £5.5m (2005: £4.1m). The results were boosted by the acquisition of HKX in November 2005, which contributed £5.3m to revenue and £0.9m to operating profit. Excluding the impact of the acquisition and on a constant currency basis, the continuing businesses grew sales and operating profits by 11% and 15% respectively. The increase in operating margins to 15.3% (2005:14.9%) reflected the contribution from HKX and improved efficiencies from investment in the Hercules and Bulldog operations. Hercules There was a strong performance from the core Hercules business in Clearwater, Florida. Hercules performed well across all of its traditional customer groups, including machinery repair shops and aftermarket kit programmes for cylinder manufacturers. Successful initiatives were also implemented to increase Hercules presence in larger, regional distributors and in the catalogues of specialist industrial distributors, such as those that service the fork lift truck operators and repair shops. New product introductions, competitive freight programmes and full line catalogue updates helped to propel Hercules to a record year for new account sales. In the US, seal and cylinder sales continued to grow in the second half of the year but at a more modest rate than that experienced in the exceptional first half, reflecting the general levelling off in the US economy and construction sectors. Exports have become an increasing area of focus for Hercules and resources were added in the year. The results have been very encouraging with a 40% increase in international sales, which now represent ca. 10% of Hercules Clearwater sales. During the year, £0.3m of capital was invested in Clearwater, largely focused on improving the operations. The resulting gains in operational efficiencies and high levels of ex-stock availability, delivered increases in sales and a further increase in operating margins. Hercules Canada again achieved good growth in sales, despite a slowdown in the Eastern Provinces relating to the US automotive industry. In Western Canada, the Edmonton branch continued to make progress, benefiting from the strong economy in Alberta. The decision was taken during the Summer to consolidate resources in Western Canada at the Edmonton location. After the year end, in November 2006, the Vancouver branch was closed but with customers continuing to be served by in-territory sales people. The cost of closing the branch was not significant and was provided for in the 2006 financial statements. Bulldog The Bulldog business in Reno, Nevada was held back in the first half of the year by cut-backs in purchasing by a large domestic customer. However, new sales and marketing initiatives took effect in the second half, generating strong growth and reversing much of the shortfall in the first half, to end the year 5% up on 2005. A new focus on transmission products brought positive results and kits introduced last year for the newer generation of diesel engines also contributed to the improved performance. During the year £0.1m was invested in new gasket cutting machines. Domestically, Bulldog has strengthened its resources and broadened its customer base to include not only the larger full-line tractor supply companies, but also smaller dealers and engine repairers that are now served directly. Internationally, Bulldog has reviewed its network of agents to again introduce its products to a wider range of customers. India and the Far East showed substantial growth and sales to the Middle East recovered from the low point of the Lebanese war to end the year strongly. HKX HKX has delivered exceptional growth since its acquisition in November 2005. Continuing demand has been generated from the larger, established dealers and increased resources are in place to broaden the customer base in the US and Canada. HKX is also developing innovative value-added components which should provide further differentiation in the attachment kits. The first of these, the proportional controller, was introduced into kits during the year, offering improved control of the excavator attachments for the operator. HKX's facility move and IT system upgrade, which represented a total investment of £0.2m, coincided with the timing of the acquisition and were successfully completed in the year. There is now capacity available to support further growth. FPE In the UK, FPE made modest