Diploma Regulatory News (DPLM)

13 Nov 2006 07:01

Diploma PLC13 November 2006 FOR IMMEDIATE RELEASE 13 November 2006 ANNOUNCEMENT OF PRELIMINARY RESULTS FOR YEAR ENDED 30 SEPTEMBER 2006 2006 2005 £m £m Revenue 128.2 111.3 +15% Operating profit* 19.4 16.5 +18% Profit before tax 31.2 17.2 +81% Adjusted profit before tax 20.4 17.2 +19% Free cash flow 24.3 11.9 +104% Pence Pence Basic earnings per share 105.5 52.4 +101% Adjusted earnings per share 62.8 53.7 +17% Dividends per share 23.0 20.0 +15% Free cash flow per share 108.2 52.9 +105% * before sale of property and amortisation of acquisition intangibles • Another year of strong growth in revenue and operating profit (before sale of property), up 15% and 18% respectively; underlying increase in both revenue and operating profit was 8%, excluding the contribution from HKX acquired in November 2005 and foreign exchange gains. • Results driven by strong growth in the North American businesses and by a focus on the more buoyant sectors in Europe, including Defence, Aerospace, Motorsport and Environmental. Operating margins increased to 15.1% (2005: 14.8%). • Acquisition of CBISS after the year end strengthens Environmental business in the UK. • Property profit of £11.1m realised on sale of Phase 3 of Stamford land; no further disposals expected in foreseeable future. • Final dividend of 15.0p per share (2005: 13.0p); total dividend for year up 15% at 23.0p (2005: 20.0p). • Strong free cash flow of £24.3m benefited from net cash proceeds of £11.0m from sale of Phase 3 Stamford land. Cash funds at 30 September 2006 of £36.7m. Commenting on the results for the year, Bruce Thompson, Diploma's Chief Executive said: " The Group delivered another strong set of results in 2006, through acombination of organic growth and acquisition. With more modest organic growthlikely in its core businesses this financial year, the continued strong growthof the Group will be more dependent on further high quality acquisitions." Notes: The financial results for the year ended 30 September 2006 represents theGroup's first full year financial statements prepared in accordance with IFRS. As a consequence, the 2005 results have been restated. Diploma PLC uses alternative performance measures as key financial indicators toassess the underlying performance of the Group. These include adjusted profitbefore tax, adjusted earnings per share and free cash flow. The narrative inthis Announcement is based on these alternative measures and an explanation isset out in note 2 to the consolidated financial statements in this PreliminaryAnnouncement. For further enquiries please contact: Bruce Thompson, Chief Executive Officer 020 7638 0934 Nigel Lingwood, Group Finance Director 020 7448 4875 Ian Seaton, Bankside Consultants 020 7367 8891 NOTE TO EDITORS: Diploma PLC is an international group of specialised distribution businessesoperating in three sectors: Life Sciences - suppliers of consumables, instrumentation and related servicesto research, environmental and clinical diagnostic laboratories. Principalcompanies are Anachem, a1-envirosciences and CBISS in Europe and Somagen inCanada. Seals - Suppliers of hydraulic seals, gaskets, cylinders and attachment kits forheavy mobile machinery. Principal companies are Hercules Bulldog SealingProducts and HKX in North America and FPE in the UK. Controls - Suppliers of specialised wiring, connectors, control devices andfasteners for a range of technically demanding applications. Principalcompanies are IS Group in the UK and US, Sommer Filcon in Germany and Hawco inthe UK. Within each of these sectors, the Diploma businesses serve industry segmentswith long term growth potential and with the opportunity for sustainablesuperior margins through the quality of customer service, depth of technicalsupport and value adding activities. Further information on Diploma PLC can be found at www.diplomaplc.com PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2006 CHAIRMAN'S STATEMENT This has been another year of excellent performance for Diploma. The Groupachieved another year of double digit profit growth and strong free cash flow. The successful sale of Phase 3 of the Stamford land provided a further boost tothe Group's cash resources. These will be used to pursue the Group's strategy ofbuilding more substantial, broader based businesses through a combination oforganic growth and acquisition. Strong Growth Group revenue increased by 15% to £128.2m (2005: £111.3m) largely driven bystrong growth in the North American businesses and by a focus on the morebuoyant sectors in Europe, including Defence, Aerospace, Motorsport andEnvironmental. Operating profit, before the sale of property and amortisation ofacquisition intangibles, increased by 18% to £19.4m (2005: £16.5m) and operatingmargins strengthened to 15.1% (2005: 14.8%). Sales and operating profitbenefited from contributions of £5.3m and £0.9m respectively from HKX, acquiredon 29 November 2005. Adjusted profit before tax increased by 19% to £20.4m (2005: £17.2m), whileheadline IFRS profit before tax was £31.2m (2005: £17.2m), reflecting the profitof £11.1m realised from the sale of the Stamford land in February 2006. Adjustedearnings per share grew by 17% to 62.8p (2005: 53.7p) and headline IFRS earningsper share were 105.5p. The net cash proceeds of £11.0m received during the year from the sale of theStamford land contributed to free cash flow in 2006 of £24.3m (2005: £11.9m).Underlying cash flow generated by the businesses also improved, reflecting thecontinuing active management of working capital. After investing a total of£8.0m in the acquisition of HKX and in payments of deferred consideration, theGroup's cash funds increased by £11.0m during the year to £36.7m at 30 September2006. Dividends The Directors are recommending an increased final dividend of 15.0p per share(2005: 13.0p). This increases the total dividend payment for the year to 23.0p(2005: 20.0p), an increase of 15%. Subject to approval at the Annual GeneralMeeting, the final dividend will be paid on 17 January 2007 to shareholders onthe register at the close of business on 1 December 2006. Management and Employees Lord Stewartby, who has served as a non-Executive Director of Diploma since1990, intends to retire from the Board