169531 600 Group Report & Accounts Cover_169531 600 Group Report & Accounts Cover 25/07/2017 14:24 Page 1 The 600 Group PLC Union Street Heckmondwike West Yorkshire WF16 0HL T: +44 (0)1924 415000 W: www.600group.com ANNUAL REPORT & ACCOUNTS 2017 The 600 Group PLC Contents Chairman’s statement Strategic report Report of the directors Statement of directors’ responsibilities Remuneration report Independent auditor’s report to the members of The 600 Group Plc Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated cash flow statement Group accounting policies Notes relating to the consolidated financial statements Company statement of financial position Company statement of changes in equity Company accounting policies Notes relating to the company financial statements 1 4 12 15 16 20 21 22 23 24 25 26 32 67 68 69 71 Chairman’s statement I am pleased to report that we have produced a solid performance in what has been a turbulent period with both Brexit disrupting markets in the UK and Europe and the presidential elections materially slowing down activity in the USA. This solid performance is all the more significant in that it was delivered against a backdrop of global market weakness in machine tools. This performance was largely as a result of the successful integration of our industrial laser systems manufacturing facilities into the new site in Ohio, USA, which has reduced the overall cost base significantly combined with further efficiencies achieved by revising the supply chain. Although many economic forecasters predict risks associated with the UK leaving the EU, we believe The 600 Group is less prone to the possible adverse consequences given that over 60% of the Group’s activities are now conducted in the USA and these businesses are the main profit drivers of the Group. Furthermore, the US dollar income the Group generates provides a natural currency hedge against the majority of our purchases which are in US dollars. In the current year, only 12% of Group sales were to EU countries excluding the UK and we remain firmly focused on developing new markets outside of this area, particularly in South East Asia. In addition, over 15% of our total revenues are derived from the supply of spare parts and services and this revenue stream is not dependent on achieving new sales but on servicing our existing client base. Industrial Lasers The industrial laser systems division now accounts for 49% of the Group’s underlying operating profits (before special items and head office costs). The successful integration of TYKMA and Electrox over the last two years has significantly raised the profile of the industrial laser division in the marketplace and has given the enlarged business increased recognition and credibility in this highly fragmented industry. As a consequence, it has been able to secure a number of sales in the year to multi-national corporations and it is pleasing to report that this trend has continued into the current financial year. The division is constantly developing new products and exploring new opportunities in the rapidly developing laser market and introduced some of these new products to the market in September last year. These new products have been extremely well received with a growing level of sales that will help to underpin the current year performance. The business entered the new financial year with an order book up 50% on the same time last year. The joint TYKMA Electrox brand now provides laser solutions across a number of industrial laser applications including marking, engraving and micro-material processing. The markets for these types of laser applications have shown continued growth for a number of years and industry forecasters continue to predict single digit growth, despite the slow economic pick -up in activity, as these products replace ink printing and legislation continues to increase the requirement for traceability of all production items. Machine Tools The overall performance of our machine tools division in the period matched their performance of the previous year. This was a good outcome given the various headwinds we faced through most of the year which created high levels of instability in the UK, European and US markets. Activity levels have picked up markedly in 2017 and the machine tools division entered the new financial year with an overall order book 44% up on the same time last year, increasing further to over 50% currently. This increase has also come from a broad range of industry sectors. The US machine tool market continued to be weak in the calendar year to December 2016 with uncertainty over the presidential elections creating a marked slowdown in demand. The Oxford Economics machine tool survey indicated a 2.1% fall in consumption, with order activity being reported much weaker. Consequently, our USA machine tool business contracted in local currency terms during the year, nevertheless, producing a small increase in Sterling terms as a result of its fall against the US dollar. Since the start of 2017, order activity in the USA has been good and continues to improve with order backlog now currently 64% up on the same time last year. New product launches are planned for the second half of the year including more USA - produced machines and an increased sales effort into Mexico and Canada. In the UK, uncertainty caused by the run up to the Brexit vote adversely impacted order activity and the subsequent fall in the value of Sterling had the effect of pushing up the cost of imported machine components and squeezing margins. Consequently, the business, like most of its competitors, was forced to introduce a price increase for new orders from November 2016 in an effort to restore profitability. At the same time, a number of other management and cost reduction exercises were undertaken to help deal with the situation. Since the beginning of 2017 the business has seen an improved market and order backlog going into the new financial year was up 54% on the previous year. New product launches are planned in the UK and Europe from September onwards to increase the product offering through existing and new distributor partners as well as through direct sales in the UK. 1 Chairman’s statement The Australian machine tools business maintained a break even trading position for the period and has secured good orders since the start of the new financial year including the first orders in Thailand with a new distributor. Work continues on supporting the expanded distributor network including training and support at trade shows in Vietnam, Singapore, Malaysia and the Philippines. The supply and distribution agreement with our Indian partners for the manufacture and supply of machine tools and their manufacture and distribution under licence is now coming on stream. This will expand our product offering and increase market coverage of our brands. Acquisitions In October 2016 we acquired the Spanish machine tool brand of Kondia and certain assets for a minimal consideration of 50,000 Euros. Kondia was formerly Spain’s largest manufacturer of milling machines and was placed into administration in 2015. As a result we now own the Kondia name and all IP in addition to a large inventory of spare parts. For over twenty years Clausing, our US machine tool company, has sold Kondia FV, milling machines and associated spares. It will now start to produce a US- made Kondia milling machine, in addition to providing worldwide support for the sale of spare parts for the existing installed base of these machines. Financial Overview The results for the current year are for the 52 weeks to 1 April 2017 (prior year 53 weeks to 2 April 2016). Revenue from continuing operations was £47.0m (2016: £45.3m) a 4% increase on the previous year. After taking account of interest, taxation, pension’s credits and other special items, the Group profit for the financial year was £2.06m (2016: £1.15m).Underlying profit (before special items) amounted to £2.24m (2016: £1.54m) resulting in underlying earnings of 2.15p per share (2016: 1.69p) and total earnings were 1.97p per share (2016: 1.26p). At the end of the financial year, Group net indebtedness stood at £13,66m (2016: £13.89m), with gearing of 27% (2016:34%). Whilst cash was generated from the sale of the Letchworth property in July 2016 reducing UK borrowings, currency depreciation increased the Sterling value of the US borrowings. In addition increased working capital in TYKMA to support the transfer of manufacturing from the UK resulted in increased US borrowings. The net effect produced little impact on the overall debt at the current year end. At the end of the year the Group had headroom on the existing borrowing facilities of £3.20m and had complied with all financial covenants throughout the year. Facilities At the beginning of July 2016,we completed the sale of our Letchworth long leasehold site for £2m, with the much reduced UK laser operation moving to a new leasehold site also in Letchworth. In the USA we expanded our footprint in the new purpose built leasehold premises in Chillicothe, Ohio to accommodate the transfer of UK laser manufacturing. This and the new premises for Clausing in Kalamazoo Michigan, which were opened in the previous year, have improved the working environment for all staff, increased operational efficiency and provided room for growth. People On behalf of the Board, I would like to thank all our employees for their ongoing support, commitment and dedication to The 600 Group which has been important in improving our businesses in the last year and I look forward to working with them again in the coming year. Dividends The Board continues to believe that the retention of earnings for deployment in the business is the most appropriate use of financial resources and accordingly they do not recommend the payment of a dividend at the present time. 2 Chairman’s statement Outlook Trading in the period since the FY17 financial year end has been in line with the Board’s expectations and order books in both divisions are much improved. Overall orders now stand 42% up on the same time last year which provides greater visibility of future trading .We are continuing to leverage our industry - recognised brands through an increased worldwide distribution network and introducing new products to widen the customer base. Whilst industry forecasts of growth for both divisions remain at low levels for the coming year, we believe the investment in new products and new markets will lead to increased market share and position the Group’s businesses well for any increase in market activity. Paul Dupee Executive Chairman 3 July 2017 3 Strategic report Our businesses The 600 Group PLC ("the Group") is a leading engineering group with a world class reputation in the design and distribution of machine tools, precision engineered components and the design, manufacture and distribution of industrial laser systems. The Group operates these businesses from locations in North America, Europe and Australia selling into more than 180 countries worldwide. During the 52 week period ended 1 April 2017 27% of revenues came from the sale of metal turning machine tools, with a further 19% from other machine tools and 10% from the sale of precision engineered components. Sales of Industrial laser equipment amounted to 29% of revenues with the remaining 15% of revenues being from after sales support, spare parts and services from both divisions. Group businesses serve customers across a broad range of industry sectors, from niche markets for technical education of young engineering apprentices through to high volume production of automotive, aerospace and defence equipment. A high proportion of revenue is derived from sales via third party distribution channels, in respect of which it is more difficult to track the industry dispersion of end-user customers. The Group benefits from a high degree of loyalty and repeat business via a large number of established distributors in many countries and territories. In the year ended 1 April 2017 the top 20 customers, of which 17 were distributors, contributed less than 26% of revenues, the same as the previous year. By geographical territory of destination Revenues are generated across many diverse geographical territories, with the principal markets in: Percentage of worldwide revenues (by destination) United States of America United Kingdom Europe (excluding UK) Rest of the World Total 2017 % 64 15 12 9 100 2016 % 60 19 13 8 100 Macroeconomic and industry trends Machine tools and precision engineered components The worldwide machine tool industry was estimated by Oxford Economics at over $75bn in annual sales in its Spring 2017 report. The market is driven by the investment intentions of manufacturers, and is sensitive to changes in the economic and financial climate. Demand responds to economic trends and typically lags the main cycle of the economy. Gardner Research identified the largest five producer countries of machine tools to be China, Japan, Germany, Italy and South Korea with the largest five countries ranked by consumption as China, USA, Germany, Japan and South Korea. The global consumption of machine tools excluding China was reported as being negative at -3% in the latest Oxford Economics data for the year to December 2016 against a positive 8% in 2015. In our most important markets USA was negative at –2.1%, Germany positive at 3.9% and the UK negative at -7%. Industrial laser systems Industry use of industrial lasers for material processing has continued to expand worldwide. Laser systems have now become a mainstream manufacturing process covering the areas of laser machining, including cutting and drilling, marking, ablation and a host of other niche applications. Industry spending for the entire global industrial laser market is reported to be $3.1bn and growing at between 2% and 8% each year. The laser marking and micro-materials subset of the overall laser industry continues to grow at the lower end of these growth forecasts but is supported by enhanced performance in the speed, cost and quality of the systems being implemented compared to other techniques as well as by legislative changes driving a requirement for greater traceability. 4 Strategic report Results Machine tools and precision engineered components This division operates from Heckmondwike and Colchester in the UK, Kalamazoo Michigan in the USA, and Sydney and Brisbane in Australia. It designs and develops metal processing machine tools sold under the brand names Colchester, Harrison and Clausing and designs and manufactures precision engineering components under the brand names Pratt Burnerd and Gamet. There are also spares, accessories and service operations which support the significant number of machines sold over the Group’s long history of supplying quality equipment. Sales are made worldwide, with direct sales operations and distribution in North America, Europe, and Australia and a network of distributors in all other key end-user markets. The financial results of these activities, on a total and underlying basis, were as follows: 2017 £ 000 2016 £ 000 Revenues Operating profit Operating margin Underlying operating profit* Underlying operating margin* 32,424 32,127 2,750 8.5% 2,059 6.4% 2,355 7.3% 2,073 6.5% *underlying figures before special items. See note 3 and 34. Revenues overall increased by 1% in Sterling terms despite a decline in local currency terms of 15% in the USA and a backdrop of weak customer confidence caused first by the Brexit vote affecting UK and Europe and secondly the presidential elections in the USA. It was not until the start of the 2017 calendar year that more stable conditions returned and trading has steadily improved since then. The Australian operation broke even after a return to full time working and has begun to show signs of further progress through the new distribution channels it has established in South East Asia which gained some traction in the early part of the new financial year with the first orders for Thailand being received. The UK and European operations experienced difficult market conditions following the depreciation of Sterling after the Brexit vote. This pushed up the costs of imported machines and parts, which are largely US Dollar denominated. This inevitably reduced margins and consequently the business took the decision, along with most of its competitors, to increase prices for new orders received after 1 November 2016. Additionally steps were taken during the period to reduce costs and a number of management changes took place at Heckmondwike. The Clausing product range of drills, mills, saws and grinders, which were introduced into the product portfolio at the end of last year, are now becoming a regular feature of the package of products we supply in the UK and Europe. Additional launches of new products are planned for later this year which will further enhance the product range and widen the appeal to customers and distributors. The Clausing range of products has been one of the key reasons behind the growth in the North American operations in recent years and represents over 33% of their product sales compared to a figure of just 5% for the UK and European operation. 5 Strategic report Industrial laser systems The final integration of the combined TYKMA Electrox operations was completed in early FY17 as all manufacturing operations were consolidated in the Chillicothe, Ohio USA facility. The existing UK factory in Letchworth was sold in July 2016. The remaining UK operations moved to new leasehold premises in Letchworth and now provide a customer-focused service operation serving the UK and Europe. The industrial laser systems division now accounts for 49% of the Group underlying operating profits (before special items and head office costs). Results for the financial year, on a total and underlying basis, were as follows: 2017 £ 000 14,608 1,322 9.0% 1,993 13.6% 2016 £ 000 13,142 (2,033) (15.4)% 1,179 8.9% Revenues Operating profit Operating margin Underlying operating profit* Underlying operating margin* *underlying figures before special items. See note 3 and 34. Operating efficiencies and savings (including those from supplier consolidation) were successfully achieved and reflected in the improved margins during the year. Similarly to the machine tools division, revenues were held back by the major issues of the Brexit vote in the UK and Europe and the presidential elections in the USA. Once again, however, there has been a steady improvement in trading activity since the start of the 2017 year and order books are currently 29% up on the same period last year, including a large medical industry order. The worldwide industrial laser systems business operates under the combined TYKMA Electrox brand. Each end user or distributor is free to choose among our brands which combined creates an enhanced product portfolio for solving a larger number of applications. These Industrial laser systems are sold for a variety of applications to provide solutions which include marking, engraving and micro-material processing. Sales are made to an extensive range of industries and increasingly to large multi-national corporate customers. Group revenue Revenue from continuing operations increased by 4% to £47.0m (2016: £45.3m) which although representing only a modest increase over last year was achieved despite difficult conditions experienced in a turbulent worldwide market. Costs and margins Gross margins in the industrial laser systems division improved significantly as a result of the business integration. Margins in machine tools were impacted by Sterling’s weakness after the Brexit vote increasing input prices but as a result of actions taken in our UK operation these have now been restored. Profit before taxation Group profit before tax was £3.23m (2016: £1.01m) and the underlying profit before tax figure before special items was £2.12m (2016: £1.48m). 6 Strategic report Special items During the financial year, the Group undertook a number of transactions, which, in the opinion of the directors, should be reported separately for a better understanding of the underlying trading performance of the Group. These underlying figures are used by the Board to monitor business performance, form the basis of bonus incentives and are used for the purposes of the bank covenants. The current year has an overall net credit before taxation of £1.11m (2016 net charge £0.47m). A credit of £0.65m (2016: credit of £0.94m) is included as a result of the work by the Trustees of the UK pension scheme and the Group in reducing pension liabilities. A number of transactions took place over the prior and current year including a pension increase exchange, commutation of small pensions and other flexible retirement options. These are now an integral part of the flexible offer to members at retirement. These resulted in actuarial adjustments to the pension liabilities, which are processed through the Consolidated Income Statement. In addition, as a result of the pension scheme being in surplus on an accounting basis, a credit of £1.45m (2016: credit of £1.17m) is recorded in financial income. No cash was paid to or received from the scheme in respect of these transactions. Redundancy and restructuring costs were incurred on both the integration of the Electrox and TYKMA businesses and the overhead and operating cost reduction in head office and UK machine tools business which amounted to £0.62m (2016 £0.83m) and associated stock write offs of £0.19m (2016 £0.89m). A small profit against the written down value of the Letchworth property of £0.1m was achieved on the sale in July 2016. In addition, share option costs, amortisation of intangible assets and amortisation of loan note costs all of which are non-cash costs to the Group in the year have been included in special items. Taxation The current year underlying trading resulted in a small credit of £118k for taxation (2016: credit of £65k). Deferred taxation is provided on the pension credits of £2.16m at a rate of 35%, being the rate applicable to any refund from a pension scheme and is included in special items. The UK businesses continue to benefit from substantial previous tax losses and no taxation is payable in the UK. The US businesses are subject to taxation on their profits at a rate of 34%. Net profit and earnings per share The total profit attributable to equity holders of the parent for the current financial year amounted to £2.06m (2016: profit of £1.16m) with underlying profit of £2.24m (2016: £1.55m). Underlying earnings from continuing operations before special items and related taxation were 2.15p per share (2016: 1.69p) and basic earnings per share were1.97p (2015: 1.26p) Financial position and utilisation of resources Cash flow Cash generated from operations before working capital movements was £3.58m (2016: £3.03m). Working capital movement was largely due to a reduction in creditors and build up of stocks as a consequence of the transfer of laser manufacturing operations to the USA. £0.54m was expended on redundancy and restructuring costs which largely consisted of redundancy payments at Electrox, UK machine tools and head office. Interest paid was in line with previous years at £0.95m with the largest component being interest on the £8.5m 8% loan notes. Capital expenditure largely consisted of demonstration and showroom equipment for the new facility in Chillicothe and these machines generally turn over regularly. The net proceeds from the Letchworth property sale were received in July 2016 and were used to pay down UK bank debt. Net borrowings Group net debt at 1 April 2017 was reduced to £13.66m (2016: £13.89m) and comprised net bank and finance lease indebtedness of £5.79m (2015: £4.0m) and the amount outstanding on the loan notes of £7.87m(2016: £7.70m). The amount outstanding is net of un-amortised costs and amounts disclosed in equity reserve of £0.6m in the current financial year(2016: £0.8m). 