annu ralep t or2017 - diamorph · 26 group - change in equity 27 group - cash flow 28 parent...

Annual Report

2017

Diamorph AB (publ) — 556647-5371

5 CEO’s message

7 Strategy

10 Fire Protection

11 Marine

12 Rail

13 Ceramic Rollers

14 Vacuum Pumps and Compressors

15 Business Development

16 Administration Report

22 5 years record

Tables24 Group - Income statements

25 Group - Balance sheet

26 Group - Change in equity

27 Group - Cash flow

28 Parent Company - Income statements

29 Parent Company - Balance sheet

30 Parent Company - Change in equity

31 Parent Company - Cash flow

32 Notes

57 Auditor’s report

60 Board of Directors and Management

The formal annual report and accounts comprises pages 16 to 56.

Contents

4 Diamorph Annual Report 2017

“ Several of our business areas, including our rail, ceramic roller and European fire protection businesses have delivered very good growth.

Revenues428.7 (423.6) MSEK

2 % Increase at fixed exchange rates

58%Europe26%

USA

16%Rest of

the world

“

Diamorph Annual Report 2017 5

During 2017 I believe that Diamorph Group made good progress and a number of significant strategic developments have further strengthened the business.

Operationally we have been working throughout the year on our SEK 30 million capital investment in the Hob Certec ceramic roller business in the Czech Republic. This significant investment will position the Group to meet demand from the market for even longer rollers as customers seek to make productivity gains through investments in wider kiln designs. It keeps Diamorph right at the forefront of the market whilst also expanding capacity from previous levels and enabling improvements in customer service through shorter lead times. After the completion of final testing, the Group made its first sales of product manufactured in the new kiln in early 2018.

As noted previously, Diamorph started in 2016 to invest more resources to strengthen our sales and marketing teams. We have also invested in various other functional areas, including an upgrade to our innovation centre in Manchester. We always knew these were long-term investments and they have been deliberately phased in over a period of time to ensure they are appropriately targeted. The final phase of this additional invest-ment concluded during 2017 and will now be fully reflected in the 2018 cost base; however I am confident we have during 2017 started to see the first evidence of the benefits of these invest-ments. Overall, despite quite challenging market conditions for our Fire Protection business in the USA, it is pleasing to have reported 2% overall sales growth at fixed exchange rates during 2017 to reach SEK 428.7 million in sales.

In some ways 2017 has proved to be a frustrating year. Several of our business areas, including our Rail, Ceramic Roller and European Fire Protection businesses have delivered very good growth. We have also experienced some level of recovery in the Rotor Vane business, until more recently impacted by the down-turn in the oil and gas industry; however weakness in the marine sector and also the market for our fire protection products in the USA has offset much of this improvement. In the latter case, there has been a combination of challenges posed by competi-tion and substitution from LED lighting and lower specification alternatives. Changes in the product mix and investments in the infrastructure of the business contributed to a 0.6% reduction in

the gross margin percentage. Together with an increase of 1% in overheads (excluding acquisition-related and non-recurring items), adjusted operating profit was flat at SEK 143.9 million (33.6% margin).

The sales performance in 2017 again highlights the diversity of the Diamorph business, both in terms of the breadth of products we supply and the markets and countries we sell into. Diversity brings many benefits to the business including a breadth of expertise to find solutions for customers’ challenges and reduced dependencies on individual markets. Our largest customer continues to account for just 3% of our sales and our 10 largest customers still account for less than 20% of our sales. We sell into around 65 countries overall. But diversity also brings with it certain challenges, not least how to manage our resources effectively across a disperse portfolio of business areas.

So, in the last few months, we have critically appraised this challenge and concluded to slightly adapt our strategy as out-lined on pages 7 to 15 of this Report. In summary the changes more clearly identify our core business areas so as to give them greater focus and ensure the optimal level of resource allocation alongside our many other business development opportuni-ties. Key other elements of our strategy, such as our focus on developing highly differentiated products for niche market segments, are unchanged. I am confident this adaptation to the strategy will start to reap rewards in the year ahead.

One of our business opportunities still rests with our Ferobide product, a weldable wear part, which we launched toward the end of 2015. Sales of this product decreased in 2017 as we focused sales and marketing efforts within the agricultural sector on a narrower range of more targeted applications where the product benefits are strongest. We continue to actively explore new markets for the technology and remain optimistic about opportunities in the longer term.

Focusing more on financial matters, Diamorph successfully completed a refinancing of its borrowings during 2017. This followed a strategic review of the Group’s borrowing structure to ensure it appropriately balances the certainty of availability of finance, borrowing costs, and the flexibility we desire to support our growth ambitions. Between March and September

CEO’s messageAt the forefront of the market


2017, the Company’s SEK 500 million of bonds were repaid using a combination of existing surplus cash accumulated within the Group as well as from proceeds drawn down through a new senior secured bank facility. The refinancing triggered a number of one-off charges which are reflected in the income statement in 2017, including the payment of early redemption fees to bondholders; however we anticipate a payback period of approximately one year.

The strategic refinancing followed the acquisition of the final 10% of Diamorph Bearings AB in February 2017 and so the Group now controls 100% of each of its subsidiaries. Since 2012 a sig-nificant part of the cash flow generated by the Group has been applied to deferred and other payments linked to the Tenmat and HOB Certec acquisitions. The completion of this transac-tion meant that all of these payments were concluded.

Overall the Group finished 2017 with net debt of SEK 290.2 million representing 1.94x EBITDA. Despite flat operating profits, the reduction in financing costs since September 2017 caused adjusted profits before tax to increase by 9% and a lower tax rate (influenced partly by a reduction in the UK corporation tax rate to 19% in April 2017) further caused adjusted earnings per share to increase by 15% to SEK 1.79 per share.

Looking ahead there are strong grounds for optimism. With improved sales growth of 6% in the second half of 2017 and 8% growth in the first quarter of 2018, I am optimistic about our prospects in 2018. Supported by an updated strategy, the investments we have made in the business in the last couple of years starting to bed in, and a good pipeline of opportuni-ties, I look ahead with confidence. On top of the opportunities presented to our existing businesses, we are actively looking to accelerate growth by making selective acquisitions that comple-ment and support the organic growth strategy.

In January 2018, Anthony Moore resigned as a board member of Diamorph AB (publ). He was previously the Managing Director of the Tenmat business (acquired by the Group in July 2012) and stayed on as a Diamorph board member to ensure continuity during the management transition. We thank him for his service to the board over the past 5 years and wish him well during a hard-earned retirement.

Finally I would also like to once again thank all employees, customers, shareholders and other business partners for their support during 2017.

Gordon MacLeman, CEO

Key figuresAmounts in Swedish Krona (SEK) millions (unless stated otherwise)

FY 2017 FY 2016 Restated

Δ%

Net sales 428.7 423.6 2¹

Adjusted operating profit (EBITA)¹ 143.9 144.1² 0Adjusted operating profit margin (EBITA)¹, % 33.6 34.0² Adjusted profit before tax¹ 116.5 106.7² 9

Adjusted earnings per share¹ (SEK) 1.79 1.55² 15Average number of shares in issue (’000) 52,847 52,741

Operating cash flow 119.1 115.8 3Operating cash conversion, % 82 83

Net debt 290.2 305.9 –5EBITDA 149.8 150.5 0Net debt: EBITDA (ratio) 1.94 2.03

Operating profit - reported (IFRS) 145.0 139.6 4Profit before tax - reported (IFRS) 100.5 141.1 –29Earnings per share - reported (IFRS) (SEK) 1.45 2.08 –30

1The Group provides adjusted figures as key performance measures in addition to those reported under IFRS. The adjusted measures, and their definitions, are set out on pages 54 and 55. Reconciliations showing how adjusted performance measures are derived from those reported under IFRS are shown on pages 24 and 54.2The adjusted performance measures for 2016 have been restated to exclude acquisition-related intangible asset amortisation charges and associated tax credits. This change is explained on page 17.


OrganisationFounded in 2003, Diamorph has its creative roots in materials research at Stockholm University. Since its inception, the company has been focused on providing advanced materials solutions to customers’ problems. Today the Group has pro-duction, development and sales across two manufacturing units in the United Kingdom and the Czech Republic, as well as sales teams based in Sweden, USA, France, Italy and Germany.

Value propositionDiamorph provides its customers with high performance solutions that ensure technological advantage and peace of mind in the demanding environments in which they operate.

Our productsDiamorph materials and components extend the performance, lifetime or reliability of products and processes in some of the most intense operating conditions in the world. From con-taining and preventing the spread of fire in densely populated accommodation blocks to taking the strain in the latest design of tilting train suspension systems, and from reducing energy loss from high temperature marine transportation tanks to ensuring continuous running in high volume production kilns in the tile production industry, Diamorph products solve customer problems in around 65 countries across six continents.

TrendsAround the world, populations are increasingly concerned to ensure higher standards of health, safety and environmental regulation, and global industries are adapting to those increased requirements. At the same time, it is becoming clearer every day that the planet’s resources are finite, and companies are under increasing pressure to utilise those resources more efficiently. These trends are driving demand for materials and components with higher performance thresholds - materials which allow plant and machinery or transportation systems to operate safer, more efficiently, for longer and with lower environmental impacts, or which allow buildings to protect the health and safety of the people in them for longer in the event of fire, whilst consuming less energy in normal use. Diamorph Group’s strong track record in material and component design, combined with a deep understanding of our customers’ requirements, means we are well placed to produce practical solutions to some of industry’s toughest problems.

StrategyOur strategy looks to achieve growth in sales and profitability by continuing to use our “deep niche” business model, carefully allocating resources between a number of core business areas and our business development opportunities, and by making a number of targeted acquisitions.

A photograph of the opening ceremony to launch HOB Certec's SEK 30 million new kiln investment

Strategy


Friction modification

Abrasionresistance

Wearresistance

Crackresistance

Flexuralstrength

Compressivestrength

Lowthermal

expansion

Hightemperature

stiffness

Impactstrength

Hightemperature

stabilityElectricalinsulation

Noise reduction

Reductionof volatile

organiccompounds

Lowthermal

conductivity

Thermalshock

resistanceChemical resistance

Free ofharmfulfibres

Oxidationresistance

Fire resistance

Weightsavings

Smoke reduction

Fire protection

Hydro-phobicity

MARKET NEEDS& OPPORTUNITIES

MATERIAL DESIGN

Regulation

Inno

vatio

n Quality

Cost

effi

cienc

y

DifferentiationDeep niche

An illustration of the Diamorph model


The Diamorph ModelIn order to meet the diverse requirements of our customers we work with a variety of advanced materials platforms, including ceramics, fibre-reinforced polymers and metals. Within this, Diamorph seeks to focus on those materials which represent the “top of the pyramid” in their material class. Our products are designed to address a very wide range of func-tional requirements (as illustrated in the chart opposite) and are differentiated by their exceptional technical properties. We maintain close relationships with our customers in order to understand their current requirements, and anticipate future developments in their industries. We look to help our customers to meet increasingly stringent regulations (e.g. environmental, health & safety etc.), innovate new products, drive cost efficiency and quality or performance improvements. In doing so we look for “deep niche indicators” (strong regulatory frameworks, long testing and approval cycles, process criticality) in our chosen markets, which, although often relatively small, are usually global.

Focused GrowthDiamorph operates in a large number of diverse industrial markets. Whilst valuing the benefits which this brings, we recognise the benefits of focusing resources on key oppor-tunities, and of correctly timing our investments in new and developing technology. We have therefore identified 5 core business areas (Fire Protection, Rail, Marine, Vacuum Pumps & Compressors and Ceramic Rollers) around which we will focus a significant proportion of our current resources. In each of these business areas Diamorph has a highly differentiated product range, strong commercial channels to market, good growth potential and there is a sizeable accessible market.

We maintain close relationships with our customers in order to understand their current requirements, and anticipate future developments in their industries.

Business DevelopmentThe remainder of our operations are grouped within our Business Development category. Within this group we have businesses with some but not all of the characteristics we would associate with a core business, either in terms of a fully proven differen-tiated product range, strong sales channel, growth potential or market size. Collectively we see Business Development providing strong growth potential, and as these business opportunities develop, we expect that a number of them will grow to become a core business area in their own right.

AcquisitionIn addition, we will continue to seek potential acquisition targets which will complement and support the organic growth strategy.


Our range of Tenmat fire protection products and materials are based on so-called intumescent materials – technologically advanced fire protection materials which expand rapidly when heated. This expansion process can be tailored to suit a variety of applications where controlled or directional expansion is used to seal off a wide variety of construction joints, cavities or service penetrations.

Diamorph exclusively use in-house manufactured intumescent materials, and our ability to adapt and modify materials to suit ever more demanding applications sets us apart from the competition. Our product designers can form our intumes-cent material into complex shapes, allowing the direction of expansion to be directly focused on the quick and effective sealing of a cavity in a fire situation. This ability to produce pre-formed components without the requirement for metal supports means our products are lighter weight and easier to install than standard industry or competitive solutions.

An example of this is our Ventilated Fire Barrier range for use in the cavity of external wall and façade systems. Such façade systems are designed to be held away from the inner structure of the building to maintain a ventilation gap and improve energy

efficiency. However, this results in the open cavity acting like an open chimney that would allow fire to spread. Our range of intumescent materials has enabled us to develop a range of Ventilated Fire Barriers that have the ability to maintain an open air gap in normal use but rapidly expand to prevent fire spread.

Across Europe, North America and Australasia, Tenmat’s fire protection products offer outstanding performance, backed by comprehensive third party fire test data and approvals giving architects, installers and building inspectors peace of mind on the fire safety of their buildings.

Diamorph has long standing relationships with industry leading OEMs, specialist fire protection suppliers and supplies both international and national building material distributors. We have market leading positions in a number of key fire protection segments, and tightening fire protection regulations around the world present significant potential for growth. Diamorph is fully committed to developing products which lead the way in meeting the expectations of the global construction industry.

Fire Protection


Within the marine industry Diamorph supplies high quality com-posite bearings for demanding and critical applications such as propeller shafts, rudder systems and steering gears. We also supply a range of bearings for applications on the deck of the ship including hatch covers, winches, davits and lifeboat hooks. FEROFORM® and RAILKO® are advanced engineering com-posite materials that are fitted in over 8,000 vessels worldwide. Our marine bearings offer ship-owners, shipyards, designers and OEMs considerable benefits in terms of performance, reli-ability, ease of use, availability and design.

Our materials combine high strength with excellent wear resistance and durability, yielding high performance bearings for all types of service conditions, especially in arduous abrasive and sand laden waters, thus reducing maintenance and operating costs for end users. Furthermore, our composites are proven to resist biofouling which can help avoid premature wear due to organic growth, a common problem with water lubricated bearings.

For over 25 years Tenmat’s FEROFORM® F3637 Tanker Sup-port Pad System has been the world’s leading solution for the transportation of hot cargos including bitumen, asphalt and sulphur. The system provides the independent cargo tanks with high temperature insulation along with unrivalled load bearing support, typically 4 times the load bearing capacity of any other product available in the market place. Consequently Tenmat’s FEROFORM® F3637 Tanker Support Pad System allows the ship-owner to use less supports without compromising perfor-mance, particularly in the harsh conditions which vessels are regularly subjected to at sea. FEROFORM® F3637 pads are installed on over 75 vessels ranging from 3,000 tonne to 37,000 tonne vessels, they are maintenance free and come with a life-time guarantee such is the confidence we have in our system.

Diamorph marine products are used across the marine industry for naval, commercial and passenger vessels with ship-owners enjoying the benefits of our high quality and resilient materials and components. We have extensive stock and availability in over 45 countries via our worldwide distribution network and our products are approved by all of the major marine classifi-cation societies giving the ship-owner both flexibility, peace of mind and the assurance of high quality.

An illustration of how Diamorph’s tanker support components are used in a Bitumen tanker vessel

Marine


Our bearings and wear parts for the rail industry are based on our range of advanced composite materials, which provide long service intervals, quiet operation and low friction performance without need for lubrication, while also fulfilling the latest fire standards.This ultimately means peace of mind for rolling stock owners and operators who rely on Diamorph’s industry-leading solutions to give protection from derailment and fire.

We have designed, manufactured and supplied the railway industry with innovative composite rail components for more than 100 years, and in several cases our products have evolved to become the industry standard. We are approved and speci-fied by most large European rail authorities including Deutsche Bahn, SNCF, RENFE, British Rail and many others. We not only manufacture standard bearings and wear parts, but also produce tailor-made solutions to operate in specialised appli-cations within the passenger, freight and locomotive industries.

Within the freight sector our materials are approved by major railway authorities and OEMs. They are used in a wide range of applications like centre pivot liners (CPL), side bearer liners (SBL), brake gear bushes, hook guide plates and friction damper bushes – challenging environments where RAILKO® materials’ controlled friction and long wear life provide outstanding per-formance.

For passenger rail we supply the most demanding applications, such as gangway tread plates, coupler bushes, centre pivot liners, side plates and anti-roll bar bushes. Additionally, the high load capabilities of our materials make them suitable for locomotives for replacing traditional lubricated metallic bear-ings with a lubrication-free solution. They are widely used by all leading locomotive manufacturers in a wide range of demand-ing applications.

With strong market positions in Europe and long track record, our high performing products are also increasingly approved by users in other major rail markets like North America and Asia.

