Avon Protection
Annual Report 2014

Plain-text annual report

4 1 0 2 L T A U N N A R O P E R A N I N T R O D U C T I O N T O A V O N R U B B E R p . l . c . The Group has transformed itself over recent years into an innovative design and engineering group specialising in two core markets, Protection & Defence and Dairy. With a strong emphasis on research and development we design, test and manufacture specialist products from a number of sites in the US and UK, serving markets around the world. We achieve this through nurturing the talent and aspirations of our employees to realise their highest potential. Avon Protection is the recognised global market leader in advanced Chemical, Biological, Radiological and Nuclear (CBRN) respiratory protection systems technology for the world’s military, homeland security, first responder, fire and industrial markets. With an unrivalled pedigree in mask design dating back to the 1920s, Avon Protection’s advanced products are the first choice for Personal Protective Equipment (PPE) users worldwide and are placed at the heart of many international defence and tactical PPE deployment strategies. Our expanding global customer base now includes military forces, civil and first line defence troops, emergency service teams and industrial, marine, mineral and oil extraction site personnel. All put their trust in Avon’s advanced respiratory solutions to shield them from every possible threat. Our world-leading Dairy supplies business and its Milkrite brand have a global market presence. With a long history of manufacturing liners and tubing for the dairy industry, we have become the leading innovator and designer for products and services right at the heart of milking. Our goal is always to improve and maintain animal health. Working with the leading scientists and health specialists in the global dairy industry we continue to invest in technology to further improve the milking process and animal welfare. Our products provide exceptional results for both the animal and the milker, making the milk extraction process run smoothly. As our market share and milking experience continue to improve, so does our global presence. D E L I V E R I N G P E R F O R M A N C E A N D P O T E N T I A L “2014 has been an excellent year reflecting the strategic decisions made over the last three years to invest in innovative new products and technologies while expanding our international markets. This strategy will continue to drive growth in the years ahead.” Peter Slabbert, Chief Executive Our determination to adhere to our consistent strategy and execute it relentlessly has delivered exceptionally strong growth and excellent cash generation in 2014 and reflects the increasing strength and confidence of our teams from the Board all the way through to the shop floor. The investments we have made are delivering sustained growth and improving returns for the Group. In our Protection & Defence business, we have leveraged our prime contractor status with the US Department of Defense (DOD) to deliver growth in sales into other military and first responder markets. We are the CBRN respiratory protection systems provider of choice for users worldwide with a unique modular personal protection system offering multiple functionality for military, fire and first responder communities. This year we have obtained key new product approvals and will further expand our product capability next year as we target all air, land and sea based personnel. We also see opportunities in niche industrial markets for our unique capabilities. Our Dairy business under the Milkrite brand is the leading global supplier of consumable milking rubberware. We are postioning ourselves as experts in the milk harvesting process through product development and expansion and have successfully introduced a service offering as well. We expect long-term growth in the emerging markets to be significant and our Chinese distribution business will be replicated in Brazil in the coming year to ensure we are positioned to benefit from growth in these regions. We will continue to consistently implement our strategy as we remain convinced of the long-term growth potential for both our Protection & Defence and Dairy businesses. I believe that our ability to deliver further shareholder value remains considerable. Peter Slabbert Chief Executive 19 November 2014 IFC D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 G R O U P Revenue £124.8m Operating Profit* £17.0m  £2.8m P R O T E C T I O N & D E F E N C E Revenue £92.8m Operating Profit* £13.6m  £2.6m D A I R Y Revenue £32.0m Operating Profit £5.7m  £0.5m Operating Profit* (£m) Operating Profit* (£m) Operating Profit* (£m) £17.0m £14.2m £11.6m £11.1m £9.3m £5.5m £13.6m £11.0m £7.5m £7.5m £6.5m £4.5m £5.5m £6.0m £5.2m £5.7m £4.6m £3.0m 09 10 11 12 13 14 09 10 11 12 13 14 09 10 11 12 13 14 * = before exceptional items, defined benefit pension scheme costs and the amortisation of acquired intangibles, see page 19 for a reconciliation to non-adjusted measures C O N T E N T S O V E R V I E W O F T H E Y E A R H O W W E P E R F O R M E D IFC 01 - 07 08 - 10 11 - 33 Delivering performance & potential 74 - 112 Financial results Who we are, where we are and what we do 113 - 120 Independent Auditors' Reports Chairman's Statement Strategic Report 121 - 130 Parent Company Financial Statements 131 Five year record 34 - 40 Environmental and Corporate Social Responsibility H O W W E R U N O U R B U S I N E S S S H A R E H O L D E R I N F O R M AT I O N 41 42 - 45 46 - 50 51 52 - 53 54 - 73 Board of Directors Directors' Report Corporate Governance Nominations Committee Report Audit Committee Report Remuneration Report 132 - 137 Notice of Annual General Meeting IBC Shareholder information R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 01 W O R L D C L A S S I N N O V AT I O N I N P R O T E C T I O N & D E F E N C E “Avon’s high specification products continue to gain widespread support as users experience their superior design and comfort. Our depth of capability and development positions Avon as the global market leader of respiratory protection systems technology.” Peter Slabbert, CEO “OVER 2,000,000 FIRST RESPONDERS WORLDWIDE ARE PROTECTED BY AVON RESPIRATORS EVERY SINGLE DAY” Delivering in new markets  We are proud to have protected first responders in more than 64 countries Delivering new products and services  Project Fusion has brought together the talent of our design and engineering teams to develop a new and unique modular personal protection system offering multiple functionality  Combined or singular use of modular products deliver enhanced protection that we expect to expand our reach into the military, law enforcement and first responder protective equipment markets  In the Middle East we continue to grow in new markets as new customers experience our advanced products We have delivered:  We have expanded into the tactical dive market with advanced rebreather technology and complementary services  We now provide total respiratory protection solutions for land, air and water based armed forces  Our rapidly growing global customer base includes military forces, civil and first line defence troops, emergency service teams and industrial, marine, mineral and oil extraction site personnel  We continue to broaden our global sales teams and partnerships with national distributors to improve our channels to market  We have continued our expansion into South America Delivering brand recognition  Our product management team continues to deliver innovative new industry firsts in every product category  Our brand loyalty is increasing through customer satisfaction and the commitment of our sales and marketing teams  AvonAir, our new National Institute for Occupational Safety and Health (NIOSH) approved range of Powered Air Purifying Respirators (PAPRs)  Filter technology developments covering a wider variety of threat scenarios for global military and law enforcement users  Deltair, our self-contained breathing apparatus (SCBA) innovation which received NIOSH and 2013 US National Fire Protection Association (NFPA) standard certification and approvals  EEBD, our NIOSH-approved Emergency Escape Breathing Device  DEKRA Gmbh certifications for the CE-approved HM50 CBRN respirator and the HMK150 Helmet Mask Kombination System for riot control  Land, air and sea capability. Our development teams are also expanding our respiratory product offering into the aerospace market (through an aircrew version of our existing M53 respirator) and the military diving market through a range of rebreather and monitoring technologies 02 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 “Becoming the leading fire equipment authority is our mission.“ John Kime, Protection & Defence COO Protection innovation delivering results Avon Protection has delivered innovative industry firsts time after time to each of its core markets and with Deltair, our new SCBA for the firefighting community, we have delivered an award-winning product. Deltair is the most innovative SCBA available on the market, designed by firefighters for firefighters. Deltair received ultimate recognition with the GOLD Industrial Designers Society of America, International Design Excellence Award (IDEA) for research relating to the Deltair product development as well as being awarded The People’s Choice Award; ultimate recognition for its design excellence. Deltair is the result of extensive investment in development as part of Project Fusion, designed to meet the critical needs of the fire service and to meet and exceed the new NFPA 1981, 1982: 2013 Standard on Open-Circuit Self-Contained Breathing Apparatus (SCBA) for Emergency Services. Avon’s Deltair design team developed a product to provide the features and benefits that are most important to the firefighting community, using a completely new platform, unlike other available products which are simply existing and dated models adjusted to meet the new standards. Fully approved for use in a CBRN environment, the revolutionary Deltair offers superior air management, single power supply, clearer communications and optimal weight distribution for firefighters and other first responder teams. The ergonomic design of this advanced SCBA evenly distributes the weight of the cylinder on the firefighter’s hips, which alleviates pressure on the back and shoulders, minimizes the risk of fatigue and increases a firefighter’s ability to operate in challenging environments. The low-profile mask design provides the greatest field of vision in the marketplace, which is critical when firefighters are navigating dark, smoky environments. Intelligent air management provides more time on the target to perform critical tasks. Avon has advanced the development of SCBA equipment with the introduction of new technologies and by leveraging our proven military pedigree, whilst through intelligent design we have maintained the simplicity and reliability demanded by today’s firefighter. “Avon Protection does what it says it will do. Avon Protection helps firefighters do their jobs effectively and with confidence.” Dean Holland, retired Saginaw, Michigan fire chief R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 03 M I L K R I T E I N N O V AT I O N AT T H E H E A R T O F M I L K I N G “Our goal is to permanently improve on farm milking conditions, through our products, support and advice.” “We believe in thinking differently.” “We focus on the milk extraction process and overall animal health, with the aim of more efficient milking for both the animal and the milker.” Paul McDonald, Avon Dairy Solutions Managing Director Delivering in new markets Delivering new products and services  After entering China in 2012, our Shanghai sales  Milkrite products are the most technically advanced in and distribution facility is now well established and provides a strong platform for the future as we grow in the emerging markets  This year we are pleased to report the establishment of a similar distribution facility for South America in Brazil  Over the next 12 months we will continue our focus on growth in China and the Far East, North America, South America and Western Europe. We expect these markets to provide continued growth opportunities for the future Delivering brand recognition  A commitment to sales and marketing has strengthened the Milkrite brand and enables us to focus on increasing brand loyalty through customer satisfaction  As part of our global positioning strategy we continue to invest in external communications through trade exhibitions and digital communication channels the market. We take pride in providing quality products that milk better and keep animals healthier  Our Cluster Exchange programme is well established in the US with distribution on both the East and West coast. This exciting programme has also gained considerable momentum in Continental Europe over the past year with a total take-up covering over 256,000 cows. Cluster Exchange is a complete solution provider, saving farmers time on low-value tasks, securing our relationship with our customers and managing the change cycle  We believe our advanced range of liners, milk tubing and other essential components of the milking process are the very best on the market, and our customers tell us the same, but we are constantly looking at ways we can further improve efficiency for the farmer whilst ensuring improved animal health  Our product development team put customer requirements at the heart of every new innovation. We work with farmers to provide exceptional results for both the animal and the milker 04 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4  We inspect all liners to assess the washed conditions and issue a “liner scoring report” to the farmer. This allows the farmer to check the efficiency of his wash system  When the next change is due, we send another full cluster using cleaned and refurbished equipment with new liners and pulse tubes  The farmer fits the new, refurbished clusters and puts the used clusters in the plastic box provided  Then the farmer calls us, and the process starts again It’s so simple, milking made easier It saves time and money for the farmer and increases parlour productivity. We make the change process effortless and easy:  Changing liners is always low on the activity or priority list for farmers and so we take away the effort We use the latest technology to improve milking efficiency and improve teat health:  ImpulseAir: the biggest advance in the milking process in a generation - Improved teat-end condition and greatly reduced congestion of the teat - Liners stay on the teats better, with reduced squawks and slips - Dryer teats, because milk is taken away more efficiently We maintain the cluster for the farmer:  Lifetime guarantee on all parts  We maintain the claw  We change the air tubes when required Our support service also includes a tune-up programme for the parlour:  We assess parlour conditions and routines  We assess pulsation and vacuum conditions to provide the optimum settings and conditions for teat health  We regularly review the process of wash performance, through our feedback system  We work with the farmer and their dealer to keep their parlour tuned to their herd R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S Giving time back to the farmer, stress free milking Cluster Exchange  The farmer pays an initial small sign-up fee per cluster, and then a regular fee per change  The farmer provides information on the parlour type, number of points, number of milking cows in herd and frequency of milking  The farmer chooses the product type (and liners available) and the claw option  At the first change, the farmer receives a brand new cluster including liners, shells, weights, pulse tubes and claw. The farmer fits the new cluster and returns the used clusters in the plastic boxes provided, then calls us to arrange pick up  We handle all transport costs and arrangements A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 05 G L O B A L I N V E S T M E N T 8 2 7 3 4 1 1 1 1 2 3 Avon Rubber p.l.c. Corporate Headquarters Melksham, UK Avon Protection Melksham, UK Avon Dairy Solutions Melksham, UK 6 Avon Protection Brussels, EU ARTIS Melksham, UK 7 Avon Dairy Solutions Johnson Creek, WI Avon Protection Cadillac, MI 8 Milkrite Modesto, CA Avon Protection Baltimore, MD 9 Milkrite Rudnik, Czech Republic 4 Avon Protection - AEF Picayune, MS 10 Milkrite Shanghai, China 5 Avon Protection Kuala Lumpur, Malaysia 11 Milkrite Castro, Brazil 11 06 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 1 1 1 1 6 9 10 5 Agents and Distributors Distribution countries A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 07 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S 229890 C H A I R M A N ' S S TAT E M E N T “The successful implementation of our strategy has delivered exceptionally strong growth and excellent cash generation in 2014. We remain convinced of the long-term growth potential for both our Protection & Defence and Dairy businesses.” David Evans, Chairman, Avon Rubber p.l.c. Introduction Avon has delivered another year of exceptionally strong growth in 2014. We have further strengthened our business, improved our margins and through sound operational management provided strong cash generation moving us to a net cash position. We have recorded significant increases in operating margins, profits and earnings per share, despite the foreign exchange headwind caused by a weaker US dollar. Revenue of £124.8m (2013: £124.9m) would have increased by £5.6m or 5% on a constant currency