at the conclusion of the Annual GeneralMeeting on 10 January 2007. Lord Stewartby has made a significant contributionto the Board over an extended period, as the Group has undergone a majorrestructuring of its operations and refocused on the core of growing, profitablebusinesses. We wish him a long and happy retirement. On behalf of shareholders and the Board, I would like to acknowledge thededication of our employees across all our operations whose hard work andcommitment have been the critical factors in achieving another year of stronggrowth and improvement for the Group. Outlook The new financial year has started positively, with the Group trading in linewith internal budgets. The European Defence, Aerospace, Motorsport andEnvironmental markets in which the Group operates continue to be relativelybuoyant, although there are signs of caution in North American markets. The Group continues to achieve growth by a combination of organic growth andacquisitions. With more modest organic growth likely in its core businesses thisfinancial year, the continued strong growth of the Group will be more dependenton further high quality acquisitions. CHIEF EXECUTIVE'S REVIEW OF OPERATIONS LIFE SCIENCES The Life Sciences businesses made further advances in 2006. Sector salesincreased by 13% to £39.2m (2005: £34.7m) and operating profits increased by 20%to £6.1m (2005: £5.1m). Operating margins increased to 15.6% (2005: 14.7%). The main drivers of growth in the sector were Somagen and a1-envirosciences.Somagen maintained its market position and achieved steady sales growth inCanadian dollar terms. Sales and particularly operating profit were then furtherboosted by the ca. 10% appreciation of the Canadian dollar against both thepound Sterling (translation benefits) and the US dollar (purchasing benefits). a1-envirosciences again achieved strong double digit sales growth and improvedoperating margins significantly as it achieved greater critical mass in itsoperations. Somagen Somagen achieved sales growth of ca. 6% in Canadian dollar terms with goodperformances in each of the three segments of consumables, capital and service. The majority of consumable product sales are supplied as part of multi-yearreagent rental contracts, funded through the operating budgets within hospitals.Fully serviced and maintained instruments are supplied in return for acommitment to minimum annual purchases of reagent kits. Sales within thesecontracts grew steadily, with particularly good progress in the sale of allergyand immunology kits. Instruments are also supplied outside of reagent rental contracts, fundedthrough the capital expenditure budgets within hospitals. These capital productsales were again strong, boosted by the success in winning a large tender forinfectious disease testing instruments in Ontario. Service sales benefitedfrom the high levels of capital product sales in recent years and the serviceteam was strengthened further during the year to meet the increased demand. In June 2006, Somagen's distribution agreement with GeneOhm for MRSA kits wasterminated early, following GeneOhm's acquisition by Becton, Dickinson andCompany. In compensation for the early termination, Somagen received a paymentof £0.3m (C$0.5m). The lost revenues and profit from this supplier will largelybe offset by the Trinity Biotech range of coagulation products. Somagen wasawarded the exclusive distribution rights to these products towards the end ofthe financial year. Anachem Anachem showed modest progress in its core Bioscience business, maintaining itsmarket leading position in pipettes, tips and service. This was achieved by acombination of extensive field sales coverage and relentless direct marketing.The increased sales coverage had the greatest impact in the more price sensitiveUniversity sector, where Anachem extended its presence during the year. The new range of filtration products has now been fully launched and althoughearly in the process, is showing encouraging signs of success. Sales in Eirehave also moved forward following the appointment of further direct sales andservice personnel to the territory. During the year, £0.2m was invested in a newcalibration system to support the service activities. Sales in the Instrumentation business declined, but there was an improvement inthe second half of the year as new software and new instrument models wereintroduced to customers. The change to the new Trilution software for HPLCinstruments has provided a significant boost as the previous software had becomeuncompetitive. Product line extensions included the launch of a new generationof HPLC instruments, the GX range of injectors and fraction collectors, toreplace the existing ten year old technology. The Reactarray team continued tointroduce product enhancements and delivered a particularly strong performancein the US. a1-envirosciences a1-envirosciences grew strongly in the year and accounts for 20% of sectorsales. Operating margins, though not yet at the sector average levels, improvedsignificantly as increased scale was achieved in the operations in the UK, Eire,Germany and Switzerland. The a1-envirotech analyser business performed well in the UK, Germany and Eire.Highlights include the supply of portable analysers to the UK National Grid tomonitor sulphur hexafluoride (SF6) gases and strong demand from the Germanpetrochemical industry for elemental analysers to measure sulphur content infuels. There was also the continued success of a1-envirotech's own brandautomation products within environmental laboratories. The a1-safetech business also grew strongly, boosted by a large order from Rochein Switzerland for more than 100 potent powder enclosure units. The safetyenclosure range now accounts for over £2m of sales, an excellent example oforganic growth within this expanding business. After the year end, the acquisition of CBISS was completed for a maximum cost of£6.0m. CBISS is the leading UK supplier of bespoke Continuous EmissionMonitoring Systems (CEMS) for waste incineration plants and is extending intoPower, Chemicals and other industries. It also supplies systems for gas leakdetection and process and toxic gas monitoring. Systems are supported by CBISSunder comprehensive service contracts and analyser hire is also