An illustration of some of Diamorph’s components in a

freight train bogie

Rail


Diamorph HOB Certec’s high quality ceramic refractory rollers are used mainly as transport conveyors for firing of ceramic tiles in high volume production kilns. Other applications include transport conveyance for heat treatment processes in the auto-motive industry and in specialist glass production, or as bearing tubes for electrical wiring in ceramics kilns.

Using only the purest raw materials from the world’s top materials suppliers, each material formulation has been developed specifically for specific applications in the preheating, main firing, rapid cooling and final cooling zones of the production line, including rollers for automatic correction of deviations in the line of transportation. Critical physical properties such as density, modulus of elasticity, thermal expansion, chemical resistence and water absorption are strictly monitored and controlled.

Diamorph HOB Certec guarantees extremely tight dimensional tolerances, allowing the world’s leading tile manufacturers to maintain the highest quality standards, at the fastest production speed and for the longest in service period.

In the intensely competitive world of ceramic tile production, kiln constructors continuously strive to increase production with larger and longer kilns, whilst tile producers look to meet new market requirements with thicker and heavier tiles. Diamorph HOB Certec has more than 20 years of experience of working with customers to develop innovative products like the unique Hyperroll Dense roller with the highest modulus of elasticity available on the world roller market, allowing rollers to cope easily with high loads. Our Hyperroll NG roller combines excellent thermal shock resistence and modulus of elasticity, making it uniquely capable of dealing with a wide variety of working conditions, with extended working life.

HOB Certec quality is recognised around the world and our rollers are sold in more than 30 countries. Our market leading capabilities have recently been further improved by the addition of a new production line capable of manufacturing the world’s longest ceramic conveyor rollers in sizes up to 6.5 meters long, making Diamorph HOB Certec well placed to serve the next generation of tile production facilities around the globe.

Ceramic Rollers


Our Vacuum Pumps and Compressors business (formerly referred to as Rotor Vanes) offers a complete range of high per-formance vanes which improve reliability, efficiency and service intervals in vacuum pumps and compressors across the world.

Diamorph’s market leading FEROFORM® F57 rotor vanes are recognised around the world for their durability in demanding applications, often in remote locations where reliability is crit-ical, or in capital intensive industries where pump failure can bring expensive processes to a halt.

FEROFORM® F57 vanes are the industry standard for heavy-duty machines used in refrigeration industry, tanker discharge pumps, and shale gas extraction. The medium duty range includes milking pumps, vacuum packaging, printing & paper, etc. Other specialized applications include high vacuum and dry running pump vanes, found in analytical equipment, hospitals, and food industry.

Diamorph’s materials have a unique propriety composite struc-ture with extremely low coefficient of friction and high abra-sion resistance. These products have been recognized as the industry standard in Europe and North America, however there is still ample room for growth in Asia and South America. The main customer base is constituted by world renowned OEMs which are specifying and using uniquely vanes manufactured by Diamorph. Original spares are also provided through the OEM channels.

FEROFORM® rotor vanes are tailored to the pump specifica-tion and supplied fully machined according to strict tolerances and quality standards. Diamorph has developed dedicated machines which deliver both precision and efficiency. When it comes to quality and performance, FEROFORM® rotor vanes have been the preferred OEM choice for over 20 years.

Vacuum Pumps and Compressors


Diamorph’s focus on innovation combined with truly global capability, means the Group is well placed to develop and strengthen operations in a number of industrial sectors. This is reflected in the breadth and depth of our Business Develop-ment portfolio.

In the wear protection market, following its initial launch into the agricultural sector, Ferobide® is on trial in a number of extremely demanding industrial environments including earth moving, tunnel boring and solid-liquid separation. The material’s unique combination of high wear resistance and weldability make it one of the world’s hardest weldable materials. Although Ferobide® remains at the early stages in these industries, we remain optimistic about the prospects for this material as mar-ket acceptance increases.

We also have a number of more established materials which have substantial growth potential in high temperature process applications. These range from advanced composite conveyor rollers in steel and aluminium production plants which provide improved end-product quality, extended service intervals and reduced operating cost, through to hot gas filters capable of removing dust particles from flue gases at temperatures in excess of 1000 degrees C. As populations around the world demand improvements in air quality, particularly in industrial-ised urban environments, Diamorph’s hot gas filters assist plant operators in reducing process emissions.

Business Development

For the energy and power generation and handling industries we offer high temperature electrical insulators for use in cir-cuit breakers and switchgear on nuclear power stations, steel mills, rail networks and more. In the renewables sector we offer durable lightweight materials for wind turbines and hydro-electric generators, which can operate without lubrication at extreme temperatures.

Diamorph’s low friction automotive slip coat material is used by several of the world’s largest car producers in static and dynamic seal systems such as glass run channels as well as hood and roof seals. This new generation of seal materials help reduce vehicle weight and therefore fuel consumption, whilst reducing noise levels when windows are operated, an ever more important issue as cars go electric (and silent!).

Whilst each of the parts of our business development portfolio are currently smaller than those of our core businesses, they have high growth potential and our Business Development team are focused on one clear challenge – to create the new core businesses which will be at the heart of the Diamorph Group in years to come!


OperationsDiamorph AB (publ) and its subsidiaries (“the Group” or “Diamorph”), conducts research, development and com-mercialisation of advanced materials solutions for especially demanding industrial applications.

The Group focuses on narrow niches with differentiated products to solve industrial materials challenges. This requires close cooperation with customers and long approval testing, resulting in high barriers to entry for competitors.

Diamorph has a diverse product offering which is sold to a wide customer base in around 65 countries. The largest customer accounts for 3% of Diamorph’s total sales and the ten largest customers represent less than 20% of sales.

The GroupDiamorph AB (publ) is the Parent Company of the Group and principally acts as a holding company.

There have been no significant changes in the Group structure in 2017 except for the acquisition of the final 10% of Diamorph Bearings AB from a minority shareholder. Since the end of February 2017 Diamorph has therefore controlled 100% of each of its subsidiaries. This acquisition is described further in the section below.

At 31 December 2017, the Diamorph Group includes, besides the Parent Company, two main companies that in turn control the main operating subsidiaries:

• Diamorph AB (publ) controls the UK holding company Dia-morph UK Limited (100%) which in turn controls Modular Stock Limited (100%), the holding company for the Tenmat business acquired in 2012, which in turn controls Tenmat Limited (100%) (“Tenmat”). Diamorph UK Limited and Modu-lar Stock Limited have no significant activities other than the funding and management of their subsidiaries; and

• Diamorph AB (publ) controls the Swedish company Dia-morph Bearings AB (100%) which in turn controls Diamorph hob certec s.r.o. (100%) (“Hob Certec”) which was acquired by the Group in 2011. Diamorph Bearings AB has no signifi-cant activities other than the funding and management of its subsidiaries.

For a detailed description of the Group’ shareholdings refer also to note 25.

Significant events during the yearStrategic investment in HOB Certec ceramic roller businessThroughout 2017 the Group has been moving forward with its SEK 30 million capital investment in the Hob Certec ceramic roller business in the Czech Republic. This significant invest-ment has positioned the Group to meet demand from the mar-ket for even longer rollers, keeping us right at the forefront of the market and significantly expanding capacity from previous levels. After completion of final testing, the Group made its first sales of product manufactured in the new kiln in early 2018.

Refinancing and redemption of bondsAfter making a voluntary partial repayment of SEK 50 million of bonds earlier in March 2017, Diamorph AB (publ) redeemed all of its remaining SEK 450 million of outstanding bonds in Sep-tember 2017. The combined transactions required the payment of early redemption premiums of SEK 14.5 million (in aggregate) to bondholders. The bonds were redeemed using a combination of existing surplus cash accumulated within the Group as well as from proceeds drawn down through a new senior secured bank facility. Further information on the new bank facility is set out on page 47.

The completion of this refinancing transaction represented an important step in the development of the Group. It followed a review of the Group’s borrowing structure to ensure it balanced the certainty of availability of finance, borrowing costs, and flexibility to support growth ambitions.

During the fourth quarter of 2017, the Group took advantage of the flexibility within the new bank facility to borrow funds in different currencies. Previously the bond was denominated in SEK whilst much of the Group’s net earnings are EUR and USD denominated, giving rise to potentially unnecessary currency exposures within the business.

During October 2017, the gross borrowings were transitioned toward a targeted 75:25 EUR: USD currency basket. At 31 December 2017, 77% and 23% of the Group’s borrowings were denominated in EUR: USD respectively.

Repayment of bank loan in Hob CertecSeparately, on 3 August 2017, the Hob Certec business in the Czech Republic made its final balloon payment to fully repay the bank loan with Unicredit taken out at the time of the acquisition by the Group in 2011. This loan was repaid using surplus cash within the Group.

Administration Report


Acquisition of 10% of Diamorph Bearings ABAt the end of 2016, 10% (159 shares) of Diamorph Bearings AB was owned by a minority shareholder who had subscribed for these shares as part consideration for the acquisition of Hob Certec in 2011. In February 2017 Diamorph acquired this final 10% minority interest for cash consideration of SEK 32.0 million. The purchase price was calculated consistent with the arrange-ments agreed at the time of acquisition of Hob Certec in 2011. A put option relating to these arrangements (see note 4) was valued at SEK 8.9 million in the balance sheet at 31 December 2016 and this liability has been derecognised through equity in 2017. Since February 2017 Diamorph AB (publ) has controlled 100% of each of its subsidiaries.

Liquidation of KHP Marketing Gmbh i.L. KHP Marketing Gmbh i.L. is a subsidiary company in Switzer-land that became part of the Group at the time of the Hob Certec acquisition. During 2017 the Group has started a pro-cess to liquidate this company to simplify the Group structure and eliminate unnecessary administrative costs. The liquidation process will ultimately involve the distribution of the compa-ny’s net assets (principally cash and intercompany balances) to its Parent Company Diamorph Bearings AB. This process is deemed to be an effective distribution of profits and requires the settlement of SEK 5.9 million of withholding taxes to the Swiss tax administration. This payment was made in January 2017 and forms part of the non-recurring tax charges in the year. No liability for this withholding tax payment was recog-nised in the balance sheet at 31 December 2016 because the payment was not committed at that date.

Significant events after year endEnvironmental reviewSince the end of the year specialist consultants have been engaged to undertake an environmental review focused on the Group’s main manufacturing site in Manchester. Based on the preliminary findings of the review, we expect that certain reme-dial actions will be necessary or recommended. At this time we cannot reliably estimate the extent, timing nor cost associated with any such remedial actions. Further information will be pro-vided when the review is completed.

ShareholdersBased on the requests of at least 93% of the Company’s share-holders, in April 2018 the board of the Company appointed advisers to initiate a trade sale of the shares of the Company. There can be no guarantee that the process will lead to offers at a price considered acceptable to the board. At the date of publication of the Annual Report, this process was ongoing and further information will be released in due course.

Adjusted performance measuresThe Group’s financial performance can be impacted by non-re-curring items including foreign exchange gains and losses. In order to better show the underlying performance of the busi-ness, Diamorph provides adjusted figures for key performance measures in addition to those reported under IFRS. The defini-tions of the adjusted measures are set out in note 30 and are unchanged except as explained below.

During 2017 the previous definitions of adjusted operating profit, profit before tax and earnings per share measures have been expanded to additionally exclude acquisition-related items being currently the charges relating to the amortisation of intangible assets; adjusted earnings per share further excludes tax credits associated with such charges. The comparative adjusted figures for 2016 have been restated to reflect the changes; the effect on the adjusted measures reported for the year ended 2016 has been to increase the adjusted operating profit margin by 1.0%, adjusted profit before tax by SEK 4.3 million and adjusted earnings per share by SEK 0.06 per share.

During 2017 a new measure of EBITDA has been added to allow a leverage ratio with net debt to be presented. EBITDA is calcu-lated in a manner intended to be as consistent as practical with the detailed definition of EBITDA used for covenant calculations under the Group’s new banking facility.

Reconciliations between profit and earnings figures reported under IFRS and adjusted figures are set out on pages 24 and 54.


Financial PerformanceSalesSales amounted to SEK 428.7 (423.6) million, an increase of 1% as reported and 2% at fixed exchange rates.

Demand for our ceramic roller products has continued to be healthy during the year, as has demand for our fire protection products in the UK and rest of Europe. We have continued to see growth in our rail business and have experienced some level of recovery in the vacuum pumps and compressors busi-ness (previously referred to as our rotor vane business) which had more recently been impacted by the downturn in the oil and gas industry.

The effect of these sales increases has however been partially offset by lower sales of fire protection products in the USA where there has been a combination of challenges posed by competition and substitution from LED lighting and lower specification alternatives. We also experienced lower sales in the marine business due to certain projects in early 2016 not repeating and generally weak levels of activity within marine industries. Sales of our new Ferobide product line decreased as we focused our sales and marketing efforts within the agri-cultural sector on a narrower range of targeted applications where the product benefits are strongest; at the same time we continue to explore new markets for this technology.

Operating profit performanceDriven by the sales performance, gross profit amounted to SEK 237.9 (237.6) million giving a gross profit margin of 55.5% (56.1%). During 2017, the gross margin has been adversely impacted by a combination of factors but the trend has mainly been influenced by changes in the product mix and investments in the infrastructure of the business.

Operating expenses excluding acquisition-related and non-re-curring items were SEK 94.0 (93.5) million representing a small increase of 1% as reported and also at fixed exchange rates. Adjusted operating profit therefore amounted to SEK 143.9 (144.1) million giving an operating profit margin of 33.6% (34.0%).

The Group recognized net non-recurring operating income of SEK 5.2 (expenses of 0.2) million which mainly related to a legal settlement in the Group’s favour relating to alleged infringe-ments of one of the Group’s trademarks. Acquisition-related intangible asset amortisation charges were SEK 4.1 (4.3) mil-lion. Including these items, operating profit (as reported under IFRS) therefore increased to SEK 145.0 (139.6) million.

Financing charges and profits before taxNet financial items amounted to expenses of SEK 44.5 (income of 1.5) million. The changes in net financial items arise mainly from changes in non-recurring financing charges as underlying net financial expenses reduced to SEK 27.4 (37.4) million follow-ing the voluntary partial repayment of SEK 50 million of outstand-ing bonds in March 2017 and the refinancing of the remaining SEK 450 million of outstanding bonds in September 2017.

Non-recurring financial items totaled expenses of SEK 17.1 (income of SEK 38.9) million. Further detail of the non-recurring expenses is shown in note 9. In 2017, the expenses include the early redemption charges relating to the refinancing of the bond of SEK 14.5 million. Foreign exchange gains and losses on third party and intercompany financing balances arise in both years but they were less significant during 2017 than in 2016 when foreign exchange gains arose on intercompany balances as GBP weakened against SEK both in the run up to and subse-quent to the UK referendum on EU membership.

Adjusted profits before tax (adjusted to remove the effect of acquisition–related and non-recurring operating and financing items) therefore increased by 9% to SEK 116.5 (106.7) million. Profit before tax (as reported under IFRS reduced to SEK 100.5 (141.1) million.

TaxesIncome taxes amounted to a charge of SEK 24.0 (29.0) million. As for the net financial expenses, the tax charge comprises tax on the underlying business performance as well as non-recur-ring tax items.

The underlying tax charge was SEK 21.4 (22.3) million. The underlying tax charge represents an effective tax rate of 18% (21%) of adjusted profits before tax. The decrease in the effec-tive tax rate reflected a combination of factors including a reduction in the rate of UK corporation tax from 20% to 19% in April 2017 as well as tax credits in respect of prior years.

There were non-recurring tax charges of SEK 2.6 (6.7) million. These include the tax effects on the non-recurring operating and financing items described above. In 2017 the charges also include the payment of SEK 5.9 million of withholding taxes to the Swiss tax administration as part of the process to liquidate KHP Marketing Gmbh i.L (as referred to above).

Earnings per shareAfter allowing for the profits after tax attributable to minority interests, adjusted earnings per share increased by 15% to SEK 1.79 (1.55). Earnings per share (as reported under IFRS) decreased by 30% to SEK 1.45 (2.08).

Cash flow and financial positionNet cash flow from operating activities before changes in working capital amounted to SEK 91.2 (93.1) million in the full year. The decrease is driven mainly by changes in the amount of interest and tax payments. Previously interest payments relat-ing to the bond occurred in March and September each year, whereas the interest payments under the bank facility now occur more gradually during the year so the timing of interest payments toward the end of the year has effectively been accelerated. Tax payments in 2017 are significantly higher than the previous year partly because they include payments arising on large foreign exchange gains reported in 2016. Tax payments in 2017 also reflect that tax relief on certain refinancing related costs is expected to be spread over the period between 2017 and 2019.


Changes in working capital decreased cash flow by SEK 2.7 (16.4) million. Changes in working capital are influenced by the phasing of sales but have also been influenced by increases in strategic stock holding during 2017 and changes in credi-tors including those related to liabilities in respect of capital expenditure.

Cash outflows from investing activities were SEK 47.8 (48.6) million. Cash outflows include SEK 32.0 (19.0) million relating to the acquisition of shares from minority shareholders of Dia-morph Bearings AB; the purchase of the final 10% of Diamorph Bearings AB in 2017 also caused a restriction over SEK 22.6 million of cash to be released. Cash outflows include invest-ments in property, plant and equipment of SEK 35.8 (18.8) mil-lion, the increase being due mainly to the expenditure in 2017 necessary to create and expand capacity for the production of longer ceramic rollers by the Hob Certec business in the Czech Republic. In both years, cash outflows also include payments of SEK 2.6 (2.7) million to the Tenmat defined benefit pension scheme.

