REG - Diploma PLC - Final Results
21/11/2022 07:00
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RNS Number : 9775G Diploma PLC 21 November 2022
DIPLOMA PLC 10-11 CHARTERHOUSE SQUARE, LONDON EC1M 6EE
TELEPHONE: +44 (0)20 7549 5700
FACSIMILE: +44 (0)20 7549 5715
21 November 2022
PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2022
Very strong results.
Building high quality, scalable businesses for sustainable organic growth.
PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2022
Very strong results.
Building high quality, scalable businesses for sustainable organic growth.
FY 2022 FY 2021 Y/y change
Revenue £1,012.8m £787.4m +29%
Organic revenue growth((1)) 15% 12%
Adjusted operating profit((2)) £191.2m £148.7m +29%
Adjusted operating margin((2)) 18.9% 18.9% -
Statutory operating profit £144.3m £104.3m +38%
Free cash flow((3)) £120.4m £108.8m +11%
Free cash flow conversion((3)) 90% 103%
Adjusted earnings per share((2)) 107.5p 85.2p +26%
Basic earnings per share 76.1p 56.1p +36%
Total dividend per share 53.8p 42.6p +26%
Net debt/EBITDA 1.4x 1.1x
ROATCE 17.3% 17.4%
(1) Adjusted for acquisition and disposal contribution and currency effects;
(2) Before acquisition related and other charges and acquisition related
finance charges; (3) Before cash flows on acquisitions, disposals and
dividends. All alternative performance measures are defined in note 13 to the
condensed Consolidated Financial Statements
A very strong financial performance
· Organic growth of 15% driven by our revenue initiatives, positive
demand, and pricing:
o Controls +24%: excellent Windy City Wire performance; International
Controls accelerating growth in attractive end segments while broadening US
and European exposure.
o Seals +14%: accelerated market share gains in North American Aftermarket
and broad-based growth in International Seals.
o Life Sciences -4%: returned to growth in Q4 as expected; excluding last
year's COVID-related revenues, organic growth in the year was 2%, moderated by
hospital staffing shortages.
· Reported revenues +29%: positive contribution from high quality
acquisitions and 5% foreign exchange benefit.
· Adjusted operating margin 18.9%: resilient value-added service model
and pricing offsetting inflation.
· Adjusted EPS +26%; total dividend also +26%, demonstrating continued
confidence in the strategy.
· Free cash flow conversion in-line with our model at 90%, including
targeted investment in inventory.
· Attractive returns: ROATCE 17.3%.
· Resilient balance sheet to support growth: net debt/EBITDA of 1.4x
and 50% of gross debt at fixed interest rates.
Revenue diversification driving organic growth, building scale and increasing
resilience
· Positioning our businesses behind structurally growing end markets:
e.g. technology, renewable energy, infrastructure and diagnostics.
· Further penetrating core developed economies: e.g. excellent progress
in the US in International Controls and Seals; continuing to build scale in
Europe in Life Sciences.
· Extending product ranges to expand addressable markets: e.g. the
acquisition of R&G broadens our fluid power offering within Seals.
· M&A to accelerate organic growth:
o £187m invested in seven strategically important acquisitions, including
R&G Fluid Power Group and Accuscience which are trading well.
o Accretive bolt-ons: since our H1 results, £19m invested in six bolt-ons
(two post-year end) at an average multiple of 5x and year 1 ROATCE >20%.
o Encouraging acquisition pipeline; maintaining financial discipline given
wider market uncertainties.
Scaling effectively for sustainable growth: building scale in our value-added
businesses and the Group
· In the businesses: developing target operating models to deliver
customer proposition at scale, underpinned by continuous improvement of our
core competencies and selective investment in talent, technology and facility.
· As a Group: evolving our structure, capability and culture to support
the development of a rapidly expanding Group.
Embedding ESG in our strategy and culture through Delivering Value Responsibly
("DVR")
· Building momentum: ingrained in our strategic activity and culture,
now driving improvement initiatives.
· Launched targets across our five focus areas: Colleague Engagement;
Health & Safety; Diversity, Equity & Inclusion; Supply Chain and
Environment.
· Committed to net zero in our own operations (Scope 1 & 2) by
2040; on the path to setting SBTi-approved net zero target across our entire
value chain (Scope 1, 2 & 3) by 2050.
Increasing resilience underpins our outlook
· Mindful of the uncertain economic outlook and the prospect of a
tougher demand environment.
· Successful long-term track record of performance delivery and
compounding growth through the cycle.
· Our resilience is based on: increasing revenue diversification and
scale; value-added products and services, critical to customers' operating
needs, supporting sustainable margins; highly cash generative model and robust
balance sheet.
· At this stage, FY 2023 expected to be positive and in-line with our
long-term model:
o Organic revenue growth: mid-single digit (likely to be weighted to H1).
o Acquisitions announced to date add ca.6% to reported revenue growth.
o Strong, resilient operating margin, in the range of 18-19%.
o For now, the foreign exchange benefit from weaker sterling and higher
interest costs are expected to be neutral to adjusted EPS.
· FY 2023 has started well, consistent with our guidance.
Commenting on the results, Johnny Thomson, Diploma's Chief Executive said:
"We've made excellent progress this year, with our very strong performance
building on an exceptional long-term track record of organic growth, margin
and EPS delivery. The management team and all my Diploma colleagues do a
brilliant job - thank you.
Our organic growth strategy is working as we continue to execute on fantastic
opportunities to diversify and scale. The seven exciting businesses we
welcomed to the Group in the year will complement our future organic growth.
We are scaling our businesses and our Group effectively to sustain our
customer proposition and margins for the long-term. Finally, I am delighted
with our progress on DVR: it's embedded in the strategy and culture so we can
now get on with making a meaningful difference.
While the economic environment is uncertain, our business model is resilient,
our strategy is working, and our performance momentum is encouraging. We
remain confident in the Group's outlook and long-term prospects."
Notes:
1. 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, net debt to EBITDA and ROATCE. All references in this
Announcement to "organic" revenues refer to reported results on a constant
currency basis, before acquired or disposed businesses (ex-growth basis) and
include growth generated by acquisitions under our ownership. The narrative in
this Announcement is based on these alternative measures and an explanation is
set out in note 13 to the condensed consolidated financial statements in this
Announcement.
2. 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.
There will be a meeting for analysts today at Farmers & Fletchers, 3 Cloth
Street, London EC1A 7DL at 09:00 (UK). The presentation will also be webcast
at https://secure.emincote.com/client/diploma/diploma001
(https://protect-eu.mimecast.com/s/jeuFC68l0IM5jYip4wr1?domain=secure.emincote.com)
This presentation will be available after the conference call at:
https://www.diplomaplc.com/investors/financial-presentations/
(https://www.diplomaplc.com/investors/financial-presentations/) .
A replay of the webcast will be available on the same link after the event.
For further information please contact:
Diploma PLC - +44 (0)20 7549 5700
Johnny Thomson, Chief Executive Officer
Chris Davies, Chief Financial Officer
Kellie McAvoy, Head of Investor Relations
Tulchan Communications - +44 (0)20 7353 4200
Martin Robinson
Olivia Peters
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 critical to customers' needs, providing recurring income and stable
revenue growth.
Our businesses design their individual business models, with the support of
the Group, 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. We encourage an entrepreneurial
culture in our businesses through our decentralised management structure. We
want our managers to 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. 3,000 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. 13% p.a. through a combination of organic growth and
acquisitions. Diploma is a member of the FTSE 250 with a market capitalisation
of ca. £3.3bn.
Further information on Diploma PLC can be found at www.diplomaplc.com
(http://www.diplomaplc.com)
LEI: 2138008OGI7VYG8FGR19
Chair's statement
It is a great pleasure to present my first statement as Chair of Diploma. As
you will see throughout this report, my first year has covered a period of
considerable achievement and strategic progress. When I was appointed, I felt
proud to be joining an organisation with exciting opportunities, a
differentiated value-added model delivering sustainable growth and great
people. During my first year, I have not been disappointed - I have been
impressed by the power of our decentralised model and the pride our employees
take in their jobs. Our businesses have strong cultures, but share the same
inherent values - they are accountable, entrepreneurial and empowered to
deliver critical services and products for their customers.
Very strong financial performance, excellent strategic progress
The Group has delivered another very strong financial performance, with
double-digit organic revenue growth and consistent strong operating margins
translating into 26% growth in adjusted earnings per share (EPS). Our 15%
organic growth shows that our strategy and growth frameworks continue to
produce results. We are also seeing growth in a number of areas aligned with
positive impact, demonstrating that our businesses are embedding Delivering
Value Responsibly, our ESG programme, into their commercial strategies. It has
been another busy year for acquisitions, with seven high-quality businesses
joining the Group; these will accelerate our future organic growth. In
particular, I am very pleased to welcome Accuscience and R&G Fluid Power
Group, both exciting additions.
Given the challenges of the external operating environment, sustaining our
adjusted operating margin at 18.9% is a great achievement and reflects both
our differentiated value-added servicing model and the hard work of colleagues
across the Group.
Ensuring the sustainability of our growth is paramount, and the team has
continued to build scale, investing across our businesses and the Group to
ensure we can continue to deliver for customers as we grow. Throughout this,
we remain financially disciplined, maintaining high-teens ROATCE of 17.3%, and
our strong balance sheet allows us to invest in growth. I would like to thank
the management team and all of our businesses for another great year at
Diploma.
Colleagues and culture
As a customer-service organisation, our colleagues are critical to our
success. Since joining, I have really enjoyed visiting the businesses and
meeting colleagues. I have been impressed by their commitment to their
customers, and the great sense of loyalty they feel for their businesses. This
is underlined by the very positive results of this year's Colleague Engagement
Survey. The Board remains committed to ensuring Diploma is a diverse and
inclusive organisation and is pleased to have set targets for 2023 that we
will continue to evolve and drive forward. I look forward to meeting more of
our people in the year ahead.
Our Group Colleague Engagement Survey continues to show excellent levels of
engagement. The learnings from this survey will inform future actions and
activity to ensure colleagues continue to view Diploma as a great place to
work. The results and learnings were also discussed by the Board, helping to
shape and inform our views on culture and diversity.
Diploma's culture continues to be critical to accelerating our strategy,
aligning decentralised businesses and providing competitive advantage. The
Board is very conscious of its role in fostering and monitoring this positive
culture. Although, as a decentralised Group, there isn't one, single culture,
all of our businesses share core values. Alongside our strong, local cultures,
we are steadily building Diploma networks based on best practice and knowledge
sharing.
While we have much more to do, we are increasingly leveraging the collective
power of the Group whilst maintaining local agility.
Board changes
After nearly nine years on the Board, John Nicholas stepped down from the role
of Chair and the Board in January 2022. The Board and I would like to thank
John for his support, and I look forward to building on all that he achieved
during his tenure.
Barbara Gibbes stepped down from the Board and the role of Chief Financial
Officer on 30 September 2022. On behalf of the Board, I would like to thank
Barbara for her leadership and dedication. The Nomination Committee led a
thorough selection process and, in August 2022, we announced the appointment
of Chris Davies as Chief Financial Officer. Chris joined us on 1 November
2022, bringing a wealth of experience and an excellent track record of
leadership in decentralised, service-led, multinational organisations.
Two of our independent Non-Executive Directors, Anne Thorburn and Andy Smith,
are due to retire from the Board in 2024 at the end of their third and final
terms. As per our standing succession planning, we have already commenced the
search to ensure successors are appointed in time for an orderly handover.
Further information on this and the diversity of the Board can be found in the
Nomination Committee Report. It remains our intention that the diversity of
the Board will increase over time.
Dividends
The Board has a progressive dividend policy that aims to increase the dividend
each year, broadly in line with growth in adjusted EPS. The combination of
very strong results and free cash generation, supported by a robust balance
sheet, has led the Board to recommend a 29% increase in the final dividend to
38.8p (2021: 30.1p) taking the total dividend to 53.8p (2021: 42.6p). This
represents dividend cover of 2x. Subject to shareholder approval at the Annual
General Meeting, this dividend will be paid on 3 February 2023 to shareholders
on the register at 20 January 2023 (ex-div 19 January 2023).
Outlook
The Group started the new financial year from a position of strength. While
the wider backdrop is one of macroeconomic uncertainty and volatility, the
achievements of the last three years mean that our Group is larger, more
diverse and therefore more resilient than ever. We have a differentiated,
value-added business model, a proven strategy for delivering sustainable
growth, and great teams.
On behalf of the Board, I would like to take this opportunity to thank all of
our colleagues for their welcome contribution to our success over the last
year and, personally, for giving me such a warm welcome.
David Lowden
Chair
CEO statement
Very strong results and excellent strategic progress
I am delighted with our 2022 financial performance and strategic progress,
proving the strength of our model and continuing our long track record of
growth and value creation. Our colleagues have been brilliant, and the team
has really risen to the challenges presented by the external environment.
Our execution has been very strong. Organic growth is the Group's number one
priority, so I am particularly pleased that we have delivered 15% this year.
We have also successfully maintained our adjusted operating margin at 18.9%,
with our resilient value-added service model and pricing enabling us to offset
inflation. We have invested £187m in seven strategically important
acquisitions, which will accelerate future organic growth, and build scale in
key business lines.
Growth is only one part of the strategy; our future success also depends on
effectively scaling our businesses and the Group to ensure growth is
sustainable. For our businesses, we are steadily developing their target
operating models and continuously improving the core competencies of our
value-added model. At a Group level, we continue to quietly evolve our
structures, capability and culture for scale.
One of the most exciting aspects of 2022 has been the way in which our
businesses and colleagues have embraced Delivering Value Responsibly (DVR),
our ESG programme. Our businesses are executing initiatives aligned with our
five DVR focus areas, we have embedded our framework into our commercial
strategy and culture, and we are announcing ESG targets to drive continuous
improvement in material areas.
