Financial Highlights For the year ended 30 September 2017

Strong results with double-digit growth in revenue and earnings

Revenue £451.9m 2016: £382.6m +18%
Adjusted operating profit1 £78.2m 2016: £65.7m +19%
Adjusted operating margin1 17.3% 2016: 17.2% +10bps
Adjusted profit before tax1,2 £77.5m 2016: £64.9m +19%
Profit before tax £66.8m 2016: £54.0m +24%
Free cash flow3 £55.7m 2016: £59.0m -6%
1.Before acquisition related charges. 2.Before fair value remeasurements and gain on disposal of assets. 3.Before cash payments on acquisitions and dividends.

Chairman’s Statement

Strong performance in 2017

The Group has a long track record of consistent delivery against its key performance metrics.

John Nicholas Chairman

Principal corporate objectives

Achieve double-digit growth in adjusted EPS over the business cycle
Generate TSR growth in the upper quartile of the FTSE 250
Deliver progressive dividend growth with two times dividend cover

Group at a Glance

Well diversified by geography and business area

Life Sciences

Healthcare (84% of revenues)

Clinical diagnostic instrumentation, consumables and services supplied to hospital pathology and life sciences laboratories for the testing of blood, tissue and other samples. Surgical medical devices and related consumables and services supplied to hospital operating rooms, GI/Endoscopy suites and clinics.

Environmental (16% of revenues)

Environmental analysers, containment enclosures and emissions monitoring systems.

Group Revenue

28%

Employees

412

Primary growth drivers

  • Public and private healthcare spending
  • Population ageing and increasing life expectancy
  • Health & Safety and Environmental regulation
Seals

North America – Aftermarket (32% of revenues)

Next day delivery of seals, sealing products and cylinder components for the repair of heavy mobile machinery.

North America – Industrial OEM (29% of revenues)

Sealing products, custom moulded and machined parts supplied to manufacturers of specialised industrial equipment.

International (39% of revenues)

Sealing products and filters supplied outside North America to Aftermarket and Industrial OEM customers as well as to Maintenance, Repair and Overhaul (“MRO”) operations.

Group Revenue

43%

Employees

862

Primary growth drivers

  • General economic growth
  • Activity and spending levels in Heavy Construction and Infrastructure
  • Growth in industrial production
  • MRO expenditure in Mining and process industries
Controls

Interconnect (59% of revenues)

Wiring, cable harness components and cable accessories used in specialised technical applications in Aerospace, Defence, Motorsport, Energy, Medical, Rail and Industrial.

Specialty Fasteners (18% of revenues)

Specialty aerospace-quality fasteners supplied to Civil Aerospace, Motorsport, Industrial and Defence markets.

Fluid Controls (23% of revenues)

Temperature, pressure and fluid control products used in Food, Beverage and Catering industries.

Group Revenue

29%

Employees

437

Primary growth drivers

  • General growth in the industrial economy
  • Activity and spending levels in Aerospace, Defence, Motorsport, Energy, Medical and Rail
  • Equipment installation and maintenance in Food, Beverage and Catering

Chief Executive’s Review

Building larger, broader-based businesses

The Group’s strategy, consistently applied, delivers strong growth in earnings and shareholder value.

Bruce Thompson Chief Executive Officer

Our Year in Review

  • Revenue and adjusted operating profit increased by 18% and 19% respectively
  • Robust underlying revenue growth of 7%, with strong tailwind from currency and modest contribution from acquisitions
  • Operating margins up by 10bps to 17.3% with easing of transactional currency pressures in Healthcare and improved margins in acquired businesses
  • Acquisition spend of £20.1m in the year; £90m over three years
  • Strong free cash flow funded acquisitions and healthy dividend; cash funds of over £20m at end of year
  • 19% growth in Adjusted EPS; 24% growth in TSR; 24% ROATCE
Financial performance

In 2017, the Group delivered strong double-digit growth in revenue and earnings with robust underlying growth, a modest net contribution from acquisitions and further benefiting from the strong tailwind from the depreciation in UK sterling.

The Group’s reported revenues increased by 18%, with currency movements increasing revenues by 9% and acquisitions contributing a further 2% to the revenue growth, net of a small prior year disposal. On an underlying basis, after adjusting for acquisitions and for currency effects on translation, Group revenues increased by 7%.