basis. Operating margins have increased by 2.2% to 13.6% with an operating profit of £17.0m (2013: £14.2m), up 20%. Diluted earnings per share rose 30% to 42.3p (2013: 32.5p). In addition to the strong financial performance, we end the year with a more robust and sustainable business. Both Protection & Defence and Dairy are generating opportunities for growth. In Protection & Defence we have 11 new product approvals and are growing in all our market sectors. In Dairy we are increasing our own brand Milkrite’s market share, expanding our product and service offerings and developing our distribution in emerging markets. We have also invested £2m across the Group in upgrading our IT systems over the past 18 months which will deliver a single Group-wide ERP infrastructure to provide better business integration and support our growing global business. Our continued investment in product, brand and market development and in our operational capability in 2014 should position us to make further progress in the coming years. Protection & Defence Protection & Defence order intake was £93m with increased orders from the DOD, EMEA and North American customers. Our DOD long-term M50 mask contract is in its seventh year and we supplied 168,000 systems during the year, bringing the total to over 1.2m systems so far under this contract. As a result of higher order intake of 246,000 mask systems we enter 2015 with an order book covering the first half year sales at a slightly accelerated rate. Follow-on DOD M50 orders are expected in the first half as 2015 DOD budgets are released. The filter requirement has less short-term visibility, but we expect this consumable item to be a good source of repeat revenue in the long term as more masks enter service. Whilst uncertainty continues in the US regarding budget cuts and sequestration, we are an established programme, delivering to schedule and the largest user, the Army, has begun taking product. This gives us a reasonable degree of comfort that mask system volumes will continue at good levels for the foreseeable future. During the year the Joint Service Aircrew Mask (JSAM) programme design, development and testing work progressed well. This will provide respiratory protection to a wide range of operators on the DOD’s fleet of fixed wing aircraft. This $6.7m development contract is due to conclude at the end of our 2015 financial year and should lead to a production contract which could be worth up to $74m. Our newly developed Emergency Escape Breathing Device (EEBD) received NIOSH approval to the new standard, with Avon being the only manufacturer to date to achieve this. This product has applications on board navy ships and in the mining sector. The US Navy has an open solicitation to replace its ageing installed base to which we will respond early in our 2015 financial year. The non-DOD side of the business includes the North American first responder market and the Rest of World military and law enforcement market. Both markets are currently being driven by an increasing need to provide improved protection against growing global CBRN threats as recently seen in a number of areas around the world. 08 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 In the US, while budgets remain constrained, we offer the respirator of choice for law enforcement which enables us to displace incumbent product and grow our market share, in particular as less effective equipment procured post 9/11 is replaced. Competition is more intense in the fire market. At present our new Deltair self-contained breathing apparatus is one of only three approved to the new standard and has been well received in the market. We expect this and further planned enhancements to provide the opportunity to increase our market share in 2015 and beyond. In Rest of World markets, we are the CBRN respiratory protection provider of choice and we continue to build business, particularly in South America and the Middle East. We have also started to make progress into new markets such as the oil and gas sector and see opportunities for further growth in the broader industrial sector with our enhanced and differentiated technologies. The timing of end-user procurement remains difficult to predict, but in 2014 we grew our revenues in the Rest of World market by 26%. We have consolidated our Protection & Defence operations from four US sites into three ahead of the expiry of the lease on our Lawrenceville, Georgia facility in 2015. The move is substantially complete and we are pleased that our operations team brought the project in on time and on budget. Our Cadillac, Michigan facility is now the centre of excellence for both mask manufacture and filter technology as well as the supplied air products previously manufactured in Lawrenceville. Our proven ability to convert profit into cash has enabled us to continue to invest in new products, laying the foundation for further growth. Our programme to expand and enhance our product range (Project Fusion) remains on track with 11 new products receiving regulatory approval in 2014. A pipeline of further products have been submitted for approval which should deliver further new product launches in our 2015 financial year. Dairy Dairy has become substantially less dependent on original equipment manufacturers (OEMs) in recent years as we continue to grow our own higher margin Milkrite branded products. Only four years ago OEM customers represented 47% of our revenue; at the end of this year this has fallen to 31%, reflecting the growth of the higher margin Milkrite brand. Market conditions improved during the year with milk prices and feed costs returning to more normal levels and demand for our consumable products was generally at a higher level than the previous year. In recent years the business has demonstrated through the launch of our ImpulseAir liner that the industry is receptive to new technology which improves farm efficiency and animal health. This proprietary product now enjoys a 21% market share in the US. This success has given us the confidence to invest further in Dairy product development resource and to launch the next generation of products and services. The first example of this is our Cluster Exchange service. Under this programme farmers outsource to us their liner change process, through Avon service centres with the support of our dealers and third-party logistics specialists. This was launched in the US and Europe at the end of 2013 and by the end of the year was servicing 256,000 cows on 887 farms, ahead of our expectations. This service has the potential to grow a significant recurring revenue stream in the years to come as more farms continue to sign up. Huge potential exists in emerging markets, especially in Brazil, Russia, India and China where the growing demand for animal protein in diets and the expanding middle class has led to an increase in demand for dairy products, driving demand for our consumable product. We established a sales and distribution facility in China during 2012 and in the first half of 2015 we have opened a sales and distribution centre in Brazil, allowing us access to this growing market. Group results Revenue was flat at £124.8m (2013: £124.9m) (an increase of 5% on a constant currency basis), with Protection & Defence lower by 0.3% at £92.8m (2013: £93.2m) and Dairy up 0.8% to £32.0m (2013: £31.7m), both impacted by the negative translation effect of the weaker dollar. On a constant currency basis, Protection & Defence revenue increased by 5% (£4.2m) due to growth in non-DOD sales. Dairy revenue increased by 5% on a constant currency basis with Milkrite and Cluster Exchange growth and improved market conditions. Operating profit before depreciation and amortisation (EBITDA) rose 14% to £22.9m (2013: £20.0m) and operating profit rose 20% to £17.0m (2013: £14.2m) (an increase of 26% at constant currency). The progressive strengthening of sterling during the year gave the Group a foreign exchange translation headwind. The US $/£ average rate was $1.65 (2013: $1.56) and this 9 cent headwind was equivalent to £5.7m at a revenue level and £0.8m at an operating profit level. Constant currency information is provided in the Strategic Report. Operating profit in Protection & Defence grew strongly to £13.6m (2013: £11.0m) reflecting the revenue growth in non-DOD markets and improved operational performance. Dairy operating profit rose 11% to £5.7m (2013: £5.2m) reflecting the success of our Cluster Exchange service and the growth of the Milkrite brand in Europe as we saw the first returns from the additional resource added in this area in 2013. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 09 opportunities to fruition. Our strong balance sheet will also support complementary acquisitions which can deliver synergistic benefits. Board changes After serving as a Non-Executive Director since March 2005 Stella Pirie will stand down at the AGM in January 2015. Stella has made a significant contribution during a period of remarkable progress and change for the Group, for which she has my considerable thanks. A recruitment process to appoint a suitable replacement is underway and an announcement will be made at the appropriate time. Outlook Our strategy has significantly improved the shape of the Group, reduced the risk profile and improved margins. This is providing continued growth and the outlook for the future remains positive. In our global Protection & Defence business we have good visibility of DOD revenues for 2015 and expect to see growth in the fire and industrial markets. New products will contribute to growth and we should see a positive operational gearing effect from a stable cost base. The Dairy business is well positioned with positive current market conditions and long-term market growth potential. We expect volume growth from our investment in the emerging markets of China and Brazil and from the Cluster Exchange programme. We continue to invest in enhanced milking technologies. David Evans Chairman 19 November 2014 C H A I R M A N ' S S TAT E M E N T Interest costs were £0.3m (2013: £0.3m) and the Group effective tax rate fell from 27% to 21% due to a more favourable geographic mix of profits to give a profit for the year of £13.1m (2013: £10.0m). This equates to earnings per share of 43.7p (2013: 33.8p). On a fully-diluted basis, earnings per share rose 30% to 42.3p (2013: 32.5p) (up 37% at constant currency). We continue to invest in product development reflected in our expanding product range in both sides of the business. Our total investment in research and development (capitalised and expensed) amounted to £7.0m (2013: £6.4m) of which £4.5m (2013: £2.1m) was customer funded. Net cash at year end was £2.9m (2013: net debt of £10.9m), reflecting the strong cash conversion from the business. Committed bank facilities of £24.5m run to 30 November 2017. Dividend Based on the Group’s improved profitability, cash generation and the confidence the Board has in the Group’s future prospects, the Board is pleased to propose a 30% increase in the final dividend to shareholders of 3.74p per ordinary share (2013: 2.88p). This, combined with the 2014 interim dividend of 1.87p, results in a full year dividend of 5.61p (2013: 4.32p), up 30%. Employees Our employees have risen to the challenge in supporting the Group’s progression from a traditional manufacturing business to a customer and technology driven, sales and marketing led organisation. We are succeeding in creating a culture of innovation to enable us to take full advantage of opportunities in developing new technologies and new markets while maintaining the manufacturing excellence for which the Group is so highly regarded. Our people have continued to respond positively and I thank all of them for their valued contribution on behalf of the Board. Opportunities Last year I said that the nature of our challenge had changed and that management was now firmly focused on growth and margin enhancement. Both of these are clearly reflected in the 2014 results. Looking forward we see our global market leading positions delivering further opportunities for organic growth. We will continue to invest in innovative new technologies and products and in building our brand and market reach to bring these 10 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 S T R AT E G I C R E P O R T Strategic overview Group objectives Group strategy We have two strategic priorities at Group level:  Expanding our Protection & Defence business in military and first responder markets globally; and  Developing our Dairy operation through its Milkrite brand in traditional and emerging markets with both existing and innovative new products. We measure progress against our strategic priorities by reference to our financial performance (as shown on page 1) and a broader set of key performance indicators (KPIs) which are shown on pages 26 to 27. The Group is committed to generating shareholder value through developing new products and serving global markets that can deliver long-term sustainable revenues at higher than average margins. Business overview The Group has transformed itself over recent years into an innovative design and engineering group specialising in two core business markets, Protection & Defence and Dairy. With a strong emphasis on research and development we design, test and manufacture specialist products from a number of sites in the US and UK, serving markets around the world. We achieve this through nurturing the talent and aspirations of our staff to realise their highest potential. Avon Protection Systems is the recognised global market leader in advanced CBRN respiratory protection systems for the world’s military, homeland security, first responder, fire and industrial markets. With an unrivalled pedigree in mask design dating back to the 1920s, Avon Protection’s advanced products are the first choice for PPE users worldwide and are placed at the heart of many international defence and tactical PPE deployment strategies. Our expanding global customer base now includes military forces, civil and first line defence troops, emergency service teams and industrial, marine, mineral and oil extraction site personnel. All put their trust in Avon’s advanced respiratory solutions to shield them from every possible threat. Our world-leading Dairy business and its Milkrite brand have a global market presence. With a long history of manufacturing liners and tubing for the dairy industry, Milkrite has become the leading innovator and designer of products and services right at the heart of milking. Our goal is always to improve and maintain animal health. Working with the leading scientists and health specialists in the global industry, we continue to invest in technology to further improve the milking process and animal welfare. Our products provide exceptional results for both the animal and the milker, making the milk extraction process more efficient. As our market share and milking experience continue to grow, so does our global presence. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 11 S T R AT E G I C R E P O R T Protection & Defence strategy We have a world-leading range of military respirators, developed over many years and funded partially by our customers, where we own the intellectual property. Our strategy is to build a strong position in the US military market and use this position to sell to other governments and first responder markets globally. We initially demonstrated this through our long-term sole-source mask systems contract to supply the US military and our status as a prime contractor to the DOD, which regards us as experts in our field, has brought us a number of other opportunities to replicate this with our recently developed respiratory protection products. Our product range and capacity for manufacture is increasing. Developing through-life revenues with greater consumable sales and service revenue, such as filters, is also a key objective. We believe that our expanding product range and customer base, together with our credibility and development expertise, will put us in a market-leading position to supply into all accessible global markets. Strategic imperatives for success in Protection & Defence We are simultaneously targeting homeland security markets with non-military versions of these products. Our SCBA products have the potential for greater integration with our other respiratory protection products and this has been initially demonstrated with the ST53 product. We aim to increase our range of modular product offerings, widen our routes to market and aggressively pursue further product approvals and certifications in new markets. In addition, successfully integrating our respiratory products with other CBRN protection products such as helmets and suits will provide further integrated solutions to our customer base. These developments will primarily be through organic growth in the short term although the Group’s strengthened balance sheet now enables the acquisition of complementary technologies such as the acquisition of VR Technology Holdings in 2013. We have consolidated our Protection & Defence operations from four US sites into three ahead of the expiry of the lease on our Lawrenceville, Georgia facility in 2015. The move is substantially complete and we are pleased that our operations team brought the project in on time and on budget. Our Cadillac, Michigan facility is now the centre of excellence for both mask manufacture and filter technology as well as the supplied air products previously manufactured in Lawrenceville. Leverage our relationship with the DOD to aid Ensure customers and stakeholders recognise and facilitate next generation products for the Avon brand as synonymous with commercialisation. advanced CBRN respiratory protection. Develop a global operating platform to Maximise profitable growth through new support business demands. business development and products. Create stable organic growth by ensuring our Attract, retain and develop our employees. core products exceed customer expectations. EMPLOYEE OPINION SURVE Y 2014 Employee engagement is at the heart of our business and we recognise its importance in achieving success. Avon Engineered Fabrications in Picayune achieved a 100% response rate in the employee opinion survey this year. A happy, engaged and productive workforce equals inspiration and growth. 