TIDMDPLM
RNS Number : 6527T
Diploma PLC
18 November 2019
DIPLOMA PLC
12 CHARTERHOUSE SQUARE, LONDON EC1M 6AX
TELEPHONE: +44 (0)20 7549 5700
FACSIMILE: +44 (0)20 7549 5715
FOR IMMEDIATE RELEASE
18 November 2019
PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS
FOR THE YEARED 30 SEPTEMBER 2019
"Strong double-digit growth in revenues and earnings"
Audited Audited
2019 2018
GBPm GBPm
Revenue 544.7 485.1 +12%
Underlying revenue growth 5% 7%
Adjusted operating profit(1) 97.2 84.9 +14%
Adjusted operating margin(1) 17.8% 17.5% +30bps
Adjusted profit before
tax(1),(2) 96.5 84.8 +14%
Statutory operating profit 84.1 73.2 +15%
Statutory profit before
tax 83.5 72.7 +15%
Free cash flow(3) 56.5 60.5 -7%
Adjusted earnings per
share (1),(2) 64.3p 56.4p +14%
Basic earnings per share 54.7p 47.5p +15%
Total dividend per share 29.0p 25.5p +14%
(1) Before acquisition related charges and Chief Executive
Officer transition costs in 2018
(2) Before fair value remeasurements
(3) Before cash payments on acquisitions and dividends
Strong performance with underlying growth across all three
Sectors
-- Reported growth of 12%, comprising 5% underlying revenue
growth, 5% contribution from acquisitions and a 2% currency
benefit
-- Adjusted operating margin up 30bps to 17.8%, with stronger
gross margins and a tight control of costs
-- Double-digit growth in adjusted EPS and dividends
Strong trading and operating leverage in Life Sciences
-- Underlying revenues up 7% with good performance across Healthcare businesses
-- Adjusted operating margin up 120bps benefiting from strong operating leverage
Underlying growth in Seals against background of softer
industrial markets
-- Underlying revenues up 1% with solid growth from US Aftermarket and International Seals
-- US Industrial OEM faced more challenging trading environment
from softer Industrial markets and ERP implementation issues at
start of year which impacted service levels and revenue growth
-- Adjusted operating margin unchanged as stronger Aftermarket
margins were offset by investments to resolve ERP issues
Another robust performance in Controls
-- Underlying revenue growth of 9% benefiting from another
excellent year in Specialty Fasteners and a good contribution from
Interconnect
-- Adjusted operating margin up 10bps with benefits from
operational leverage offsetting impact of businesses acquired at
initial lower margins
Record investment in acquisitions
-- GBP78.3m spent on acquisitions this year to access new
markets and broaden products and services supplied, in line with
strategy
-- Pipeline of acquisition opportunities is healthy, but opportunities remain competitive
Strong balance sheet and cash generation
-- Net debt of GBP15.1m at year end; ca GBP54m of facilities unused
-- Free cash flow of GBP56.5m reflecting strong cash inflow to
working capital in second half of year, as strategic inventories
successfully unwound
Outlook
-- Uncertain political and economic environment impacting Industrial markets
-- Remain confident of further progress in the current financial
year as moderately lower underlying growth will be offset by a
strong contribution from acquisitions.
Commenting on the results, Johnny Thomson, Diploma's Chief
Executive Officer said:
"Diploma has delivered another strong set of results with
double-digit revenue and earnings growth in the year. We were also
delighted to welcome four new businesses into the group, all of
which are strategically important and have exciting prospects. The
political and economic outlook remains uncertain, but I am
confident our resilient business model will support a consistently
strong performance again in the year ahead.
We have also reviewed and refreshed our strategy since I joined.
Our plans are about continuity, building on the strong foundations
of our value-add distribution model, focusing on the development of
the organisation's capability to deliver that model at scale and
focusing on the significant growth opportunities in our core
markets and products. I am excited by the prospect of working with
my colleagues to deliver more success for Diploma in the
future."
There will be a presentation of the results to analysts and
investors at 9.00am this morning at London Stock Exchange, 10
Paternoster Square, London EC4M 7LS. This presentation will be
broadcast live via webcast at
https://3xscreen.videosync.fi/20191118-diploma-results
A replay of the webcast will be available after the event.
For further information please contact:
Diploma PLC - +44 (0)20 7549 5700
Johnny Thomson, Chief Executive Officer
Nigel Lingwood, Group Finance Director
Tulchan Communications - +44 (0)20 7353 4200
David Allchurch
Martin Robinson
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, free cash flow and ROATCE.
All references in this Preliminary Announcement ("Announcement") to
"underlying" revenues or operating profits refer to reported
results on a constant currency basis and before any contribution
from acquired or disposed businesses. The narrative in this
Announcement is based on these alternative measures and an
explanation is set out in notes 2 and 3 to the consolidated
financial statements in this Announcement.
-- Certain statements contained in this Announcement constitute
forward-looking statements. Such forward-looking statements involve
risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Diploma PLC, or industry
results, to be materially different from any future results,
performance or achievements expressed or implied by such
statements. Such risks, uncertainties and other factors include,
among others, exchange rates, general economic conditions and the
business environment.
NOTE TO EDITORS:
Diploma PLC is an international group supplying specialised
products and services to a wide range of end segments in our three
Sectors of Life Sciences, Seals and Controls.
Diploma's businesses are focused on supplying essential products
and services which are funded by the customers' operating rather
than their capital budgets, providing recurring income and stable
revenue growth.
Our businesses then design their individual business models to
closely meet the requirements of their customers, offering a blend
of high quality customer service, deep technical support and value
adding activities. By supplying essential solutions, not just
products, we build strong long term relationships with our
customers and suppliers, which support attractive and sustainable
margins.
Finally, we encourage an entrepreneurial culture in our
businesses through our decentralised management structure. We want
our managers to feel that they have the freedom to run their own
businesses, while being able to draw on the support and resources
of a larger group. These essential values ensure that decisions are
made close to the customer and that the businesses are agile and
responsive to changes in the market and the competitive
environment.
The Group employs ca. 2,000 employees and its principal
operating businesses are located in the UK, Northern Europe, North
America and Australia.
Over the last ten years, the Group has grown adjusted earnings
per share at an average of ca. 16% p.a. through a combination of
underlying growth and acquisitions. Diploma is a member of the FTSE
250 with a market capitalisation of ca. GBP1.9bn.
Further information on Diploma PLC can be found at
www.diplomaplc.com
LEI: 2138008OG17VYG8FGR19
PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS
FOR YEARED 30 SEPTEMBER 2019
CHAIRMAN'S STATEMENT
Diploma has delivered another strong financial performance in
2019. The Group again achieved double-digit growth in adjusted
earnings per share, generated strong free cash flow and maintained
a robust balance sheet, despite having invested a record amount in
acquiring new businesses this year. The results demonstrate the
resilience of the Group's businesses and the consistent delivery
against the Group's strategy that has allowed Diploma to build a
long track record of strong financial performance and growth in
shareholder value.
The Board was pleased to appoint a new Chief Executive Officer
("CEO") early in the financial year. Since joining Diploma in
February this year, Johnny Thomson has demonstrated strong and
effective leadership. Johnny has also completed a thorough review
of the Group's strategy which the Board has approved and which has
excellent potential to create further shareholder value in the
years ahead.
Shortly after the year end Nigel Lingwood, Group Finance
Director, announced his decision to retire from the Board at the
close of the next financial year. Nigel joined the Group in 2001
and has played a significant role in pursuing the current strategy
that over the past 18 years has delivered double-digit growth in
earnings and dividends. This has led to a growth in market
capitalisation from GBP60m to over GBP1.9bn today. We look forward
to working with Nigel during his final year with the Group, before
wishing him a long and restful retirement.
Results
Group revenues increased in 2019 by 12% to GBP544.7m (2018:
GBP485.1m), benefiting from both a strong 5% contribution from
acquisitions and a currency tailwind of 2% from translating the
results of the overseas businesses, caused by the sharp
depreciation in UK sterling in the second half of the year.
After adjusting for the contribution from acquisitions completed
both this year and last year, net of a small disposal last year and
for the currency effects on translation, Group revenues increased
by 5% on an underlying basis. The Life Sciences and Controls
businesses both delivered strong underlying revenue growth of 7%
and 9% respectively, but the generally weaker Industrial markets
limited the more cyclical Seals businesses to 1% growth in
underlying revenues.
Adjusted operating profit increased by 14% to GBP97.2m (2018:
GBP84.9m) reflecting the strong growth in revenues and an increase
of 30bps in adjusted operating margins to 17.8% (2018: 17.5%).
Adjusted profit before tax and adjusted earnings per share ("EPS")
also increased by 14% to GBP96.5m (2018: GBP84.8m) and 64.3p (2018:
56.4p), respectively.
On a statutory basis, the Group's operating profit was 15% ahead
of last year at GBP84.1m (2018: GBP73.2m) after GBP13.1m (2018:
GBP9.6m) of acquisition related charges, largely comprising
amortisation of acquired intangible assets. Last year's statutory
operating profit included one-off charges of GBP2.1m with respect
to the previous CEO transition process. Statutory profit before tax
increased by 15% to GBP83.5m (2018: GBP72.7m) and statutory EPS was
15% up on last year at 54.7p (2018: 47.5p).
The Group's free cash flow remained robust at GBP56.5m (2018:
GBP60.5m); last year's free cash flow included GBP4.0m from the
sale of a small non-core US gasket business. The outflow of cash to
support working capital increased this year to GBP9.4m (2018:
GBP5.1m) and was largely driven by the investment required in the
US Industrial OEM business, following implementation of a new ERP
system. Capital expenditure also increased this year to GBP10.9m
(2018: GBP6.6m) as the investment in the new distribution facility
in the US Seals Aftermarket began to ramp up and further investment
was made by the Healthcare businesses in new field equipment in
support of customer contracts.
As indicated in last year's Annual Report, the heightened
uncertainty in global industrial markets has led to a healthier
pipeline of acquisition opportunities as vendors of good quality
businesses decide to exit their companies, having enjoyed the
benefit of relatively favourable macroeconomic conditions over the
previous few years. The Group invested a record GBP78.3m (2018:
GBP20.4m) in acquisitions this year which will provide a strong
contribution to operating profits in future years. The acquisition
pipeline remains healthy and although acquisition processes remain
competitive, the Group will retain its disciplined approach to
bringing high quality, value enhancing businesses into the
Group.
The Group's balance sheet remains robust with net debt at 30
September 2019 of GBP15.1m (2018: cash funds of GBP36.0m), after
investing GBP78.3m in acquisitions and making distributions to
shareholders of GBP29.8m (2018: GBP26.8m). The Group also has
unutilised bank facilities of ca. GBP54m and the Group's strong
balance sheet provides support to increase these facilities to
finance further acquisition opportunities in the next financial
year.
Dividends
The combination of strong results and free cash flow supported
by a robust balance sheet has led the Board to recommend an
increase in the final dividend of 15% to 20.5p per share (2018:
17.8p). Subject to shareholder approval at the Annual General
Meeting ("AGM"), this dividend will be paid on 22 January 2020 to
shareholders on the register at 29 November 2019.
The total dividend per share for the year will be 29.0p (2018:
25.5p), which represents a 14% increase on 2018, with the level of
dividend cover remaining unchanged at 2.2 times on an adjusted EPS
basis.
Governance
The appointment of a new CEO this year has provided stability in
the Executive leadership of the Group. The focus this year will be
on broadening the non-Executive resource to provide further support
to the leadership team and to prepare for the additional corporate
governance compliance requirements that come into effect for the
Company in the new financial year. The Nomination and Audit
Committees are now supporting the CEO in searching for a new Group
Finance Director. The Remuneration Committee has updated the
Remuneration Policy in light of the change in leadership and this
Policy will be proposed for approval by shareholders at the AGM on
15 January 2020.
Employees
The process undertaken over the past two years in changing the
leadership of the Group has been a challenging period for our
employees. I would like to record my thanks to all our employees
who, during this period, have remained focused on delivering
excellent service and value to our customers that is the driving
force behind the Group's performance and the achievement of another
year of strong financial results.
Outlook
Diploma has a strong and resilient business model with a broad
geographic spread of businesses supported by a robust balance sheet
and consistently strong free cash flow. This model has delivered
another strong financial performance in line with our
expectations.
Despite the uncertain political and economic environment
impacting Industrial markets, the Board remains confident of
further progress in the current financial year as moderately lower
underlying growth will be offset by a strong contribution from
acquisitions.
CHIEF EXECUTIVE'S REVIEW
2019 has been another year of strong performance. The Group's
reported revenues increased by 12%, with currency movements adding
2% and acquisitions contributing a further 5% to the revenue
growth. On an underlying basis, after adjusting for acquisitions
and for currency effects on translation, Group revenues increased
by 5%. Encouragingly, there was good growth in all three Sectors.
Group adjusted operating margins improved by an excellent 30bps to
17.8%. As a result, the Group's adjusted earnings grew by 14% in
the year. Strong cash flow generation provided funds to allow us to
report a record year for acquisition spend, as well as a 15%
proposed increase in the final dividend.
Sector Performance
It has been a very strong year in Life Sciences. Somagen, in
Canada, extended its coverage in the Canadian Provinces with its
diagnostic screening product designed to provide early detection of
colorectal cancer. This product has been very well received in its
market and is a great example of innovation in response to customer
need. Market share gains in Vantage's Endoscopy business in Canada
have also boosted growth. The acquisition of Sphere Surgical
("Sphere") in Australia has given us a good entry point into the
high-growth bariatrics segment and complements our current product
portfolio in BGS. In Life Sciences, underlying revenues increased
by 7%, after adjusting for currency movements and the acquisition
of Sphere.
In the Seals Sector, the NA Aftermarket businesses had another
strong year as we grew market share through our high quality
service offering and scale of our operation. We are currently
developing a new leasehold facility in Louisville, Kentucky, which
will further broaden our footprint across North America. The US
Industrial OEM markets have been challenging this year. We
experienced implementation issues with the ERP system earlier in
the year, however with new leadership in place we are confident
that these difficulties have now been resolved. VSP Technologies
has made an encouraging contribution since joining the Group in
July this year and extends our sealing products offering to the
gasket market, supported by a high-quality, well-established
customer proposition and management team. In September we completed
the acquisition of DMR Seals in the UK, which complements our
existing FPE Seals business. In Seals, underlying revenues
increased by 1%, after adjusting for currency movements and
acquisitions.