availablethrough EIM, a subsidiary of CBISS. This acquisition will add scale and criticalmass to the a1-envirosciences operations in the UK and offer opportunities forgrowth, both in the UK and more broadly in Europe. SEALS The Seals businesses delivered further strong growth in 2006. Sector salesincreased by 30% to £35.9m (2005: £27.6m) and operating profits, beforeamortisation of acquisition intangibles, increased by 34% to £5.5m (2005:£4.1m). The results were boosted by the acquisition of HKX in November 2005,which contributed £5.3m to revenue and £0.9m to operating profit. Excluding theimpact of the acquisition and on a constant currency basis, the continuingbusinesses grew sales and operating profits by 11% and 15% respectively. Theincrease in operating margins to 15.3% (2005:14.9%) reflected the contributionfrom HKX and improved efficiencies from investment in the Hercules and Bulldogoperations. Hercules There was a strong performance from the core Hercules business in Clearwater,Florida. Hercules performed well across all of its traditional customer groups,including machinery repair shops and aftermarket kit programmes for cylindermanufacturers. Successful initiatives were also implemented to increase Herculespresence in larger, regional distributors and in the catalogues of specialistindustrial distributors, such as those that service the fork lift truckoperators and repair shops. New product introductions, competitive freightprogrammes and full line catalogue updates helped to propel Hercules to a recordyear for new account sales. In the US, seal and cylinder sales continued to grow in the second half of theyear but at a more modest rate than that experienced in the exceptional firsthalf, reflecting the general levelling off in the US economy and constructionsectors. Exports have become an increasing area of focus for Hercules andresources were added in the year. The results have been very encouraging with a40% increase in international sales, which now represent ca. 10% of HerculesClearwater sales. During the year, £0.3m of capital was invested in Clearwater, largely focused onimproving the operations. The resulting gains in operational efficiencies andhigh levels of ex-stock availability, delivered increases in sales and a furtherincrease in operating margins. Hercules Canada again achieved good growth in sales, despite a slowdown in theEastern Provinces relating to the US automotive industry. In Western Canada, theEdmonton branch continued to make progress, benefiting from the strong economyin Alberta. The decision was taken during the Summer to consolidate resourcesin Western Canada at the Edmonton location. After the year end, in November2006, the Vancouver branch was closed but with customers continuing to be servedby in-territory sales people. The cost of closing the branch was not significantand was provided for in the 2006 financial statements. Bulldog The Bulldog business in Reno, Nevada was held back in the first half of the yearby cut-backs in purchasing by a large domestic customer. However, new sales andmarketing initiatives took effect in the second half, generating strong growthand reversing much of the shortfall in the first half, to end the year 5% up on2005. A new focus on transmission products brought positive results and kitsintroduced last year for the newer generation of diesel engines also contributedto the improved performance. During the year £0.1m was invested in new gasketcutting machines. Domestically, Bulldog has strengthened its resources and broadened its customerbase to include not only the larger full-line tractor supply companies, but alsosmaller dealers and engine repairers that are now served directly.Internationally, Bulldog has reviewed its network of agents to again introduceits products to a wider range of customers. India and the Far East showedsubstantial growth and sales to the Middle East recovered from the low point ofthe Lebanese war to end the year strongly. HKX HKX has delivered exceptional growth since its acquisition in November 2005.Continuing demand has been generated from the larger, established dealers andincreased resources are in place to broaden the customer base in the US andCanada. HKX is also developing innovative value-added components which shouldprovide further differentiation in the attachment kits. The first of these, theproportional controller, was introduced into kits during the year, offeringimproved control of the excavator attachments for the operator. HKX's facility move and IT system upgrade, which represented a total investmentof £0.2m, coincided with the timing of the acquisition and were successfullycompleted in the year. There is now capacity available to support furthergrowth. FPE In the UK, FPE made modest progress in a subdued, low growth UK market, thoughexports continued to show good growth. An upgrade to the IT system was completedin 2006 and the benefits should be seen in the new financial year. CONTROLS The Controls businesses made good progress in 2006. Sector sales increased by 8%to £53.1m (2005: £49.0m) and operating profit increased by 7% to £7.8m (2005:£7.3m). Both the IS Group and Sommer Filcon performed strongly, achieving growth in thesluggish industrial economies of the UK and Germany, by focusing on the morebuoyant technology-driven segments of the market. Operating margins were maintained at 14.7% (2005:14.9%), with margin pressureswithin the Hawco businesses being offset by slightly improved margins in theother businesses. IS Group The IS Group continued to grow strongly as the increased demand from GroundDefence and Military Marine programmes continued through the second half of theyear. In particular, IS-Rayfast was well positioned to benefit substantiallyfrom supplying the UORs (Urgent Operational Requirements) received from theMinistry of Defence. Products were also supplied to a range of other programmes,including the Starstreak missile, Viper Weapon Sight, T45 destroyer and Astutesubmarine programmes. In Aerospace, IS-Rayfast benefited from smaller projects and prototypes for theJoint Strike Fighter and the Boeing 787 Dreamliner. The demand from the Oil andGas sector for cables and connectors also remained strong. IS-Motorsport and Clarendon benefited from the generally buoyant