Cash flows from financial activities amounted to an outflow of SEK 233.3 (7.5) million. In more detail, the net cash flow in 2017 comprises:

• funds raised from the new bank facility of SEK 343.0 million to refinance the bond in September 2017, before transaction costs of SEK 6.9 million. Loan repayments of SEK 31.1 million were subsequently made giving a net cash flow of SEK 305 million relating to the new bank facility;

• repayment of bonds including associated early redemption charges of SEK 514.5 million; and

• amortisation of the bank loan in the Hob Certec business including a final balloon payment in August 2017. Total repay-ments of SEK 23.8 (7.5) million were made during the year.

Cash flow therefore amounted overall to a cash outflow of SEK 192.6 (inflow of 20.6) million. After adjusting for exchange rate differences, cash and cash equivalents at the end of the year amounted to SEK 22.1 (213.2) million.

New bank facilityOn 10 August 2017, Diamorph AB (publ) entered into a new senior secured bank facility agreement with Nordea Bank AB (“Nordea”) to facilitate redemption of the Company’s bonds in September 2017.

The Nordea facility comprises a USD 5.7 million 3 year amortis-ing term loan and EUR 36 million revolving credit facility, giving an initial total facility of approximately SEK 392 million. The facility is for an initial term of 3 years (with further extensions of up to 2 years possible under certain conditions) and it can be drawn in a combination of SEK, EUR, USD and GBP currencies. Interest on the borrowings is based on a margin above floating interest rates, where the margin is linked to the Group’s lever-age position.

A number of benefits are expected from refinancing, including:• a reduction in financing costs. Depending on future move-

ments in market interest rates, after taking account of trans-action costs (including bank arrangement fees, legal fees and early redemption fees payable to bondholders), the payback period is expected to be approximately one year;

• improved flexibility to efficiently manage surplus cash;

• the opportunity to better manage currency exposures. As noted above, during October 2017, the gross borrowings were transitioned toward a targeted 75:25 EUR: USD currency basket. At 31 December 2017, 77% and 23% of the Group’s borrowings were denominated in EUR and USD respectively.

Net debtNet debt at the end of the year amounted to SEK 290.2 (305.9) million, a decrease of SEK 15.7 (23.3) million. As required by an amendment to IAS7, a new note is presented in the financial statements showing a reconciliation in the movements in the Group’s liabilities. Combining this information with that pre-sented in the cash flow statement, the overall movements in net debt are summarized in the table below.

2017 2016At start of year 305.9 329.2

Free cash (inflow)/outflow (40.7) (28.1)Premium paid to bond holders 14.5 -Exchange rate differences 4.9 3.0Amortisation of arrangement fees 5.6 1.8At end of year 290.2 305.9

Equity and number of sharesThe Parent Company’s share capital at 31 December consisted of SEK 1,105,608 divided in to 52,846,841 shares with a quote value of SEK 0.0209.

Group equity at 31 December 2017 amounted to SEK 534.1 (461.6) million, an increase of SEK 72.5 (decrease of 54.0) mil-lion during the year. In addition to the net profit of SEK 76.5 (112.1) million reported for the year, foreign exchange losses of SEK 7.9 (109.8) million arose primarily on GBP denominated net assets within the business and an actuarial gain (net of tax) of 26.2 (loss of 35.4) million arose on the Tenmat defined benefit pension scheme (see section below).

In 2017, additional movements through equity have included a net SEK 23.1 million effect of the transaction with a minority shareholder to acquire a further 10% of Diamorph Bearings AB (SEK 32.0 million consideration paid, net of SEK 8.9 million for the previously recognized carrying value of a put option now extinguished). In 2016, additional movements through equity arose from the transaction with other minority shareholders to acquire 10% of Diamorph Bearings AB for total consideration of SEK 22.8 million which was closely linked also with a directed share issues of 3.8 million.


Related party transactionsArrangements involving related parties are set out in note 28. The most significant related party transaction within the Group relates to investments in the bond issues by the Company that were previously held by a substantial shareholder. Latour-Grup-pen AB, a substantial shareholder, previously held SEK 144 mil-lion of outstanding bonds issued by Diamorph AB (publ) which it had previously purchased in the open market. As part of the Company’s redemption of its bonds in September 2017 a pay-ment of SEK 144 million together with the associated 3% early redemption fee (SEK 4.3 million) was made to Latour-Gruppen AB on exactly the same terms as for other bondholders.

Defined benefit pension schemeThe Group operates a defined benefit pension plan related to Modular Stock Limited and its subsidiary Tenmat Limited. Although the scheme is closed to future accrual of benefits by employees, funding the pension scheme remains an obligation of the Group. Under UK pension regulations, defined benefit pension schemes are required to undergo formal actuarial valuations of the funding position every three years. The most recent valuation, as at 3 August 2016, was finalized during Octo-ber 2017 and determined a deficit of GBP 5,294,000 (approxi-mately SEK 59 million based on the exchange rate at the end of December 2017). Payments of GBP 1,150,000 (approximately SEK 12.7 million) are expected to be made by the Group to the pension scheme over the next 5 years starting in January 2018.

Actuarial valuations of the pension scheme position for funding purposes adopt a more conservative approach than that used under IFRS to determine the pension scheme valuation reflected in the balance sheet. After recognizing the movements through equity noted above, the pension scheme deficit reflected in the balance sheet was SEK 2.3 (35.7) million.

Accounting policiesThe significant accounting policies are unchanged since the last annual report. As noted above, a new disclosure note 22 is how-ever provided following the amendments to IAS7 which shows a reconciliation of the movements in the Group’s borrowings.

Risks and uncertaintiesThe new bank facility adapts the risk environment in a number of respects including the following:

• the new bank facility has the flexibility to borrow funds in different currencies. Previously the bond issued by Diamorph AB (publ) was denominated in SEK. In October 2017, the Group transitioned its gross borrowings toward a EUR: USD currency basket as noted above;

• the Group is now exposed to market movements in interest rates whereas previously interest rates on the bonds were fixed. Also interest rates differ depending on the currency of borrowings; and

• as part of the security arrangements associated with the bank facility, the Group must maintain its leverage (net debt:EBITDA ratio) and interest cover (EBITDA:financing costs).

Changes in macroeconomic environmentOperationally the Group maintains a good degree of diversifi-cation in terms of the customers and markets it serves. Also, in the eyes of the customer, Diamorph’s sales can comprise both capital as well as operating expenditure so the Group’s performance is partially protected from swings in demand influ-enced by traditional capex cycles. Despite this the Group would be, and is exposed, like other industrial companies, to changes in the macroeconomic climate. This would include potential changes to the business environment and trading terms that eventually arise from the ongoing negotiations between the UK and the EU following the UK referendum on EU membership. There is some flexibility to adjust costs in response to changes in demand due to the natural mix of variable cost within the business, but a significant proportion of the Group’s costs are fixed in nature.

Exposures to changes in foreign exchange ratesThe Group operates and sells in various geographic markets and therefore undertakes transactions in foreign currencies. The Group mainly transacts sales and purchases in the follow-ing currencies: Euro (EUR), US Dollars (USD), British Pounds (GBP) and Czech Koruna (CZK). Where possible the Group seeks to achieve a natural match of cash flow in each currency (e.g. by sourcing raw material in EUR and USD to match its revenues in those currencies) but it is only able to do this to a limited extent. Overall the Group’s net operating cash inflows are weighted toward EUR and USD. During 2016, the Group had interest-bearing liabilities in SEK (the bond) and EUR (bank loan in Czech Republic). As described above, the Group has been through a refinancing process during 2017 and its borrowings have now been transitioned to a EUR: USD currency basket; this is in order to seek a better match between the operating cash flows and those relating to the Group’s financing. This change has reduced the Group’s exposures to exchange rate movements but not eliminated them. Furthermore exposures additionally arise on translation of the Group’s results into SEK. Exposures to exchange rate fluctuations therefore arise. Strategies to manage the net currency exposures are continu-ally reviewed; forward exchange contracts are selectively used to mitigate the potential short-term impact from changes in exchange rates but they do not mitigate all or a significant part of the Group’s exposure.

Protection of Intellectual PropertyThe Group’s financial performance is at least partly depend-ent on its ability to exploit and protect its intellectual prop-erty rights including its trademarks. Only a proportion of the Group’s intellectual property is protected by patent rights partly because the process of obtaining a patent carries an inherent risk of putting information into the public domain that can be exploited by third parties. The legal costs necessary to incur to defend intellectual property rights can also be very expensive especially given the fact that the Group is operating in several countries. However the Group does take legal action to defend its rights where it considers such action to be appropriate and therefore the Group can be involved in ongoing legal actions from time to time.


Funding of defined benefit pension schemeAs noted above, the Group operates a defined benefit pension plan related to Modular Stock Limited and its subsidiary Ten-mat Limited. Although the scheme is closed to future accrual of benefits by employees, funding the pension scheme remains an obligation of the Group. Additional information specific to the Group’s defined benefit pension scheme is set out in note 23.

R&DThe goal of Diamorph’s research and development is to develop new materials and products that extend life, reliability and performance of our customers’ products and applications. Research and development activity is undertaken in Manches-ter, United Kingdom and Horni Briza, Czech Republic. Research and development costs amounted to 1% (1%) of sales excluding the amortisation charges relating to intangible assets arising on acquisition. No research and developments costs incurred in 2017 or 2016 were capitalised.

Number of employeesIn 2017, an average of 275 (272) persons were employed in the Group. At 31 December the Group had 286 (279) employees. For further information, see note 8.

Environmental informationThe Company holds the necessary permits for the operations and production in Manchester, United Kingdom and Horni Briza, Czech Republic. The operations manage waste according to applicable regulations.

The Parent CompanyThe Parent Company’s net revenue amounted to SEK 0.9 (2.0) million, giving an operating loss of SEK 3.1 (3.7) million.

Cash and cash equivalents at the end of the period amounted to SEK 0.6 (21.0) million.

Proposed distribution of profitsThe Board of Directors do not propose any distribution to share-holders and propose that the loss for the year is transferred to retained earnings.

2017 2016Share premium account 287.5 287.5Accumulated loss -66.8 -63.3Loss for year -3.4 -4.7Total available for distribution 217.3 219.5

Distributed - -Carried forward 217.3 219.5

OwnershipAs of 31 December 2017, the number of shareholders amounted to 226 (234), of which the largest are shown in the table below:

OwnerTotal number

of sharesShare

capital,%Latour-Gruppen AB 14,923,571 28.2%Serendipity* 14,310,537 27.1%First Kraft AB 4,672,558 8.8%J P Morgan Bank Luxembourg SA 4,577,652 8.7%AB Måttex 1,317,800 2.5%Mikael Lönn 1,277,000 2.4%Fredrik Palmstierna 1,070,742 2.0%Tindaf AB 861,162 1.6%Anthony Moore 654,558 1.2%SIX SIS AG 594,856 1.1%Others 8,586,405 16.4%Total 52,846,841 100.0%

*At 31 December 2017, Serendipity Growth AB owns 21.5% (previously Serendipity Ixora AB owned 23.4% at December 2016). Serendipity Group AB owns 5.6% (Dec 2016 – 5.5%). Serendipity Group AB and Serendipity Growth AB have been grouped together as Serendipity Group AB controls Serendipity Growth AB.

Other informationOther information is available in the following financial state-ments and accompanying notes. All amounts stated in SEK million unless otherwise stated.


The key performance measures for the past 5 years are shown in the table below

Key figures 2017 2016Restated

2015Restated

2014Restated

2013Restated

Net Sales 428.7 423.6 431.5 383.7 333.8

Adjusted operating profit (EBITA) 143.9 144.1 156.0 132.0 102.6Adjusted operating profit (EBITA) margin, % 33.6 34.0 36.2 34.4 30.7

Adjusted profit before tax 116.5 106.7 118.3 80.6 46.3

Adjusted earnings per share (SEK) 1.79 1.55 1.74 1.13 0.69Average number of shares in issue (‘000) 52,847 52,741 52,594 52,594 51,840

Operating cash flow 119.1 115.8 160.9 135.3 112.1Operating cash conversion, % 82 83 106 109 115

Net debt 290.2 305.9 329.2 417.1 395.7EBITDA 149.8 150.5 163.8 137.9 106.7Net debt: EBITDA (ratio) 1.94 2.03 2.01 3.02 3.71

For definitions of key figures that are not sourced directly from the financial statements, please see note 30. For an explanation of the restatement of previous year figures, please see page 17.

Net sales

428.7 (423.6) MSEK

0

100

200

300

400

500

20172016

20152014

2013

333.8

383.7431.5 423.6 428.7

Operating profit

143.9 (144.1) MSEK

0

50

100

150

200

20172016

20152014

2013

102.6

132.0

156.0144.1 143.9

5 Years Record

2017

34 %

2016201520142013

Profit margin

34% (34%) Percent

Tables


Income statement Note 2017 2016

Net sales 5 428.7 423.6 Cost of goods sold -190.8 -186.0 Gross profit 237.9 237.6

Operating expensesSales -57.8 -58.8 Admin -31.5 -29.2 R&D -9.0 -10.0 Other operating income 5.4 -Operating expenses -92.9 -98.0

Operating profit before acquisition-related and non-recurring items 143.9 144.1 Non-recurring items 6 5.2 -0.2 Acquisition-related intangible asset amortisation -4.1 -4.3 Operating profit 6 145.0 139.6

Financial itemsFinancial income 9 - 0.1 Financial expenses 9 -27.4 -37.5 Non-recurring financial (charges)/credits 9 -17.1 38.9 Net financial -44.5 1.5 Profit before income tax 100.5 141.1

Income taxes 10 -24.0 -29.0 Profit for the year 76.5 112.1

Consolidated statement of comprehensive income 2017 2016Profit for the year 76.5 112.1

Other comprehensive profit/(loss) for the yearItems that may be returned to the profit and loss statement in future periodsExchange rate differences -7.9 -109.8

Items that will not be returned to the profit and loss statement in future periodsActuarial profit/(loss), net after tax 26.2 -35.4 Other comprehensive profit/(loss) for the year 18.3 -145.2 Total comprehensive profit/(loss) for the year 94.8 -33.1

Profit for the year attributable to:Parent Company shareholders 76.7 109.6 Non-controlling interests -0.2 2.5 Total 76.5 112.1

Total comprehensive profit/(loss) attributable to:Parent Company shareholders 95.0 -36.2 Non-controlling interests -0.2 3.1 Total 94.8 -33.1

Earnings per share before and after dilution, SEK 29 1.45 2.08Average number of shares, basic and diluted 18 52,846,841 52,741,387

GroupIncome statements


Note 2017 2016

ASSETSFixed assetsIntangible assets 11 675.5 684.3 Property, plant and equipment 12 108.1 77.4 Total fixed assets 783.6 761.7

Current assetsInventories 13 39.6 31.1 Accounts receivable 14 80.1 75.1 Current tax assets - -Derivative financial instruments 15 1.0 0.2 Other receivables 16 2.0 2.2 Prepaid expenses and accrued income 1.4 1.6 Restricted cash 17 - 22.6 Cash and cash equivalents 17 22.1 213.2 Total current assets 146.2 346.0 TOTAL ASSETS 929.8 1,107.7

EQUITY 18Equity attributable to owners of the ParentShare capital 1.1 1.1 Other capital contributions 324.5 324.5 Other reserves 15.1 23.0 Retained earnings 193.4 99.0 Total equity attributable to owners of the Parent 534.1 447.6 Non-controlling interests - 14.0 Total equity 534.1 461.6

LIABILITIESLong-term liabilitiesInterest-bearing liabilities 21 296.7 495.3 Pension liability 23 2.3 35.7 Deferred tax liability 10 22.5 20.1 Other non-current financial liabilities - 8.9 Total long-term liabilities 321.5 560.0

Current liabilitiesInterest-bearing liabilities 21 15.6 23.8 Accrued interest 0.6 11.2 Accounts payable 24.2 26.9 Current tax liabilities 6.7 10.7 Derivative financial instruments 15 - 0.1 Other liabilities 24 2.6 2.4 Accrued expenses and deferred income 24.5 11.0 Total current liabilities 74.2 86.1 TOTAL LIABILITIES AND EQUITY 929.8 1,107.7

GroupBalance sheet


2017 Share capital

Other capital contributions

Other reserves

Retained earnings Total

Non-controlling interests

Total equity

At beginning of year 1.1 324.5 23.0 99.0 447.6 14.0 461.6

Comprehensive profit/(loss)Profit/(loss) for the year - - - 76.7 76.7 -0.2 76.5 Other comprehensive profit/(loss)

Actuarial profit/(loss) on defined benefit pension scheme - - - 31.0 31.0 - 31.0 Tax effect on actuarial profit - - - -4.8 -4.8 - -4.8 Exchange rate differences - - -7.9 - -7.9 - -7.9 Total comprehensive profit/(loss) - - -7.9 102.9 95.0 -0.2 94.8

Transactions with shareholdersShare-based payments - - - 0.8 0.8 - 0.8 Purchase of non-controlling interest - - - -18.2 -18.2 -13.8 -32.0

Revaluation of put option over non-controlling interests - - - 8.9 8.9 - 8.9 Total transactions with shareholders - - - -8.5 -8.5 -13.8 -22.3

At end of year 1.1 324.5 15.1 193.4 534.1 - 534.1

2016 Share capital

Other capital contributions

Other reserves

Retained earnings Total

Non-controlling interests

Total equity

At beginning of year 1.1 320.7 133.4 38.1 493.3 22.3 515.6

Comprehensive profit/(loss)Profit/(loss) for the year - - - 109.6 109.6 2.5 112.1 Other comprehensive profit/(loss)