The Controls Sector has developed well this year. The Clarendon
Specialty Fasteners business had great success penetrating further
into the civil aerospace market. The Interconnect business has been
expanding successfully in Germany and has extended its business
reach with the acquisition of Gremtek in France. We continue to add
new products into the Sector. Whilst market conditions in the UK
have created more uncertainty in our Industrial end markets, we
continue to be very positive about the future prospects for this
Sector. In Controls, underlying revenues increased by 9%, after
adjusting for currency effects and acquisitions.
Acquisitions
Diploma has a strong history of disciplined acquisitions. We had
a very positive year for acquisitions with VSP Technologies,
Gremtek, DMR Seals and Sphere all joining the Group with a total
spend of ca. GBP78m. In the US we have been pleased with the
transition of VSP Technologies into the Group and are excited by
its growth potential. VSP Technologies is a leading supplier of
high-quality gasket and fluid sealing products, as well as
customised solutions, to the industrial MRO market. VSP
Technologies is built on strong, long-standing customer and
supplier relationships supported by value-add servicing. The
acquisition is consistent with our strategy and provides an
exciting opportunity to extend our Seals activities in North
America. In addition, three smaller bolt-on acquisitions were
completed in the Seals, Controls and Life Sciences sectors during
the year - DMR Seals in the UK, Gremtek in France, and Sphere
Surgical in Australia. We are very positive about the prospects for
all four businesses and the strategic attributes they bring to the
Group. Bolt-on acquisitions remain a key part of the Group's
strategy.
Management Resources
Strong management in the businesses is key to the continued
success of the Group. This year we have made some important
appointments to reflect our growing organisation: David Goode
joined in April 2019 to lead the Controls Sector, allowing Gustav
Rober to retain his focus leading our Corporate Development. In
September, following the acquisition of VSP Technologies in the US
which extended the scale and opportunity of the Seals businesses,
Alessandro Lala, who has been with the Group since 2006, was
appointed to manage the International Seals businesses. Jill
Tennant joined the Group as our first Group HR Director in May 2019
this year, in recognition of the increasing importance of
developing the Group's organisational capability.
In order to manage our succession and business growth
requirements most effectively, while retaining our winning culture,
we are committed to making internal appointments where possible. In
2019, over 50% of our senior appointments were internal candidates.
The right blend of stability, internal progression and external
skill is key to the strong results that will lead to our future
success. Acquisition growth in 2019 has also allowed us to bring
new talent into the Group.
We continue to develop the Executive Management Committee
("EMC") which comprises the Executive Directors and Executive
senior managers responsible for the major business clusters and key
Group functions. The EMC meets regularly, providing the opportunity
for members to broaden their perspective of the Group's activities,
reinforce the key elements of the Group's culture and identify best
practices that are transferable across the Group.
Strategy
We have a consistent strategy that is built on the strong
foundations of our value-add distribution model. Since joining this
year I have, together with the Executive team, reviewed and
refreshed the Group's strategy based on these strong foundations.
As the Group evolves, we will continue to strengthen the Core
Competencies that support that model and the Organisational
Capability to execute these Core Competencies at scale. We will
also focus our growth on the exciting opportunities in core
developed larger markets and products. This growth will be organic
and complemented as normal by acquisitions. This strategy will
continue to deliver strong and consistent financial returns for
shareholders.
Business Model - value-add distribution
Stable and resilient revenue growth is achieved through our
focus on Essential Products and services funded by customers'
operating models rather than capital budgets and supplied across a
range of specialised industry segments. By supplying Essential
Solutions, not just products, we build strong, long-term
relationships with our customers and suppliers, which support
sustainable and attractive margins. Finally, we encourage an
entrepreneurial culture in our businesses through our decentralised
management structure. These Essential Values ensure that decisions
are made close to the customer and that the businesses are agile
and responsive to changes in the market and the competitive
environment.
SECTOR DEVELOPMENTS
LIFE SCIENCES
The Life Sciences Sector businesses supply a range of
consumables, instrumentation and related services to the healthcare
and environmental industries.
2019 2018
Revenue GBP145.8m GBP134.7m +8%
Adjusted operating profit GBP27.5m GBP23.9m +15%
Adjusted operating margin 18.9% 17.7% +120bps
Free cash flow GBP23.2m GBP17.3m +34%
ROATCE 22.0% 19.1% +290bps
--------------------------- ---------- ---------- --------
-- Sector revenue growth of 8%; underlying growth of 7% after
adjusting for currency effects and a small surgical acquisition in
Australia completed late in the year
-- In Canada, DHG underlying revenues increased by 10% with
strong consumable and capital revenues from its market-leading new
technology products, new cancer diagnostics program in Somagen and
endoscopy product lines in Vantage
-- In Australia and New Zealand, underlying revenues increased
by 8%. Abacus dx reported strong growth across its portfolio of
products. Diploma acquired Sphere Surgical in September, adding
bariatrics to the product portfolio of the BGS surgical products
business
-- TPD underlying revenues declined 7% in Ireland as the
business rebuilds its product portfolio and restructures its
commercial divisions
-- The Environmental businesses reported 9% underlying revenue
growth with strong revenue growth in the a1-CBISS business,
following a good recovery in the second half for CEMS installations
and associated services
Reported revenues of the Life Sciences Sector businesses
increased by 8% to GBP145.8m (2018: GBP134.7m) with strong revenue
growth from both the DHG and a1-group. Revenues benefited from a
currency tailwind of 1% on translation of the results from the
overseas businesses to UK sterling. After adjusting for currency
effects and the acquisition of Sphere Surgical, underlying revenues
increased by 7%.
Adjusted operating margins grew by 120bps to 18.9% largely
reflecting strong operating cost leverage across both the DHG and
Environmental businesses. Gross margins were slightly weaker
reflecting the impact of transactional currency pressures on the
Healthcare margins, but favourable currency hedges helped offset
some volatility of the Canadian and Australian dollars relative to
the US dollar and Euro during the second half of the year. Adjusted
operating profits increased by 15% to GBP27.5m (2018:
GBP23.9m).
The Life Sciences businesses invested GBP3.3m (2018: GBP3.5m) in
new capital during the year of which GBP2.7m (2018: GBP2.3m) was
spent on acquiring field equipment for both new placements in
hospitals and laboratories and for loan equipment and demonstration
models to support existing placements. The increased spend on field
equipment was largely driven by the launch this year of a new
series of flexible endoscopes and expansion and conversion of
special biochemistry technology in Australasia, together with the
replacement of smoke evacuation products to extend contracted
business. The balance of GBP0.6m was split between furnishings for
the newly renovated AMT/Vantage facility and service equipment
improvements and upgrades. The IT infrastructure across the
Healthcare businesses was also upgraded. Free cash flow increased
strongly to GBP23.2m (2018: GBP17.3m), largely reflecting strong
operating cash flow, which also benefited from a cash inflow from
reduced working capital.
Healthcare
The DHG businesses, which account for 85% of Life Sciences
revenues, increased underlying revenues by 7% after adjusting for
currency effects and the small acquisition.
In Canada, underlying revenues increased by 10% driven by new
technologies in all businesses, despite the ongoing backdrop of
regional consolidation of Group Procurement Offices ("GPOs"). The
GPOs continue to restructure and amalgamate, leading to harmonised
contracting, and rationalised service provision in the laboratory
sector in Quebec, in particular. In response the DHG businesses
continue to seek new suppliers that develop and provide innovative
products to the market.
Somagen's core Clinical Diagnostics business delivered an
underlying increase of 10% in revenues, with sustained growth in
consumable and service revenues. Capital sales decreased reflecting
the impact of laboratory centralisation, particularly in Quebec.
Demand for diagnostic testing, both cancer screening and companion
diagnostics, remained robust. Somagen implemented two new large
Provincial contracts to provide colorectal cancer screening
products and services with the stability of long-term contracts.
Somagen continued to pursue new supplier recruitment programs,
resulting in new targets entering the contracting phase across the
Specialty Diagnostics, Microbiology and Molecular Diagnostics
segments of the market.
AMT/Vantage, the combined Surgical and Endoscopy businesses in
Canada, delivered strong underlying growth of 10% in revenues,
particularly driven by Vantage's continued success with the
introduction of a new series of gastric endoscopes. The new
technology in these endoscopes has successfully driven current
customer contract extensions as well as new contracted business.
Continued diversification across both Vantage's endoscopy division
and AMT's surgical specialty division offers growth in new segments
of the market as well as off-setting some of the maturing,
traditional electrosurgical market. AMT/Vantage's discipline around
portfolio lifecycle management, has yielded new suppliers that will
drive future growth in both the GI/Endoscopy and Specialty Surgical
segments of the Canadian market.
In Australasia, Abacus dx delivered 11% underlying growth in
revenues driven by expansion of product offerings in the immunology
market and conversion of special biochemistry technology. However
revenues were also impacted by the continuing consolidation of
testing within the Australian Clinical Diagnostics market and
broader based GPOs in the fragmented diagnostics market. BGS, the
Surgical Products business in Australasia, stabilised revenues with
a modest 1% underlying growth after the loss of a key surgical
supplier last year. The acquisition of Sphere Surgical provided
access to the Bariatric Surgery market, a new segment for BGS. BGS
also made good progress in securing new specialty surgical
suppliers that will drive further growth.
The TPD business in Ireland and the UK reported declining
underlying revenues of 7% attributed to its Medical and Surgical
business in Ireland as it continues to manage the transition of a
number of medical and surgical suppliers who have moved from
specialised distribution to a direct supply model. The Biotech
business grew 13% on an underlying basis, with the Clinical
business remaining largely unchanged on prior year. The business
has restructured into two commercial divisions, Medical Science and
Clinical Science, with Medical Science aligning to the Medical and
Surgical markets, and Clinical Science aligning to the IVD and
Biotech markets. Both divisions have focused on portfolio
development efforts resulting in new suppliers that will provide
new growth in the future.
Environmental
The a1-group of Environmental businesses in Europe, which
account for 15% of Life Sciences revenues, saw underlying revenues
increase by 9%, with both businesses performing strongly in the
second half of the year.
The a1-envirosciences business based in Germany increased
underlying revenues by 4% driven by expanding demand across Europe
for elemental analysers and the associated service contracts. The
increasing environmental awareness and in particular, the
anticipated regulations on toxic polyfluorinated compounds, found
in a range of manufactured products, is creating continued demand
for these analysers in R&D and Environmental control. Health
& Safety regulations also continue to increase demand for
customised containment enclosures for the safe weighing of
hazardous materials. The business has invested in additional
service personnel and an IT based field service management system
to support the larger installed base and capitalise on the demand
from customers for faster response times.
The a1-CBISS business based in the UK delivered strong
underlying growth of 15% in revenues against a weak prior year
comparator. Revenue growth reflected a strong recovery in order
placement for continuous emissions monitoring systems ("CEMS") and
associated service, as well as growth in the gas detection product
segment. With strong CEMS capital sales, the associated service
contracts provide for future revenue growth.
SEALS
The Seals Sector businesses supply a range of seals, gaskets,
filters, cylinders, components and kits used in heavy mobile
machinery and specialised industrial equipment.
2019 2018
Revenue GBP220.6m GBP208.0m +6%
Adjusted operating profit GBP38.1m GBP36.0m +6%
Adjusted operating margin 17.3% 17.3% -
Free cash flow GBP17.7m GBP25.9m (32%)
ROATCE 19.3% 25.3% (600bps)
--------------------------- ---------- ---------- ---------
-- Sector revenue growth of 6%, reflecting contribution from
acquisition of VSP Technologies; underlying growth of 1% after
adjusting for currency and acquisitions
-- NA Aftermarket underlying revenues increased by 2%, driven by
improved trading conditions in the second half of the year as large
mobile machinery continued to move out of warranty period; HKX
revenues declined marginally reflecting a reduced supply of new
equipment
-- US Industrial OEM revenues significantly impacted this year
by combination of softening US Industrial markets and operational
issues arising on implementation of new ERP; underlying revenues
decreased by 6% on prior year. ERP issues now resolved and new
leadership team appointed at end of year
-- VSP Technologies acquired in July has made solid contribution in line with expectations
-- International Seals reported an increase in underlying
revenues of 4%; weaker second half reflecting softer European
industrial markets
Reported revenues of the Seals Sector businesses increased by 6%
to GBP220.6m (2018: GBP208.0) with the acquisitions in the second
half of the year of VSP Technologies and DMR Seals contributing
GBP9.3m to Sector revenues. Underlying revenues increased by 1%,
after adjusting for these acquisitions, net of a small disposal
last year and for currency effects on translation of results to UK
sterling.
Adjusted operating margins remained unchanged at 17.3% with
stronger gross margins, particularly in the NA Aftermarket business
following robust price increases and strong freight recoveries.
However these margins were largely offset by investment in the US
Industrial OEM business necessary to resolve the issues that arose
on implementation of a new ERP system. The International Seals
businesses reported adjusted operating margins marginally below the
prior year, reflecting the impact of softer demand in their key
markets.
The Sector invested GBP5.1m (2018: GBP2.0m) in capital
expenditure during the year reflecting the ramp up of investment of
GBP3.2m in a second distribution facility for the NA Aftermarket
business and a further GBP0.6m (2018: GBP0.8m) was invested in
completing the implementation of the new ERP system in the US
Industrial OEM business. The International Seals businesses
invested GBP1.0m on beginning an implementation project for new ERP
systems in both Kubo and in FPE Seals and on new warehouse
machinery.
Free cash flow was significantly impacted by difficulties that
arose from the ERP implementation this year in the US Industrial
OEM business and decreased by GBP8.2m to GBP17.7m (2018: GBP25.9m).
These difficulties were exacerbated by the expansion of trade
tariffs in the US during the year. Both issues contributed to a
substantial increase in inventories in this business necessary to
help customers mitigate the impact of tariffs, manage increased
lead times from select suppliers and increased on-hand stock
requirements to maintain service levels to customers.
North American Seals
The NA Seals businesses, which accounts for ca. 61% of Seals
revenues, reported revenues up 7% on the prior year which included
a strong contribution from VSP Technologies, acquired in July 2019.
Underlying revenues decreased by 1%, after adjusting for this
acquisition, net of a small non-core disposal last year and the
weakening of UK sterling against both the US and Canadian
dollar.
The US Aftermarket businesses increased revenues by 2% on an
underlying basis, driven by improved trading in the second half of
the year in the Repair market, after a weak first half caused by an
unusually high influx of new heavy mobile equipment in the past few
years, which remained under the original manufacturer's warranty.