marketconditions in Motorsport. In Formula One, there was an additional team on thegrid and increased demand from the re-design of engines from V10 to V8. TheWorld Rally Championships also expanded as Ford introduced additional cars. Inthe US, another strong performance was delivered with IS-Motorsport expandingits sales to NASCAR and generating additional business through improved stockavailability. The IS Group's UK warehousing and logistics operations have now beenconsolidated at Swindon, which has allowed the kitting services offered to theMotorsport sector to be significantly expanded. An investment of £0.1m was alsomade to up-grade and improve the capabilities of the IT systems within the ISGroup. During the year, IS Rayfast established a Representative office in Beijing andemployed an experienced Chinese national to lead its expansion in this region.The initial focus will be on the Chinese commercial aerospace repair andaftermarket sector, where there is an increasing demand for high performancecomponents for electrical harnesses. Sommer Filcon Sommer Filcon continued its steady growth with strong order levels from a rangeof defence programmes. The Eurofighter Tranche II and Tornado upgradeprogrammes continued to generate orders, as did the NH90 and Tiger helicopterprogrammes. These were supplemented with new orders from various Missile,Weapon and Combat Land Vehicle programmes. A key feature of the year has been the success of the Sommer Filcon sales teamsin sharing intelligence and identifying cross-selling opportunities. Thecombined strength of the two operations in terms of technical knowledge and thebreadth of product portfolio has created a well rounded business in an importantspecialised market. Outside the Defence area, Sommer Filcon also had a strong year for medical wiresales as demand for German made endoscopic instruments grew. Sommer's FormulaOne relationships were also combined with Filcon's connector expertise topenetrate the German based Formula One teams and engine builders. Finally, newfranchises were secured for cable protection products and other specialistconnectors. Hawco Sales at Hawco remained at prior year levels overall, with the Refrigerationbusiness continuing to show growth and the Controls business continuing to slow. Refrigeration maintained its momentum in both the OEM and contractor sectors. Ina very competitive market place, the division gained business by bundlingcompatible components for its OEM customers. The company also recently launcheda focussed simple-to-use catalogue targeted at the contractor sector and theearly response has been positive. In the Controls business, the salesmanagement team has been strengthened and work continues to ensure that thedivision is appropriately focused to compete in a challenging environment. FINANCIAL REVIEW International Financial Reporting Standards International Financial Reporting Standards ("IFRS") were adopted by the Groupwith effect from 1 October 2004 and these are the first full set of Groupfinancial statements prepared in accordance with IFRS. Adoption of IFRS requiredthe restatement of the 2005 results and the balance sheets at 1 October 2004 and30 September 2005. The impact of adopting IFRS on the Group's adjusted resultshas not been significant and was set out in an Announcement to shareholders on25 January 2006. Alternative Performance Measures The Directors consider that there are alternative measures which are helpful inassessing the underlying operating performance of the Group. For internalmanagement reporting purposes, the Board uses a number of financial measures(which are not defined within IFRS) to assess the underlying operationalperformance of the Group and its businesses. As such the Board believes thesemeasures are important and should be considered alongside the IFRS measures.The alternative performance measures, which have been used in this PreliminaryAnnouncement, are described in note 2 to the consolidated financial statementsin this Preliminary Announcement. Results for the year Revenue increased by 15% to £128.2m and operating profit, before the sale ofproperty and amortisation of acquisition intangibles, increased by 17.6% to£19.4m. The results included a contribution to revenue and operating profit of£5.3m and £0.9m from the acquisition of HKX in the Seals sector, completed on 29November 2005. A significant strengthening in the Canadian dollar during the year and in the USdollar in the early part of the year, contributed to an increase in revenue andoperating profit of £2.2m and £0.5m respectively on translation of the resultsof the Group's North American businesses. The strong Canadian dollar alsocontributed to an increase in the operating margin of the Life Sciences sector,reflecting the US dollar denominated purchases made by Somagen. Operating margins, before amortisation of acquisition intangibles, againimproved in 2006 to 15.1% from 14.8% last year. Part of this increase arose inthe Life Sciences sector from currency benefits and from receipt of £0.3m on thereturn of distribution rights to a supplier by Somagen; continuing operationalefficiencies from warehouse automation in the Seals sector also contributed toimproved margins. After generating interest income of £1.0m on cash funds held during the year,adjusted profit before tax increased by 18.6% to £20.4m (2005: £17.2m). Sale of property In February 2006, the Group completed the sale of the former brickworks site ofWilliamson Cliff (referred to as Phase 3 of the Stamford land), for proceeds of£11.8m, before expenses of sale. A small part of the proceeds (£0.5m) werereceived in October 2006, following confirmation of the estimated contributionrequired to meet certain environmental conditions. The profit on sale of thisland was £11.1m; tax of £0.9m has been provided on this profit, after utilisingthe remaining capital losses to mitigate part of the tax on the gain. The Group retains approximately a further 150 acres of farm and former quarryland in Stamford, which in the opinion of the Directors is unlikely to be worthmore than £0.5m in its present condition. The Directors do not expect that therewill be any further disposal of the land in the foreseeable future. Taxation The Group's adjusted effective tax charge