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Continued Strong Performance

In 2011 Diploma achieved very strong growth in operating profits, supported by robust cash generation as demand continued to remain buoyant in each of the Group's principal markets. Revenue increased by 26% to £230.6m (2010: £183.5m) and adjusted operating profit, which is before acquisition related charges, increased by 41% to £45.2m (2010: £32.1m). The adjusted operating margin increased to a record 19.6% from 17.5% in the 2010 financial year, demonstrating the high degree of operational leverage in the Group's businesses and in the North American Seals businesses in particular. In the medium term, this level of operating margin is likely to fall back slightly as new investment is made in the businesses to add resource and upgrade the infrastructure to support future growth in the Group.

Adjusted operating profit in the second half of the year of £23.1m (2010: £17.5m) was 32% ahead of the comparable period last year and represented 51% of the full year's operating profit. This compared with an increase in operating profits of 51% in the first half of the year.

These results demonstrate that the recovery in 2010, following the 2009 recession, continued to be strong throughout much of 2011. Against increasingly demanding comparatives, the growth rates moderated slightly towards the end of the financial year.

Substantial Increase in Underlying Operating Profits

Acquisitions completed during both 2010 and 2011 incrementally contributed £17.2m and £3.2m to revenues and adjusted operating profit, respectively.

The net impact on the Group's results from the translation of the results of the overseas businesses to UK sterling was much smaller than in previous years. This year Group revenues and adjusted operating profits were reduced by £0.5m and £Nil respectively, as the impact of a weaker US dollar offset the benefit of a stronger Canadian dollar. On a transaction basis, a small gain to the gross margin of the UK businesses, from the volatility of the Euro during the year, was offset by a small net loss to gross margins in the Canadian Healthcare businesses from the effect of their US dollar hedging programme.

On an underlying basis, revenues and adjusted operating profit increased by 17% and 31% respectively, after adjusting for these items.

Adjusted Profit, Earnings per Share and Dividends

Adjusted profit before tax increased 39% to £44.9m (2010: £32.2m), after net interest expense of £0.3m (2010: income of £0.1m). IFRS profit before tax, which is after acquisition related charges of £4.8m (2010: £3.5m) and fair value remeasurements of £0.9m (2010: £2.0m), was £39.2m (2010: £26.7m).

The Group's adjusted effective accounting tax charge represented 28.7% (2010: 29.2%) of adjusted profit before tax which was also broadly consistent with the cash tax rate of 27.6%. This year's effective rate benefited from a reduction in the statutory corporate tax rates in both the UK and in Canada, although this was somewhat offset by the higher proportion of profits contributed by HFPG in the US, where the effective tax rate is ca. 38%.

Adjusted earnings per share increased by 48% to 27.9p, compared with 18.9p last year, which was much larger than the increase in adjusted profit. This larger increase reflected the impact of buying-out the 25% minority interest in AMT during the year. IFRS basic earnings per share increased to 24.0p (2010: 14.6p).

In light of the strong increase in earnings, the Directors have recommended an increase in the final dividend to 8.5p per share; this gives a total dividend for the year of 12.0p per share which represents an increase of 33% on the prior year.

The dividend cover increases to 2.3 times which is larger than previous years, but reflects a degree of caution, given the current uncertainty in the direction of global markets.

Robust Free Cash Flow

The Group continued to generate strong free cash flow of £25.0m in 2011, despite the return of working capital to more normal levels. Last year's free cash flow was £29.8m, but this included £6.4m of proceeds from the sale of the Anachem businesses. Free cash flow is before expenditure on acquisitions or returns to shareholders.

Operating cash flow increased to £40.3m (2010: £34.3m) after investing £7.4m (2010: £0.1m reduction) in working capital, mainly to rebuild inventories during the year to support the current level of trading activity. The ratio of working capital to revenues at 30 September 2011 was 16.1% (2010: 15.4%) which was still below the longer run average of ca. 17%.

Group tax payments increased to £12.4m (2010: £9.3m) in line with the increase in taxable profits and £1.6m (2010: £0.4m) was spent on funding the Employee Benefit Trust to allow it to purchase ordinary shares in the Company. Capital expenditure increased to £1.7m (2010: £1.3m) but remained below the £2.1m charge for depreciation. The Canadian Healthcare businesses spent £0.4m on acquiring field equipment in support of their customer contracts with Canadian hospitals. In Seals, HFPG spent £0.3m on two new custom seal machines and a further £0.2m on completing the warehouse automation project in Clearwater. Other capital expenditure of £0.8m included enhancements to existing facilities and further investment in the IT infrastructure across the Group, including £0.2m on a new ERP system in Sommer.

The Group spent £28.2m (2010: £11.0m) of its cash resources on acquiring businesses, including minority interests, during the year and £14.8m (2010: £10.2m) on paying dividends to both Company and minority shareholders.

Significant Reduction in Liabilities to Minority Shareholders

During the year the Group acquired the outstanding 25% minority shareholding in AMT, one of the Group's Healthcare businesses in Canada, for £12.5m. These shares were acquired through the exercise of put/call options, agreed at the time of acquisition in September 2007.