A very strong financial performance
Financial results for the year were very strong across the key metrics of our
model. Organic growth of 15% reflects the success of our revenue
diversification initiatives, positive demand and pricing:
· Controls +24%: excellent Windy City Wire (WCW) performance;
International Controls accelerating growth in exciting end segments while
broadening US and European exposure.
· Seals +14%: accelerated market share gains in North American
Aftermarket and broad-based growth in International Seals against a robust
comparator.
· Life Sciences -4%: return to growth in Q4 as expected; organic growth
of 2%, excluding last year's Covid-related revenues, was moderated by hospital
staffing shortages.
Reported revenue growth was 29%, including a positive contribution from
high-quality acquisitions and a 5% benefit from foreign exchange movements.
We are very pleased to have maintained our adjusted operating margin at 18.9%
(2021: 18.9%) despite a challenging operating environment and inflationary
pressures. This was driven by pricing initiatives across the Group together
with the benefits of our value-added model. We grew adjusted earnings per
share by 26%.
Our H2 cash performance was strong; free cash flow conversion was in-line with
our model at 90%. This has resulted in good deleveraging in the second half;
year end net debt was 1.4x EBITDA (2021: 1.1x), underpinning our resilience
and providing good flexibility to continue to invest in growth. We have good
liquidity with undrawn facilities of £204m; 50% of our gross debt is at fixed
interest rates (ca. 3%)(( 1 (#_ftn1) )).
Sustainable organic growth strategy: revenue diversification driving growth,
building scale and increasing resilience
The Group's strategy is to build high-quality, scalable businesses for organic
growth. All of our businesses have fantastic opportunities and our strategy is
focused on growing, diversifying and scaling in three ways:
1. Positioning behind high growth end segments: many of which are also linked
to our focus on end markets with a positive impact.
· Technology investment, including in data centres, digital antenna
systems, telecommunications and electrification is creating exciting
opportunities, particularly in Controls.
· Renewable energy and infrastructure investment in the US and
elsewhere is benefiting Seals and Controls.
· Accelerating diagnostics spending: ageing populations and rising
healthcare spending remain fundamental drivers for Life Sciences; moreover, we
are also well-positioned to capitalise on changing healthcare spending
priorities post-pandemic, particularly in clinical diagnostics.
2. Geographic penetration of core developed economies: we remain relatively
underpenetrated in our core developed markets of North America, Europe and
Australia.
· We are already benefiting from accelerated market share gains in
North American Aftermarket and the potential in previously untapped Western
and Midwestern states is hugely exciting.
· Geographic diversification in the US and Europe at International
Controls, both organically and through acquisitions, creating a more balanced
geographic revenue mix.
· The acquisition of Anti-Corrosion Technology (ACT) in Australia marks
further progress in Australian Seals where, over the last three years, we have
built a much bigger, higher quality business.
· We continue to build scale in Europe in Life Sciences with the
acquisition of Accuscience.
3. Product range extension to expand addressable markets: we do this
incrementally, within the businesses, and at portfolio level.
· The acquisition of R&G Fluid Power Group (R&G) represents a
step change for Seals in the UK, broadening Seals' fluid power offering.
· Continued development of our exciting Adhesives business line in
Controls: Techsil, acquired last year, has delivered impressive organic
growth, and the tuck-in acquisition of Silicone Solutions further strengthens
our position in the UK.
· Across our portfolio, incremental product adjacency initiatives
formed a key part of growth in the year with future plans including: supplier
diversification in International Controls; proprietary product development in
US MRO; initiatives across Seals relating to O-rings, cylinders and gaskets;
and ongoing Life Sciences product pipeline development in new, innovative
technologies, for example leveraging artificial intelligence, and in
diagnostics.
Focused portfolio development
Focused portfolio development is key to the sustainability of our organic
growth. As the Group grows, we must focus on business lines that best
represent our model and for which we are the right owners to grow and scale.
This means being disciplined about acquisitions and disposals.
Acquisitions to accelerate organic growth
Acquisitions are a key part of our growth strategy, with a disciplined focus
on businesses with strong value-add distribution characteristics and high
gross margins, and with organic growth potential and great management teams.
During 2022, we acquired seven high-quality businesses for a total of £187m,
deploying capital across all three Sectors:
· LJR Electronics (Controls): acquired in February for £21m
(annualised revenue ca. £16m) to give Interconnect improved access to the
large, attractive and growing US interconnect market.
· R&G (Seals): a value-added aftermarket distributor of a diverse
range of industrial, hydraulic and pneumatic products, including seals and
gaskets, acquired in April for £101m (annualised revenue ca. £69m). The
business has added scale in the UK and broadened the Seals product portfolio
to expand addressable markets.
· Accuscience (Life Sciences): a market-leading life sciences and
med-tech distributor in Ireland, acquired in May for £51m (annualised revenue
ca. £28m), adding scale in Ireland, continuing the build out of the European
pillar of Life Sciences and giving access to the exciting diagnostics segment.
· ACT (Seals): a specialist provider of sustainable materials
engineering and corrosion control solutions. Acquired in July for £7m
(annualised revenue ca. £4m), highly complementary, and a further step in
building a high-quality, scalable Australian platform for growth.
· Silicone Solutions (Controls): acquired for £3m in September
(annualised revenue ca. £2m), continuing to build out and diversify our new
adhesives business line.
· Two small bolt-ons at R&G (Seals): R&G continues to
consolidate smaller regional players, acquiring two businesses for £4m
(annualised revenue ca. £5m).
Our acquisition pipeline is encouraging, albeit given the wider market
uncertainties, we will maintain our strict financial discipline. Nonetheless,
we continue to invest in value-accretive bolt-ons at very attractive
multiples. Since our H1 results, and prior to year end, we invested £14m in
four bolt-ons; since year end R&G has completed a further two bolt-on
acquisitions for £5m. These businesses were acquired for a 5x blended average
multiple.
Portfolio discipline
As part of a disciplined approach to portfolio management, we made two small,
non-core disposals in the year. In early May, we disposed of
a1-envirosciences, formerly part of the Life Sciences Sector for £11m
(annualised revenue ca. £13m). In November last year, we also disposed of
Kentek, our Russian filters business, for £10m (annualised revenue ca.
£23m).
Scaling our value-added businesses and the Group
Scaling our value-added businesses
As our businesses grow and scale, they need to evolve their operating models
to continue to deliver their value-add customer proposition. All of our
businesses have defined their future target operating models, and the strategy
to achieve this.
As part of this, we seek to continuously improve the Core Competencies of our
model:
· Supply chain: development of a more structured and proactive
approach, including category management techniques and evaluation of partners
on a fuller set of criteria, including location, flexibility, environmental
and employment practices, not just quality and cost. While we have much more
to do, management of our supply chain has been a differentiator in 2022; in
some cases better product availability, particularly at WCW, has enabled
market share gains.
· Commercial discipline (or pricing): the combination of improving
pricing processes and the value we deliver for customers has enabled us to
protect our operating margins. We have more to learn and more we can do with
better data, through working with our suppliers and greater forward planning
with customers to deliver the right pricing outcomes.
· Operational excellence: another focus area this year as we improve
warehouse processes across the portfolio; as our businesses scale, they are
making increasing use of automation. Through our network of best practice, we
are also working to standardise processes.
We support the development of these Core Competencies through reinvesting in
capability - Talent, Technology and Facility:
· Talent: investment in talent remains a key driver for future growth,
with a number of important appointments made in the year - these range from 25
functional appointments in Finance, Operations, Supply Chain and Commercial,
to a newly created role heading up the Life Sciences European pillar. We
remain focused on retention and have made important progress with the training
and development available to colleagues and business leaders.
· Our approach to Technology is incremental, and success is dependent
on having the right people in place to successfully implement change. We have
a number of small upgrade projects ongoing at any one time, and many
businesses are developing their webstore capabilities.
· Our investments in Facility support the growth of our businesses as
well as providing opportunities to reduce emissions and to improve colleague
working environments. During the year, we opened new facilities in Life
Sciences in Australia and Europe; and we are in the planning stages for a
further two new facilities over the next 18 months.
Scaling the Group
We continue to quietly evolve the structures, capability and culture of the
Group. Over the last three years, we have evolved the Group's organisational
structure around core, scalable business lines and developed our strategic and
performance frameworks. At Group centre, we retain a lean head office focused
on providing a service to the businesses, also selectively investing in
upskilling functions such as Finance, Legal, Corporate Development and
Internal Audit.
Alongside our powerful decentralised approach and strong local cultures, we
continue to develop a complementary shared Diploma culture and identity based
on best practice sharing.
Delivering Value Responsibly: embedding into our commercial strategy and
culture
Over the past year, there has been a real step change in momentum with DVR,
our ESG programme. Our colleagues and businesses are executing initiatives
aligned with our five focus areas. We have improved reporting with metrics now
embedded, supported by strong governance at Group, Sector and business level.
Looking ahead, new targets will drive further progress in 2023, and we are
well on the way to submitting net zero targets to the Science Based Targets
initiative.
Key performance highlights of the year include:
· Excellent and consistent colleague engagement score: 79% (2021: 79%),
and a very high response rate of 86%. This is a brilliant achievement given
the challenging operating environment, and I am delighted with how leaders
across the Group have worked hard to engage colleagues and leverage last
year's engagement survey feedback.
· Increasing the diversity of our Senior Management Team (SMT): female
representation at SMT increased to 27% (2021: 24%), driven by external
recruitment (40% female) which more than offset the impact of acquisitions
(SMT talent additions from acquisitions >90% male).
· Carbon emissions flat despite 15% organic revenue growth: due to
business initiatives and our investments in facility.
We are also announcing DVR targets aligned to our five focus areas. We are
committed to net zero emissions across our value chain by 2050 at the latest,
and have set an interim 50% reduction target for Scope 1 & 2 by 2030. We
are currently calculating our Scope 3 emissions in order to submit net zero
targets to the Science Based Targets initiative (SBTi) in 2023.
Increasing resilience underpins our outlook
While we are mindful of the uncertain economic outlook and prospect of a
tougher demand environment, we remain confident in the Group's increasing
resilience.
Diploma has an excellent track record of compounding growth and delivering
strong financial returns through the cycle. Our model is resilient, and our
strategic activity makes us more so over time as we diversify and scale.
Increasing revenue diversification means we are exposed to exciting,
structurally growing end segments. Our focus on value-added products and
solutions critical to customer needs and predominantly serving opex budgets,
together with our service component, fosters sticky customer relationships and
pricing power and supports sustainable margins. Our highly cash-generative
model and strong balance sheet underpin our resilience.
At this stage, FY 2023 is expected to be in line with our long-term model:
· Organic revenue growth: mid-single digit, consistent with our model
and likely to be weighted to H1.
· Acquisitions announced to date are expected to add ca. 6% to reported
revenue growth.
· Strong, resilient operating margin, in a range of 18-19%.
· At this stage, the foreign exchange benefit from weaker sterling and
higher interest costs are expected to be neutral to adjusted EPS.
FY 2023 has started well, consistent with our guidance. We remain focused on
executing our strategy of building high-quality, scalable businesses for
organic growth and are confident in our ability to deliver long-term growth at
sustainably high margins.
Johnny Thomson
Chief Executive Officer
Sector Review: Controls
The Controls Sector businesses supply specialised wiring, cable, connectors,
fasteners, control devices and adhesives for a range of technically demanding
applications.
FY 2022 FY 2021 Change in the year
Revenue £492.8m £343.3m +44%
Organic growth revenue +24% +16%
Adjusted operating profit £105.8m £72.4m +46%
Adjusted operating margin 21.5% 21.1% +40bps
FY 2022 highlights
· Share gains in high growth end markets and compelling customer
proposition driving an excellent WCW performance: organic revenue growth 32%,
including double digit volume growth
· International Controls organic growth 18%, with accelerating growth
in attractive end segments while also broadening US and European exposure
· Product extension: excellent organic growth in our new Adhesives
business line, with a bolt-on acquisition to add scale and diversify end
markets
Sector financial performance
The Controls Sector delivered a very strong full year performance, with
reported revenues materially higher, up 44% to £492.8m (2021: £343.3m). This
consisted of organic growth of 24%, an 11% contribution from acquisitions and
a 9% foreign exchange tailwind.
Adjusted operating profit increased 46% to £105.8m (2021: £72.4m), with the
adjusted operating margin 40bps higher year-on-year at 21.5%. Both
International Controls and WCW contributed to this margin expansion, with
scale benefits and performance more than offsetting investment in growth and
mix effects.
International Controls (50% of Sector revenue 2 (#_ftn2) ) enjoyed a
successful year as a result of organic revenue initiatives and market share
gains in buoyant end markets, particularly civil aerospace. This translated
into organic growth of 18%, with sustained momentum throughout the year and
double-digit growth across all business lines. Positive pricing contributed,
but volume growth was the primary driver of organic growth. The overall
International Controls margin increased slightly, with positive operating
leverage on volume growth partially diluted by investment in growth and mix
effects, including acquisitions.
The International Controls Wire & Cable business, Shoal Group, performed
very well against a strong comparator. This reflects supportive end markets
and revenue initiatives to drive growth in new products, through ecommerce and
in new markets including electric vehicles, distribution centres, data centres
and renewables. The addition of SWA last year has also improved access to the
electrical wholesale market and creates cross-selling opportunities.
Double-digit organic growth at Interconnect reflects strength across the
board, particularly our German energy activities where organic growth was over
30%, helped by upgrades to the transmission and distribution network. Other
key growth segments include motorsport, aerospace and medical. Interconnect's
recent US acquisition, LJR, has also made an excellent start delivering double
digit organic revenue growth, with its superior service levels and customer
proximity underpinning market share gains. The business is investing in sales
resource to sustain this momentum. The only area of weakness was Gremtek, a
more automotive-focused French business whose customer base has been impacted
by semi-conductor chip shortages.