represented 29.9% (2005: 29.1%) ofadjusted profit before tax. During the year, tax authorities in a number ofjurisdictions in which the Group operates completed reviews of prior year taxcomputations. The conclusion of these reviews resulted in an aggregate prioryear tax credit of £0.6m. The underlying tax rate, excluding the impact ofprior year tax credits, was 32.8%. This rate compares with a corporate tax rateof 30% in the UK and approximately 36% on profits earned in North America andGermany. Earnings and Dividends Adjusted earnings per share increased 16.9% to 62.8p compared with 53.7p lastyear. The Board has proposed a final dividend of 15.0p per share, which willgive a total dividend for the year of 23.0p, an increase of 3.0p or 15.0% onlast year. The dividend for the year is covered 2.7 times by adjusted earnings. Free Cash Flow The Group's free cash flow, which is before expenditure on dividends andbusiness combinations, was £24.3m, including £11.0m of net cash proceedsreceived during the year from the sale of the Stamford land. The underlyingfree cash flow was £13.3m, compared with £11.9m last year. Operating cash flow increased by £4.5m to £20.9m reflecting tight control overworking capital, despite the underlying growth in the business. Additions tofixed assets, including software, were £1.4m, which compared with a depreciationcharge of £1.6m. Additions included £0.6m of additional production andcalibration equipment and £0.5m on improvements to the IT infrastructure. At 30 September 2006, the Group's cash funds had increased by £11.0m to £36.7m. Acquisitions On 29 November 2005, the Group acquired 100% of HKX Inc, a leading provider ofhydraulic kits for the installation of attachments on excavators. Considerationof £6.6m (US$11.5m), including expenses, was paid during the year. A maximum ofa further £0.5m (US$1.0m) is payable in February 2007, dependent on the grossprofit achieved in the twelve months ending 31 December 2006. In November 2005, deferred purchase consideration of £1.0m (C$2.0m) was paid tothe vendors of Somagen as final settlement of their performance payment. TheGroup owns 80% of Somagen and 95% of Hawco. The Group has put/call options toacquire the outstanding share capital which can be exercised in part at 30September 2007 and 2009. The consideration is based upon a multiple ofoperating profits. Shortly after the year end, the Group also completed the acquisition of CBISSLimited ("CBISS") for a maximum consideration of £6.0m. CBISS is a leadingsupplier of equipment and services for environmental monitoring and control andis based in Tranmere, near Liverpool. Goodwill and acquisition intangible assets As required by IFRS, the Directors carried out an assessment of the fair valueof the identifiable intangible assets acquired in HKX; these assets comprised"customer relationships" and certain databases which were considered key to thefuture success of the business and were valued at £2.5m on acquisition. Inaddition, goodwill of £3.8m arose on the acquisition of HKX. This goodwillcomprises the value in the business relating to the product know-how held by theemployees and the prospects for further sales growth in the future from newcustomers. The acquisition intangible assets will be amortised over theirexpected useful economic lives of between five and seven years; goodwill is notamortised. The Directors have also carried out an impairment review of the total goodwillof £28.0m held at 30 September 2006 and are satisfied that none of this goodwillhas been impaired. Shareholders' funds The Board considers that return on trading capital employed is a key indicatorof the underlying performance of the Group. It is defined in note 2 to thefinancial statements in this Preliminary Announcement, and is after takingaccount of any historic gross goodwill and acquired intangible assets whicharose on acquired businesses. In 2006 return on trading capital employed hadincreased to 23.9% from 22.1% last year. Shareholders' funds increased by £17.5m to £92.9m at 30 September 2006 which isequivalent to 410p per share, compared with 333p last year. Pensions IFRS requires the Group to include the actuarial value of its retirement benefitobligations in the consolidated balance sheet. At 30 September the aggregatevalue of these obligations had increased to £4.7m (2005: £4.4m). A reduction inthe margin between the rate used to discount the liabilities and the assumedinflation rate, together with a strengthening in some mortality assumptions,more than offset the benefit from higher investment returns and the Group's cashcontributions of £0.3m. However, on an ongoing funding basis agreed with the actuaries, the aggregatedeficit reduced to £2.6m (2005: £3.6m) which the Group has agreed to fund over aperiod not exceeding nine years. During the year, a formal actuarial valuation was carried out on the DiplomaHoldings PLC scheme in accordance with the new Scheme Specific Fundinglegislation. This showed a significant improvement in the funding positionsince the last valuation to 95% (2005: 88%), although the company will continueto contribute £42,000 pa to the scheme, in addition to meeting all of theexpenses of running the scheme. Anachem contributed £238,000 to the closedAnachem pension scheme, in accordance with the recommendations of the actuary. The aggregate retirement benefit obligations, net of deferred tax, at 30September 2006 were £3.3m (2005: £3.1m) which equates to 3.6% of shareholders'funds. CONSOLIDATED INCOME STATEMENTfor the year ended 30 September 2006 2006 2005 Note £m £m REVENUE 5 128.2 111.3Cost of sales (82.4) (71.8) Gross profit 45.8 39.5Distribution costs (3.7) (3.5)Administration costs (22.7) (19.5)Amortisation of acquisition intangibles (0.3) - OPERATING PROFIT before sale of property 5 19.1 16.5Profit on sale of property 5 11.1 - OPERATING PROFIT 30.2 16.5Finance income 1.0 0.7 PROFIT BEFORE TAX 31.2 17.2Tax expense 7 (7.0) (5.0) PROFIT FOR THE YEAR 24.2 12.2 Attributable to: Shareholders of the Company 23.7 11.8 Minority interests 0.5 0.4 24.2 12.2 EARNINGS PER 5P SHARE Basic and diluted earnings 8 105.5p 52.4p All activities both in the current and previous year relate to continuingoperations. Alternative Performance Measures (note 2) 2006 2005 Note £m £m Profit