progress in a subdued, low growth UK market, though exports continued to show good growth. An upgrade to the IT system was completed in 2006 and the benefits should be seen in the new financial year. CONTROLS The Controls businesses made good progress in 2006. Sector sales increased by 8% to £53.1m (2005: £49.0m) and operating profit increased by 7% to £7.8m (2005: £7.3m). Both the IS Group and Sommer Filcon performed strongly, achieving growth in the sluggish industrial economies of the UK and Germany, by focusing on the more buoyant technology-driven segments of the market. Operating margins were maintained at 14.7% (2005:14.9%), with margin pressures within the Hawco businesses being offset by slightly improved margins in the other businesses. IS Group The IS Group continued to grow strongly as the increased demand from Ground Defence and Military Marine programmes continued through the second half of the year. In particular, IS-Rayfast was well positioned to benefit substantially from supplying the UORs (Urgent Operational Requirements) received from the Ministry of Defence. Products were also supplied to a range of other programmes, including the Starstreak missile, Viper Weapon Sight, T45 destroyer and Astute submarine programmes. In Aerospace, IS-Rayfast benefited from smaller projects and prototypes for the Joint Strike Fighter and the Boeing 787 Dreamliner. The demand from the Oil and Gas sector for cables and connectors also remained strong. IS-Motorsport and Clarendon benefited from the generally buoyant market conditions in Motorsport. In Formula One, there was an additional team on the grid and increased demand from the re-design of engines from V10 to V8. The World Rally Championships also expanded as Ford introduced additional cars. In the US, another strong performance was delivered with IS-Motorsport expanding its sales to NASCAR and generating additional business through improved stock availability. The IS Group's UK warehousing and logistics operations have now been consolidated at Swindon, which has allowed the kitting services offered to the Motorsport sector to be significantly expanded. An investment of £0.1m was also made to up-grade and improve the capabilities of the IT systems within the IS Group. During the year, IS Rayfast established a Representative office in Beijing and employed an experienced Chinese national to lead its expansion in this region. The initial focus will be on the Chinese commercial aerospace repair and aftermarket sector, where there is an increasing demand for high performance components for electrical harnesses. Sommer Filcon Sommer Filcon continued its steady growth with strong order levels from a range of defence programmes. The Eurofighter Tranche II and Tornado upgrade programmes continued to generate orders, as did the NH90 and Tiger helicopter programmes. These were supplemented with new orders from various Missile, Weapon and Combat Land Vehicle programmes. A key feature of the year has been the success of the Sommer Filcon sales teams in sharing intelligence and identifying cross-selling opportunities. The combined strength of the two operations in terms of technical knowledge and the breadth of product portfolio has created a well rounded business in an important specialised market. Outside the Defence area, Sommer Filcon also had a strong year for medical wire sales as demand for German made endoscopic instruments grew. Sommer's Formula One relationships were also combined with Filcon's connector expertise to penetrate the German based Formula One teams and engine builders. Finally, new franchises were secured for cable protection products and other specialist connectors. Hawco Sales at Hawco remained at prior year levels overall, with the Refrigeration business continuing to show growth and the Controls business continuing to slow. Refrigeration maintained its momentum in both the OEM and contractor sectors. In a very competitive market place, the division gained business by bundling compatible components for its OEM customers. The company also recently launched a focussed simple-to-use catalogue targeted at the contractor sector and the early response has been positive. In the Controls business, the sales management team has been strengthened and work continues to ensure that the division is appropriately focused to compete in a challenging environment. FINANCIAL