Group adjusted operating margins improved by 10bps to 17.3%, compared with 17.2% in the prior full year and the first half of the current year. Management gross margins have reduced overall by 60bps with margin pressures in several businesses from a combination of the impact on product costs from currency movements and increases in other margin support costs. These pressures have been partly mitigated by the stronger gross margins in recent acquisitions and transactional currency pressures in the Healthcare businesses have eased during the year. Operating costs as a percentage of revenue have reduced by 70bps with improved operating leverage from the increase in revenues and generally tight control of operating costs.

Working capital as a percentage of revenue was managed down through the year to 15.0%, although the Group’s free cash flow reduced by 6% to £55.7m, reflecting the absence of prior year proceeds from one-off property sales and the divestment of the Medivators business.

Sector performance

In Life Sciences, underlying revenues increased by 4% after adjusting for currency movements, the acquisition of Abacus and the prior year disposal of the Medivators business. The Healthcare businesses benefited from stronger capital revenues as new technology was introduced and delayed projects were reactivated in the laboratory diagnostic sector. The Environmental businesses delivered steady growth in instrumentation sales and increasing service contract revenues.

In Seals, underlying revenues increased by 4% after adjusting for currency movements and the acquisitions of PSP and Edco. In North America, the improving trend in industrial activity seen in the second quarter, following the US election, strengthened further as the year progressed. In the International Seals businesses, strong growth in the UK and Scandinavia was offset by more challenging market conditions in Switzerland, Russia and Australia.

In Controls, underlying revenues increased by 14% after adjusting for currency movements and the prior year acquisitions of Cablecraft and Ascome. The Specialty Fasteners business increased revenues strongly, driven principally by a ramp-up in demand from customers in the Civil Aerospace sector. The Interconnect and Fluid Controls businesses also delivered good growth benefiting from increased project work and targeted investment in sales resources.

Acquisitions and disposals

Over the last three years, a total of ca. £90m has been invested in acquisitions which contributed ca. 16% of 2017 Group revenues.

During 2017, total acquisition spend was ca. £20m, of which ca. £15m was invested in the acquisition of Abacus, a long established supplier of diagnostics instrumentation and consumables to the Pathology and Life Sciences sectors in Australia and New Zealand. Abacus adds critical mass to our existing Healthcare businesses in the region and opens up new growth opportunities.

In addition, two smaller bolt-on acquisitions were completed in the Seals Sector during the year – PSP in the US and Edco in the UK. After the year end, a small acquisition was completed in the Controls Sector of Coast Fabrication Inc. (“Coast”), a US specialty fastener distributor.

Business Model

Making us essential to our customers

Essential Products
What we put in

Our businesses focus on supplying essential products and services funded by customers’ operating rather than capital budgets and supplied across a range of specialised industry segments.

The majority of the Group’s revenues are generated from consumable products. In many cases, the products will be used in repair and maintenance applications and refurbishment and upgrade programmes, rather than supplied to original equipment manufacturers.


What we get out

Recurring income and stable revenue growth

Our focus on essential products and services contributes to the Group’s record of stable revenue growth over the business cycle.

Our businesses target GDP plus levels of underlying revenue growth, over the economic cycle, with higher growth rates achieved at the Group level through carefully selected value enhancing acquisitions.


How we have made progress

Performance is measured by the underlying growth in revenue, after adjusting for currency and acquisitions:

  • This year, the underlying growth has been +7%.
  • Over five years, the average has been +5% p.a..
Essential Solutions
What we put in

Our businesses design their individual business models to provide solutions which closely meet the requirements of their customers:

  • Highly responsive customer service, such as the next day delivery from stock of essential, but low value items.
  • Deep technical support, where we work closely with our customers in designing our products into their specific applications.
  • Added value services which, if we did not provide these services, customers would have to pay others to provide them or would require them to invest in additional resources of their own.


What we get out

Sustainable and attractive margins

By supplying solutions, not just products, we build strong long term relationships with our customers and suppliers, supporting sustainable and attractive margins.

Our businesses achieve sustainable and attractive gross margins by offering strongly differentiated products and customer focused solutions within specialised market segments. By running efficient operations, these gross margins are converted into healthy operating margins.