before tax 31.2 17.2 Less: Profit on sale of property (11.1) - Add: Amortisation of acquisition intangibles 0.3 - ADJUSTED PROFIT BEFORE TAX 20.4 17.2 ADJUSTED EARNINGS PER SHARE 8 62.8p 53.7p CONSOLIDATED BALANCE SHEETas at 30 September 2006 2006 2005 £m £mNON-CURRENT ASSETSGoodwill 28.0 24.6Acquisition intangible assets 2.0 -Other intangible assets 0.6 0.6Property, plant and equipment 9.5 9.8Deferred tax assets 3.4 3.1 43.5 38.1 CURRENT ASSETSInventories 22.9 21.3Trade and other receivables 20.4 19.7Cash and cash equivalents 36.7 25.7 80.0 66.7 CURRENT LIABILITIESTrade and other payables (20.9) (19.4)Current tax liabilities (2.9) (2.9)Other liabilities (0.5) (1.0) (24.3) (23.3) NET CURRENT ASSETS 55.7 43.4 TOTAL ASSETS LESS CURRENT LIABILITIES 99.2 81.5NON-CURRENT LIABILITIESRetirement benefit obligations (4.7) (4.4) NET ASSETS 94.5 77.1 EQUITYShare capital 1.1 1.1Capital redemption reserve 0.2 0.2Translation reserve 0.7 2.2Hedging reserve - -Retained earnings 90.9 71.9 TOTAL SHAREHOLDERS' EQUITY 92.9 75.4Minority interests 1.6 1.7 TOTAL EQUITY 94.5 77.1 CONSOLIDATED STATEMENT OFRECOGNISED INCOME AND EXPENSEfor the year ended 30 September 2006 2006 2005 £m £m Exchange rate adjustments on foreign currency net investments (1.5) 2.2Changes in fair value of cash flow hedges 0.1 -Actuarial losses on defined benefit pension schemes (0.6) (0.6)Deferred tax on actuarial losses 0.2 - Net (expense)/income recognised directly in equity for the year (1.8) 1.6Profit for the year 24.2 12.2 TOTAL RECOGNISED INCOME AND EXPENSEFOR THE YEAR 22.4 13.8 Attributable to: Shareholders of the Company 21.9 13.4 Minority interests 0.5 0.4 22.4 13.8 Other Changes in Share Capital Translation Hedging Retained TotalShareholders' Equity capital redemption reserve reserve earnings reserve £m £m £m £m £m £m At 1 October 2004 1.1 0.2 - - 64.6 65.9Total recognised income and expensefor the year attributable toshareholders - - 2.2 - 11.2 13.4Share based payments expense - - - - 0.6 0.6Purchase of own shares - - - - (0.5) (0.5)Dividends - - - - (4.0) (4.0) At 30 September 2005 1.1 0.2 2.2 - 71.9 75.4Adjustment on adoption of IAS 39 - - - (0.1) - (0.1) At 1 October 2005, as restated 1.1 0.2 2.2 (0.1) 71.9 75.3Total recognised income and expensefor the year attributable toshareholders - - (1.5) 0.1 23.3 21.9Share based payments expense - - - - 0.5 0.5Purchase of own shares - - - - (0.1) (0.1)Dividends - - - - (4.7) (4.7) At 30 September 2006 1.1 0.2 0.7 - 90.9 92.9 CONSOLIDATED CASH FLOW STATEMENTfor the year ended 30 September 2006 2006 2005 Note £m £mCASH FLOWS FROM OPERATING ACTIVITIESCash flow from operations 9 20.9 16.4Finance income received 1.0 0.7Tax paid (7.1) (3.7) NET CASH FROM OPERATING ACTIVITIES 14.8 13.4 CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of subsidiaries (net of cash acquired) (7.0) -Deferred consideration paid (1.0) (0.3)Proceeds from the sale of property, plant and equipment 11.0 0.4Purchase of property, plant and equipment (1.3) (1.4)Purchase of other intangible assets (0.1) - NET CASH FROM/(USED IN) INVESTING ACTIVITIES 1.6 (1.3) CASH FLOWS FROM FINANCING ACTIVITIESDividends paid to shareholders (4.7) (4.1)Dividends paid to minority interests (0.3) -Purchase of own shares (0.1) (0.5) NET CASH USED IN FINANCING ACTIVITIES (5.1) (4.6) NET INCREASE IN CASH AND CASH EQUIVALENTS 11.3 7.5Cash and cash equivalents at beginning of year 25.7 17.9Effect of exchange rates on cash and cash equivalents (0.3) 0.3 CASH AND CASH EQUIVALENTS AT END OF YEAR 36.7 25.7 Alternative Performance Measures (note 2) 2006 2005 £m £m NET INCREASE IN CASH AND CASH EQUIVALENTS 11.3 7.5Add: Dividends paid to shareholders 4.7 4.1 Dividends paid to minority interests 0.3 - Acquisition of subsidiaries (net of cash acquired) 7.0 - Deferred consideration paid 1.0 0.3 FREE CASH FLOW 24.3 11.9 1. GENERAL INFORMATION Diploma PLC is a public limited company registered and domiciled in England andWales and listed on the London Stock Exchange. The address of the registeredoffice is 20 Bunhill Row, London, EC1Y 8UD. The consolidated financialstatements comprise the Company and its subsidiaries (together referred to asthe "Group"). The consolidated financial statements, which were authorised by the Directorsfor publication on 13 November 2006, are presented in pounds Sterling and allvalues are rounded to the nearest one hundred thousand, except where otherwiseindicated. The financial information set out in this Preliminary Announcement, which hasbeen extracted from the audited consolidated financial statements, does notconstitute the Group's statutory financial statements for the years ended 30September 2006 and 2005. Statutory financial statements for the year ended 30 September 2005 have beendelivered to the Registrar of Companies. The statutory financial statements forthe year ended 30 September 2006, which were approved by the Directors on 13November 2006, will be delivered to the Registrar of Companies following theCompany's Annual General Meeting. The auditors have reported on the consolidated financial statements for theyears ended 30 September 2006 and 2005. The reports were unqualified and didnot contain a statement under Section 237(2) or (3) of the Companies Act 1985. The Company's Annual General Meeting will be held at 12.00 midday on 10 January2007 in the Members' Room, Chartered Accountants' Hall, Moorgate Place, LondonEC2P 2BJ. The Notice of Meeting will be set out in a separate document issuedto shareholders. 2. ALTERNATIVE PERFORMANCE MEASURES The Group uses a number of alternative (non-Generally Accepted AccountingPractice ("non-GAAP")) financial measures which are not defined within IFRS.The Directors use these measures in order to assess the underlying operationalperformance of the Group and as such, these measures are important and should beconsidered alongside the IFRS measures. The following non-GAAP measures arereferred to in this Preliminary Announcement. 2.1 Adjusted profit before tax On the face of the consolidated income statement, "adjusted profit before tax"is separately disclosed, being defined as profit before tax and before the costsof restructuring or rationalisation of operations, the profit or loss relatingto the sale of property and the amortisation and impairment of intangibleassets. The Directors believe that adjusted profit before tax is an importantmeasure of the underlying performance of the Group. 