REVIEW International Financial Reporting Standards International Financial Reporting Standards ('IFRS') were adopted by the Group with effect from 1 October 2004 and these are the first full set of Group financial statements prepared in accordance with IFRS. Adoption of IFRS required the restatement of the 2005 results and the balance sheets at 1 October 2004 and 30 September 2005. The impact of adopting IFRS on the Group's adjusted results has not been significant and was set out in an Announcement to shareholders on 25 January 2006. Alternative Performance Measures The Directors consider that there are alternative measures which are helpful in assessing the underlying operating performance of the Group. For internal management reporting purposes, the Board uses a number of financial measures (which are not defined within IFRS) to assess the underlying operational performance of the Group and its businesses. As such the Board believes these 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 in this Preliminary Announcement. Results for the year Revenue increased by 15% to £128.2m and operating profit, before the sale of property and amortisation of acquisition intangibles, increased by 17.6% to £19.4m. The results included a contribution to revenue and operating profit of £5.3m and £0.9m from the acquisition of HKX in the Seals sector, completed on 29 November 2005. A significant strengthening in the Canadian dollar during the year and in the US dollar in the early part of the year, contributed to an increase in revenue and operating profit of £2.2m and £0.5m respectively on translation of the results of the Group's North American businesses. The strong Canadian dollar also contributed to an increase in the operating margin of the Life Sciences sector, reflecting the US dollar denominated purchases made by Somagen. Operating margins, before amortisation of acquisition intangibles, again improved in 2006 to 15.1% from 14.8% last year. Part of this increase arose in the Life Sciences sector from currency benefits and from receipt of £0.3m on the return of distribution rights to a supplier by Somagen; continuing operational efficiencies from warehouse automation in the Seals sector also contributed to improved margins. After generating interest income of £1.0m on cash funds held during the year, adjusted profit before tax increased by 18.6% to £20.4m (2005: £17.2m). Sale of property In February 2006, the Group completed the sale of the former brickworks site of Williamson Cliff (referred to as Phase 3 of the Stamford land), for proceeds of £11.8m, before expenses of sale. A small part of the proceeds (£0.5m) were received in October 2006, following confirmation of the estimated contribution required to meet certain environmental conditions. The profit on sale of this land was £11.1m; tax of £0.9m has been provided on this profit, after utilising the remaining capital losses to mitigate part of the tax on the gain. The Group retains approximately a further 150 acres of farm and former quarry land in Stamford, which in the opinion of the Directors is unlikely to be worth more than £0.5m in its present condition. The Directors do not expect that there will be any further disposal of the land in the foreseeable future. Taxation The Group's adjusted effective tax charge represented 29.9% (2005: 29.1%) of adjusted profit before tax. During the year, tax authorities in a number of jurisdictions in which the Group operates completed reviews of prior year tax computations. The conclusion of these reviews resulted in an aggregate prior year tax credit of £0.6m. The underlying tax rate, excluding the impact of prior year tax credits, was 32.8%. This rate compares with a corporate tax rate of 30% in the UK and approximately 36% on profits earned in North America and Germany. Earnings and Dividends Adjusted earnings per share increased 16.9% to 62.8p compared with 53.7p last year. The Board has proposed a final dividend of 15.0p per share, which will give a total dividend for the year of 23.0p, an increase of 3.0p or 15.0% on last year. The dividend for the year is covered 2.7 times by adjusted earnings. Free Cash Flow The Group's free cash flow, which is before expenditure on dividends and business combinations, was £24.3m, including £11.0m of net cash proceeds received during the year from the sale of the Stamford land. The