Actuarial profit/(loss) on defined benefit pension scheme - - - -44.2 -44.2 - -44.2 Tax effect on actuarial loss - - - 8.8 8.8 - 8.8 Exchange rate differences - - -110.4 - -110.4 0.6 -109.8 Total comprehensive profit/(loss) - - -110.4 74.2 -36.2 3.1 -33.1

Transactions with shareholdersShare issue - 3.8 - - 3.8 - 3.8 Share-based payments - - - 0.4 0.4 - 0.4 Purchase of non-controlling interest - - - -11.4 -11.4 -11.4 -22.8

Revaluation of put option over non-controlling interests - - - -2.3 -2.3 - -2.3 Total transactions with shareholders - 3.8 - -13.3 -9.5 -11.4 -20.9

At end of year 1.1 324.5 23.0 99.0 447.6 14.0 461.6

GroupChange in equity


Note 2017 2016

Cash flow from operationsOperating profit 145.0 139.6

Adjustments for items not included in cash flow: Depreciation and amortisation 11,12 11.8 11.0 Share based payment expense 0.8 0.4 Interest received - 0.1 Interest paid -36.0 -35.7 Tax paid -30.4 -22.3 Cash flow from operations before change in working capital 91.2 93.1

Changes in working capital(Increase) / decrease in inventories and work in progress -8.6 -1.3 (Increase) / decrease in accounts receivable -5.0 -14.0 (Increase) / decrease in other receivables -0.6 -0.5 Increase / (decrease) in other current liabilities 2.6 -3.3 Increase / (decrease) in accounts payable 8.9 2.7 Total changes in working capital -2.7 -16.4 Cash flow from operations 88.5 76.7

Cash flow from investment activitiesInvestments in tangible and intangible fixed assets 11,12 -35.8 -18.8 Acquisition of non-controlling interest -32.0 -19.0 Release/(transfer) of restricted cash relating to acquisition of subsidiaries 22.6 -8.1 Payment to defined benefit pension scheme -2.6 -2.7 Total cash flow from investment activities -47.8 -48.6 Free cash flow for the year 40.7 28.1

Cash flow from financial activitiesInitial drawing under new bank facility, net of transaction costs 336.1 -Repayment of loans under new facility -31.1 -Repayment of bonds, including early redemption fee -514.5 -Repayment of loans under previous facility (Czech Republic) -23.8 -7.5 Total cash flow from financial activities 22 -233.3 -7.5 Cash flow for the year -192.6 20.6

Cash and cash equivalents at beginning of year 213.2 194.3 Exchange rate differences 1.5 -1.7 Cash and cash equivalents at end of year 17 22.1 213.2

GroupCash flow


Income statement Note 2017 2016

Net sales 0.9 2.0 Cost of goods sold - -

Gross profit 0.9 2.0

Operating expensesSales -0.9 -1.9 Admin -3.1 -3.8 Operating expenses -4.0 -5.7

Operating loss before non-recurring items -2.9 -3.5 Non-recurring items -0.2 -0.2 Operating loss -3.1 -3.7

Financial itemsFinancial income 9 41.6 36.8 Financial expenses 9 -41.9 -37.8 Net financial -0.3 -1.0Loss before income tax -3.4 -4.7

Income taxes 10 - -Loss for the year -3.4 -4.7

Parent Company statement of comprehensive income 2017 2016

Loss for the year -3.4 -4.7

Other comprehensive profit/(loss) - -Other comprehensive profit/(loss) for the year, net after income tax - - Total comprehensive loss for the year -3.4 -4.7

Parent CompanyIncome statements


Note 2017 2016

ASSETSFinancial assetsShares in subsidiaries 25 191.7 158.6 Receivables from Group Companies - 550.9 Total financial assets 191.7 709.5

Total fixed assets 191.7 709.5

Current assetsCurrent receivablesReceivables from Group Companies 64.0 12.0 Other receivables 16 0.1 0.2 Total current receivables 64.1 12.2

Cash and cash equivalents 0.6 21.0 Total current assets 64.7 33.2

TOTAL ASSETS 256.4 742.7

EQUITY 18Restricted equityShare capital 1.1 1.1 Total restricted equity 1.1 1.1

Unrestricted equityShare premium account 287.5 287.5 Retained earnings -70.2 -68.0 Total unrestricted equity 217.3 219.5

Total equity 218.4 220.6

LIABILITIESLong-term liabilitiesInterest-bearing liabilities - 495.3 Total long-term liabilities - 495.3

Current liabilitiesAccrued interest - 11.2 Accounts payable - 0.2 Liabilities to subsidiaries 36.9 13.5 Accrued expenses and deferred income 1.1 1.9 Total current liabilities 38.0 26.8

TOTAL LIABILITIES AND EQUITY 256.4 742.7

Parent CompanyBalance sheet


2017 Share capital

Share premium

Retained earnings

Total equity

At beginning of year 1.1 287.5 -68.0 220.6

Comprehensive profit/(loss)Loss for the year - - -3.4 -3.4

Transactions with shareholdersShare based payments - - 1.2 1.2 Total comprehensive loss - - -2.2 -2.2 At end of year 1.1 287.5 -70.2 218.4

2016 Share capital

Share premium

Retained earnings

Total equity

At beginning of year 1.1 283.7 -63.3 221.5

Comprehensive profit/(loss)Loss for the year - - -4.7 -4.7

Transactions with shareholdersShare issue - 3.8 - 3.8 Total comprehensive loss - 3.8 -4.7 -0.9 At end of year 1.1 287.5 -68.0 220.6

Parent CompanyChange in equity


2017 2016

Cash flow from operationsOperating loss -3.1 -3.7 Interest received 33.3 46.0 Interest paid -33.3 -35.0 Cash flow from operations before change in working capital -3.1 7.3

Changes in working capital(Increase) / decrease in other receivables -0.1 -(Increase) / decrease in receivables from Group Companies 1.2 9.7 Increase / (decrease) in accounts payable -0.2 -0.7 Increase / (decrease) other current liabilities -0.7 -Total changes in working capital 0.2 9.0

Cash flow from operations -2.9 16.3

Cash flow from investment activitiesAcquisition of non-controlling interest -32.0 -19.0 Total cash flow from investment activities -32.0 -19.0

Free cash flow for the year -34.9 -2.7

Cash flow from financial activitiesLoan received from subsidiary company 22.5 -Loan advanced to subsidiary company -8.0 -Repayment of bond, including early redemption fee -514.5 -Repayment of loan to subsidiary company, including fees 514.5 18.7 Total cash flow from financial activities 14.5 18.7

Cash flow for the year -20.4 16.0

Cash and cash equivalents at beginning of year 21.0 5.0 Cash and cash equivalents at end of year 0.6 21.0

Parent CompanyCash flow


Note 1. General informationDiamorph AB (publ) and its Subsidiaries (“the Group” or “Dia-morph”), conducts research, development and commercialisa-tion of advanced materials solutions for especially demanding industrial applications.

The Parent Company is a limited liability Company registered in Sweden and has its headquarters in Stockholm. The street address of its registered office is c/o Sdiptech AB (publ), Sture-plan 15, SE-111 45 Stockholm, Sweden.

On 18 May 2018 the Board of directors approved these con-solidated financial statements and the annual report for publi-cation. The financial statements are subject to approval by the Annual General Meeting of the shareholders on 8 June 2018.

All amounts are in millions of Swedish krona, SEK million, unless otherwise stated. Figures in brackets relate to the previous year.

Note 2. Significant accounting policies2.1 Basis of preparationThe consolidated financial statements for Diamorph have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, RFR1 Supplementary Accounting and the Annual Accounts Act.

The principal accounting policies applied in these financial statements are set out below. These policies have been consist-ently applied to all years presented, unless otherwise stated.

The Parent Company’s financial statements are prepared in accordance with RFR 2, Accounting for Legal Entities and the Companies Act. In cases where the Parent Company applies accounting principles other than those for the Group they are listed separately at the end of this note.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to make certain judgments in applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assump-tions and estimates are significant to the consolidated financial statements are reported in note 4.

New and revised standards applied by the Group in 2017The Group applied for the first time certain standards and amendments which are effective for annual periods beginning on or after 1 January 2017. These mainly related to amendments to IAS7 Disclosure Initiative.

Although all newly effective standards and amendments have been applied for the first time, they did not have any significant impact on the Group except for the requirement to include a new disclosure note to reconcile the movements in the Group’s borrowings (see note 22).

Standards, amendments and interpretations to existing standards that are not yet effective and that have not been early adopted by DiamorphThe Group has not early adopted any other standard, interpreta-tion or amendment that has been issued but is not yet effective. An analysis of the effect of such changes on Diamorph’s future reports is not yet completed and analysed so only a preliminary indication of the possible changes is presented below, focused only on those standards and amendments that are considered most likely to have some potential impact.

IFRS 9 Financial InstrumentsThe standard is intended to replace IAS 39 Financial Instru-ments: Recognition and Measurements, and addresses the classification and measurement of financial instruments and hedge accounting. The effective date is not until January 1, 2018 but the Group’s preliminary analysis has concluded there will be no significant impacts from the implementation of IFRS 9.

IFRS 15 Revenue from Contracts with CustomersThis new standard replaces existing revenue recognition stand-ards and specifies how and when the Group will recognise rev-enue as well as requiring the Group to provide users of financial statements with more informative and relevant disclosures. The effective date is not until January 1, 2018 but the Group’s preliminary analysis has concluded there will be no significant impacts from the implementation of IFRS 15.

IFRS 16 LeasesThis new standard replaces existing standards that address the accounting for leases of property and equipment. Exist-ing standards distinguish between operating type leases and financing type leases. For lessees operating type leases do not result in any asset being recognised on the balance sheet whilst financing type leases do together with a financial obligation. With some exceptions the new standard will require lessees to recognise more financing type leasing arrangements. The effective date is January 1, 2019. The Group is yet to assess the full impact of IFRS 16.

2.2 Group reporting SubsidiariesSubsidiaries are all entities over which the Group has the power to govern the financial and operating policies in a way that generally accompanies a shareholding of more than 50% of the shares (or the voting rights) or in which the Group contrac-tually exercises a controlling influence. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases.

The purchase method is used to report the acquisition of sub-sidiaries. The cost of an acquisition is measured as the fair value of the assets transferred, equity instruments issued and liabilities incurred or assumed at the date of transfer. Costs that are directly attributable to the acquisition are expensed as

Accounting principles and notes


incurred. Identifiable assets acquired and liabilities and contin-gent liabilities in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acqui-sition over the fair value of the Group’s share of identifiable net assets acquired is recorded as goodwill. If the cost is less than the fair value of the acquired subsidiary’s assets and liabilities, any difference is recognised directly in the income statement.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unreal-ised losses are also eliminated, but any losses are viewed as an indication that an impairment may exist.

Transactions with non-controlling interestsThe Group accounts for transactions with non-controlling inter-ests as transactions with the Group’s shareholders. For pur-chases from non- controlling interests, the difference between any consideration paid and assets is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

2.3 Segment reportingOperating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker is the function responsible for allocating resources and assessing perfor-mance of the operating segments. In the Group, this function has been identified as the Board together with the CEO. Any division into different segments has not occurred and the Com-pany is assessed to be a one segment Company.

2.4 Translation of foreign currencies Functional currency and reporting currencyItems included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial state-ments are presented in Swedish kronor (SEK), which is the Company’s functional and reporting currency.

Transactions and balance sheet itemsForeign currency transactions are translated into the functional currency using the exchange rates prevailing on the transaction date. Exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the closing exchange rate are reported in the income statement. Exchange rate differences on loans and borrowings (including intercompany loans) and foreign currency cash balances con-sidered to be related to the Group’s financing arrangements, are reported in financial items, while other exchange differ-ences are included in operating profit.

SubsidiariesThe results and financial position of all the Group entities (none of which has a hyperinflationary economy as its functional cur-rency) that have a functional currency different from the pres-entation currency are translated into the presentation currency as follows:

• Assets and liabilities for each balance sheet presented are translated at the closing rate;

• Income and expenses for each income statement are trans-lated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction date, otherwise the reve-nue and expenses are translated at the rate in force on the transaction date), and

• All resulting exchange differences are recognised in other comprehensive income.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

2.5 Intangible assets PatentsPatents have a finite useful life and are reported at cost less accumulated amortisation. Amortisation is applied to allocate the cost of patents over their estimated useful life.

Development expenditureExpenditure on research activities is expensed as incurred. Development costs are also expensed unless it can be shown that they are directly attributable to the development and testing of identifiable and unique products controlled by the Group and meet all of the criteria for capitalisation according to IAS 38.

Technology acquired as part of business combinations is recog-nised as capitalised development expenditure at the fair value at the date of acquisition.

Capitalised development costs are amortised on a straight-line basis over a period of up to ten years. The capitalised develop-ment costs acquired as part of the acquisition of the Tenmat Group of companies are being amortised over 7.5 years.

TrademarksTrademarks acquired through business combinations are rec-ognised at fair value at the acquisition date. The brands’ longev-ity has not been determined why depreciation is not charged, but rather, they are evaluated for impairment annually together with the associated goodwill and other assets included in each cash-generating unit.

GoodwillGoodwill represents the excess of cost over the fair value of the Group’s share of the acquiree’s identifiable net assets at the acquisition date.

Goodwill on acquisition of subsidiaries is included in intangible assets.


Goodwill is reported as an indefinite useful life intangible asset but is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-gener-ating units or groups of cash-generating units expected to benefit from the business combination in which the goodwill arose.

Gains or losses on disposal of an entity include the carrying amount of goodwill relating to the entity sold.

2.6 Tangible fixed assetsAll tangible fixed assets are stated at cost less depreciation. Cost includes expenditure that is directly attributable to the acquisition of the asset, including costs attributable to bringing the assets to their location and putting them in the necessary condition for their intended use.

Subsequent costs are added to the asset’s carrying amount or reported as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the asset can be measured reliably. The carrying amount of the replaced part is derecog-nised. All other repair and maintenance costs are expensed in the income statement in the period in which they arise.

There is no depreciation on land. Depreciation of other assets, in order to allocate the difference between their cost and their estimated residual value over their estimated useful lives, is performed on a straight line basis as follows:Plant, machinery, tooling 5-15 yearsComputers 3-5 yearsOffice equipment 4-5 yearsBuildings 15-40 years

The assets’ residual values and useful lives are reviewed each report-ing date and adjusted if necessary. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount exceeds its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount at the time of disposal.

2.7 Impairment of non-financial assetsAssets that have an indefinite useful life, such as goodwill and trademarks, are not amortised but tested annually for impair-ment. Tangible fixed assets and intangible assets are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognised for the amount by which the assets carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). For tangible and intangible assets previously written down, an assessment is made at each reporting date of whether reversal is required.

2.8 Financial instrumentsThe Group classifies its financial instruments in the following categories: financial assets and liabilities at fair value through profit or loss, loans and receivables, financial assets availa-ble-for-sale and other financial liabilities. The classification depends on the purpose for which the financial instruments were acquired. Management determines the classification of its financial instruments at initial recognition and re-evaluates this designation at every reporting date.

Classification and measurementFinancial assets and liabilities at fair value through profit or lossFinancial assets and liabilities at fair value through profit or loss are financial instruments held for trading. A financial asset or a financial liability is classified in this category if acquired principally for the purpose of being divested shortly. Derivatives are classified as held for trading unless they are designated as hedges. Financial instruments in this category are measured at fair value and changes are recognised in profit or loss, except for changes in the fair value of the put option over non-con-trolling interests explained in note 4 (where changes in value are recognised in equity).

Loans and receivablesLoans and receivables are financial assets that are not deriva-tives with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for items with maturities greater than twelve months after the balance sheet date which are classified as fixed assets. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. An impairment of trade receivables is recognised in the income statement within selling expenses.

Financial assets available for saleFinancial assets available for sale are assets that are not deriv-atives which have been identified as available for sale or are not classified in any other category. They are included in non-cur-rent assets unless management intends to dispose of the asset within twelve months after the reporting period. These assets are measured at fair value with changes in value being recognised in other comprehensive income except for impair-ment losses which are recognised in profit and loss. When an investment is derecognised, the cumulative gain or loss in other comprehensive income is transferred to profit or loss.

Other financial liabilitiesOther financial liabilities are measured at amortised cost using the effective interest method.

Where financial instruments are carried at fair value, the fair values are assessed using the methods described in section 3.3 below.

The categories allocated to the Group’s assets and liabilities are explained further in section 3.4 below.

Recognition and de-recognitionPurchases and sales of financial assets are recognised on the trade date - the date on which the Group commits to purchase or sell the asset or liability.


Financial assets are de-recognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards associated with ownership. Financial liabilities are de-recognised when the contractual obligations have been completed or otherwise terminated.

Impairment of financial assetsThe Group assesses at each balance sheet date whether there is objective evidence of impairment for a financial asset or group of financial assets, such as the disappearance of an active market, or if it is unlikely that a debtor can fulfil its com-mitment. Impairment losses are recognised in profit or loss.

2.9 InventoriesInventories are stated at the lower of cost and net realisable value.

Cost is determined using the first-in, first-out method (FIFO). The cost of inventories consists of all costs of purchasing the goods and bringing them to their location and condition. Borrowing costs are not included. Inventories consist mainly of raw materials used in own production, work in progress or finished goods. Work in pro-gress and finished goods include an appropriate share of manufac-turing production overheads based on normal production capacity.

Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Necessary provision for obsolescence has been made after individual assessment.

2.10 ReceivablesTrade receivables are recognised initially at fair value and sub-sequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evi-dence that the Group will not be able to collect all amounts due according to the original terms. Provisions for impairment are measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Impairment losses related to trade receivables are recognised in selling expenses in the income statement.

The carrying value of trade receivables, less any impairment losses, are assumed to correspond to their fair value, since they are short-term in nature.

2.11 Cash and cash equivalentsCash and cash equivalents include cash, bank deposits and short-term investments with maturities of three months or less.

2.12 Share capitalOrdinary shares are classified as equity. Transaction costs directly attributable to the issue of new shares are recognised, net of tax, in equity as a deduction from the proceeds.

2.13 PayablesTrade payables are recognised initially at fair value and subse-quently measured at amortised cost using the effective interest method. The carrying amount of trade payables are assumed to correspond to their fair value because they are short-term in nature.

2.14 BorrowingsBorrowings are recognised initially at fair value net of transac-tion costs. Borrowings are subsequently stated at amortised cost and any difference between the proceeds (net of trans-action costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has a right to defer settlement of the liability for at least twelve months after the balance sheet date.

Borrowing costsGeneral and specific borrowing costs that are directly attribut-able to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are reported as part of such assets.

Capitalisation ceases when all the activities necessary to pre-pare the assets for their intended use or sale are substantially completed. All other borrowing costs are expensed as incurred.

2.15 Current and deferred taxThe current tax expense is calculated on the basis of the tax rates as at the balance sheet date that are enacted or substan-tively enacted in countries where the Company’s subsidiaries operate and generate taxable income. Management periodi-cally evaluates the positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and, when deemed appropriate, makes provi-sions for amounts expected to be paid to the tax authorities.

Deferred tax is recognised in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is not recognised on tempo-rary differences arising from the initial recognition of goodwill and differences relating to investments in subsidiaries to the extent they will not reverse in the foreseeable future.

Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are only recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

2.16 Compensation to employees Pension obligationsThe Group operates both defined contribution and defined benefit pension plans.

Defined contribution pensionsFor defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due.


Defined benefit pensionsDefined benefit plans are characterised by defining an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.

The liability recognised in the balance sheet for defined ben-efit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the same currency in which the benefits will be paid and with maturities comparable to the pension liability. The calculation also takes account of assumptions such as mortality rates and expected future inflationary increases in salaries.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the state-ment of other comprehensive income in the period they occur.

Bonus plansThe Group reports a liability and an expense for bonuses. The Group recognises a liability when there is a legal obligation or a constructive obligation as a result of past practices.

2.17 ProvisionsProvisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obliga-tion and the amount can be estimated reliably. Provisions are not recognised for future operating losses.

Provisions are measured at the fair value of the amount expected to be required to settle the obligation. A discount rate before tax is used that reflects current market assessments of the time value of money and the risks specific to the obligation. Increases in provisions due to the passage of time are recognised as inter-est expenses (referred to as ‘unwinding of discount charges’).

2.18 Revenue reporting Sale of goodsThe Group’s income is predominantly generated from the sale of products developed and manufactured within the Group.

Revenue comprises the fair value of the consideration received or receivable for goods sold in the Group’s operating activities. Revenues are reported net after deduction of value added tax, returns and discounts.

The Group recognises revenue when the significant risks and rewards of ownership have been transferred to the buyer which takes into account, inter alia, whether the amount receivable can be measured reliably and it is probable that future economic benefits will flow to the Group. In most circumstances, this date coincides with the delivery of the goods to the customer.

Interest incomeInterest income is recognised on a time proportioned basis using the effective interest method.

Government grantsGrants from the government are recognised at fair value when there is reasonable assurance that the grant will be received and the Group will comply with the conditions attached to the grant. Government grants relating to costs are deferred and recognised as income over the periods the costs are intended to cover.

2.19 LeasingLeases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operat-ing leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement over the lease period.

Leases of fixed assets where the Group has substantially all the risks and rewards of ownership are classified as finance leases. At lease inception, the finance leases are capitalised at the lower of the leased asset’s fair value and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges to achieve a constant rate of interest on the liability. Corresponding payment obliga-tions, net of finance charges, are included in the balance sheet item. The interest element of the finance cost is recognised in the income statement over the lease period. Fixed assets held under finance leases are depreciated over the shorter of the asset useful life and the lease term.

2.20 DividendsDividends paid to Parent Company shareholders are recog-nised as liabilities in the consolidated financial statements in the period in which the dividends are approved by the Compa-ny’s shareholders.

2.21 Share-based paymentsFollowing approval of a long-term incentive programme at the AGM in 2016, certain employees of the Group have been issued with warrants. These are accounted for as a form of share-based payment transaction, whereby employees render services in exchange for shares or rights over shares. Although there are specific circumstances in which the Company may become obligated to repurchase the warrants for cash consideration, this is not assessed to be a probable outcome and hence the share-based payment transactions are accounted for as “equity- settled transactions”.

The cost of equity-settled transactions with employees is meas-ured at fair value at the date at which they are granted and then expensed on a straight-line basis over the vesting period based on the Group’s estimate of shares that will eventually vest. The estimate of the number of awards likely to vest is reviewed at each balance sheet date up to the vesting date, at which point the estimate is adjusted to reflect the actual outcome of awards which have vested. No adjustment is made to the fair value after the vesting date even if the awards are forfeited or not exercised.

2.22 Earnings per shareBasic earnings per share are calculated based on the profit for the year attributable to the owners of the Parent Company and the basic weighted average number of shares in issue and outstanding.


Diluted earnings per share are calculated based on the profit for the year attributable to the owners of the Parent Company and the basic weighted average number of shares in issue and outstanding but adjusted for the effects of dilutive warrants.

2.23 Parent Company accounting policiesAside from presentational differences in the format of the income statement and balance sheet, the Parent Company applies accounting principles other than the Group in the cases listed below.

Shares in subsidiariesShares in subsidiaries are carried at cost less any impairment losses. Transaction costs incurred in connection with a busi-ness combination are accounted for as part of the acquisition costs and are not expensed.

Dividends received are recognised as income when the right to receive payment is established. Thereafter, an impairment test of the investment to which the dividend relates is performed.

When there is an indication that the investments in subsidiaries might be impaired, an estimate of recoverable amount is made. If this is lower than the carrying amount, an impairment loss is recognised in the income statement.

Shareholder contributions and share based paymentsShareholder contributions are recognised as an increase in the value of investment in Group companies. An assessment is then made of whether there is a need for impairment of the value of the investment in question.

Where the warrants issued to certain employees of the Group, under a long-term incentive programme, relate to employees of subsidiary companies, the share based payment charge is treated in the Parent Company as an addition to the cost of its investments in those subsidiary companies.

Note 3. Financial risk management3.1 Financial risk factorsThe Group’s activities expose it to various financial risks: market risk (currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial results.

Risk management is handled by the CEO and CFO in accord-ance with policies established by the Board.

Market risk(i) Currency risksThe Group operates and sells in various geographic markets and, therefore, undertakes transactions in foreign currencies. The Group’s main exposures arise on the following currencies: Euro (EUR), US Dollars (USD), British Pounds (GBP) and Czech Koruna (CZK). The proportion of the Group’s sales and operat-ing expenses arising in these currencies is disclosed in notes 5 and 6. As can be seen from this data, very little of the Group’s sales and operating expenses arise in SEK and therefore a 1% change in the SEK exchange rate has the potential to increase or decrease operating profit by close to 1%. Further details on foreign currency sensitivity can be found in note 31.

The exposures to changes in foreign exchange rates can be separated between translation exposures and transaction exposures. These are explained further below.

Translation exposureDiamorph prepares its financial statements in Swedish kronor (SEK) so there is an exposure arising when consolidating the results of foreign subsidiaries and reporting the financial state-ments in SEK. Translation exposures arise both on the consoli-dation of the balance sheet of the foreign subsidiaries and their income statements. The Group does not seek to hedge these exposures.

Transaction exposureThe foreign subsidiaries themselves are exposed to changes in exchange rates on their sales and purchases transactions. For the Tenmat operations in the UK, sales are made predominantly in GBP, EUR and USD whilst most costs are incurred in GBP with some costs incurred in USD and EUR. For the Hob Certec opera-tions in the Czech Republic, sales are predominantly in EUR whilst costs are incurred mostly in EUR and CZK. A further transactional exposure can arise in the subsidiaries on foreign currency denom-inated intercompany loans (and interest charges).

The Group’s general policy for managing transactional exposures is to match the foreign currency cash inflows and outflows where possible. Strategies to manage the remaining net exposures are continually reviewed. During 2017, the Group has taken advantage of the opportunity afforded by the new bank facility to transition its borrowings to a basket of EUR and USD borrowings. Pre-viously the borrowings were mainly denominated in SEK. This change means that, whilst the Group is still exposed to changes in exchange rates, it does now enjoy a better match between the currency of cash flows from operating activities and those of its debt service (financing) activities. A consequence of this change, however is that the borrowing entity (being today Diamorph UK Limited, whose functional currency is SEK) carries a transactional exposure to those foreign currency borrowings and interest charges.

Forward exchange contracts are selectively used to mitigate the potential short term impact from changes in exchange rates. Typi-cally a proportion of the expected foreign cash flows are hedged using forward exchange contracts looking at a period up to 24 months’ forward. The value of the Group’s forward exchange contracts is set out in note 15.

Parent CompanyThe Parent Company is mainly exposed to the risk of changes in the value of its investments in foreign subsidiaries since its funding is denominated in SEK. These exposures are not hedged.

(ii) Interest rate riskThe Group’s revenues and cash flows from operating activities are substantially independent of changes in market interest rates.

Following the refinancing of the bond during 2017, the Group’s borrowings today comprise bank loans which are exposed to floating interest rates. The Group continuously reviews strate-gies to manage this exposure which might include transacting derivative financial instruments such as interest rate swap or cap products. Based on the current levels of borrowing lev-


erage, the Group currently considers the risk associated with exposure to floating interest rates to be manageable and so has not entered into any such arrangements during 2017. Further information on the Group’s borrowings is set out in note 21.

The Group operates a defined benefit pension scheme and the valuation of the Group’s pension obligations is influenced, inter alia, by changes in market interest rates. Detailed information relating to the pension scheme, including the sensitivity of the valuation of the pension obligation to changes in interest rates, is set out in note 23.

Credit riskCredit risk arises on deposits with banks and financial insti-tutions as well as credit exposures to the Group’s customers, including outstanding receivables and committed transactions.

In assessing which banks and financial institutions to deposit funds with and in assessing which customers to extend credit to, the Group has regard to ratings from independent rating agencies. For customers where no credit assessment exists, a risk assessment of the customers’ creditworthiness is made by considering their financial position taking into account previ-ous experience in dealings with that customer. Credit insurance is taken where it is deemed to be cost effective. Credit exposures and the credit limits afforded to customers are regularly monitored.

The maximum credit exposure is the book value of the exposed assets recognised in the balance sheet. Further information on the Group’s credit exposures on trade receivables is set out in note 14.

Liquidity riskThe Group’s liquidity risk is the risk that the Group could lack cash for payment of its obligations due to poor market liquidity.

The Group prepares financial forecasts and on the basis of these an assessment is made as to the necessary minimum level of liquidity, that it is prudent to hold either through existing cash resources or via committed credit facilities. Cash deposits in excess of the minimum requirements may be invested in marketa-ble securities that provide a higher rate of return on investment.

At 31 December 2017 the Group had cash and cash equivalents of SEK 22.1 (213.2) million, the reduction reflecting the fact that the new bank facility allows surplus cash to be deployed more efficiently; the Group’s gross borrowings were substantially reduced by refinancing the bond during the year.

The maturity profile of the undiscounted value of the Group and Parent Company’s financial liabilities (all liabilities excluding pension liabilities and deferred tax liabilities adjusted to include all interest commitments) is set out in the table on page 39.

3.2 Management of capital riskThere are no external capital requirements placed on the Group.

The Group’s policy is to adopt a capital structure that safe-guards the Group’s ability to continue its operations, so that it can continue to provide returns for shareholders and benefits for other stakeholders. In doing so, the intention is to support

future development of the business and maintain a capital struc-ture that has an appropriate cost of capital. The Group monitors its access to capital partly through monitoring its leverage ratio of net debt to EBITDA (see definitions in note 30). The position at 31 December 2017 is shown in the table below and shows a small improvement in the leverage ratio during the year. At cur-rent leverage levels, the Group remains comfortably within the maintenance covenants contained within its committed banking facility.

Net debt : EBITDA 2017 2016

Total interest-bearing liabilities (Note 21) 312.3 519.1

Less: cash and cash equivalents (Note 17) –22.1 –213.2 Net debt 290.2 305.9 EBITDA 149.8 150.5 Net debt : EBITDA (ratio) 1.94 2.03

3.3 Fair valueIn the balance sheet financial instruments are carried either at fair value or at amortised cost depending on the classification of the financial instrument. Companies classify fair value meas-urement methods using a hierarchy that reflects the reliability of the inputs used in making the valuations. The fair value hier-archy has the following levels:

Level 1: This method uses quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: This method uses inputs, other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Examples of observable data include market interest rates or exchange rates.

Level 3: This method uses inputs for the asset or liability that are not based on observable information. Fair values are determined using valuation models where significant ele-ments of the valuation are not observable in the market.

At 31 December 2017, the Level 2 method was used to value the Group’s forward exchange contracts. At 31 December 2016, the Level 2 method was also used to value the Group’s outstanding interest rate swap and the Level 3 method was used to value the outstanding put option held by non-controlling interests.

3.4 Financial instruments per categoryIn 2017, the Group has classified its financial instruments in the following categories.

Derivative financial instruments are classified as financial assets and liabilities at fair value through profit or loss.

Cash balances, trade and other receivables are classified as loans and receivables.

The Group classifies its financial liabilities, including trade paya-bles and interest-bearing liabilities, as other financial liabilities.

Hedge accounting has not been applied in preparing these financial statements.


TotalLess than

1 yearBetween 1

and 2 yearsBetween 2

and 5 yearsMore than

5 years

GroupAs of 31 December 2017Interest-bearing liabilities (including interest) 338.8 23.9 23.4 291.5 – Other liabilities and provisions 9.3 9.3 – – –

Accounts payable, other liabilities and accruals (excluding interest) 48.7 48.7 – – – Total 396.8 81.9 23.4 291.5 –

As of 31 December 2016Interest-bearing liabilities (including interest) 629.0 59.0 35.0 535.0 – Derivative financial instruments 0.1 0.1 – – –Other liabilities and provisions 22.0 22.0 – – –

Accounts payable, other liabilities and accruals (excluding interest) 37.9 37.9 – – –Total 689.0 119.0 35.0 535.0 –

Parent CompanyAs of 31 December 2017Interest-bearing liabilities (including interest) - bank loan – – – – –

Interest-bearing liabilities (including interest) - liabilities to subsidiaries 37.6 37.6 – – –

Accounts payable, other liabilities and accruals (excluding interest) 1.1 1.1 – – –Total 38.7 38.7 – – –

As of 31 December 2016Interest-bearing liabilities (including interest) - bond 605.0 35.0 35.0 535.0 –

Interest-bearing liabilities (including interest) - liabilities to subsidiaries 14.2 14.2 – – –

Accounts payable, other liabilities and accruals (excluding interest) 2.1 2.1 – – – Total 621.3 51.3 35.0 535.0 –

Note 4. Significant estimates and judgmentsThe preparation of financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Estimates and judgments are continually evaluated and are based on historical experi-ence and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Significant estimates and assumptions for accounting purposes The Group makes estimates and assumptions concerning the future. The resulting accounting estimates that result from these will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of material adjustments to the carrying values of assets and liabili-ties within the next financial year are outlined below.

Impairment tests for goodwillDiamorph assesses if there is any impairment of goodwill in accordance with the accounting policy described in Note 2.7 Impairment of non-financial assets. Recoverable amounts of cash generating units have been determined by calculating the value in use. These calculations require the use of esti-mates (see note 11).

It has been assessed that there is no impairment of goodwill and the carrying values at the balance sheet date for goodwill allocated to cash- generating units are shown in note 11.

Valuation of loss carry-forwardsThe Group tests annually whether any impairment exists for deferred tax assets for tax loss carry-forwards. In addition, the Group assesses the ability to recognise new deferred tax assets for the year’s tax losses, if it is applicable. Deferred tax assets are only recognised when it is probable that future taxable profit will be available against which the temporary differences can be uti-lised. Due to the history of losses in the entities that have tax loss carry-forwards, no deferred tax assets have been recognised for the calculated loss carry-forwards. The value of potential deferred tax assets not recognised are set out in note 10.

Put option held by non-controlling interestsAt 31 December 2016, the Group was party to a put option arrangement with a minority shareholder who had subscribed for 10% of the equity in the subsidiary Diamorph Bearings AB at the time of the acquisition of the Hob Certec business in the Czech Republic in 2011.


As described on page 17, during 2017 the Group has acquired the final remaining 10% of Diamorph Bearings AB and the put option has expired.

At 31 December 2016, the fair value of the put option had been assessed as being SEK 8.9 million and this was recognised in the Group balance sheet as a non-current financial liability. Changes in the fair value of the option have been recognised within equity.