2.2 Adjusted earnings per share Adjusted earnings per share is calculated as the total of adjusted profit, lessincome tax costs, but excluding the tax impact on the items included in thecalculation of adjusted profit and the tax effects of goodwill in overseasjurisdictions, less profit attributable to minority interests, divided by theweighted average number of ordinary shares in issue during the year. TheDirectors believe that adjusted earnings per share provides an important measureof the underlying earning capacity of the Group. 2.3 Free cash flow On the face of the consolidated cash flow statement, "free cash flow" isreported, being defined as net cash flow from operating activities, after netcapital expenditure on fixed assets (excluding business combinations), butbefore expenditure on business combinations and dividends paid to both minorityshareholders and the Company's shareholders. The Directors believe that freecash flow gives an important measure of the cash flow of the Group, availablefor future investment. 2.4 Trading capital employed In the segment analysis in note 5 to the financial statements in thisPreliminary Announcement, "trading capital employed" is reported, being definedas net assets less cash and cash equivalents and deferred tax assets, and afteradding back defined benefit obligations. Return on trading capital employed isdefined as being adjusted profit before finance income and tax, divided bytrading capital employed plus all historic goodwill and as adjusted for thetiming effect of major acquisitions and disposals. The Directors believe thatreturn on trading capital employed is an important measure of the underlyingperformance of the Group and of each of the businesses. 3. ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS The consolidated financial statements have been prepared for the first time inaccordance with International Financial Reporting Standards ("IFRS") as endorsedby the European Union, and in accordance with the Companies Act 1985, asapplicable to companies reporting under IFRS. The comparatives have beenrestated from UK Generally Accepted Accounting Practice ("UK GAAP") to complywith IFRS. As part of the transition to IFRS, the Group's accounting policieshave been reviewed. An explanation of how the transition to IFRS has affected the reported financialposition and financial performance of the Group was provided in an Announcementto shareholders on 25 January 2006. No material adjustments other than changesin presentation have been made to the consolidated cash flow statement. In the Announcement, the Group published a detailed income statement, balancesheet and equity reconciliations of UK GAAP to IFRS. The published document isposted on the Diploma PLC website: www.diplomaplc.com. Subsequent to this Announcement, the Directors revised the basis of calculatingthe charge to profit in respect of the Group's share based payment schemes.This resulted in profit before tax for the year ended 30 September 2005 beingincreased by £0.1m to £17.2m, from £17.1m included in the Announcement. The Group has taken advantage of exemptions available in IFRS 1, (First-timeAdoption of International Financial Reporting Standards (revised 2004)), inrelation to actuarial gains and losses, business combinations, financialinstruments and cumulative translation differences, details of which are set outin note 4. 4. FIRST-TIME ADOPTION OF IFRS (IFRS 1) IFRS 1 was issued to assist companies with the first time adoption of IFRS.IFRS 1 permitted companies adopting IFRS for the first time to adopt alternativeaccounting treatments for certain areas of the financial statements during thetransition period. In preparing the financial information in this PreliminaryAnnouncement, the Group has taken the following exemptions: 4.1 Business combinations Business combinations prior to the transition date, 1 October 2004, have notbeen restated to an IFRS basis. As a result, in the transition balance sheet asat 1 October 2004, goodwill arising from past business combinations remains asstated under UK GAAP at £23.5m. 4.2 Retirement benefit obligations IFRS requires that a balance sheet asset or liability must be shown in respectof defined benefit pension schemes. Actuarial gains and losses arise when theactual returns on scheme assets and liabilities differ from those anticipated atthe time of valuation. The Group has adopted the exemption in IFRS 1 allowingall actuarial gains and losses arising before 1 October 2004 to be shown in theopening balance sheet at 1 October 2004. Since 1 October 2004, all actuarialgains and losses have been included in the SORIE. 4.3 Cumulative translation differences In the consolidated financial statements, the results of overseas subsidiariesare translated into pounds Sterling at the average exchange rate. The balancesheet is translated at the closing rate. This leads to exchange gains andlosses being generated on consolidation. IFRS requires translation differenceson the retranslation of the assets and liabilities of overseas subsidiaries tobe taken directly to a separate translation reserve. On the disposal of anoverseas entity, exchange differences previously taken to reserves will betransferred to the income statement as part of the profit/loss on disposal ofthat entity. The elective exemption in IFRS 1 means that any translation differences prior tothe date of transition (1 October 2004) do not need to be analysedretrospectively and so the deemed cumulative translation differences at thisdate can be set to £nil. Thus, any cumulative translation differences arisingprior to the date of transition are excluded from any future profit/loss ondisposal of any entities. 4.4 Financial instruments (IAS 32 and 39) As permitted, the implementation of IAS 32 and IAS 39 has been first applied tothe financial year ended 30 September 2006. As a result, financial instrumentscontinued to be accounted and presented in accordance with UK GAAP for the yearended 30 September 2005. 