The Aftermarket business is now beginning to benefit as this new
equipment moves out of warranty. HKX also experienced slightly
softer markets from a reduced supply of new mobile equipment in the
dealer network and competition from excavator OEM
manufacturers.
In the domestic Aftermarket, Hercules reported underlying
revenues up 3% on the prior year with the Repair and Distributor
segments continuing to provide growth and opportunities. Smaller
seal distributors continued to purchase from Hercules to avoid seal
manufacturer lead times and minimum order quantities. Hercules also
added new products to its portfolio as well as broadening both the
scope of customers and equipment supported. After several years of
product development, Hercules are now making successful inroads to
supply seals into the heavy mobile equipment Rental sector,
including Aerial Lifts, Skidsteer Loaders and Front-end Loaders.
New market opportunities include seal kitting services for
industrial plants of OEMs and industrial MRO. E-commerce continued
to deliver strong year-on-year growth and now accounts for 34% of
invoices processed and 28% of Hercules US revenues. A new version
of the e-commerce site has been developed during the year and will
be rolled out in early 2020. This will provide greater
functionality, faster response and greatly enhanced search engine
optimisation.
The US$10m project to develop a second distribution facility
made strong progress during the year with new logistic equipment
being installed in a new 120,000 sq ft leased facility in
Louisville, Kentucky. During the year ca. GBP0.2m of one-off costs
were incurred on this project; further one-off/dual running costs
of ca. GBP2m will be incurred in the next financial year, prior to
completion of the project in late 2020. When fully operational,
this facility will comprise highly technical warehouse automation
that will allow much greater access to expanded territories in the
US, as well as more competitive shipping logistics.
In Canada, revenues increased by 6% in local currency terms.
This outpaces a Canadian economy that has seen some volatility over
the past year, with market share being gained from both Repair and
Industrial OEM customers. During the year, Canada also successfully
leveraged the Hercules e-commerce platform, which now accounts for
9% of invoices and 5% of Canadian revenue.
In markets outside of North America, Hercules faced headwinds
because of the impact of increased tariffs that led to a reduction
in cylinders manufactured in China and delivered to export markets.
Despite this reduction in cylinders, moderate revenue growth of 2%
was reported in Central and South America.
HKX revenues declined by 3% as the business faced significant
equipment shortages which reduced HKX kitting opportunities and as
excavator OEM manufacturers enhanced both their capability and
availability of factory installed auxiliary hydraulics. The
introduction of mandated Tier 4 mobile equipment in Canada from 1
January 2019 also contributed to weaker demand, after a strong
finish for Tier 3 machines last year.
The US Industrial OEM business was disrupted significantly this
year by the difficulties that arose on implementation of the new
ERP system on 1 October 2018 and underlying revenues were 6% below
the prior year. Revenues also suffered from a softening US
industrial market in the second half of the year, caused by ongoing
disruption from increased trade tariffs and weaker global economies
leading to a decline in US exports. With this background, larger
customers in particular continued to seek pricing concessions in
exchange for both retaining and gaining additional business. In
response, management has also secured price reductions from its
suppliers and has taken advantage of suppliers who relocated
production facilities outside of tariffed regions, to maintain
competitiveness in the marketplace.
The business has a number of large key accounts across a range
of specialised industrial applications in industries including
Water, Medical, Oil & Gas, Fluid Handling and Food Equipment,
as well as Consumer Products. Despite the operational difficulties,
Water, Medical and Consumer Products continued to show positive
gains as new projects and products were introduced. However the
business saw a decline in revenues from customers in the
Automotive, Hydraulic and Aerospace sectors from dual sourcing and
some Industrial OEM customers were lost because of weaker service
delivery caused by operational challenges that arose following the
ERP implementation.
In the second half of the year, the principal issues relating to
the ERP implementation were successfully resolved with a
corresponding and substantial improvement in operational processes.
In September a new leadership team was appointed and the business
has now stabilised and is looking forward to resume growth by
exploiting newly developed products and additional specialty
compounds, as well as building relationships with engineering
departments at several large and mid-size customers.
In MRO, the VSP Technologies business, acquired in July 2019,
reported a solid contribution to revenues in its initial three
months as part of the Group with revenues above last year on a
like-for-like-basis and in line with our expectations. The business
continued to gain US market share growth in the transportation
segment through its RideTight(R) programme. The demand for the
RideTight(R) programme and related products has also gained
traction internationally. The Group has begun developing
cross-selling opportunities with our existing Seals businesses and
these will provide good opportunities for growth next year.
International Seals
The International Seals businesses, which account for ca. 39% of
Seals revenues, reported a 4% increase in reported and underlying
revenues, with activity across European Industrial OEM markets
softening in the second half of the year, against a strong
comparative last year. During the year FPE Seals, Kubo and M Seals
UK commenced work on implementing new ERP systems, all of which are
expected to go live during 2020. These new systems will lead to
substantial operating efficiencies, including cross selling and
inventory management within the International Seals businesses and
provide a platform to extend their e-commerce activities.
The FPE Seals and M Seals businesses, with their principal
operations in the UK, Scandinavia and the Netherlands, together
delivered underlying growth of 5% in revenues on a constant
currency basis and after adjusting for the acquisition of DMR Seals
in September this year. The FPE Seals business delivered
double-digit underlying growth, benefiting from the continuing
improvement in the Oil & Gas market and strong growth in
international sales which benefited from additional European sales
resources added last year. Revenues also benefited from good growth
in its core UK Aftermarket hydraulic seals and cylinder parts
business, although a weaker UK construction market led to slower
activity in the second half of the year. In September 2019, FPE
Seals acquired DMR Seals, a well established UK distributor of
bespoke machined seals and gaskets based in Sheffield and supplying
OEMs and MRO companies operating in a broad mix of industries. DMR
Seals success has been built on deep technical knowledge, high
levels of customer service and flexible machining capabilities and
complements well the products and services offered by FPE
Seals.
M Seals delivered modest growth in revenue in both the
Scandinavian and UK markets, although trading activity softened in
the second half of the year. In Scandinavia, solid revenue growth
was achieved in Sweden driven by specific customer activity, but
this was largely offset by flat revenues in the Danish core
markets. In the UK, similarly to FPE Seals, M Seals benefited from
the improvement in the Oil & Gas market with customers
expanding activities but this was partly offset by a weaker
Industrial OEM market.
Kubo, which operates in Switzerland and Austria, increased
underlying revenues by 1% with performance very dependent on local
market conditions. In Switzerland, revenues reduced modestly
against a strong comparative, as customers looked to reduce
inventories to meet weaker industrial production in 2019 also
reflecting the impact from the appreciation in the Swiss franc,
relative to the Euro. A new distribution supply agreement for a
major supplier expanded both the company's customer base and
product range and helped mitigate the weakness in some of its
existing markets. In Austria, Kubo reported robust revenue growth,
benefiting from a new customer contract gained in the second half
of last year.
The Kentek business, with principal operations in Finland and
Russia, saw revenues reduce by 1% in Euro terms with competitive
trading conditions continuing in both Finland and Russia,
reflecting generally tougher end markets. Revenues generated in
Russia, which account for ca. 65% of Kentek revenues, reduced
slightly in Euro terms as the ongoing impact from international
sanctions increasingly hindered trading activity and led to some
projects being postponed. In response, Kentek continued to focus on
sales of its own-brand filter range and also invested in a new
sales branch in the far east of Russia to support the mining and
logging sectors. In Finland, Kentek revenues reduced by 4% as sales
to Aftermarket customers and other distributors suffered from
strong competition in a market hampered by a lack of growth
opportunities.
The TotalSeal business in Australia and New Caledonia has core
capabilities in industrial gaskets and mechanical seals used in MRO
operations in complex, high specification and arduous conditions.
The business reported double-digit growth in both Australia and New
Caledonia against a weak comparative and benefiting from an
improving mining sector. The business in New Caledonia was
successful in renewing its supply contract with its major
international mining customer.
CONTROLS
The Controls Sector businesses supply specialised wiring, cable,
connectors, fasteners and control devices used in a range of
technically demanding applications.
2019 2018
Revenue GBP178.3m GBP142.4m +25%
Adjusted operating profit GBP31.6m GBP25.0m +26%
Adjusted operating margin 17.7% 17.6% +10bps
Free cash flow GBP24.7m GBP19.8m +25%
ROATCE 31.0% 29.8% +120bps
--------------------------- ---------- ----------- --------
-- Sector revenue growth of 25%; underlying growth of 9% after
adjusting for currency and acquisitions completed both this year
and last year
-- Interconnect delivered underlying growth of 7% with strong
growth in the IS-Group businesses more than offsetting weaker
revenues in the CCA Group (Cablecraft and FS Cables)
-- The Gremtek acquisition completed in October 2018 adds to the
Interconnect business a range of own-branded protective sleeving
and cable identification products and expands the business into
France
-- Clarendon increased underlying revenues by 21%, with growth
driven by strong demand from both existing and new Civil Aerospace
customers
-- Fluid Controls revenues increased by 1% with solid growth in
the refrigeration market, held back by a challenging UK industrial
market
Reported revenues of the Controls Sector businesses increased by
25% to GBP178.3m (2018: GBP142.4m). The acquisition of Gremtek in
October 2018 and FS Cables in August 2018, contributed GBP24.6m or
14% to Sector revenues. After adjusting for negligible currency
movements on revenues from translation to UK sterling and for these
acquisitions, underlying Sector revenues increased by 9%.
Adjusted operating margins increased by 10bps to 17.7% (2018:
17.6%) largely reflecting operating leverage from strong revenue
growth, which more than offset the impact from acquired businesses
that joined the Sector at lower initial operating margins. Gross
margins improved marginally, largely reflecting mix effects across
the Sector businesses. Adjusted operating profits increased by 26%
to GBP31.6m (2018: GBP25.0m).
Capital expenditure in Controls increased to GBP2.5m (2018:
GBP1.1m) in 2019, including GBP0.7m invested in completing the
expansion and refurbishment of the IS-Sommer facility in Germany.
Contracts to sale and leaseback this facility are expected to be
completed in early 2020. In September 2019 GBP1.3m was invested on
a new stand-alone facility for Clarendon to provide additional
capacity to meet the substantial growth in this business. After a
short period of refurbishment, Clarendon will relocate to this
facility in December 2019 before completing a sale and leaseback of
the facility early in 2020. Free cash flow increased by 25% to
GBP24.7m (2018: GBP19.8m) reflecting stronger trading and the
benefit from reduced working capital, after the unwinding of Brexit
stock built up in the first half of the year.
Interconnect
The Interconnect businesses account for 63% of Controls revenues
and reported an increase in revenues of 34% in UK sterling terms.
After adjusting for the acquisitions of Gremtek and FS Cables and
for currency effects, underlying revenues increased by 7%. Strong
underlying growth in the IS-Group and Filcon, more than offset
weaker demand in the UK centric CCA Group.
The IS-Group's UK businesses reported a 10% increase in revenues
reflecting further success achieved in broadening its customer base
across the EMEA region and good growth from sales in the Asia
Pacific region. IS-Group has been successful in the EMEA region by
directly targeting cable harness houses and developing its network
of sub-distributors. In the Aerospace sector a strong performance
was driven by sales of assembly tags for fuel pipes, in addition to
protective strips and sleeving into an aircraft manufacturer. There
was a modest fall in the UK Defence sector reflecting the absence
of a large one-off order delivered last year. The Industrial sector
benefited from a positive first half as customers built inventories
ahead of Brexit; however the UK industrial market softened in the
second half reflecting weaker economic conditions. The Energy
sector remained strong with sales particularly buoyant into
offshore and subsea applications and activity levels remaining
robust in the North Sea Oil markets. In Motorsport, there was solid
revenue growth from an expanding presence in the Formula E race
series, which offset another quiet year for development in Formula
1 and WRC. The IS-Cabletec business, a supplier of high performance
braided products, also delivered solid growth as it re-gained
business with a key customer.
The IS-Sommer business in Germany delivered 9% growth in
revenues with particularly strong performances in the Defence and
Energy markets. The improvement in Energy revenues was driven by an
expanded territorial access and, an improved service offering to a
market with short lead times on inventory availability. In the
Defence market, revenue growth was achieved from new projects for
the refurbishment of Leopard II tanks and Howitzer (PzH 2000) tanks
for supply into Hungary. The Industrial market also grew supported
by a large project win for insulation and protection of fuel-pipes
into the automotive sector. The Medical sector reported
double-digit revenue growth and continued to benefit from technical
support provided to manufacturers in previous years to assist them
managing new European Regulations for medical devices. Motorsport
revenues recovered modestly following a decline in revenues in the
prior year when Audi and Volkswagen withdrew from the German DTM
series. Aerospace revenues declined in the year against a strong
comparative when a new distribution agreement was concluded and led
to large initial orders.
In October 2018, IS-Group expanded its European footprint
through the acquisition of Gremtek based in Paris, France. Gremtek
is a long established and leading supplier of own branded
protective sleeving and cable identification products. Now fully
integrated into the IS-Group, Gremtek offers a broader product
range, whilst at the same time providing a platform to sell
existing IS-Group products into the French market. Gremtek's
revenues since acquisition were in line with expectations.
Filcon reported a 13% increase in revenues against a weak
comparative, with strong demand from its three core markets:
Military Aerospace, Space and Motorsport. In Military Aerospace,
public spending increased in Germany following pressure to meet
NATO's defence spending targets. There was strong growth in the
Space sector driven by a new customer acquisition and geographic
expansion and in Motorsport, demand increased due to new project
wins across the existing customer base and the addition of new
applications within Formula E.
The CCA Group comprising Cablecraft and FS Cables (acquired in
August 2018) together reported a 3% decrease in underlying
revenues. Cablecraft revenues suffered from a reduction in demand
from the rail sector when the new five-year funding cycle (Control
Period 6) opened in April 2019. This led to a combination of a
change to the funding process and a delay in commencement of major
projects, which are now anticipated to ramp up in early 2020. The
wholesale and distribution sectors were also relatively flat as
activity levels in the wider construction sector slowed sharply in
the second half of the year. During the year, Cablecraft has
launched a new e-commerce platform with enhanced functionality
providing encouraging indications of revenue growth in the second
half of the year from both existing and new customers.
FS Cables, an established and leading supplier of specialist
cable products, was acquired in August 2018. The revenues were
broadly flat on a like-for-like basis with solid export revenues
(which account for ca. 20% of total revenues), offset by weaker
revenues in its core UK commercial construction market.