How we have made progress

Performance is measured by the level and stability over time of gross and operating margins:

  • Gross margins have remained broadly stable over many years, excluding shorter term currency effects.
  • This year, adjusted operating margin improved 10bps to 17.3%.
  • Over five years, the average adjusted operating margin has been 18%.
Essential Values
What we put in

We encourage an entrepreneurial culture across our businesses, through a decentralised management structure.

We want the managers to feel that they have the freedom to run their own businesses, while being able to draw upon the support and resources of a larger group where this is beneficial.

Within our businesses we have strong, self-standing management teams who are committed to and rewarded according to the success of their businesses.


What we get out

Agility and responsiveness

Our decentralised organisational model ensures 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.

Agility and responsiveness in the businesses ensure close management of operating costs and working capital and deliver strong free cash flow.


How we have made progress

Performance is more difficult to measure directly, but non-financial KPIs can give an indication of organisational stability and health:

  • This year, average length of service is 6.7 years against a five-year average of 6.5 years.
  • Number of working days lost to sickness has been only ca. 1% for the last five years.

Compounding growth through acquisitions

Acquire
What we put in

Clear business criteria have been established to guide the Group’s acquisition programme:

  • fit with the Group’s business model;
  • marketing led with strong customer relationships;
  • secure supply of high quality, differentiated products; and
  • capable management.

The principal financial criteria are:

  • Track record of stable, profitable growth and cash generation.
  • Exceed post-tax IRR threshold of 13% to ensure 20%+ pre-tax return on investment.


What we get out

Acquisitions give entry into new but related markets and thereby extend the reach of the existing businesses and bring new growth opportunities.

The Group applies a consistent level of effort and resources to identifying and developing acquisition opportunities. However, the output in terms of acquisitions completed, ebbs and flows depending on the acquisition environment.

To achieve the Group’s objective of strong double-digit growth, acquisition spend of at least £30m p.a. is targeted.


How we have made progress

Abacus

In April 2017, the DHG group acquired Abacus, a long established supplier of specialised diagnostic instrumentation and consumables in Australia and New Zealand. Abacus has a good fit with our existing DS business, adds attractive product lines, critical mass and economies of scale in Clinical Diagnostics and gives entry to new segments within the broader Healthcare and Life Sciences sectors.

Build
What we put in

The acquisitions we make are of businesses which are already successful and with a good track record. However, these businesses have typically reached the point where additional resources are needed to take them to the next level of growth.

Working with the management, we provide the investment required to build a solid foundation to allow the business to move to a new level of growth. The investment we make in new acquisitions will normally be in new facilities and IT systems, increased but better managed working capital and additional management resource.


What we get out

Except in the case of smaller bolt-on acquisitions, the acquired companies maintain their distinct sales and marketing identity and strong independent management teams.

Where there are opportunities for synergies with other Group businesses, these are managed in larger business clusters. Synergies typically include:

  • Cross-selling between the businesses
  • Joint purchasing between the businesses
  • Shared operational infrastructure and shared back-office functions


How we have made progress

US Industrial OEM Seals

In the second half of this year, a senior leadership team was established to manage the cluster of Industrial OEM Seals businesses in the US. While maintaining the distinct identities of the businesses and close local contact with the customers, key functions including Sales, Supply chain, Technical and Finance will be managed centrally by this team. Investment will also be made in implementing a new ERP system to replace the disparate legacy IT systems.

Grow
What we put in

Once the acquisition is integrated into the Group, with a solid platform established, the focus is on delivering stable, profitable growth.

The results of the Acquire, Build, Grow strategy can be seen in the improving revenue growth and operating margins post acquisition.


What we get out

By the third year post-acquisition, underlying revenue growth for the acquired businesses is typically higher than the Group average and operating margins have improved by 200–300bps on average.

These improvements in financial performance ensure that the Group creates value through its acquisition programme and maintains ROATCE above the 20% threshold.

How we have made progress

Cablecraft

Cablecraft, in only its second year as part of the Group, is already showing the benefits of investments made post-acquisition in increasing management and sales resources, expanding e-commerce capabilities and refurbishing facilities.