Specialty Fasteners delivered very strong growth, taking share in recovering
aerospace end markets and benefiting from diversification into new and
exciting end segments. AHW, the US business acquired last year, has now been
integrated into our existing operation; the combined business is winning new
contracts and capitalising on recovering aerospace demand. Geographic
diversification has also been a theme in aerospace, with growth in Asia and an
important contract win in France for a major seating manufacturer. Newer end
markets such as space are growing rapidly, while growth in high performance
road vehicles and Formula One rule changes have also contributed.
Fluid Controls had another good year, delivering strong double-digit growth
and capitalising on the recovering food and beverage market.
In Adhesives, Techsil continued to perform extremely well, with broad-based
growth in key automotive end markets where adhesives have many applications.
The business has particularly benefited from the diversity of its customer
footprint and is winning new projects with customers supplying into the EV and
telecommunications markets. In September, we completed a small adhesives
bolt-on, acquiring the trade and assets of Silicone Solutions (£3m) to add
scale and diversify end markets.
Windy City Wire (50% of Sector revenue 3 (#_ftn3) ) (WCW) had another
excellent year, building on its strong track record. Organic growth was 32%,
with double-digit volume growth against strong comparators, as well as the
pass through of higher year-on-year copper prices. The impact of copper
moderated through the middle of the year as we started to lap stronger
comparators. The business has benefited from its exposure to high growth end
markets in areas related to building automation, security access, data centres
and digital antenna systems. Over and above this, WCW has taken market share
as a result of its compelling customer proposition and superior product
availability, underpinned by a secure and stable supply chain.
Volume growth combined with a well invested platform has translated into very
strong operating leverage and operating margins above the Group average. Over
the last two years, WCW has doubled its operating profit and significantly
outperformed its acquisition case, generating high-teens ROATCE in year two,
well ahead of expectations.
Strategic progress
Delivering on our growth strategy:
· Our Controls businesses are benefiting from initiatives to capture
growth in structurally growing end segments - from data centres and digital
antenna systems at WCW to electric vehicles and energy in International
Controls which is also pushing into emerging markets such as space and
unmanned aerial vehicles.
· Continued geographic diversification of International Controls,
building scale outside the UK - our German energy business has delivered
excellent growth; Fasteners is winning share in Asia and Europe; and
acquisitions in Fasteners and Interconnect are now delivering strong organic
growth in the US.
· Product adjacencies remain an incremental component of our
businesses' growth including through supplier diversification and
cross-selling.
· M&A to accelerate organic growth:
o Strategic acquisition of LJR Electronics in February for £21m to build
scale in the world's largest developed interconnect market, also giving our
existing operation in Indianapolis the ability to leverage LJR's supply chain.
o Continued build out of our new adhesives business line with the acquisition
of Silicone Solutions for £3m, further diversifying end markets.
Building scale in our value-added businesses:
· Acquired last year, we have fully integrated AHW into our existing US
Fasteners operation, merging our facilities at Long Beach and Huntingdon
Beach. The US business is now a single, combined entity under one management
team and on a single ERP system.
· Continued progress with the project to move our UK cable businesses
towards a single management structure and ERP.
· Ongoing investment in talent, including sales hires to drive growth
and supply chain and operations directors to support the execution of our core
competencies.
· Incremental investment in technology and facility, including
barcoding in Interconnect in the UK and a number of smaller ERP projects.
We have made good strategic progress in Controls as we diversify end segments
to increase resilience, and broaden our geographic and product addressable
markets. The Sector has good momentum, and we are positive about its future
prospects.
Sector Review: Seals
The Seals Sector businesses supply a range of seals, gaskets, cylinders,
components and kits used in heavy mobile machinery and a diverse range of
fluid power products with Aftermarket, OEM and MRO applications.
FY 2022 FY 2021 Change in the year
Revenue £331.4m £263.7m +26%
Organic growth revenue +14% +7%
Adjusted operating profit £62.6m £46.5m +35%
Adjusted operating margin 18.9% 17.6% +130bps
FY 2022 highlights
· Geographic penetration: Louisville giving access to previously
untapped Western and Midwestern states, driving accelerated market share gains
in North American Aftermarket
· Diversification in growth end segments: International Seals organic
growth 11% with broad-based growth against a strong comparator
· Product extension: strategic acquisition of R&G in April to build
scale in the UK and broaden the Seals product portfolio into pneumatics,
expanding addressable markets
· Building scale: acquisition of ACT, a supplier of innovative
anti-corrosion products and solutions, adds further scale to the high quality
platform for growth we have built in Australia over the last three years
Sector financial performance
Reported revenues increased 26% to £331.4m (2021: £263.7m), reflecting 14%
organic growth, a 6% contribution from acquisitions and a 6% benefit from
foreign exchange translation.
Adjusted operating profit outperformed revenue growth, increasing 35% to
£62.6m (2021: £46.5m) with the adjusted operating margin 130bps higher
year-on-year at 18.9% (2021: 17.6%). This was primarily due to a step up in
the North American margin which benefited from the end of dual-running costs
and improved efficiency at Louisville, as well as gains in MRO. The Sector
margin has also benefited from positive operating leverage on higher volumes
and the disposal of the lower margin Kentek business, partially offset by the
acquisition of R&G.
North American Seals (53% of Sector revenue 4 (#_ftn4) ) delivered organic
growth of 16%, reflecting very strong growth in our MRO and Aftermarket
businesses. North American Aftermarket had a highly successful year, with
Louisville's better location, extended service hours and expanded next day
delivery footprint enabling accelerated market share gains in previously
untapped Midwestern and Western states. This has been coupled with commercial
initiatives, including investment in sales and marketing, to build brand
recognition in newer locations. Organic growth in the US was over 26%; growth
in some Western states was higher still. The International Aftermarket
businesses also had a good year, with double digit organic growth, as they
continue to diversify into new markets, especially industrial and
non-hydraulic repair.
Organic growth was very strong for MRO, driven by revenue diversification
initiatives and positive end market demand. Investment in broadening the
business's value-add capabilities and new proprietary products is translating
into new customer wins and market share capture. The end market backdrop was
positive, with sustained momentum in industrial markets and a tailwind from
strong growth in the later cycle transportation market.
US Industrial OEM had a solid year, and remains focused on driving organic
growth through customer and market diversification. The business saw some
softening of demand in housing and consumer-related end markets towards the
end of the year, but most industrial end segments remain robust. The business
has effectively deployed its sales team to diversify its opportunity pipeline;
investments in technology and talent in supply chain and operations have
enhanced value-added services and improved supply chain capabilities. This
leaves the business well-positioned for the year ahead.
International Seals (47% of Sector revenue 5 (#_ftn5) ) had another strong
year, with organic growth of 11%, building on a track record of resilience and
consistency that reflects the business's diverse profile.
In the UK, FPE delivered double digit organic growth against a strong
comparator; excellent service and better stock availability has enabled the
business to capitalise on demand in construction and the recovering oil &
gas segment. The acquisition of R&G in April has been transformational,
materially increasing scale in the UK. Following a successful onboarding,
R&G's organic growth performance has been strong. This is a result of
excellent customer service, a strong product portfolio and exploiting
cross-selling opportunities within the business to drive value from bolt-on
M&A. Its roll-up M&A programme has continued, with a further four
bolt-on acquisitions since April, with two completing post year end.
Elsewhere, Kubo had another solid year, with high single digit organic growth
against a strong comparator. Having successfully captured the growth in
medical in FY 2021, the Swiss business successfully pivoted to industrial;
better product availability versus competitors also underpinned market share
gains. Double digit growth in Austria reflects recovering end markets as well
as geographic penetration gains in Germany.
Similarly, high single digit organic growth at M Seals reflected strength in
Sweden and the UK, offsetting slower Danish and Chinese demand. Growth in
Sweden was driven by sales activity to develop key accounts as well as the
resumption of projects put on hold during the pandemic. The business is
investing in organic growth in Germany, while the newly combined UK operation
is now capitalising on the benefits of co-ordinated commercial activity to
drive growth. M Seals has recently invested in ecommerce and new machining
capabilities to drive growth in Scandinavian markets.
Following a slower start to the year due to extended Covid lockdowns and
supply chain bottlenecks, our Australian Seals businesses had a strong second
half, converting backlogs and capitalising on buoyant mining, water treatment
and infrastructure end markets.
Strategic progress
Delivering on our growth strategy:
· Revenue diversification underpins the Sector's consistency. For
most businesses, this reflects incremental benefits from revenue
diversification initiatives focused on growth segments, geographic penetration
and product extension.
· Additionally, our facility in Louisville has delivered a step change
for North American Aftermarket with the team successfully converting the
opportunity into accelerated share gains. The facility is also delivering
clear quality and efficiency improvements; we plan to invest in expanding the
autostore to increase capacity in the year ahead.
· M&A to accelerate organic growth:
o Acquisition of R&G in April for £101m: a key milestone not just for the
UK, but the Seals Sector as a whole. A value-added aftermarket distributor,
R&G has added scale in the UK and significantly broadened the Seals
product portfolio, expanding addressable markets.
o Bolt-on acquisition of ACT in July for £7m, a specialist provider of
sustainable materials engineering and corrosion control solutions. It is
highly complementary to our existing Australian Seals business with potential
revenue and cost synergies.
Building scale in our value-added businesses:
· Completion of the integration of DMR into M Seals and rebranding; the
combined business is now leveraging a single go-to-market strategy and
co-ordinated commercial activity to drive growth.
· Integration of TotalSeal and facility expansion in Australia. Over
the last three years, we have transformed Australian Seals through
acquisitions to add scale and structuring the business into two strong pillars
in the East and West, creating a high-quality platform for growth.
· Across the Sector, all businesses continue on their journey to scale
with incremental investment in talent, automation solutions and capabilities,
including new machining capability to support product innovation.
We have made really good strategic progress in Seals in the year. The Sector
is more resilient now than ever, supported by end segment exposures such as
medical, food and beverage and renewable energy, as well as the impetus from
greater infrastructure investment through the cycle in the US. We are
optimistic about the Sector's prospects.
Sector Review: Life Sciences
The Life Sciences Sector businesses supply a range of equipment, consumables,
instrumentation and related services to the Healthcare industry.
FY 2022 FY 2021 Change in the year
Revenue £188.6m £180.4m +5%
Organic growth revenue (4)% +14%
Adjusted operating profit £41.0m £43.2m (5)%
Adjusted operating margin 21.7% 23.9% (220)bps
FY 2022 highlights
· Organic revenue growth was 2% excluding last year's Covid-related
revenues and was moderated by hospital staffing shortages; returned to organic
growth in Q4 as expected
· Strong diagnostics and endoscopy performance
· Sector well-positioned for growth: exposed to rising diagnostics
spend and significant elective surgical backlogs
· Strategic acquisition of Accuscience: increases exposure to high
growth testing, diagnostics and medical segments; continues the build out of
our European footprint
· Disciplined portfolio management: disposal of a1-envirosciences
Sector financial performance
In FY 2022, Life Sciences Sector revenues increased 5% to £188.6m (2021:
£180.4m), with organic revenues 4% lower year-on-year. Acquisitions net of
disposals added 7%, with the contribution from Accuscience and last year's
Scandinavian acquisitions more than offsetting the disposals of
a1-envirosciences in May and a1-CBISS last year. Foreign exchange movements
increased reported revenues by 2%.
Excluding last year's non-recurring Covid-related ventilator sales, the Sector
delivered 2% organic revenue growth. Growth was also somewhat moderated by
lockdowns and hospital staffing shortages in our key Canadian and Australian
surgical markets.
Adjusted operating profit was 5% lower year-on-year at £41.0m (2021:
£43.2m). The adjusted operating margin fell 220bps to 21.7% against an
untypically strong comparator (2021: 23.9%). This reflects operating leverage
on lower volumes, mix effects including the impact of acquisitions, and a
controlled return of variable costs.
Underlying momentum was very positive in testing and diagnostics, with
businesses such as TPD in Ireland and Abacus in Australia delivering high
single-digit organic growth against strong FY 2021 comparators. While
COVID-related testing volumes have eased, our businesses have successfully
captured growth elsewhere as laboratories shift their focus to clearing
backlogs, and as our teams have regained access to customers. Accuscience,
acquired in May, is settling into the Group well with exciting prospects in
high growth segments such as molecular diagnostics.
Our surgical businesses were impacted by extended lockdowns in Canada and
Australia together with hospital capacity constraints, reducing sales teams'
access and demand for consumables. Both AMT in Canada and BGS in Australia
experienced organic revenue declines with surgical throughput running well
below pre-COVID levels. We expect throughput to slowly improve in the year
ahead, with some unwinding of elective surgical backlogs, but hospital
capacity constraints are likely to persist in the near-term.
In critical care - primarily Simonsen & Weel in Denmark - while organic
revenue growth was negative, this reflects the non-recurring ventilator sales
mentioned above. Our other medical businesses focused on GI endoscopy (Vantage
in Canada and Kungshusen in Sweden) had a very good year with some exciting
new product introductions. Outpatients have also been much less impacted by
COVID, with sales of capital and consumables driving double digit organic
growth.
Strategic progress
Delivering on our growth strategy:
· Exciting organic growth potential: while FY 2022 has been a more
challenging year, this largely reflects short-term factors. The Sector's
prospects remain as positive as ever, underpinned by elective surgical backlog
recovery: rising diagnostics spending and our product pipeline. Across the
Sector, businesses have been investing in their portfolios, seeking out new
suppliers developing innovative products which will enable us to capitalise on
the post-pandemic shifts in healthcare spending
· M&A to accelerate organic growth:
o Strategic acquisition of Accuscience in Ireland for £51m: a market-leading
IVD, life sciences and med-tech distributor. The acquisition increases our
exposure to the high growth diagnostics segment, including molecular
diagnostics. The business also adds scale to Life Sciences in Ireland, and
continues to build out the Sector's European pillar.