The CCA Group has recently been created to take advantage of
cross-selling opportunities across both Cablecraft and FS Cables
and to provide a strong platform for future growth under a single
leadership team.
Specialty Fasteners
The Clarendon business now accounts for 21% of Controls revenues
and reported an increase in underlying revenues of 21%, after
adjusting for currency and a small acquisition in the prior year.
In a buoyant Civil Aerospace sector, revenue growth continued to be
driven by both increased demand from existing customers and further
penetration into new customers across Europe and Asia. These
customers, along with their sub-contractors, are manufacturing
aircraft seating and cabin interiors and Clarendon supports many of
these customers by supplying product through its automatic
inventory replenishment system ("Clarendon AIR"). The number of
customers using Clarendon AIR saw significant growth reflecting the
high quality service and responsiveness provided by Clarendon.
In Clarendon's other major market of Motorsport, underlying
revenue grew, despite the number of Formula 1 races remaining
unchanged and there being no significant changes to engine
regulations. Revenues also benefited from demand on "supercar"
development projects with major automotive OEMs and from the supply
of pre-assembled and captive fasteners and bespoke engineered
solutions to the Defence and Industrial sectors.
Clarendon's US business, acquired early last year, delivered
robust growth during the year from gaining new customers within the
US aircraft seating and cabin interiors sector, as well as solid
revenues generated in the space and urban air mobility (UAM)
markets.
Fluid Controls
The Hawco Group of Fluid Controls businesses accounts for 16% of
Controls revenues and supplies temperature, pressure and fluid
control products, principally to the Food & Beverage industry.
Revenues increased by 1% against the prior year with growth coming
from the OEM refrigeration market as tighter environmental
regulations drove demand; however overall revenue growth was held
back by a challenging UK industrial market.
Hawco's revenue growth in the OEM Refrigeration equipment market
came from OEMs exporting into the USA, supplying into the
Refrigerated Transport Home Delivery market and from the ongoing
development of store formats in Convenience stores and Petrol
forecourts. Contractor revenues were marginally up on prior year
with refrigeration spares sales improving, but installation of air
conditioning units reduced because of a slowdown in construction
projects. Revenues to OEMs for the supply of heating and
temperature control products slowed in the financial year as demand
weakened and projects were deferred.
Abbeychart revenues declined slightly during the year, where
strong revenues from the Coffee, Soft Drinks and Water sectors were
more than offset by a weaker Vending sector. In the Vending sector,
OEMs reduced production of new machines to match softer demand and
operators reduced spare parts held for the Aftermarket. Good
progress was made in North America, which delivered growth on the
prior year. Additional sales resource was added in the second half
of the year to support future growth plans. In May 2019, Abbeychart
consolidated its inventory with Hawco's inventory held in Bolton
and relocated its operations into a new leasehold facility in
Swindon.
FINANCE REVIEW
Reported and underlying results in 2019
Reported revenues increased by 12% to GBP544.7m (2018:
GBP485.1m) and adjusted operating profit increased by 14% to
GBP97.2m (2018: GBP84.9m). The results benefited from a strong
contribution from acquisitions, a currency tailwind and an
improvement in adjusted operating margins.
Acquisitions completed this year and last year, net of a small
disposal last year, incrementally contributed GBP26.2m and GBP4.9m
to revenue and adjusted operating profit, respectively. A weakening
in UK sterling relative to the US and Canadian dollars,
particularly in the second half of the year, provided a currency
tailwind of 2% on the translation of the results of the overseas
businesses, when compared with last year's average exchange rates.
This currency tailwind contributed to an increase in revenues and
adjusted operating profits of GBP9.0m and GBP1.9m,
respectively.
The underlying results present the performance of the Group on a
like-for-like basis by adjusting for the contribution from
businesses acquired during the year (and from the incremental
impact from those acquired last year) and for the impact on the
translation of the results of the overseas businesses from the
weakening in the UK sterling exchange rate in the second half of
the year, primarily against the US and Canadian dollars in
particular. After adjusting for the currency tailwind and for the
incremental contribution from acquisitions (net of a small
disposal), underlying revenues and underlying adjusted operating
profits increased by 5% and 7%, respectively.
Adjusted operating margin
The Group's adjusted operating margin improved by 30bps this
year to 17.8% (2018: 17.5%) largely reflecting stronger gross
margins from a combination of robust price increases implemented
earlier in the financial year, improved focus on other gross margin
support costs and tight control of operating costs.
In Life Sciences, adjusted operating margins benefited from
strong operational leverage. However, headwinds from adverse
currency transactional effects led to slightly weaker gross
margins, despite favourable currency hedges partly mitigating the
impact from weaker Australian dollar and Canadian dollar spot
exchange rates relative to the US dollar and Euro. In Seals,
adjusted operating margins remained unchanged as much stronger
gross margins from robust price increases to customers and stronger
freight recoveries, were offset by increased revenue investment in
the US Industrial OEM business to resolve the difficulties with the
ERP implementation. In Controls, adjusted operating margins
improved marginally reflecting operating leverage from stronger
revenues and a small positive mix effect on gross margins, partly
offset by initial margin dilution from acquired business.
Adjusted and statutory profit before tax
Adjusted profit before tax increased by 14% to GBP96.5m (2018:
GBP84.8m). The interest expense this year increased to GBP0.7m
(2018: GBP0.1m), including GBP0.4m on increased borrowings to
finance acquisitions, a small arrangement fee to extend the expiry
of the revolver facility and an increase in the notional interest
expense on the Group's pension deficit.
Statutory profit before tax was GBP83.5m (2018: GBP72.7m) and is
after charging acquisition related charges of GBP13.1m (2018:
GBP9.6m), comprising the amortisation of acquisition related
intangible assets and acquisition costs and a net GBP0.1m credit
(2018: GBP0.4m charge) on the fair value remeasurement of financial
liabilities. A one-off charge of GBP2.1m of CEO transition costs
was incurred last year relating to the change of the previous
CEO.
Tax charge, earnings per share and dividends
The Group's effective tax charge on adjusted profit remained
broadly unchanged at 24.0%, compared with 23.9% last year. Adjusted
earnings per share ("EPS") increased by 14% to 64.3p, compared with
56.4p last year and statutory EPS increased by 15% to 54.7p (2018:
47.5p).
The Board has a progressive dividend policy that aims to
increase the dividend each year broadly in line with the growth in
adjusted EPS. In determining the dividend in any one year, the
Board also considers a number of factors which include the strength
of the free cash flow generated by the Group, the future cash
commitments and investment needed to sustain the Group's long term
growth strategy and the target level of dividend cover. The Board
continues to target towards two times dividend cover (defined as
the ratio of adjusted EPS to total dividends paid and proposed for
the year), which provides a prudent buffer. The ability of the
Board to maintain future dividend policy will be influenced by the
principal risks identified on pages 18 to 22 that could adversely
impact the performance of the Group.
For 2019, the Board has recommended a final dividend of 20.5p
per share (2018: 17.8p) making the proposed full year dividend
29.0p (2018: 25.5p). This represents a 14% increase in the proposed
full year dividend with dividend cover remaining unchanged at 2.2
times adjusted EPS.
Free cash flow
Free cash flow represents cash available to invest in
acquisitions or return to shareholders. The Group generated strong
free cash flow this year of GBP56.5m compared with GBP60.5m last
year which benefited from GBP4.0m received on the sale of a small
non-core US business. The reduction in free cash flow conversion to
78% (2018: 95%) of adjusted earnings reflects a combination of a
larger cash outflow into working capital and increased capital
investment this year.
The Group's operating cash flow increased this year by 9% to
GBP92.3m (2018: GBP84.3m), but was partly offset by both an
increase in working capital outflows of GBP9.4m (2018: GBP5.1m) and
a cash payment of GBP1.3m (2018: GBP0.8m) this year to the former
CEO in settlement of his compromise agreement. There was a strong
inflow of cash from working capital in the second half of the year
as the strategic build of inventories at 31 March 2019 to meet both
Brexit uncertainty and specific customer/product requirements was
successfully unwound by the end of the year. However, the initial
difficulties that arose on implementation of the new ERP system in
the US Industrial OEM business led to a significant build-up in
inventories which was necessary to ensure service levels to
customers were maintained. This alone accounted for most of the net
increase in inventories of GBP12.2m (2018: GBP8.3m) which was
partly offset by an inflow of GBP2.8m (2018: GBP3.2m) from an
increase in net payables at the year end. The Group's KPI metric of
working capital to revenue at 30 September 2019 increased to 16.5%
(2018: 15.1%), reflecting the increased inventories held in the US
Industrial OEM business at the year end.
Group tax payments increased by GBP2.9m to GBP21.9m (2018:
GBP19.0m). On an underlying basis, cash tax payments represented
ca. 22% (2018: 22%) of adjusted profit before tax which is slightly
below the effective accounting rate reflecting the benefit from tax
timing differences. Underlying tax payments are before currency
effects from translation and exclude payments for pre-acquisition
tax liabilities in acquired businesses.
The Group's tax strategy is to comply with tax laws in the
countries in which it operates and to balance its responsibilities
for managing tax, with its responsibility to pay tax where it does
business. The Group's tax strategy and policy was approved by the
Board last year and tax risks are regularly reviewed by the Audit
Committee.
The Group's capital expenditure increased again this year to
GBP10.9m (2018: GBP6.6m) largely reflecting investment in expanding
the Group's facilities, as well as ongoing investment in both new
field equipment in the Healthcare businesses and IT infrastructure
across the Group to replace legacy IT systems.
During the year, GBP3.2m was invested in a major project for ca.
GBP8m to set up a new distribution facility for the NA Aftermarket
business, comprising fit-out of the new leasehold facility in
Louisville, Kentucky together with racking and new carousels. In
Germany a further GBP0.7m was incurred in completing the expansion
of the warehouse and offices in IS-Sommer at a total cost of
GBP1.4m. In the UK, Clarendon invested GBP1.3m in acquiring a new
facility in Wootton Bassett which will allow it to relocate from
its current facility which is shared with the IS-Rayfast business.
Both the IS-Sommer and the Clarendon facility will be sold and
leased back to the businesses early in the next financial year.
The DHG business in Life Sciences invested GBP2.7m (2018:
GBP2.3m) in field equipment to support placements of new surgical
equipment in hospitals and diagnostic machines in laboratories.
Investment in IT infrastructure was GBP1.5m which included GBP0.9m
on completing both the new ERP system in the US Industrial OEM
Seals business and on commencing new ERP projects in the
International Seals businesses. The remaining capital expenditure
of GBP1.6m was invested on new warehouse equipment and tooling
across the Group's businesses.
The Company paid the PAYE income tax liability of GBP1.7m (2018:
GBP1.0m) on the exercise of LTIP share awards in November 2018, in
exchange for reduced share awards to participants. In addition,
GBP1.2m (2018: GBP1.2m) was paid to the Employee Benefit Trust to
fund the acquisition of 100,000 ordinary shares in the Company to
meet incentive awards.
The Group spent GBP78.3m (2018: GBP20.4m) of free cash flow on
acquisitions as described below and GBP30.1m (2018: GBP27.0m) on
paying dividends to both Company and minority shareholders.
Acquisitions completed during the year
The Group invested GBP77.2m on acquiring new businesses this
year and paid a further GBP1.1m of deferred consideration for
businesses acquired last year. As indicated last year, the
increasing uncertainty about the future direction of global
economies contributed to a greater number of sellers of private
businesses to take advantage of several years of robust financial
performance and sell their businesses.
With a more receptive M&A market for these businesses the
Group completed a record spend on acquisitions this year. After a
lengthy structured sale process, the Group completed the
acquisition of VSP Technologies in July for initial consideration
of GBP57.2m, net of expenses and cash acquired in the business. VSP
Technologies is a leading supplier of high-quality gaskets and
fluid sealing products and the acquisition provides an exciting
opportunity to extend our Seals activities in North America,
consistent with the Group's strategy.
A further three bolt on businesses were also acquired in the
year for aggregate consideration of GBP20.0m, net of acquisition
expenses and cash acquired. In October last year Gremtek, a small
Interconnect business based in Paris, France was acquired for total
consideration of GBP6.9m and in September this year both DMR Seals,
based in Sheffield, UK and Sphere Surgical, based in Melbourne,
Australia were acquired for initial consideration of GBP7.3m and
GBP6.6m, respectively. These three businesses are good examples of
Diploma bolt on acquisitions which provide each of the Sectors an
opportunity to extend into new strategically related markets by
broadening the existing product offering leading to increased value
to shareholders.
These acquisitions added GBP53.2m to the Group's acquired
intangible assets, which represents the valuation of customer
relationships that will be amortised over periods ranging from five
to fifteen years. At 30 September 2019, the carrying value of the
Group's acquired intangible assets was GBP96.1m (2018: GBP53.6m)
and there was an GBP11.6m (2018: GBP9.3m) charge this year to
amortise these assets.
Goodwill at 30 September 2019 was GBP155.0m (2018: GBP128.5m)
and included GBP24.1m relating to those businesses acquired during
the year (including fair value adjustments to the assets and
liabilities acquired). Goodwill is not amortised but is assessed
each year at a Sector level to determine whether there has been any
impairment in the carrying value of goodwill acquired. The exercise
to assess whether goodwill has been impaired is described in note
10 to the consolidated financial statements. It was confirmed that
there was significant headroom on the valuation of this goodwill,
compared with the carrying value of goodwill at the year end.
Liabilities to shareholders of acquired businesses
The Group's liability to shareholders of acquired businesses at
30 September 2019 increased by GBP5.7m to GBP11.3m (2018: GBP5.6m)
and comprises both put options to purchase outstanding minority
shareholdings and deferred consideration payable to vendors of
businesses acquired during the last year.
The liability to acquire minority shareholdings outstanding at
30 September 2019 relates to a 10% interest held in both M Seals
and Kentek. These options are now fully exercisable and are valued
at GBP4.3m (2018: GBP4.5m), based on the Directors' latest estimate
of the earnings before interest and tax ("EBIT") of these
businesses when these options crystallise.
The liability for deferred consideration payable at 30 September
2019 was GBP7.0m (2018: GBP1.1m). This liability represents the
Directors' best estimate of the amount likely to be paid to the
vendors of businesses purchased during the year, based on the
expected performance of these businesses during the measurement
period. The gross liability for deferred consideration of GBP7.5m
has been discounted to reflect the expected date on which these
payments will be made. During the year, GBP1.1m of deferred
consideration was paid to the vendors of Coast and FS Cables that
were acquired last year.