underlying free cash flow was £13.3m, compared with £11.9m last year. Operating cash flow increased by £4.5m to £20.9m reflecting tight control over working capital, despite the underlying growth in the business. Additions to fixed assets, including software, were £1.4m, which compared with a depreciation charge of £1.6m. Additions included £0.6m of additional production and calibration equipment and £0.5m on improvements to the IT infrastructure. At 30 September 2006, the Group's cash funds had increased by £11.0m to £36.7m. Acquisitions On 29 November 2005, the Group acquired 100% of HKX Inc, a leading provider of hydraulic kits for the installation of attachments on excavators. Consideration of £6.6m (US$11.5m), including expenses, was paid during the year. A maximum of a further £0.5m (US$1.0m) is payable in February 2007, dependent on the gross profit achieved in the twelve months ending 31 December 2006. In November 2005, deferred purchase consideration of £1.0m (C$2.0m) was paid to the vendors of Somagen as final settlement of their performance payment. The Group owns 80% of Somagen and 95% of Hawco. The Group has put/call options to acquire the outstanding share capital which can be exercised in part at 30 September 2007 and 2009. The consideration is based upon a multiple of operating profits. Shortly after the year end, the Group also completed the acquisition of CBISS Limited ('CBISS') for a maximum consideration of £6.0m. CBISS is a leading supplier of equipment and services for environmental monitoring and control and is based in Tranmere, near Liverpool. Goodwill and acquisition intangible assets As required by IFRS, the Directors carried out an assessment of the fair value of the identifiable intangible assets acquired in HKX; these assets comprised 'customer relationships' and certain databases which were considered key to the future success of the business and were valued at £2.5m on acquisition. In addition, goodwill of £3.8m arose on the acquisition of HKX. This goodwill comprises the value in the business relating to the product know-how held by the employees and the prospects for further sales growth in the future from new customers. The acquisition intangible assets will be amortised over their expected useful economic lives of between five and seven years; goodwill is not amortised. The Directors have also carried out an impairment review of the total goodwill of £28.0m held at 30 September 2006 and are satisfied that none of this goodwill has been impaired. Shareholders' funds The Board considers that return on trading capital employed is a key indicator of the underlying performance of the Group. It is defined in note 2 to the financial statements in this Preliminary Announcement, and is after taking account of any historic gross goodwill and acquired intangible assets which arose on acquired businesses. In 2006 return on trading capital employed had increased to 23.9% from 22.1% last year. Shareholders' funds increased by £17.5m to £92.9m at 30 September 2006 which is equivalent to 410p per share, compared with 333p last year. Pensions IFRS requires the Group to include the actuarial value of its retirement benefit obligations in the consolidated balance sheet. At 30 September the aggregate value of these obligations had increased to £4.7m (2005: £4.4m). A reduction in the margin between the rate used to discount the liabilities and the assumed inflation rate, together with a strengthening in some mortality assumptions, more than offset the benefit from higher investment returns and the Group's cash contributions of £0.3m. However, on an ongoing funding basis agreed with the actuaries, the aggregate deficit reduced to £2.6m (2005: £3.6m) which the Group has agreed to fund over a period not exceeding nine years. During the year, a formal actuarial valuation was carried out on the Diploma Holdings PLC scheme in accordance with the new Scheme Specific Funding legislation. This showed a significant improvement in the funding position since the last valuation to 95% (2005: 88%), although the company will continue to contribute £42,000 pa to the scheme, in addition to meeting all of the expenses of running the scheme. Anachem contributed £238,000 to the closed Anachem pension scheme, in accordance with the recommendations of the actuary. The aggregate retirement benefit obligations, net of deferred tax, at 