12 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Dairy strategy Our strategy for long-term sustainable profit growth is to continue to grow our market-leading Milkrite brand in the US and to replicate that position in our European business. In both of these developed markets we have recently added a service offering, Cluster Exchange, which provides efficiency gains for the farmer and provides us with an increased, more predictable revenue base. We are also investing in opportunities in developing markets such as China, Brazil, India, Russia and Eastern Europe by expanding our global distribution capability and our in-country network to deliver growth in the longer term. Following the opening of our Chinese sales and distribution facility in February 2012, we have opened a similar facility in Brazil early in our 2015 financial year. Innovative new product and service offerings and continued world-class low-cost manufacturing excellence should enable this business to sustain growth, profitability and cash generation. Strategic imperatives for success in Dairy Expansion of our product and service range. Expansion of in-country sales presence. brand development and positioning. Expansion of distribution and dealer network. Leverage the benefit of our world class Attract, retain and develop our employees. manufacturing operations. INVES TING IN ANIMAL HE ALTH Our goal is to continually improve on farm milking conditions through our products, research, support and advice. Milkrite sponsored the National Mastitis Council regional meeting in Ghent in August 2014 which was home to many discussions regarding mastitis and udder health. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 13 S T R AT E G I C R E P O R T Group business model Our management structure is decentralised and decision-making is delegated to the appropriate executive team. Our Board manages overall control of the Group’s affairs and is responsible for delivering the Group’s overall objective of generating shareholder value through developing new products and serving global markets that can deliver long-term sustainable revenues at higher than average margins. The Group Executive team which comprises the Executive Directors and three key members of our senior management team is responsible for assisting the Chief Executive in implementing our strategy and the day-to-day management of the Group. This team is supported by three executive teams, covering Protection & Defence, Dairy and Business Development. Protection & Defence business model Markets Our respiratory protection products are sold direct to military markets where our primary customer is the DOD (Army, Navy, Marines, Coastguard and Air Force) as well as a number of approved governments globally. Other significant markets are categorised under the first responder banner and include the police and other emergency services and are addressed either directly or through distribution channels. SCBA and thermal-imaging equipment is targeted at fire services and other industrial users, primarily through a distribution network in the US. All of these products are safety-critical and the markets are consequently highly regulated with the approval standards creating significant barriers to entry. Product life cycles are long and standardisation to a particular product by users is typical. US DOD FIRE We have a long-term sole-source contract with the US DOD for the supply of mask systems. Our products have earned a reputation for quality and comfort and the business is currently developing a new aircrew mask system funded by the DOD. We provide a total solutions option, manufacturing a broad portfolio of high-performance, timesaving respiratory personal protection equipment that employs the most advanced features in the fire-service industry. In 2014 we launched Deltair, our completely redesigned fire SCBA which meets the latest NFPA regulatory standard. OTHER MILITARY, LAW ENFORCEMENT AND FIRST RESPONDER AEF Orders for our respiratory protection products from foreign military, law enforcement (LE) and first responder (FR) customers have continued to grow, demonstrating that we are delivering results from our investment strategy. We continue to provide the US Army and Navy with hovercraft skirting assemblies. We also supply a wide range of collapsible storage tanks for static fuel and water storage for military applications and other industrial applications such as fracking. 14 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Products Our Protection & Defence business consists of a growing range of respiratory products. The main products are respirators or gas masks (product names M50, C50, ST53, M53 and FM12) together with a range of spares and accessories; the NIOSH-approved emergency hood (NH15); rebreathers for escape and underwater use; and SCBA (primarily the Deltair product range). We also manufacture the consumable filters used by these products and thermal-imaging camera equipment. The respirators and escape hoods offer breathing protection to varying degrees against CBRN threats while the SCBA equipment offers protection in oxygen depleted environments. We also have a flexible fabrications business which manufactures fuel and water storage tanks and hovercraft skirts. M50 M61 The most advanced general service respiratory protection mask to date, offering advanced comfort, usability, operational effectiveness and protection. Pioneering conformal filter technology for closer integration and designed with bayonet quick fit for use only with the M50 mask. C50 MILCF50 Developed using the same platform as our M50 based US military mask. The innovative design features optimise the user’s time in the operational arena for CBRN protection in law enforcement or counter terrorism operations. The filter has a unique conformal shape providing a low profile close fit with the mask. The filter design minimises snag and pull hazards as well as reducing neck loading. ST53 DELTAIR One system for all missions combining the FM53 mask technology with an advanced modular breathing apparatus for specialist operations. As the firefighting industry’s first new SCBA innovation in years, Deltair offers superior air management, single power supply, clearer communication and optimal weight distribution for firefighters and other first responders. EEBD UNDERWATER REBREATHERS Our Emergency Escape Breathing Device for which we recently obtained NIOSH certification has military applications on-board ship and we are targeting applications in the mining industry. Following the acquisition of VR Technology Holdings we are upgrading the current recreational product range for military use and developing a multi-capability mine counter-measures rebreather. JSAM NH15 We are developing upgraded CBRN respiratory protection equipment for aircrew on the DOD’s fleet of fixed wing aircraft. The smallest NIOSH-certified CBRN air purifying escape respirator on the market ideal for police, emergency medical services and fire officers seeking immediate or emergency respiratory protection in a CBRN scenario. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S AEF Offering design and manufacture of flexible storage tanks, containers and other air-supported rubber structures. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 15 S T R AT E G I C R E P O R T Product development Our product development programme, Project Fusion, combines the skills and expertise of our design and engineering teams to produce a modular personal protection system comprising smaller modules with multiple functionalities that can be combined or used independently in different threat scenarios. We have launched the first components of this system:  AvonAir, our new range of Powered Air Purifying Respirators (NIOSH-approved, compact, battery-powered modular airflow units which reduce breathing resistance).  Extending our own range of filters. The M61 filter supplied to the DOD provides CBRN protection to the US warfighter. We have extended our range of NIOSH and CE-approved filters to cover a wider variety of threat scenarios for military and LE users.  Deltair, our new fire service offering, designed to meet the new 2013 NFPA standard, received NIOSH and NFPA certification and approval in April 2014 and was successfully launched to the market in the second half of our 2014 financial year.  EEBD, our emergency escape breathing device, for which we recently obtained NIOSH certification has military applications on-board ship and we are targeting applications in the mining industry.  HMK150 Helmet Mask Kombination was launched in 2014 and became the first product to meet a new German police standard for CBRN respiratory protection and head protection for riot control when combined with the Schuberth P100N helmet.  Further development activity is also expanding our respiratory product offering into the aerospace market (with an aircrew version of our existing M53 respirator) and the underwater diving market through a variety of breathing and monitoring technologies. We expect this modular approach to further extend our market reach into the military, law enforcement and first responder protective equipment market for air, land or sea based users. Avon’s new law enforcement SCBA system, the ST54, combines our new FM54 mask technology with a modular breathing apparatus. It is currently in its NIOSH & CE certification testing cycle and should be available in 2015. The PC50 respirator, derived from our successful C50 respirator, is specifically designed for the correctional facility market and is already NIOSH-approved. It should also be CE-approved in 2015 and will be made available with the base AvonAir breath assist system. The entire AvonAir modular product range has undergone extensive “voice of the customer” reviews to ensure we have incorporated features that provide customers with the best in class product. This process has confirmed we have captured the changing requirements and our proactive and constantly evolving design approach is working. We anticipate finalising the design efforts and submitting the product for certification testing in 2015. The Deltair, our new fire service SCBA product, incorporates Avon’s military pedigree in design and quality as a result of extensive investment in research. It will be further enhanced by a new respirator as part of the Project Fusion development programme. The design is nearing completion and we anticipate that the enhanced product will be available for the North American market in 2015. 16 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Dairy business model Markets Our Dairy business designs, manufactures and sells products and services used in the automated milking process, primarily rubberware such as liners and tubing. These consumable products come into direct contact with the cow and the milk and are replaced regularly to ensure product hygiene, animal welfare and to maximise milk quality. Our customer base is split between OEM customers and customers buying our own-brand Milkrite products. The global market is concentrated in high consumption automated milking markets in North America and Western Europe where we have significant market shares. Potential exists outside these traditional markets, in particular in China, India, Russia, Eastern Europe and South America, all of which are currently experiencing rapidly increasing demand for dairy products which is being satisfied through mechanised milking. During 2012 we established our first sales and distribution facility in Shanghai to enable us to service the Asian market more efficiently and have recently opened a similar facility in Brazil to service the South American market. US CHINA  Our Milkrite brand has established a 40% market share  Contracts secured with China’s largest milk suppliers  ImpulseAir has 21% share of the market and distributors, Mengniu and Yili  Dealer network established EU OTHER MARKETS  Milkrite market share has increased to 16% of which 2.5% represents ImpulseAir, launched in 2013  We now have sales resource in Brazil, India and Eastern Europe which will allow further opportunity for growth  Investment made in sales resource in 2013 starting to deliver Milkrite growth S W O C F O S N O I L L I M 40 35 30 25 20 15 10 5 0 EU NA CHINA BRAZIL RUSSIA INDIA  AVON MARKET SHARE  NO. OF COWS  OPPORTUNITY A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 17 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S S T R AT E G I C R E P O R T Products Our products are manufactured for major OEMs as well as being sold through distributors under our own Milkrite brand. We excel in product design, materials specification and manufacturing efficiency. We are working to bring a wider range of dairy products to market under our Milkrite brand, enhancing the farmer’s view of Milkrite as the primary technical solutions provider in the milk extraction process. The success of the innovative Milkrite Impulse Mouthpiece Vented Liner, ImpulseAir, continues and this product has established a 21% market share in the US since its launch in 2010 and a 2.5% market share in Europe since its launch there in 2013. Milkrite liners Milkrite’s Impulse and ImpulseAir range provides triangular liners designed for less slip and improved animal health benefits with their unique interlocking anti-twist shell design. ImpulseAir takes innovation one step further using a unique air flow to draw the milk away quickly. Milkrite’s ULTRALINER LT and TLC offer value for money and the latest in technological innovation. Milkrite tubing Milkrite Ultraclean dairy tubing is the first to combine a smooth sanitary interior surface with a durable, flexible rubber exterior which is chemically cross-linked, resulting in long-lasting tubing that will clean better and maintain milk purity like no other product on the market today. OEM liners and OEM tubing We manufacture liners and tubing for milking machine manufacturers. Product development We have invested considerably in product development resource. Our Cluster Exchange programme, recently launched in the US and Europe, means Milkrite is a complete solution provider, saving farmers time on low-value tasks, securing our relationships with our customers and managing the liner change cycle. Further opportunities are available for this exciting concept. Health standards around the world are changing and we take them very seriously. This year, we have invested in an upgrade to our compound to ensure that we comply with new regulations in Europe. We continue to provide Food and Drug Administration (FDA) approved products to the US and we have developed a unique long life capability for rubber liners, which is developing a growing market share in the North American market. RESE ARCH AND DE VELOPMENT AWARD FOR MILK RITE In October 2013 Milkrite was presented with The Royal Association of British Dairy Farmers (RABDF) Prince Philip Award by His Royal Highness at Buckingham Palace. The award recognised research and development in the field of dairy farming. RABDF’s president, Prof David Leaver said: "The development of new technology which improves productivity on dairy farms is an important component for improving the industry's competitiveness. Consequently, I am delighted to see Milkrite receiving the award for their continuing innovation as a company.” 18 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Business review – the year under review Group performance Avon has delivered a strong set of financial results, providing returns on the investments made in the previous five years. The increase in profitability (despite foreign exchange translation headwinds of £0.8m) and strong cash conversion has enabled the Group to position itself to take advantage of the many further opportunities for future growth. The Group’s key achievements in 2014 have been:-  EBITDA growth of 14% to £22.9m  Increased order intake in Protection & Defence  Operating profit growth of 20% to £17.0m  Product approvals received for Deltair, EEBD and  Operating margins improved by 2.2% to 13.6%  Profit before tax up 21% to £16.6m  Diluted earnings per share up 30% to 42.3p  Dividend increase of 30% to 5.61p reflecting business growth, strong cash flows and confidence in the future  Cash generated from operating activities of £26.5m, representing 156% of operating profit a number of other Project Fusion modules  Market share growth of ImpulseAir to 21% in the US and 2.5% in the EU  Cluster Exchange successfully launched in US and Europe servicing 256,000 cows on 887 farms  Investment of £7.0m in new products and new markets NOTE: The Directors believe that adjusted measures provide a more useful comparison of business trends and performance. Adjusted results exclude exceptional items, defined benefit pension scheme costs and the amortisation of acquired intangibles. The term adjusted is not defined under IFRS and may not be comparable with similarly-titled measures used by other companies. All profit and earnings per share figures in the Chairman's Statement and this Strategic Report relate to adjusted business performance (as defined above) unless otherwise stated. A reconciliation of adjusted measures to statutory measures is provided below:- 2014 2014 2014 2013 2013 2013 Statutory Adjustments Adjusted Statutory Adjustments Adjusted Group EBITDA (£m) Group operating profit (£m) Other finance expense (£m) Group profit before taxation (£m) Taxation (£m) Group profit for the year (£m) Basic earnings per share (pence) Diluted earnings per share (pence) Protection & Defence EBITDA (£m) Protection & Defence operating profit (£m) 20.5 14.3 0.2 13.9 3.1 10.8 36.2 35.0 16.5 11.3 2.4 2.7 - 2.7 0.4 2.3 7.5 7.3 2.0 2.3 22.9 17.0 0.2 16.6 3.5 13.1 43.7 42.3 18.5 13.6 19.2 13.0 0.3 12.4 3.6 8.8 30.0 28.8 15.7 10.2 0.8 1.2 0.1 1.3 0.1 1.2 3.8 3.7 0.4 0.8 20.0 14.2 0.2 13.7 3.7 10.0 33.8 32.5 16.1 11.0 The adjustments comprise:  Amortisation of acquired intangibles of £0.3m (2013: £0.4m)  Defined benefit pension scheme costs of £0.4m (2013: £0.4m), which relate to a scheme closed to future accrual and therefore do not relate to current operations Further details are provided in note 3 of the financial statements.  