Return on adjusted trading capital employed and capital
management
A key metric used to measure the overall profitability of the
Group and its success in creating value for shareholders is the
return on adjusted trading capital employed ("ROATCE"). At a Group
level, this is a pre-tax measure that is applied against the fixed
and working capital of the Group, together with all gross
intangible assets and goodwill, including goodwill previously
written off against retained earnings. At 30 September 2019, the
Group ROATCE of 22.9% (2018: 24.5%) was weakened slightly by new
acquisitions this year but remained comfortably ahead of our 20%
benchmark. Adjusted trading capital employed is defined in notes 2
and 3 to the consolidated financial statements.
The Group continues to maintain a robust balance sheet with net
debt of GBP15.1m at 30 September 2019, compared with cash funds of
GBP36.0m last year. Surplus cash funds generated in the businesses
are generally repatriated to the UK, unless they are required
locally to meet certain commitments, including acquisitions.
The Group extended the expiry of its committed revolving
multi-currency credit facility this year to 1 June 2022. This
facility comprises a GBP30m committed facility with an accordion
option that allows the Group to increase this commitment up to a
maximum of GBP60m of borrowings. It is primarily used to meet any
shortfall in cash to fund smaller bolt on acquisitions. In July
this year the Group also drew down on a GBP40m term facility to
help finance the larger acquisition of VSP Technologies, which
unless extended under option, is repayable in full by 8 July
2021.
With undrawn facilities of ca. GBP54m available at 30 September
2019 and negligible debt leverage, the Group remains confident of
seeking additional facilities up to a maximum of ca. 2 times
adjusted EBITDA to fund further acquisitions in the new financial
year.
Employee pension obligations
Pension benefits to existing employees, both in the UK and
overseas, are provided through defined contribution schemes at an
aggregate cost in 2019 of GBP3.8m (2018: GBP3.1m).
The Group maintains a small legacy closed defined benefit
pension scheme in the UK. A formal triennial funding valuation of
this scheme was carried out as at 30 September 2016 and reported a
funding deficit of GBP9.2m with a 75% funding level, based on bond
yields of 1.5% at the valuation date, compared with 1.8% at 30
September 2019. The company is currently funding this deficit with
cash contributions of GBP0.5m (2018: GBP0.5m) which increases
annually on 1 October by 2% with the objective of eliminating the
deficit within ten years. A charge of GBP0.1m has also been made
against operating profits this year to equalise GMPs accrued
between 1990 and 1997, between men and women.
At 1 September 2018, the scheme trustees completed a buy-in of
the pensioner liabilities which represented ca. 30% of the scheme's
liabilities existing at 1 September 2018. A new formal funding
valuation is being carried out as at 30 September 2019 and the
results will be reported in next year's Annual Report &
Accounts.
In Switzerland, local law requires Kubo to provide a
contribution based pension for all employees, which are funded by
employer and employee contributions. This pension plan is managed
for Kubo through a separate multi-employer plan of non-associated
Swiss companies, which pools the funding risk between participating
companies. In Switzerland, Kubo's annual cash contribution to the
pension scheme was GBP0.4m (2018: GBP0.2m).
Both the UK defined benefit scheme and the Kubo defined
contribution scheme are accounted for in accordance with IAS19
(Revised). At 30 September 2019 the aggregate accounting pension
deficit in these two schemes increased sharply by GBP7.3m to
GBP17.8m reflecting the impact from a large reduction in bond
yields in both the UK and Switzerland during the second half of the
year. The gross aggregate pension liability in respect of these two
schemes at 30 September 2019 increased by GBP8.2m to GBP57.3m,
which is funded by GBP39.5m of assets.
New Reporting Standards (IFRSs)
The Group adopted two new International Financial Reporting
Standards (IFRSs) this year: Revenue from Contracts with Customers
(IFRS15) and Financial Instruments (IFRS9). There is no material
impact on the consolidated financial statements from adopting these
new standards, although additional disclosure has been included in
the notes to the consolidated financial statements.
The new IFRS16 Leases will be implemented from 1 October 2019.
The work carried out to assess the impact of this new standard has
indicated that ca. GBP34m of existing operating leases - referred
to as "Right of Use" assets - will be capitalised on the Group
Balance Sheet with the obligation to fund these operating leases
being recognised as ca. GBP34m of debt. The impact on adjusted
operating profit and adjusted profit before tax is not expected to
be material. There will be no impact on the Group's free cash
flow.
Impact of Brexit
At an operational level, the impact on the Group's businesses
from the current uncertainty over the process and timing of the
UK's exit from the European Union is not expected to be significant
in terms of the Group's overall profitability. UK based revenues
account for 28% of the Group's overall revenues and the UK
businesses, as well as those based in Continental Europe, are
substantially "in country" industrial suppliers of goods with
limited cross border sales activity.
The Group's financial results this year have been slightly
impacted by macroeconomic instability caused by the delayed and
uncertain timing of the intended exit from the European Union. This
uncertainty has contributed to a weaker UK economy and to a
substantial depreciation in UK sterling, particularly in the second
half of the year. This has had a negative impact on the Group's
operating profits, although the overall Group results this year
have benefited on the translation of the results of the Group's
overseas businesses into UK sterling.
A prolonged disruption at the UK's borders as a result of Brexit
has the potential to impact the supply chain of the Group's UK
businesses. In the first half of the year the Group's UK businesses
extended the depth of inventories by ca. GBP2m from building
inventory levels of their faster moving product lines which was
successfully unwound by 30 September 2019. The Board will continue
to monitor closely developments in the Brexit plans, but currently
has no intention to re-build inventory levels.
PRINCIPAL RISKS AND UNCERTAINTIES
Set out below are the principal risks and uncertainties
affecting the Group that have been determined by the Board, based
on a robust risk evaluation process, that have the potential to
have the greatest impact on the Group's future viability. These
risks are similar to those reported last year, although with some
movement on the relative ranking of these risks. There were no new
Principal Risks identified from the review process carried out by
the Board this year.
The risks are each classified as either strategic, operational,
financial or accounting. The Group's decentralised operations with
different Sectors and geographical spread helps mitigate the impact
of these principal risks.
The Board has also considered the risks associated with the UK's
vote to leave the European Union and this is explained above in the
Finance Review.
Strategic risk Relative movement to prior year
Downturn/instability in major Increase
markets
Risk description and assessment Mitigation
Adverse changes in the major The businesses identify key
markets in which the businesses market drivers and monitor the
operate can have a significant trends and forecasts, as well
impact on performance. The effects as maintaining close relationships
of these changes can be seen with key customers who may give
in terms of slowing revenue an early warning of slowing
growth, due to reduced or delayed demand.
demand for products and services,
or margin pressures due to increased Changes to cost levels and inventories
competition. can then be made in a measured
way to mitigate the effects.
A number of characteristics
of the Group's businesses moderate Significant global effects are
the impact of economic and business closely monitored to determine
cycles on the Group as a whole: any potential impact on key
markets.
* The Group's businesses operate in three differing
Sectors with different cyclical characteristics and
across a number of geographic markets.
* The businesses offer specialised products and
services, which are often specific to their
application; this offers a degree of protection
against customers quickly switching business to
achieve a better price.
* A high proportion of the Group's revenues comprise
consumable products that are purchased as part of the
customer's operating expenditure, rather than through
capital budgets.
* In many cases the products are used in repair,
maintenance and refurbishment applications, rather
than original equipment manufacturer.
* The global political and economic is more uncertain.
----------------------------------------------------------------------
Strategic risk Relative movement to prior year
Supplier concentration/loss No change
of key suppliers
----------------------------------------------------------------------
Risk description and assessment Mitigation
For manufacturer-branded products, Long term, multi-year exclusive
there are risks to the business contracts signed with suppliers
if a major supplier decides with change of control clauses,
to cancel a distribution agreement where possible, included in
or if the supplier is acquired contracts for protection or
by a company that has its own compensation in the event of
distribution channels in the acquisition.
relevant market. There is also
the risk of a supplier taking Collaborative projects and relationships
away exclusivity and either maintained with individuals
setting up direct operations at many levels of the supplier
or appointing another distributor. organisation, together with
regular review meetings and
Currently no single supplier adherence to contractual terms.
represents more than 10% of
Group revenue and only four Regular review of inventory
suppliers represent more than levels.
2% each of Group revenue.
Bundling and kitting of products
Relationships with suppliers and provision of added value
have normally been built up services.
over many years and a strong
degree of interdependence has Periodic research of alternative
been established. The average suppliers as part of contingency
length of the principle supplier planning.
relationships in each of the
Sectors is over ten years. The businesses work very closely
with each of their suppliers
The strength of the relationship and regularly attend industry
with each supplier and the volume exhibitions to keep abreast
of activity generally ensures of the latest technology and
continuity of supply, when there market requirements/trends.
is shortage of product. The businesses also meet with
key customers on a regular basis
The success of the businesses to gain insight into their product
depends significantly on representing requirements and market developments.
suppliers whose products are
recognised in the marketplace
as the leading competitive brand.
If suppliers fail to support
these products with new development
and technologies, then our businesses
will suffer from reduced demand
for their products and services.
----------------------------------------------------------------------
Strategic risk Relative movement to prior year
Customer concentration/loss Decrease
of key customer(s)
----------------------------------------------------------------------
Risk description and assessment Mitigation
The loss of one or more major Specific large customers are
customers can be a material important to individual operating
risk. businesses and a high level
of effort Is invested in ensuring
The nature of the Group's businesses that these customers are retained
is such that there is not a and encouraged not to switch
high level of dependence on to another supplier.
any individual customer and
no single customer represents In addition to providing high
more than 3.5% of Sector revenue levels of customer service and
or more than 1.5% of Group revenue. value added activities, close
integration is established where
possible with customers' systems
and processes.
----------------------------------------------------------------------
Operational risk Relative movement to prior year
Cybersecurity/information technology/business No change
interruption
----------------------------------------------------------------------
Risk description and assessment Mitigation
Group and operating business There is good support and back-up
management depend critically built into local IT systems
on timely and reliable information and the spread of businesses
from their IT systems to run with their own stand alone IT
their businesses. The Group systems also offers good protection
seeks to ensure continuous availability, from individual events. The
security and operation of those majority of businesses back-up
information systems. online data at least once a
Cyber threats to the businesses day to an offsite data storage
information systems have this centre.
year reduced, following action
taken to strengthen the IT infrastructure A member of the Executive Management
environment across the Group's Committee is responsible for
businesses. ensuring each business in the
Any disruption or denial of Group has a robust cybersecurity
service may delay or impact programme and reports twice
decision making through lack a year to the main Board on
of availability of reliable the status of cybersecurity
data. Poor information dandling across the Group. In addition,
or interruption of business education/awareness of cyber
may also lead to reduced service threats continues to ensure
to customers. Unintended actions Group employees protect themselves
of employees caused by a cyber-attack and Group assets. At 30 September
may also lead to disruption, 2019, all businesses had achieved
including fraud. the UK Government endorsed Cyber
The North American Aftermarket Essentials accreditation; it
business is operated from a is expected that recently acquired
single warehouse based in Tampa, businesses will be fully accredited
Florida which continues to be in 2020.
exposed to hurricanes during
the season from August to November. Business continuity plans exist
The US Industrial OEM Seals for each business with ongoing
business experiences difficulties testing.
with implementation of a new
ERP system earlier in the year. The North American Seals Aftermarket
business is investing in a second
facility in Louisville, Kentucky.
In response to the ERP implementation
difficulties in 2019, the Group
has set up a committee to oversee
more closely the processes and
milestones during any ERP implementation
across the Group.
----------------------------------------------------------------------
Operational risk Relative movement to prior year
Loss of key personnel Decrease
----------------------------------------------------------------------
Risk description and assessment Mitigation
The success of the Group is Contractual terms such as notice
built upon strong, self-standing periods and non-compete clauses
management teams in the operating can mitigate the risk in the
businesses, committed to the short term. However, more successful
success of their respective initiatives focus on ensuring
businesses. As a result, the a challenging work environment
loss of key personnel can have with appropriate reward systems.
an impact on performance, for The Group places very high importance
a limited time period. on planning the development,
motivation and reward for key
The average length of service managers in the operating businesses
of the ca. 110 senior managers including:
in the Group is 10 years and
for all personnel in the Group * Ensuring a challenging working environment where
is consistently ca. 7 years. managers feel they have control over, and
responsibility for, their businesses.
* Establishing management development programmes to
ensure a broad base of talented managers.
* Offering a balanced and competitive compensation
package with a combination of salary, annual bonus
and long term cash or share incentive plans targeted
at the individual business level.
* Giving the freedom, encouragement, financial
resources and strategic support for managers to
pursue ambitious growth plans.
----------------------------------------------------------------------
Operational risk Relative movement to prior year
Product liability No change
----------------------------------------------------------------------
Risk description and assessment Mitigation
There is a risk that products Technically qualified personnel
supplied by a Group business and control systems are in place
may fail in service, which could to ensure products meet quality
lead to a claim under product requirements. The Group's businesses
liability. are required to undertake Product
Risk assessments and comprehensive
If a legal claim is made it Supplier Quality Assurance assessments.
will typically draw in our business The Group has also established
as a party to the claim and Group-wide product liability
the business may be exposed insurance which provides worldwide
to legal costs and potential umbrella insurance cover of
damages if the claim succeeds GBP30m across all Sectors.
and the supplier fails to meet
its liabilities for whatever The businesses, in their terms
reason. Product liability insurance and conditions of sale with
can be limited in terms of its customers, will typically mirror
scope of insurable events, such the terms and conditions of
as product recall. purchase from the suppliers.
In this way the liability can
In situations where a Group be limited and subrogated to
business is selling own-branded the supplier.
products and cannot subrogate
the liability to a supplier, The Group's businesses have
the business will be liable undergone product liability
for failure of the product. training and are continually
A Group business may also be reviewed to demonstrate compliance
liable for the associated costs with Group policies and procedures
of a subsequent customer recall relating to product liability.
arising directly from failure
of an own-branded product.