Significant judgmentsAccounting for defined benefit pension scheme Pensions and other post-employment obligations are depend-ent on the assumptions established by management and used by actuaries in calculating such amounts. The key assump-tions include discount rates, inflation, future salary increases and mortality rates.

The actuarial assumptions are reviewed on an annual basis and are changed when it is deemed appropriate. However, the valua-tion of the Groups defined benefit pension scheme can be volatile in its nature and small changes in assumptions can trigger the net pension obligation to change significantly from period to period.

At 31 December 2017, the Group had a net pension liability of SEK 2.3 (SEK 35.7) million before recognising tax effects. This is reported in the Group balance sheet and the change in the value is recognised within equity. The key assumptions used in the valuation are set out in note 23.

Functional currency of subsidiary companyIn connection with the acquisition of the Tenmat Group of companies in 2012, a new wholly owned holding Company in the UK was created for administrative purposes (Diamorph UK Limited). From an accounting perspective, this has been treated as an extension of the Parent Company and so the functional currency of Diamorph UK Limited has been assessed to be SEK.

Note 5. Geographic salesAll sales relate to sales of products. Net sales are distributed in the following geographical markets:

Group 2017 2016Sweden 7.0 5.5 Rest of Europe 241.4 222.7USA 111.7 118.2Rest of World 68.6 77.2Total 428.7 423.6

The data above has been re-presented based on the updated definition of ‘Rest of Europe’: all countries classified as EU member states (excluding Sweden which is disclosed sepa-rately) plus Belarus, Bosnia and Herzegovina, Gibraltar, Jersey, Liechtenstein, Norway, Serbia, Switzerland and Ukraine.

The Group has no single customer representing more than 10% of annual turnover in either 2016 or 2017.

The Group’s net sales principally arise in the following curren-cies: GBP 31% (31%) of total, EUR 41% (38%), USD 28% (30%) and CZK 0% (1%).

Since the Group’s main operations are in the United Kingdom and the Czech Republic, all significant assets are located in Europe.

Note 6. Operating profitOperating profit is stated after charging or crediting the following items:

Group 2017 2016Net foreign exchange gains/(losses) –3.5 –1.2 Operating lease expenses –1.8 –0.9

Total operating expenses and cost of goods sold are analysed by cost type as follows:

Group 2017 2016Raw materials and consumables 80.6 77.9 Employee benefits (note 8) 104.5 104.3

Depreciation and amortisation (notes 11, 12) 11.8 11.0 Other expenses 86.8 90.6 Total 283.7 283.8

The Group’s total operating expenses arise principally in the following currencies: GBP 69% (64%) of total, EUR 13% (16%), CZK 12% (11%), USD 5% (7%) and SEK 1% (2%).

Non-recurring items have been presented separately in the Group income statement to better show the underlying operat-ing profit performance.

Non-recurring income of SEK 5.2 (expenses 0.2) million was recognized which mainly relate to a legal settlement in the Group’s favour relating to alleged infringements of one of the Group’s trademarks.

Note 7. Remuneration to auditorsAudit assignments refer to reviewing the annual report and accounts, the Board and the CEO’s management as well as other tasks incumbent on the Company’s auditors and advice or other assistance resulting from observations made during the audit or performance of such tasks. All other assignments are referred to as other assignments.

Group 2017 2016Ernst & YoungAudit assignments 1.1 1.1 Tax advice - 0.2 Total 1.1 1.3

Parent Company 2017 2016Ernst & YoungAudit assignments 0.5 0.5 Total 0.5 0.5


Note 8. Remuneration to employeesGroup 2017 2016Salaries and benefits 89.6 89.2 Social costs 11.0 11.1 Pension costs-defined contribution plans 3.1 3.6 Equity-settled share-based payment expense 0.8 0.4 Total 104.5 104.3

2017 2016

Wages and Salaries

Pension costs

Wages and Salaries

Pension costs

GroupBoard members, CEO and other senior executives 9.0 0.6 7.9 0.3 Other employees 80.6 2.5 81.3 3.3 Total Group 89.6 3.1 89.2 3.6

Parent CompanyBoard members 0.6 - 0.6 -Other employees 0.2 0.1 0.9 0.1 Total Parent Company 0.8 0.1 1.5 0.1

Information on the average number of employees:

2017 2016Total employees Men Women Total employees Men Women

Sweden 1 1 - 2 2 -Total Parent Company 1 1 - 2 2 -

SubsidiariesUnited Kingdom 212 189 23 211 188 23Czech Republic 50 46 4 47 43 4Others 12 8 4 12 8 4Total Subsidiaries 274 243 31 270 239 31

Total Group 275 244 31 272 241 31

Gender breakdown for directors and other senior executives:

2017 2016

Total number at end of year Men Women

Total number at end of year Men Women

GroupMembers of the Board 5 5 - 5 5 -Chief Executive Officer 1 1 - 1 1 -Other senior executives 5 5 - 4 4 -Total Group 11 11 - 10 10 -

Parent CompanyMembers of the Board 5 5 - 5 5 -Chief Executive Officer - - - - - -Total Parent Company 5 5 - 5 5 -

Remuneration to senior executives:Group (SEK) Salary/board fee Bonus Other benefits Pension costs Total2017Chairman Ashkan Pouya 200,000 - - - 200,000Board member Saeid Esmaeilzadeh 100,000 - - - 100,000Board member Anthony Moore* 100,000 - 2,519 - 102,519Board member Anders Mörck 100,000 - - - 100,000Board member Ola Ringdahl 100,000 - - - 100,000Chief Executive Officer 1,595,073 478,522 113,360 159,507 2,346,462Other senior executives 4,921,271 797,127 455,545 432,109 6,606,052Total 7,116,344 1,275,649 571,424 591,616 9,555,033

*includes remuneration from subsidiary company


Group (SEK) Salary/board fee Bonus Other benefits Pension costs Total2016Chairman Ashkan Pouya 200,000 - - - 200,000Board member Saeid Esmaeilzadeh 100,000 - - - 100,000Board member Anthony Moore* 172,394 - 16,100 - 188,494Board member Anders Mörck 100,000 - - - 100,000Board member Ola Ringdahl 100,000 - - - 100,000Chief Executive Officer 1,665,057 - 13,035 166,505 1,844,597Other senior executives 5,103,060 212,582 260,378 122,831 5,698,851Total 7,440,511 212,582 289,513 289,336 8,231,942

*includes remuneration from subsidiary company

Note 9. Financial itemsNon-recurring financial items have been presented separately in the Group income statement to better show the underlying financial income and expenses.

Group 2017 2016Financial incomeInterest income - 0.1 Total financial income - 0.1

Financial expensesInterest expense - bond -22.1 -35.0 - bank borrowings -3.2 -0.7 Amortisation of arrangement fees -2.1 -1.8 Total financial expenses -27.4 -37.5

Non-recurring financial itemsEarly redemption charges arising on repayment of bond -14.5 -Accelerated charges relating to bond arrangement fees -3.5 -Foreign exchange gains/(losses) 2.7 37.8 Changes in fair value of derivative financial instruments -0.9 0.8 Interest income/(expense) on defined benefit pension scheme -0.9 0.3 Total non-recurring financial items -17.1 38.9 Total -44.5 1.5

Net non-recurring financial expenses of SEK 17.1 (income of 38.9) million were reported. In 2017 the expenses mainly comprise the aggregate early redemption premiums of SEK 14.5 million arising on the repayment of the bond, being a 2% premium (SEK 1.0 million) on the voluntary partial repayment of SEK 50 million of bonds in March 2017 and a 3% premium (SEK 13.5 million) on the full redemption of the remaining SEK 450 million of outstanding bonds in September 2017. In addition the charges relating to the remaining unamortised element of the arrangement fees for the bond issue were accelerated. In 2016, the non-recurring financial income mainly comprised net foreign exchange gains on third party and intercompany financing balances; significant foreign exchange gains arose in 2016 on intercompany balances as GBP weakened against SEK in 2016 both in the run up to and subsequent to the UK referendum on EU membership.

Parent Company 2017 2016Financial incomeInterest income on loans to subsidiaries 22.5 35.0 Other financial income - subsidiary companies 19.1 1.8 Total financial income 41.6 36.8

Financial expensesInterest expense - bond -22.1 -35.0 - loans from subsidiaries -0.7 -0.6 Early redemption charges arising on repayment of bond -14.5 -Amortisation of arrangement fees -4.6 -1.8 Foreign exchange gains/(losses) - -0.4 Total financial expenses -41.9 -37.8 Total -0.3 -1.0

No borrowing costs have been capitalised within property, plant and equipment in 2016 or 2017.


Note 10. Income TaxGroup 2017 2016Current tax -26.6 -29.6 Deferred tax 2.6 0.6 Total -24.0 -29.0

The differences between the reported tax expense and an estimated tax based on current tax rate is as follows:

Group 2017 2016Profit before tax 100.5 141.1Income tax calculated in accordance with the current weighted average tax rate -18.9 -29.8Non-deductible expenses -2.2 -0.8Revaluation of deferred taxes due to change in tax rate -0.7 1.7Tax losses for which no deferred tax assets were recognised -0.6 -1.0Adjustment for current tax of previous periods 0.9 -0.3Adjustment for deferred tax of previous periods 0.3 -0.1Withholding taxes paid as part of process to liquidate KHP Marketing Gmbh i.L. -5.9 -Other 3.1 1.3Income tax -24.0 -29.0

Parent Company 2017 2016Loss before tax -3.4 -4.7Income tax calculated in accordance with the current tax rate 0.8 1.0Tax losses for which no deferred tax assets were recognised -0.8 -1.0Income tax - -

At the end of 2017 the Group had unrecognised potential deferred tax assets of SEK 20.4 (20.3) million relating to brought forward tax losses which are mainly attributable to the Group’s Swedish companies. No deferred tax asset has been recognised due to the history of losses but the tax losses are not limited in time as to when they can be utilised.

Deferred tax liabilities at 31 December 2017, amounted to SEK 22.5 (20.1) million and principally relate to the deferred tax liabilities arising on intangible assets acquired through the Tenmat and Hob Certec business of SEK 25.4 (26.6) million.

Note 11. Intangible assetsGroup 2017

Computer Software

Development expenditure Patents Trademarks Goodwill Total

Opening acquisition value 1.0 31.3 0.2 142.0 528.7 703.2 Additions 0.1 - - - - 0.1 Exchange rate differences 0.2 -0.4 - -2.0 -2.5 -4.7 Closing acquisition value 1.3 30.9 0.2 140.0 526.2 698.6

Opening depreciation -0.3 -18.4 -0.2 - - -18.9 Depreciation for the year -0.2 -4.1 - - - -4.3 Exchange rate differences -0.1 0.2 - - - 0.1 Closing depreciation -0.6 -22.3 -0.2 - - -23.1

Opening net carrying value 0.7 12.9 - 142.0 528.7 684.3 Closing net carrying value 0.7 8.6 - 140.0 526.2 675.5

Group 2016

Computer Software

Development expenditure Patents Trademarks Goodwill Total

Opening acquisition value 0.8 34.8 0.2 157.6 579.1 772.5 Additions 0.2 - - - - 0.2 Exchange rate differences - -3.5 - -15.6 -50.4 -69.5 Closing acquisition value 1.0 31.3 0.2 142.0 528.7 703.2

Opening depreciation -0.1 -15.9 -0.2 - - -16.2 Depreciation for the year -0.2 -4.3 - - - -4.5 Exchange rate differences - 1.8 - - - 1.8 Closing depreciation -0.3 -18.4 -0.2 - - -18.9

Opening net carrying value 0.7 18.9 - 157.6 579.1 756.3 Closing net carrying value 0.7 12.9 - 142.0 528.7 684.3


Impairment testing of goodwill and trademarksImpairment tests have been performed during the year in respect of goodwill, SEK 526.2 (528.7) million and trademarks, SEK 140.0 (142.0) million and capitalised development expenditures, SEK 8.6 (12.9) million. In the impairment test, a pre-tax discount rate of 14.0% (14.0%) was used. The average sales growth rate during the budget period (1-5 years) is 5.0% (4.0%) and the average growth rate used to extrapolate cash flows beyond the budget period is estimated at 2.0% (2.0%). The projected cash flows (years 1-5) include capital expenditures of approximately 3% (3%) of sales on average, except in year 2 where they are budgeted to be higher and assume that working capital levels will be maintained as a percentage of sales at approximately 1% on average. Assets have been allocated to two cash generating units which are the business units in the United Kingdom and the Czech Republic, with goodwill allocated of SEK 472.8 (479.5) million and SEK 53.4 (49.2) million respectively.

Note 12. Tangible fixed assetsGroup 2017 Land and Buildings Machinery Office equipment TotalOpening acquisition value 65.3 140.1 14.6 220.0 Additions 12.1 23.6 - 35.7 Disposals - -0.2 - -0.2 Reclassification -0.6 -11.5 -3.2 -15.3 Exchange rate differences 2.0 3.9 -0.2 5.7 Closing acquisition value 78.8 155.9 11.2 245.9

Opening depreciation -19.7 -109.4 -13.5 -142.6 Depreciation for the year -1.5 -5.9 -0.1 -7.5 Disposals - 0.2 - 0.2 Reclassification 0.6 11.5 3.2 15.3 Exchange rate differences -0.5 -2.6 -0.1 -3.2 Closing depreciation -21.1 -106.2 -10.5 -137.8

Opening net carrying value 45.6 30.7 1.1 77.4 Closing net carrying value 57.7 49.7 0.7 108.1

Group 2016 Land and Buildings Machinery Office equipment TotalOpening acquisition value 62.8 133.5 15.5 211.8 Additions 5.6 13.0 - 18.6 Disposals - -0.4 - -0.4 Exchange rate differences -3.1 -6.0 -0.9 -10.0 Closing acquisition value 65.3 140.1 14.6 220.0

Opening depreciation -19.3 -109.1 -14.1 -142.5 Depreciation for the year -1.3 -5.0 -0.2 -6.5 Disposals - 0.4 - 0.4 Exchange rate differences 0.9 4.3 0.8 6.0 Closing depreciation -19.7 -109.4 -13.5 -142.6

Opening net carrying value 43.5 24.4 1.4 69.3 Closing net carrying value 45.6 30.7 1.1 77.4

There is no financial leasing within the Group.

Note 13. InventoriesGroup 2017 2016Raw materials 14.1 11.5 Work in progress 8.1 6.4 Finished goods 17.4 13.2 Total 39.6 31.1

During 2017, SEK 1.0 million was recognised as a reversal of a previous write down for inventories carried at net realisable value. In 2016 a 1.9 million expense had been recognised within cost of sales.


Note 14. Accounts receivableGroup 2017 2016Trade receivables 81.6 77.7 Provision for doubtful debts -1.5 -2.6 Total 80.1 75.1

Trade receivables by currency:

Group 2017 2016GBP 27.1 32.5 CZK 0.1 2.0 EUR 40.9 28.1 USD 11.9 12.0 Other currencies 0.1 0.5 Total 80.1 75.1

The fair value of the Group’s trade receivables is consistent with the reported value. As at the balance sheet date, trade receivables amounting to SEK 7.3 (8.0) million were overdue without any impairment being considered necessary. These relate to a number of independent customers that have not had payment difficulties. The aging analysis of these trade receivables is as follows:

Analysis of credit risk exposure in trade receivables 2017 2016Trade receivables that are neither overdue nor impaired 72.8 67.1

Overdue:- Less than 2 months 6.3 7.2 - 3-6 months 1.0 0.1 - 7-12 months - 0.7 Total overdue 7.3 8.0 Book value of trade receivables 80.1 75.1

Amounts reported in the allowance account are usually written off when the Group does not expect to recover additional cash. The maximum exposure to credit risk on trade receivables comprise the book value at the balance sheet date. The Group has no collateral as security.

Note 15. Derivative financial instrumentsGroup 2017 2016Current assets 1.0 0.2Current liabilities - -0.1Total asset/(liability) 1.0 0.1

No hedge accounting has been applied to the derivative financial instruments and so the change in fair value of derivative financial instruments during the year has been fully recognised in the income statement.

At 31 December 2017, the forward exchange contracts partially hedge exposure to sales denominated in USD and EUR. At 31 December 2016, the forward exchange contracts additionally also partially hedged the Group’s exposure to interest payments on the bond denominated in SEK.

At 31 December 2017, the Group has no interest rates outstanding. At 31 December 2016, an interest rate swap was in place to hedge part of the exposure to changes in 3 month Euribor rates for the bank loan taken out by the Hob Certec business in the Czech Republic (see note 21).

Note 16. Other receivablesGroup 2017 2016Value added tax 1.3 1.7 Other receivables 0.7 0.5 Total 2.0 2.2

Parent Company 2017 2016Value added tax - 0.1 Other receivables 0.1 0.1 Total 0.1 0.2


Note 17. CashGroup 2017 2016Cash at bank and on hand 22.1 213.2 Restricted cash - 22.6 Total 22.1 235.8

For the purposes of the Group cash flow statement, cash and cash equivalents comprise only the cash at banks and on hand of SEK 22.1 (213.2) million.

Restricted cash related to cash that the Group had pledged under an agreement with a minority shareholder of Diamorph Bearings AB, see note 4 for further details. During the year, this pledge was released.