30 September 2006 were £3.3m (2005: £3.1m) which equates to 3.6% of shareholders' funds. CONSOLIDATED INCOME STATEMENT for the year ended 30 September 2006 2006 2005 Note £m £m REVENUE 5 128.2 111.3 Cost of sales (82.4) (71.8) Gross profit 45.8 39.5 Distribution costs (3.7) (3.5) Administration costs (22.7) (19.5) Amortisation of acquisition intangibles (0.3) - OPERATING PROFIT before sale of property 5 19.1 16.5 Profit on sale of property 5 11.1 - OPERATING PROFIT 30.2 16.5 Finance income 1.0 0.7 PROFIT BEFORE TAX 31.2 17.2 Tax expense 7 (7.0) (5.0) PROFIT FOR THE YEAR 24.2 12.2 Attributable to: Shareholders of the Company 23.7 11.8 Minority interests 0.5 0.4 24.2 12.2 EARNINGS PER 5P SHARE Basic and diluted earnings 8 105.5p 52.4p All activities both in the current and previous year relate to continuing operations. Alternative Performance Measures (note 2) 2006 2005 Note £m £m Profit before tax 31.2 17.2 Less: Profit on sale of property (11.1) - Add: Amortisation of acquisition intangibles 0.3 - ADJUSTED PROFIT BEFORE TAX 20.4 17.2 ADJUSTED EARNINGS PER SHARE 8 62.8p 53.7p CONSOLIDATED BALANCE SHEET as at 30 September 2006 2006 2005 £m £m NON-CURRENT ASSETS Goodwill 28.0 24.6 Acquisition intangible assets 2.0 - Other intangible assets 0.6 0.6 Property, plant and equipment 9.5 9.8 Deferred tax assets 3.4 3.1 43.5 38.1 CURRENT ASSETS Inventories 22.9 21.3 Trade and other receivables 20.4 19.7 Cash and cash equivalents 36.7 25.7 80.0 66.7 CURRENT LIABILITIES Trade and other payables (20.9) (19.4) Current tax liabilities (2.9) (2.9) Other liabilities (0.5) (1.0) (24.3) (23.3) NET CURRENT ASSETS 55.7 43.4 TOTAL ASSETS LESS CURRENT LIABILITIES 99.2 81.5 NON-CURRENT LIABILITIES Retirement benefit obligations (4.7) (4.4) NET ASSETS 94.5 77.1 EQUITY Share capital 1.1 1.1 Capital redemption reserve 0.2 0.2 Translation reserve 0.7 2.2 Hedging reserve - - Retained earnings 90.9 71.9 TOTAL SHAREHOLDERS' EQUITY 92.9 75.4 Minority interests 1.6 1.7 TOTAL EQUITY 94.5 77.1 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE for the year ended 30 September 2006 2006 2005 £m £m Exchange rate adjustments on foreign currency net investments (1.5) 2.2 Changes in fair value of cash flow hedges 0.1 - Actuarial losses on defined benefit pension schemes (0.6) (0.6) Deferred tax on actuarial losses 0.2 - Net (expense)/income recognised directly in equity for the year (1.8) 1.6 Profit for the year 24.2 12.2 TOTAL RECOGNISED INCOME AND EXPENSE FOR THE YEAR 22.4 13.8 Attributable to: Shareholders of the Company 21.9 13.4 Minority interests 0.5 0.4 22.4 13.8 Other Changes in Share Capital Translation Hedging Retained Total Shareholders' Equity capital redemption reserve reserve earnings reserve £m £m £m £m £m £m At 1 October 2004 1.1 0.2 - - 64.6 65.9 Total recognised income and expense for the year attributable to shareholders - - 2.2 - 11.2 13.4 Share based payments expense - - - - 0.6 0.6 Purchase of own shares - - - - (0.5) (0.5) Dividends - - - - (4.0) (4.0) At 30 September 2005 1.1 0.2 2.2 - 71.9 75.4 Adjustment on adoption of IAS 39 - - - (0.1) - (0.1) At 1 October 2005, as restated 1.1 0.2 2.2 (0.1) 71.9 75.3 Total recognised income and expense for the year attributable to shareholders - - (1.5) 0.1 23.3 21.9 Share based payments expense - - - - 0.5 0.5 Purchase of own shares - - - - (0.1) (0.1) Dividends - - - - (4.7) (4.7) At 30 September 2006 1.1 0.2 0.7 - 90.9 92.9 CONSOLIDATED CASH FLOW STATEMENT for the year ended 30 September 2006 2006 2005 Note £m £m CASH FLOWS FROM OPERATING ACTIVITIES Cash flow from operations 9 20.9 16.4 Finance income received 1.0 0.7 Tax paid (7.1) (3.7) NET CASH FROM OPERATING ACTIVITIES 14.8 13.4 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of subsidiaries (net of cash acquired) (7.0) - Deferred consideration paid (1.0) (0.3) Proceeds from the sale of property, plant and equipment 11.0 0.4 Purchase of property, plant and equipment (1.3) (1.4) Purchase of other intangible assets (0.1) - NET CASH FROM/(USED IN) INVESTING ACTIVITIES 1.6 (1.3) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to shareholders (4.7) (4.1) Dividends paid to minority interests (0.3) - Purchase of own shares (0.1) (0.5) NET CASH USED IN FINANCING ACTIVITIES (5.1) (4.6) NET INCREASE IN CASH AND CASH EQUIVALENTS 11.3 7.5 Cash and cash equivalents at beginning of year 25.7 17.9 Effect of exchange rates on cash and cash