Building scale in our value-added businesses:
· Completion of a multi-year project to create a scalable Australian
platform on a single distribution site in Brisbane. The consolidation of
operations and relocation of our Australian businesses to new, modern
facilities will create efficiencies and reduce our environmental footprint as
well as enable future growth.
· Investing in capability and talent in key functional areas, including
Finance and Operations.
· Developing regional leadership structures, including appointment of
new heads for Europe and Australia.
· New Simonsen & Weel facility in Denmark to support growth,
improve energy and waste efficiency and provide colleagues with a better
working environment.
Disciplined portfolio management:
· Disposal of a1-envirosciences in May.
We have made great strategic progress in Life Sciences, and the Sector in
itself provides balance, and therefore resilience, to our portfolio. We are
carrying improving momentum into the new year, and the medium-term outlook is
exciting, with the likely unwinding of elective surgical backlogs as well as
increasing diagnostics investment.
Finance Review
Diploma has delivered a very strong set of results, demonstrating the strength
of our financial model.
Financial highlights
· Organic growth 15%, more than half of which was volume growth
· Reported revenue growth 29%: very positive 9% net contribution from
acquisitions and disposals, and a 5% foreign exchange benefit
· Consistent, high margin: 18.9% operating margin, unchanged on the
prior year, with our resilient value-added service model enabling us to
continue to navigate supply chain challenges and offset inflation
· Full year free cash flow conversion 90%, including targeted
investment in inventory to support growth
· 26% growth in adjusted EPS
Financial Highlights
Reported results Adjusted results
FY FY % FY FY %
2022
2021
change
2022
2021
change
Revenue £m 1,012.8 787.4 +29%
Operating profit £m 144.3 104.3 +38% 191.2 148.7 +29%
Free cash flow conversion % 90 103
Earnings per share pence 76.1 56.1 +36% 107.5 85.2 +26%
Total dividend per share pence 53.8 42.6 +26%
Double digit organic growth
Reported revenues increased by 29% to £1,012.8m (2021: £787.4m), consisting
of organic growth of 15%, a 9% net contribution from acquisitions and
disposals, and a 5% benefit from foreign exchange translation. During the
year, the Group disposed of Kentek (November), and a1-envirosciences (May),
which together contributed £9.9m to Group revenues in FY 2022.
Attractive, high teens margins
Adjusted operating profit increased 29% to £191.2m (2021: £148.7m), with the
operating margin unchanged on the prior year at 18.9%. This reflects margin
expansion at both Controls and Seals, offset by a lower margin in Life
Sciences, which was principally due to the benefit from one-off Covid-related
revenues in the prior year and mix effects from acquisitions. The increase in
central costs primarily relates to talent as part of our investment in scaling
the Group.
Adjusted operating profit by Sector
Adjusted operating profit Adjusted operating margin
2022 2021 % 2022 2021 bps
change
£m £m % % change
Controls 105.8 72.4 +46% 21.5 21.1 +40
Seals 62.6 46.5 +35% 18.9 17.6 +130
Life Sciences 41.0 43.2 (5)% 21.7 23.9 (220)
Central costs (18.2) (13.4) +36%
Group 191.2 148.7 18.9 18.9 -
Higher financing costs
The interest expense increased to £11.6m (2021: £6.8m), principally due to
increased borrowings to finance acquisitions and the impact of higher interest
rates, and in particular in the second half of the year.
Profit before tax
Adjusted profit before tax increased by 27% to £179.6m (2021: £141.9m).
Statutory profit before tax was £129.5m (2021: £96.6m) and is stated after
charging acquisition related costs of £46.9m (2021: £44.4m), principally
comprising the amortisation of acquisition related intangible assets of
£42.4m (2021: £33.1m) and £10.5m of acquisition related costs (2021:
£9.7m) in respect of the seven acquisitions completed during the year and
partly offset by a net gain of £7.3m (2021: charge of £1.6m) from two
disposals in the year.
Effective tax rate broadly unchanged
The Group's effective tax charge on adjusted profit was 25.0% (2021: 25.4%)
broadly in line with prior year.
We are committed to being a responsible taxpayer and our approach is to comply
with tax laws in the countries in which we operate and to pay our fair share
of tax. We recognise the impact tax has on wider society and we always factor
the Group's reputation and corporate and social responsibilities into tax
considerations. Tax legislation is not always prescriptive and the impact of a
transaction or item can give rise to more than one interpretation of the law.
The Group assesses all such exposures and, where it is considered probable
that further tax will be payable, an uncertain tax provision is recognised.
The provision is estimated based on the expected value method. The Group's tax
strategy was approved by the Board and is published on our website.
26% growth in adjusted EPS and total dividend
Adjusted EPS increased by 26% to 107.5p (2021: 85.2p). The adjusted EPS growth
is marginally lower than the adjusted operating profit growth due to increased
interest charges.
For FY 2022, the Board has recommended a final dividend of 38.8p per share,
making the proposed full year dividend 53.8p (2021: 42.6p). This represents a
26% increase in the total dividend with dividend cover at 2.0x EPS, continuing
the Group's progressive dividend track record.
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 ability of the Board to
maintain future dividend policy will be influenced by the principal risks
identified below that could adversely impact the performance of the Group.
Free cash flow conversion 90%
Free cash flow represents cash available to invest in growth through
value-enhancing acquisitions or to return to shareholders. Free cash flow
increased 11% in the year to £120.4m (2021: £108.8m). Free cash flow
conversion for the year was 90% (2021: 103%), in-line with our targeted 90%+,
demonstrating the highly cash-generative qualities of the business model
despite very strong organic revenue growth and targeted investment in
inventory. Free cash flow benefited from fixed asset disposal proceeds of
£9.9m (2021: £4.8m).
The working capital outflow of £28.7m (2021: £12.6m outflow) was driven by
increased inventory and receivables, reflecting the strong growth in trading
activity and targeted investment in inventory to support customer service in
the year. We are focused on ensuring optimal levels of inventory, taking into
account working capital management and customer service. The Group's working
capital to revenue at 30 September 2022 improved to 15.6% (2021: 15.8%).
Group tax payments increased by £16.4m to £40.6m (2021: £24.2m). On an
underlying basis, cash tax payments increased to 22% (2021: 17%) of adjusted
profit before tax. Our effective cash tax rate is lower than our Group
effective tax rate, mainly due to acquisition goodwill which is deductible for
US tax purposes. Our cash tax rate is higher than last year both due to
capital gains during the period and the benefits from enhanced deductions on
capital spend in the prior year.
The Group's capital expenditure was higher this year at £15.4m (2021: £6.2m)
largely consisting of ongoing investment in new field equipment in the
Healthcare businesses of £6.8m (2021: £2.0m), which directly supports
revenue growth. Excluding this, capital expenditure increased £4.4m to
£8.6m, consisting of infrastructure and equipment spend to scale up
efficiently for growth (£5.9m), and improvements or replacements of legacy IT
systems plus investments into newly acquired businesses (£2.7m).
The Group spent £186.6m (2021: £462.2m) on acquisitions and £56.4m (2021:
£53.2m) on paying dividends to both Company and minority shareholders.
Acquisitions to accelerate our growth
Acquisition spend of £186.6m, which includes fees, mainly comprises the
initial spend for R&G (£91.7m) and Accuscience (£49.9m), as well as an
additional £31.4m principally relating to five smaller businesses. The total
spend also includes £6.5m of acquisition fees and deferred consideration of
£7.1m. We remain highly disciplined in our approach with all of these
high-quality, value-add acquisitions offering our Sectors opportunities to
accelerate their organic growth and create value.
Goodwill at 30 September 2022 was £372.3m (2021: £260.7m). Goodwill is
assessed each year to determine whether there has been any impairment in the
carrying value. It was confirmed that there was significant headroom on the
valuation of this goodwill, compared with the carrying value at the year end.
Disciplined portfolio management
The Group completed two disposals in the year - the disposal of
a1-envirosciences in May 2022 for proceeds of £11.4m, and the sale of its 90%
interest in Kentek in November 2021 for proceeds of £10.0m. a1-envirosciences
and Kentek generated revenues of £7.0m and £2.9m in the year respectively.
The proceeds are not included in free cash flow and the net profit on disposal
of £7.3m is not included in adjusted operating profit.
Liabilities to shareholders of acquired businesses
The Group's liability to shareholders of acquired businesses at 30 September
2022 increased by £7.7m to £31.4m (2021: £23.7m) and comprises both put
options to purchase outstanding minority shareholdings and deferred
consideration payable to vendors of businesses acquired during the current and
prior year.
The liability to acquire minority shareholdings outstanding at 30 September
2022 relates to a 10% interest held in M Seals, 5% interest in Techsil and a
2% interest in R&G. These options are valued at £7.4m (2021: £5.2m),
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 2022 was
£24.0m (2021: £18.5m). This liability represents the Directors' best
estimate of any outstanding amounts likely to be paid to the vendors of
businesses, based on the expected performance of these businesses during the
measurement period. The increase in the year is primarily due to the
acquisition of R&G.
ROATCE: strong returns
ROATCE is a key metric used to measure our success in creating value for
shareholders. As at 30 September 2022, the Group's ROATCE was 17.3% (2021:
17.4%), in-line with our high-teens target. The full year outcome reflects a
number of moving parts with the temporary dilution from recent acquisitions
and targeted inventory investment partially offset by WCW continuing to
outperform its acquisition case. Subject to future acquisition activity, we
expect ROATCE to increase in FY 2023.
Adjusted trading capital employed is defined in note 13.
Strong balance sheet
Strong free cash generation has allowed the Group to deleverage more quickly
than expected. At 30 September 2022, the Group's Net Debt (excluding IFRS 16
lease liabilities) stood at £328.9m. The Group continues to maintain a robust
balance sheet with net bank debt comprised of borrowings of £370.6m, less
cash funds of £41.7m.
On 13 October 2020, the Group entered into a debt facility agreement (SFA)
which comprised a three-year term loan for an aggregate principal amount of
£136.0m ($170.0m) and a committed multi-currency revolving facility for an
aggregate principal amount of £135.0m, which was increased to £185.0m during
the previous financial year.
During the year the Group has amended the SFA to increase the total facility
size. As at 30 September 2022, the SFA comprises a committed multi-currency
revolving facility for an aggregate principal amount of £359.7m, an
amortising term loan for an aggregate principal amount of £114.2m ($127.5m),
a bullet term loan for an aggregate principal amount of £59.1m ($66.0m) and a
further bullet term loan for an aggregate principal amount of £45.3m. The SFA
is due to expire in December 2024 and there is an option to extend for a
further 12-month period.
The Group's debt facilities are subject to interest at variable rates. During
the year, the Group entered into interest rate swap contracts with the effect
of fixing the interest rate on $100m (£89.6m) of debt. The effective fixed
rate debt was 24% as a proportion of total debt. Subsequent to the year end,
the Group entered into further interest rate swap contracts with the effect of
fixing the interest rate on an additional $100m of debt.
At 30 September 2022, the Group's Net Debt/EBITDA was 1.4x. We have strong
liquidity, with year end headroom of £204m.
Type Currency Amount GBP equivalent Interest rate exposure
Term loan USD $193.5m £173.3m Fixed at ca.3% 6 (#_ftn6)
RCF USD $8.0m £7.2m
RCF GBP £122.2m Floating
RCF EUR €81.6m £71.6m Floating
Capitalised debt fees net of accrued interest £(3.7)m
Gross debt drawn at year end £370.6m
Cash & equivalents at year end £(41.7)m
Net debt at year end £328.9m
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 FY 2022
of £6.6m (2021: £5.5m).
The Group maintains a legacy closed defined benefit pension scheme in the UK.
The Group is currently funding this scheme with cash contributions of £0.6m
(2021: £5.8m) which increases annually on 1 October by 2%.
In Switzerland, local law requires our Kubo business to provide a
contribution-based pension for all employees, which is funded by employer and
employee contributions. This pension plan is managed for Kubo through a
separate multi-employer plan of non-associated Swiss companies, which pools
the funding risk between participating companies. In Switzerland, Kubo's
annual cash contribution to the pension scheme was £0.5m (2021: £0.5m).
Both the UK defined benefit scheme and the Kubo contribution scheme are
accounted for in accordance with IAS 19 (revised). At 30 September 2022, the
aggregate accounting pension surplus/deficit in these two schemes moved from a
deficit of £4.9m to a surplus of £6.4m, reflecting the sharp increase in
bond yields as at 30 September 2022, which in turn reduced the value of the
schemes' liabilities. The next formal triennial funding valuation of the UK
scheme is due as at 30 September 2022, with completion expected in the second
half of FY 2023.
FX tailwind and interest headwind largely offsetting
Whilst there cannot be any certainty over future interest rates and exchange
rates, looking ahead to 2023, it is likely that exchange rates, especially
Sterling-Dollar will provide a boost to reported earnings whilst increasing
interest rates will increase costs. With around 50% of the Group's debt
floating, should USD-GBP rates remain at current levels, we would expect these
effects to largely offset each other.
Going concern
The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out in this
announcement. The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the Finance Review. In
addition, the Annual Report & Accounts include the Group's objectives,
policies and processes for managing its capital; its financial risk management
objectives; details of its financial instruments and hedging activities; and
its exposures to credit risk and liquidity risk.
The Group continues to operate against a backdrop of macroeconomic disruption,
including widespread global inflation, rising interest rates and the continued
uncertainty of the Covid-19 pandemic, in particular its lasting impact on
global supply chains. Accordingly, the Directors have again considered a more
comprehensive going concern view than in previous years. The Group has
considerable financial resources, together with a broad spread of customers
and suppliers across different geographic areas and sectors, often secured
with longer term agreements. As a consequence, the Directors believe that the
Group is well placed to manage its business risks successfully.