4.5 Share-based payments (IFRS 2) At the transition date, the Group had no equity settled share-based awardsrelating to awards made before 7 November 2002. The Group did have awardsoutstanding at 1 October 2004 where part of the awards comprised a cash settledshare-based transaction. However, all of the performance conditions for theseawards had been completed by the transition date and the awards had vested, asdefined by IFRS. Hence no adjustment in respect of these awards was necessaryon transition. 5. BUSINESS SEGMENT ANALYSIS For management reporting purposes, the Group is organised into three mainbusiness segments, Life Sciences, Seals and Controls. These segments form thebasis of the primary reporting format disclosures below. Segment revenuerepresents revenue to external customers; there is no inter-segment revenue.Segment results, assets and liabilities include items directly attributable to asegment, as well as those that can be allocated on a reasonable basis. Segment assets exclude cash and cash equivalents, deferred tax assets andcorporate assets that cannot be allocated on a reasonable basis to a businesssegment. These items are shown collectively in the following tables as "unallocated assets". Segment liabilities exclude retirement benefit obligationsand corporate liabilities that cannot be allocated on a reasonable basis to abusiness segment. These items are shown collectively in the following tables as"unallocated liabilities". Life Sciences Seals Controls Total 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m REVENUE 39.2 34.7 35.9 27.6 53.1 49.0 128.2 111.3Segment operating profit 6.1 5.1 5.5 4.1 7.8 7.3 19.4 16.5Amortisation of acquisition intangibles - - (0.3) - - - (0.3) - 6.1 5.1 5.2 4.1 7.8 7.3 19.1 16.5Profit on sale of property 11.1 - OPERATING PROFIT 30.2 16.5 The contribution from acquisitions for the year ended 30 September 2006 wasrevenue of £5.3m and operating profit of £0.9m. The acquisition related to HKXInc in the Seals segment, which was acquired on 29 November 2005. There were noacquisitions during the year ended 30 September 2005. The profit on sale of property arose from the disposal of 12.2 acres of land(known as Phase 3) in Stamford, East Midlands for consideration of £11.5m, afterexpenses. Life Sciences Seals Controls Total 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m Operating assets 15.2 16.3 17.4 15.9 20.0 19.0 52.6 51.2Goodwill 13.8 13.9 4.7 1.2 9.5 9.5 28.0 24.6Acquisition intangible assets - - 2.0 - - - 2.0 - 29.0 30.2 24.1 17.1 29.5 28.5 82.6 75.8Unallocated assets:- Deferred tax assets 3.4 3.1- Cash and cash equivalents 36.7 25.7- Corporate assets 0.8 0.2 TOTAL ASSETS 123.5 104.8 Operating liabilities (7.5) (7.3) (3.6) (3.0) (9.3) (9.4) (20.4) (19.7)Unallocated liabilities:- Retirement benefit (4.7) (4.4)obligations- Corporate liabilities (3.9) (3.6) TOTAL LIABILITIES (29.0) (27.7) NET ASSETS 94.5 77.1 OTHER SEGMENT INFORMATIONCapital expenditure 0.5 0.8 0.7 0.4 0.2 0.2 1.4 1.4Depreciation (including 0.8 0.7 0.6 0.4 0.2 0.4 1.6 1.5software)Amortisation of acquisitionintangibles - - 0.3 - - - 0.3 - ALTERNATIVE PERFORMANCE Life Sciences Seals Controls TotalMEASURES (note 2) 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m Net assets 94.5 77.1Add/(less):- Deferred tax assets (3.4) (3.1)- Retirement benefit obligations 4.7 4.4- Cash and cash equivalents (36.7) (25.7) GROUP TRADING CAPITAL EMPLOYED 59.1 52.7Add: Corporate liabilities, net 3.1 3.4 SEGMENT TRADING CAPITAL EMPLOYED 21.5 22.9 20.5 14.1 20.2 19.1 62.2 56.1 6. GEOGRAPHIC SEGMENT ANALYSIS Trading capital Revenue Gross assets employed Capital expenditure 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m United Kingdom 58.7 55.7 63.0 50.4 16.6 17.8 0.4 0.4Rest of Europe 20.2 17.0 11.8 13.3 8.6 7.6 0.1 0.1North America 49.3 38.6 48.7 41.1 33.9 27.3 0.9 0.9 128.2 111.3 123.5 104.8 59.1 52.7 1.4 1.4 7. TAXATION The Group's adjusted effective tax charge of £6.1m (2005: £5.0m) represented29.9% (2005: 29.1%) of adjusted profit before tax. The underlying tax rate,excluding the impact of prior year tax credits of £0.6m, was 32.8%. This ratecompares with the corporate tax rate of 30% in the UK and approximately 36% onprofits earned in North America and Germany. Tax of £0.9m has been provided on the gain arising on the disposal of property,after taking account of available capital tax losses. 8. EARNINGS PER ORDINARY SHARE Basic and diluted earnings per share Basic and diluted earnings per ordinary share are calculated on the basis of theweighted average number of ordinary shares in issue during the year of22,468,648 (2005: 22,513,603) and the profit for the year attributable toshareholders of £23.7m (2005: £11.8m). There were no potentially dilutiveshares. Adjusted earnings per share Adjusted earnings per share, which is defined in note 2, are calculated asfollows: 2006 2005 2006 2005 pence pence per share per share £m £m Profit before tax 31.2 17.2Tax expense (7.0) (5.0)Minority interests (0.5) (0.4)Profit for the year attributable to shareholdersof the Company 105.5 52.4 23.7 11.8Profit on sale of property, net of (45.3) - (10.2) -taxAmortisation of acquisition 1.3 - 0.3 -intangiblesTax effects on goodwill and acquisition 1.3 1.3 0.3 0.3intangibles ADJUSTED EARNINGS 62.8 53.7 14.1 12.1 9. RECONCILIATION OF CASH FLOW FROM OPERATIONS 2006 2005 £m £m Profit for the year 24.2 12.2Depreciation 1.6 1.5Amortisation of acquisition intangibles 0.3 -Share based payments expense 0.5 0.4Finance income (1.0) (0.7)Profit on disposal of property (11.1) -Tax expense 7.0 5.0 Operating cash flow before changes in working capital 21.5 18.4Increase in inventories (1.6) (0.6)(Increase)/decrease in trade and other receivables (0.1) 0.6Increase/(decrease) in trade and other payables 1.4 (1.9) Cash paid into defined benefit schemes (0.3) (0.1) CASH FLOW FROM OPERATIONS 20.9 16.4 10. DIVIDENDS Subject to approval at the Annual General Meeting, a proposed final dividend of15.0p per share (2005: 13.0p) will be paid on 17 January 2007 to ordinaryshareholders on the register at the close of business on 1 December 2006. 11. EXCHANGE RATES The following exchange rates have been used to translate the results of theoverseas businesses: Average Average Closing Closing 2006 2005 2006 2005 US Dollar 1.80 1.84 1.87 1.77Canadian Dollar 2.05 2.27 2.08 2.05Euro 1.46 1.46 1.47 1.47 This information is provided by RNS The company news service from the London Stock Exchange