Exceptional item of £2.0m (2013: £0.4m) relating to the consolidation of Protection & Defence sites  Tax effect of exceptional item of £0.4m (2013: £0.1m) R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 19 S T R AT E G I C R E P O R T Results Constant currency information Avon has made excellent progress during 2014. Revenue remained flat at £124.8m (2013: £124.9m) as a result of strengthening sterling. At constant currency, revenue increased by 4.8% with Protection & Defence up 4.7% and Dairy up 5.0%. Operating profit increased to £17.0m (2013: £14.2m) and earnings before interest, taxation, depreciation and amortisation (EBITDA) were £22.9m (2013: £20.0m). This represents a return on sales (defined as EBITDA divided by revenue) of 18.4% (2013: 16.0%). After net interest and other finance costs the profit before tax was £16.6m (2013: £13.7m). After tax, the profit for the year was £13.1m (2013: £10.0m). Finance expenses Net interest costs remained constant at £0.3m (2013: £0.3m). Other (non-cash) finance expenses associated with the unwinding of discounts on provisions were £0.2m (2013: £0.2m). Taxation The statutory tax charge totalled £3.1m (2013: £3.6m) on a statutory profit before tax of £13.9m (2013: £12.4m). In 2014 the Group paid tax in the US, but not in the UK due to brought forward tax losses. The effective tax rate for the period is 22% (2013: 29%), reflecting a more favourable geographic mix of profits. The adjusted effective tax rate, where the tax charge and the profit before taxation are adjusted for exceptional items, the amortisation of acquired intangibles and defined benefit pension scheme costs is 21% (2013: 27%). In 2014 the US Federal tax rate was 34% and the Group’s effective tax rate reflects the predominance of US revenues and earnings. Unrecognised deferred tax assets in respect of tax losses in the UK amounted to £1.4m (2013: £2.8m). The Group is exposed to the translation effect of fluctuations in the sterling/US dollar rate given its significant US presence. In 2014 the strengthening of sterling by 9 cents from an average rate of $1.56 to $1.65 provided a currency headwind. Constant currency information is based on 2014 actual results compared with 2013 results translated at 2014 rates and the impact on key reported numbers is: Reported change Constant Currency Growth Group revenue Group operating profit Group diluted EPS P&D revenue P&D operating profit Dairy revenue Dairy operating profit (0.1%) 19.5% 30.2% (0.3%) 23.0% 0.8% 10.7% 4.8% 25.7% 36.5% 4.7% 28.1% 5.0% 17.0% Earnings per share Basic earnings per share were 43.7p (2013: 33.8p) and diluted earnings per share were 42.3p (2013: 32.5p). GRE AT PL ACE TO WORK We launched our Great Place to Work initiative on 1 October 2014 with a new employee recognition and reward programme. The aim of the new programme is to reward employees who demonstrate Avon's core values, embodied by the acronym CREED. See page 38 for further details. 20 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Segmental performance Protection & Defence performance Protection & Defence represented 74% (2013: 75%) of total Group revenues. The business saw revenues decrease by 0.3% from £93.2m to £92.8m (an increase of 4.7% at constant currency). Underlying growth was due to growing non-DOD mask sales. Our strong manufacturing capability and existing capacity allowed us to meet this increase in customer demand. 7% 12% 49% 2013 £93.2m 28% 38% 2014 £92.8m 34% Operating profit grew strongly to £13.6m (2013: £11.0m) up 23.0% and EBITDA was £18.5m (2013: £16.1m), representing a return on sales (as defined above) of 20.0% (2013: 17.3%). This reflects a richer mix of non-DOD sales and improved operational performance, slightly offset by continued investment in the infrastructure of the business. As expected, sales of mask systems and filter spares to the DOD reduced from £45.2m to £34.0m as production scheduling was flexed to accommodate the higher level of non-DOD activity. We delivered 168,000 mask systems and 172,000 pairs of filter spares, compared with 223,000 mask systems and 429,000 pairs of filter spares in 2013. As a result of higher order intake of 246,000 mask systems, we have orders in hand of 118,000 mask systems which gives us good order coverage for the first half of 2015. As part of our 10 year sole-source contract to supply the DOD with mask systems, we expect further orders as 2015 DOD budgets are released in the first half of the new financial year. 6% 10% 8% 8% Mask systems ) S D N A S U O H T ( S M E T S Y S K S A M 3000 2500 2000 1500 1000 500 0 DOD masks and filters DOD spares EMEA/NA Law Enforcement Fire AEF 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2  D E L I V E R E D  O R D E R S NE W UNDERWATER SYS TEMS FACILIT Y IN POOLE, UK Over the past year Avon Protection has evolved its product offerings into underwater breathing apparatus for the military diving market. This complements our military portfolio of land, air and sea. Avon Underwater Systems now provides innovative military diving equipment and technology to a global customer base. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 21 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S S T R AT E G I C R E P O R T DOD sales are a lower proportion of the division’s sales as, in line with our strategy, we have successfully grown our non-DOD sales. Sales to US law enforcement and non-US military and law enforcement increased from £25.0m to £31.0m as a result of strong order intake in 2014 as we experience the benefit of the increased sales and marketing resource added in prior years. We won an industrial order in the final quarter of the year for 27,000 escape hoods of which the majority is for delivery in 2015. Sales to the fire market were flat in the first half of the year as purchasers put procurement decisions on hold pending release of the new, delayed, NFPA standard. Our new Deltair SCBA, designed to meet these new US regulations and to enhance operational performance, was approved in April 2014. It is one of only three units to receive approval to date and has been well received by the market in early customer trials. This led to a relatively stronger conclusion to the year and our target of converting this pipeline of opportunity into revenue in 2015 has begun well as we carry forward confirmed orders for 600 Deltair units. AEF again made a positive contribution to divisional operating profit, winning hovercraft skirt and fuel and water storage tank orders. We enter 2015 with order coverage for the first half of the year, which gives us excellent visibility in this part of the business. DOD spares sales have grown this year, as expected; as the installed base of masks grows so does the DOD’s requirement to fill its supply chain. Operating margin % P&D 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2009 2010 2011 2012 2013 2014  Operating margin % P&D Dairy performance Dairy revenues increased by 0.8% to £32.0m (2013: £31.7m) (up 5.0% on a constant currency basis) reflecting the success of our Cluster Exchange service and growth of the Milkrite brand in Europe. Operating profit increased by 10.7% to £5.7m (2013: £5.2m) (up 17.0% at constant currency). EBITDA was £6.6m (2013: £5.8m), giving a return on sales (as defined above) of 20.7%, up from 18.4% in 2013. Operating margin % Dairy 20.0% 15.0% 10.0% 5.0% 0.0% 2009 2010 2011 2012 2013 2014  Operating margin % Dairy The difficult market conditions experienced during the latter part of the previous financial year began to improve as a result of the better 2013 harvest which resulted in lower animal feed costs. This, together with higher milk prices, reduced the pressure on farmer revenues and margins and led to a return of more normal levels of demand for our consumable products. Milkrite increased as a proportion of total revenue providing a richer sales mix. Only four years ago OEM customers represented 47% of our revenue; at the end of this year this had fallen to 31%, reflecting the success of the Milkrite brand. ) m £ ( E U N E V E R 18 16 14 12 10 8 6 4 2 FY11 H1 FY11 H2 FY12 H1 FY12 H2 FY13 H1 FY13 H2 FY14 H1 FY14 H2  O E M  M I L K R I T E  T O TA L 22 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 In recent years the business has demonstrated through the launch of its ImpulseAir liner that the industry is receptive to new technology which improves farm efficiency and animal health, with our proprietary product now enjoying a 21% market share in the US (2013: 19%). The launch of the ImpulseAir liner in Europe, where market share grew to 2.5%, contributed to an increase in Milkrite’s overall market share (now 16.5%), delivering returns on our investment in the sales force, enhanced technical support and a larger distributor network. This success has given us the confidence to invest further in product development resource and to commence work on the next generation of products. The first example of this, our Cluster Exchange service, which was successfully launched in the US and Europe at the end of 2013, gained momentum as the year developed and by the end of the year was servicing 256,000 cows on 887 farms. This add-on service for the farmer increases the value of each direct liner sale we make and should lead to a more robust business model. Under this programme farmers outsource to us their liner change process, which we deliver through service centres established in our existing facilities, with the support of our dealers and third-party logistics specialists. US Market Share 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 3% 2.5% 2% 1.5% 1% 0.5% 0% Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14  US Market Share EU Market Share US Cluster Exchange Monthly Revenue 2 1 t c O 2 1 v o N 2 1 c e D 3 1 n a J 3 1 b e F 3 1 r a M 3 1 r p A 3 1 y a M 3 1 n u J 3 1 l u J 3 1 g u A 3 1 p e S 3 1 t c O 3 1 v o N 3 1 c e D 4 1 n a J 4 1 b e F 4 1 r a M 4 1 r p A 4 1 y a M 4 1 n u J 4 1 l u J 4 1 g u A 4 1 p e S UK & EU Cluster Exchange Monthly Revenue 160 140 120 100 80 60 40 20 0 0 0 0 $ ' 0 0 0 £ ' 60 50 40 30 20 10 0 Mar 13 Sep 13 Mar 14 Sep 14 1 1 t c O 1 1 c e D 2 1 b e F 2 1 r p A 2 1 n u J 2 1 g u A 2 1 t c O 2 1 c e D 3 1 b e F 3 1 r p A 3 1 n u J 3 1 g u A 3 1 t c O 3 1 c e D 4 1 b e F 4 1 r p A 4 1 n u J 4 1 g u A  EU Market Share  UK  EU A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 23 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S UK retirement benefit obligations The balance, as measured under IAS 19 (revised) ('IAS 19 (R)'), associated with the Group’s UK retirement benefit obligation, which has been closed to future accrual, has moved from a £11.3m deficit at 30 September 2013 to a £16.0m deficit at 30 September 2014. This movement has resulted from a decrease in the discount rate. IAS 19 (R) specifies the use of AA corporate bond (rather than gilt) yields to set the discount rate. During 2014, the Group paid total contributions of £0.5m. A new triennial actuarial valuation took place as at 31 March 2013. That valuation showed the scheme to be 98.0% funded on a continuing basis and this has given rise to a new deficit recovery plan under which the payments for the Group financial years ending 30 September will be as follows: 2015: £550,000, 2016: £675,000, 2017: £700,000 and 2018: £700,000. These amounts include £250,000 p.a. in respect of administration expenses. S T R AT E G I C R E P O R T In China, after a softer first half when the dairy industry was restructured following a number of issues, including contaminated milk, contaminated feed and an outbreak of foot and mouth disease, we were pleased to see volumes returning to expected levels in a market which has excellent long-term potential. In many other emerging markets, including Brazil and India, the number of dairy cows being milked using automated milking processes is growing strongly. This is adding to the market potential for the consumable products we sell. We plan to harness this potential by establishing sales and distribution functions in these markets as they develop and consequently we have established a sales and distribution centre in Brazil in the first quarter of the new financial year. Group position Net cash and cashflow Net cash at the end of the year was £2.9m (2013: net debt of £10.9m). The Group has no borrowings at the year end; total bank facilities were £24.5m, which are US dollar denominated and committed to 30 November 2017. In the year we invested £6.8m (2013: £11.1m) in property, plant and equipment and new product development. In the Protection & Defence business this focused on our new product development programme, Project Fusion. In Dairy we invested in the hardware required to support our Cluster Exchange service offering. Across the Group we continued our investment in a common IT platform to support the Group’s future growth ambitions. Operating activities generated cash of £26.5m (2013: £15.5m), representing 156% of operating profit (2013: 109%). Through sound operational management the Group has driven a strong conversion of profits into cash and this was supplemented by the phasing of customer payments including £3.5m of accelerated payments from a major customer ahead of its financial year-end. Receivables at 30 September 2014 were lower than the previous year due to this phasing and these accelerated payments. IMPUL SE AIR PARLOUR FOR LUCK Y DE VON FARMER Mr Raffe, a farmer based in Holsworthy, Devon was the lucky winner of the Milkrite ImpulseAir competition this year and his parlour was fitted with brand new ImpulseAir liners, shells and weights. 24 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Research and development expenditure Protection & Defence £m Dairy £m Total expenditure Less customer funded Group expenditure Capitalised Income statement impact of current year expenditure Amortisation Total income statement impact Revenue R&D spend as % of revenue 6.7 (4.5) 2.2 (1.6) 0.6 1.7 2.3 92.8 7.2% 0.3 - 0.3 (0.2) 0.1 0.1 0.2 32.0 1.0% Total £m 7.0 (4.5) 2.5 (1.8) 0.7 1.8 2.5 124.8 5.6% An update to the actuarial position as at 30 September 2014 has been obtained and this shows a deficit of £10m, which represents a funding level of 97%. It is this metric that the Group focuses on, as this and not the accounting IAS 19 (R) metric is what drives the funding requirement for the scheme. At 30 September 2014 the reason for the difference between the two measures is the fall in AA corporate bond yields. IAS 19 (R) specifies the use of AA corporate bond yields (rather than gilt yields adjusted for expected returns on return-seeking assets in the investment portfolio) to set the discount rate for the accounting metric. As the Avon scheme is not 100% invested in corporate bonds a mis-match in the accounting metric occurs. The actuarial metric takes account of the diversified investment approach of Avon’s scheme and therefore provides a more realistic reflection of the funding status of the scheme at any point in time. Research and development Intangible assets totalling £17.2m (2013: £16.5m) form a significant part of the balance sheet as we invest in new product development. This can be seen from our expanding product range, particularly respiratory protection products. The annual charge for amortisation of intangible assets was £1.8m (2013: £1.9m). Our total investment in research and development (capitalised and expensed) amounted to £7.0m (2013: £6.4m) of which £4.5m (2013: £2.1m) was customer funded and has been recognised as revenue. In Dairy we have started to expand our product range under the Milkrite brand beyond liners and tubing into non-rubber goods such as liner shells and claws. We have started to see the benefits of these efforts, which underpin the long-term prosperity of the Group, during our 2014 financial year. DELTAIR PICK S UP GOLD AWARD Deltair, our new fire service offering, received NIOSH and NFPA certification and approval and was successfully launched to the market in our 2014 financial year. Deltair received ultimate recognition with a Gold International Design Excellence Award (IDEA®) for research. The IDEA programme is regarded as an extremely distinguished design competition with its scope and influence reaching far beyond the US. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 25 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S S T R AT E G I C R E P O R T Key Performance Indicators (KPIs) The Group uses a variety of performance measures which are detailed below. 12 MONTH MOVING TOTAL REVENUE 130 125 120 115 £m 110 105 100 95 90 REASON FOR CHOICE This looks at revenue for a cumulative 12 month period and is used to identify the directional trend in revenue. HOW WE CALCULATE This is measured at sales value. COMMENTS ON RESULTS Revenue is flat in 2014 due to the negative translation effect of the weaker US dollar. On a constant currency basis, revenue increased by 4.8% due to an increase in non-DOD sales in Protection & Defence and growth in Milkrite and Cluster Exchange in Dairy. Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 2013 Sep 2014 D E C R E A S E D BY 0.1% PROTECTION & DEFENCE ORDERS IN HAND REASON FOR CHOICE This demonstrates the orders in hand for fulfilment and future sales. £46m £31m £15m 2012 £31m £15m £16m 2013 £33m £21m £12m 2014 DOD NON DOD RETURN ON SALES 15.3% 16.0% 18.4% 2012 2013 2014 HOW WE CALCULATE This is measured at sales value. COMMENTS ON RESULTS We delivered a large non-DOD order prior to the year end and flexed our DOD scheduling to meet these production requirements. I N C R E A S E D T O  £33m REASON FOR CHOICE This measure brings together the combined effects of procurement costs and pricing as well as the leverage of our operating assets. HOW WE CALCULATE Earnings before interest, taxation, depreciation, amortisation and exceptional items (EBITDA) divided by revenue. COMMENTS ON RESULTS We have succeeded in growing profit in our Protection & Defence business through the richer sales mix of higher margin non-DOD sales. In Dairy, an increasing proportion of higher margin Milkrite sales contributed to an increased return on sales. I N C R E A S E D T O  18.4% 26 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 TRADE WORKING CAPITAL TO REVENUE RATIO 19.0% 20.8% 17.8% REASON FOR CHOICE Management of working capital ensures that profit growth converts into cash generation. HOW WE CALCULATE Trade working capital is defined as inventory + trade receivables - payables, expressed as a percentage of revenue. COMMENTS ON RESULTS Overall, working capital has been reasonably stable during the year and was impacted at the year end by an accelerated payment from a major customer. 2012 2013 2014  D E C R E A S E D T O 17.8% DILUTED EARNINGS PER SHARE 25.4p 32.5p 42.3p REASON FOR CHOICE This measure is designed to include the effective management of interest costs and the tax charge and measure the total return achieved for shareholders. HOW WE CALCULATE Profit after tax excluding the impact of the amortisation of acquired intangibles, defined benefit pension scheme costs and exceptional items divided by the fully diluted number of ordinary shares. COMMENTS ON RESULTS Higher operating profit and a lower Group effective tax rate in 2014 have contributed to an improved EPS position. 2012 2013 2014  I N C R E A S E D T O 42.3p Our non-financial KPIs in relation to health and safety and employees are detailed in our Environmental and Corporate Social Responsibility report on pages 34 to 40. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 27 S T R AT E G I C R E P O R T Principal risks and uncertainties The Group has an established process for the identification and management of risk across the two business divisions working within the governance framework set out in our corporate governance statement (see pages 46 to 50). Ultimately the management of risk is the responsibility of the Board of Directors, and the development and execution of a comprehensive and robust system of risk management has a high priority at Avon. The Board’s role in risk management includes promoting a culture that emphasises integrity at all levels of business operations, Risk management within the business involves: embedding risk management within the core processes of the business, approving appetite for risk, determining the principal risks, ensuring that these are communicated effectively across the businesses and setting the overall policies for risk management and control. The principal risks affecting the Group are identified by the Group Executive team and reviewed by the Board.  Identification and assessment of individual risk  Design of controls  Testing of controls through internal audits  Formulating a conclusion on the effectiveness of the control environment in place 28 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 The process involves a quarterly risk assessment and a process for ensuring that the Group’s approach to dealing with individual risks is robust and timely. Each risk, once identified, has priority tasks allocated to it that are the responsibility of the members of the Group Executive to deliver during the financial year. Regular sessions are held throughout the year to review progress in delivery of the priority tasks at an operational level. We identify three main risk areas:  Strategic risks – risks affecting the strategic aims of the business, or those issues that affect the strategic objectives faced by the Group  Financial risks – issues that could affect the finances of the business both externally and from the perspective of internal controls  Operational risks – matters arising out of the operational activities of the Group relating to areas such as procurement, product development and interaction with commercial partners The principal risks identified through the risk management process are listed on the following page in order of severity and with the categorisation given to them internally shown alongside. Mitigation, where possible, is shown by each identified risk area. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 29 S T R AT E G I C R E P O R T Principal risks and uncertainties (continued) Type of Risk Business Risk Mitigation 1 O P E R AT I O N A L Product development  Failure to meet regulatory product/system requirements  Lack of investment in new products  Lack of expertise and skills  Failure to identify and implement new products e.g. protection equipment and dairy products require regulatory approvals in each market in which they are sold. Obtaining approval can lead to delays in product launches or significant rework for different markets Market threat  Lack of sales growth  2 S T R AT E G I C  Loss of major contract or business to competitor e.g. price competition in the dairy market and the impact of milk prices and feed costs  Publication of and adherence to a technology roadmap, intellectual property manual and New Product Introduction (NPI) process  Focus on delivery of projects in the roadmap on time, to budget and cost  Sales and product development have the objective of delivering external funding and new revenue streams  Safety approvals and sole source supply contracts provide significant barriers to entry  Continued investment in product development to ensure competitive advantage e.g. our ImpulseAir dairy liners which offer superior quality and milk yield and our innovative Protection project to integrate our suite of masks and breathing apparatus  Setting the strategy for i) securing US Government funding; ii) winning additional business from existing customers; and iii) capturing new customers and revenue streams  Continuing recruitment of sales personnel  3 O P E R AT I O N A L  Business interruption – supply chain  Dependency on sole supplier/subcontractor  Proactive approach to the approval of second sources  Availability/quality of raw materials  Failure to manage distributors and dealers correctly and reducing cost through purchasing initiatives  Robust supplier quality management procedures  Negotiations with customers to pass on increases in raw materials prices Key Arrows indicate whether the level of risk relative to the other risks of the business has increased (), decreased () or remained the same() during the year. 30 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Type of Risk Business Risk Mitigation 4 O P E R AT I O N A L Talent management  Insufficient skills of employees  Poor engagement and morale  Dysfunctional organisational structure/reporting lines  5 Quality risks and product recall  Poor quality systems allow faulty O P E R AT I O N A L product to reach customer  Process/material/equipment inadequacy e.g. our protection products are safety critical therefore all product reaching the end consumer must meet specification Customer dependency  Over reliance on a few customers e.g. US Government, Dairy OEMs  Poor customer relationships and communication due to incomplete understanding of customers or failure to meet expectations Non-compliance with legislation  6 S T R AT E G I C  7  Focus on celebrating and rewarding achievements and promoting positive action by empowering our people and engaging and involving them through effective communication, including CEO annual presentations to each location  Continue to realign teams and structures, recruiting where appropriate to ensure that as the business grows the structure remains fit for purpose  Active management by succession planning, the annual performance management process and the reward and incentives structure  Focus on Six Sigma manufacturing disciplines, site quality procedures and employee engagement  Focus on product development to improve design of products  Continue with equipment and process improvements  Focus on customer service (internal and external)  Growing sales to other customers e.g. continuing to expand Protection sales into new countries and markets and expanding dairy sales into developing markets  Setting and regular monitoring of sales budgets and major sales prospects by the Group Executive and the Board  Failure to comply with export controls,  Regular focus and review of the export and ITAR O P E R AT I O N A L the International Traffic in Arms Regulations (ITAR), Bribery Act and product approvals control framework, NPI process and the internal control procedures  Internal and external audit  Talent management is considered an increasingly important priority for the business. Due to the limited number of quality issues and our lower dependence on large customers, these risks have been re-ordered. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 31 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S S T R AT E G I C R E P O R T Trends affecting the future Protection & Defence – DOD spending Our Protection & Defence business is well placed to meet the challenges of a continuing period of instability in the global defence market. Providing safety-critical equipment to the warfighter under a long-term sole-source contract with the DOD provides a degree of certainty in our biggest market, while our rapid growth in homeland security and military markets around the globe demonstrates the success of our strategy of investing in sales, marketing and product development. In May 2008 we were successful in obtaining a single-source $112m, five year full rate production (FRP) contract from the DOD for the M50 military respirator at the supply rate of 100,000 mask systems per annum. The DOD also exercised its ‘requirements’ option to extend the order for a further five years allowing it to take up to a further 200,000 mask systems per annum, resulting in total potential quantities of up to 300,000 mask systems per annum over a ten year period. Budget funding for our ten year sole-source respirator programme with the DOD has been largely unaffected by the current economic instability although the procedural process of doing business with the US Government has slowed. Despite continued downward pressure on military budgets globally and in particular uncertainty about the size and timing of the approval of DOD budgets, we expect spend on PPE for the warfighter to remain stable, although the timing of orders may again be unpredictable. At the year end we carried forward orders for 118,000 M50 masks for delivery in 2015. We also expect further mask orders in 2015 from 2015 DOD budgets. The buying pattern of filter spares has been less stable and predictable as is often the case when a new product is first fielded to the front line. The combination of filling the logistics chain and replacement of filters which have been used or where the shelf-life has expired provides a long-term source of demand for filter spares. We expect Avon to be one of two sources for filters for the DOD from 2015. Dairy – market conditions The market for our consumable product can be affected by macro issues that impact farmers’ short-term cash flow and thus their purchasing patterns. The milk price, which determines the farmer’s revenue, is impacted by both short-term commodity markets (it is a traded item in the US) and the medium-term cycle of cow population, as herds are bred or culled. Feed is the farmer’s major input cost and the price of feed is determined by the success or otherwise of the harvest and competing demand for the crops. ARMED FORCES DAY At Avon, we are immensly proud of our armed forces, the work they do and the sacrifice they make on our behalf. A number of our employees and their families serve in reserve forces and we are forever grateful for their commitment. 32 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Group – treasury and exchange rates The Group uses various types of financial instruments to manage its exposure to market risks which arise from its business operations, full details of which are included in note 19 of the financial statements. The main risks continue to be movements in foreign currency and interest rates. The Group’s exposure to these risks is managed by the Group Finance Director who reports to the Board. The Group faces translation currency exposure on its overseas subsidiaries and is exposed in particular to changes in the US dollar. Each business hedges significant transactional exposure by entering into forward exchange contracts for known sales and purchases. The Group reports trading results of overseas companies based on average rates of exchange compared with sterling over the year. This income statement translation exposure is not hedged as this is an accounting rather than cash exposure and as a result the income statement is exposed to the following:  Based on the 2014 results a 5¢ movement in the average US dollar rate would have impacted reported operating profit by £0.4m (2013: £0.4m) and profit after tax by £0.3m (2013: £0.3m). The balance sheets of overseas companies are included in the consolidated balance sheet based on the local currencies being translated at the closing rates of exchange. Balance sheet translation exposure can be partially hedged by matching either with foreign currency borrowings within the subsidiaries or with foreign currency borrowings which are held centrally. At the end of the year the asset exposure was not hedged as there were no borrowings (2013: asset exposure was 5% hedged). As a result of the remaining balance sheet exposure, the Group was exposed to the following:  Based on the 2014 balance sheet a 5¢ movement in the year-end US dollar rate would have impacted Group assets by £1.4m (2013: £1.1m). The Group is exposed to interest rate fluctuations but with net cash of £2.9m (2013: net debt of £10.9m), a 1% movement in interest rates would have no impact on interest costs (2013: increase of £0.1m). The Group assesses the need to obtain the best mix of fixed and floating interest rates in conjunction with the maturity profile of its debt. There were no fixed interest borrowings at the year end (2013: £nil). Peter Slabbert Chief Executive 19 November 2014 Andrew Lewis Group Finance Director 19 November 2014 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 33 E N V I R O N M E N TA L A N D C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y Annual report on environmental Ethics and anti-corruption and corporate social responsibility The Directors recognise the importance placed on how businesses take account of their economic, social and environmental impact with the aim of addressing their own competitive interests at the same time as those of wider society. The Directors acknowledge that this involves balancing the interests of shareholders, employees, customers, suppliers and the wider communities in which our businesses operate. As we continue to work to strengthen our position as the world leader in the markets in which we do business, we will also seek to honour our obligations to society by being an economic, intellectual and social asset to each community in which we operate. We are committed to minimising the impact of our operations on the environment. We encourage all employees to think about ways of modifying their behaviour to reduce our impact on the environment by, for example, reducing waste, cutting out unnecessary travel and saving water and energy. At many of our sites we remain one of the largest employers in the local area. As an integral part of the community we are aware of the impact that our operations and products have on the local environment and seek to contribute to its economic, social and environmental sustainability. We also strive to:  Manage the Group as a sustainable business for the benefit of shareholders and other stakeholders The Code requires our employees to carry on their business activities in a way that will attract the respect of those they deal with and will not bring Avon’s reputation into disrepute. This includes complying with the laws and regulations in the countries in which we operate and do business. The Code also contains guidance on avoiding conflicts of interest, confidentiality, our approach to gifts and hospitality, bribery and corruption and managing relationships with third parties. We have a zero-tolerance approach to bribery and corruption and are committed to acting professionally, fairly and with integrity in all our business dealings and relationships and implementing and enforcing effective systems to counter bribery and corruption. We are committed to only working with third parties whose standards are consistent with our own. For example, all agents and third parties who act on behalf of the Group are obliged to comply with the standards set out in the Code, which is incorporated into all written agreements. A programme of supplier audits exists to ensure suppliers adhere to Avon’s standards. These areas continue to receive focus as part of our aim to uphold the strictest standards of business conduct and ethics throughout the Group. We believe a culture of openness and accountability is essential to encourage all employees to report any behaviour which may be a breach or a suspected breach of the Code, or any unethical or illegal behaviour. The Code also contains a whistleblowing procedure which enables any employee or individual working for the Group to raise concerns about breach of policy or malpractice directly at the highest level.  