----------------------------------------------------------------------
Financial risk Relative movement to prior year
Foreign currency No change
----------------------------------------------------------------------
Risk description and assessment Mitigation
Foreign currency risk is the The Group operates across a
risk that currency rates will number of diverse geographies
affect the Group's results. but does not hedge translational
The Group is exposed to two exposure of operating profit
types of financial risk caused and net assets.
by currency volatility: translational
exposure, being the effect that The Group's businesses may hedge
currency movements have on the up to 80% of forecast (for a
Group's financial statements maximum of 18 months) foreign
on translating the results of currency transactional exposures
overseas subsidiaries into UK using forward foreign exchange
sterling; and transactional contracts.
exposure, being the effect that
currency movements have on the The Group finance department
results of operating businesses monitors rolling monthly forecasts
because their revenues or product of currency exposures.
costs are denominated in a currency
other than their local currency. Details of average exchange
rates used in the translation
The Group operates internationally of overseas earnings and of
and is exposed to translational year end exchange rates used
foreign exchange risk arising in the translation of overseas
from various currency exposures, balance sheets, for the principal
primarily with respect to the currencies used by the Group,
US dollar, the Canadian dollar, are shown in note 14 to the
the Australian dollar and the consolidated financial statements.
Euro. The results and net assets
of the Group's operations outside
the UK are also exposed to foreign
currency translation risk.
A strengthening of UK sterling
by 10% against all the currencies
in which the Group does business,
would reduce adjusted operating
profit before tax by approximately
GBP7.4m (8%), due to currency
translation. Similarly, a strengthening
of UK sterling by 10% against
all the non-UK sterling capital
employed would reduce shareholders'
funds by GBP13.8m (5%).
The Group's UK businesses are
exposed to transactional foreign
exchange risk on those purchases
that are denominated in a currency
other than their local currency,
principally US dollars and Euros.
The Group's Canadian and Australian
businesses are also exposed
to a similar risk as the majority
of their purchases are denominated
in US dollars and Euros. The
Group's US businesses do not
have any material foreign currency
transactional risk.
----------------------------------------------------------------------
Accounting risk Relative movement to prior year
Inventory obsolescence No change
----------------------------------------------------------------------
Risk description and assessment Mitigation
Working capital management is Inventory write-offs are controlled
critical to success in specialised and minimised by active management
industrial distribution businesses and inventory levels based on
as this has a major impact on sales forecasts and regular
cash flow. The principal risk cycle counts.
to working capital is in inventory
obsolescence and write-off. Where necessary, a provision
is made to cover both excess
The charge against operating inventory and potential obsolescence.
profit in respect of aged or
surplus inventory in the year
was GBP2.1m, but inventories
are generally not subject to
technological obsolescence.
----------------------------------------------------------------------
RESPONSIBILITY STATEMENT OF THE DIRECTORS
IN RESPECT OF THE ANNUAL REPORT 2019
The Directors confirm that to the best of their knowledge:
-- the Group's consolidated financial statements, prepared in
accordance with IFRS as adopted by the EU and the Parent Company
financial statements, prepared in accordance with UK Accounting
Standards, give a true and fair view of the assets, liabilities,
financial position and profit of the Group and Parent Company and
the undertakings included in the consolidation taken as a
whole;
-- the Annual Report & Accounts includes a fair review of
the development and performance of the business and the position of
the Group and the undertakings included in the consolidation taken
as a whole, together with a description of the principal risks and
uncertainties faced by the Group; and
-- the Annual Report & Accounts, taken as a whole, are fair,
balanced and understandable and provide the information necessary
for shareholders to assess the Company's position and performance,
business model and strategy.
The Directors of Diploma PLC and their respective
responsibilities are listed in the Annual Report & Accounts for
2018 and on the Company's website at www.diplomaplc.com. Johnny
Thomson was appointed to the Board as Chief Executive Officer on 25
February 2019.
This responsibility statement was approved by the Board of
Directors on 18 November 2019 and is signed on its behalf by:
JD Thomson NP Lingwood
Chief Executive Officer Group Finance Director
Registered office:
12 Charterhouse Square
London
EC1M 6AX
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2019
2019 2018
Note GBPm GBPm
------------------------------ ----- -------- ---------
Revenue 3,4 544.7 485.1
Cost of sales (347.7) (312.2)
------------------------------ ----- -------- ---------
Gross profit 197.0 172.9
Distribution costs (12.7) (10.8)
Administration costs (100.2) (88.9)
------------------------------ ----- -------- ---------
Operating Profit 3 84.1 73.2
Financial expense, net 5 (0.6) (0.5)
------------------------------ ----- -------- ---------
Profit before tax 83.5 72.7
Tax expense 6 (21.1) (18.3)
------------------------------ ----- -------- ---------
Profit for the year 62.4 54.4
------------------------------ ----- -------- ---------
Attributable to:
Shareholders of the Company 61.9 53.8
Minority interests 0.5 0.6
------------------------------ ----- -------- ---------
62.4 54.4
------------------------------ ----- -------- ---------
Earnings per share
Basic and diluted earnings 7 54.7p 47.5p
------------------------------ ----- -------- ---------
Alternative Performance Measures (note
2) 2019 2018
Note GBPm GBPm
---------------------------------------- ---- ----- -------- --------
Operating profit 84.1 73.2
Add: Acquisition related charges 3 13.1 9.6
Add: CEO transition costs - 2.1
Adjusted operating profit 3,4 97.2 84.9
Deduct: Interest expense 5 (0.7) (0.1)
---------------------------------------------- ----- -------- --------
Adjusted profit before tax 96.5 84.8
---------------------------------------------- ----- -------- --------
Adjusted earnings per share 7 64.3p 56.4p
---------------------------------------------- ----- -------- --------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2019
2019 2018
GBPm GBPm
----------------------------------------------------------- -------- ------
Profit for the year 62.4 54.4
------------------------------------------------------------ -------- ------
Items that will not be reclassified to the Consolidated
Income Statement
Actuarial (losses)/gains in the defined benefit
pension schemes (7.2) (1.0)
Deferred tax on items that will not be reclassified 1.3 0.2
------------------------------------------------------------ -------- ------
(5.9) (0.8)
----------------------------------------------------------- -------- ------
Items that may be reclassified to Consolidated Income
Statement
Exchange rate gains/(losses) on foreign currency
net investments 6.2 0.1
Gains/(losses) on fair value of cash flow hedges 0.4 0.7
Net changes to fair value of cash flow hedges transferred
to the Consolidated Income Statement (0.7) 0.9
Deferred tax on items that may be reclassified - (0.4)
------------------------------------------------------------ -------- ------
5.9 1.3
----------------------------------------------------------- -------- ------
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 62.4 54.9
------------------------------------------------------------ -------- ------
Attributable to:
Shareholders of the Company 61.9 54.2
Minority interests 0.5 0.7
------------------------------------------------------------ -------- ------
62.4 54.9
----------------------------------------------------------- -------- ------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 September 2019
Share-holders'
Share Translation Hedging Retained equity Minority Total
capital reserve reserve earnings interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ --- ---------- -------------- ---------- ----------- --------------- ------------ ---------
At 1 October 2017 5.7 29.7 (0.7) 227.3 262.0 4.8 266.8
Total
Comprehensive
Income - 0.1 1.2 52.9 54.2 0.7 54.9
Share-based
payments - - - 1.0 1.0 - 1.0
Minority
interests
acquired - - - 2.5 2.5 (2.5) -
Minority interest
contribution - - - - - 0.3 0.3
Tax on items
recognised
directly in
equity - - - 0.5 0.5 - 0.5
Notional purchase
of
own shares - - - (2.2) (2.2) - (2.2)
Dividends 13 - - - (26.8) (26.8) (0.2) (27.0)
At 30 September
2018 5.7 29.8 0.5 255.2 291.2 3.1 294.3
Total
Comprehensive
Income - 6.2 (0.3) 56.0 61.9 0.5 62.4
Share-based
payments - - - 0.8 0.8 - 0.8
Minority interest - - - - - - -
acquired
Minority interest - - - - - - -
contribution
Tax on items
recognised
directly in
equity - - - 0.1 0.1 - 0.1
Notional purchase
of
own shares - - - (2.9) (2.9) - (2.9)
Dividends 13 - - - (29.8) (29.8) (0.3) (30.1)
------------------ --- ---------- -------------- ---------- ----------- --------------- ------------ ---------
AT 30 SEPTEMBER
2019 5.7 36.0 0.2 279.4 321.3 3.3 324.6
------------------ --- ---------- -------------- ---------- ----------- --------------- ------------ ---------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September 2019
2019 2018
Note GBPm GBPm
--------------------------------------- ----- -------- --------
Non-current assets
Goodwill 10 155.0 128.5
Acquisition intangible assets 96.1 53.6
Other intangible assets 2.7 1.8
Investment - 0.7
Property, plant and equipment 26.7 23.0
Deferred tax assets 0.5 0.3
---------------------------------------- ----- -------- --------
281.0 207.9
--------------------------------------- ----- -------- --------
Current assets
Inventories 102.6 82.9
Trade and other receivables 91.1 77.6
Cash and cash equivalents 27.0 36.0
---------------------------------------- ----- -------- --------
220.7 196.5
--------------------------------------- ----- -------- --------
Current liabilities
Trade and other payables (90.2) (80.5)
Current tax liabilities 6 (6.9) (4.8)
Other liabilities 12 (10.8) (5.6)
(107.9) (90.9)
--------------------------------------- ----- -------- --------
Net current assets 112.8 105.6
---------------------------------------- ----- -------- --------
Total assets less current liabilities 393.8 313.5
Non-current liabilities
Retirement benefit obligations (17.8) (10.5)
Borrowings 9 (42.1) -
Other liabilities 12 (0.5) -
Deferred tax liabilities (8.8) (8.7)
---------------------------------------- ----- -------- --------
Net assets 324.6 294.3
---------------------------------------- ----- -------- --------
Equity
Share capital 5.7 5.7
Translation reserve 36.0 29.8
Hedging reserve 0.2 0.5
Retained earnings 279.4 255.2
---------------------------------------- ----- -------- --------
Total shareholders' equity 321.3 291.2
Minority interests 3.3 3.1
---------------------------------------- ----- -------- --------
Total equity 324.6 294.3
---------------------------------------- ----- -------- --------
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2019
2019 2018
Note GBPm GBPm
-------------------------------------------------- ----- ------- -------
OPERATING PROFIT 84.1 73.2
Acquisition related charges 8 13.1 9.6
CEO transition costs, unpaid 8 (1.3) 1.3
Non-cash items 8 5.8 5.3
Increase in working capital 8 (9.4) (5.1)
-------------------------------------------------- ----- ------- -------
Cash flow from OPERATING activities 8 92.3 84.3
Interest paid, net (0.1) -
Tax paid (21.9) (19.0)
-------------------------------------------------- ----- ------- -------
Net cash from operating activities 70.3 65.3
-------------------------------------------------- ----- ------- -------
Cash flow from investing activities
Acquisition of businesses (net of expenses
and cash acquired) 11 (77.2) (18.1)
Deferred consideration paid 12 (1.1) (0.3)
Proceeds from sale of business (net of expenses) - 4.0
Purchase of property, plant and equipment (9.7) (5.3)
Purchase of other intangible assets (1.2) (1.3)
Proceeds from sale of property, plant and - -
equipment
-------------------------------------------------- ----- ------- -------
Net cash used in investing activities (89.2) (21.0)
-------------------------------------------------- ----- ------- -------
Cash flow from financing activities
Acquisition of minority interests 12 - (2.0)
Dividends paid to shareholders 13 (29.8) (26.8)
Dividends paid to minority interests (0.3) (0.2)
Purchase of own shares by Employee Benefit
Trust (1.2) (1.2)
Notional purchase of own shares on exercise
of share options (1.7) (1.0)
Proceeds from borrowings, net 9 41.1 -
-------------------------------------------------- ----- ------- -------
Net cash used in financing activities 8.1 (31.2)
-------------------------------------------------- ----- ------- -------
Net increase in cash and cash equivalents (10.8) 13.1
Cash and cash equivalents at beginning of
year 36.0 22.3
Effect of exchange rates on cash and cash
equivalents 1.8 0.6
-------------------------------------------------- ----- ------- -------
Cash and cash equivalents at end of year 9 27.0 36.0
-------------------------------------------------- ----- ------- -------
ALTERNATIVE PERFORMANCE MEASURES (NOTE 2) 2019 2018
GBPm GBPm
----------------------------------------------------- ---- ------- -----
Net increase in cash and cash equivalents (10.8) 13.1
Dividends paid to shareholders and minority
Add: interests 13 30.1 27.0
Acquisition of businesses, minority
interest and deferred consideration 11,
paid 12 78.3 20.4
Proceeds from borrowings, net 9 (41.1) -
---------------------------------------------------- ---- ------- -----
FREE CASH FLOW 56.5 60.5
----------------------------------------------------- ---- ------- -----
(NET DEBT)/CASH FUNDS 9 (15.1) 36.0
----------------------------------------------------- ---- ------- -----
Cash and cash equivalents 27.0 36.0
----------------------------------------------------- ---- ------- -----
Borrowings (42.1) -
----------------------------------------------------- ---- ------- -----
(Net debt)/cash funds (15.1) 36.0
----------------------------------------------------- ---- ------- -----
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 18 November
2019.
These statements are presented in UK sterling, with all values
rounded to the nearest 100,000, except where otherwise
indicated.
The consolidated financial statements, which 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 the
current and the comparative year.
There were two new accounting standards adopted in the year,
IFRS15 'Revenue from Contracts with Customers' and IFRS9 'Financial
Instruments', however the application of these new standards has
not had a material impact on the results, financial position or
presentation of the consolidated financial statements for the year
ended 30 September 2019.
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
2019 and 2018. Statutory financial statements for the year ended 30
September 2018 have been delivered to the Registrar of Companies
and are available on the website at www.diplomaplc.com. The
statutory financial statements for the year ended 30 September
2019, which were approved by the Directors on 18 November 2019,
will be sent to shareholders on 6 December 2019 and delivered to
the Registrar of Companies, following the Company's Annual General
Meeting.
The auditor has reported on the consolidated financial
statements for the years ended 30 September 2019 and 2018. 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 15 January 2020 in Pewterers' Hall, Oat Lane, London,
EC2V 7DE. 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")) performance measures which are
not defined within IFRS. The Directors use these measures for
internal management reporting of Key Performance Indicators in
order to assess the operational performance of the Group on a
comparable basis and as such, these measures should be considered
alongside the IFRS measures. The following non-GAAP measures are
referred to in this 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 expenses, adjustments to deferred consideration
(collectively, "acquisition related charges"), the costs of a
material restructuring (including the incremental costs related
directly to the change of the Chief Executive Officer in 2018) or
rationalisation of operations and the profit or loss relating to
the sale of businesses or property. The Directors believe that
adjusted operating profit is an important measure of the
operational performance of the Group.