7 Strategic report Net debt repayments of £0.8m were made during the year but given a large part of the Group’s working capital finance is denominated in US Dollars the depreciation of Sterling has had the effect of increasing disclosed debt by £430k on translation to Sterling at the year end. New increased banking facilities were agreed with HSBC,in the UK, in August 2016 following the sale of the Letchworth property. A package of facilities to support the working capital of the UK machine tools business and a term loan secured on the remaining freehold site in Colchester were put in place totaling £4.95m. In March 2016,Bank of America supported the acquisition by the Group of the 20% interest in TYKMA not previously owned with an additional term loan of $1.8m in addition to their existing term and working capital facilities. The Group has a mixture of term loans and revolving working capital facilities with maturities between 1 and 5 years. Headroom on bank facilities was £3.2m at the year-end (2016: £3.2m) and all financial covenants in place were met during the year. The £8.5m 8% loan notes with a maturity of February 2020 also entitle holders to warrants of equal value to subscribe for new ordinary shares at 20p. Gearing amounted to 27% of aggregate net assets (2016: 34%) Going concern In accordance with FRC guidelines, the Board has assessed the Group’s funding and liquidity position. The Directors confirm that, after having made appropriate enquiries, they have a reasonable expectation that the Group and the Company have adequate resources to continue operations for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparation of the financial statements. Retirement benefits The accounting surplus on the UK scheme at 1 April 2017 was £52.50m (2016: £41.97m). This surplus has been calculated in accordance with the scheme rules and recognised accounting requirements. As a result of liability reduction exercises undertaken by the UK scheme’s Trustees in conjunction with the company, a credit has been taken in the period in the Income Statement of £0.65m (2016 £0.94m) to reflect the actuarial reduction in scheme liabilities. In accordance with the current legislation on taxation of pension surplus returns to a company, deferred taxation has been provided for on the pension entries at 35% as opposed to the normal 19% rate. In October 2013 the Company reached agreement with the Trustees of the scheme regarding the funding position on a more prudent Technical Provisions basis as at 31 March 2013, which indicated a funding deficit of £25.4m at that date. It was further agreed that the Technical Provisions deficit would be resolved by an out-performance of the investment returns on the scheme assets of 1% above the return on UK gilts, and that no cash contributions would be required until at least the next funding valuation due as at 31 March 2016. The formal Actuarial Technical Provisions calculation for 31 March 2016 has now been undertaken and the draft results show that the scheme was in surplus by £2.2m at that time and this surplus has continued to grow since then and is estimated to be in surplus of £10.8m at 31 March 2017. The Directors and the Trustees work together on a collaborative basis to continue to monitor investment performance and market conditions closely and to mitigate the risk of mis-matching assets and liabilities to a tactically appropriate level. The US retiree health scheme and pension fund deficits reduced slightly during the year due to changes in actuarial assumptions to £1.03m (2016: £1.04m.) 8 Strategic report Key performance indicators (KPI’s) The Group monitors performance against key financial objectives that the Directors judge to be effective in measuring the delivery of strategic aims, and managing and controlling the business. These focus at Group level on underlying profit, together with its associated earnings per share, forward order book and cash generation. At individual business unit level, KPI’s also include working capital control, and customer- related performance measures such as on-time delivery, minimisation of warranty concerns, and measured levels of overall customer satisfaction. These key performance indicators are measured and reviewed on a regular basis and enable the business to set and communicate its performance targets and monitor its performance against these targets. The Group’s recent performance against financial KPI’s is set out as follows: KPI Benchmark Target 2017 2016 2015 2014 2013 Revenue (annual growth rate) >10% 3.9% 3.4% Book-to-bill ratio >110% 109% 107% Order book (months) 2.0 - 3.0 1.6 1.5 5% 97% 1.4 (0.2)% 11.2% 101.8% 89.4% 1.9 2.0 Gross margin (%of revenue) EBIT margin (% of revenue) Working capital (% of revenue) Inventory turns Receivables (days) All figures are pre special items >33% >7.5% <25% >3.0 x < 60 Key business risks 34.9% 34% 32.9% 33.2% 31.7% 6.5% 5.2% 5.6% 5.6% 2.3% 31.3% 25.9% 23.3% 20.0% 21.5% 2.4x 58 2.6x 57 2.7x 58 3.3x 54 2.8x 55 The Board of Directors has identified the main categories of business risk in relation to the implementation of the Group’s strategic aims and objectives, and has considered reasonable steps to prevent, mitigate or manage these risks. The principal areas noted during this review are summarised as follows: Macro-economic – the Group’s businesses are active in markets which can be cyclical in nature as the overall level of market demand is dependent upon capital investment intentions. Economic or financial market conditions determine global demand and could adversely affect our customers, distributors, operations, suppliers, and other parties with whom we transact. Such factors as the Brexit vote and the presidential elections in the USA during the current financial year are examples of factors which have resulted in changes in demand. The Directors seek to ensure that our overall risk is mitigated by avoiding excessive concentration of exposure to any given geographical or industry segment, or to any individual customer. Market conditions, lead indicators and industry forecasts are monitored for any early warning signs of changes in overall market demand, and measures to exploit opportunities or manage elevated risks are taken as appropriate. Production and supply chain – the continuity of the Group’s business activities is dependent upon the cost effective supply of products for sale from our own facilities, and those of our key vendors. Supply can be disrupted by a variety of factors including raw material shortages, labour disputes and unplanned machine down time. In particular, the Directors are mindful that a small number of key manufacturing outsource partners are located in relatively close proximity to each other in Taiwan. Taiwan is ranked by Gardner Research as the seventh largest producer nation of machine tools, with global production valued at almost US$4 billion. Taiwanese suppliers represent approximately one third of the total cost of sales for the Group. Group businesses mitigate against such risk by carefully selecting high quality vendors, and maintaining long term constructive and open relationships. The effectiveness of such mitigation would be limited, however, in certain catastrophic circumstances (for example, extreme weather or seismic activity in the vicinity), against which the Group carries appropriate insurance .Additional supply sources in India have been developed as a consequence and an increasing amount of product is now made in the USA as well. 9 Strategic report Laws and regulations – Group businesses may unknowingly fail to comply with all relevant laws and regulations in the countries in which they operate and contract business. There is a risk of breach of legal, safety, environmental or ethical standards which can be more difficult to identify, comprehend, or monitor in certain territories than others. The Directors believe that they have taken all reasonable steps to ensure that operations are conducted to high ethical, environmental and health and safety standards. Controls are in place to keep regulatory and other requirements under careful review, and scrutinise any identified instances of elevated risk. Information Technology (“IT”) – Group IT systems and the information they contain are subject to security risks including the unexpected loss of continuity from virus or other issues, and the deliberate breach of security controls for commercial gain or mischief. Any such occurrences could have a significant detrimental effect on the Group’s business activities. These risks are mitigated by the utilisation of physical and embedded security systems, regular back-ups and comprehensive disaster recovery plans. Treasury and risk management Financial risks The main financial risks faced by the Group are credit risk, foreign currency risk, interest rate risk and liquidity risk. The Directors regularly review and agree policies for managing these risks. Credit risk is managed by monitoring limits and payment performance of counterparties. The Directors consider the level of general credit risk in current market conditions to be higher than normal. Where a customer is deemed to represent an unacceptable level of credit risk, terms of trade are modified to limit the Group’s exposure. Foreign currency risk is managed by matching payments and receipts in foreign currency to minimise exposure. Foreign currency is bought to match liabilities as they fall due where currency receipts are insufficient to match the liability. The results of 600 Inc, TYKMA Inc. and 600 Australia Pty Limited are reported in United States dollars and Australian dollars respectively and translated into Sterling, and as a result the Group’s Statement of Financial Position and trading results can be affected by movements in these currencies. Part of this exposure is naturally hedged by entering into borrowing facilities denominated in US dollars. Liquidity risk is managed by the Group maintaining undrawn trade finance facilities in addition to a number of longer term loans and loan notes in order to provide short term flexibility. Interest rate risk is managed by holding a mixture of cash and borrowings in Sterling, US dollars and Australian dollars at floating rates of interest and holding loan notes with a fixed interest rate until maturity. Market risks The Group’s main exposure to market risk arises from increases in input costs in so far as it is unable to pass them on to customers through price increases. The Group does not undertake any hedging activity in this area and all materials and utilities are purchased in spot markets. The Group seeks to mitigate increases in input costs through a combination of continuous improvement activities to minimise increases in input costs and passing cost increases on to customers, where this is commercially viable. The Group is also aware of market risk in relation to the dependence upon a relatively small number of key vendors in its supply chain. This risk could be manifest in the event of a commercial or natural event leading to reduced or curtailed supply. The Group seeks to mitigate these risks by maintaining transparent and constructive relationships with key vendors, sharing long term plans and forecasts, and encouraging effective disaster recovery planning. Alternative sources of supply in different geographic regions have also been put in place. The Group is also exposed to the risk of a downturn in its customers’ end markets leading to reduced levels of activity for the Group. The Directors seek to ensure that the Group’s activities are not significantly concentrated in sales to either one individual customer or into a single market sector in order to mitigate the exposure to a downturn in activity levels. The Directors consider that the current level of market risk is normal. 10 Strategic report Other principal risks and uncertainties The remaining main risks faced by the Group are its exposure to pension funding and the risk to its reputation of a significant failure to comply with accepted standards of ethical and environmental behaviour. Pension funding risk arises from the Group’s operation of a defined benefit pension scheme which gives rise to fluctuations between the value of its projected liabilities and the value of the assets the scheme holds in order to discharge those liabilities. The amount of any surplus or deficit may be adversely affected by such factors as lower than expected investment returns, changes in long term interest rates and inflation expectations, and increases in the forecast longevity of members. The Directors regularly review the performance of the pension scheme and any recovery plan. Proactive steps are taken to identify and implement cost effective activities to mitigate the pension scheme liabilities. The Directors have taken steps to ensure that all of the Group’s global operations are conducted to the highest ethical and environmental standards. Regulatory requirements are kept under review, and key suppliers are vetted in order to minimise the risk of the Group being associated with a company that commits a significant breach of applicable regulations. Neil Carrick Finance Director 3 July 2017 11 Report of the directors Directors Paul Dupee Appointed to the Board as a non-executive Director on 2 February 2011, appointed Chairman on 14 September 2011 and appointed Executive Chairman on 30 April 2015. A private investor and currently Managing Partner of Haddeo Partners LLP. Neil Carrick Appointed to the Board as Group Finance Director on 3 October 2011. Previously Group Finance Director and Company Secretary of Cosalt plc. Stephen Rutherford* A non-executive Director since 1 October 2007. Managing Director of Neofil Limited and Cares UK Limited. Derek Zissman* Appointed to the Board as a non-executive Director on 2 February 2011. Currently a non-executive director of a number of companies including Amiad Water Solutions Ltd (AIM Listed), HelloFresh SE and a previous vice-chairman of KPMG LLP. Stephen Fiamma* Appointed to the Board as a non-executive Director on 13 May 2015. Until 2014 a partner in the tax practice of Allen & Overy LLP. * Non-executive Director and member of the Audit Committee and member of the Remuneration Committee. SECRETARY Neil Carrick REGISTERED OFFICE 1 Union Works Union Street Heckmondwike West Yorkshire WF16 0HL REGISTERED NUMBER 196730 REGISTRAR Capita Asset Services 34 Beckenham Road Beckenham Kent BR3 4TU AUDITOR KPMG LLP BANKERS HSBC Bank plc Bank of America BROKER Finncap NOMINATED ADVISORS Spark Advisory Partners 12 Report of the directors The Directors present their report to the members, together with the audited financial statements for the 52 week period ended 1 April 2017, which should be read in conjunction with the Chairman’s Statement on the affairs of the Group (pages 1 to 3), and the Strategic Report (pages 4 to 11). The Consolidated Financial Statements incorporate financial statements, prepared to the Saturday nearest to the Group’s accounting reference date of 31 March, of the Company and all subsidiary undertakings (the Group). The results for 2017 are for the 52-week period ended 1 April 2017. The results for 2016 are for the 53-week period ended 2 April 2016. ACTIVITIES OF THE GROUP The Group is principally engaged in the manufacture and distribution of machine tools, precision engineered components and industrial laser systems. The Group has subsidiary companies in overseas locations but does not have any overseas branches. RESULT The result for the period is shown in the Consolidated Income Statement on page 21. BUSINESS REVIEW A balanced and comprehensive analysis of development and performance of the Group is contained in the Chairman’s Statement and the Strategic Report on pages 1 to 11. This analysis includes comments on the position of the Group at the end of the financial period, consideration of the principal risks and uncertainties facing the business and the key performance indicators which are monitored in relation to the achievement of the strategy of the business. RESEARCH AND DEVELOPMENT Group policy is to design and develop products that will enable it to retain and improve its market position. INTERESTS IN SHARE CAPITAL At 8 June 2017, the Directors had been informed of the following interests in shares of 3% or more of the issued ordinary share capital of the Company: Haddeo Partners LLP Mr D Grimes Mr A Perloff and the Maland Pension Fund Trustees Schroder Investment Management Percentage of issued ordinary Number share capital 23,492,535 22.51 7,500,000 6,550,000 3,671,320 7.19 6.28 3.52 The Directors have not been notified that any other person had a declarable interest in the nominal value of the ordinary share capital amounting to 3% or more. On 18 March 2015 shareholders approved the issue of up to 43,950,000 new warrants to subscribe for ordinary shares at a price of 20p per share. Subscribers to the new loan notes issued in February, March and August 2015 were issued with warrants totalling 34,755,000. In addition 9,195,000 new warrants were issued as replacements for the same number of old warrants granted as part of the old shareholder loan arrangements to those old shareholder loan note holders who agreed to roll over their notes into the new loan issue. Haddeo Partners LLP, in addition to their shareholding above, currently hold 5,050,000 of these warrants. PURCHASE OF OWN SHARES Authority granting the Company the option to purchase 10,435,795 of its own ordinary shares in accordance with the Companies Act 2006 was given by shareholders at the Annual General Meeting of the Company on 29 September 2016. This authority remains valid until the conclusion of the next Annual General Meeting. 13 Report of the directors DIRECTORS Details of the current Directors of the Company are shown on page 12. The beneficial interests of the directors in the share capital of the Company at 1 April 2017 are shown in the Remuneration Report on pages 16 to 19. No Director has a beneficial interest in the shares or debentures of any other Group undertaking. ENVIRONMENTAL POLICY It is the Group’s policy to seek continually to eliminate and, where this is not practicable, to minimise negative environmental impacts from the pursuit of its various business interests whilst continuing to produce high quality products to its customers’ requirements. It is the Group’s policy to comply with all statutory environmental legislation as a minimum and to aim to improve upon the standards set by the local regulatory authorities. DIVIDEND The directors do not recommend the payment of a dividend. FINANCIAL INSTRUMENTS An indication of the financial risk management objectives and policies and the exposure of the Group to price risk, credit risk, liquidity risk and cash flow risk is provided in Note 26 to the financial statements. PROVISION OF INFORMATION TO AUDITOR All of the current Directors have taken all steps that they ought to have taken to make themselves aware of any information needed by the Company’s auditor for the purposes of their audit and to establish that the auditor is aware of that information. The Directors are not aware of any relevant audit information of which the auditor is unaware. QUALIFYING THIRD PARTY INDEMNITY The Company has provided an indemnity for the benefit of certain of its current Directors which is a qualifying third party indemnity provision for the purpose of the Companies Act 2006. On behalf of the Board NEIL CARRICK DIRECTOR 3 JULY 2017 14 Statement of Directors’ responsibilities in respect of the strategic report, the Directors’ report and the financial statements The Directors are responsible for preparing the Strategic Report, the Directors’ Report and the group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare group and parent company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice) including FRS101 Reduced Disclosure Framework. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • • • for the group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. NEIL CARRICK DIRECTOR 3 JULY 2017 15 Remuneration report As an AIM listed company The 600 Group plc is not required to prepare a remuneration report in accordance with Directors Report Regulations of the Companies Act 2006, however the Directors recognise the importance and support the principles of the Regulations. The Auditor is not required to report to the shareholders on the remuneration report, but the table of Directors’ emoluments on page 18 and the table of Directors’ share options on page 19 do form part of the audited accounts. THE REMUNERATION COMMITTEE The Remuneration Committee (the Committee) is responsible for determining the salary and benefits of Executive Directors. It currently consists of three Non-executive Directors. The members of the Committee during the year have been: S E Fiamma (Committee Chairman) S J Rutherford D Zissman The Committee held three meetings during the year. The most significant matters discussed by the Committee at its formal meetings this year were: • the design and implementation of a new group wide bonus policy. • the formal grant of awards under the share plans; and • a review of Directors’ salaries. No Director was present when his own remuneration arrangements were being discussed. EXECUTIVE DIRECTORS’ REMUNERATION POLICY The Company aims to attract, motivate and retain the most able executives in the industry by ensuring that the Executive Directors are fairly rewarded for their individual contributions to the Group’s overall performance, to the interests of the shareholders and to the ongoing financial and commercial health of the Group. The Committee feels that including equity incentives in the total remuneration package encourages alignment of the interests of the Executive Directors and senior management with those of the shareholders. The Company’s strategy is to reward Executive Directors and key senior employees on both a long-term and short-term basis. SALARIES Salaries are established on the basis of market comparisons with positions of similar responsibility and scope in companies of a similar size in comparable industries. Individual salaries of Directors are reviewed annually by the Committee and adjusted by reference to individual performance and market factors. With the approval of the Chairman, Executive Directors may take up appointments as Non- executive Directors and retain payments from sources outside the Group, provided that there is no conflict of interest with their duties and responsibilities with the Group. BONUS SCHEME No bonuses were paid in the year. A new bonus scheme has been implemented from the start of the financial year ending 31 March 2018 based on financial targets for Executive Directors. LONG-TERM INCENTIVE PLANS THE 600 GROUP PLC 2012 DEFERRED SHARE PLAN (THE DSP) A new scheme was introduced on 18 January 2012 which provided for deferred shares to be issued to directors and senior executive’s. Options were granted on 19 November 2012 which are exercisable at 10p between three and ten years after grant date and further options excercisable at 17p were issued on 7 April 2014 and at 18p on 18 August 2015. 500,000 nil cost options were issued under this scheme on 1 September 2016. BENEFITS IN KIND Executive Directors’ benefits include a car allowance and medical insurance for self and family. 16 Remuneration report SERVICE CONTRACTS Mr N R Carrick has a service contract dated 27 May 2016 with a notice period of twelve months. In the case of early termination, the Company would negotiate compensation on an individual basis taking into account salary and other benefits as set out in the audited part of this report and the twelve month notice period. In the event of a change of control the notice period will be extended to 24 months, reducing back to 12 months over a 12 month period. NON-EXECUTIVE DIRECTORS’ REMUNERATION Fees for Non-executive Directors are determined by the Board on the basis of market comparisons with positions of similar responsibilities and scope in companies of a similar size in comparable industries. Non-executive Directors have contracts of service terminable on 3 months’ notice and are not eligible for pension benefits. TOTAL SHAREHOLDER RETURN This graph shows the Total Shareholder Return (TSR) of the Company (black line) from 1 April 2013 to 1 April 2017 compared with the AIM Index (grey line), rebased to 100. The TSR is defined as share price growth plus dividends reinvested. As the Company has been a constituent of this index since 14 July 2011, the Board considers that this is the most appropriate index against which the TSR of the Company should be measured. RELATIVE PERFORMANCE OF FTSE AIM ALL SHARE INDEX TO 600 GROUP APRIL 2013 TO APRIL 2017 17 Remuneration report DIRECTORS’ INTERESTS IN SHARES The interests of Directors holding office at 1 April 2017 in the ordinary shares of the Company were as follows: P R Dupee S J Rutherford N R Carrick D Zissman At 1 April 2017 Number At 2 April 2016 Number 23,492,535 23,492,535 20,000 113,404 400,000 20,000 113,404 400,000 P R Dupee’s interest in the 23.5m shares arises from his position as Managing Partner of Haddeo Partners LLP, which owns these shares. In addition, Haddeo Partners LLP holds 5,050,000 warrants and N R Carrick 250,000 warrants which can be used to either convert their loan notes into shares or to purchase shares for a cash consideration. DIRECTORS’ EMOLUMENTS Audited P R Dupee N R Carrick D Zissman S J Rutherford S E Fiamma N F Rogers Total . Salary Fees Pension Bonus in kind £ £ £ £ £ All benefits Total 2017 £ Total 2016 £ 250,000 175,000 — — — 15,750 — — — — 33,000 33,000 33,000 — — — — — 425,000 99,000 15,750 — — — — — — — — 250,000 234,167 18,281 209,031 205,632 — — — — 33,000 33,000 33,000 33,000 33,000 29,171 — 18,294 18,281 558,031 553,264 18 Remuneration report DIRECTORS’ SHARE OPTIONS Audited Details of share options at 1 April 2017 and 2 April 2016 for each Director who held office during the year are as follows: N Carrick P Dupee S Rutherford D Zissman S Fiamma Number of options at 2 April 2016 Granted Exercised 3,150,000 1,000,000 500,000 500,000 500,000 — — — — — — — — — — Number of options at 1 April 2017 3,150,000 1,000,000 500,000 500,000 500,000 Lapsed/ forfeited — — — — — Options were all granted under the 600 Group PLC Deferred Share Plan and are exercisable between 3 and 10 years from date of grant. 4,500,000 options with an exercise price of 10p were granted on 19 November 2012 of which 1,750,000 remain outstanding at the year-end. 5,400,000 options with an exercise price of 17p were granted on 7 April 2014, of which 3,400,000 remain outstanding, and 500,000 options with an exercise price of 18p were granted on 6 August 2015, all of which remain outstanding. During the prior year, 2,750,000 share options were exercised by N Rogers on 10 July 2015. 2,750,000 new ordinary shares of 1p each were exercised at 10p generating cash proceeds for the Group of £275,000. The charge to the Income Statement in respect of share based payments was £68,000 (2016: £64,000). The share price at 1 April 2017 was 12.625p and the highest and lowest prices during the period were 14.375p and 7.75p respectively. On behalf of the Board NEIL CARRICK DIRECTOR 3 JULY 2017 19 Independent auditor’s report To the members of The 600 Group PLC INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF THE 600 GROUP PLC We have audited the financial statements of The 600 Group PLC for the period ended 1 April 2017 set out on pages 21 to 77. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) including FRS 101 Reduced Disclosure Framework. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 15, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion: • • • • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 1 April 2017 and of the group’s profit for the period then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; the parent company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial period is consistent with the financial statements. Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic Report and the Directors’ Report: • we have not identified material misstatements in those reports; and • in our opinion, those reports have been prepared in accordance with the Companies Act 2006. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • • • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Nick Plumb (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Sovereign Square Sovereign Street Leeds LS1 4DA 3 July 2017 20 Consolidated income statement For the 52-week period ended 1 April 2017 Continuing Revenue Cost of sales Gross profit/(loss) Net operating expenses Operating profit/(loss) Financial income Financial expense Contingent consideration settlement Profit/(loss) before tax Income tax (charge)/credit Profit/(loss) for the period Notes 1 2,3 3,4 6 6 3 7 Before Special Items After Before Special Special Special Special Items Items Items Items After Special Items 52 weeks 52 weeks 52 weeks 53 weeks 53 weeks 53 weeks ended 1 April 2017 £000 47,032 (30,602) 16,430 (13,365) ended 1 April 2017 £000 ended 1 April 2017 £000 ended 2 April 2016 £000 ended 2 April 2016 £000 ended 2 April 2016 £000 - 47,032 45,269 - 45,269 (118) (118) (30,720) (29,899) 16,312 15,370 (894) (894) (30,793) 14,476 (53) (13,418) (13,014) (2,626) (15,640) 3,065 (171) 2,894 2,356 (3,520) (1,164) 3 (946) - 1,445 (168) - 1,448 (1,114) - 10 (890) - 1,171 (150) 2,032 1,181 (1,040) 2,032 2,122 1,106 3,228 1,476 (467) 1,009 118 (1,287) (1,169) 65 72 2,240 (181) 2,059 1,541 (395) Attributable to equity holders of the parent 2,240 (181) 2,059 Attributable to non controlling interests - - - 2,240 (181) 2,059 1,552 (11) 1,541 (395) - (395) 137 1,146 1,157 (11) 1,146 Basic earnings per share Diluted earnings per share 9 9 2.15p (0.18)p 1.97p 1.69p (0.43)p 1.26p 2.14p (0.18)p 1.96p 1.68p (0.43)p 1.25p Company Number 00196730 The accompanying accounting policies and notes on pages 26 to 66 form part of these Financial Statements. 21 Consolidated statement of comprehensive income for the 52-week period ended 1 April 2017 Profit for the period Other comprehensive income/(expense) Items that will not be reclassified to the Income Statement: Remeasurement of defined benefit asset Deferred taxation Total items that will not be reclassified to the Income Statement: Items that are or may in the future be reclassified to the Income Statement: Foreign exchange translation differences Fair valuation of assets held for sale Fair valuation of investments Total items that are or may in the future be reclassified to the Income Statement: Other comprehensive income for the period, net of income tax Total comprehensive income for the period Attributable to: Equity holders of the Parent Company Non controlling interests Total recognised income Notes 30 14 52-week 53-week period ended period ended 1 April 2017 £000 2,059 8,367 (2,928) 5,439 705 - 1,157 1,862 7,301 9,360 9,360 - 9,360 2 April 2016 £000 1,146 4,436 (515) 3,921 286 (450) (29) (193) 3,728 4,874 4,885 (11) 4,874 The accompanying accounting policies and notes on pages 26 to 66 form part of these Financial Statements. 22 Consolidated statement of financial position As at 1 April 2017 Company Number 00196730 As at As at 1 April 2017 2 April 2016 Notes £000 £000 Non-current assets Property, plant and equipment Goodwill Other Intangible assets Investments Deferred tax assets Employee benefits Current assets Inventories Trade and other receivables Assets classified as held for sale Cash and cash equivalents Total assets Non-current liabilities Loans and other borrowings Deferred tax liabilities Current liabilities Trade and other payables Provisions Loans and other borrowings Total liabilities Net assets Shareholders’ equity Called-up share capital Share premium account Revaluation reserve Available for sale reserve Equity reserve Translation reserve Retained earnings Total equity 11 12 12 13 14 30 15 16 17 18 19 14 20 21 19 23 3,732 7,144 305 1,653 3,486 51,469 67,789 12,737 7,444 - 1,081 21,262 89,051 (9,234) (18,216) (27,450) (5,436) (389) (5,508) (11,333) (38,783) 50,268 1,044 1,013 637 506 139 2,466 44,463 50,268 3,235 7,144 322 496 3,832 40,937 55,966 11,271 6,771 1,999 765 20,806 76,772 (11,376) (14,538) (25,914) (6,318) (425) (3,275) (10,018) (35,932) 40,840 1,044 1,013 1,273 (651) 139 1,714 36,308 40,840 The financial statements on pages 21 to 66 were approved by the Board of Directors on 3 July 2017 and were signed on its behalf by: NEIL CARRICK GROUP FINANCE DIRECTOR 3 July 2017 23 Consolidated statement of changes in equity As at 1 April 2017 Company Number 00196730 Ordinary Share Available Non share premium Revaluation for sale Translation Equity Retained Controlling Total capital account reserve reserve reserve reserve Earnings Total Interest Equity At 28 March 2015 At 29 March 2015 Profit for the period Other comprehensive income: Foreign currency translation Net defined benefit asset mvmt Fair valuation of Investments Fair valuation of assets held for sale Transfer on revalued properties Deferred tax Total comprehensive income Transactions with owners: £000 896 896 — — — — — — — — — — — — — — — — — — Share capital subscribed for 148 1,013 Equity element of shareholder loan issued in period Acquisition of NCI Credit for share-based payments Total transactions with owners At 2 April 2016 At 3 April 2016 Profit for the period Other comprehensive income: Foreign currency translation Net defined benefit asset mvmt Fair valuation of Investments Transfer on revalued properties Deferred tax Total comprehensive income Transactions with owners: Credit for share-based payments Total transactions with owners — — — 148 1,044 1,044 — — — 1,013 1,013 1,013 — — — — — — — — — — — — — — — — — — £000 £000 £000 £000 £000 £000 £000 £000 £000 1,494 (622) 1,428 124 31,270 34,590 136 34,726 1,494 (622) 1,428 124 31,270 34,590 136 34,726 — — 1,157 1,157 (11) 1,146 — — — — (450) 229 — — — — (29) — — — 286 — — — — — (221) (29) 286 — — — — — — — — — — — — — — — 1,273 1,273 (651) 1,714 (651) 1,714 — 75 — — (711) — — — — 1,157 — — — 752 — — — — — — — — — — — — 15 — 15 139 139 — — — — — — 286 — 286 4,436 4,436 — 4,436 — (29) — (450) (229) — — — — (29) (450) — (515) (515) — (515) 4,849 4,885 (11) 4,874 — 1,161 — 1,161 15 — — —— 125 125 (125) 64 64 — 15 — 64 189 1,365 (125) 1,240 36,308 40,840 — 40,840 36,308 40,840 — 40,840 2,059 2,059 — 2,059 (122) 705 — 705 8,367 8,367 — 8,367 — 1,157 — 1,157 711 — — — — (2,928) (2,928) — (2,928) (636) 1,157 752 — 8,087 9,360 — 9,360 — — — — — — — — 68 68 68 68 — — 68 68 At 1 April 2017 1,044 1,013 637 506 2,466 139 44,463 50,268 — 50,268 The accompanying accounting policies and notes on pages 26 to 66 form part of these Financial Statements. 24 Consolidated cash flow statement For the 52-week period ended 1 April 2017 Cash flows from operating activities Profit for the period Adjustments for: Amortisation of development expenditure Depreciation Net financial income Net pension credit Other Special Items Equity share option expense Income tax expense/(credit) Operating cash flow before changes in working capital and provisions (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories Decrease in trade and other payables Restructuring and redundancy expenditure Employee benefits contributions Cash generated in operations Interest paid Income tax received/( paid) Net cash flows from operating activities Cash flows from investing activities Interest received Proceeds from sale of property, plant and equipment Purchase of TYKMA Inc. Purchase of property, plant and equipment Development and trademarks expenditure capitalised Net cash flows from investing activities Cash flows from financing activities Proceeds from issue of ordinary shares Proceeds from issue of Loan Notes Repayment of external borrowing Proceeds from external borrowing Net finance lease income/(expenditure) Net cash flows from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the period Effect of exchange rate fluctuations on cash held Cash and cash equivalents at the end of the period 52-week 53-week period ended period ended Notes 24 1 April 2017 £000 2,059 58 452 (334) (647) 750 68 1,169 3,575 (150) (1,404) (1,260) (541) (120) 100 (946) 88 (758) 3 2,090 — (490) (22) 1,581 — — (2,513) 2,074 (93) (532) 291 765 25 18 1,081 2 April 2016 £000 1,146 122 548 (141) (940) 2,363 64 (137) 3,025 463 106 (1,682) (807) (130) 975 (964) (3) 8 10 — (1,378) (1,522) (297) (3,187) 275 806 1,883 — 67 3,031 (148) 902 11 765 25 The accompanying accounting policies and notes on pages 26 to 66 form part of these Financial Statements. Group accounting policies BASIS OF PREPARATION The 600 Group PLC is a public limited company incorporated and domiciled in England and Wales. The Company’s ordinary shares are traded on the Alternative Investment Market (AIM) of the London Stock Exchange. The Group Consolidated Financial Statements incorporate accounts, prepared to the Saturday nearest to the Group’s accounting reference date of 31 March of the Company and its subsidiary undertakings (together referred to as the Group). The results for 2017 are for the 52-week period ended 1 April 2017. The results for 2016 are for the 53-week period ended 2 April 2016. The Parent Company financial statements present information about the Company as a separate entity and not about its Group. The Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and with those parts of the Companies Act 2006 applicable to companies reporting under adopted IFRS. The Company has elected to prepare its parent company financial statements in accordance with FRS 101; these are presented on pages 67 to 77. IFRS and IFRIC are issued by the International Accounting Standards Board (the IASB) and must be adopted into European Union law, referred to as endorsement, before they become mandatory under the IAS Regulation. There have been no alterations made to the accounting policies as a result of considering all amendments to IFRS and IFRIC interpretations that became effective during the accounting period as these were considered to be immaterial to the Group’s operations or were not relevant. A change to the Deed and Rules was agreed with the Trustees of the UK 600 Group Pension Scheme on 28 September 2012 allowing the accounting surplus on the scheme to be included on the Group balance sheet under IFRIC 14. Under section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own profit and loss account. At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): IAS 7 (amendments) Disclosure initiative (effective from 1 January 2017) IAS 12 (amendments) Recognition of Deferred Tax Assets for Unrealised Losses (effective from 1 January 2017) IFRS 12 (amendments) Annual Improvements to IFRSs 2014-2016 Cycle (effective from 1 January 2017) IFRS 9 Financial Instruments (effective from 1 January 2018) IFRS 15 Revenue from contracts with customers (effective from 1 January 2018) IFRS 2 (amendments) Classification and Measurement of Share-based Payment Transactions (effective from 1 January 2018) IFRIC 22 Foreign Currency Transactions and Advance Consideration (effective from 1 January 2018) IFRS 16 Leases (effective from 1 January 2019) IFRS 10 and IAS 28 (amendments) Sale or contribution of assets between an investor and its associate or joint venture (effective date deferred indefinitely) The directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group in future periods, except that IFRS 9 will impact both the measurement and disclosures of financial instruments, IFRS 15 will have an impact on revenue recognition and related disclosures, IFRS 16 will have an impact on the recognition of leases and the related disclosures. Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of IFRS 9, IFRS 15 and IFRS 16 until a detailed review has been completed. The Group is currently reviewing the potential impact of the above standards. Preliminary indications are that the impact would not be significant. The same is true of the following new or amended standards: IFRS 14 Regulatory Deferral Accounts; Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11); Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38); Defined Benefit Plans: Employee Contributions (Amendments to IAS 19); Annual Improvements to IFRSs 2010-2012 Cycle; and Annual Improvements to IFRSs 2011-2013 Cycle. The preparation of financial statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of IFRS that have a significant effect on the Group financial statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 31. The consolidated financial statements are presented in sterling rounded to the nearest thousand. The following principal accounting policies have been applied consistently to all periods presented in these Group financial statements. The financial statements are prepared under the historical cost convention except that properties and assets held for sale are stated at their fair value. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman’s Statement on page 1 to 3 and the Strategic Report on pages 4 to 11. 26 Group accounting policies New increased banking facilities were agreed with HSBC in the UK in August 2016 following the sale of the Letchworth property. A package of facilities to support the working capital of the UK machine tools business and a term loan secured on the remaining freehold site in Colchester were put in place totaling £4.95m. In the USA Bank of America supported the 20% TYKMA acquisition in March 2016 with an additional term loan of $1.8m in addition to their existing term and working capital facilities. The Group has a mixture of term loans and revolving working capital facilities with maturities between 1 and 5 years. Headroom on bank facilities was £3.2m at the year- end (2016: £3.2m) and all financial covenants in place were met during the year. It is expected that the short term facilities in place at the year-end will be extended on similar terms. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. BASIS OF CONSOLIDATION The Group’s financial statements consolidate the financial statements of the Company and its subsidiary undertakings. Subsidiary undertakings are those entities that are controlled by the Group. The results of any subsidiaries sold or acquired are included in the Group’s income statement up to, or from, the date control passes. All intra-Group balances and transactions, including unrealised profits arising from intra-Group transactions, are eliminated fully on consolidation. FOREIGN CURRENCY TRANSLATION Transactions denominated in foreign currencies are translated into Sterling at the rates of exchange ruling on the date of the transaction. Monetary assets and liabilities are translated into Sterling at the rate of exchange ruling at the balance sheet dates. Earnings of foreign operations are translated at the average exchange rate for the period as an approximation to actual transaction date rates. Exchange rates used to express the assets and liabilities of overseas companies in Sterling are the rates ruling at the balance sheet dates. Exchange differences arising from the re-translation of the investments in overseas subsidiaries are recorded as a movement on reserves. All other exchange differences are dealt with through the income statement. On transition to adopted IFRS, the Group took the exemption under IFRS 1 to reset the translation reserve to £nil. The balance on this reserve only relates to post transition. REVENUE Revenue represents the total of the amounts invoiced to customers outside the Group for goods supplied and services rendered, excluding VAT, and after deducting discounts allowed and credit notes issued. Revenue is recognised at the point at which goods are supplied or title passes to customers, depending on the respective terms of sale or when services have been completed in full. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated completion costs, the possible return of goods or continuing management involvement with the goods other than in respect of storage for customers’ goods. 15% of the Group’s revenues arise from after sales support, spare parts and services. SEGMENT ANALYSIS The Group has adopted IFRS 8 “Operating segments” which requires operating segments to be identified on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance. The Executive Directors consider there to be two continuing operating segments being Machine Tools and Precision Engineered Components and Industrial Laser Systems. The Executive Directors assess the performance of the operating segments based on a measure of underlying operating profit/(loss). This measurement basis excludes the effects of Special Items from the operating segments. Head Office and unallocated represent central functions and costs. OPERATING PROFIT, SPECIAL ITEMS AND DISCONTINUED OPERATIONS In order for users of the financial statements to better understand the underlying performance of the Group, the Board have separately disclosed transactions which, whilst falling within the ordinary activities of the Group, are, by the virtue of their size or incidence, considered to be one off in nature. In addition share based payments and amortisation of intangible assets acquired and non cash pension transactions are separately identified as special items (see note 3). Special items include acquisition costs, gains and losses on the sale of properties and assets, exceptional costs relating to reorganisation, redundancy and restructuring, refinancing costs, legal disputes and inventory, asset and intangibles impairments. 27 Group accounting policies PENSIONS AND POST-RETIREMENT HEALTH BENEFITS The Group operates both defined benefit and defined contribution pension schemes. It also operates a retirement healthcare benefit scheme for certain of its employees in the US. The Group’s net obligation in respect of the defined benefit schemes and the retirement healthcare benefit scheme is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted. The discount rate for the UK schemes is based on the annualised yield on AA credit rated corporate bonds. The discount rate for the retirement healthcare benefit scheme is based on a similar measure which is appropriate for the US market. The calculations are performed by a qualified actuary using the projected unit method. Remeasurements are recognised immediately through the statement of comprehensive income. The extent to which the schemes’ assets exceed the liabilities is shown as a surplus in the balance sheet to the extent that the surplus is recoverable by the Group. Further provision is made to the extent that the Group has any additional obligation under a minimum funding requirement. The UK defined benefit scheme was closed to future accrual on 31 March 2013 after a period of consultation with employees and the agreement of the scheme trustees. Items recognised in the income statement and statement of comprehensive income are as follows: WITHIN PROFIT FROM OPERATIONS • current service cost – representing the increase in the present value of the defined benefit obligation resulting from employee service in the current period; • past service cost – representing the increase in the present value of the defined benefit obligation resulting from employee service in prior periods, which arises from changes made to the benefits under the scheme in the current period. To the extent that the changes to benefits vest immediately, past service costs are recognised immediately, on the income statement; and • gains and losses arising on settlements and curtailments – where the item that gave rise to the settlement or curtailment is recognised within operating profit. • obligations for contributions to defined contribution pension schemes are recognised as an expense in the income statement as incurred. BELOW PROFIT FROM OPERATIONS • interest cost on the net asset or liability of the scheme – calculated by reference to the net scheme asset or liability and discount rate at the beginning of the period.. WITHIN THE STATEMENT OF COMPREHENSIVE INCOME • remeasurements arising on the assets and liabilities of the scheme. GOODWILL Goodwill arising on acquisition of subsidiaries and businesses is capitalised as an asset and represents the excess of the fair value of the consideration given over the fair value of the net identifiable assets, liabilities and contingent liabilities acquired. In accordance with IFRS 1 “First-time Adoption of IFRS”, goodwill has been frozen at its net book value as at the date of transition and will not be amortised. Instead it will be subject to an annual impairment review with any impairment losses being recognised immediately in the income statement. Goodwill written off in prior years under previous UK GAAP is not reinstated. RESEARCH AND DEVELOPMENT Research expenditure undertaken with the prospect of gaining new scientific or technical knowledge and understanding is recognised in the income statement as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources to complete development. The expenditure capitalised includes direct labour and an appropriate proportion of overheads. Amortisation is charged to the income statement on a straight-line basis over the useful economic life of the activity. Currently the annual rate used is 20%. INVESTMENTS Investments in quoted shares are classified as Available for sale and measured at fair value. Movements in fair value are recorded in the Available for sale reserve until the shares are sold, in which case the Available for sale reserve is recycled to the income statement. 28 Group accounting policies PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are held at cost, subject to property revaluations every three to five years, or indications of changes in fair value of properties. During March 2015 the Group’s properties were revalued. The valuations were performed by independent valuers, Sanderson Weatherall, and the valuations were determined by market rate for sale with vacant possession. Revalued amounts are reflected in the balance sheet with resulting credits taken to revaluation reserve and debits, after reversing previous credits, taken to the consolidated income statement. Profits or losses on disposals are calculated using the carrying value in the balance sheet. Depreciation is calculated to write off the cost (or amount of the valuation) of property, plant and equipment less the estimated residual value on a straight-line basis over the expected useful economic life of the assets concerned. The annual rates used are generally: • freehold buildings • leasehold buildings • plant and machinery – 2 to 4% – over residual terms of the leases – 10 to 20% • fixtures, fittings, tools and equipment – 10 to 33.3% INVENTORIES Inventories are valued at the lower of cost and net realisable value after making due allowance for obsolete and slow moving items. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • raw materials - purchase cost on a first in, first out basis • finished goods and work in progress – cost of direct materials on a first in, first out basis and labour and a proportion of manufacturing overheads based on normal operating capacity Net realisable value is the estimated selling price in the ordinary course of business, less estimated cost of completion and the estimated costs necessary to make the sale. TRADE AND OTHER RECEIVABLES Trade receivables are initially measured on the basis of their fair value and are subsequently reduced by appropriate provisions for estimated unrecoverable amounts. Trade receivables are subsequently measured at amortised cost. Bad debts are written off when identified. CASH AND CASH EQUIVALENTS Cash and cash equivalents in the balance sheet comprise cash at bank and in hand. For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as described above, net of outstanding bank overdrafts which are repayable on demand and form an integral part of cash management. COMPOUND FINANCIAL INSTRUMENTS Compound financial instruments issued by the Group comprise convertible notes that can be converted to share capital at the option of the holder, when the number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not remeasured subsequent to initial recognition. Interest and gains and losses related to the financial liability are recognised in profit or loss. On conversion, the financial liability is reclassified to equity; no gain or loss is recognised on conversion. SHARE-BASED PAYMENTS The grant-date fair value of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (vesting date). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of awards that, in the opinion of the Directors of the Group and based on the best available estimates at that date, will ultimately vest. The charge is trued-up only for service and non-market conditions. The income statement charge or credit for a period represents the movement in cumulative expenses recognised as at the beginning and end of that period. Charges for employee services received in exchange for share-based payment have been made for all options granted after 7 November 2002 in accordance with IFRS 2 “Share-based payment”. The fair value of such options has been calculated using a binomial or Black Scholes option-pricing model, based upon publicly available market data at the point of grant. 29 Group accounting policies TAXATION Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in the statement of comprehensive income. Income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which an asset can be utilised. LEASES Assets financed by leasing arrangements, which give rights approximating to ownership, are treated as if they had been purchased outright and are capitalised and depreciated over the shorter of the estimated useful life of the assets and the period of the leases. The capital element of future rentals is treated as a liability and the interest element is charged against profits in proportion to the balances outstanding. Leases where the risk and reward of ownership remain with the lessor are treated as operating leases and the rental costs are charged against profits on a straight-line basis. DERIVATIVE FINANCIAL INSTRUMENTS The Group does not hedge account but uses on occasion derivative financial instruments to hedge its commercial exposure to foreign exchange arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are accounted for as trading instruments and are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value based on market valuations obtained. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, which is based on the quoted forward price. INTEREST-BEARING BORROWINGS Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. PROVISIONS Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefit will be required to settle the obligation, although there remains uncertainty over timing or the amount of the obligation, and a reliable estimate can be made of the amount of the obligation. IMPAIRMENT The carrying amount of the Group’s assets, other than inventories and deferred tax assets (see accounting policies above), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the consolidated income statement. Those relating to revalued property are treated in accordance with IAS 16. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then to reduce the carrying amount of the other assets of the unit (group of units) on a pro rata basis. ASSETS AND LIABILITIES CLASSIFIED AS HELD FOR SALE Assets and liabilities held for sale are those which are being actively marketed for sale at the period-end and which management believes will be disposed of within 12 months of the balance sheet date. These assets are stated at fair value with any gain or loss resulting from the changes in fair value recognised within the consolidated income statement as a special item. Where the asset is an investment in a subsidiary undertaking then any corresponding liabilities are disclosed in liabilities held for sale. 30 Group accounting policies BUSINESS COMBINATIONS All business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Acquisitions on or after 1 January 2010: For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as: the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus the fair value of the existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. On a transaction-by-transaction basis, the Group elects to measure non-controlling interests, which have both present ownership interests and are entitled to a proportionate share of net assets of the acquiree in the event of liquidation, either at its fair value or at its proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date. All other non-controlling interests are measured at their fair value at the acquisition date. Acquisitions prior to 1 January 2010: For acquisitions prior to 1 January 2010, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of the acquisition. ACQUISTIONS AND DISPOSALS OF NON-CONTROLLING INTERESTS Acquisitions and disposals of non-controlling interests that do not result in a change of control are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result of such transactions. The adjustments to non- controlling interests are based on a proportionate amount of the net assets of the subsidiary. Any difference between the price paid or received and the amount by which non-controlling interests are adjusted is recognised directly in equity and attributed to the owners of the parent. Prior to the adoption of IAS 27 (2008), goodwill was recognised on the acquisition of non-controlling interests in a subsidiary, which represented the excess of the cost of the additional investment over the carrying amount of the interest in the net assets acquired at the date of the transaction. NON-CONTROLLING INTERESTS Transactions that result in changes in ownership interests while retaining control are accounted for as transactions with equity holders in their capacity as equity holders. As a result, no gain or loss on such changes is recognised in profit or loss but rather in equity. DIVIDENDS Dividends on non-equity shares are recognised as a liability and accounted for on an accruals basis. Equity dividends are recognised as a liability in the period in which they are declared (appropriately authorised and no longer at the discretion of the Company). RESERVES A consolidated statement of changes in equity is shown on page 24. Share premium account The share premium reserve comprises the premium paid over the nominal value of shares for shares issued. Revaluation reserve The Group’s properties are valued periodically and the difference between the valuation and the carrying value of the property is taken to revaluation reserve. Any impairments in property valuation in excess of credits made to the revaluation reserve for that property are charged to the consolidation income statement. Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign subsidiaries. Equity reserve The equity reserve was created on the issue of the loan notes which include convertible warrants, the value of which is recognised in equity. Available for sale reserve The available for sale reserve was created for movements in the carrying value of the Group’s investment in ProPhotonix Ltd. Retained earnings Retained earnings brought forward from prior periods along with current year result. 31 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 1. SEGMENT INFORMATION IFRS 8 – “Operating Segments” requires operating segments to be identified on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance. The chief operating decision maker has been identified as the Executive Directors. The Executive Directors review the Group’s internal reporting in order to assess performance and allocate resources. The Executive Directors consider there to be two continuing operating segments being machine tools and precision engineered components and industrial laser systems. The Executive Directors assess the performance of the operating segments based on a measure of underlying operating profit/(loss). This measurement basis excludes the effects of Special Items from the operating segments. Head Office and unallocated represent central functions and costs. The following is an analysis of the Group’s revenue and results by reportable segment: 52 Weeks ended 1 April 2017 Segmental analysis of revenue Total revenue Segmental analysis of operating profit/(loss) before Special Items Special Items Group operating profit/(loss) Other segmental information: Reportable segment assets Reportable segment liabilities Fixed asset additions Depreciation and amortisation Continuing Machine tools & precision engineered components Industrial laser systems Head Office & unallocated £000 £000 32,424 14,608 £000 — 2,059 691 2,750 1,993 (671) 1,322 (987) (191) (1,178) Total £000 47,032 3,065 (171) 2,894 29,120 7,638 (26,538) (3,772) 52,293 (8,473) 89,051 (38,783) 115 295 397 215 — — 512 510 32 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 1. SEGMENT INFORMATION (CONTINUED) 53 Weeks ended 2 April 2016 Segmental analysis of revenue Total revenue Segmental analysis of operating profit/(loss) before Special Items Special Items Group operating profit/(loss) Other segmental information: Reportable segment assets Reportable segment liabilities Fixed asset additions Depreciation and amortisation Machine tools & precision engineered components Industrial laser systems Head Office & unallocated £000 £000 32,127 13,142 2,073 1,179 282 (3,212) £000 — (896) (590) 2,355 (2,033) (1,486) Total £000 45,269 2,356 (3,520) (1,164) 26,630 5,970 (22,078) (3,048) 605 293 1,214 457 44,172 (10,806) — — 76,772 (35,932) 1,819 750 Inter-segment pricing is determined on an arm’s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. Geographical segmental analysis of revenue is shown by origin and destination in the following two tables: Segmental analysis by origin Gross sales revenue: UK North America Australasia Total Revenue 2017 £000 2016 % £000 % 11,705 33,354 1,973 47,032 24.9 70.9 4.2 100.0 14,851 28,936 1,482 45,269 32.8 63.9 3.3 100.0 33 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 1. SEGMENT INFORMATION (CONTINUED) Segmental analysis by destination: Gross sales revenue: UK Other European North America Africa Australasia Central America Middle East Far East 2017 2016 £000 % £000 % 7,193 5,783 29,732 141 1,804 140 431 1,808 47,032 15.3 12.3 63.3 0.3 3.8 0.3 0.9 3.8 100.0 8,498 5,905 27,291 162 1,438 163 733 1,079 45,269 18.8 13.0 60.3 0.4 3.2 0.4 1.6 2.3 100.0 There are no customers that represent 10% or more of the Group’s revenues. 2. NET OPERATING EXPENSES – administration expenses – distribution costs Total net operating expenses 2017 £000 10,669 2,749 13,418 2016 £000 13,061 2,579 15,640 34 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 3. SPECIAL ITEMS In order for users of the financial statements to better understand the underlying performance of the Group the Board have separately disclosed transactions which by virtue of their size or incidence, are considered to be one off in nature. In addition the charge for share based payments, amortisation of intangible assets acquired and non cash pension transactions have also been separately identified. Special items include Items included in cost of sales: Stock write-offs Items included in operating profit: Pensions credit Refinancing costs Redundancy and reorganisation Profit on sale of property Impairment of intangible assets Acquisition costs Share option charge Amortisation of intangible assets acquired Items included in financial (income)/expense: Pensions interest on surplus Amortisation of loan note expenses Items included in contingent consideration settlement: TYKMA deferred consideration settlement Total special items before tax Income tax credit on special items Total special items after tax 2017 £000 (118) (118) 647 (54) (622) 114 — (29) (68) (41) (53) 1,445 (168) 1,277 — — 1,106 (1,287) (181) 2016 £000 (894) (894) 940 — (835) — (2,390) (197) (64) (80) (2,626) 1,171 (150) 1,021 2,032 2,032 (467) 72 (395) Special items are disclosed separately on the basis that this presentation gives a clearer picture of the underlying performance of the Group. Special items comprise two elements: - - Items which are expected to be one-off in nature and are considered significant to the result of the group or one of its reporting segments; and Non-cash items which, given the scale of our current activities, represent a disproportionate share of the Group’s result. Examples include the credit arising on the pension surplus share based payments and the amortisation of intangible assets. During the year the Group incurred further costs with regard to the reorganisation of TYKMA Inc and the integration of the Electrox Laser marking division. Redundancy exercises were carried out in the UK during the year. Property disposals in the UK also resulted in the profit of £114k. Costs were also incurred relating to the refinancing carried out in the UK during the year. Costs were also incurred with regard to the granting of share options. 