Liquidity and financing position
On 13 October 2020, the Group entered into a debt facility agreement (SFA)
which comprised a three-year term loan for an aggregate principal amount of
£136.0m ($170.0m) and a committed multi-currency revolving facility (RCF) for
an aggregate principal amount of £135.0m, which was increased to £185.0m
during the previous financial year.
During the year the Group has amended the SFA to increase the total facility
size. As at 30 September 2022 the SFA comprises a committed RCF for an
aggregate principal amount of £359.7m, an amortising term loan for an
aggregate principal amount of £114.2m ($127.5m), a bullet term loan for an
aggregate principal amount of £59.1m ($66.0m) and a further bullet term loan
for an aggregate principal amount of £45.3m. The SFA is due to expire in
December 2024 and there is an option to extend for a further 12-month period.
The Group's debt facilities are subject to interest at variable rates. During
the year the Group entered into interest rate swap contracts with the effect
of fixing the interest rate on $100.0m (£89.6m) of debt. The effective fixed
rate debt was 24% of total debt. Subsequent to year end, the Group has entered
into further interest rate swap contracts with the effect of fixing the
interest rate on an additional $100.0m of debt.
At 30 September 2022, the Group's Net Debt/EBITDA ratio is 1.4x,
as illustrated in note 13.
As at 30 September 2022, the term loans have an aggregate outstanding
principal amount of £173.3m ($193.5m) and the Group has utilised £201.0m of
the revolving facility. There remains £158.7m undrawn on the revolving
facility and £45.3m undrawn on the bullet term loan. Borrowings include
£1.0m (2021: £0.4m) of accrued interest and the carrying amount of
capitalised debt fees of £4.7m (2021: £2.8m).
As at 30 September 2021, under the SFA the Group had a drawn term loan with an
aggregate principal amount of £113.5m ($153.0m) and drawings of £95.1m under
the revolving facility. As at 30 September 2021 the undrawn revolving facility
amount was £89.9m.
Total net debt is £398.0m (2021: £229.7m) comprising cash funds of £41.7m
(2021: £24.8m), borrowings of £370.6m (2021: £206.2m), and lease
liabilities of £69.1m (2021: £48.3m). Bank covenants are tested against net
debt funds only (i.e. excluding lease liabilities).
Financial modelling
The Group has modelled a base case and downside case in its assessment of
going concern. The base case is driven off the Group's detailed budget which
is built up on a business by business case and considers both the micro and
macroeconomic factors which could impact performance in the industries and
geographies in which that business operates. The downside case models steep
declines in revenues and operating margins as well as materially adverse
working capital movements. These sensitivities factor in a continued
unfavourable impact from a prolonged downturn in the economy.
The purpose of this exercise is to consider if there is a significant risk
that the Group could breach either its facility headroom or financial
covenants. Both scenarios indicate that the Group has significant liquidity
and covenant headroom on its borrowing facilities to continue in operational
existence for the foreseeable future.
Going concern basis
Accordingly and after making enquiries, the Directors have a reasonable
expectation that the Group has adequate resources to continue in operational
existence for the foreseeable future and they continue to adopt the going
concern basis in preparing the Annual Report & Accounts.
Principal risks and uncertainties
The Group's decentralised operations, which have different Sectors and
geographical spread, helps mitigate the potential impact of these principal
risks.
Set out in this section of the Strategic report are the principal risks and
uncertainties affecting the Group. These have been determined by the Board,
using the robust risk evaluation described on the previous page, to have the
greatest potential impact on the Group's future viability.
The principal risks are each classified as either macro/external, strategic or
operational and are not presented in order of probability or impact.
The risks summarised below represent the principal risks and uncertainties
faced by the Group, and the steps taken to mitigate such risks. These risks
are considered to be material to the development, performance, position or
future prospects of the Group. However, these risks do not comprise all of the
risks that the Group may face and accordingly this summary is not intended to
be exhaustive.
There have been some changes to the Groups principal risks arising from the
evolved risk identification process together with the increased scale of the
Group and revenue diversification strategies being successfully implemented:
· Customer Concentration and Inventory Obsolescence are no longer
considered to be principal risks, although will continue to be monitored and
evaluated.
· Inflationary Environment has been recategorised to be a principal
risk, previously being considered an emerging risk.
· Supplier Concentration/Loss of Key Suppliers and Supply Chain
disruptors have been amalgamated into Supply Chain, which will also include
the risk of supplier disintermediation.
· Loss of key personnel has evolved to Talent & Diversity and will
also cover the risk of having wrong talent or lack of/poor diversity, failure
to attract/retain staff and inadequate development.
· Tax Compliance has evolved into Non-compliance with Laws and
Regulations, which also covers non-compliance with environmental regulation
and the increasing international compliance alignment burden.
Principal Risk Risk Description & Assessment Mitigation
Downturn/instability in
major markets
Risk category
Macro/external risk
Adverse changes in the major markets that the businesses operate in can result The businesses identify key market drivers and monitor trends and forecasts,
in slowing revenue growth due to reduced or delayed demand for products and as well as maintaining close relationships with key customers who may give an
services, or margin pressures due to increased competition. early warning of slowing demand.
Board risk appetite
A number of characteristics of the Group's businesses moderate the impact of
Averse economic and business cycles:
· The Group's businesses operate in three different Sectors with
different characteristics and across a number of geographic markets.
Change in risk
· The businesses offer specialised products and services, which are
No change often specific to their application, increasing customers' switching costs.
· A high proportion of the Group's revenue comprises consumable
products, which are purchased as part of the customer's operating budget,
This risk remains at a similar level to last year and is addressed rather than through capital budgets.
continuously in our risk management process.
· In many cases the products are used in repair, maintenance and
refurbishment applications, rather than original equipment manufacture.
Supply Chain
Risk category The ability to service our customers in a timely manner is a key part of our Management continues to pursue diversification strategies and regularly seeks
value-added proposition. alternative sourcing.
Strategic risk
For manufacturer-branded products, there is the risk that existing Long-term, multi-year exclusive contracts have been signed with suppliers with
distribution agreements and vertical integration of suppliers is cancelled, change of control clauses, where applicable, for protection or compensation in
therefore losing access to key distribution channels. the event of acquisition.
Board risk appetite
There is also the risk of: We maintain strong relationships with suppliers and keep customers updated in
Cautious
the event of change to retain key business.
· A supplier taking away exclusivity.
Meeting with key customers regularly to gain insight into their product
· Manufacturing lead times increasing as a result of supply chain requirements and market developments.
Change in risk shortages. We have experienced this, particularly with suppliers based in
Asia, in the current year. We work with our supply chain partners to help them meet our standards of
No change
acceptable working conditions, financial stability, ethics and technical
· Supply chain partners not operating to the same ethical standards competence. If they are unable to meet these standards then we will source
as Diploma product elsewhere.
Supply chain disruption has reduced since last year but operational
interruptions at customers and suppliers continue.
Inflationary Environment
Risk category Significant or unexpected cost increases by suppliers due to the pass through Improved pricing processes and the value-added activities undertaken by the
of higher commodity prices or other price increases, higher trade tariffs businesses mean we are better able to pass cost increases to customers.
Macro/external risk and/or foreign currency fluctuations, could adversely impact profits if
businesses are unable to pass on such cost increases to customers. A number of characteristics of the Group's businesses moderate the impact of
economic and business cycles:
Board risk appetite · The Group's businesses operate in three different Sectors with
different characteristics and across a number of geographic markets.
Cautious
· The businesses offer specialised products and services, which are
often specific to their application, increasing customers' switching costs.
Change in risk · A high proportion of the Group's revenue comprises consumable
products, which are purchased as part of the customer's operating budget,
New risk for 2022 rather than through capital budgets.
· In many cases the products are used in repair, maintenance and
refurbishment applications, rather than original equipment manufacture.
Unsuccessful acquisition
Risk category Diploma has a strong history of disciplined acquisitions. The business model A clearly defined acquisition strategy is in place with a disciplined
of the Group is based on successful acquisitions in large and developed approach, including financial return hurdles, to bringing high-quality,
Strategic risk markets and sectors. value-enhancing businesses into the Group.
The following are the key risks of an acquisition process: An experienced Corporate Development team is responsible for seeking and
evaluating new acquisition opportunities with the Corporate Development
Board risk appetite · The Group may overpay for a target. Director reporting to the CEO.
Tolerant · The acquired business may experience limited growth post A formal due diligence process is followed for every acquisition, with close
acquisition. supervision by the CEO and relevant Group senior management. A formal
governance process is in place up to Board level.
· Loss of key customers or suppliers post integration.
Change in risk
A disciplined post-acquisition integration process covers operational,
· Potential cultural misfit as smaller businesses are faced with financial, governance, legal and reporting matters.
No change the new requirements of a listed Company.
The Board reviews performance of recent acquisitions annually.
The above may be the result of inadequate due diligence, poor integration or
unrealistic assumptions used in the investment case.
The acquisition pipeline remains healthy and Diploma retains its disciplined
approach to bringing high-quality, value-enhancing businesses into Diploma.
Geopolitical disruptions
Risk category Diploma operates in established economies with stable political and legal We continue to diversify our supply base and invest in product range
systems. development to mitigate exposure to any single market or region.
Macro/external risk
Geopolitical events that could disrupt the Group's operations are mainly Whenever possible, we capitalise on Group synergies and leverage inter-company
related to: trading.
Board risk appetite · Interruption of trade agreements.
Averse · Tariffs.
· Change of trade relationships amongst countries in which we
operate (e.g. Brexit).
Change in Risk
· Government budget spending.
Increase
· Political elections.
This risk remains elevated in certain geographies, including due to ongoing
events such as the conflict in Ukraine.
Health & Safety
Risk category Some Diploma businesses are exposed to Health & Safety risks, including The Covid-19 pandemic placed a greater focus on Health & Safety and
via the environment in which their employees, contractors, customers, and preventive measures to limit the spread of Covid-19. Implementing and
Operational risk suppliers operate, or through the products they sell. continuously evolving these measures has improved Health & Safety across
the Group.
Additionally, management continues to promote mental health and wellbeing,
Board risk appetite offering support to colleagues and access to an employee assistance programme.
Averse
Change in risk
Decrease
Relative to FY 2021 there has been a significant decrease in Health &
Safety risk as a result of the conclusion of the Covid-19 pandemic and
improvements in processes arising from the pandemic.
Technology & Cyber
Risk category Group and operating business management depend critically on timely and The decentralised nature of the Group, including stand-alone IT systems for
reliable information from their IT systems to run their businesses and serve each business, limits the potential impact to any individual business. There
Operational risk their customers' needs. is good support and back-up built into local IT systems.
Any disruption or denial of service may delay or impact decision-making if All businesses in the Group have a robust cybersecurity programme and we
reliable data is unavailable. regularly engage with cybersecurity experts to continuously improve and
Board risk appetite
strengthen our IT systems.
Poor information handling or interruption of business may also lead to reduced
Cautious service to customers. Unintended actions of employees caused by a cyber-attack A formalised ERP approval and implementation process ensures businesses have
may also lead to disruption, including fraud. the most suitable IT systems to effectively manage their business.
Business continuity plans exist for each business with ongoing testing.
Change in risk
No change
The risk of cyber-attacks remained high in 2022.
The businesses maintained a high standard of cybersecurity whilst
accommodating remote working practices in territories where strict lockdowns
were in place as a response to the Covid-19 pandemic.
Talent & Diversity
The success of the Group is built on strong, self-standing management teams in Contractual terms such as notice periods and non-compete clauses can mitigate
the operating businesses, committed to the success of their respective the risk in the short term.
Risk category businesses. As a result, the loss of key personnel can have an impact on
performance for a limited time period. The Group places very high importance on planning development, motivation and
Operational risk
reward:
Not having the right talent or diversity at all levels of the organisation to
deliver our strategy, resulting in reduced financial performance. · Ensuring a challenging working environment where managers feel
they have control over, and responsibility for, their businesses.
Board risk appetite
· Implementing a structured talent review process for the
Cautious development, retention and succession of key personnel.
· Offering balanced and competitive compensation packages with a
combination of salary, annual bonus and long-term cash or share incentive
Change in risk plans.
Increase · Giving the freedom, encouragement, financial resources and
strategic support for managers to pursue ambitious growth plans.
This risk has increased in the year, mainly due to current market labour
conditions with the tightening of labour markets affecting candidate
availability and retention, upward pressure on wage levels in certain
geographies and changing expectations of working environments.
Product liability
There is a risk that products supplied by a Group business may fail in Technically qualified personnel and control systems are in place to ensure
service, which could lead to a claim under product liability. products meet quality requirements. The Group's businesses are required to
Risk category
undertake product risk assessments and comprehensive supplier quality
The Group may be exposed to legal costs and potential damages if the claim assurance assessments.
Operational risk succeeds and the supplier fails to meet its liabilities for whatever reason.
The businesses, in their terms and conditions of sale with customers, will
In situations where a Group business is selling own-branded products and typically mirror the terms and conditions of purchase from the suppliers to
cannot subrogate the liability to a supplier, the business will be liable for limit any liabilities.
Board risk appetite failure of the product.
Averse The Group has liability insurance in place providing appropriate cover for
each business.
Change in risk
No change
This risk remains at a similar level to last year.
Foreign currency
The Group is exposed to two types of financial risk caused by currency The Group operates across a number of diverse geographies but does not hedge
volatility: translational exposure, on translating the results of overseas translational exposure of operating profit and net assets.
Risk category subsidiaries into UK sterling; and transactional exposure, due to operating
businesses' revenues or product costs being denominated in a currency other The Group's businesses may hedge up to 80% of forecast (for a maximum of 18
Financial risk than their local currency. months) foreign currency transactional exposures using forward foreign
exchange contracts.
Translational foreign exchange risk arises primarily with respect to the US
dollar, the Canadian dollar, the Australian dollar and the Euro. Rolling monthly forecasts of currency exposures are reviewed on a regular
Board risk appetite
basis.