Aim for the highest standards of health and safety in the workplace A copy of the Code is available to all employees in addition to being available on the Group website.  Develop and motivate our employees, ensuring they are Human rights fully engaged in the Group’s strategy Avon is fully committed to respecting the human rights of all those working with or for us. We do not accept any form of child or forced labour and we will not do business with anyone who fails to uphold these standards.  Minimise waste and emissions that contribute to climate change Code of conduct Our Code of Conduct has been updated and will be re-launched at the end of the calendar year. It sets out the values and standards of behaviour expected from everyone working for or on behalf of Avon at our locations around the world. The Code provides employees with a guide as to what is expected of them as representatives of the Group and provides information on how to report concerns. 34 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Environmental responsibility At the start of the year we set significant environmental improvement goals. Each site has delivered a number of improvements: Cadillac, US  Improved lithium and alkaline battery recycling facilities on site  Lighting improvements reducing total emissions and delivering cost reductions  Installation of motion detectors to control lighting in offices and rest rooms  All corrugated material is now recycled Picayune, US  Wooden pallets are now recycled rather than disposed of as general waste  Lighting reductions, without compromising safety or the integrity of the product, have reduced our carbon emissions and saved on energy costs  Soak hoses have been introduced to replace spraying to water the landscape  Waste Electronic and Electrical Equipment (WEEE) and used ink cartridges are recycled locally rather than disposed of in landfill Belcamp, US  A single stream recycling programme has been introduced  Site lighting has been upgraded for a more energy efficient system  Motion sensors have been installed in each office ensuring that lights are automatically turned off when the office is vacant Johnson Creek, US  Hydraulic pumps are now fitted with an automatic shut off system to reduce risks in the event of a fire. We have four hydraulic pumps that feed more than 70 presses Melksham, UK  A reduction in the kilo volt ampere (KVA) usage  Implementation of our ‘Red Tag’ project has seen the site recycle much of its unused equipment by either selling or transferring equipment to other sites or recycling with metal contractors  A number of employees participated in our ‘cycle to work scheme’ as part of the UK Government's 'Green Transport Plan'  Replacement of thorn bushes surrounding the facility with a mulch of waste cured rubber, reducing the need for cured rubber disposal and providing a cost-effective pest control measure Recycling In the UK our target is to achieve an annual 85% recycled waste level and this year we achieved 82%. It is becoming increasingly difficult to meet this target as cured rubber waste contractors are under significant pressure following a reduction of government funding for items such as school playgrounds, road surfacing and equestrian surfacing. This, coupled with the reduction in permitted emission levels from incineration, has had a detrimental effect on our recycling efforts. Our only other option is to dispose by landfill which we are reluctant to do as we are committed to minimising our environmental impact. We are exploring the potential of granulating our cured rubber waste and supplying direct to the equestrian world and are actively examining our compounds for suitability to ensure compliance with legislation. At all our sites we continue to recycle:  Waste cardboard  Waste polythene  Paper  Used products  Toners and inks  Metal  WEEE The significant improvements across all our sites are testament to the commitment of the Board and all our employees to invest in the future whilst reducing our impact on the environment and making substantial financial savings. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 35 E N V I R O N M E N TA L A N D C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y ISO 14001 In March 2014 our Melksham site successfully retained its 3 yearly accreditation to the ISO 14001 standard for environmental management systems; this audit was conducted by an external quality auditor. What is ISO 14001? ISO 14001 was developed to provide a management system to help organisations reduce their environmental impact. The standard provides the framework for organisations to demonstrate their commitment to the environmental by:  Reducing harmful effects on the environment  Providing evidence of continual improvement of environmental management Environmental management system By achieving ISO 14001 certification Avon is able to clearly demonstrate its commitment to reducing waste and recycling materials where appropriate. The benefits to the organisation are not just in cost savings, having ISO 14001 accreditation is also beneficial when tendering for new business. We aim to ensure that the ISO 14001 standard is successfully introduced into our Cadillac and Picayune plants over the next 18 months. Legislation With evolving environmental legislation within the EU, US and the UK, Avon ensures compliance through regular environmental updates from its membership to the Institute of Environmental Management and Assessment (IEMA). Carbon Reduction Commitment scheme (CRC) Avon’s Melksham site has been included in phase 1 of the Carbon Reduction Commitment scheme (CRC) for three years. This scheme is designed to improve energy efficiency and cut emissions. The CRC affects large public and private sector organisations across the UK, who are collectively responsible for approximately 10% of the UK’s greenhouse gas emissions. Participants include supermarkets, water companies, banks, manufacturing facilities, local authorities and all central government departments. Qualification for the next three year phase of the scheme which commenced in April 2014 is based on electricity usage. At Melksham, the installation of settled half-hourly meters has significantly reduced its electricity usage from that of phase 1 and the site does not qualify for inclusion in this next phase. Mandatory carbon reduction scheme The Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013 requires quoted companies to include within their annual report details of greenhouse gas emissions for which they are responsible and other environmental matters for which key performance indicators are selected. Avon has employees in each of its facilities who are responsible for collecting and acting on the data. The collected data allows the organisation to monitor and examine carbon emission trends and act accordingly. Emissions at Melksham have increased due to increased production on the tile moulding press, which requires steam to achieve temperature. Johnson Creek emissions increased due to the output from the new Cluster Exchange facility at the Johnson Creek site. Health and safety (H&S) The past year has been an exciting time for the health and safety professionals in our organisation with the introduction of monthly global H&S meetings for the UK and US sites. Through information sharing, knowledge and ideas we are able to implement best practice across our global sites. GLOBAL ISO 9 0 01:20 08 CER TIFIC ATION In June 2014, Avon Protection was recommended by Lloyds Registrar for Quality Assurance (LRQA) for Global ISO 9001:2008 certification and formal approval of this standard has now been received. We have developed a Quality Management System (QMS) to meet our customers' quality requirements while continually improving our operational processes. 36 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Greenhouse Gas (GHG) emissions Description GHG emissions in tons 2012/13 GHG emissions in tons 2013/14 Monthly meeting reports are displayed in our facilities and on our Avon Communication Exchange (ACE) intranet site for all employees and invited visitors to view and comment. Scope 1 Mandatory reporting of emissions directly from our operations which include fuel in our vehicles and refrigeration leakage. 7 5 Scope 2 Mandatory reporting of emissions from electricity, gas and water usage at each facility. 8,496 8,185 Over the next 12 months we will identify areas in which we can create standardised global policies, procedures and documentation; this will assist by removing any ambiguity regarding procedures and safety arrangements, therefore improving the safety of our working environments. Our management teams put considerable focus on dangerous occurrence reporting. This reporting ensures that any potential hazards are reported early and appropriate action taken before they cause an incident or a serious accident. These actions are key to ensure our facilities are safe places in which to work. Scope 3 Voluntary reporting of emissions including business travel, waste recycling, well to tank and transport and distribution. 747 5,372 Legionella Total GHG emissions 9,250 13,562 **For 2013/14 scope 3 voluntary reporting purposes we have included ‘well to tank,’ all company business travel emissions and ‘transport and distribution’ figures. These were added as suggested internal reporting categories this year therefore there will be no correlation with the previous year. Facility 2012/3 Scope 2 Emissions 2013/4 Scope 2 Emissions 2012/3 Average Headcount 2013/4 Average Headcount Melksham 3,300 2,686 Cadillac 2,062 2,066 Picayune Belcamp 913 149 1,019 155 196 304 46 40 205 304 37 44 Johnson Creek 2,072 2,259 156 160 2014 has seen an increase in focus regarding the prevention of any Legionella outbreak within the workplace by the Health and Safety Executive (HSE). There has been a concerted effort to inspect all premises in the UK with a cooling tower. Our Melksham site had a HSE inspection earlier in the year with a total clean bill of health given, however we as an organisation have decided to do more than our legal requirements by increasing our external servicing and cleanliness agreements. Safety teams A best practice initiative from our Cadillac site, which we will roll out across all sites next year, is that of empowering our employees to become more involved in health and safety decisions and best practices. Safety teams will be established at each of the facilities to conduct internal audits, inspections and lead by example, further increasing the positive safety culture throughout our organisation. NUR TURING TALENT Avon is committed to recognising, developing and recruiting new talent across our businesses. We believe that engaging bright talented people is the backbone to real innovation. UK A’ Level student Georgiana joined the Melksham design team this year for work experience in design and engineering. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 37 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S E N V I R O N M E N TA L A N D C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y Corporate social responsibility Investing in our people Our success depends on our people. The Group recognises the importance of our employees in helping us to achieve our corporate goals. We are committed to providing a working environment where everyone feels respected and valued and pursue equality of opportunity in all employment practices, policies and procedures regardless of race, nationality, gender, age, marital status, sexual orientation, disability, religious or political beliefs. During the year, the Board put in place a formal diversity policy setting out its approach to diversity, a copy of which can be found in the corporate governance section of our website. The Group aims to support all employees to develop to their full potential and we are committed to recognising, encouraging and developing talent across our business. We encourage talented employees by matching the right people to the right roles and by ensuring professional development opportunities are available throughout their employment within the Group. During the year we launched our flagship global ‘Professional Development Programme’ which enabled participants across our business to manage their own career development through setting self-learning objectives with the help and guidance of a mentor from within the organisation. We strive to be a great place to work for all our employees and it is under this banner that we have reinvigorated and re-launched our CREED recognition and reward programme. The Group’s core values are embodied by the acronym CREED, a set of principles and cultural values which are rigorously pursued and adhered to across the Group. C R E E D Understanding and delivering our CUSTOMER (internal or external) needs and expectations Motivating our people through appropriate RECOGNITION and reward programmes Providing responsibility through meaningful employee EMPOWERMENT Ensuring a friendly and ENGAGED environment that embraces worthwhile communications where innovation is encouraged Recognising the value of cultural DIVERSITY and talent across our business All employees have a part to play in ensuring Avon remains a great place to work. One of our corporate values is to motivate our people through appropriate recognition and reward programmes. Under our CREED reward programme, employees can nominate colleagues whom they believe embody one or more of the CREED values in their job performance. Each month all those nominated receive a recognition award from the Group, with a quarterly and annual winner selected from those nominated. Nurturing talent In the UK we support student engineers by enabling two second year university students to spend a year as members of our design team, working on new product development. In the US, we support a number of student summer placements and internship placements where students are able to alternate school semesters with full-time work semesters from their freshman year to graduation. We are also able to provide additional opportunities through secondments between our global sites. The students help us tackle real-world engineering problems as they learn about the engineering profession as well as having the potential for long-term employment within Avon. A number of our student placements have taken up full time employment with the Group following their graduation and contribute significantly to Group achievements. We operate Group-wide employee share plans to encourage our staff to participate in the future of the Group through share ownership. All UK employees are entitled to participate in the Share Incentive Plan (SIP) whilst US employees are invited to join the Employee Stock Purchase Plan (ESPP). Both provide the opportunity to purchase shares through payroll deductions. 38 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 The gender of our staff at 30 September 2014 was as follows: Non-Executive Directors Executive Directors Senior Managers Other Employees Total Male Female 2 2 14 475 493 1 - 4 262 267 Six of the senior managers (four male, two female) are also directors or officers of subsidiary undertakings. Employee Opinion Survey We understand that to provide growth and expand our future opportunities, we need a happy and motivated workforce. Understanding and acting on the concerns of our employees is the key to our future and we encourage active engagement across our sites throughout the year. Our annual employee opinion survey gives the opportunity for employees to give anonymous feedback to management, which we assess and use to inspire improvement plans. The survey helps to ensure Avon listens to its employees and strives for continuing improvement. The responses are evaluated by every manager level and it will continue to be an annual forum that helps Avon invest in its people and drive success.  