35 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 4. OPERATING PROFIT/(LOSS) Operating profit/(loss) is after charging/(crediting) : – depreciation of assets held under finance leases – amortisation of development expenditure and trademarks – hire of plant – other operating lease rentals – profit on sale of property, plant and equipment 2017 £000 23 58 16 352 114 2016 £000 26 202 7 240 - Special Items –Acquisition costs, reorganisation and restructuring, inventory and asset impairments, property disposals and refinancing costs (note 3) (1,106) 467 Auditor’s remuneration: – audit of these financial statements – amounts receivable by auditor and its associates in respect of: – auditing of accounts of subsidiaries of the company pursuant to legislation (including that of countries and territories outside of Great Britain) – other services relating to tax compliance – other services relating to tax advisory 70 21 7 5 70 27 6 18 Amounts paid to the Company’s auditor in respect of services to the Company, other than the audit of the Company’s financial statements have not been disclosed as the information is required instead to be disclosed on a consolidated basis. 5. PERSONNEL EXPENSES Staff costs: – wages and salaries – social security costs – pension charges relating to defined contribution schemes – pension charges relating to defined benefit schemes – equity share options expense (included in Special Items) 2017 £000 7,937 1,073 354 14 68 2016 £000 7,258 983 373 12 64 9,446 8,690 In addition to the above staff costs, redundancy costs of £291,000 were incurred during the year (2016: £586,000). Directors’ emoluments including disclosure of the highest paid director are included in the Directors’ Emoluments table and table of Directors’ share options contained within the Remuneration report (pages 16-19). 36 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 5. PERSONNEL EXPENSES (CONTINUED) The average number of employees of the Group (including Executive Directors) during the period was as follows: Management and administration Production Sales Total . 6. FINANCIAL INCOME AND EXPENSE Bank and other interest Interest on pensions surplus Financial income Bank overdraft and loan interest Other loan interest Other finance charges Finance charges on finance leases Amortisation of shareholder loan expenses Financial expense 2017 Number 2016 Number 61 79 66 206 2017 £000 3 1,445 1,448 (173) (761) - (12) (168) 52 98 84 234 2016 £000 10 1,171 1,181 (155) (721) (3) (11) (150) (1,114) (1,040) 37 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 7. TAXATION Current tax: Corporation tax at 20% (2016: 20%): – current period Overseas taxation: – current period Total current tax charge Deferred taxation: – current period – prior period (adjustments to the capital allowance pools in the UK and overseas) Total deferred taxation credit/(charge) (Note 14) Taxation charged to the income statement 2017 £000 — — — (695) (474) (1,169) (1,169) 2016 £000 — 53 53 79 5 84 137 TAX RECONCILIATION The tax charge assessed for the period is higher than the standard rate of corporation tax in the UK of 20% (2016: lower than standard rate of 20%). The differences are explained below: 2017 £000 3,228 % 2016 £000 1,009 646 20.0 Profit before tax Profit before tax multiplied by the standard rate of corporation tax in the UK of 20% (2016: 20%) Effects of: –income not taxable and/or expenses not deductible (423) (13.1) – overseas tax rates – pension fund surplus taxed at higher rate – property disposals – state taxes – deferred tax prior period adjustment – tax not recognised on losses/(unrecognised losses utilised) – impact of rate change Taxation charged/(credited) to the income statement Deferred taxation balances are analysed in note 14. 8. DIVIDENDS No dividend was declared in the period (2016: no dividend paid). 17 129 — 17 474 309 — 1,169 0.5 4.0 — 0.5 14.7 9.6 — 36.2 202 (205) 19 321 (52) 75 (5) (600) 108 (137) % 20.0 (20.3) 1.9 31.8 (5.2) 7.4 (0.5) (59.4) 10.7 (13.6) 38 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 9. EARNINGS PER SHARE The calculation of the basic earnings per share of 1.97p (2016: 1.26p) is based on the earnings for the financial period attributable to the Parent Company’s shareholders of a profit of £2,059,000 (2016: £1,157,000) and on the weighted average number of shares in issue during the period of 104,357,957 (2016: 91,684,103). At 1 April 2017, there were 6,650,000 (2016: 6,150,000) potentially dilutive shares on option with a weighted average effect of 303,255 (2016: 583,333) shares giving a diluted earnings per share of 1.96p (2016: 1.25p) Weighted average number of shares Issued shares at start of period Effect of shares issued in the year Weighted average number of shares at end of period Total post tax earnings Share Option Costs Pensions Interest Amortisation of Shareholder loan expenses Pensions credit Credit on settling deferred consideration Impairment of intangible assets Amortisation of intangible assets acquired Other special items Acquisition costs Associated Taxation Underlying Earnings after tax Underlying Earnings before tax Underlying EPS 2017 2016 104,357,957 89,607,957 — 2,076,146 104,357,957 91,684,103 £000 2,059 68 £000 1,146 64 (1,445) (1,171) 168 (647) — — 41 680 29 1,287 2,240 2,122 2.15p 150 (940) (2,032) 2,390 80 1,729 197 (72) 1,541 1,476 1.69p 39 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 10. EMPLOYEE SHARE OPTION SCHEMES The Group has granted share options to employees under The 600 Group PLC Deferred Share Plan 2011. Options under the DSP were granted to senior executives and directors on 19 November 2012 at 10p per share, on 7 April 2014 at 17p per share, on 6 August 2015 at 18p per share and finally additional nil cost options on 1 September 2016. These options are exercisable between 3 and 10 years from the grant date. The schemes are equity-settled. SHARE-BASED EXPENSE The Group recognised a total charge of £68,000 (2016: £64,000) in relation to equity-settled share-based payment transactions. The number and weighted average exercise prices of share options Number of options outstanding at beginning of period Number of options granted in period Number of options forfeited/lapsed in period Number of options exercised in period Number of options outstanding at end of period Number of options exercisable at end of period 2017 DSP 2016 DSP 6,150,000 500,000 — — 6,650,000 1,750,000 9,900,000 1,000,000 (2,000,000) (2,750,000) 6,150,000 1,750,000 On 19 November 2012 4,500,000 options with an exercise price of 10p were granted, of which 1,750,000 were still outstanding, and on 7 April 2014 5,400,000 options with an exercise price of 17p were granted, of which 3,400,000 were still outstanding. On 6 August 2015 1,000,000 shares with an exercise price of 18p were granted, and on 1 September 2016 500,000 nil cost options were granted, all of which are still outstanding. All options are exercisable between 3 and 10 years from the date of grant. On 30 April 2015 Mr N Rogers resigned as a director. 2,750,000 options with an exercise price of 10p were agreed to become immediately exercisable by Mr N Rogers and 2,000,000 options with an exercisable price of 17p were forfeit. During the current and prior period, the Group has not granted equity as consideration for goods or services received. FAIR VALUE ASSUMPTIONS OF SHARE-BASED PAYMENTS THE 600 GROUP PLC 2011 DEFERRED SHARE PLAN (DSP) The fair value of awards granted under these Share Plans are determined using the Black Scholes valuation model. The fair value of share options and assumptions are shown in the table below: Fair value Share price at grant Exercise price Dividend yield Expected volatility Expected life Risk-free interest rate Number of shares under option 2016 Grant £000 £0.10 £0.10 0p 0% 50% 2015 Grant £000 £0.04 £0.18 18p 0% 50% 2014 Grant £000 £0.04 £0.17 17p 0% 25% 2013 Grant £000 £0.04 £0.10 10p 0% 50% 3.0 years 3.0 years 3.0 years 3.0 years 1.36% 1.36% 4.08% 4.08% 500,000 1,000,000 3,400,000 1,750,000 40 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 11. PROPERTY, PLANT AND EQUIPMENT Cost or valuation At 2 April 2016 Exchange differences Transfers from/(to) inventory Additions during period Disposals during period At 1 April 2017 At professional valuation At cost Depreciation At 2 April 2016 Exchange differences Charge for period Disposals during period At 1 April 2017 Net book value At 1 April 2017 At 2 April 2016 Land and buildings Plant and Fixtures, fittings, tools and Freehold Leasehold machinery equipment £000 £000 £000 £000 Total £000 1,208 389 10,347 2,382 14,326 92 — 2 — 1,302 1,300 2 1,302 34 1 19 — 54 1,248 1,174 52 — 64 (1) 504 440 64 504 6 1 25 (1) 31 473 383 162 348 116 (130) 10,843 — 10,843 10,843 304 (48) 308 (26) 2,920 — 2,920 2,920 610 300 490 (157) 15,569 1,740 13,829 15,569 9,281 1,770 11,091 109 343 (45) 230 65 (1) 341 452 (47) 9,688 2,064 11,837 1,155 1,066 856 612 3,732 3,235 During March 2016 the Group’s properties were revalued. The valuations were performed by independent valuers and the valuations were determined by market rate for sale with vacant possession. 41 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 11. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) The net book value of property, plant and equipment includes £210,000 (2016: £156,000) of assets held under finance leases. The depreciation charged in the period against assets held under finance leases was £23,000 (2016: £26,000). Various properties with a net book value of £1,721,000 (2016: £3,040,000) are charged as security for borrowing facilities. Land and buildings Plant and Fixtures, fittings, tools and Freehold Leasehold machinery equipment £000 £000 £000 £000 Total £000 1,186 2,676 10,994 2,074 Cost or valuation At 29 March 2015 Exchange differences Transfer to assets classified as held for resale Additions during period Disposals during period At 2 April 2016 At professional valuation At cost Depreciation At 29 March 2015 Exchange differences Transfer to assets classified as held for resale Charge for period Disposals during period At 2 April 2016 Net book value At 2 April 2016 At 28 March 2015 22 — — — 1,208 1,208 — 1,208 16 — — 18 — 34 1,174 1,170 6 (2,556) 383 (120) 389 389 — 389 78 (1) (107) 61 (25) 6 383 2,598 40 — 758 (1,445) 10,347 — 10,347 10,347 92 — 382 (166) 2,382 — 2,382 2,382 16,930 160 (2,556) 1,523 (1,731) 14,326 1,597 12,729 14,326 10,099 1,578 11,771 36 — 314 (1,168) 9,281 1,066 895 72 — 155 (35) 1,770 612 496 107 (107) 548 (1,228) 11,091 3,235 5,159 42 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 12. GOODWILL AND OTHER INTANGIBLE ASSETS Cost At 2 April 2016 Additions Disposals Foreign exchange At 1 April 2017 Amortisation and impairment At 2 April 2016 Amortisation Foreign exchange At 1 April 2017 Net book value At 1 April 2017 At 2 April 2016 Goodwill Trademarks Expenditure £000 £000 £000 Development 7,144 — — — 7,144 — — — — 7,144 7,144 405 2 (1) 35 441 112 48 15 175 266 293 35 20 — — 55 6 10 — 16 39 29 Total £000 7,584 22 (1) 35 7,640 118 58 15 191 7,449 7,466 The additions to Development Expenditure of £20k in the period and £264k in the prior period related primarily to internal development. The Goodwill related to the acquisition of TYKMA Inc and more details on this can be found in note 32. Cost At 28 March 2015 Additions Disposals Impairment Foreign exchange At 2 April 2016 Amortisation and impairment At 28 March 2015 Amortisation Disposals Impairment Foreign exchange At 2 April 2016 Net book value At 2 April 2016 At 28 March 2015 Goodwill Trademarks Expenditure £000 £000 £000 Development 7,144 — — — — 7,144 — — — — — — 7,144 7,144 445 32 (94) — 22 405 71 92 (60) — 9 112 293 374 2,271 264 — (2,500) — 35 298 110 (292) (110) — 6 29 1,973 Total £000 9,860 296 (94) (2,500) 22 7,584 369 202 (352) (110) 9 118 7,466 9,491 Amortisation and impairment charges are recorded in the following line items in the income statement: Operating expenses 2017 £000 58 2016 £000 202 43 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 12. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) IMPAIRMENT OF GOODWILL Goodwill of £7.1m arose on the acquisition of TYKMA Inc. and its carrying value has been tested for impairment at the year-end with no provisions deemed necessary. The Industrial Laser Systems Division is regarded as one cash-generating unit and as such this supports the carrying value of the goodwill. The impairment review comprised a comparison of the goodwill with its recoverable amount (the higher of net realisable value and value in use). To the extent that the carrying amount exceeds the recoverable amount, an impairment charge is recognised. Value in use calculations are based on Board approved profit forecasts and the resulting cashflows are discounted at the Group’s pre-tax weighted average cost of capital, which is adjusted for CGU risk factors, resulting in a rate of 8%. Cash flows are extrapolated beyond their term (of between 1 and 4 years) using an estimated growth rate of 3% and are appropriate because these are long term businesses. The growth rates used are consistent with the long-term average growth rates for the industries and countries in which the CGUs are located. This has no impact on the Group accounts. During the prior year, there was a £2.39m impairment of development expenditure with regard to the Industrial Laser Systems Division. 13. INVESTMENTS Cost: At 2 April 2016 Fair valuation in the period Disposals in the period At 1 April 2017 Provisions: At 2 April 2016 Write-back in the period At 1 April 2017 Net book values At 1 April 2017 At 2 April 2016 Shares In listed investments £000 1,147 506 — 1,653 651 (651) — 1,653 496 Total £000 1,147 506 — 1,653 651 (651) — 1,653 496 On 3 August 2014 the Company acquired 26.3% of the ordinary share capital of ProPhotonix Limited through the issue of ordinary shares in the Company representing 5.5% of the enlarged share capital of 600 Group Plc. ProPhotonix Limited is AIM listed, although registered in Delaware, and designs and manufactures LED arrays and laser diode modules in the UK and Ireland. It has a strong base of technology and applications knowledge, applicable to high growth sectors including niche industrial, security and medical markets. Despite the group owning greater than 20% of the share capital of Prophotonix, the directors have accounted for it as an investment as opposed to an associate. This is because there is no representation from the Group or the Company on the board of Prophotonix and therefore significant influence may not be exerted over key strategic decisions. The initial investment of £1.15m was adjusted to a fair value of £1.65m at 1 April 2017 (2016: £0.50m). The £1.16m write up in the period was taken to the Statement of comprehensive income and expense. During the prior year 600 Group Inc acquired the remaining 20% of the shares of TYKMA Inc. Further details can be found in note 32. 44 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 13. INVESTMENTS (CONTINUED) The principal subsidiary undertakings of The 600 Group PLC and their countries of incorporation are: ENGLAND & WALES: 600 UK Limited*; The 600 Group (Overseas) Limited*; Electrox Laser Limited; Pratt Burnerd International Limited; Electrox Limited; The Colchester Lathe Company Limited; Crawford Collets Limited; 600 Machine Tools Limited; 600 Controls Limited; Pratt Gamet Limited; Gamet Bearings Limited; T S Harrison & Sons Limited; The Richmond Machine Tool Company Limited; 600 Lathes Limited; 600 SPV1 Limited*; 600 SPV2 Limited*; Coborn Insurance Company Limited and The 600 Group Pension Trustees Limited*. All subsidiary undertakings in England & Wales have their registered offices at 1 Union Works, Union Street, Heckmondwike, West Yorkshire WF16 0HL except Coborn Insurance Company Limited, whose registered office is PO Box 34, St Martin's House, Le Bordage, St Peter Port, Guernsey, GY1 4AU. 600 UK Limited’s principal activity is the design and distribution of machine tools and precision engineered components. Electrox Laser Limited’s principal activity is the design, manufacture and distribution of industrial laser systems. Coborn Insurance Company Limited is a captive insurance company and all other subsidiary undertakings in England & Wales are dormant or holding companies. US: 600 Group Inc Clausing Industrial, Inc TYKMA Inc Clausing Industrial, Inc’s principal activity is the design and distribution of machine tools and precision engineered components. TYKMA Inc’s principal activity is the design, manufacture and distribution of industrial laser systems. 600 Group Inc is a holding company. Clausing Industrial, Inc and 600 Group Inc both have a registered office at 3963 Emerald Drive, Kalamazoo, Michigan 49001, US. TYKMA Inc has a registered office at 370 Gateway Drive, Chillicothe, Ohio 45601, US. REST OF THE WORLD: 600 Machinery Australia (Pty) – (Australia) 600 Group Equipment Limited - (Canada) 600 Machinery Australia (Pty)’s principal activity is the design and distribution of machine tools and precision engineered components. 600 Group Equipment Limited is a dormant company. All undertakings marked * are 100% owned directly by the Parent Company. The others are 100% owned through intermediate holding companies. All undertakings above are included in the consolidated accounts. ProPhotonix Limited’s registered office is Pierce Williams, Sparrow Lane, Hatfield Broad Oak, Bishop's Stortford, Hertfordshire, CM22 7BA with a main office in the US at 13 Red Roof Lane, Suite 200, Salem, New Hampshire 03079. 14. DEFERRED TAX ASSETS AND LIABILITIES RECOGNISED DEFERRED TAX ASSETS AND LIABILITIES Deferred tax assets and liabilities are attributable to the following: Accelerated capital allowances Short-term timing differences Tax losses Overseas tax losses Employee benefits Revaluations and rolled over gains Net tax assets/(liabilities) Assets Liabilities Net 2017 £000 766 280 1,598 842 — — 2016 £000 1,236 347 1,505 744 — — 2017 £000 — — — — 2016 £000 — — — — 2017 £000 766 280 1,598 842 2016 £000 1,236 347 1,505 744 (18,025) (14,296) (18,025) (14,296) (191) (242) (191) (242) 3,486 3,832 (18,216) (14,538) (14,730) (10,706) 45 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 MOVEMENT IN DEFERRED TAX DURING THE PERIOD Accelerated capital allowances Short-term timing differences Tax losses Overseas tax losses Employee benefits Revaluations and rolled over gains As at 3 April 2016 £000 1,236 347 1,505 744 Statement of Income comprehensive Exchange statement income Fluctuations £000 (485) (46) 93 23 £000 — — — — (14,296) (242) (805) (2,928) 51 — (10,706) (1,169) (2,928) MOVEMENT IN DEFERRED TAX DURING THE PRIOR PERIOD As at Statement of 29 March Income comprehensive Exchange statement income Fluctuations £000 £000 Accelerated capital allowances Short-term timing differences Tax losses Overseas tax losses Employee benefits Revaluations and rolled over gains Research and development 2015 £000 819 316 1,187 700 (12,013) (1,246) (99) (10,336) £000 417 19 318 11 — — — — (796) (1,503) 16 99 84 988 — (515) £000 15 (21) — 75 4 — 73 — 12 — 33 16 — — 61 As at 1April 2017 £000 766 280 1,598 842 (18,025) (191) (14,730) As at 2 April 2016 £000 1,236 347 1,505 744 (14,296) (242) — (10,706) 46 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 14. DEFERRED TAX ASSETS AND LIABILITIES (CONTINUED) Deferred taxation at 35% is applied to pension assets, being the rate applicable to refunds from a scheme, as opposed to the normal rate of 19% The rate of UK corporation tax reduced to 20% in April 2015. Further reductions to 19% (effective from 1 April 2017) and to 17% (effective from 1 April 2020) were substantially enacted on 26 October 2015. The deferred tax assets and liabilities at the balance sheet date have been calculated based on these rates. US deferred tax is provided at 34%. No provision is made for taxation that would arise if reserves in overseas companies were to be distributed. The following deferred tax assets have not been recognised on the basis that their future economic benefit is uncertain: Advance corporation tax recoverable Tax losses There is no expiry date for the advance corporation tax recoverable or the tax losses. 15. INVENTORIES Raw materials and consumables Work in progress Finished goods and goods for resale 2017 £000 1,670 3,903 2016 £000 1,670 4,626 2016 £000 836 619 11,282 12,737 2016 £000 546 955 9,770 11,271 The Directors consider all inventories to be essentially current in nature although the Group’s operational cycle is such that a proportion of inventories will not be realised within twelve months. It is not possible to determine with accuracy when specific inventory will be realised as this is subject to a number of issues, including customer demand. Inventories included within Cost of Sales amounted to £25.9m (2016: £24.9m) During the period inventory provisions have increased by £36,000 (2016: increased by £46,000). Following the impairment provisions, inventories are valued at fair value less costs to sell rather than at historical cost. 47 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 16. TRADE AND OTHER RECEIVABLES Trade receivables Other debtors Other prepayments and accrued income The trade receivables disclosed above are shown net of the provisions which are disclosed below. The movements on the Group’s provisions against trade receivables are as follows: At start of year Exchange differences on opening balances Utilised in the period Charged in the period At end of year The ageing analysis of gross trade receivables, before provisions, is as follows: Current (not overdue) Overdue: – 0–3 months overdue – 3–6 months overdue – 6–12 months overdue – more than 12 months overdue Total gross trade receivables before provision 2017 £000 5,717 348 1,379 7,444 2017 £000 207 19 (94) 88 220 2017 £000 4,356 1,235 40 110 196 2016 £000 5,534 189 1,048 6,771 2016 £000 135 3 (19) 88 207 2016 £000 4,456 968 208 30 79 5,937 5,741 As at 1 April 2017, trade receivables that were neither past due nor impaired related to a number of independent customers for whom there is no recent history of default. The other classes of debtors do not contain impaired assets. 