A strengthening of UK sterling by 10% against all the currencies in which the
Cautious Group does business, would reduce adjusted operating profit by approximately Details of average exchange rates used in the translation of overseas earnings
£17.0m (9%), due to currency translation. Similarly, a strengthening of UK and of year end exchange rates used in the translation of overseas balance
sterling by 10% against all the non-UK sterling capital employed would reduce sheets, for the principal currencies used by the Group, are shown in note 12
shareholders' funds by £31.6m (5%). to these condensed consolidated financial statements.
Change in risk
Transactional foreign exchange risk arises principally with respect to US
No change dollars and Euros. The majority of the Group's Canadian and Australian
businesses' purchases are denominated in US dollars and Euros. The Group's US
businesses do not have any material foreign currency transactional risk.
This risk has remained at a similar level to last year.
Non-compliance with laws
Risk category The Group's businesses are affected by various statutes, regulations and The board of each business is accountable for identifying and monitoring what
standards in the countries and markets in which they operate. Diploma PLC laws are relevant to their business, including any emerging or changing
Operational risk itself is a listed entity subject to regulation and governance requirements. legislation, and for ensuring commercial legal risks are appropriately
managed.
The Head of Legal advises on legislative and regulatory changes relevant to
Board risk appetite the Group as a listed company and has oversight of all material transactions
including acquisitions.
Averse
Change in risk
Increase
Laws governing businesses continue to increase in volume, scope and
complexity. As the Group scales, businesses are increasingly subject to the
regulations of multiple jurisdictions that may not all align with one another.
Our businesses are facing a large number of regulatory changes over the coming
years in respect of environmental commitments and controls.
Consolidated Income Statement
For the year ended 30 September 2022
Note 2022 2021
£m £m
Revenue 2,3 1,012.8 787.4
Cost of sales (638.3) (499.0)
Gross profit 374.5 288.4
Distribution costs (25.9) (23.9)
Administration costs (204.3) (160.2)
Operating profit 2 144.3 104.3
Financial expense, net 4 (14.8) (7.7)
Profit before tax 129.5 96.6
Tax expense 5 (34.1) (26.9)
Profit for the year 95.4 69.7
Attributable to:
Shareholders of the Company 94.7 69.8
Minority interests 0.7 (0.1)
95.4 69.7
Earnings per share
Basic earnings 6 76.1p 56.1p
Diluted earnings 6 75.9p 55.9p
Alternative Performance Measures(1)
Note 2022 2021
£m £m
Operating profit 144.3 104.3
Add: Acquisition related and other charges included in administration costs 2 46.9 44.4
Adjusted operating profit 2,3 191.2 148.7
Deduct: Net interest and similar charges 4 (11.6) (6.8)
Adjusted profit before tax 179.6 141.9
Adjusted earnings per share 6 107.5p 85.2p
1 The adjusted numbers set out above are non-statutory measures which are
defined and reconciled in note 13 of the financial statements
Consolidated Statement of Comprehensive Income
For the year ended 30 September 2022
Note 2022 2021
£m £m
Profit for the year 95.4 69.7
Items that will not be reclassified to the Consolidated Income Statement
Actuarial gain on the defined benefit pension schemes 10.6 7.4
Deferred tax on items that will not be reclassified 5 (2.8) (0.8)
7.8 6.6
Items that may be reclassified to the Consolidated Income Statement
Exchange differences on translation of foreign operations 76.8 (16.2)
Gains on fair value of cash flow hedges 4.5 0.4
Net changes to fair value of cash flow hedges transferred to the Consolidated (0.4) 0.1
Income Statement
Deferred tax on items that may be reclassified 5 (1.1) (0.1)
79.8 (15.8)
Total Other Comprehensive Income 87.6 (9.2)
Total Comprehensive Income for the year 183.0 60.5
Attributable to:
Shareholders of the Company 182.2 60.8
Minority interests 0.8 (0.3)
183.0 60.5
Consolidated Statement of Changes in Equity
For the year ended 30 September 2022
Note Share Share premium Translation reserve Hedging reserve Retained earnings Shareholders' equity Minority interests Total
equity
capital £m £m £m £m £m £m
£m £m
At 1 October 2020 6.3 188.6 28.3 (0.3) 304.1 527.0 3.7 530.7
Total Comprehensive Income - - (16.2) 0.5 76.5 60.8 (0.3) 60.5
Share-based payments - - - - 1.8 1.8 - 1.8
Tax on items recognised directly in equity 5 - - - - 1.0 1.0 - 1.0
Notional purchase of own shares - - - - (0.5) (0.5) - (0.5)
Acquisition of business - - - - - - 0.9 0.9
Minority interest put option on acquisition - - - - (0.9) (0.9) - (0.9)
Minority interest issued - - - - - - 0.7 0.7
Dividends 11 - - - - (52.9) (52.9) (0.3) (53.2)
At 30 September 2021 6.3 188.6 12.1 0.2 329.1 536.3 4.7 541.0
Total Comprehensive Income - - 76.7 3.0 102.5 182.2 0.8 183.0
Share-based payments - - - - 2.8 2.8 - 2.8
Tax on items recognised directly in equity 5 - - - - 0.4 0.4 - 0.4
Notional purchase of own shares - - - - (2.8) (2.8) - (2.8)
Acquisition of business - - - - - - 2.5 2.5
Disposal of business - - - - - - (1.3) (1.3)
Minority interest put option on acquisition - - - - (1.9) (1.9) - (1.9)
Minority interest put option disposal - - - - 1.2 1.2 - 1.2
Minority interest acquired - - - - - - (0.3) (0.3)
Dividends 11 - - - - (56.2) (56.2) (0.2) (56.4)
At 30 September 2022 6.3 188.6 88.8 3.2 375.1 662.0 6.2 668.2
Consolidated Statement of Financial Position
As at 30 September 2022
Note 2022 2021
£m £m
Non-current assets
Goodwill 9 372.3 260.7
Acquisition intangible assets 455.0 344.9
Other intangible assets 4.1 3.4
Property, plant and equipment 49.6 35.4
Leases - right-of-use assets 62.4 44.9
Retirement benefit assets 6.4 -
Deferred tax assets 0.2 0.4
950.0 689.7
Current assets
Inventories 217.4 139.8
Trade and other receivables 169.9 117.8
Assets held for sale - 11.3
Cash and cash equivalents 8 41.7 24.8
429.0 293.7
Current liabilities
Borrowings 8 (30.5) (18.0)
Trade and other payables (189.5) (127.0)
Current tax liabilities 5 (11.8) (10.0)
Other liabilities (19.0) (11.7)
Lease liabilities (12.7) (9.7)
(263.5) (176.4)
Net current assets 165.5 117.3
Total assets less current liabilities 1,115.5 807.0
Non-current liabilities
Retirement benefit obligations - (4.9)
Borrowings 8 (340.1) (188.2)
Lease liabilities (56.4) (38.6)
Other liabilities (12.4) (12.0)
Deferred tax liabilities (38.4) (22.3)
Net assets 668.2 541.0
Equity
Share capital 6.3 6.3
Share premium 188.6 188.6
Translation reserve 88.8 12.1
Hedging reserve 3.2 0.2
Retained earnings 375.1 329.1
Total shareholders' equity 662.0 536.3
Minority interests 6.2 4.7
Total equity 668.2 541.0
Consolidated Cash Flow Statement
For the year ended 30 September 2022
Note 2022 2021
£m £m
Operating profit 144.3 104.3
Acquisition related and other charges 46.9 44.4
Non-cash items and other 18.1 9.8
Increase in working capital (28.7) (12.6)
Cash flow from operating activities 7 180.6 145.9
Interest paid, net (including borrowing fees) (15.0) (5.6)
Tax paid (40.6) (24.2)
Net cash from operating activities 125.0 116.1
Cash flow from investing activities
Acquisition of businesses (net of cash acquired) 10 (173.0) (451.4)
Deferred consideration paid (7.1) (6.6)
Proceeds from sale of business (net of cash disposed) 13.7 11.0
Purchase of property, plant and equipment (14.3) (4.9)
Purchase of other intangible assets (1.1) (1.3)
Proceeds from sale of property, plant and equipment 9.9 4.8
Net cash used in investing activities (171.9) (448.4)
Cash flow from financing activities
Proceeds from issue of share capital (net of fees) - (0.6)
Dividends paid to shareholders 11 (56.2) (52.9)
Dividends paid to minority interests (0.2) (0.3)
Proceeds from minority interests - 0.7
Acquisition of minority interests (0.3) -
Purchase of own shares by Employee Benefit Trust - -
Notional purchase of own shares on exercise of share options (2.8) (0.6)
Proceeds from borrowings 8 154.8 215.3
Repayment of borrowings 8 (20.0) (12.4)
Principal elements of lease payments (10.9) (9.5)
Net cash from financing activities 64.4 139.7
Net increase/(decrease) in cash and cash equivalents 17.5 (192.6)
Cash and cash equivalents at beginning of year 24.8 206.8
Effect of exchange rates on cash and cash equivalents (0.6) 10.6
Cash and cash equivalents at end of year 41.7 24.8
Alternative Performance Measures(1)
Note 2022 2021
£m £m
Free cash flow 13 120.4 108.8
Adjusted earnings 13 133.9 106.1
Free cash flow conversion % 13 90% 103%
1 The adjusted numbers set out above are non-statutory measures which are
defined and reconciled in note 13 of the financial statements
Notes to the Consolidated Financial Statements
For the year ended 30 September 2022
1. General information
Diploma PLC is a public company limited by shares incorporated in the United
Kingdom, registered and domiciled in England and Wales and listed on the
London Stock Exchange. The address of the registered office is 10-11
Charterhouse Square, London EC1M 6EE. 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 21 November
2022. These statements are presented in UK sterling, with all values rounded
to the nearest 100,000, except where otherwise indicated.
On 31 December 2020, IFRS as adopted by the European Union at that date was
brought into UK law and became UK-adopted International Accounting Standards,
with future changes being subject to endorsement by the UK Endorsement Board.
Diploma PLC transitioned to UK-adopted International Accounting Standards in
its consolidated financial statements on 1 October 2021. This change
constitutes a change in accounting framework. However, there is no impact on
recognition, measurement or disclosure in the period reported as a result of
the change in framework. The consolidated financial statements of the Group
have been prepared in accordance with UK-adopted International Accounting
Standards and with the requirements of the Companies Act 2006 as applicable to
companies reporting under those standards. The accounting policies have been
consistently applied in the current and comparative year.
The financial information set out in this Preliminary Announcement, which has
been extracted from the audited consolidated financial statements, does not
constitute the Group's statutory financial statements for the years ended 30
September 2022 and 2021. Statutory financial statements for the year ended 30
September 2022 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 2022, which were approved by the
Directors on 21 November 2022, will be sent to shareholders in December 2022
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 2022 and 2021. 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 9:00am on 18 January 2023
in The Charterhouse, Charterhouse Square, EC1M 6AN. The Notice of Meeting will
be sent out in a separate Circular to shareholders.
2. Business Sector analysis
The Chief Operating Decision Maker ("CODM") for the purposes of IFRS 8 is the
CEO. The financial performance of the business Sectors is 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 this operating segment level. 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,
retirement benefit assets, acquisition related assets and corporate assets
that cannot be allocated on a reasonable basis to a business Sector. Sector
liabilities exclude borrowings (other than lease liabilities), retirement
benefit obligations, deferred tax liabilities, acquisition related 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 Corporate Group
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m £m £m £m £m
Revenue - existing 178.0 180.4 294.4 263.7 481.9 343.3 - - 954.3 787.4
Revenue - acquisitions 10.6 - 37.0 - 10.9 - - - 58.5 -
Revenue 188.6 180.4 331.4 263.7 492.8 343.3 - - 1,012.8 787.4
Adjusted operating profit - existing 39.7 43.2 57.0 46.5 104.0 72.4 (18.2) (13.4) 182.5 148.7
Adjusted operating profit - acquisitions 1.3 - 5.6 - 1.8 - - - 8.7 -
Adjusted operating profit 41.0 43.2 62.6 46.5 105.8 72.4 (18.2) (13.4) 191.2 148.7
Acquisition related and other charges 1.5 (4.6) (16.6) (9.7) (30.5) (30.1) (1.3) - (46.9) (44.4)
Operating profit 42.5 38.6 46.0 36.8 75.3 42.3 (19.5) (13.4) 144.3 104.3
Operating assets 74.0 51.2 207.5 134.4 211.5 164.8 - - 493.0 350.4
Goodwill 106.2 81.4 125.2 60.0 140.9 119.3 - - 372.3 260.7
Acquisition intangible assets 74.9 47.2 100.2 50.4 279.9 247.3 - - 455.0 344.9
255.1 179.8 432.9 244.8 632.3 531.4 - - 1,320.3 956.0
Unallocated assets:
- Deferred tax assets 0.2 0.4 0.2 0.4
- Cash and cash equivalents 41.7 24.8 41.7 24.8
- Acquisition related assets 1.8 - 1.8 -
- Retirement benefit assets 6.4 - 6.4 -
- Corporate assets 8.6 2.2 8.6 2.2
Total assets 255.1 179.8 432.9 244.8 632.3 531.4 58.7 27.4 1,379.0 983.4
Operating liabilities (41.7) (30.2) (103.3) (58.4) (92.6) (68.1) - - (237.6) (156.7)
Unallocated liabilities:
- Deferred tax liabilities (38.4) (22.3) (38.4) (22.3)
- Retirement benefit obligations - (4.9) - (4.9)
- Acquisition related liabilities (31.4) (23.7) (31.4) (23.7)
- Corporate liabilities (32.8) (28.6) (32.8) (28.6)
- Borrowings (370.6) (206.2) (370.6) (206.2)
Total liabilities (41.7) (30.2) (103.3) (58.4) (92.6) (68.1) (473.2) (285.7) (710.8) (442.4)
Net assets 213.4 149.6 329.6 186.4 539.7 463.3 (414.5) (258.3) 668.2 541.0
Acquisition related and other charges are £46.9m (2021: £44.4m) and comprise
£42.4m (2021: £33.1m) of amortisation of acquisition intangible assets,
£10.5m of acquisition expenses as defined in note 13 (2021: £9.7m), a £7.3m
(2021: £1.6m net charge) net gain on the disposal of businesses, which is set
out in note 10, and one-off restructuring costs of £1.3m associated with the
transition of the Group's Chief Financial Officer.