Note 18. Share capital, other paid-in capital and other reservesShare capital and other capital contributions:

2017 Number of shares Share capitalOther capital contributions Total

At beginning of year 52,846,841 1.1 324.5 325.6At end of year 52,846,841 1.1 324.5 325.6

2016 Number of shares Share capitalOther capital contributions Total

At beginning of year 52,593,751 1.1 320.7 321.8Share issue 253,090 - 3.8 3.8At end of year 52,846,841 1.1 324.5 325.6

The shares have a quota value of SEK 0.0209 per share. Each share corresponds to one vote. All balance sheet date registered shares are fully paid. The number of shares reflect the current quota value.

Other reserves:

2017 Exchange rate differences TotalAt beginning of year 23.0 23.0 Exchange rate differences -7.9 -7.9 At end of year 15.1 15.1

2016 Exchange rate differences TotalAt beginning of year 133.4 133.4 Exchange rate differences -110.4 -110.4 At end of year 23.0 23.0

Note 19. Proposed distribution of profitsThe Board of Directors do not propose any distribution to shareholders and propose that the loss for the year is transferred to retained earnings.

2017 2016Share premium account 287.5 287.5Accumulated loss -66.8 -63.3Loss for year -3.4 -4.7Total available for distribution 217.3 219.5Distributed - -Carried forward 217.3 219.5

Note 20. Share options At the 2016 AGM, an issue of a maximum of 980,000 warrants was approved. These warrants have subsequently been issued to a number of senior executives and employees of the Group for no consideration as a form of long-term incentive programme. Each warrant entitles the holder to subscribe for one new share in the Company at a subscription price of SEK 15. Warrants can only be exercised during the period from 1 September 2020 up to and including 31 December 2022, or up to and including an earlier date that follows from the complete terms and conditions of the warrants.


The warrants are accounted for as a form of share-based payment transaction, whereby employees render services in exchange for shares or rights over shares. Although there are specific circumstances in which the Company may become obligated to repurchase the warrants for cash consideration, this is not assessed to be a probable outcome and hence the share-based payment transac-tions are accounted for as “equity-settled transactions” and no liability has been recognized on the balance sheet. The total charge to the income statement in 2017 of SEK 0.8 (0.4) million was therefore credited to equity.

The warrants have been valued using an option pricing model. The average share price at the date of grant was deemed to be equivalent to the exercise price of SEK 15 and the option pricing model assumes no dividends, a risk free rate of 0% and expected volatility of 30%. The warrants were issued in three tranches with 720,000 warrants issued in June 2016, 130,000 in September 2016 and 130,000 in January 2017 giving an expected life of 4.33, 4.00 and 3.67 years respectively, and a fair value per warrant of 3.68 SEK, 3.54 SEK and 3.39 respectively. The cost of each warrant has been expensed on a straight-line basis over the vesting period based on the Group’s estimate of shares that will eventually vest. At 31 December 2017 and 31 December 2016, it has been assumed that all warrants will eventually vest. The estimate of the number of awards likely to vest will be reviewed at each future balance sheet date up to the vesting date (to take account, for example, of leavers) at which point the estimate will be adjusted to reflect the actual number of warrants which have vested.

At 31 December 2017 and 31 December 2016, the warrants do not have any dilutive effect on earnings per share on the basis that it is assessed that there is currently no material difference between the number of shares that would be issued at market value from the proceeds of dilutive options and the number of shares that will be issued if all warrants are exercised.

Note 21. Interest-bearing liabilitiesGroup 2017 2016Long-termBank loans 302.7 -Bond - 500.0 Capitalised arrangement fees -6.0 -4.7 Total long-term interest-bearing liabilities 296.7 495.3

Short termBank loans 15.6 23.8 Total short-term interest-bearing liabilities 15.6 23.8

Total 312.3 519.1

The currency denomination of the Group’s borrowings are as follows:

Group 2017 2016Borrowing in EUR 245.8 23.8 Borrowing in USD 72.4 500.0 Borrowing in SEK 0.1 -Gross borrowings 318.3 523.8 Capitalised arrangement fees -6.0 -4.7 Total 312.3 519.1

New bank facility arranged during 2017 On 10 August 2017, Diamorph AB (publ) entered into a new senior secured bank facility agreement to facilitate redemption of the Company’s bonds. The new facility comprises a USD 5.7 million 3 year amortising term loan and EUR 36 million revolving credit facility, giving an initial total facility of approximately SEK 392 million based on the exchange rate environment at the time the facility was arranged. The facility is for an initial term of 3 years (with further extensions of up to 2 years possible under certain conditions) and it can be drawn in a combination of SEK, EUR, USD and GBP currencies. Interest on the borrowings is based on a margin above floating interest rates, where the margin is linked to the Group’s leverage position. The loans are secured on the shares of certain Group companies, an intercompany loan between the Company and Diamorph UK Limited and there are other conditional security arrangements over certain assets of the Company, as also disclosed in note 26. The facility agreement includes various undertakings and commitments, including maintenance covenants in respect of leverage (net debt: EBITDA ratio), and interest cover (EBITDA: finance charges); the covenants are continuously monitored and were complied with as at 31 December 2017.

The board has chosen to target a 75:25 weighting of EUR and USD borrowings under the facility. At 31 December 2017, 77% of the loans drawn down under the facility were denominated in EUR and 23% were denominated in USD. The weighted average total effective interest rate on the borrowings (excluding commitment fees and amortisation charges for arrangement fees) at 31 December 2017 was 2.37%.


The USD 5.7 million 3 year amortising term loan is due for repayment in equal instalments of USD 475,000 in March, June, Sep-tember and December. At 31 December 2017, loans of SEK 15.6 million are therefore presented as current liabilities representing the next 4 instalments.

Bond (repaid in full during 2017)The bond carried a fixed interest coupon of 7% and was issued with a five year term in September 2014. Interest payments were due every 6 months falling on 5th March and 5th September each year. The bond was not subject to any maintenance covenants but was secured on the shares in certain Group companies and an intercompany loan between the Company and Diamorph UK Limited. The bond was listed on NASDAQ OMX Nordic with ISIN SE0006028221. The bond’s fair value was SEK 472 million at 31 December 2016, calculated under Level 1 category. The bond was fully repaid in two stages during 2017:

• A voluntary partial repayment of SEK 50 million of outstanding bonds was made in March 2017, including payment of a 2% (SEK 1 million) early redemption premium; and

• A full redemption of the remaining SEK 450 million of outstanding bonds took place in September 2017, including payment of a 3% (SEK 13.5 million) early redemption premium.

Unicredit bank loan (repaid in full during 2017)The Unicredit bank loan was taken by Diamorph Hob Certec s.r.o. in the Czech Republic and was secured on the assets in that com-pany. It was arranged at the time of the acquisition of Diamorph Hob Certec s.r.o. by the Group in 2011. The loan was denominated in Euro, repayable in quarterly instalments of Euro 196,000 with a final balloon payment of Euro 2,094,000 which was made from cash already available within the Group in August 2017. The interest on a proportion of the loan had been swapped onto a fixed rate and so the weighted average total effective interest rate on the borrowings at 31 December 2016 was 2.56%. The Unicredit bank loan included maintenance covenants in respect of debt cover, interest cover and a liquidity ratio; the covenants were continuously monitored and were complied with throughout 2016 and 2017 until the loan was repaid.

The maturity profile of the interest-bearing liabilities is set out in the table at the top of page 39.

Parent Company 2017 2016Long–termBond - 500.0 Capitalised arrangement fees - -4.7 Total - 495.3

Note 22. Reconciliation of liabilities arising from financing activitiesThe table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash flows as cash flows from financing activities.

2017 Non-cash changes

Liabilities at start of year

Cash flow from financing activities

Amortisation of arrangement fees - underlying charge

Amortisation of arrangement fees -

charge accelerated by refinancing of bond

Foreign exchange

movements

Liabilities at end

of year

Long term interest-bearing liabilities-Bond, net of arrangement fees 495.3 -500.0 1.2 3.5 - -

-Bank loan, net of arrangement fees - 289.7 0.9 - 6.1 296.7

Short term interest-bearing liabilities-Bank loan 23.8 -8.5 - - 0.3 15.6 Total interest bearing liabilities 519.1 -218.8 2.1 3.5 6.4 312.3

Premiums paid to bondholders -14.5

Total cash flow from financing activities as per cash flow statement -233.3


2016 Non-cash changes

Liabilities at start of year

Cash flow from financing activities

Amortisation of arrangement fees - underlying charge

Amortisation of arrangement fees -

charge accelerated by refinancing of bond

Foreign exchange

movements

Liabilities at end

of year

Long term interest-bearing liabilities-Bond, net of arrangement fees 493.6 - 1.7 - - 495.3 -Bank loan, net of arrangement fees 22.7 - 0.1 - 1.0 23.8

Short term interest-bearing liabilities-Bank loan 7.2 -7.5 - - 0.3 - Total interest bearing liabilities 523.5 -7.5 1.8 - 1.3 519.1 Total cash flow from financing activities as per cash flow statement -7.5

Note 23. Pension obligationsWithin the Group there is one defined benefit pension plan related to Modular Stock Limited and its subsidiary, Tenmat Limited. Pension obligations are volatile in nature and this is an accounting area that is the subject of critical judgments and estimates. See note 4 significant estimates and judgments. Also it should be noted that the valuation of the pension deficit in accordance with IFRS is not equal to a valuation that a third party would acquire (or take over) the pension commitments on an arms-length basis.

All liabilities and assets in the scheme are denominated in GBP and so the figures below in SEK have been translated at appropriate exchange rates. With effect from January 2010, the pension scheme was closed to future pension accruals, so there are no current or expected ongoing service costs.

Group 2017 2016Present value of funded obligations -378.9 -397.8 Fair value of plan assets 376.6 362.1 Net liability in balance sheet -2.3 -35.7

The changes in the defined benefit obligation are as follows:

Group 2017 2016At beginning of year -397.8 -340.5 Items reported in profit and loss statement

- interest -10.4 -12.2 Items reported in other comprehensive income:

- revaluations 4.6 -85.6 - exchange rate differences 5.7 34.9

Benefit payments 19.0 5.6 At end of year -378.9 -397.8

The change in the fair value of the plan assets are as follows:

Group 2017 2016At beginning of year 362.1 346.8 Items reported in profit and loss statement

- expected return on plan assets (interest) 9.5 12.5 Items reported in other comprehensive income:

- revaluations 26.4 41.4 - exchange rate differences -5.0 -35.7

Cash contribution from Group Company 2.6 2.7 Benefit payments -19.0 -5.6 At end of year 376.6 362.1

Revenues and expenses reported in the income statement are as follows:

Group 2017 2016Net interest income/(expense) -0.9 0.3 Total -0.9 0.3


Effects recognised in other comprehensive income relate to the revaluation of investment assets and the obligations for post-employment benefits and amount to:

Group 2017 2016Return on plan assets (excluding interest) 26.4 41.4 Gain/(loss) arising from changes in financial and demographic assumptions -8.5 -93.6 Experience gains 13.1 8.0 Total profit/(loss) included in other comprehensive income 31.0 -44.2

The expected return on plan assets is set in line with the discount rate used to estimate the value of the liability for post-employment benefits. The discount rate is set based on high quality corporate bonds in the geographic market (the United Kingdom) where the employees covered by the plan are active.

In total there are 200 (206) employees covered by being 175 men and 25 women (183 men and 23 women). Of these people, 122 (140) individuals have not retired. The mean age of the persons who have not reached retirement age is 56 (56) years.

The assumptions used in the valuation can affect the net asset/liability substantially. In the calculation of the obligation and the value of the plan assets, a best estimate has been made. The following shows the main assumptions and how a reasonably possible change would affect the Group’s obligations for post-employment benefits (pensions).

Main assumptions:

Group 2017 2016Discount rate, % 2.60% 2.75%Inflation, % 2.65% 2.65%

Assumptions regarding longevity are based on statistics for employees in the United Kingdom. The table below shows the expected number of remaining years of life after age 65. The life expectancy after age 65 for members who are currently aged 45 is approxi-mately 2 (2) years longer than the amounts shown in the table below:

Group 2017 2016Men 22 22Women 24 25

Sensitivity analysisThe discount rate is the assumption that has the greatest impact on pension obligations. A 1 percentage point change in the discount rate changes commitments by about 20% (19%).

Mortality rates also affects the calculation. If the life expectancy is extended by one year, the commitment would increase by about 3% (3%).

Plan assetsPlan assets consist of equity instruments, interest-bearing debt instruments and cash deposits. All asset values are based on quoted market prices. The allocation of assets is as follows:

Group 2017 2016Equities 266.9 256.3 Interest bearing securities 108.1 103.4 Cash and cash equivalents 1.6 2.4 Total 376.6 362.1

Triennial valuationThe information set out above relates to the accounting valuation of the defined benefit pension scheme and disclosures required under IAS 19. Separate actuarial valuations are required by the UK Pension Regulator every 3 years and the method used is different to that used under IAS 19. The most recent such valuation of the pension plan was finalised during 2017 and determined a deficit (as at 3 August 2016, the triennial valuation date) of GBP 5,294,000 (being approximately SEK 59 million based on the exchange rate at the end of December 2017). The Pension Trustees of the scheme accepted that this deficit would be eliminated over a 5 year period by equal cash payments by the Group of GBP 1,150,000 per annum (being approximately SEK 12.7 million per annum based on the exchange rate at the end of the year), with the first payment made in January 2018. The next actuarial valuation is due as at 3 August 2019.


Note 24. Other liabilitiesGroup 2017 2016Liabilities to customers 2.6 2.4 Total 2.6 2.4

Note 25. Shares in Group companiesParent Company 2017 2016At beginning of year 158.6 135.8 Acquisition of shares in Diamorph Bearings AB 32.0 22.8 Disposal of Diamorph Ceramic AB -0.1 -Share based payments 1.2 -At end of year 191.7 158.6

The Parent Company holds interests in the following subsidiaries:

NameCorp reg number

Book valuePlace Stake 2017 2016

Diamorph Bearings AB* 556667-0989 Sweden 100% 98.7 66.7Diamorph Ceramic AB 556848-2433 Sweden 100% - 0.1Diamorph Services AB 556899-3082 Sweden 100% 0.1 0.1Diamorph UK Limited* 08071521 United Kingdom 100% 91.7 91.7Share based payments 1.2 -Total 191.7 158.6

Details of the share based payments provided are presented in note 20. Where the warrants issued to certain employees of the Group, under a long-term incentive programme, relate to the employees of subsidiary companies, the share based payment charge is treated in the Parent Company as an addition to the cost of its investments in those subsidiary companies.

The Group holds indirectly through its subsidiary Diamorph Bearings AB shares in the following companies:

Name Corp reg number Place StakeKHP Marketing GmbH i.L. CH-170.4.002.659-4 Switzerland 100%Diamorph hob Certec s.r.o 278 644 64 Czech Republic 100%

The Group holds indirectly through its subsidiary Diamorph UK Limited the following wholly owned subsidiaries:

Name Corp reg number Place StakeModular Stock Limited* 03342312 United Kingdom 100%Tenmat Limited* 03342498 United Kingdom 100%Tenmat Overseas Limited* 03342311 United Kingdom 100%Railko Limited 05773671 United Kingdom 100%Tenmat Holdings Inc.* 2775017 USA 100%Tenmat Inc.* 2237774 USA 100%

*for an explanation of the companies associated with this symbol, see note 26


Note 26. Pledged assets, contingent liabilities and commitmentsAs described in note 21, the new bank facility arranged during 2017 is secured. The security arrangements include a pledge on the shares of certain Group companies and a SEK 55.6 million intercompany loan between the Parent Company and Diamorph UK Limited. The companies which have pledged shares under the new facility have been highlighted with an asterisk in note 25 above. By virtue of these security arrangements, and those in respect of the facilities at the end of 2016, the following assets have therefore effectively been pledged by the Group.

Group 2017 2016Cash and cash equivalents 20.6 165.4Tangible fixed assets 108.1 24.9 Accounts receivable 77.9 18.8 Inventories 39.6 7.0 Total 246.2 216.1

As described in note 21, the borrowing arrangements in place at 31 December 2016 were all fully repaid during 2017. These previous borrowing arrangements had their own security structures which were terminated at the time the borrowings were repaid.

Contingent liabilitiesThere are no contingent liabilities in the Group or Parent Company except in respect of the information disclosed in note 27 below.

Commitments for operating leasesFuture lease payments under non-cancellable leases are payable as follows:

Group 2017 2016Within one year 0.7 1.2 After one year but within five years 1.0 1.2 Total 1.7 2.4

There are no operating lease commitments in the Parent Company.

Note 27. Events after the year endEnvironmental reviewSince the end of the year specialist consultants have been engaged to undertake an environmental review focused on the Group’s main manufacturing site in Manchester. Based on the preliminary findings of the review, we expect that certain remedial actions will be necessary or recommended. At this time we cannot reliably estimate the extent, timing nor cost associated with any such remedial actions. Further information will be provided when the review is completed.

ShareholdersBased on the requests of at least 93% of the Company’s shareholders, in April 2018 the board of the Company appointed advisers to initiate a trade sale of the shares of the Company. There can be no guarantee that the process will lead to offers at a price con-sidered acceptable to the board. At the date of publication of the Annual Report, this process was ongoing and further information will be released in due course.