48 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 17. ASSETS CLASSIFIED AS HELD FOR SALE Balance brought forward Transferred from property plant and equipment - cost Transferred from property plant and equipment - depreciation Disposed of during the year Impairment 2017 £000 1,999 — — (1,999) — — 2016 £000 — 2.556 (107) — (450) 1,999 The above leasehold property was written down to its net realisable value at the prior year-end with the £0.45m reduction in its carrying value taken to the revaluation reserve, removing a previous valuation uplift on the same property. On 11 July 2016 the sale of the Letchworth property was completed for net proceeds of £2.0m. 18. CASH AND CASH EQUIVALENTS Cash at bank Short-term deposits Cash and cash equivalents per statement of financial position and per cash flow statement 19. LOANS AND OTHER BORROWINGS CURRENT: Bank loans Obligations under finance leases (note 22) NON-CURRENT: Bank loans 8% Loan Notes Obligations under finance leases (note 22) 2017 £000 981 100 1,081 2017 £000 5,427 81 5,508 2017 £000 1,277 7,867 90 9,234 2016 £000 665 100 765 2016 £000 3,114 161 3,275 2016 £000 3,596 7,699 81 11,376 The £8.5m of Loan Notes in place at the year-end were issued in three tranches in February, March and August 2015 with 43.95m convertible warrants attached to them. These warrants allow the holders to either convert the loan into 20p shares or to purchase 20p shares for a cash consideration. The loan has both debt and equity components and £139,000 is shown in equity reserve and the balance after deduction of associated costs and amortisation of £494,000, is shown in non current borrowings. Costs are amortised to the income statement over the term of the loan. During the year a Term Loan of £927,000 included within Bank loans was scheduled to be repaid on a quarterly basis with payments of £153,846 on 30 June 2016 through to 30 November 2017. A further Term Loan of £612,000, also included within Bank loans, was scheduled to be repaid on a quarterly basis with payments of £18,000 on 30 June 2016 through to 30 June 2019 and a final payment of £378,000 on 31 May 2019. £1,300,000 included within non–current borrowings related to a RCF facility with a termination date of 31 May 2017. Following the disposal of the Letchworth property in July 2016 these borrowings with Santander were reduced by the net proceeds of £2m and on the change of bank to HSBC in August 2016 the balance of all these facilities were repaid and replaced by facilities from HSBC. These facilities included a £1.6m trade finance facility, of which £1.1m had been utilised at the year-end, and a mortgage for the Colchester property of £333,000 which will be repaid on a monthly basis through to March 2020. 49 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 19. LOANS AND OTHER BORROWINGS (CONTINUED) US Dollar denominated loans of £959,000 and £653,000 are to be repaid on a monthly basis through to March 2019 and April 2021 respectively in equal instalments with an interest rate of 3.35% and 3.85%. Given the nature of the Group’s financial assets and liabilities, it is the directors’ opinion that there is no material difference between their reported book values and estimated fair values. The fair value of the Loan Notes is the book value less the debt issue cost and equity element. The above loans and borrowings are secured by way of fixed and floating charges over the assets of the Company and its subsidiaries. 20. TRADE AND OTHER PAYABLES Current liabilities: Payments received on account Trade payables Social security and other taxes Other creditors Accruals and deferred income 21. PROVISIONS Provision carried forward at 3 April 2016 Exchange differences (Credited)/Charged to income statement Utilised in the period Provision carried forward at 1 April 2017 2016 £000 28 3,286 210 1,221 1,573 6,318 2017 £000 38 2,810 618 541 1,429 5,436 Total £000 425 55 — (91) 389 Other Warranties £000 382 51 — (91) 342 £000 43 4 — — 47 The timing of warranty payments are uncertain in nature. The warranty provisions are calculated based on historical experience of claims received, taking into account recent sales of items which are covered by warranty. The provision relates mainly to products sold in the last twelve months. The typical warranty period is now twelve months. Other provisions of £342,000 relate to the provisions associated with the TYKMA Inc acquisition which relate to warranty and dilapidation provisions. 22. OBLIGATIONS UNDER FINANCE LEASES The maturity of obligations under finance leases is as follows: Falling due: – within one year – within two to five years – less future finance charges Amounts falling due within one year Amounts falling due after one year 2017 £000 65 113 (7) 171 81 90 171 2016 £000 128 124 (10) 242 161 81 242 50 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 23. SHARE CAPITAL Allotted, called-up and fully paid: Ordinary shares of 1p each 2017 £000 2016 £000 104,357,957 ordinary shares of 1p each on issue at start of the period (2016: 89,607,957 ordinary shares ) 1,044 2016 – 2,750,000 ordinary shares of 1p each issued to N Rogers 2016 – 12,000,000 ordinary shares of 1p each issued in acquisition or remaining 20% of TYKMA Inc 104,357,957 ordinary shares of 1p each on issue at end of period (2016: 104,357,957 ordinary shares of 1p) Total Allotted, called-up and fully paid at the end of period — — 1,044 1,044 896 28 120 1,044 1,044 The Company has one class of ordinary shares which carry no rights to fixed income. The ordinary shareholders are entitled to receive dividends as declared and are entitled to vote at meetings of the Company. During the prior year 2,750,000 ordinary shares of 1p each were issued to N Rogers in July 2015 pursuant to the exercise of share options. This resulted in share capital increasing by £27,500 with a corresponding share premium increase of £247,500. In addition, the Company issued 12,000,000 ordinary shares of 1p each as consideration for the purchase of the remaining 20% of shares in TYKMA Inc. On 28 August 2015 the Company raised an additional £0.806m through the issue of loan notes. In the prior year on 16 February 2015 and 18 March 2015 the Company raised £6.739m and £0.955m respectively through the issue of loan notes. The loan notes have 5 year maturity and carry a coupon of 8% payable quarterly in arrears. The subscribers for loan notes are also entitled to receive warrants with an expiry date of 14 February 2020 to subscribe for 43.95m ordinary shares of 1p each in the Company at a price of 20p per Ordinary Share. The issue of the warrants occurred after approval was granted by the shareholders at a general meeting on 18 March 2015. 43.95m warrants remained outstanding at the year-end. 24. RECONCILIATION OF NET CASH FLOW TO NET DEBT Increase/(decrease) in cash and cash equivalents Decrease/(increase) in debt and finance leases Decrease/(increase) in net debt from cash flows Net debt at beginning of period Shareholder loan issue costs amortisation Exchange effects on net funds Net debt at end of period 25. ANALYSIS OF NET DEBT Cash at bank and in hand Term deposits (included within cash and cash equivalents on the balance sheet) Debt due within one year Debt due after one year Loan notes due after one year Finance leases Total At 3 April Exchange 2016 £000 665 100 765 (3,114) (3,596) (7,699) (242) (13,886) movement £000 Other £000 25 — 25 (239) (194) — (22) (430) — — — — — (168) — (168) 2017 £000 291 532 823 2016 £000 (148) (2,757) (2,905) (13,886) (10,798) (168) (430) (110) (73) (13,661) (13,886) At 1 April 2017 £000 981 100 1,081 (5,427) (1,277) (7,867) (171) Cash flows £000 291 — 291 (2,074) 2,513 — 93 823 (13,661) 51 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 26. FINANCIAL INSTRUMENTS Overview The Group has exposure to the following risks from its use of financial instruments: • credit risk; • liquidity risk; and • market risk. This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing exposure to these. The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board is responsible for developing and monitoring the Group’s risk management policies. The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group actively manages and monitors capital across the different businesses within the Group. Targets in relation to return on capital are considered as part of the annual budgeting process. £8.5m was raised in prior years through the issue of loan notes which had 43.95m warrants attached to them. These warrants allow the holders to either convert the loan into 20p shares or to purchase 20p shares for a cash consideration. The Directors determine the appropriate capital structure of the Group between funds raised from equity shareholders (equity), through the issue of shares and retention of profits generated, and funds borrowed from financial institutions, other businesses, individuals and preference shareholders (debt) in order to finance the Group’s activities both now and in the future. The Board’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns to Shareholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Audit Committee is assisted in its oversight role by head office staff undertaking both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. FAIR VALUE OF FINANCIAL INSTRUMENTS Non-current asset investments The fair value of investments is based on management’s assessment of share value where the investment is not a traded security. Trade and other payables and receivables The fair value of these items are considered to be their carrying value as the impact of discounting future cash flows has been assessed as not material. Cash and cash equivalents The fair value of cash and cash equivalents is estimated as its carrying value where the cash is repayable on demand. Where it is not repayable on demand then the fair value is estimated at the present value of future cash flows, discounted at the market rate of interest at the balance sheet date. Long-term and short-term borrowings The fair value of bank loans and other loans is based on the terms the Group has agreed for its variable rate debt. Short-term deposits The fair value of short-term deposits is considered to be the carrying value as the balances are held in floating rate accounts where the interest rate is reset to market rates. Fair value hierarchy The following hierarchy classifies each class of financial asset or liability depending on the valuation technique applied in determining its fair value:- Level 1: The fair value is calculated based on quoted prices traded in active markets for identical assets or liabilities. Level 2: The fair value is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The fair value of forward foreign exchange and commodity contracts is determined using quoted forward exchange rates and commodity prices at the reported date and yield curves derived from quoted interest rates matching the maturities of the forward contracts. Level 3: The fair value is based on inputs for the asset or liability that are not based on observable market data (unobservable inputs). The shares in the listed investment of Prophotonix plc is a level 1 fair value estimate, based on the quoted price of this AIM company. The warrants attached to the loan notes are a level 2 fair value estimate. There have been no transfers between categories in the current or preceding period. The fair values of all financial instruments, throughout the reporting periods, approximate to their carrying values except for the Loan Notes which have a carrying value net of issued costs. The fair value is deemed to be the gross loan amount. 52 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 26. FINANCIAL INSTRUMENTS (CONTINUED) CREDIT RISK Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group’s customer base, including the default risk of the industry and country in which customers operate, has less of an influence on credit risk. Geographically, there is no significant concentration of credit risk. The Board has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings, where available, and in some cases bank references. Purchase limits are established for each customer which represents the maximum open amount without requiring approval from the Board; these limits are reviewed quarterly. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. Goods are sold subject to retention of title clauses, so that in the event of non-payment the Group may have a secured claim. The Group does not require collateral in respect of trade and other receivables. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. The carrying value of financial assets represents the maximum credit exposure. The maximum exposure at the reporting date was: Trade receivables Cash and cash equivalents The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: UK North America Australasia 2017 £000 5,717 1,081 6,798 2017 £000 1,802 3,724 191 5,717 2016 £000 5,534 765 6,299 2016 £000 2,278 3,012 244 5,534 53 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 26. FINANCIAL INSTRUMENTS (CONTINUED) LIQUIDITY RISK Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Due to banking facilities being held with different banks in USA and Australia certain restrictions on the repatriation of funds to the UK may be imposed by the local bank. Typically the Group ensures that it has sufficient cash or short term facilities on demand to at least meet any unexpected operational expenses; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. The following are the contractual maturities of financial liabilities: Trade finance Bank loan 8% loan notes Finance lease obligations Interest bearing financial liabilities Trade and other payables Financial liabilities Trade finance Bank loan 8% loan notes Finance lease obligations Interest bearing financial liabilities Trade and other payables Financial liabilities 2017 Carrying Contractual Less than Amount cash flows £000 1,107 5,706 10,455 171 17,439 5,436 22,875 £000 1,107 5,597 7,867 171 14,742 5,436 20,178 2016 1 year £000 1,107 4,376 680 81 6,244 5,436 11,680 1–2 years 2–5 years £000 — 701 680 61 1,442 — 1,442 £000 — 629 9,095 29 9,753 — 9,753 Carrying Contractual Less than Amount cash flows £000 646 6,064 7,699 242 14,651 6,318 20,969 £000 646 6,185 11,135 242 18,208 6,318 24,526 1 year £000 646 2,517 680 161 4,004 6,318 10,322 1–2 years 2–5 years £000 — 2,293 680 57 3,030 — 3,030 £000 — 1,375 9,775 24 11,174 — 11,174 MARKET RISK Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. 54 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 26. FINANCIAL INSTRUMENTS (CONTINUED) CURRENCY RISK The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the functional currency of the Group, primarily the Euro (€) and US Dollars ($). The Group’s exposure to foreign currency risk may be summarised as follows: Trade receivables Trade payables Balance sheet exposure The following exchange rates applied during the year: US Dollar Euro US Dollar 2017 US Dollars $000 4,667 (2,039) 2,628 2016 Euro €000 191 (89) 102 US Dollars $000 4,312 (1,607) 2,705 Euro €000 191 (292) (101) 2017 2016 Average rate 1.250 1.176 Year end spot rate 1.251 1.169 Average rate 1.499 1.360 Year end spot rate 1.419 1.251 Change if appreciated/ Depreciated Net assets by 25% in foreign against local currency Currency 4,282 1,079 The Group has operations around the world and is therefore exposed to foreign exchange risk arising from net investments in foreign operations. Where cost effective, the exposures arising from the translation of the net assets of the Group’s foreign operations are managed through the use of borrowings or cross-currency swaps in the relevant foreign currency. Some Group operations on occasion also enter into commercial transactions in currencies other than their functional currencies. Exposures arising from the translation of foreign currency transactions are continually monitored and material exposures are managed where necessary through the use of forward contracts or options once cash flows can be identified with sufficient certainty. As at the year-end there were no forward contracts outstanding (2016: none). Exposures arising from the translation of intra-group lending are managed through the use of borrowings in the relevant foreign currency. 55 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 26. FINANCIAL INSTRUMENTS (CONTINUED) The following table shows the impact (due to the retranslation of non-functional currency monetary assets and liabilities in the Group's operations) of a, reasonably possible, 10% movement in the Group’s principal foreign currency exchange rates at the year-end date. 1 April 2017 US$ AUD 2 April 2016 US$ AUD 10% increase Effect on profit before tax £000 (19) (8) (923) (27) Effect on shareholders’ equity £000 10 % decrease Effect on profit before tax £000 Effect on shareholders’ equity £000 380 124 441 226 19 8 923 27 (380) (124) (441) (226) The effect on profit before taxation is due to the retranslation of trade receivables, cash and cash equivalents, borrowings, trade payables and derivative financial assets and liabilities denominated in non-functional currencies. The effect on shareholders’ equity is due to the effect on profit as well as the effect of financial assets and liabilities denominated in foreign currencies qualified as either cash flow or net investment hedges. INTEREST RATE RISK The Group holds a mixture of both fixed and floating interest borrowings to control its exposure to interest rate risk although it has no formal target for a ratio of fixed to floating funding. The level of debt is continually reviewed by the Board. The sensitivity analysis is set out below: US Dollar AUS Dollar Net cash/ Change if in foreign interest rates borrowings in foreign in foreign Currency currency change by 1% £’000 £’000 (4,911) 282 (1) — The impact of interest rate risk on the Group's result is due to changes in interest rates on net floating rate cash and cash equivalents and borrowings. On 1 April 2017, if interest rates on the Group's net floating rate cash and cash equivalents and borrowings had been 100 basis points higher, a reasonably possible movement, with all other variables held constant, the effect on profit before taxation in the year would have been a charge of £0.08m (2016: charge of £0.06m). A reduction of 100 basis points would have the equal and opposite effect. There is no further impact on shareholders' equity. 56 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 26. FINANCIAL INSTRUMENTS (CONTINUED) HEDGING OF FLUCTUATIONS IN FOREIGN CURRENCY The Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than Sterling. The Group uses on occasion forward exchange contracts to hedge its commercial foreign currency risk. The Group does not apply a policy of hedge accounting. Forward exchange contracts generally have maturities of less than one year. There were no contracts outstanding at the period end. In respect of other monetary assets and liabilities held in currencies other than Sterling, the Group ensures that the net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates where necessary to address short-term imbalances. At the period-end there were no outstanding derivative contracts in place. SENSITIVITY ANALYSIS In managing interest rate and currency risks, the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidated earnings. FINANCIAL INSTRUMENTS The Group’s financial instruments include bank loans, overdrafts and cash. These financial instruments are used for the purpose of funding the Group’s operations. In addition, the Group enters into forward currency derivative transactions on occasion which have been used in the management of risks associated with currency exposure. There were no contracts in place at the period-end. ASSETS AND LIABILITIES The Group does not hedge account but occasionally uses derivative financial instruments to hedge its commercial exposure to foreign exchange. These instruments are recognised at fair value. Any gain or loss is immediately recognised in the income statement. The fair value of forward exchange contracts used at 1 April 2017 was a liability of £nil (Note 18) (2016: liability of £nil). FINANCIAL ASSETS The Group’s financial assets comprise cash and trade receivables. The profile of the financial assets at 1 April 2017 and 2 April 2016 was: 2017 Financial assets 2016 Financial assets Floating rate Fixed rate on which Floating rate Fixed rate on which financial financial no interest financial financial no interest assets assets is earned Currency Sterling US Dollars Australian Dollars Euros assets £000 169 640 172 — 981 assets is earned £000 100 — — — £000 1,774 3,834 202 127 Total £000 2,043 4,474 374 127 100 5,937 7,018 £000 484 — 181 — 665 There is no interest received on floating rate financial assets. The floating rate financial assets comprise other deposits that earn interest based on short-term deposit rates. The trade receivables are shown gross and do not include bad debt provisions. £000 100 — — — £000 2,160 3,151 253 177 Total £000 2,744 3,151 434 177 100 5,741 6,506 57 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 26. FINANCIAL INSTRUMENTS (CONTINUED) FINANCIAL LIABILITIES Financial liabilities comprise short-term loans, overdrafts, trade payables, obligations under finance leases, other creditors more than one year, forward exchange contract liabilities and other provisions for liabilities and charges (excluding accrued post-retirement health care accrual and deferred tax provision). The profile of the Group’s financial liabilities at 1 April 2017 and 2 April 2016 was: 2017 Financial liabilities 2016 Financial liabilities Floating rate Fixed rate on which Floating rate Fixed rate on which financial Financial no interest financial financial no interest liabilities Liabilities £000 2,139 4,565 — 6,704 £000 7,902 49 87 8,038 is paid £000 2,316 2,917 203 5,436 Total £000 12,357 7,531 290 liabilities liabilities £000 3,485 3,178 47 £000 7,787 70 83 20,178 6,710 7,940 is paid £000 3,437 2,580 302 6,319 Total £000 14,709 5,828 432 20,969 Currency Sterling US Dollars Australian Dollars The floating rate financial liabilities comprise bank borrowings and overdrafts that bear interest rates based on local currency base interest rates. BORROWING FACILITIES At 1 April 2017 and 2 April 2016 the Group had undrawn committed borrowing facilities as follows: UK US Australia FAIR VALUES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Trade receivables Cash and cash equivalents Bank overdrafts Bank loan Other loans Finance lease obligations Trade payables 2017 ‘000 £1,083 $1,948 2016 ‘000 £529 $3,365 AUD$500 AUD$500 2017 £000 7,444 1,081 (1,107) (5,597) (8,500) (171) (5,436) 2016 £000 6,771 765 (646) (6,063) (8,500) (242) (6,318) (12,286) (14,233) Given the nature of the Group’s financial assets and liabilities, it is the Directors’ opinion that there is no material difference between their reported book values and estimated fair values excepting the Loan Notes which are shown at their gross value of £8.5m. Their carrying value in the accounts is shown net of issue costs. 