2.2 Adjusted profit before tax
At the foot of the Consolidated Income Statement, "adjusted
profit before tax" is separately disclosed, being defined as
adjusted operating profit, after finance expenses (but before fair
value remeasurements in respect of financial liabilities) and
before tax. The Directors believe that adjusted profit before tax
is an important measure of the operational performance of the
Group.
2.3 Adjusted earnings per share
"Adjusted earnings per share" ("adjusted EPS") is calculated as
the total of adjusted profit before tax, less income tax costs, but
including the tax impact on the items included in the calculation
of adjusted profit, less profit attributable to minority interests,
divided by the weighted average number of ordinary shares in issue
during the year. The Directors believe that adjusted EPS provides
an important measure of the earnings 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 tangible and
intangible assets and including proceeds received from business
disposals, but before expenditure on business
combinations/investments and dividends paid to both minority
shareholders and the Company's shareholders. The Directors believe
that free cash flow gives an important measure of the cash flow of
the Group, available for future investment or distribution to
shareholders.
2.5 Trading capital employed and ROATCE
In the Sector analysis in note 3, "trading capital employed" is
reported, being defined as net assets less cash and cash
equivalents and after adding back: borrowings; retirement benefit
obligations; deferred tax; and acquisition liabilities in respect
of future purchases of minority interests and deferred
consideration. Adjusted trading capital employed is reported as
being trading capital employed plus goodwill and acquisition
related charges previously written off (net of deferred tax on
acquisition intangible assets). Return on adjusted trading capital
employed ("ROATCE") at the Group and Sector level is defined as the
adjusted operating profit, divided by adjusted trading capital
employed and adjusted for the full year effect of acquisitions and
disposals. The Directors believe that ROATCE is an important
measure of the profitability of the Group.
3. Business Sector Analysis
The Chief Operating Decision Maker ("CODM") for the purposes of
IFRS8 is the Chief Executive Officer (or interim Executive
Chairman). The financial performance of the Sectors are reported to
the CODM on a monthly basis and this information is used to
allocate resources on an appropriate basis.
For management reporting purposes, the Group is organised into
three main reportable business Sectors: Life Sciences, Seals and
Controls. These Sectors are the Group's operating segments as
defined by IFRS 8 and form the basis of the primary reporting
format disclosures below. The CODM reviews discrete financial
information at these operating segment levels. Sector revenue
represents revenue from external customers; there is no
inter-Sector revenue. Sector results, assets and liabilities
include items directly attributable to a Sector, as well as those
that can be allocated on a reasonable basis.
Sector assets exclude cash and cash equivalents, deferred tax
assets and corporate assets that cannot be allocated on a
reasonable basis to a business Sector. Sector liabilities exclude
borrowings, retirement benefit obligations, deferred tax
liabilities, acquisition liabilities and corporate liabilities that
cannot be allocated on a reasonable basis to a business Sector.
These items are shown collectively in the following analysis as
"unallocated assets" and "unallocated liabilities",
respectively.
Life Sciences Seals Controls Group
2019 2018 2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- --------- -------- ------- ------- ------- ------- ------- -------
Revenue * existing 145.7 134.7 211.3 208.0 168.3 142.4 525.3 485.1
- acquisitions 0.1 - 9.3 - 10.0 - 19.4 -
Revenue 145.8 134.7 220.6 208.0 178.3 142.4 544.7 485.1
Adjusted operating
profit - existing 27.4 23.9 36.4 36.0 30.1 25.0 93.9 84.9
- acquisitions 0.1 - 1.7 - 1.5 - 3.3 -
Adjusted operating profit 27.5 23.9 38.1 36.0 31.6 25.0 97.2 84.9
Acquisition related charges (2.3) (2.4) (7.0) (5.0) (3.8) (2.2) (13.1) (9.6)
CEO transition costs - (2.1)
--------------------------------------- --------- -------- ------- ------- ------- ------- ------- -------
operating Profit 25.2 21.5 31.1 31.0 27.8 22.8 84.1 73.2
--------------------------------------- --------- -------- ------- ------- ------- ------- ------- -------
Acquisition related charges of GBP13.1m (2018: GBP9.6m)
comprises GBP11.6m (2018: GBP9.3m) of amortisation of acquisition
intangible assets, GBP1.5m of acquisition expenses (2018: GBP0.5m)
and GBPNil relating to adjustments to deferred consideration (2018:
GBP0.2m credit).
Life Sciences Seals Controls Group
2019 2018 2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ---------- --------- ------- ------- ------- ------- -------- --------
Operating assets 45.6 43.5 109.6 80.1 65.6 59.3 220.8 182.9
Investment - - -- 0.7 - - - 0.7
Goodwill 64.0 59.0 59.1 40.3 31.9 29.2 155.0 128.5
Acquisition intangible
assets 15.6 12.9 61.7 21.8 18.8 18.9 96.1 53.6
---------------------------------- ---------- --------- ------- ------- ------- ------- -------- --------
125.2 115.4 230.4 142.9 116.3 107.4 471.9 365.7
Unallocated assets:
- Deferred tax assets 0.5 0.3
- Cash and cash equivalents 27.0 36.0
- Corporate assets 1.9 2.4
---------------------------------- ---------- --------- ------- ------- ------- ------- -------- --------
Total assets 125.2 115.4 230.4 142.9 116.3 107.4 501.3 404.4
---------------------------------- ---------- --------- ------- ------- ------- ------- -------- --------
Operating liabilities (25.3) (21.6) (37.1) (32.2) (27.6) (25.5) (90.0) (79.3)
Unallocated liabilities:
- Deferred tax liabilities (8.8) (8.7)
- Retirement benefit obligations (17.8) (10.5)
- Acquisition liabilities (11.3) (5.6)
- Corporate liabilities (6.7) (6.0)
- Borrowings (42.1) -
Total liabilities (25.3) (21.6) (37.1) (32.2) (27.6) (25.5) (176.7) (110.1)
---------------------------------- ---------- --------- ------- ------- ------- ------- -------- --------
Net assets 99.9 93.8 193.3 110.7 88.7 81.9 324.6 294.3
---------------------------------- ---------- --------- ------- ------- ------- ------- -------- --------
Alternative Performance Life
Measures Sciences Seals Controls Group
(Note 2) 2019 2018 2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------ -------
NET ASSETS 99.9 93.8 193.3 110.7 88.7 81.9 324.6 294.3
Add/(deduct):
* Deferred tax, net 8.3 8.4
* Retirement benefit obligations 17.8 10.5
* Acquisition liabilities 11.3 5.6
* Net debt/(cash funds) 15.1 (36.0)
------ -------
REPORTED TRADING CAPITAL
EMPLOYED 377.1 282.8
* Historic goodwill and acquisition related charges,
net of deferred tax 32.0 31.4 39.2 33.0 13.1 10.2 84.3 74.6
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------ -------
ADJUSTED TRADING CAPITAL
EMPLOYED 131.9 125.2 232.5 143.7 101.8 92.1 461.4 357.4
Pro-forma adjusted operating
profit(1) 29.0 23.9 44.9 36.3 31.6 27.4 105.5 87.6
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------ -------
ROATCE 22.0% 19.1% 19.3% 25.3% 31.0% 29.8% 22.9% 24.5%
---------------------------------------------------------- ------ -------- ------ ------ ------- ------- ------ -------
(1) After annualisation of adjusted operating profit of acquisitions
and disposals.
OTHER SECTOR INFORMATION Life Sciences Seals Controls Group
2019 2018 2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- --------- -------- ------ ------ ------- ------ ------ ------
Capital expenditure 3.3 3.5 5.1 2.0 2.5 1.1 10.9 6.6
Depreciation and amortisation 2.7 2.4 2.0 1.8 0.7 0.6 5.4 4.8
Revenue recognition:
* Immediately on sale 131.8 122.5 219.5 206.9 178.3 142.4 529.6 471.8
* Over a period of time 14.0 12.2 1.1 1.1 - - 15.1 13.3
----------------------------------- --------- -------- ------ ------ ------- ------ ------ ------
145.8 134.7 220.6 208.0 178.3 142.4 544.7 485.1
----------------------------------- --------- -------- ------ ------ ------- ------ ------ ------
Accrued income ("contract assets") at 30 September 2019 of
GBP1.5m (2018: GBP1.6m) and deferred revenue ("contract
liabilities) of GBP2.6m at 30 September 2019 (2018: GBP2.4m) is
included in trade and other receivables and trade and other
payables, respectively.
4. GEOGRAPHIC SEGMENT ANALYSIS BY ORIGIN
Adjusted Trading
operating Non-current capital Capital
Revenue profit assets(1) employed expenditure
2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------- ------ ------- ------- --------- -------- ------ ------ -------- --------
United Kingdom 154.8 130.2 27.8 23.5 59.0 54.1 84.5 79.2 2.0 0.6
Rest of Europe 128.1 115.2 18.6 17.6 58.9 57.0 80.4 76.9 1.7 1.5
North America 220.5 202.3 45.0 39.5 129.8 70.5 176.2 97.1 6.5 4.0
Rest of World 41.3 37.4 5.8 4.3 32.8 25.3 36.0 29.6 0.7 0.5
---------------- ------- ------ ------- ------- --------- -------- ------ ------ -------- --------
544.7 485.1 97.2 84.9 280.5 206.9 377.1 282.8 10.9 6.6
---------------- ------- ------ ------- ------- --------- -------- ------ ------ -------- --------
(1) Non-current assets exclude the investment and deferred tax
assets.
5. FINANCIAL EXPENSE, NET
2019 2018
GBPm GBPm
-------------------------------------------------------------- ------ ------
Interest (expense)/income and similar charges
* bank facility and commitment fees (0.2) (0.1)
* interest income on bank deposits 0.1 0.1
(0.4) -
* interest expense on bank borrowings
* notional interest expense on the defined benefit
pension scheme (0.2) (0.1)
---------------------------------------------------------------- ------ ------
Net interest expense and similar charges (0.7) (0.1)
---------------------------------------------------------------- ------ ------
* fair value remeasurement of financial liabilities and
unwind of discount 0.1 (0.4)
---------------------------------------------------------------- ------ ------
FINANCIAL EXPENSE, NET (0.6) (0.5)
---------------------------------------------------------------- ------ ------
The fair value remeasurement of GBP0.1m credit (2018: GBP0.4m
debit) comprises GBP0.1m debit (2018: GBPnil) that relates to the
unwinding of the discount on the liability for deferred
consideration in respect of the acquisition of VSP Technologies.
and of a movement in the fair value of the put options of GBP0.2m
credit (2018: GBP0.2m debit). There is no impact (2018: GBP0.2m
debit) for future purchases of minority interests as the discount
is now fully unwound.
6. TAX EXPENSE
2019 2018
GBPm GBPm
------------------------------------------------------ ------ ------
Current tax
The tax charge is based on the profit for the year
and comprises:
- UK corporation tax 4.9 3.9
- Overseas tax 17.8 16.1
------------------------------------------------------ ------ ------
22.7 20.0
Adjustments in respect of prior year:
- -
* UK corporation tax
- Overseas tax 0.5 (0.1)
------------------------------------------------------ ------ ------
Total current tax 23.2 19.9
------------------------------------------------------ ------ ------
Deferred tax
The net deferred tax credit based on the origination
and reversal of timing differences comprises:
- United Kingdom (0.9) (0.4)
- Overseas (1.2) (1.2)
Total deferred tax (2.1) (1.6)
------------------------------------------------------ ------ ------
TOTAL TAX ON PROFIT FOR THE YEAR 21.1 18.3
------------------------------------------------------ ------ ------
Factors affecting the tax charge for the year:
The difference between the total tax charge calculated by
applying the effective rate of UK corporation tax of 19.0% to the
profit before tax of GBP83.5m and the amount set out above is as
follows:
2019 2018
GBPm GBPm
----------------------------------------------------------- ----- -----
Profit before tax 83.5 72.7
----------------------------------------------------------- ----- -----
Tax on profit at UK effective corporation tax rate of
19.0% (2018: 19.0%) 15.9 13.8
Effects of:
- higher tax rates on overseas earnings 3.8 4.0
- adjustments to current tax charge in respect of previous
years 0.5 (0.1)
- other permanent differences 0.9 0.6
TOTAL TAX ON PROFIT FOR THE YEAR 21.1 18.3
----------------------------------------------------------- ----- -----
The Group earns its profits in the UK and overseas. The Group
prepares its consolidated financial statements for the year to 30
September and the effective tax rate for UK corporation tax in
respect of the year ended 30 September 2019 was 19.0% (2018: 19.0%)
and this rate has been used for tax on profit in the above
reconciliation.
The Group's net overseas tax rate is higher than that in the UK,
primarily because the profits earned in the US, Canada and
Australia are taxed at higher rates than the UK. The UK deferred
tax assets and liabilities at 30 September 2019 have been
calculated based on the future UK corporation tax rate of 17.0%
(2018: 17.0%), as substantively enacted at 30 September 2019.
At 30 September 2019, the Group had outstanding tax liabilities
of GBP6.9m (2018: GBP4.8m) of which GBP3.0m (2018: GBP2.1m) related
to UK tax liabilities and GBP3.9m (2018: GBP2.7m) related to
overseas tax liabilities. These amounts are expected to be paid
within the next financial year.
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 113,179,582 (2018: 113,140,435) and the
profit for the year attributable to shareholders of GBP61.9m (2018:
GBP53.8m).