The launch of our ‘Professional Development Programme’ will help employees develop to their full potential  The reinvention of CREED, our recognition and reward programme will encourage, reward and motivate our people We listen and drive forward improvements to make Avon a Great Place to Work Community and charitable contributions We aim to work with and for the communities in which we operate, recognising our role as a major employer in our geographical site locations. We are aware of the impact the Group has on its local environment and seek to contribute to its economic, social and environmental sustainability. Engaging with, and giving back positively to, the local community ensures that we are supporting our employees, their friends and families. We also work with many charitable organisations who work in the areas of business in which we operate. We recognise the value provided to local and wider communities by members of the reserve forces and those in public service. We are proud to have employees serving, and a number of our employees are part of service families. We support their commitment and dedication to serve. In the US we support our employees and their families in extracurricular activities through sponsoring local sports and school teams. In the UK, we have regular charitable giving events aimed at raising funds for both local and national causes. Listed below are a few examples of the organisations we have helped this year across our US and UK sites: • Cadillac Firefighters • CAPS - Soccer Field Improvement Target 2014 2013 • Creative Embroidery Response rate >50% 45% 71% • Friends of the Library Avon is a great place to work >60% 75% 80% • Mercy Hospital surgical wing The survey results are another of the Group's key performance indicators. • Pines Pin Busters • Wexford Habitat sponsorship of a habitat house We listened to the 2013 results and acted to make positive change across the company:  A new group wide HR role will bring HR policies into line across all sites A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 39 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S E N V I R O N M E N TA L A N D C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y • Wexford County historical museum restoration • Cancer Research UK • American Red Cross - Service to Armed Forces • 1st Bowerhill Scout Group, Melksham • Cadillac Community Schools • Alzheimer’s Support, Trowbridge • Cadillac Area Festival hospice motorcycle ride • Splash Wiltshire, Melksham • First Baptist Church shepherd's table • Children’s Hope Charity • United Way - Corp Pledge Community action • Cadillac Leadership lakefront playground • Cadillac Area Hockey • Franklin PTO technology upgrade • Tight Lines for Troops • CAPS Center Lake Fund field trips for school kids • The Cadillac Wellness Team (and their families) participated in the Cadillac Rotary Club Memorial Day 5K. Funds raised from this race help support Rotary community projects, including a student exchange programme • Donation of rubber benches and assistance to a Melksham primary school playground renovation • French American Chamber table sponsorship for comerica • Provided employee sponsorship through the Cadillac Chamber • Wexford Missaukee CTC • CASA - Sponsorship of baseball team • JDRF - Diabetes Ride sponsorship • Cadillac Leadership playground project • Oasis Family Resource cigar dinner • Alex Harrison Memorial bullying stance • DbarD Ranch Ride for A Cure, Spectrum Health Cancer Center • Cadillac Leadership Programme. This programme realises the fundraising and completion of a community project. This year’s class will provide the build of a play structure along the community lakefront in Cadillac. • Representation on the Baker College Advisory Committee, Wexford-Missauke, Career Technical Center Advisory Committee, Cadillac Chamber Leadership Board, MAT2 Initiative, Mercy Hospital Board, SHRM Cadillac Chapter, and Cadillac Area Health Coalition, CAIG group, Cadillac Area Industrial Foundation, Mercy Finance Committee and Cadillac Area Chamber Board of Directors • Feeding America Food Truck • Army Cricket Officials Association & Combined Cricket Officials Association India 2013 tour • British Mastitis Conference • KL National Herdsman’s Conference • National Mastitis Council Regional Miles Ingrey-Counter Company Secretary 19 November 2014 40 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 B O A R D O F D I R E C T O R S David Evans Chairman “The successful implementation of our strategy has delivered exceptionally strong growth and excellent cash generation in 2014. We remain convinced of the long-term growth potential for both our Protection & Defence and Dairy businesses.” Aged 68. David took up the position of Chairman of the Board in February 2012 having served on the Board from the time of his appointment in June 2007. He has been working in the defence sector for over 30 years and has extensive knowledge of the US market. David spent 17 years with GEC-Marconi before joining Chemring Group PLC in 1987 and was appointed Chief Executive in 1999. He remained on the Chemring Board as a Non-Executive Director following his retirement in April 2005 but stood down from this role during 2012 to focus on his role as Chairman of Avon Rubber p.l.c. He was previously a Non- Executive Director of Whitman PLC. Peter Slabbert Chief Executive Stella Pirie OBE Non-Executive Director Aged 52. Peter became Avon Rubber p.l.c.’s Chief Executive in April 2008. Peter was awarded the Chief Executive of the Year Award at the Grant Thornton Quoted Company Awards in January 2011. He joined Avon as Group Financial Controller in May 2000 and was appointed Group Finance Director on 1 July 2005. A Chartered Accountant, Peter joined from Tilbury Douglas where he was Divisional Finance Director and Group Financial Controller. Prior to that he worked at Bearing Power International as Finance Director. Aged 64. Stella was appointed as a Non-Executive Director in March 2005 and at the completion of 10 years’ valuable service will retire from the Board at the annual general meeting on 29 January 2015. Stella began her career as an auditor at KPMG before becoming Divisional Finance Director and Group Treasurer of Rotork p.l.c. and then Finance Director of GWR Group Plc. Stella has held various non-executive positions in both the private and public sectors. She is currently a Non-Executive Director and Audit Committee Chairman of Schroder UK Growth Fund p.l.c. and Highcross Limited. Stella was awarded the OBE in 1999. Andrew Lewis Group Finance Director Richard Wood Non-Executive Director Aged 43. Andrew joined Avon in September 2008 as Group Finance Director. He holds a first class joint honours degree in mathematics and accounting from the University college of North Wales, Bangor and is a Fellow of the ICAEW. Andrew was awarded the Young Finance Director of the Year Award at the ICAEW Financial Directors' Excellence Awards in May 2011. He gained a wide range of international experience as a Director at PricewaterhouseCoopers in Bristol and New Zealand before joining Rotork p.l.c. as Group Financial Controller. Aged 69. Richard joined the Board in December 2012. Richard is a graduate Chartered Chemical Engineer. He worked for ICI for 23 years and is a former Managing Director of ICI Seeds UK. Following this time he entered the pharmaceutical industry, firstly as Chief Executive of Daniels Pharmaceutical Limited until it was acquired by Lloyds Chemist plc, and then as Managing Director of a Lloyds division. He was Chief Executive of Genus plc for 15 years until his retirement in September 2011. He is currently Chairman of Atlantic Pharmaceuticals Limited and of Innovis Limited. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 41 D I R E C T O R S ' R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 The Directors submit the annual report and audited financial statements of Avon Rubber p.l.c. (‘the Company’) and the Avon Rubber group of companies, ('the Group') for the year ended 30 September 2014. The Company is registered in England and Wales with company registration number 32965. Strategic Report The Strategic Report, which contains a review of the Group’s The only significant agreements to which the Company is a business (including by reference to key performance indicators), party which take effect, alter or terminate upon a change a description of the principal risks and uncertainties facing the of control of the Company following a takeover bid are Group, and commentary on likely future developments is set out the Company's revolving credit facility agreement and the on pages 11 to 33. Performance Share Plan. Financial results and dividend The unsecured revolving credit facility of up to $40 million provided by Barclays Bank PLC and Comerica Bank contains The Group statutory profit for the year after taxation amounts a provision which, in the event of a change of control of the to £10,811,000 (2013: £8,837,000). Full details are set out in the Company, gives the lending banks the right to cancel all Consolidated Statement of Comprehensive Income on page 74. commitments to the Company and to declare all outstanding An interim dividend of 1.87p per share was paid in respect of the credit and accrued interest immediately due and payable. year ended 30 September 2014 (2013: 1.44p). A change of control will be deemed to have occurred if any The Directors recommend a final dividend of 3.74p per share (2013: 2.88p) resulting in a total dividend distribution per share for the year to 30 September 2014 of 5.61p (2013: 4.32p). Share capital As at 19 November 2014, the issued share capital of the Company was 31,023,292 ordinary shares of £1 each. Details of the shares in issue during the financial year are set out in note 20 of the financial statements. person or persons acting in concert (as defined in the City Code on Takeovers and Mergers) gains direct or indirect control of the Company. Under the rules of the Performance Share Plan, on a takeover a proportion of each outstanding grant will vest. The number of shares that vest is to be determined by the Remuneration Committee, including by reference to the extent to which the performance condition has been satisfied and the number of months that have passed since the award was made. The employment contracts for the Executive Directors do not The rights and obligations attaching to the Company’s shares are contain any specific right to compensation for loss of office on set out in the Company’s Articles of Association ('Articles'), copies a takeover bid. of which can be obtained from Companies House or by writing to the Company Secretary. Shareholders are entitled to receive the Company’s reports and accounts, to attend and speak at general meetings of the company, to exercise voting rights in person or Substantial shareholdings At 10 November 2014, the following shareholders held 3% or by appointing a proxy and to receive a dividend where declared more of the Company’s issued ordinary share capital:- or paid out of profits available for that purpose. There are no restrictions on the transfer of issued shares or on the exercise of voting rights attached to them, except where the Company has suspended their voting rights or prohibited their transfer following a failure to respond to a notice to shareholders under section 793 Schroder Investment Management BlackRock Investment Management JPMorgan Asset Mangement of the Companies Act 2006, or where the holder is precluded from Henderson Global Investors transferring or voting by the Financial Services Authority’s Listing Avon Rubber p.l.c. Trustees Rules or the City Code on Takeovers and Mergers. The 1,081,810 shares held in the names of the two Employee Share Ownership Trusts on a jointly owned basis or as a hedge against awards previously made or to be made pursuant to the Performance Share Plan are held on terms which provide voting rights to the Trustee and, in certain circumstances under the terms of joint ownership awards, to the recipient of the awards. Franklin Templeton Investments 18.0% 11.5% 5.2% 3.5% 3.5% 3.3% 42 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Acquisition of own shares During the year the Directors had the power to make market The Board confirms that Mr Wood has contributed substantially purchases of up to 4,608,492 of the Company’s own shares in to the performance of the Board. The Chairman gives his full issue on the basis as set out in the explanatory note on page 137. support to Mr Wood’s offer of re-election and draws the attention The Company did not acquire any of its own shares in 2014. of shareholders to his profile on page 41. The Directors also had the authority to allot shares up to an aggregate nominal value of £10,241,097 which was approved by shareholders at the last annual general meeting (AGM). In addition, shareholders approved a resolution giving the Directors a limited authority to allot shares for cash other than pro rata to existing shareholders. During the year the Company issued 300,000 ordinary shares of £1 each at par to ACS HR As part of the Board’s annual evaluation process, each Director undertook a performance evaluation which included considering the effective contribution of Board members and the effectiveness of the Board committees. All Executive Directors’ service contracts with the Company require one year’s notice of termination. Neither of the Executive Solutions Share Plan Services (Guernsey) Limited (in its capacity Directors is currently appointed as a non-executive director of as the trustee of the Company's Employee Share Ownership Trust any limited company outside the Group. No.1) as described in note 20. These resolutions remain valid until the conclusion of this year’s AGM when resolutions to renew these authorities will be None of the Directors have a beneficial interest in any contract to which the Company or any subsidiary was a party during the year. Beneficial interests of Directors, their families and trusts in proposed. Dividends on shares held by the two Employee Share ordinary shares of the Company can be found on page 70. Ownership Trusts have been waived. Directors Directors’ and officers’ indemnity insurance Subject to the provisions of the Companies Act 2006 ('the The names of the Directors as at 19 November 2014 are set out on Act'), the Articles provide for the Directors and Officers of the Company to be appropriately indemnified. In accordance with section 233 of the Act the Company has arranged an appropriate Directors and Officers insurance policy to provide cover in respect of legal action against its Directors. In 2006 the Company’s Articles were amended to allow the Company to provide the Directors with funds to cover the costs incurred in defending legal proceedings. The Company is therefore treated as providing an indemnity for its Directors and Company Secretary which is a qualifying third party indemnity provision for the purposes of the Act. page 41. The Company’s rules about the appointment and replacement of Directors, together with the powers of Directors, are contained in the Articles. Changes to the Articles must be approved by special resolution of the shareholders. During the year there have been no changes to the membership of the Board. The Board is satisfied that Mr D R Evans, Mrs S J Pirie and Mr R K Wood are independent Non-Executive Directors. Mrs S J Pirie, having completed nine years as Non-Executive Director in March 2014, will retire from the Board with effect from the conclusion of the AGM. The search for Mrs Pirie’s replacement, led by David Evans as Chairman of the Nominations Committee, is underway as at the date of this report. Mr Wood will replace Mrs Pirie as the Senior Independent Director following her retirement. Mr A G Lewis retires by rotation and, being eligible, offers himself for re-election. The Board confirms that Mr Lewis has contributed substantially to the performance of the Board. The Chairman gives his full support to Mr Lewis’ offer of re-election and draws the attention of shareholders to his profile on page 41. Mr R K Wood retires by rotation and, being eligible, offers himself for re-election. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 43 D I R E C T O R S ' R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Research and development The Group continues to utilise its technical and materials expertise to further advance its products and remain at the forefront of technology in the field of polymer technology and materials engineering. The Group maintains its links to key universities in the US and UK and continues to work with new and existing customers and suppliers to develop its knowledge and product range. Total Group expenditure on research and development in the year was £7,046,000 (2013: £6,407,000) further details of which are contained in the Strategic Report on pages 11 to 33. Through ARTIS, the Group’s research and development arm, the Group is recognised as a world leader in understanding the composition and use of polymer products. Environmental and corporate social responsibility Matters relating to environmental and corporate social responsibility including reference to our policy on diversity are set out on pages 34 to 40. Political and charitable contributions No political contributions were made during the year or the prior year. Contributions for charitable purposes amounted to £13,542 (2013: £15,305) consisting exclusively of numerous small donations to various community charities in Wiltshire, Maryland, Michigan, Wisconsin, Georgia and Mississippi. Financial instruments An explanation of the Group policies on the use of financial instruments and financial risk management objectives are contained in note 19 of the financial statements. Post balance sheet events There have been no significant events affecting the Company or Group since the year end. Statement of Directors’ responsibilities for preparing the financial statements The Directors are responsible for preparing the Annual Report, the Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). In preparing the Group financial statements, the Directors have also elected to comply with IFRSs issued by the International Accounting Standards Board (IASB). 