equivalents (0.3) 0.3 CASH AND CASH EQUIVALENTS AT END OF YEAR 36.7 25.7 Alternative Performance Measures (note 2) 2006 2005 £m £m NET INCREASE IN CASH AND CASH EQUIVALENTS 11.3 7.5 Add: Dividends paid to shareholders 4.7 4.1 Dividends paid to minority interests 0.3 - Acquisition of subsidiaries (net of cash acquired) 7.0 - Deferred consideration paid 1.0 0.3 FREE CASH FLOW 24.3 11.9 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 20 Bunhill Row, London, EC1Y 8UD. The consolidated financial statements comprise the Company and its subsidiaries (together referred to as the 'Group'). The consolidated financial statements, which were authorised by the Directors for publication on 13 November 2006, are presented in pounds Sterling and all values are rounded to the nearest one hundred thousand, except where otherwise indicated. 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 2006 and 2005. Statutory financial statements for the year ended 30 September 2005 have been delivered to the Registrar of Companies. The statutory financial statements for the year ended 30 September 2006, which were approved by the Directors on 13 November 2006, will be 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 2006 and 2005. The reports were unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. The Company's Annual General Meeting will be held at 12.00 midday on 10 January 2007 in the Members' Room, Chartered Accountants' Hall, Moorgate Place, London EC2P 2BJ. The Notice of Meeting will be set out in a separate document issued 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 profit before tax On the face 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 and the amortisation and impairment of intangible assets. The Directors believe that adjusted profit before tax is an important measure of the underlying performance of the Group. 2.2 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. 2.3 Free cash flow On the face 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 (excluding business combinations), 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. 2.4 Trading capital employed In the segment analysis in note 5 to the financial statements in this Preliminary Announcement, 'trading capital employed' is reported, being defined as net assets less cash and cash equivalents and deferred tax assets, and after adding back defined benefit obligations. Return on trading capital employed is defined as being adjusted profit before finance income and tax, divided by trading capital employed plus all historic goodwill and as adjusted for the timing effect of major acquisitions and disposals. The Directors believe that return on trading capital employed is an important measure of the underlying performance of the Group and of each of the businesses. 3. ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS The consolidated financial statements have been prepared for the first time in accordance with International Financial Reporting Standards ('IFRS') as endorsed by the European Union, and in accordance with the Companies Act 1985, as applicable to companies reporting under IFRS. The comparatives have been restated from UK Generally Accepted Accounting Practice ('UK GAAP') to comply with IFRS. As part of the transition to IFRS, the Group's accounting policies have been reviewed. An explanation of how the transition to IFRS has affected the reported financial position and financial performance of the Group was provided in an Announcement to shareholders on 25 January 2006. No material adjustments other than changes in presentation have been made to the consolidated cash flow statement. In the Announcement, the Group published a detailed income statement, balance sheet and equity reconciliations of UK GAAP to IFRS. The published document is posted on the Diploma PLC website: www.diplomaplc.com. Subsequent to this Announcement, the Directors revised the basis of calculating the charge to profit in respect of the Group's share based payment schemes. This resulted in profit before tax for the year ended 30 September 2005 being increased by £0.1m to £17.2m, from £17.1m included in the Announcement. The Group has taken advantage of exemptions available in IFRS 1, (First-time Adoption of International Financial Reporting Standards (revised 2004)), in relation to actuarial gains and losses, business combinations, financial instruments and cumulative translation differences, details of which are set out in note 4. 