58 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 27. CONTINGENT LIABILITIES Third-party guarantees 2017 £000 92 2016 £000 92 These guarantees and letters of credit are entered into in the normal course of business. A liability would only arise in the event of the Group failing to fulfil its contractual obligations. 28. CAPITAL COMMITMENTS Capital expenditure contracted for but not provided in the accounts 2017 £000 — 2016 £000 — 29. OPERATING LEASE COMMITMENTS The Group has outstanding commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows: Land and buildings Within one year More than one year and less than five years Over five years Other Within one year More than one year and less than five years 2017 £000 573 2,304 2,609 5,486 11 24 35 2016 £000 237 861 394 1,492 49 60 109 The significant increase in land and buildings commitments is due to the two new leases which were signed during the year for leasehold premises by Tykma Inc in Chillicothe Ohio and by Clausing Inc in Kalamazoo Michigan. 30. EMPLOYEE BENEFITS The Group operates a number of defined benefit pension schemes throughout the world. The assets of these schemes are held in separate trustee-administered funds. The benefits from these schemes are based upon years of pensionable service and pensionable remuneration of the employee as defined under the respective scheme provisions. The schemes are funded by contributions from the employee and from the employing company over the period of the employees’ service. Contributions are determined by independent qualified actuaries based upon triennial actuarial valuations in the UK and on annual valuations in the US. UK In relation to the fund in the UK, the Group’s funding policy is to ensure that assets are sufficient to cover accrued service liabilities. The most recent triennial full valuation was carried out as at 31 March 2013. US In relation to the fund in the US, the funding policy is to ensure that assets are sufficient to cover accrued service liabilities allowing for projected pay increases. In addition, the Group operates a retirement healthcare benefit scheme for certain of its retired employees in the US, which is also treated as a defined benefit scheme. The most recent annual valuation was carried out as at 31 March 2016. The disclosures for the US schemes that follow refer to the US defined benefit scheme and the retirement healthcare benefit scheme. 59 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 30. EMPLOYEE BENEFITS (CONTINUED) MORTALITY RATES The mortality assumptions for the UK scheme are based on standard mortality tables which allow for future mortality improvements. The assumptions are that a member who retires in 2017 at age 65 will live on average for a further 21.6 years (2016: 21.6 years) after retirement if male and for a further 24.0 years (2016: 23.6 years) after retirement if female. For a member who is currently aged 45 retiring in 2037 at age 65, the assumptions are that they will live on average for a further 22.0 years (2016: 22.7 years) after retirement if they are male and for a further 24.3 years (2016: 24.6 years) after retirement if they are female. The mortality rates for the US scheme are based on the RP-2014 Mortality Table for males and females adjusted to 2006 total dataset with improvement factor scale MP-2016. IAS 19 Disclosures in accordance with IAS 19 are set out below. The principal assumptions used for the purpose of the IAS 19 valuation were as follows: Inflation under RPI Inflation under CPI Rate of general long-term increase in salaries Rate of increase for CARE benefit while an active member Rate of increase to pensions in payment – LPI 5% Rate of increase to pensions in payment – LPI 2.5% Discount rate for scheme liabilities 2017 2016 UK scheme UK scheme % p.a. 3.25 2.15 n/a n/a 3.15 2.15 2.55 % p.a. 2.85 1.85 n/a n/a 2.80 2.05 3.60 Assumed healthcare cost trend rates have a significant effect on the amounts recognised in the income statement. From 1 November 2010 future changes in healthcare costs re the US retirement healthcare benefit scheme will be borne by the participants rather than the company. The assets and liabilities of the schemes at 1 April 2017 and 2 April 2016 were: Assets Liabilities (Deficit)/surplus US schemes £000 867 2017 UK scheme £000 Total £000 244,500 245,367 US schemes £000 808 2016 UK scheme £000 Total £000 219,400 220,208 (1,898) (192,000) (193,898) (1,844) (177,427) (179,271) (1,031) 52,500 51,469 (1,036) 41,973 40,937 60 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 30. EMPLOYEE BENEFITS (CONTINUED) Movement in net defined benefit asset Defined benefit obligation Fair value of plan assets Net defined benefit asset 1 April 2017 £000 2 April 2016 £000 1 April 2017 £000 2 April 2016 £000 1 April 2017 £000 2 April 2016 £000 (179,271) (195,754) 220,208 230,046 40,937 34,292 (14) 647 1,445 — 3,501 (29,727) 5,358 (7,687) (248) — (12) 973 1,112 — 182 7,203 — (7,331) (100) — 12,098 14,456 (193,898) (179,271) — — 30 — — 26 29,264 (2,941) — — — 7,687 108 120 (12,050) 245,367 — — — 7,331 42 120 (14,416) 220,208 (14) 647 1,475 29,264 3,501 (29,727) 5,358 — (140) 120 48 (12) 973 1,138 (2,941) 182 7,203 — — (58) 120 40 51,469 40,937 Opening balance: Included in profit or loss: Current service cost Past service credit Interest income Included in OCI: Remeasurement (loss)/gain Experience gain/(loss) Change in assumptions – financial Change in assumptions – demographic Interest (cost)/income Exchange differences Contributions paid by employer Benefits paid Closing balance: Following a change to UK scheme rules in September 2012 any surplus after all liabilities have been paid is to be repaid to the Company and consequently the accounting surplus is recognised on the Group balance sheet under IFRIC 14 Long-term rate of return expected at Expected return on assets UK scheme Long-term rate of return Long-term rate of return Value at expected at Value at expected at 1 April 2017 % p.a. 2.55 2.55 2.55 2.55 2.55 2.55 2.55 2.55 1 April 2017 £m 8.40 5.00 195.40 0.80 0.50 32.10 2.30 244.50 2 April 2016 % p.a. 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 2 April 2016 £m 52.70 9.80 72.40 n/a 23.20 44.30 17.00 219.40 28 March 2015 % p.a. 3.30 3.30 3.30 3.30 3.30 3.30 3.30 3.30 Value at 28 March 2015 £m 52.80 9.90 83.30 n/a 23.20 44.80 15.20 229.20 Equities Property LDI funds Government bonds Corporate bonds Absolute Return Other Combined The LDI funds referred to relate to Liability Driven Investment funds which have been increasingly utilised by the pension scheme. LDI funds represent investments in a Liability Driven Investment fund via a Pooled Investment Vehicle. With the exception of cash, the remaining scheme investments comprise of Pooled Investment Vehicles. Investments are included at fair value as follows: Pooled Investment Vehicles which are not traded on active markets, but where the investment manager has provided a monthly trading price, are valued using the last bid price, provided by the investment manager at the year end. 61 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 30. EMPLOYEE BENEFITS (CONTINUED) The assumed long-term rate of return on each asset class is equal to the discount rate applied to liabilities. The assets held within the US scheme amount to £0.867m (2016: £0.808m) and are held mainly in bonds. Amounts recognised in the income statement in respect of the defined benefit schemes before taxation are as follows: Included within operating profit: – current service cost – past service credit (Special Items) – settlements (Special Items) Included within financial income: –Interest on pension surplus (Special Items) US schemes £000 14 — — 38 2017 UK scheme £000 — (647) — Total £000 14 (647) — (1,513) (1,475) US schemes £000 12 — — 33 2016 UK scheme £000 — — Total £000 12 — (973) (973) (1,171) (1,138) The past service credit of £647,000 recognised in the income statement relates to a liability reduction exercise undertaken by the UK scheme’s Trustees in conjunction with the Company. A number of transactions took place over the previous and current year including a pension increase exchange, commutation of small pensions and other flexible retirement options. These are now an integral part of the flexible offer to members at retirement. These resulted in actuarial adjustments to the pension liabilities, which are processed through the Consolidated Income Statement. Amounts recognised in the statement of comprehensive income are as follows: Return on plan assets Experience gain/(loss) on liabilities Change in assumptions - financial Change in assumptions - demographic Amounts recognised during the period Balance brought forward Balance carried forward US schemes £000 9 140 — — 149 1,229 1,378 2017 UK scheme £000 29,255 3,361 Total £000 29,264 3,501 (29,727) (29,727) 5,358 8,247 29,285 37,532 5,358 8,396 30,514 38,910 US Schemes £000 (30) 172 — — 142 1,087 1,229 2016 UK scheme £000 Total £000 (2,909) (2,939) — 7,203 — 4,294 24,991 29,285 172 7,203 — 4,436 26,078 30,514 62 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 30. EMPLOYEE BENEFITS (CONTINUED) IAS 19 CONTINUED Changes in the present value of the defined benefit obligations before taxation are as follows: Opening defined benefit obligation Exchange differences Current service cost Past service cost credit Interest cost Benefits paid Settlements Actuarial (gains)/losses Closing defined benefit obligations US Schemes £000 1,844 217 14 — 68 2017 UK scheme £000 Total £000 177,427 179,271 — — (647) 6,174 217 14 (647) 6,242 (109) (11,962) (12,071) — (136) 1,898 — — 21,008 20,872 192,000 193,898 Changes in the fair value of the schemes’ assets before taxation are as follows: Opening fair value of scheme assets Exchange differences Interest income Return on plan assets Contributions by employer Benefits paid Closing fair value of schemes’ assets US schemes £000 808 108 30 9 — (88) 867 2017 UK scheme £000 Total £000 219,400 220,208 — 7,687 29,255 120 108 7,717 29,264 120 (11,962) (12,050) 244,500 245,367 US schemes £000 1,969 85 12 — 59 (109) — (172) 1,844 US schemes £000 846 37 26 (30) — (71) 808 The history of the schemes for the current and prior period before taxation is as follows: 2017 US UK Schemes Scheme £000 £000 Total £000 US schemes £000 2016 UK scheme £000 Total £000 193,785 195,754 — — — 85 12 — 6,160 6,219 (14,342) (14,451) (973) (973) (7,203) (7,375) 177,427 179,271 2016 UK scheme £000 Total £000 229,200 230,046 — 7,331 (2,909) 120 (14,342) 219,400 2016 UK scheme £000 37 7,357 (2,939) 120 (14,413) 220,208 Total £000 Present value of defined benefit obligation (1,898) (192,000) (193,898) (1,844) (177,427) (179,271) Fair value of scheme assets (Deficit)/surplus in the scheme Experience adjustments on the scheme liabilities Experience adjustments on scheme assets Exchange differences 867 244,500 245,367 808 219,400 220,208 (1,031) 52,500 51,469 136 9 (109) (21,008) (20,872) 29,255 — 29,264 (109) (1,036) (172) (30) (48) 41,973 (7,203) (2,909) — 40,937 (7,375) (2,939) (48) Following the closure of the UK scheme to future accrual there will be no further payments to the scheme. Pension provision has been replaced by a money purchase arrangement in the UK. 63 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 30. EMPLOYEE BENEFITS (CONTINUED) IAS 19 continuedSensitivity Analysis: The calculation of the defined benefit obligation is sensitive to the assumptions set out above. The following table summarises how the impact on the defined benefit obligation at the end of the reporting period would have increased (decreased) as a result of a change in the respective assumptions by 0.25%. Discount rate Future salary increases RPI inflation assumption Post-retirement mortality rated down by one year 2017 £000 (3.0)% - 2.1% 4.0% 2016 £000 (3.2)% - 1.4% 4.2% In valuing the liabilities of the pension fund at £193.9m mortality assumptions have been made as indicated above. If life expectancy had been changed to assume that all members of the fund lived for one year longer, the value of the reported liabilities at 1 April 2017 would have increased by 4.0% before deferred tax. The above sensitivities are based on the average duration of the benefit obligation determined at the date of the last full actuarial valuation at 31 March 2013 and are applied to adjust the defined benefit obligation at the end of the reporting period for the assumptions concerned. Whilst the analysis does not take account of the full distribution of cash flows expected under the plan, it does provide an approximation to the sensitivity of the assumptions shown. 31. ACCOUNTING ESTIMATES AND JUDGEMENTS Management discussed with the Audit Committee the development, selection and disclosures of the Group’s accounting policies and estimates and the application of these policies and estimates. The accounting policies are set out on pages 26 to 31. Management considers there are no critical accounting judgements made in the preparation of the financial statements. The key sources of estimation and uncertainty are: FINANCIAL INSTRUMENTS Note 26 contains information about the assumptions and estimates and the risk factors relating to interest rate and foreign currency exposures. PENSIONS The Directors have employed the services of a qualified, independent actuary in assessing pension assets and liabilities. However they note that final liabilities and asset returns may differ from actuarial estimates and therefore the pension liability may differ from that included in the financial statements. Note 30 contains information about the principal actuarial assumptions used in the determination of the net assets for defined benefit obligations. DEFERRED TAXATION Note 14 contains details of the Group’s deferred taxation. Liabilities recognised are determined by the likelihood of settlement and the likelihood that assets are received are based on assumptions of future actions. The recognition of deferred taxation assets is particularly subjective and may be undermined by adverse economic decisions. INVENTORY VALUATION The Directors have reviewed the carrying value of inventory and believe this is appropriate in the context of current trading levels and strategic direction of the Group. DEVELOPMENT EXPENDITURE The level of development expenditure capitalised is at risk if technological advancements make new developments obsolete. However management constantly reviews the appropriateness of the product portfolio and have reviewed the carrying value of capitalised development expenditure and believe it to be appropriate given expected future trading levels and strategic direction of the Group. PROVISIONS The Directors have reviewed the carrying value of the fair value provision following the acquisition of TYKMA Inc (note 32) and adjusted it accordingly. Other provisions of £342,000 relate to the fair value provision for the TYKMA Inc acquisition which relate to warranty on certain products sold prior to acquisition, dilapidation provisions for current and former buildings and debtor recoverability on long-term overseas debts. 64 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 32. ACQUISITION There have been no changes in the year to the fair value of net assets acquired, and therefore no change in the goodwill arising of £7,144,000. During the prior year the final 20% of the issued share capital of TYKMA Inc. was acquired. The original acquisition of 80% of the issued share capital of TYKMA Inc. included put and call options for the remaining 20% between the group and the vendor which had a value at March 2015 of £4.1m. During the prior year the value was remeasured to £2.1m and was settled at this amount. The settlement comprised of US$1.8m and the issue of 12m ordinary shares in the Group with a value at that time of £0.9m. The gain of £2,032,000 was included as a special item given its size and nature. 33. RELATED PARTY TRANSACTIONS Detailed disclosure of the individual remuneration of Board members is included in the Remuneration report. The Executive Board members are regarded as the Key Management Personnel of both the Company and the Group. Mr P Dupee is the managing partner of Haddeo Partners LLP who have received £64,800 in interest payments during the financial year (2016: £64,800) in respect of their respective holding of the loan notes. At the year-end Haddeo Partners LLP held £810,000 of loan notes. In addition, the wife of Mr N Carrick, the Group Finance Director, also held £50,000 of loan notes. Further details on the loan notes can be found in note 19. Mr D Grimes, the Divisional Managing Director of Industrial Laser Systems, is party to a trust which owns the property rented by TYKMA Inc. in the US and which received $154,000 rent and associated property costs during the period (2016: $72,000). There have been no other transactions between Key Management Personnel and the Company. None of the directors were due any monies at the end of the current period or the prior period. The Group contributed £120,000 to the UK pension scheme during the current period (2016: £120,000) and no contributions were overdue at the period-end. The monthly payments of £10,000 were paid by the Group to the UK pension scheme from April 2015 onwards in respect of an augmentation to benefits made in 2008/09 of £510,971. No deficit reduction payments are currently required. In the US no employer contributions were made to the US pension scheme during the current period (2016:£nil) and no payments were overdue at the period-end. 34. ALTERNATIVE PERFORMANCE MEASURES The Directors assess the performance of the Group by a number of measures and frequently present results on an ‘underlying’ basis, which excludes special items. The Directors believe the use of these ‘non-GAAP measures’ provide a better understanding of underlying performance of the Group. In the review of performance refererence is made to ‘underlying profit’ or ‘profit before special items’, and in the Consolidated Income Statement the Group’s results are analysed between Before Special items and After Special items. Special items are detailed in note 3, and are disclosed separately on the basis that this presentation gives a clearer picture of the underlying performance of the group. Special items comprise two elements: - - Items which are expected to be one-off in nature and are considered significant to the result of the group or one of its reporting segments; and Non-cash items which, given the scale of our current activities, represent a disproportionate share of the Group’s result. Examples include the credit arising on the pension surplus share based payments and the amortisation of intangible assets. These measures are used by the Board to assess performance, form the basis of bonus incentives and are used in the Group’s banking covenants. In addition the Board makes reference to orders and order book or backlog. This represents orders received from customers for goods and services and the amount of such orders not yet fulfilled. 65 Notes relating to the consolidated financial statements For the 52-week period ended 1 April 2017 34. ALTERNATIVE PERFORMANCE MEASURES (CONTINUED) Underlying operating profit Operating profit /(loss) Special items included in cost of sales (see note 3) Special items included in net operating expenses (see note 3) Underlying operating profit Underlying profit / (loss) for the period Profit for the period Special items included in cost of sales (see note 3) Special items included in net operating expenses (see note 3) Special items included in Financial income Special items included in Financial expense Contingent consideration settlement Special items included in income tax charge /(credit) Underlying profit for the period Underlying EPS A reconciliation of underlying EPS is included in note 9 £000 2,894 118 53 3,065 2,059 118 53 (1,445) 168 - 1,287 2,240 £000 (1,164) 894 2,626 2,356 1,146 894 2,626 (1,171) 150 (2,032) (72) 1,541 66 Company statement of financial position As at 1 April 2017 Company Number 00196730 Non-current assets Investments Current assets Trade and other receivables Assets classified as held for resale Cash and cash equivalents Total assets Current liabilities Trade and other payables Non-current liabilities Trade and other payables Total liabilities Net assets Shareholders’ equity Called-up share capital Share premium account Revaluation reserve Available for sale reserve Equity reserve Profit and loss account Notes 5 6 7 8 8 9 As at 1 April 2017 £000 10,356 10,356 32,885 — 27 32,912 43,268 (829) (829) (7,867) (7,867) (8,696) 34,572 1,044 1,013 — 506 139 31,870 34,572 As at 2 April 2016 £000 9,199 9,199 30,772 1,999 252 33,023 42,222 (1,527) (1,527) (9,487) (9,487) (11,014) 31,208 1,044 1,013 711 (651) 139 28,952 31,208 The financial statements on pages 67 to 77 were approved by the Board of Directors on 3 July 2017 and were signed on its behalf by: NEIL CARRICK GROUP FINANCE DIRECTOR 3 JULY2017 REGISTERED OFFICE 1 Union Works Union Street Heckmondwike West Yorkshire WF16 0HL 67 Company statement of changes in equity As at 1 April 2017 Company Number 00196730 At 28 March 2015 At 29 March 2015 Profit for the period Other comprehensive income: Fair value of Investments Fair value of assets held for sale Transfer on revalued properties Total comprehensive income Transactions with owners: Share capital subscribed for Equity element of shareholder loan issued in the period Credit for share-based payments Total transactions with owners At 2 April 2016 At 3 April 2016 Profit for the period Other comprehensive income: Fair value of Investments Release of revaluation reserve Total comprehensive income Transactions with owners: Credit for share-based payments Total transactions with owners Ordinary Share Available share premium Revaluation for sale Equity Retained capital account reserve reserve reserve Earnings £000 £000 £000 £000 £000 Total £000 £000 896 896 — — — — — — — — — — — — 148 1,013 — — 148 1,044 1,044 — — 1,013 1,013 1,013 — — — — — — — — — — — — 1,311 (622) 124 21,590 23,299 1,311 — — (450) (150) (600) — — — — 711 711 — (622) — (29) — — (29) — — — — 124 21,590 23,299 — — — — — — 15 — 15 7,148 7,148 — (29) — (450) 150 — 7,298 6,669 — 1,161 — 64 64 15 64 1,240 (651) 139 28,952 31,208 (651) 139 28,952 31,208 — 2,139 2,139 — 1,157 (711) (711) — 1,157 — — — — — — — — — — — 1,157 711 — 2,850 3,296 68 68 68 68 At 1 April 2017 1,044 1,013 506 139 31,870 34,572 The accompanying accounting policies and notes on pages 67 to 77 form part of these Financial Statements. 