Note 28. Transactions with related partiesIncome from related parties:Parent Company 2017 2016Diamorph UK Limited - Financing income 41.5 36.8 Modular Stock Limited – Financing income 0.1 -Tenmat Limited - Other services 0.9 1.9 Tenmat Limited - Royalty income - 0.1 Total Parent Company 42.5 38.8

Charges from related parties:Group 2017 2016Substantial shareholder - Financing charges (interest paid) 9.6 10.0 Total Group 9.6 10.0

Parent Company 2017 2016Modular Stock Limited - Management services 1.2 1.2 Diamorph Bearings AB - Financing charges 0.7 0.6 Total Parent Company 1.9 1.8

Receivables from related parties:Parent Company 2017 2016Diamorph UK Limited 55.9 562.0 Modular Stock Limited 8.1 -Tenmat Limited - 0.9 Total Parent Company 64.0 562.9

Liabilities to related parties:Group 2017 2016Substantial shareholder - 144.0 Total Group - 144.0

Parent Company 2017 2016Diamorph Bearings AB 36.6 13.5 Modular Stock Limited 0.3 -Total Parent Company 36.9 13.5

Transactions with related parties primarily relate to financing activities. The most significant related party transaction within the Group related to investments in the bond issues by the Parent Company that were previously held by a substantial shareholder (Latour-Gruppen AB) who held SEK 144 million of outstanding bonds previously purchased in the open market. As part of the Com-pany’s redemption of its bonds in September 217 a payment of SEK 144 million together with the associated 3% early redemption fee (SEK 4.3 million) was made to Latour-Gruppen AB on exactly the same terms as for other bondholders. Interest of SEK 9.6 (10.0) million was paid to Latour-Gruppen AB in the period before the bond was redeemed by the Company.

For the Parent Company the refinancing of the bond during 2017 has caused the outstanding balances with its subsidiary Diamorph UK Limited to be substantially reduced at the end of the year. At 31 December 2016, the Parent Company had made an intercom-pany loan of SEK 500 million to Diamorph UK Limited which mirrored (“back-to-back”) the arrangements in place with the bond issued by the Parent Company. Following the refinancing, Diamorph UK Limited can borrow funds directly under the new bank facility described in note 21.

Information relating to the remuneration of senior executives is set out in note 8, Remuneration to employees.


Note 29. Adjusted key performance measuresIn order to better show the underlying performance of the business, management use adjusted figures for key performance meas-ures in addition to those reported under IFRS. The adjusted operating profit performance is presented in the income statement on page 24. Reconciliations of EBITDA, adjusted profit before tax and adjusted earnings per share are shown below. Non-recurring items are items which management do not consider reflect the underlying performance of the business. Non–recurring tax items are analysed below and include both the tax effect of non-recurring operating and financing items, as well as non-recurring tax items.

Group 2017 2016Cash flow from operations as reported under IFRS 88.5 76.7

Adjusted for:Interest paid and received 36.0 35.6 Tax paid 30.4 22.3 Investments in tangible and intangible fixed assets -35.8 -18.8 Operating cash flow for the purpose of calculating operating cash conversion % 119.1 115.8

Group 2017 2016Operating expenses as reported under IFRS -92.9 -98.0

Adjusted for:Non-recurring operating (income)/expenses -5.2 0.2 Acquisition-related intangible asset amortisation 4.1 4.3 Operating expenses before acquisition-related and non-recurring items -94.0 -93.5

Group 2017 2016Operating profit as reported under IFRS 145.0 139.6

Adjusted for:Depreciation and amortisation 11.8 11.0 Non-recurring operating (income)/expenses -5.2 0.2 Unrealised (gains)/losses on derivative financial instruments -1.8 -0.3 EBITDA 149.8 150.5

Group 2017 2016Profit before tax as reported under IFRS 100.5 141.1

Adjusted for:Non-recurring operating (income)/expenses -5.2 0.2 Acquisition-related intangible asset amortisation 4.1 4.3 Non-recurring items within net financing items 17.1 -38.9 Adjusted profit before tax 116.5 106.7

Group 2017 2016Tax charge as reported under IFRS -24.0 -29.0

Adjusted for:Tax charge/(credit) on non-recurring operating expenses or income 1.0 -Tax charge/(credit) on acquisition-related intangible asset amortisation -0.8 -0.9 Tax charge/(credit) on non-recurring items within net financing items -3.5 9.3 Other non-recurring items – charge/(credit) 5.9 -1.7 Tax charge on adjusted basis -21.4 -22.3 Underlying effective tax rate (on adjusted profit before tax) 18% 21%

Group 2017 2016Profit after tax attributable to Parent Company shareholders as reported under IFRS 76.7 109.6

Adjusted for (excluding amounts attributable to non-controlling interests where applicable*):Non-recurring operating (income)/expenses -5.2 0.2 Acquisition-related intangible asset amortisation 4.1 4.3 Non-recurring items within net financing items* 17.1 -39.0 Tax effect of the above and other non-recurring tax items* 2.0 6.7 Profit after tax attributable to Parent Company shareholders on adjusted basis 94.7 81.8

Average number of shares 52,846,841 52,741,387 Basic earnings per share as reported under IFRS (SEK) 1.45 2.08 Adjusted earnings per share (SEK) 1.79 1.55


Note 30. Definitions

Sales growth adjusted to fixed exchange rates

Weighted average sales growth of the Tenmat and Hob Certec businesses using a fixed exchange rate conversion into SEK for both periods being compared

Gross profit margin, % Gross profit divided by net sales

Non-recurring items See explanation in note 29

Adjusted operating profit Operating profit before non-recurring items and acquisition-related items

Adjusted operating profit margin, % Adjusted operating profit before non-recurring items divided by net sales

Underlying net finance charges Finance income and expense excluding non-recurring financial items

Underlying tax charges Tax charges excluding non-recurring tax items

Adjusted profit before tax Adjusted operating profit combined with underlying net finance charges

Underlying effective tax rate Adjusted profit before tax

Operating cash flow Cash flow from operating activities less investments in tangible fixed assets, excluding interest and tax paid/received

Operating cash conversion, % Operating cash flow divided by operating profit

EBITDA Operating profit before depreciation and amortisation charges, and unrealised gains or losses on derivative financial instruments

Total debt Total interest-bearing liabilities and non-interest bearing deferred payment liabilities relating to acquisitions. Total debt excludes defined benefit pension scheme liabilities

Net debt Total debt less investments in marketable securities and cash and cash equivalents (excluding restricted cash)

Note 31. Foreign currency sensitivity analysisAs described previously in notes 3, 5 and 6, the majority of the Group’s operations are undertaken in currencies other than SEK. Changes in exchange rates can cause changes in the reported value of sales and expenses in the income statement and the trans-lation of assets and liabilities in the balance sheet can also give rise to exchange gains and losses through equity. The table below shows the Group’s sensitivity to changes in USD, EUR, GBP and CZK foreign exchange rates from a 5% strengthening or weakening of SEK. The Group’s exposure to foreign currency changes for all other currencies is not material. (MSEK) Change in rate Effect on operating profit Effect on equity2017 USD + 5%/- 5% (4.9)/5.4 (0.5)/0.5

EUR + 5%/-5% (6.7)/7.4 -GBP + 5%/-5% 3.0/(3.3) (34.7)/38.3CZK + 5%/-5% 1.5/(1.7) (5.7)/6.3

2016 USD + 5%/-5% (5.2)/5.7 (0.4)/0.4EUR + 5%/-5% (5.4)/5.9 (1.2)/1.3GBP + 5%/-5% 2.3/(2.6) (39.2)/43.3CZK + 5%/-5% 1.4/(1.5) (3.5)/3.9


The undersigned certify that the consolidated accounts and the annual report have been prepared in accordance with International Financing Reporting Standards (“IFRS”), as adopted by the European Union, and generally accepted accounting principles, respec-tively, and give a true and fair view of the financial position and earnings of the Group and the Company, and that the Administration Report gives a fair review of the development of the operations, financial position and earnings of the Group and the Company and describes substantial risks and uncertainties that the Group companies face.

Stockholm 18 May 2018 Diamorph AB (publ)

Ashkan Pouya Chairman

Saeid Esmaeilzadeh Board Member

Anders Mörck Board Member

Ola Ringdahl Board Member

Gordon MacLeman CEO

Stefan Andersson Berglund Ernst & Young AB


To the general meeting of the shareholders of Diamorph AB (publ), corporate identity number 556647-5371

Report on the annual accounts and consol-idated accountsOpinionsWe have audited the annual accounts and consolidated accounts of Diamorph AB (publ) for the year 2017 (the financial year 2017-01-01–2017-12-31). The annual accounts and consol-idated accounts of the company are included on pages 16-56 in this document.

In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the parent com-pany as of 31 December 2017 and its financial performance and cash flow for the year then ended in accordance with the Annual Accounts Act. The consolidated accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the group as of 31 December 2017 and their financial perfor-mance and cash flow for the year then ended in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts.

We therefore recommend that the general meeting of share-holders adopts the income statement and balance sheet for the parent company and the group.

Basis for OpinionsWe conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsibilities under those stand-ards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is suffi-cient and appropriate to provide a basis for our opinions.

Other Information than the annual accounts and con-solidated accountsThis document also contains other information than the annual accounts and consolidated accounts and is found on pages 4-15. The Board of Directors and the Managing Director are responsible for this other information.

Our opinion on the annual accounts and consolidated accounts does not cover this other information and we do not express any form of assurance conclusion regarding this other information.

In connection with our audit of the annual accounts and con-solidated accounts, our responsibility is to read the information identified above and consider whether the information is mate-rially inconsistent with the annual accounts and consolidated accounts. In this procedure we also take into account our knowledge otherwise obtained in the audit and assess whether the information otherwise appears to be materially misstated.

If we, based on the work performed concerning this informa-tion, conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Board of Directors and the Man-aging DirectorThe Board of Directors and the Managing Director are responsi-ble for the preparation of the annual accounts and consolidated accounts and that they give a fair presentation in accordance with the Annual Accounts Act and, concerning the consolidated accounts, in accordance with IFRS as adopted by the EU. The Board of Directors and the Managing Director are also respon-sible for such internal control as they determine is necessary to enable the preparation of annual accounts and consolidated accounts that are free from material misstatement, whether due to fraud or error.

In preparing the annual accounts and consolidated accounts, The Board of Directors and the Managing Director are responsi-ble for the assessment of the company’s and the group’s ability to continue as a going concern. They disclose, as applicable, matters related to going concern and using the going concern basis of accounting. The going concern basis of accounting is however not applied if the Board of Directors and the Managing Director intend to liquidate the company, to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilityOur objectives are to obtain reasonable assurance about whether the annual accounts and consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and generally accepted auditing standards in Sweden will always detect a material misstatement when it exists. Mis-statements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reason-ably be expected to influence the economic decisions of users taken on the basis of these annual accounts and consolidated accounts.

Auditor’s report


As part of an audit in accordance with ISAs, we exercise profes-sional judgment and maintain professional skepticism through-out the audit. We also:

• Identify and assess the risks of material misstatement of the annual accounts and consolidated accounts, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrep-resentations, or the override of internal control.

• Obtain an understanding of the company’s internal control relevant to our audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the compa-ny’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors [and the Manag-ing Director].

• Conclude on the appropriateness of the Board of Directors’ [and the Managing Director’s] use of the going concern basis of accounting in preparing the annual accounts and consol-idated accounts. We also draw a conclusion, based on the audit evidence obtained, as to whether any material uncer-tainty exists related to events or conditions that may cast significant doubt on the company’s and the group’s ability to continue as a going concern. If we conclude that a mate-rial uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the annual accounts and consolidated accounts or, if such disclosures are inadequate, to modify our opinion about the annual accounts and consolidated accounts. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause a company and a group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the annual accounts and consolidated accounts, including the disclosures, and whether the annual accounts and con-solidated accounts represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated accounts. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions.

We must inform the Board of Directors of, among other matters, the planned scope and timing of the audit. We must also inform of significant audit findings during our audit, including any sig-nificant deficiencies in internal control that we identified.

Report on other legal and regulatory requirementsOpinionsIn addition to our audit of the annual accounts and consolidated accounts, we have also audited the administration of the Board of Directors and the Managing Director of Diamorph AB (publ) for the year 2017 (the financial year 2017-01-01–2017-12-31) and the proposed appropriations of the company’s profit or loss.

We recommend to the general meeting of shareholders that the profit be appropriated in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the Managing Director be discharged from liability for the financial year.

Basis for OpinionsWe conducted the audit in accordance with generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is suffi-cient and appropriate to provide a basis for our opinions.

Responsibilities of the Board of Directors and the Man-aging DirectorThe Board of Directors is responsible for the proposal for appro-priations of the company’s profit or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justifiable considering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the parent company’s and the group’s equity, consolida-tion requirements, liquidity and position in general.

The Board of Directors is responsible for the company’s organ-ization and the administration of the company’s affairs. This includes among other things continuous assessment of the company’s and the group’s financial situation and ensuring that the company’s organization is designed so that the account-ing, management of assets and the company’s financial affairs otherwise are controlled in a reassuring manner. The Managing Director shall manage the ongoing administration according to the Board of Directors’ guidelines and instructions and among other matters take measures that are necessary to fulfill the company’s accounting in accordance with law and handle the management of assets in a reassuring manner.


Auditor’s responsibilityOur objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the Managing Director in any material respect:

• has undertaken any action or been guilty of any omission which can give rise to liability to the company, or

• in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association.

Our objective concerning the audit of the proposed appropria-tions of the company’s profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company’s profit or loss are not in accordance with the Companies Act.

As part of an audit in accordance with generally accepted audit-ing standards in Sweden, we exercise professional judgment and maintain professional skepticism throughout the audit. The examination of the administration and the proposed appropri-ations of the company’s profit or loss is based primarily on the audit of the accounts. Additional audit procedures performed are based on our professional judgment with starting point in risk and materiality. This means that we focus the examination on such actions, areas and relationships that are material for the operations and where deviations and violations would have particular importance for the company’s situation. We examine and test decisions undertaken, support for decisions, actions taken and other circumstances that are relevant to our opinion concerning discharge from liability. As a basis for our opinion on the Board of Directors’ proposed appropriations of the com-pany’s profit or loss we examined whether the proposal is in accordance with the Companies Act.

Stockholm, 18 May 2018 Ernst & Young AB

Stefan Andersson BerglundAuthorized Public Accountant


Ashkan Pouya I Chairman of the Board since 2014Ashkan Pouya has a business degree from Uppsala University. He was previously Director of Innovation at Lund University and has been involved in the construction of several companies in both executive and non-executive positions.

Holdings in Diamorph at 31 December 2017: 14,310,537 (15,273,716) shares (representing shares controlled by Serendipity Group AB)

Saeid Esmaeilzadeh I Board Member since 2012Saeid Esmaeilzadeh is Adjunct Professor of Materials Chemistry at Stockholm University where he received his doctorate in 2000. He has received numerous awards for his research and his work as an entrepreneur. Saeid has participated in the development of several research-based companies.

Holdings in Diamorph at 31 December 2017: 14,310,537 (15,273,716) shares (representing shares controlled by Serendipity Group AB)

Anders Mörck I Board Member since 2014Anders Mörck has a master’s degree in Economics and Business Administration from Växjö Uni-versity. He has extensive experience in leadership positions in different industries. He is currently CFO of Investment AB Latour, and board member in Swegon AB, Hultafors Group AB, Nord-Lock International AB, Latour Industries AB and HMS Networks AB.

Holdings in Diamorph at 31 December 2017: 14,923,571 (13,923,571) (representing shares con-trolled by Latour-Gruppen AB)

Ola Ringdahl I Board Member since 2015Ola Ringdahl has a Master’s degree in Finance and Business Administration from the Stockholm School of Economics. He is currently CEO of Nord-Lock Group, specialists in secure bolting solu-tions, with subsidiaries in 20 countries. He is a board member in Hultafors Group AB.

Holdings in Diamorph at 31 December 2017: 14,923,571 (13,923,571) (representing shares con-trolled by Latour-Gruppen AB)

Gordon MacLeman I Diamorph AB Group CEO since 2015Gordon has a degree in Finance from Glasgow University and has spent 31 years in the coat-ings and chemicals industry, working for Courtaulds plc and Akzo Nobel. He held various senior leadership positions in Akzo Nobel, most recently as Managing Director of one of its European performance coatings businesses.

Holdings in Diamorph at 31 December 2017: 0 (0) shares, 250,000 (250,000) warrants

Mark Hutchison I Diamorph AB Group CFO since 2014Mark has a degree in Natural Sciences from Cambridge University. He trained with KPMG and is a qualified chartered accountant in the UK. He has held senior finance leadership positions within Spectris plc, a UK listed engineering Company, most recently as divisional CFO for its business in Switzerland.

Holdings in Diamorph at 31 December 2017: 0 (0) shares, 100,000 (100,000) warrants

Board of Directors

Management


CalendarAnnual General Meeting 2018 8 June 2018

The AGM of Diamorph 2018 will be held at 13.30 on June 8 in IVA Konferenscenter, Grev Turegatan 16, in Stockholm.

DISCLOSURE UNDER SWEDISH LAW Diamorph AB (publ) discloses this information pursuant to the Swedish Securities Market Act and/or the Swedish Act on Trading in Financial Instruments. The information was submitted for publication on 18 May 2018, at 08:00.

Diamorph AB (publ) Telephone: 08- 612 68 50e-mail: [email protected]

Internet: www.diamorph.comVisiting address: c/o Sdiptech AB (publ)Stureplan 15, 111 45 Stockholm, Sweden

Registered office: StockholmRegistration number: 556647-5371

annu ralep t or2017 - diamorph · 26 group - change in equity 27 group - cash flow 28 parent...

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