Adjusted earnings per share
Adjusted earnings per share, which is defined in note 2, is
calculated as follows:
2019 2018 2019 2018
pence pence
per share per share GBPm GBPm
---------------------------------------------------- ---------- ---------- ------- -------
Profit before tax 83.5 72.7
Tax expense (21.1) (18.3)
Minority interests (0.5) (0.6)
---------------------------------------------------- ---------- ---------- ------- -------
Earnings for the year attributable to shareholders
of the Company 54.7 47.5 61.9 53.8
Acquisition related charges 11.6 8.4 13.1 9.6
Fair value remeasurement of financial liabilities
and unwind of discount (0.1) 0.4 (0.1) 0.4
CEO transition costs - 1.8 - 2.1
Tax effects on above adjustments (1.9) (1.7) (2.1) (2.0)
ADJUSTED EARNINGS 64.3 56.4 72.8 63.9
---------------------------------------------------- ---------- ---------- ------- -------
8. RECONCILIATION OF CASH FLOW FROM OPERATING ACTIVITIES
2019 2019 2018 2018
GBPm GBPm GBPm GBPm
------------------------------------------ ------- ------ ------ ------
Operating profit 84.1 73.2
Acquisition related charges (note 3) 13.1 9.6
CEO transition costs - 2.1
------------------------------------------ ------- ------ ------ ------
Adjusted operating profit 97.2 84.9
CEO transition costs paid (1.3) (0.8)
------------------------------------------ ------- ------ ------ ------
95.9 84.1
Depreciation or amortisation of tangible
and other intangible assets 5.4 4.8
Share-based payments expense 0.8 1.0
Defined benefit pension scheme (0.4) (0.5)
------------------------------------------ ------- ------ ------ ------
Non-cash items 5.8 5.3
------------------------------------------ ------- ------ ------ ------
Operating cash flow before changes in
working capital 101.7 89.4
Increase in inventories (12.2) (8.3)
Increase in trade and other receivables (1.2) (5.2)
Increase in trade and other payables 4.0 8.4
------------------------------------------ ------- ------ ------ ------
Increase in working capital (9.4) (5.1)
------------------------------------------ ------- ------ ------ ------
CASH FLOW FROM OPERATING ACTIVITIES,
BEFORE ACQUISITION EXPENSES 92.3 84.3
------------------------------------------ ------- ------ ------ ------
9. (NET DEBT)/CASH FUNDS
The movement in net funds during the year is as follows:
1 Oct Exchange Non-cash 30 Sept
2018 Cash flow movements movements 2019
GBPm GBPm GBPm GBPm GBPm
--------------------------- ------ ------------ ----------- ----------- --------
Cash and cash equivalents 36.0 (10.8) 1.8 - 27.0
Borrowings - (41.1) (0.7) (0.3) (42.1)
--------------------------- ------ ------------ ----------- ----------- --------
Cash funds/(net
debt) 36.0 (51.9) 1.1 (0.3) (15.1)
--------------------------- ------ ------------ ----------- ----------- --------
1 Oct Exchange Non-cash 30 Sept
2017 Cash flow movements movements 2018
GBPm GBPm GBPm GBPm GBPm
--------------------------- ------ ------------ ----------- ----------- --------
Cash and cash equivalents 22.3 13.1 0.6 - 36.0
Borrowings - - - - -
--------------------------- ------ ------------ ----------- ----------- --------
Cash funds 22.3 13.1 0.6 - 36.0
--------------------------- ------ ------------ ----------- ----------- --------
The non-cash movements in the year ended 30 September 2019
reflect accrued interest in excess of interest paid.
The Group has a committed multi-currency revolving facility of
GBP30.0m. In May 2019, the Group formally extended this facility
for a further two years to 1 June 2022. The facility has an
accordion option to increase the committed facility by a further
GBP30.0m up to a maximum of GBP60.0m. At 30 September 2019, the
Group had utilised GBP6.1m of this facility (2018: GBPNil).
Interest on this facility is payable between 70-115bps over LIBOR,
depending on the ratio of net debt to EBITDA.
On 8 July 2019 the Group extended its facilities with a new
two-year term loan for an aggregate principal amount of GBP40.0m
which was fully drawn to assist with the funding of the acquisition
of VSP Technologies. At 30 September 2019, the Group had GBP36.0m
of this loan outstanding, which is repayable in full by 7 July
2021. Interest on this facility is payable between 90-135bps over
LIBOR, depending on the ratio of net debt to EBITDA.
10. GOODWILL
Life Sciences Seals Controls Total
GBPm GBPm GBPm GBPm
------------------------ -------------- ------ --------- ------
At 1 October 2017 59.5 39.9 23.4 122.8
Acquisitions - - 5.7 5.7
Exchange adjustments (0.5) 0.4 0.1 -
------------------------- -------------- ------ --------- ------
At 30 September 2018 59.0 40.3 29.2 128.5
Acquisitions (note 11) 3.9 17.5 2.7 24.1
Exchange adjustments 1.1 1.3 - 2.4
------------------------- -------------- ------ --------- ------
AT 30 SEPTEMBER 2019 64.0 59.1 31.9 155.0
------------------------- -------------- ------ --------- ------
The Group tests goodwill for impairment at least once a year.
For the purposes of impairment testing, goodwill is allocated to
each of the Group's three cash generating units, which are the
three operating Sectors, Life Sciences, Seals and Controls. This
represents the lowest level within the Group at which goodwill is
monitored by management and reflects the Group's strategy of
acquiring businesses to drive synergies across a Sector, rather
than within an individual business. The impairment test requires a
"value in use" valuation to be prepared for each Sector using
discounted cash flow forecasts. The cash flow forecasts are based
on a combination of annual budgets prepared by each business and
the Group's strategic plan. Beyond five years, cash flow
projections utilise a perpetuity growth rate of 2%.
The key assumptions used to prepare the cash flow forecasts
relate to gross margins, revenue growth rates and the discount
rate. The gross margins are assumed to remain sustainable, which is
supported by historical experience; revenue growth rates generally
approximate to the average rates for the markets in which the
business operates, unless there are particular factors relevant to
a business, such as start-ups. The annual growth rates used in the
cash flow forecasts for the next five years represent the budgeted
rates for 2020 and thereafter, average growth rates for each
Sector; these annual growth rates then reduce to 2% over the longer
term.
The cash flow forecasts are discounted to determine a current
valuation using a single market derived pre-tax discount rate of
ca. 11% (2018: 11%). This single rate is based on the
characteristics of lower risk, non-technically driven, distribution
businesses operating generally in well developed markets and
geographies and with robust capital structures. As these features
are consistent between each of the Group's Sectors, the Board
considers that it is more appropriate to use a single discount rate
applied to each Sector's cash flow forecasts.
Based on the criteria set out above, no impairment in the value
of goodwill in any of the Sectors was identified.
The Directors have also carried out sensitivity analysis on the
key assumptions noted above to determine whether a "reasonably
possible adverse change" in any of these assumptions would result
in an impairment of goodwill. The analysis indicates that a
"reasonably possible adverse change" would not give rise to an
impairment charge to goodwill in any of the three Sectors.
11. ACQUISITION of BUSINESSES
On 12 October 2018, the Group completed the acquisition of
Actios SAS, the parent company of the Gremtek group ("Gremtek") of
companies. The consideration was GBP6.9m net of cash acquired of
GBP2.9m and includes acquisition expenses of GBP0.1m.
On 9 July 2019, the Group acquired the trade and net assets of
Virginia Sealing Products Inc ("VSP Technologies"), based in
Virginia US, for initial cash consideration of GBP57.2m, which is
net of cash acquired of GBP0.8m and includes GBP1.2m of acquisition
expenses. Deferred consideration of GBP5.1m (GBP5.6m undiscounted)
is assumed to be payable based on the operating profit achieved in
the twelve months ending 30 June 2020.
On 2 September 2019, the Group acquired DMR Holdings Limited,
the parent of the DMR Seals group of companies ("DMR Seals") for
initial consideration of GBP7.3m which included surplus cash of
GBP0.3m and acquisition expenses of GBP0.1m. Deferred consideration
of GBP0.6m is assumed to be payable based on the operating profit
achieved in the twelve months ending 30 April 2020.
On 20 September 2019, the Group acquired Sphere Surgical Pty
Limited and Aspire Surgical Pty Limited (together "Sphere") for
GBP6.6m net of cash acquired of GBP0.1m and including acquisition
expenses of GBP0.1m. Deferred consideration of GBP1.1m (GBP1.3m
undiscounted) is assumed to be payable based on gross profit
achieved in the twelve months ending 30 June 2020 and 2021.
Set out below is an analysis of the net book values and fair
values relating to these acquisitions:
VSP Others Total
----------------- ---------------- ----------------
Book Fair Book Fair Book Fair
value value value value value value
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- --- ------- -------- ------- ------- ------- -------
Acquisition intangible assets - 40.0 - 13.2 - 53.2
Deferred tax - - - (3.3) - (3.3)
Property, plant and equipment 1.4 0.5 0.6 0.3 2.0 0.8
Inventories 3.2 3.2 2.1 1.8 5.3 5.0
Trade and other receivables 5.5 5.2 3.1 3.0 8.6 8.2
Trade and other payables (2.5) (2.5) (2.9) (3.0) (5.4) (5.5)
Net assets acquired 7.6 46.4 2.9 12.0 10.5 58.4
Goodwill - 14.7 - 9.4 - 24.1
7.6 61.1 2.9 21.4 10.5 82.5
-------------------------------------- ------- -------- ------- ------- ------- -------
Cash paid 56.8 23.4 80.2
Cash acquired (0.8) (3.7) (4.5)
Expenses of acquisition 1.2 0.3 1.5
---------------------------------------- ------- -------- ------- ------- ------- -------
NET CASH PAID, AFTER ACQUISITION
EXPENSES 57.2 20.0 77.2
Deferred consideration payable
(note 12) 5.1 1.7 6.8
Less: expenses of acquisition (1.2) (0.3) (1.5)
---------------------------------------- ------- -------- ------- ------- ------- -------
Total consideration 61.1 21.4 82.5
---------------------------------------- ------- -------- ------- ------- ------- -------
The fair values set out above are provisional and will be
finalised in the next financial year. Goodwill of GBP24.1m
recognised on these acquisitions represents the amount paid for
future sales growth from both new customers and new products,
operating cost synergies and employee know-how.
From the date of acquisition, each acquired business contributed
the following to Group revenue and adjusted operating profit:
Date of acquisition Revenue Adjusted operating
profit(1)
(GBPm) (GBPm)
----------------------------------- --------------------- -------- -------------------
12 October
Gremtek 2018 10.0 1.5
VSP Technologies 9 July 2019 9.0 1.6
2 September
DMR Seals 2019 0.3 0.1
20 September
Sphere 2019 0.1 0.1
----------------------------------- --------------------- -------- -------------------
Contribution in year 19.4 3.3
Extrapolated for twelve months(2) 38.3 8.3
---------------------------------------------------------- -------- -------------------
Pro-forma for year ended 30
September 2019 57.7 11.6
---------------------------------------------------------- -------- -------------------
(1) After appropriate allocation of head office costs.
(2) Pro-forma revenue and adjusted operating profit has been
extrapolated from the results reported since acquisition to
indicate what these businesses would have contributed if they had
been acquired at the beginning of the financial year on 1 October
2018. These amounts should not be viewed as confirmation of the
results of these businesses that would have occurred, if these
acquisitions had been completed at the beginning of the year.
The Group's pro-forma adjusted operating profit of GBP105.5m
(note 3) comprises the Group's adjusted operating profit of
GBP97.2m and the pro-forma adjusted operating profit of GBP8.3m
relating to these acquired businesses.
12. OTHER LIABILITIES
2019 2018
GBPm GBPm
-------------------------------------------------- ------- -------
Future purchases of minority interests 4.3 4.5
Deferred consideration 7.0 1.1
----------------------------------------------------- ------- -------
11.3 5.6
-------------------------------------------------- ------- -------
Analysed as:
Due within one year 10.8 5.6
Due after one year 0.5 -
-------------------------------------------------- ------- -------
The movement in the liability for future purchases of minority
interests is as follows:
2019 2018
GBPm GBPm
-------------------------------------------------- ------- -------
At 1 October 4.5 6.1
Acquisition of minority interests
on exercise of options - (2.0)
Unwinding of discount - 0.2
Fair value remeasurements (0.2) 0.2
----------------------------------------------------- ------- -------
AT 30 SEPTEMBER 4.3 4.5
----------------------------------------------------- ------- -------
At 30 September 2019, the Group retained put options to acquire
minority interests of 10% in M Seals and Kentek which were both
exercisable from November 2018. At 30 September 2019, the estimate
of the financial liability to acquire the outstanding minority
shareholdings was reassessed by the Directors, based on their
current estimate of the future performance of these businesses and
to reflect foreign exchange rates at 30 September 2019. This led to
a remeasurement of the fair value of these put options and the
liability was decreased by GBP0.2m (2018: GBP0.2m increase)
reflecting a revised estimate of the future performance of these
businesses. There is no charge from unwinding the discount on the
liability (2018: GBP0.2m). In aggregate GBP0.2m (2018: debit
GBP0.4m) has been credited to the Consolidated Income Statement in
respect of this remeasurement of the liability.
Deferred consideration comprises the following:
Gross Discount Unwind Exchange 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------ --------- ------- --------- ------ ------
VSP Technologies 5.6 (0.5) 0.1 0.1 5.3 -
DMR Seals 0.6 - - - 0.6 -
Sphere 1.3 (0.2) - - 1.1 -
Coast - - - - - 0.1
FS Cables - - - - - 1.0
------------------ ------ --------- ------- --------- ------ ------
AT 30 SEPTEMBER 7.5 (0.7) 0.1 0.1 7.0 1.1
------------------ ------ --------- ------- --------- ------ ------
The amounts outstanding at 30 September 2019 are expected to be
paid within the next two years and are based on the performance of
these businesses in the period following their acquisition by the
Group.
During the year, outstanding deferred consideration of GBP1.1m
was paid to the vendors of FS Cables (GBP1.0m) and the vendor of
Coast (GBP0.1m).
13. DIVIDENDS
2019 2018
pence pence 2019 2018
per share per share GBPm GBPm
----------------------------------- ----------- ----------- ------ ------
Interim dividend, paid in June 8.5 7.7 9.6 8.7
Final dividend of the prior year,
paid in January 17.8 16.0 20.2 18.1
----------------------------------- ----------- ----------- ------ ------
26.3 23.7 29.8 26.8
----------------------------------- ----------- ----------- ------ ------
The Directors have proposed a final dividend in respect of the
current year of 20.5p per share (2018: 17.8p), which will be paid
on 22 January 2020, subject to approval of shareholders at the
Annual General Meeting on 15 January 2020. The total dividend for
the current year, subject to approval of the final dividend, will
be 29.0p per share (2018: 25.5p).
The Diploma PLC Employee Benefit Trust holds 51,867 (2018:
100,368) shares, which are ineligible for dividends.
14. EXCHANGE RATES
The rates used to translate the results of the overseas
businesses are as follows:
Average Closing
2019 2018 2019 2018
------------------------ ----- ----- ----- -----
US dollar (US$) 1.27 1.35 1.23 1.30
Canadian dollar (C$) 1.69 1.73 1.63 1.69
Euro (EUR) 1.13 1.13 1.13 1.12
Swiss franc (CHF) 1.27 1.31 1.23 1.27
Australian dollar (A$) 1.81 1.78 1.83 1.80
------------------------ ----- ----- ----- -----
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR LLFEDLILELIA
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