68 Company accounting policies BASIS OF PREPARATION As used in the financial statements and related notes, the term “Company” refers to The 600 Group PLC. The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by the Act, the separate financial statements have been prepared in accordance with FRS101 “Reduced Disclosure Framework”. BASIS OF ACCOUNTING The following principal accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s financial statements, except as detailed below. These accounts have been prepared under the historical cost convention, modified to include the revaluation of certain properties, and in accordance with applicable accounting standards. The financial statements have been prepared in accordance with FRS 101 “Reduced Disclosure Framework”. The accounts are prepared to the Saturday nearest to the Company’s accounting reference date of 31 March. The results for 2017 are for the 52-week period ended 1 April 2017. The results for 2016 are for the 53-week period ended 2 April 2016. In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: • an Income Statement, Statement of Comprehensive Income and related notes; • a Cash Flow Statement and related notes; • Comparative period reconciliations for share capital; • Disclosures in respect of transactions with wholly owned subsidiaries; • Disclosures in respect of capital management; • The effects of new but not yet effective IFRSs; • Disclosures in respect of the compensation of Key Management Personnel; and As the consolidated financial statements include the equivalent disclosures, the Company has also taken the exemptions under FRS 101 available in respect of the following disclosures: • IFRS 2 Share Based Payments in respect of group settled share based payments; and • Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures. NOTES ON INTERPRETATION OF ACCOUNTING STANDARDS REVALUATION OF FIXED ASSETS Property, plant and equipment are held at cost, subject to triennial property revaluations. In 2010 the Company adopted a policy of revaluation for properties. As a result all properties were independently revalued during March 2015. DEPRECIATION Depreciation is calculated to write off the cost (or amount of the valuation) of fixed assets less the estimated residual value on a straight-line basis over the expected useful economic life of the assets concerned. The annual rates used are generally: • freehold buildings • leasehold buildings • plant and machinery – 2 to 4% – over residual terms of the leases – 10 to 20% • fixtures, fittings, tools and equipment – 10 to 33.3% LEASES Assets financed by leasing arrangements, which give rights approximating to ownership, are treated as if they had been purchased outright and are capitalised and depreciated over the shorter of the estimated useful life of the assets and the period of the leases. The capital element of future rentals is treated as a liability and the interest element is charged against profits in proportion to the balances outstanding. The rental costs of all other leased assets are charged against profits on a straight-line basis. 69 Company accounting policies TAXATION Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the profit and loss account except to the extent that it relates to items recognised directly in equity or other comprehensive income, in which case it is recognised directly in equity or other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. CURRENCY TRANSLATION Transactions denominated in foreign currencies are translated into Sterling at the rates of exchange ruling on the date of the transaction. Monetary assets and liabilities are translated into Sterling at the year-end rates. INVESTMENTS Investments in respect of subsidiaries are stated at cost less any impairment in value. Investments in quoted shares are classified as Available for sale and measured at fair value. Movements in fair value are recorded in the Available for sale reserve until the shares are sold, in which case the Available for sale reserve is recycled to the income statement. FINANCIAL INSTRUMENTS: MEASUREMENT Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group, the Company considered these to be insurance arrangements and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. DIVIDENDS Dividends on non-equity shares are recognised as a liability and accounted for on an accruals basis. Equity dividends are recognised as a liability in the period in which they are declared (appropriately authorised and no longer at the discretion of the Company). 70 Notes relating to the company financial statements 1. PERSONNEL EXPENSES Staff costs: – wages and salaries – social security costs – pension charges – equity share options expense 2017 £000 677 47 18 68 810 2016 £000 627 48 19 64 758 Included within the £810k is £112k which relates to redundancy costs included within special items. The average number of employees of the Company (including Executive Directors) during the period was as follows: Head office function 2017 Number 7 2016 Number 5 These staff costs related entirely to the Directors and head office staff who are all classified as administration and management. Details of Directors’ emoluments, share option schemes and pension entitlements are given in the Remuneration Report on pages 16 to 19. 2. EMPLOYEE SHARE OPTION SCHEMES The Group has granted share options to employees under The 600 Group PLC Deferred Share Plan 2011. Options under the DSP were granted to senior executives and directors on 19 November 2012 at 10p per share, on 7 April 2014 at 17p per share, on 6 August 2015 at 18p per share and finally additional nil cost options on 1 September 2016. These options are exercisable between 3 and 10 years from the grant date. The schemes are equity-settled. SHARE-BASED EXPENSE The Group recognised a total charge of £68,000 (2016: £64,000) in relation to equity-settled share-based payment transactions. The number and weighted average exercise prices of share options Number of options outstanding at beginning of period Number of options granted in period Number of options forfeited/lapsed in period Number of options exercised in period Number of options outstanding at end of period Number of options exercisable at end of period 2017 DSP 2016 DSP 6,150,000 9,900,000 500,000 1,000,000 — (2,000,000) — (2,750,000) 6,650,000 6,150,000 1,750,000 1.750.000 On 19 November 2012 4,500,000 options with an exercise price of 10p were granted, of which 1,750,000 were still outstanding, and on 7 April 2014 5,400,000 options with an exercise price of 17p were granted, of which 3,400,000 were still outstanding. On 6 August 2015 1,000,000 shares with an exercise price of 18p were granted, and on 1 September 2016 500,000 nil cost options were granted, all of which are still outstanding. All options are exercisable between 3 and 10 years from the date of grant. On 30 April 2015 Mr N Rogers resigned as a director. 2,750,000 options with an exercise price of 10p were agreed to become immediately exercisable by Mr N Rogers and 2,000,000 options with an exercisable price of 17p were forfeit. During the current and prior period, the Group has not granted equity as consideration for goods or services received. 71 Notes relating to the company financial statements 2. EMPLOYEE SHARE OPTION SCHEMES (CONTINUED) THE 600 GROUP PLC 2008 PERFORMANCE SHARE PLAN The fair values of awards granted under these Share Plans are determined using the Black Scholes valuation model. The fair value of share options and assumptions are shown in the table below: Fair value Share price at grant Exercise price Dividend yield Expected volatility Expected life Risk-free interest rate Number of shares under option 2016 Grant £000 £0.10 £0.10 0p 0% 50% 2015 Grant £000 £0.04 £0.18 18p 0% 50% 2014 Grant £000 £0.04 £0.17 17p 0% 25% 2013 Grant £000 £0.04 £0.10 10p 0% 50% 3.0 years 3.0 years 3.0 years 3.0 years 1.36% 1.36% 4.08% 4.08% 500,000 1,000,000 3,400,000 1,750,000 3. DIVIDENDS No dividend was declared in the period (2016: no dividend paid). 4. SPECIAL ITEMS In order for users of the financial statements to better understand the underlying performance of the Company the Board have separately disclosed transactions which by virtue of their size or incidence, are considered to be one off in nature. Special items include exceptional costs relating to reorganisation, redundancy and restructuring, the charge for share based payments and impairment of investments in fellow subsidiary undertakings. Items included in operating profit: Impairment of investments in listed investments Redundancy and reorganisation Share option costs Items included in financial expense: Amortisation of loan note expenses 2017 £000 - 151 68 219 168 168 2016 £000 29 425 64 518 150 150 72 Notes relating to the company financial statements 5. INVESTMENTS Cost: At 2 April 2016 Fair valuation in the period Disposals in the period At 1 April 2017 Provisions At 2 April 2016 Reinstatement in the period At 1 April 2017 Net book values At 1 April 2017 At 2 April 2016 Shares In Listed Shares In Group Investments Undertakings £000 £000 Total £000 1,147 506 — 1,653 651 (651) — 1,653 496 40,413 41,560 — — 506 — 40,413 42,066 31,710 — 31,710 8,703 8,703 32,361 (651) 31,710 10,356 9,199 During the period an impairment review of the carrying values of investments in other group companies was carried out with no further impairment deemed necessary. This review comprised a comparison of the investment with its recoverable amount (the higher of net realisable value and value in use). To the extent that the carrying amount exceeds the recoverable amount, an impairment charge is recognised. Value in use calculations are based on Board approved profit forecasts and the resulting cashflows are discounted at the Group’s pre-tax weighted average cost of capital, which is adjusted for CGU risk factors, resulting in a rate of 8%. Cash flows are extrapolated beyond their term (of between 1 and 4 years) using an estimated growth rate of 3% and are appropriate because these are long term businesses. The growth rates used are consistent with the long-term average growth rates for the countries in which the CGUs are located. This has no impact on the group accounts. On 3 August 2014 the Company acquired 26.3% of the ordinary share capital of ProPhotonix Limited through the issue of ordinary shares in the Company representing 5.5% of the enlarged share capital of 600 Group Plc. There is no representation from the company on the board of Prophotonix and therefore significant influence may not be exerted over key strategic decisions. ProPhotonix Limited is AIM listed, although registered in Delaware, and designs and manufactures LED arrays and laser diode modules in the UK and Ireland. It has a strong base of technology and applications knowledge, applicable to high growth sectors including niche industrial, security and medical markets. The Group has no re The initial investment of £1.15m was adjusted to a fair value of £1.65m at 1 April 2017 (2016 - £0.50m). The £1.16m write up (2016 - £0.03m write down) was taken against the Assets held for sale reserve. 73 Notes relating to the company financial statements 5. INVESTMENTS (CONTINUED) The principal subsidiary undertakings of The 600 Group PLC and their countries of incorporation are: ENGLAND& WALES: 600 UK Limited*; The 600 Group (Overseas) Limited*; Electrox Laser Limited; Pratt Burnerd International Limited; Electrox Limited; The Colchester Lathe Company Limited; Crawford Collets Limited; 600 Machine Tools Limited; 600 Controls Limited; Pratt Gamet Limited; Gamet Bearings Limited; T S Harrison & Sons Limited; The Richmond Machine Tool Company Limited; 600 Lathes Limited; 600 SPV1 Limited*; 600 SPV2 Limited*; Coborn Insurance Company Limited and The 600 Group Pension Trustees Limited*. All subsidiary undertakings in England & Wales have their registered offices at 1 Union Works, Union Street, Heckmondwike, West Yorkshire WF16 0HL except Coborn Insurance Company Limited, whose registered office is PO Box 34, St Martin's House, Le Bordage, St Peter Port, Guernsey, GY1 4AU. 600 UK Limited’s principal activity is the design and distribution of machine tools and precision engineered components. Electrox Laser Limited’s principal activity is the design, manufacture and distribution of industrial laser systems. Coborn Insurance Company Limited is a captive insurance company and all other subsidiary undertakings in England & Wales are dormant or holding companies. US: 600 Group Inc Clausing Industrial, Inc TYKMA Inc Clausing Industrial, Inc’s principal activity is the design and distribution of machine tools and precision engineered components. TYKMA Inc’s principal activity is the design, manufacture and distribution of industrial laser systems. 600 Group Inc is a holding company. Clausing Industrial, Inc and 600 Group Inc both have a registered office at 3963 Emerald Drive, Kalamazoo, Michigan 49001, US. TYKMA Inc has a registered office at 370 Gateway Drive, Chillicothe, Ohio 45601, US. REST OF THE WORLD: 600 Machinery Australia (Pty) – (Australia) 600 Group Equipment Limited - (Canada) 600 Machinery Australia (Pty)’s principal activity is the design and distribution of machine tools and precision engineered components. 600 Group Equipment Limited is a dormant company. All undertakings marked * are 100% owned directly by the Parent Company. The others are 100% owned through intermediate holding companies. All undertakings above are included in the consolidated accounts. ProPhotonix Limited’s registered office is Pierce Williams, Sparrow Lane, Hatfield Broad Oak, Bishop's Stortford, Hertfordshire, CM22 7BA with a main office in the US at 13 Red Roof Lane, Suite 200, Salem, New Hampshire 03079. All undertakings marked * are 100% owned directly by the Parent Company. The others are 100% owned through intermediate holding companies. All undertakings above are included in the consolidated accounts. 6. TRADE AND OTHER RECEIVABLES Amounts owed by subsidiary undertakings1 Deferred tax Other debtors Other prepayments and accrued income 1 All inter-company loans are repayable on demand and as such are recorded at their face value. 2017 £000 2016 £000 32,224 29,946 602 59 — 749 77 — 32,885 30,772 74 Notes relating to the company financial statements 7. ASSETS CLASSIFIED AS HELD FOR RESALE Brought forward Transferred from property plant and equipment - cost Transferred from property plant and equipment - depreciation Disposals Impairment 2017 £000 1,999 — — (1,999) — — 2016 £000 — 2,556 (107) — (450) 1,999 The above leasehold property was sold on 11 July 2016 with the revaluation reserve of £711k taken to the statement of comprehensive income and expense. The property had been written down to its net realisable value at the prior year-end with the £0.4m reduction in its carrying value taken to the revaluation reserve. 8. TRADE AND OTHER PAYABLES Current liabilities: Bank loans Trade payables Amounts owed to subsidiary undertakings1 Other creditors Accruals and deferred income Non-current liabilities: Shareholder loan Bank loans Deferred taxation 2017 £000 — 269 316 29 215 829 2017 £000 7,867 — — 7,867 2016 £000 615 189 316 137 270 1,527 2016 £000 7,699 1,612 176 9,487 1 All inter-company loans are repayable on demand and as such are recorded at their face value. The 600 Group PLC has undertaken to discharge the liability for corporation tax of all UK Group undertakings. The £8.5m of Loan Notes in place at the year-end were issued in three tranches in February, March and August 2015 with 43.95m convertible warrants attached to them. These warrants allow the holders to either convert the loan into 20p shares or to purchase 20p shares for a cash consideration. The loan has both debt and equity components and £139,000 is shown in equity reserve and the balance after deduction of associated costs of £494,000, is shown in non current borrowings. Costs are amortised to the income statement over the term of the loan. A Term Loan of £927,000 included within Bank loans was scheduled to be repaid on a quarterly basis with payments of £153,846 on 30 June 2016 through to 30 November 2017. A further Term Loan of £612,000, also included within Bank loans, was scheduled to be repaid on a quarterly basis with payments of £18,000 on 30 June 2016 through to 30 June 2019 and a final payment of £378,000 on 31 May 2019. £1,300,000 included within non–current borrowings related to a RCF facility with a termination date of 31 May 2017.Following the disposal of the Letchworth property in July 2016 these borrowings with Santander were reduced by the net proceeds of £2m and on the change of bank to HSBC in August 2016 the balance of all these facilities were fully repaid and replaced by facilities from HSBC. Given the nature of the Company’s financial assets and liabilities, it is the directors’ opinion that there is no material difference between their reported book values and estimated fair values. The above loans and borrowings are secured by way of fixed and floating charges over the assets of the Company and its subsidiaries. 75 Notes relating to the company financial statements 9. SHARE CAPITAL Allotted, called-up and fully paid: Ordinary shares of 1p each 2017 £000 2016 £000 104,357,957 ordinary shares of 1p each on issue at start of the period (2016: 89,607,957 ordinary shares ) 1,044 2016 – 2,750,000 ordinary shares of 1p each issued to N Rogers 2016 – 12,000,000 ordinary shares of 1p each issued in acquisition of remaining 20% of Tykma Inc 104,357,957 ordinary shares of 1p each on issue at end of period (2016: 104,357,957 ordinary shares of 1p) Total Allotted, called-up and fully paid at the end of period — — 1,044 1,044 896 28 120 1,044 1,044 The Company has one class of ordinary shares which carry no rights to fixed income. The ordinary shareholders are entitled to receive dividends as declared and are entitled to vote at meetings of the Company. During the prior year 2,750,000 ordinary shares of 1p each were issued to N Rogers in July 2015 pursuant to the exercise of share options. This resulted in share capital increasing by £27,500 with a corresponding share premium increase of £247,500. In addition, the Company issued 12,000,000 ordinary shares of 1p each as consideration for the purchase of the remaining 20% of shares in TYKMA Inc. On 28 August 2015 the Company raised an additional £0.806m through the issue of loan notes. In the prior year on 16 February 2015 and 18 March 2015 the Company raised £6.739m and £0.955m respectively through the issue of loan notes. The loan notes have 5 year maturity and carry a coupon of 8% payable quarterly in arrears. The subscribers for loan notes are also entitled to receive warrants with an expiry date of 14 February 2020 to subscribe for 43.95m ordinary shares of 1p each in the Company at a price of 20p per Ordinary Share. The issue of the warrants occurred after approval was granted by the shareholders at a general meeting on 18 March 2015. 10. RECONCILIATION OF NET CASH FLOW TO NET DEBT Increase/(decrease) in cash and cash equivalents Increase in net debt from cash flows Net debt at beginning of period Shareholder loan deferred costs Net debt at end of period 11. ANALYSIS OF NET DEBT Cash at bank and in hand Debt due within one year Debt due after one year Loan notes due after one year Total 2017 £000 (225) 2,227 2,002 (9,674) (168) (7,840) At 2 April Exchange 2016 £000 252 (615) (1,612) (7,699) (9,674) movement £000 — — — — — Other £000 — — — (168) (168) Cash flows £000 (225) 615 1,612 — 2,002 2016 £000 460 (1,337) (877) (8,687) (110) (9,674) At 1 April 2017 £000 27 — — (7,867) (7,840) 76 Notes relating to the company financial statements 12. CONTINGENT LIABILITIES Bank guarantees in respect of Group undertakings 13. PENSION 2017 £000 92 2016 £000 92 The Company makes contributions to defined contribution schemes for certain employees. The pension contribution charge for the Company amounted to £17,000 (2016: £19,000). 14. RELATED PARTY TRANSACTIONS Detailed disclosure of the individual remuneration of Board members is included in the Remuneration report. The Executive Board members are regarded as the Key Management Personnel of the Company and the Group. Mr P Dupee is the managing partner of Haddeo Partners LLP who have received £64,800 in interest payments during the financial year (2016: £64,800) in respect of their respective holding of the loan notes. At the year-end Haddeo Partners LLP held £810,000 of loan notes. In addition, the wife of Mr N Carrick, the Group Finance Director, also held £50,000 of loan notes. Further details on the loan notes can be found in note 19. There have been no other transactions between Key Management Personnel and the Company. None of the directors were due any monies at the end of the current period or the prior period. The Group contributed £120,000 to the UK pension scheme during the current period (2016: £120,000) and no contributions were overdue at the period-end. The monthly payments of £10,000 were paid by the Group to the UK pension scheme from April 2015 onwards in respect of an augmentation to benefits made in 2008/09 of £510,971. No deficit reduction payments are currently required. 77 169531 600 Group Report & Accounts Cover_169531 600 Group Report & Accounts Cover 25/07/2017 14:24 Page 1 The 600 Group PLC Union Street Heckmondwike West Yorkshire WF16 0HL T: +44 (0)1924 415000 W: www.600group.com ANNUAL REPORT & ACCOUNTS 2017 The 600 Group PLC
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