Other Sector information
Life Sciences Seals Controls Corporate Group
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m £m £m £m £m
Capital expenditure 8.0 2.3 3.7 2.5 2.7 1.1 0.9 0.3 15.3 6.2
Depreciation and amortisation 2.9 2.6 3.5 2.9 4.6 4.1 0.2 0.3 11.2 9.9
Revenue recognition
- immediately on sale 176.4 164.2 315.6 260.1 492.8 343.3 - - 984.8 767.6
- over a period of time 12.2 16.2 15.8 3.6 - - - - 28.0 19.8
188.6 180.4 331.4 263.7 492.8 343.3 - - 1,012.8 787.4
Accrued income ("contract assets") at 30 September 2022 of £0.1m (2021:
£0.8m) and deferred revenue ("contract liabilities") of £3.5m at 30
September 2022 (2021: £2.5m) are included in trade and other receivables and
trade and other payables, respectively.
3. Geographic segment analysis by origin
Revenue Adjusted operating profit Non-current assets(1) Trading capital employed Capital expenditure
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m £m £m £m £m
United Kingdom 209.7 142.5 21.0 10.5 193.6 82.5 202.2 83.4 3.4 0.5
Rest of Europe 166.7 166.5 29.3 31.9 169.1 115.3 179.8 140.3 1.7 0.8
North America 561.0 411.8 129.5 94.7 519.2 443.7 614.2 496.1 8.9 4.1
Rest of world 75.4 66.6 11.4 11.6 57.1 47.8 62.3 53.1 1.3 0.8
1,012.8 787.4 191.2 148.7 939.0 689.3 1,058.5 772.9 15.3 6.2
1 Non-current assets excludes deferred tax assets, derivative assets and
the retirement benefit asset.
4. Financial expense, net
2022 2021
£m £m
Interest (expense)/income and similar charges
- bank facility and commitment fees (1.0) (0.5)
- interest income on short term deposits 0.1 -
- interest expense on bank borrowings (7.9) (4.1)
- notional interest expense on the defined benefit pension scheme - (0.1)
- amortisation of capitalised borrowing fees (0.2) (0.3)
- interest on lease liabilities (2.6) (1.8)
Net interest expense and similar charges (11.6) (6.8)
- acquisition related finance charges (3.2) (0.9)
Financial expense, net (14.8) (7.7)
Acquisition related finance charges includes fair value remeasurements of put
options for future minority purchases of £1.4m debit
(2021: £0.1m debit), unwind of discount on acquisition liabilities of £0.4m
debit (2021: £nil), and £1.4m debit (2021: £0.8m debit) for the
amortisation of capitalised borrowing fees on acquisition related borrowings.
5. Tax expense
2022 2021
£m £m
Current tax
The tax charge is based on the profit for the year and comprises:
UK corporation tax 10.0 5.5
Overseas tax 30.8 21.5
40.8 27.0
Adjustments in respect of prior year:
UK corporation tax (0.2) 2.1
Overseas tax 0.1 0.5
Total current tax 40.7 29.6
Deferred tax
The net deferred tax credit based on the origination and reversal of timing
differences comprises:
United Kingdom (3.1) (1.9)
Overseas (3.5) (0.8)
Total deferred tax (6.6) (2.7)
Total tax on profit for the year 34.1 26.9
In addition to the above credit for deferred tax included in the Consolidated
Income Statement, a net deferred tax charge relating to the retirement benefit
scheme and cash flow hedges of £3.9m was debited (2021: £0.9m debit) to the
Consolidated Statement of Comprehensive Income. A further £0.4m was credited
(2021: £1.0m credit) to the Consolidated Statement of Changes in Equity,
comprising current tax of £0.4m (2021: £0.8m) with nil deferred tax in the
current year (2021: £0.2m), the prior year relates to share-based payments.
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
£129.5m and the amount set out above is as follows:
2022 2021
£m £m
Profit before tax 129.5 96.6
Tax on profit at UK effective corporation tax rate of 19.0% (2021: 19.0%) 24.6 18.4
Effects of:
- higher tax rates on overseas earnings 6.7 4.7
- adjustments in respect of prior years (0.1) 2.6
- change to future tax rate in the United Kingdom - 0.5
- other permanent differences 2.9 0.7
Total tax on profit for the year 34.1 26.9
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
statutory tax rate for UK corporation tax in respect of the year ended 30
September 2022 was 19.0% (2021: 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 profits earned in the US, Canada, Germany and Australia are taxed at
higher rates than the UK. The UK deferred tax assets and liabilities at 30
September 2022 have been calculated by reference to the future UK corporation
tax rate of 25.0% (2021: 25.0%), as substantively enacted to be effective from
1 April 2023.
At 30 September 2022, the Group had outstanding tax liabilities of £11.8m
(2021: £10.0m) of which £1.9m (2021: £2.7m) related to UK tax liabilities
and £9.9m (2021: £7.3m) related to overseas tax liabilities. These amounts
are expected to be paid within the next financial year.
6. Earnings per share
Basic and diluted earnings per share
Basic earnings per ordinary 5p share are calculated on the basis of the
weighted average number of ordinary shares in issue during the year of
124,533,060 (2021: 124,468,210) and the profit for the year attributable to
shareholders of £94.7m (2021: £69.8m). Basic earnings per share is 76.1p
(2021: 56.1p). Diluted earnings per share is 75.9p (2021: 55.9p) and is based
on the average number of ordinary shares (which includes any potentially
dilutive shares) of 124,855,007 (2021: 124,794,473).
Adjusted earnings per share
Adjusted EPS, which is defined in note 13, is 107.5p (2021: 85.2p).
2022 2021 2022 2021
pence per share pence per share £m £m
Profit before tax 129.5 96.6
Tax expense (34.1) (26.9)
Minority interests (0.7) 0.1
Earnings for the year attributable to shareholders of the Company 76.1 56.1 94.7 69.8
Acquisition related and other charges and acquisition related finance charges, 31.4 29.1 39.2 36.3
net of tax
Adjusted earnings 107.5 85.2 133.9 106.1
Reconciliation of operating profit to cash flow from operating activities
2022 2022 2021 2021
£m £m £m £m
Operating profit 144.3 104.3
Acquisition related and other charges (note 2) 46.9 44.4
Adjusted operating profit 191.2 148.7
Depreciation or amortisation of tangible, other intangible assets and leases - 23.9 20.7
right-of-use assets
Share-based payments expense 2.8 1.8
Defined benefit pension scheme payment in excess of interest (0.6) (5.8)
Profit on disposal of assets (1.6) (2.8)
Acquisition and disposal expenses paid (6.5) (4.2)
Other non-cash movements 0.1 0.1
Non-cash items and other 18.1 9.8
Operating cash flow before changes in working capital 209.3 158.5
Increase in inventories (35.6) (13.5)
Increase in trade and other receivables (10.6) (16.3)
Increase in trade and other payables 17.5 17.2
Increase in working capital (28.7) (12.6)
Cash flow from operating activities 180.6 145.9
8. (Net debt)/cash funds
The movement in (net debt)/cash funds during the year is as follows:
1 Oct 2021 Cash flow(1) Exchange movements Other non-cash movements 30 Sep 2022
£m £m £m £m £m
Cash and cash equivalents 24.8 17.5 (0.6) - 41.7
Borrowings (206.2) (131.3) (30.9) (2.2) (370.6)
Net debt (181.4) (113.8) (31.5) (2.2) (328.9)
1 Oct 2020 Cash flow Exchange movements Other non-cash movements 30 Sep 2021
£m £m £m £m £m
Cash and cash equivalents 206.8 (192.6) 10.6 - 24.8
Borrowings - (202.9) (1.8) (1.5) (206.2)
Cash funds/(net debt) 206.8 (395.5) 8.8 (1.5) (181.4)
¹ The borrowings cash flow includes £3.5m of debt fees which have been
capitalised and are included within interest paid in the Consolidated Cash
Flow Statement.
On 13 October 2020, the Group entered into a debt facility agreement ("SFA")
which comprised a three-year term loan for an aggregate principal amount of
£136.0m ($170.0m) and a committed multi-currency revolving facility ("RCF")
for an aggregate principal amount of £135.0m, which was increased to £185.0m
during the previous financial year.
During the year, the Group has amended the SFA to increase the total facility
size. As at 30 September 2022, the SFA comprises a committed multi-currency
revolving facility ("RCF") for an aggregate principal amount of £359.7m, an
amortising term loan for an aggregate principal amount of £114.2m ($127.5m),
a bullet term loan for an aggregate principal amount of £59.1m ($66.0m) and a
further bullet term loan for an aggregate principal amount of £45.3m. The SFA
is due to expire in December 2024 and there is an option to extend for a
further 12-month period.
The Group's debt facilities are subject to interest at variable rates. During
the year the Group entered into interest rate swap contracts with the effect
of fixing the interest rate on $100.0m (£89.6m) of debt. The effective fixed
rate debt was 24% of total debt. Subsequent to year end, the Group has entered
into further interest rate swap contracts with the effect of fixing the
interest rate on an additional $100.0m of debt.
At 30 September 2022, the Group's Net Debt/EBITDA ratio is 1.4x, as
illustrated in note 13.
As at 30 September 2022, the term loans have an aggregate outstanding
principal amount of £173.3m ($193.5m) and the Group has utilised £201.0m of
the revolving facility. There remains £158.7m undrawn on the revolving
facility and £45.3m undrawn on the bullet term loan. Borrowings include
£1.0m (2021: £0.4m) of accrued interest and the carrying amount of
capitalised debt fees is £4.7m (2021: £2.8m).
As at 30 September 2021, under the SFA the Group had a drawn term loan with an
aggregate principal amount of £113.5m ($153.0m) and drawings of £95.1m under
the revolving facility. As at 30 September 2021 the undrawn revolving facility
amount was £89.9m.
Total net debt is £398.0m (2021: £229.7m) comprising cash funds of £41.7m
(2021: £24.8m), borrowings of £370.6m (2021: £206.2m), and lease
liabilities of £69.1m (2021: £48.3m). Bank covenants are tested against net
debt funds only (i.e. excluding lease liabilities).
Goodwill
Life Sciences Seals Controls Total
£m £m £m £m
At 30 September 2020 62.0 60.5 36.5 159.0
Acquisitions 24.1 6.8 86.7 117.6
Disposals (3.8) - - (3.8)
Reclassification to held for sale - (4.7) - (4.7)
Exchange adjustments (0.9) (2.6) (3.9) (7.4)
At 30 September 2021 81.4 60.0 119.3 260.7
Acquisitions 19.0 56.8 5.2 81.0
Exchange adjustments 5.8 8.4 16.4 30.6
At 30 September 2022 106.2 125.2 140.9 372.3
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 ("CGUs"), 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.
The key assumptions used to prepare the cash flow forecasts relate to
operating margins, revenue growth rates, working capital movements and the
discount rate and climate related risks (based on an initial high level
assessment which will be further refined in FY 2023). The operating 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; working capital movements
are projected to remain consistent as a percentage of revenue. The cash flow
forecasts use the budgeted figures for 2023, and then the three-year strategy
cash flows for the next two years. From year four onwards a long-term growth
rate of 2% is utilised.
The cash flow forecasts are discounted to determine a current valuation using
market derived pre-tax discount rates; Life Sciences 13.9% (2021: 10.6%),
Seals 13.8% (2021: 11.3%) and Controls 13.8% (2021: 11.7%). These rates are
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.
Based on the criteria set out above, no impairment in the value of goodwill in
the CGUs 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 CGUs.
10. Acquisitions and disposals of businesses
Acquisition of R&G Fluid Power Group Limited
On 6 April 2022, the Group completed the acquisition of 98% of the share
capital of R&G Fluid Power Group Limited ("R&G"), a value-added
aftermarket distributor of a diverse range of industrial, hydraulic and
pneumatic products in the United Kingdom. The initial cash payment was
£91.7m, net of cash acquired of £1.7m. Deferred consideration of up to
£7.4m is payable based on the acquired business achieving certain performance
targets in the period up to 31 December 2022.
Acquisition expenses of £2.3m have been recognised in FY 2022.
The provisional fair value of R&G net assets acquired excluding
acquisition intangibles, related deferred tax, and cash is £13.3m following
fair value adjustments of £1.3m. The goodwill represents the technical
expertise of the acquired workforce and the opportunity to leverage any
revenue synergies through cross-selling within other businesses. The principal
fair value adjustments relate to an increase in the provisions held against
inventory (£0.6m) and recognition of a dilapidations provision (£0.5m). The
intangible assets of £47.6m relates to customer relationships (£43.9m) and
brand (£3.7m).
Minority interests of £2.5m have been recognised at fair value upon
acquisition of R&G, comprising the 2% minority interest held in R&G,
as well as the 10% minority interest stake in Pneumatic Services Limited, a
company for which R&G owned 90% of the share capital at the time of
acquisition by the Group.
Acquisition of Accuscience
On 10 May 2022, the Group completed the acquisition of 100% of the share
capital of Medilink Services (NI) Limited and Accu-Science Ireland Limited,
(collectively "Accuscience") a market-leading life sciences and med-tech
distributor in Ireland, for consideration of £49.9m (€58.2m), net of cash
acquired of £3.2m (€3.8m).