Following this transaction, the liability retained by the Group to purchase the remaining minority shareholdings has fallen significantly to £2.0m (2010: £13.2m). This liability relates to minority shareholdings held in M Seals and BGS and in HPS, which is a small subsidiary of the RT Dygert seals business; the majority of this liability will be payable in December 2012 to acquire the outstanding 10% minority shareholdings in M Seals. These liabilities arise under put/call options entered into at the time of acquisition and are based on the Directors' estimate of the Earnings Before Interest and Tax ("EBIT") of these businesses when the options crystallise.

Based on the expected performance of these businesses, the Directors have reassessed the potential liability at 30 September 2011 to acquire the remaining outstanding minority interests. The fair value remeasurement of these options has led to a financial charge of £0.9m (2010: £2.0m) being made in the consolidated Income Statement.

Value Enhancing Acquisitions

The Group spent £28.2m on acquisitions during the year, including £12.5m on acquiring the outstanding 25% minority shares in AMT. Expenditure of £14.8m was paid during the year to acquire the Canadian healthcare business of CMI in December 2010; a provision of £1.1m has also been made at the year-end for deferred consideration relating to this acquisition. These acquisitions, including those made towards the end of the last financial year, have made a strong contribution to earnings this year. During the year deferred consideration of £0.9m was also paid in connection with three smaller acquisitions completed last year.

Acquisition intangible assets of £9.3m were recognised on completion of these acquisitions, as well as goodwill of £20.4m, reflecting the amount paid in excess of the value of the net assets. The acquisition of the minority interest in AMT accounted for £13.1m of this goodwill and the balance of £7.3m comprised the value in CMI relating to both the prospects for sales growth in the future (from both new customers and new products) and from operating cost synergies.

Excellent Return on Trading Capital and Strong Balance Sheet

The Group achieved an excellent return on trading capital employed ("ROTCE") of 25.4% in 2011 (2010: 22.1%). ROTCE is a pre-tax measure and includes all gross historic goodwill and intangible assets and represents an indication of the profitability of the Group. This improved return arose from a combination of the growth in profits and from strong management of working capital across the businesses.

In absolute terms, trading capital employed, which represents the amount of operational assets held by the businesses, increased by £30.6m to £152.9m (2010: £122.3m). The majority of this increase arose from the acquisition of intangible assets with the balance being contributed by investment in working capital to meet the stronger trading environment.

The Group recognises the importance of maintaining a strong balance sheet, particularly during this period of uncertainty in the global financial markets. At 30 September 2011 the Group held net cash funds of £12.2m, with £17.8m of cash balances offset by £5.6m of borrowings. The cash funds are generally repatriated to the UK, unless they are required locally to meet certain commitments, including acquisitions.

The Group borrowings of £5.6m at the year-end were drawn from the Group's £20m revolving credit facility to help finance the purchase of the minority interests earlier during the year. The Group has an option to extend these bank facilities to £40m, subject to market pricing, and these facilities remain available until November 2013.

Land at Stamford

The Group continues to retain approximately 150 acres of farm and former quarry land in Stamford which relates to a former legacy busines. This land is included in the balance sheet at £Nil and in the opinion of the Directors, it is unlikely to be worth more than £0.5m in its present condition. The Directors anticipate that this land will continue to be leased to a local farmer and there is no intention to dispose of this land in the foreseeable future.

Valuation of Merged Pension Scheme

The Group successfully completed the merger of its four small closed defined benefit pension schemes at 30 September 2010 and during 2011 finalised an actuarial funding valuation of the merged Scheme as at that date. The funding deficit in the newly merged Scheme was £2.7m, representing a funding level of 87%. The Company has agreed with the Trustees to continue to pay £320,000 into the Scheme each year (increasing by 2% p.a.) with the objective of eliminating the deficit within ten years. With the scheme merger now completed, attention will be focused on exploring opportunities to reduce the Group's pension liability through the use of structured insurance products.

On an accounting basis, the net pension liability increased marginally at 30 September 2011 to £5.4m (2010: £5.3m). The higher accounting deficit reflects the accounting requirement to value the liabilities at a more conservative market discount rate, compared with the higher discount rate used in the funding valuation.

Both the funding and accounting valuations have benefited this year from HM Government's decision earlier in the year to use the Consumer Price Index ("CPI") instead of the Retail Price Index ("RPI") as the basis for statutory inflation increases in certain pension benefits. The benefit to the accounting valuation from the change to CPI is ca. £1.4m and this is included in the consolidated Statement of Comprehensive Income.

Pension benefits to existing employees, including the Executive Directors, are provided through defined contribution schemes at an aggregate cost in 2011 of £0.8m (2010: £0.7m).

Measuring Financial Performance

The Group continues to use a number of specific measures to assess the performance of the Group and these are referred to throughout this Annual Report in the discussion of the performance of the businesses. These measures are not defined in IFRS, but are used by the Board to assess the underlying operational performance of the Group and its businesses. As such the Board believes these performance measures are important and should be considered alongside the IFRS measures. The alternative performance measures, which have been used in this Annual Report, are described in note 2 to the consolidated financial statements.

Reported performance takes into account all the factors (including those which the Group cannot influence, principally currency exchange rates) that have affected the results of the Group's business and which are reflected in the consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union.

There have been no new accounting or disclosure requirements this year that have impacted the Group's consolidated financial statements.

Nigel Lingwood

Group Finance Director