4. FIRST-TIME ADOPTION OF IFRS (IFRS 1) IFRS 1 was issued to assist companies with the first time adoption of IFRS. IFRS 1 permitted companies adopting IFRS for the first time to adopt alternative accounting treatments for certain areas of the financial statements during the transition period. In preparing the financial information in this Preliminary Announcement, the Group has taken the following exemptions: 4.1 Business combinations Business combinations prior to the transition date, 1 October 2004, have not been restated to an IFRS basis. As a result, in the transition balance sheet as at 1 October 2004, goodwill arising from past business combinations remains as stated under UK GAAP at £23.5m. 4.2 Retirement benefit obligations IFRS requires that a balance sheet asset or liability must be shown in respect of defined benefit pension schemes. Actuarial gains and losses arise when the actual returns on scheme assets and liabilities differ from those anticipated at the time of valuation. The Group has adopted the exemption in IFRS 1 allowing all actuarial gains and losses arising before 1 October 2004 to be shown in the opening balance sheet at 1 October 2004. Since 1 October 2004, all actuarial gains and losses have been included in the SORIE. 4.3 Cumulative translation differences In the consolidated financial statements, the results of overseas subsidiaries are translated into pounds Sterling at the average exchange rate. The balance sheet is translated at the closing rate. This leads to exchange gains and losses being generated on consolidation. IFRS requires translation differences on the retranslation of the assets and liabilities of overseas subsidiaries to be taken directly to a separate translation reserve. On the disposal of an overseas entity, exchange differences previously taken to reserves will be transferred to the income statement as part of the profit/loss on disposal of that entity. The elective exemption in IFRS 1 means that any translation differences prior to the date of transition (1 October 2004) do not need to be analysed retrospectively and so the deemed cumulative translation differences at this date can be set to £nil. Thus, any cumulative translation differences arising prior to the date of transition are excluded from any future profit/loss on disposal of any entities. 4.4 Financial instruments (IAS 32 and 39) As permitted, the implementation of IAS 32 and IAS 39 has been first applied to the financial year ended 30 September 2006. As a result, financial instruments continued to be accounted and presented in accordance with UK GAAP for the year ended 30 September 2005. 4.5 Share-based payments (IFRS 2) At the transition date, the Group had no equity settled share-based awards relating to awards made before 7 November 2002. The Group did have awards outstanding at 1 October 2004 where part of the awards comprised a cash settled share-based transaction. However, all of the performance conditions for these awards had been completed by the transition date and the awards had vested, as defined by IFRS. Hence no adjustment in respect of these awards was necessary on transition. 5. 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. 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. These items are shown collectively in the following tables as ' unallocated assets'. Segment liabilities exclude retirement benefit obligations and corporate liabilities that cannot be allocated on a reasonable basis to a business segment. These items are shown collectively in the following tables as 'unallocated liabilities'. Life Sciences Seals Controls Total 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m REVENUE 39.2 34.7 35.9 27.6 53.1 49.0 128.2 111.3 Segment operating profit 6.1 5.1 5.5 4.1 7.8 7.3 19.4 16.5 Amortisation of acquisition intangibles - - (0.3) - - - (0.3) - 6.1 5.1 5.2 4.1 7.8 7.3 19.1 16.5 Profit on sale of property 11.1 - OPERATING PROFIT 30.2 16.5 The contribution from acquisitions for the year ended 30 September 2006 was revenue of £5.3m and operating profit of £0.9m. The acquisition related to HKX Inc in the Seals segment, which was acquired on 29 November 2005. There were no acquisitions during the year ended 30 September 2005. The profit on sale of property arose from the disposal of 12.2 acres of land (known as Phase 3) in Stamford, East Midlands for consideration of £11.5m, after expenses. Life Sciences Seals Controls Total 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m Operating assets 15.2 16.3 17.4 15.9 20.0 19.0 52.6 51.2 Goodwill 13.8 13.9 4.7 1.2 9.5 9.5 28.0 24.6 Acquisition intangible assets - - 2.0 - - - 2.0 - 29.0 30.2 24.1 17.1 29.5 28.5 82.6 75.8 Unallocated assets: - Deferred tax assets 3.4 3.1 - Cash and cash equivalents 36.7 25.7 - Corporate assets 0.8 0.2 TOTAL ASSETS 123.5 104.8 Operating liabilities (7.5) (7.3) (3.6) (3.0) (9.3) (9.4) (20.4) (19.7) Unallocated liabilities: - Retirement benefit (4.7) (4.4) obligations - Corporate liabilities (3.9) (3.6) TOTAL LIABILITIES (29.0) (27.7) NET ASSETS 94.5 77.1 OTHER SEGMENT INFORMATION Capital expenditure 0.5 0.8 0.7 0.4 0.2 0.2 1.4 1.4 Depreciation (including 0.8 0.7 0.6 0.4 0.2 0.4 1.6 1.5 software) Amortisation of acquisition intangibles - - 0.3 - - - 0.3 - ALTERNATIVE PERFORMANCE Life Sciences Seals Controls Total MEASURES (note 2) 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m Net assets 94.5 77.1 Add/(less): - Deferred tax assets (3.4) (3.1) - Retirement benefit obligations 4.7 4.4 - Cash and cash equivalents (36.7) (25.7) GROUP TRADING CAPITAL EMPLOYED 59.1 52.7 Add: Corporate liabilities, net 3.1 3.4 SEGMENT TRADING CAPITAL EMPLOYED 21.5 22.9 20.5 14.1 20.2 19.1 62.2 56.1 6. GEOGRAPHIC SEGMENT ANALYSIS Trading capital Revenue Gross assets employed Capital expenditure 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m United Kingdom 58.7 55.7 63.0 50.4 16.6 17.8 0.4 0.4 Rest of Europe 20.2 17.0 11.8 13.3 8.6 7.6 0.1 0.1 North America 49.3 38.6 48.7 41.1 33.9 27.3 0.9 0.9 128.2 111.3 123.5 104.8 59.1 52.7 1.4 1.4 7. TAXATION The Group's adjusted effective tax charge of £6.1m (2005: £5.0m) represented 29.9% (2005: 29.1%) of adjusted profit before tax. The underlying tax rate, excluding the impact of prior year tax credits of £0.6m, was 32.8%. This rate compares with the corporate tax rate of 30% in the UK and approximately 36% on profits earned in North America and Germany. Tax of £0.9m has been provided on the gain arising on the disposal of property, after taking account of available capital tax losses. 8. EARNINGS PER ORDINARY SHARE Basic and diluted earnings per share Basic and diluted earnings per ordinary share are calculated on the basis of the weighted average number of ordinary shares in issue during the year of 22,468,648 (2005: 22,513,603) and the profit for the year attributable to shareholders of £23.7m (2005: £11.8m). There were no potentially dilutive shares. Adjusted earnings per share Adjusted earnings per share, which is defined in note 2, are calculated as follows: 2006 2005 2006 2005 pence pence per share per share £m £m Profit before tax 31.2 17.2 Tax expense (7.0) (5.0) Minority interests (0.5) (0.4) Profit for the year attributable to shareholders of the Company 105.5 52.4 23.7 11.8 Profit on sale of property, net of (45.3) - (10.2) - tax Amortisation of acquisition 1.3 - 0.3 - intangibles Tax effects on goodwill and acquisition 1.3 1.3 0.3 0.3 intangibles ADJUSTED EARNINGS 62.8 53.7 14.1 12.1 9. RECONCILIATION OF CASH FLOW FROM OPERATIONS 2006 2005 £m £m Profit for the year 24.2 12.2 Depreciation 1.6 1.5 Amortisation of acquisition intangibles 0.3 - Share based payments expense 0.5 0.4 Finance income (1.0) (0.7) Profit on disposal of property (11.1) - Tax expense 7.0 5.0 Operating cash flow before changes in working capital 21.5 18.4 Increase in inventories (1.6) (0.6) (Increase)/decrease in trade and other receivables (0.1) 0.6 Increase/(decrease) in trade and other payables 1.4 (1.9) Cash paid into defined benefit schemes (0.3) (0.1) CASH FLOW FROM OPERATIONS 20.9 16.4 10. DIVIDENDS Subject to approval at the Annual General Meeting, a proposed final dividend of 15.0p per share (2005: 13.0p) will be paid on 17 January 2007 to ordinary shareholders on the register at the close of business on 1 December 2006. 11. EXCHANGE RATES The following exchange rates have been used to translate the results of the overseas businesses: Average Average Closing Closing 2006 2005 2006 2005 US Dollar 1.80 1.84 1.87 1.77 Canadian Dollar 2.05 2.27 2.08 2.05 Euro 1.46 1.46 1.47 1.47 This information is provided by RNS The company news service from the London Stock Exchange

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