Under the continued strong leadership of one of the former owners, Cablecraft has increased revenues in 2017 by 7% on a like-for-like basis and has improved operating margins by ca. 300bps.

Sector Review

Life Sciences
Highlights from the year
  • Sector revenue growth of 15%; underlying growth of 4% after adjusting for currency, an acquisition and a disposal
  • In Canada, DHG underlying revenues increased by 6% with strong capital revenues as projects were reactivated; AMT and Vantage combined into single Surgical Products business
  • In Australia, underlying revenues increased by 4%; Abacus acquired in April 2017 and being integrated with DS to form a larger broader-based business
  • TPD revenues broadly flat in Ireland and the UK with new suppliers and products replacing suppliers moving to direct supply model
  • Environmental businesses increased underlying revenues by 3%, finishing the year with strong order books
  2017 2016
Revenue 2017£125.9m 2016£109.9m   +15%
Adjusted operating profit 2017£23.3m 2016£19.6m   +19%
Adjusted operating margin 201718.5% 201617.8%   +70bps
Free cash flow 2017£17.0m 2016£19.0m   -11%
ROATCE 201719.7% 201618.0%   +170bps
Potential for growth
  • Increase share of specialised segments of Healthcare markets in Canada, Australia and UK/Ireland
  • Leverage product portfolio across existing businesses and extend into other medical disciplines
  • Pursue further acquisition opportunities in Europe and Asia-Pacific
  • Continue to develop product and geographic spread of Environmental businesses
Seals
Highlights from the year
  • Sector revenue growth of 17%; underlying growth of 4% after adjusting for currency and acquisitions
  • In North America, Aftermarket underlying revenues increased by 5% with a good performance in the core Hercules business and a strong recovery in the HKX business
  • Industrial OEM underlying revenues in North America increased by 7% with an improving trend through the year following the US election
  • Senior leadership team established to manage cluster of Industrial OEM businesses in the US
  • International Seals businesses increased underlying revenues by 1% with performances of the businesses very dependent on local market conditions
  2017 2016
Revenue 2017£195.3m 2017£166.6m   +17%
Adjusted operating profit 2017£31.9m 2017£28.2m   +13%
Adjusted operating margin 201716.3% 201716.9%   -60bps
Free cash flow 2017£24.9m 2017£24.9m
ROATCE 201722.8% 201720.1%   +270bps
Potential for growth
  • Continue to gain share in Aftermarket Seals in North America through superior marketing, “Webstore” e-commerce and new products
  • Build and expand the group of Industrial OEM Seals businesses in North America
  • Explore opportunities more broadly in Industrial Distribution in North America
  • Build larger, broader-based International Seals business in the EMEA and Asia-Pacific regions
Controls
Highlights from the year
  • Sector revenue increased by 23%; underlying increase of 14% after adjusting for currency and acquisitions
  • The Interconnect businesses benefited from increased project work and delivered strong underlying growth of 8%; Cablecraft has expanded the range of products supplied and markets served
  • Clarendon increased revenues by over 30%, with growth driven by increased customer demand in Civil Aerospace and Motorsport
  • Fluid Controls increased revenues by 14% with upturn in refrigeration equipment sales and increased export sales in Europe and the US
  2017 2016
Revenue 2017£130.7m 2017£106.1m   +23%
Adjusted operating profit 2017£23.0m 2017£17.9m   +28%
Adjusted operating margin 201717.6% 201716.9%   +70bps
Free cash flow 2017£18.6m 2017£16.4m   +13%
ROATCE 201732.2% 201727.0%   +520bps
Potential for growth
  • In Interconnect, create a broader-based European cable harnessing business and extend product range with own-branded products
  • In Specialty Fasteners, build on strong positions in Civil Aerospace and Motorsport and expand in niche industrial markets
  • Continue to reposition Fluid Controls business towards growth segments of the Food & Beverage industry
  • Explore opportunities outside the UK and Northern Continental Europe

Finance Review

Maintaining focus on financial strength

The businesses returned to robust underlying revenue growth delivering 7% on a Group basis.

Nigel Lingwood Group Finance Director
  • Adjusted operating margin 17.3%
  • Free cash flow £55.7m
  • ROATCE 24.0%