Acquisition expenses of £1.0m have been recognised in FY 2022.
The provisional fair value of Accuscience net assets acquired excluding
acquisition intangibles, related deferred tax, and cash is
£2.2m (€2.3m) following fair value adjustments of £0.8m (€0.9m). The
provisions held against inventory and trade receivables were increased by
£0.6m (€0.7m) and £0.2m (€0.2m), respectively.
Other acquisitions
The Group completed a further five other acquisitions during the year. This
comprised the purchase of the trade and assets of Silicone Solutions Limited
("Silicone Solutions") (9 September 2022); 100% of the share capital of LJR
Electronics, LLC ("LJR") (2 February 2022), Anti Corrosion Technology Pty
Limited ("ACT") (29 July 2022), Hydraproducts Limited ("Hydraproducts") (12
May 2022) and AMG Sealing Limited ("AMG") (19 May 22).
The combined initial consideration for these acquisitions was £30.6m, net of
cash acquired of £1.2m. Deferred consideration of up to £3.6m is payable
based on the performance of the businesses.
Acquisition expenses of £0.7m have been recognised in respect of these
transactions in the financial year.
The provisional fair value of the combined net assets acquired excluding
acquisition intangibles, related deferred tax, and cash is £9.2m following
fair value adjustments of £1.2m. Fair value adjustments principally relate to
an increase in provisions held against inventory of £0.9m.
The following table summarises the consideration paid for the acquisitions
completed in the period and fair value of assets acquired and liabilities
assumed, with fair values being provisional pending completion of a final
valuation. Given the limited time between the acquisitions and signing of
these accounts, the fair valuation of acquired assets and liabilities
(principally intangible assets and working capital provisions) is incomplete
at the date of these financial statements.
During the year an additional £0.8m was paid out in relation to completion
account adjustments on previous transactions.
R&G Accuscience Others Total
Book value Fair value Book value Fair value Book value Fair value Book value Fair value
£m £m £m £m £m £m £m £m
Acquisition intangible assets(1) - 47.6 - 33.1 - 17.5 - 98.2
Deferred tax (0.7) (12.5) - (4.3) - (1.7) (0.7) (18.5)
Property, plant and equipment 5.9 5.9 0.7 0.7 0.1 0.1 6.7 6.7
Inventories 14.4 13.8 4.7 4.1 9.1 8.2 28.2 26.1
Trade and other receivables 14.4 14.3 5.5 5.3 2.8 2.7 22.7 22.3
Trade and other payables (19.4) (20.0) (7.9) (7.9) (1.6) (1.8) (28.9) (29.7)
Net assets acquired 14.6 49.1 3.0 31.0 10.4 25.0 28.0 105.1
Goodwill - 52.5 - 18.9 - 9.2 - 80.6
Minority interests - (2.5) - - - - - (2.5)
Cash paid 93.4 53.1 31.8 178.3
Cash acquired (1.7) (3.2) (1.2) (6.1)
91.7 49.9 30.6 172.2
Deferred consideration 7.4 - 3.6 11.0
Total investment 99.1(2) 49.9 34.2 183.2
1 On the acquisitions completed in the current year, acquired intangibles
relate to customer relationships (£94.5m) and brand (£3.7m).
2 Diploma acquired R&G on a cash free/debt free basis. The total
investment amounts to £99.1m (being cash paid (net of cash acquired) of
£91.7m and deferred consideration of £7.4m). Of the initial cash paid, the
vendor directed the funds in escrow to settle outstanding debt of £11.7m. The
table below details this flow of funds:
£m
Total investment
99.1
Debt settled
(11.7)
Net consideration 87.4
Acquisitions revenue and adjusted operating profit
From the date of acquisition to 30 September 2022, each acquired business
contributed the following to Group revenue and adjusted operating profit:
Acquisition date Revenue Adj.(2) Pro forma revenue Operating Adj.(2) Pro forma operating
£m £m £m profit(1) £m profit(1)
£m £m
LJR 2 Feb 2022 10.8 5.4 16.2 1.8 0.9 2.7
R&G 6 Apr 2022 34.3 34.3 68.6 4.8 4.9 9.7
Accuscience 10 May 2022 10.6 17.6 28.2 1.3 2.0 3.3
Hydraproducts 12 May 2022 1.6 2.5 4.1 0.4 0.6 1.0
AMG 19 May 2022 0.5 0.9 1.4 0.1 0.2 0.3
ACT 29 July 2022 0.6 3.0 3.6 0.3 1.5 1.8
Silicone Solutions 9 Sep 2022 0.1 2.1 2.2 0.0 0.8 0.8
58.5 65.8 124.3 8.7 10.9 19.6
1 Adjusted operating profit.
2 Pro forma revenue and adjusted operating profit have been extrapolated
(as prescribed under IFRS) 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 2021. 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.
Disposals
On 16 November 2021, the Group disposed of its 90% interest in Kentek Oy
("Kentek") for proceeds of £10.0m. A charge of £1.6m has been recognised
within administration costs principally relating to the recycling of
cumulative foreign currency translation losses arising on the disposal of
Kentek.
On 3 May 2022, the Group disposed of its 100% interest in a1-envirosciences
Limited and a1-envirosciences GmbH (collectively "a1-envirosciences") for
proceeds of £11.4m. A gain of £8.9m has been recognised within
administration costs comprising the profit on disposal of £8.7m and the
recycling of cumulative foreign currency translation gains of £0.2m.
Deferred Consideration
Deferred consideration was £24.0m (2021: £18.5m) as at 30 September 2022 and
principally relates to R&G, AHW, Kungshusen and ACT. During the year
£7.1m was paid.
11. Dividends
2022 2021 2022 2021
pence per share pence per share £m £m
Interim dividend, paid in June 15.0 12.5 18.7 15.6
Final dividend of the prior year, paid in February 30.1 30.0 37.5 37.3
45.1 42.5 56.2 52.9
The Directors have proposed a final dividend in respect of the current year of
38.8p per share (2021: 30.1p), which will be paid on 3 February 2023 subject
to approval by shareholders at the Annual General Meeting ("AGM") on 18
January 2023. The total dividend for the current year, subject to approval of
the final dividend, will be 53.8p per share (2021: 42.6p).
The Diploma PLC Employee Benefit Trust holds 71,033 (2021: 90,640) shares,
which are ineligible for dividends.
12. Exchange rates
The exchange rates used to translate the results of the overseas businesses
are as follows:
Average Closing
2022 2021 2022 2021
US dollar (US$) 1.27 1.37 1.12 1.35
Canadian dollar (C$) 1.63 1.73 1.53 1.71
Euro (€) 1.18 1.15 1.14 1.16
Swiss franc (CHF) 1.20 1.25 1.10 1.26
Australian dollar (AUD) 1.79 1.83 1.74 1.87
13. Alternative performance measures
The Group uses a number of alternative (non-Generally Accepted Accounting
Practice ("non-GAAP")) financial measures which are not defined within IFRS.
The Directors use these measures for internal management reporting of key
performance indicators ("KPIs") in order to assess the operational performance
of the Group on a comparable basis against the Group's KPIs, as a key
constituent of the Group's planning process, as well as comprising targets
against which compensation is determined. As such these measures should be
considered alongside the IFRS measures. The following non-GAAP measures are
referred to in this Annual Report & Accounts:
13.1 Adjusted operating profit and adjusted operating margin
"Adjusted operating profit" is defined as operating profit before amortisation
and impairment of acquisition intangible assets or goodwill, acquisition
expenses, post-acquisition related remuneration costs and adjustments to
deferred consideration, the costs of a material restructuring or
rationalisation of operations and the profit or loss relating to the sale of
businesses. The Directors believe that adjusted operating profit is an
important measure of the operational performance of the Group. Adjusted
operating margin is the Group's adjusted operating profit divided by the
Group's revenue.
Note 2022 2021
£m £m
Revenue 1,012.8 787.4
Operating profit 144.3 104.3
Add: Acquisition related and other charges included in administration costs 46.9 44.4
Adjusted operating profit 2,3 191.2 148.7
Adjusted operating margin 18.9% 18.9%
13.2 Adjusted profit before tax
"Adjusted profit before tax" is defined as adjusted operating profit, after
net finance expenses (but before acquisition related finance charges) and
before tax. The Directors believe that adjusted profit before tax is an
important measure of the operational performance of the Group.
2022 2021
£m £m
Adjusted operating profit 2,3 191.2 148.7
Deduct: Net interest expense and similar charges 4 (11.6) (6.8)
Adjusted profit before tax 179.6 141.9
13.3 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/(loss) attributable to minority interests, divided by the weighted
average number of ordinary shares in issue during the year of 124,533,060
(2021: 124,468,210). The Directors believe that adjusted EPS provides an
important measure of the earnings capacity of the Group.
2022 2021 2022 2021
pence per share pence per share £m £m
Profit before tax 129.5 96.6
Tax expense (34.1) (26.9)
Minority interests (0.7) 0.1
Earnings for the year attributable to shareholders of the Company 76.1 56.1 94.7 69.8
Acquisition related and other charges and acquisition related finance charges, 31.4 29.1 39.2 36.3
net of tax
Adjusted earnings 107.5 85.2 133.9 106.1
13.4 Free cash flow and free cash flow conversion
"Free cash flow" is defined as net cash flow from operating activities, after
net capital expenditure on tangible and intangible assets, and including
proceeds received from property disposals, but before expenditure on business
combinations/investments (including any pre-acquisition debt like items such
as pensions or tax settled post acquisition) and proceeds from business
disposals, borrowings received to fund acquisitions and dividends paid to both
minority shareholders and the Company's shareholders. "Free cash flow
conversion" reflects free cash flow as a percentage of adjusted earnings.
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.
Note 2022 2021
£m £m
Net increase/(decrease) in cash and cash equivalents 17.5 (192.6)
Add: Dividends paid to shareholders 11 56.2 52.9
Dividends paid to minority interests 0.2 0.3
Acquisition of minority interests 0.3 -
Proceeds from minority interests - (0.7)
Acquisition of businesses and payments of pre-acquisition debt-like items (net 177.6 451.4
of cash acquired)
Acquisition and disposal expenses paid 7 6.5 4.2
Proceeds from sale of business (net of expenses) 10 (13.7) (11.0)
Proceeds from issue of share capital (net of fees) - 0.6
Deferred consideration paid 7.1 6.6
(Proceeds from)/repayment of borrowings (net) 8 (131.3) (202.9)
Free cash flow 120.4 108.8
Adjusted earnings 133.9 106.1
Free cash flow conversion 90% 103%
13.5 Trading capital employed and ROATCE
The below reconciliation includes "trading capital employed", being defined as
net assets less cash and cash equivalents ("cash funds") and after adding
back: borrowings (other than lease liabilities); 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) and re-translated at 12 month average exchange
rates. Return on adjusted trading capital employed ("ROATCE") is defined as
the pro forma adjusted operating profit, divided by adjusted trading capital
employed, where pro forma adjusted operating profit is adjusted operating
profit 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.
2022 2021
£m £m
Net assets 668.2 541.0
Add/(deduct):
- Deferred tax, net 38.2 21.9
- Retirement benefit (assets)/obligations (6.4) 4.9
- Acquisition related liabilities/assets, net 29.6 23.7
- Net debt 328.9 181.4
Reported trading capital employed 1,058.5 772.9
- Historic goodwill and acquisition related charges, net of deferred tax and 99.6 129.6
currency movements
Adjusted trading capital employed 1,158.1 902.5
Adjusted operating profit 191.2 148.7
Pro forma adjustments(1) 9.7 8.7
Pro forma adjusted operating profit 200.9 157.4
ROATCE 17.3% 17.4%
1 Adjustment for annualisation of adjusted operating profit of
acquisitions and disposals.
13.6 Net debt to EBITDA
Net debt to EBITDA is the net debt, defined as cash and cash equivalents and
borrowings translated at 12 month average exchange rates, divided by EBITDA as
defined in the Group's external facility covenants, which is the Group's
adjusted operating profit adjusting for depreciation and amortisation of
tangible and other intangible assets, the share of adjusted EBITDA
attributable to minority interests, the annualisation of EBITDA for
acquisitions and disposals made during the financial year and to remove the
impact of IFRS 16 (Leases). The Directors consider this metric to be an
important measure of the Group's financial position.
Note 2022 2021
£m £m
Cash and cash equivalents 8 41.7 24.8
Borrowings 8 (370.6) (206.2)
Re-translation at average exchange rates 23.1 1.6
Net debt (average exchange rates) (305.8) (179.8)
Adjusted operating profit 191.2 148.7
Depreciation and amortisation of tangible and other intangible assets 11.2 9.9
IFRS 16 impact 1.2 (0.5)
Minority interest share of adjusted EBITDA (1.1) (0.8)
Pro forma adjustments(1) 10.2 8.3
EBITDA 212.7 165.6
Net debt to EBITDA 1.4x 1.1x
1 Adjustment for annualisation of adjusted EBITDA of acquisitions and
disposals.
13.7 Dividend cover
Dividend cover is adjusted earnings per share (as per note 13.3) divided by
the total dividend for the year (interim and final proposed).
Note 2022 2021
Adjusted earnings per share 6 107.5 85.2
Total dividend for the year (interim and final proposed) 11 53.8 42.6
Dividend cover 2.0 2.0
(( 1 (#_ftnref1) )) Approximately half fixed post-year end.
2 (#_ftnref2) (Pro forma adjusted for acquisitions and disposals completed
during the year)
3 (#_ftnref3) Pro forma adjusted for acquisitions and disposals completed
during the year.
4 (#_ftnref4) Pro forma adjusted for acquisitions and disposals completed
during the year
5 (#_ftnref5) Pro forma adjusted for acquisitions and disposals completed
during the year
6 (#_ftnref6) Approximately half fixed post-year end.
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