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 the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:  Select suitable accounting policies and then apply them consistently  Make judgements and accounting estimates that are reasonable and prudent  State whether IFRSs as adopted by the European Union and IFRSs issued by the IASB and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and parent company financial statements respectively  Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 44 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Having taken advice from the Audit Committee, the Board The auditors, PricewaterhouseCoopers LLP, have indicated considers that the annual report and accounts, taken as a whole, their willingness to continue in office and a resolution is fair, balanced and understandable and provides the information concerning their reappointment will be proposed at the annual necessary for shareholders to assess the Company’s performance, general meeting. business model and strategy. Each of the Directors, whose names and functions are listed on Corporate governance page 41 confirm that, to the best of their knowledge: The Company’s statement on corporate governance can be  the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and  the Strategic Report contained on pages 11 to 33 includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. Creditor payment policy Operating businesses are responsible for agreeing the terms and conditions under which business transactions with their suppliers are conducted. It is Group policy that payments are made in accordance with these terms, provided that the supplier is also complying with all relevant terms and conditions. For the year ended 30 September 2014, the number of days' purchases outstanding at the end of the financial year for the Group was found in the Corporate Governance Report on pages 46 to 50. The Corporate Governance Report forms part of this Directors’ Report and is incorporated into it by cross-reference. Annual general meeting The Company’s annual general meeting will be held at our Hampton Park West facility, Semington Road, Melksham, Wiltshire SN12 6NB on 29 January 2015 at 10.30am. The Notice of Meeting can be found on pages 132 to 137. Registration will be from 10:00am. Miles Ingrey-Counter Company Secretary two (2013: 19 days) based on the ratio of trade creditors at the 19 November 2014 end of the year to the amounts invoiced during the year by trade creditors. At 30 September 2014 there were no trade creditors in the balance sheet of the parent company (2013: nil). Independent auditors Each Director confirms that on the date that this report was approved so far as they are aware, there was no relevant audit information of which the auditors are unaware; and each Director has taken all the steps they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 45 C O R P O R AT E G O V E R N A N C E Statement of compliance with the UK Corporate Governance Code The Board of Directors believes in high standards of corporate governance, notwithstanding the Company’s size and status as a member of the FTSE SmallCap index, and is accountable to shareholders for the Group’s performance in this area. This statement describes how the Group is applying the relevant principles of governance, as set out in the UK Corporate Governance Code (the Code) which is available on the website of the Financial Reporting Council (FRC). The Company is a smaller company for the purposes of the Code and in consequence certain provisions of the Code either do not apply to the Company or may be judged to be disproportionate or less relevant in its case. The Board considers that, subject to the Senior Independent Director not attending meetings with the major shareholders to listen to their views (which is explained further below) the Company met the requirements of the Code throughout the year ended 30 September 2014. This statement will address separately the main subject areas of the Code namely Leadership, Effectiveness, Accountability and Relations with Shareholders. Remuneration is dealt with in the Remuneration Report on pages 54 to 73. The Board confirms that it has been applying the procedures necessary to implement the Turnbull Guidance on how to apply the section of the Code dealing with internal control. Leadership and effectiveness During the year the Board of Avon Rubber p.l.c. comprised a Chairman, two Non-Executive Directors ('the Non-Executive Directors'), and two Executive Directors who are the Chief Executive and the Group Finance Director. The Board treats the two Non-Executive Directors as independent. Stella Pirie, having completed nine years as Non-Executive Director, will retire with effect from the conclusion of the AGM in January 2015. Richard Wood, who was appointed to the Board as a Non Executive Director on 1 December 2012 will replace Mrs Pirie as the Senior Independent Director. Rules concerning the appointment and replacement of Directors of the Company are contained in the Articles of Association. Amendments to the Articles must be approved by a special resolution of shareholders. Under the Articles all Directors are subject to election by shareholders at the first annual general meeting following their appointment, and to re-election thereafter at intervals of no more than three years. The Board is aware of the FRC’s suggestion that companies outside the FTSE 350 should consider the annual re-election of all directors. On the basis that this is not a requirement of the Code and it has not been raised as an issue by any shareholders the Board has chosen not to change its existing practice. Non-Executive Directors submit themselves for annual re- election if they have served for more than nine years since first election. Additionally, the Non-Executive Directors are appointed by the Board on terms which allow for termination on three months’ notice. Biographies of the Directors appear on page 41. These illustrate the range of business and financial experience upon which the Board is able to call. The intention of the Board is that its membership should be balanced between executives and non- executives and have the appropriate skills and experience. The special position and role of the Chairman under the Code is recognised by the Board and a written statement of the division of responsibilities of the Chairman and Chief Executive has been agreed. The Chairman is responsible for the leadership of the Board and ensuring its effectiveness on all aspects of its role and the Chief Executive manages the Group and has the prime role, with the assistance of the Board, of developing and implementing business strategy. One of the roles of the Non-Executive Directors under the leadership of the Chairman is to undertake detailed examination and discussion of strategies proposed by the Executive Directors, so as to ensure that decisions are in the best long-term interests of shareholders and take proper account of the interests of the Group’s other stakeholders. The Chairman ensures that meetings of Non-Executive Directors without the Executive Directors are held. 46 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 How the Board operates The Chairman ensures through the Company Secretary that the Board agenda and all relevant information is provided to the Board sufficiently in advance of meetings and that adequate time is available for discussion of all agenda items, in particular strategic issues. The Chief Executive and the Company Secretary discuss the agenda ahead of every meeting. At meetings the Chairman ensures that all Directors are able to make an effective contribution throughout meetings and every Director is encouraged to participate and provide opinions for each agenda item. The Chairman always seeks to achieve unanimous decisions of the Board following due discussion of agenda items. The Non-Executive Directors fully review the Group’s operational performance and the Board as a whole has, with a view to reinforcing its oversight and control, reserved a list of powers solely to itself which are not to be delegated to management. This list includes appropriate strategic, financial, organisational and compliance issues, including the approval of high level announcements, circulars and the report and accounts and certain strategic and management issues. Examples of strategic and management issues include the following:  Approval of the annual operating budget and the three year plan  The extension of the Group’s activities into new business and geographic areas (or their cessation)  Changes to the corporate or capital structure  Financial issues, including changes in accounting policy, the approval of dividends, bank facilities and guarantees  Changes to the constitution of the Board  The approval of significant contracts, for example the acquisition or disposal of assets worth more than £1,000,000 or the exposure of the Company or the Group to a risk greater than £1,000,000  The approval of unbudgeted capital expenditure exceeding £250,000  The approval of quotations and sale contracts where the sales commission payable to an intermediary exceeds 10% of the net invoice price  Consideration and approval of all proposed acquisitions and mergers Each Director has full and timely access to all relevant information and the Board meets regularly with appropriate contact between meetings. All Directors receive an induction from the Company Secretary on joining the Board. When appointed, Non-Executive Directors are made aware of and acknowledge their ability to meet the time commitments necessary to fulfil their Board and Committee duties. Procedures are in place, which have been agreed by the Board, for Directors, where necessary in the furtherance of their duties, to take independent professional advice at the Company’s expense and all Directors have access to the Company Secretary. The Company Secretary is responsible to the Board for ensuring that all Board procedures are complied with. The removal of the Company Secretary is a decision for the Board as a whole. Performance evaluation An internal annual performance evaluation was undertaken by the Board during the year and there are no plans to move towards an externally facilitated evaluation (which is compulsory for FTSE 350 companies) at this time. The Chairman acted as the sponsor of the evaluation process and each Director was required to score a questionnaire for review by the Board. The Company Secretary acted as facilitator to the Board and issues arising from the process were incorporated into the Board’s business as appropriate. Within the evaluation exercise, the Board addressed three key areas: the extent to which the Board focuses on the right issues, interacts effectively and has the right mechanics in place. The evaluation prompted a discussion which covered the arrangements in place for succession planning, and the procedure for appointing new directors to the Board, and the need for all directors to be given the opportunity to regularly update and refresh their skills and knowledge. The evaluation concluded that the Board operates well and the Board Committees operate effectively. In particular the Board contributes valuably to strategy, has appropriate matters reserved to it for its decision and commits the necessary time to be effective. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 47 C O R P O R AT E G O V E R N A N C E Committees of the Board Of particular importance in a governance context are the three committees of the Board, namely the Remuneration Committee, the Nominations Committee and the Audit Committee. The members of the Committees comprise the Chairman and all the Non-Executive Directors. The Non-Executive Directors continue to regard the Chairman as adding significant value to the deliberations of the Audit Committee and his membership is ratified by Provision C.3.1. of the Code, which permits listed companies outside the FTSE 350 to allow the Chairman to sit on the audit committee where he or she was considered independent on appointment as Chairman. Mrs S J Pirie will remain Chairman of the Audit Committee and Senior Independent Non-Executive Director until her retirement from the Board at the conclusion of the AGM. The Board is satisfied that Mrs Pirie has recent relevant financial experience and her profile appears on page 41. It is the Board’s intention that Mrs Pirie’s replacement takes her place as Chairman of the Audit Committee and will therefore have recent relevant financial experience. Mr D R Evans is Chairman of the Nominations Committee and Mr R K Wood is Chairman of the Remuneration Committee. The Remuneration Committee’s principal responsibilities are to decide on remuneration policy on behalf of the Board and to determine remuneration packages and other terms and conditions of employment, including appropriate performance related benefits, for the Executive Directors and other senior executives. The Chief Executive and the Company Secretary attend meetings of the Committee by invitation, but are absent when issues relating to each of them are discussed. More details of the activities of the Remuneration Committee are set out in the Remuneration Report on pages 54 to 73. The Board schedules eight regular meetings per year. Meetings during year ended 30 September 2014 Board Committee Audit Remuneration Nominations Committee Committee S.J. Pirie R.K. Wood D.R. Evans P.C. Slabbert A.G. Lewis * Attendance by invitation 8 8 8 8 8 3 3 3 3* 3* 4 4 4 4* - 2 2 2 2* - This year four further meetings have been held on an ad hoc basis, including by telephone conference, in connection with the renegotiation of the Company's banking facility arrangements, the allotment and issue of new shares and internal transactions. In addition, between them, the three Non-Executive Directors visited the Group’s main US sites accompanied by the Chief Executive. Copies of the terms of reference of the Nominations, Remuneration and Audit Committees and the terms and conditions of appointment of the Non-Executive Directors are available on the Company’s website or from the Company Secretary. Relations with shareholders The Directors regard communications with shareholders as extremely important. All members of the Board receive copies of analysts’ reports of which the Company is made aware. In terms of published materials the Company issues a detailed annual report and accounts and, at the half year, an interim report. Interim management statements have been issued during the year, together with a number of other event updates. Dialogue takes place regularly with institutional shareholders and general presentations are given following the preliminary and interim results. The Board receives comments from analyst meetings and shareholder meetings after both interim and final results and at other times during the year. Shareholders have the opportunity to ask questions at the annual general meeting and also have the opportunity to leave written questions with the Company Secretary for the response of the Directors. The Directors meet informally with shareholders after the annual general meeting and respond throughout the year to correspondence from individual shareholders on a wide range of issues. Annual general meetings provide a venue for the shareholders to meet the Non-Executive Directors in addition to any other meetings shareholders may request. The Non-Executive Directors, having considered the Code with regard to relations with shareholders, are of the view that it is most appropriate for the shareholders to have regular dialogue with the Executive Directors. The results of all dialogue with shareholders are communicated to the Board and reviewed by the Senior Independent Non-Executive Director. However, should shareholders have concerns, which they feel cannot be resolved through normal shareholder meetings, the Chairman, Senior Independent Non-Executive Director and the remaining Non-Executive Director may be contacted upon request through the Company Secretary. 48 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 At the annual general meeting on 29 January 2015, the Board will be following the recommendations in the Code regarding the constructive use of annual general meetings; as usual, the agenda will include a presentation by the Chief Executive on aspects of the Group’s business and an opportunity for shareholders to ask questions. The Board has no plans to introduce poll voting on all business at general meetings as a substitute for using proxy votes, as this is not a requirement of the Code. Accountability The Code requires that Directors review the effectiveness of the Group’s system of internal controls. The scope of this review covers all controls including financial, operational and compliance controls as well as risk management. As indicated earlier, the Board has put in place the procedures necessary to implement the Turnbull Guidance on internal control and the Audit Committee has responsibility to review, monitor and make policy and recommendations to the Board upon all such matters. The Directors acknowledge their responsibility for the Group’s system of internal control. The Board, through the Audit Committee, keeps this system under continuous review and formally considers its content and its effectiveness on an annual basis. Such a system can provide only reasonable, and not absolute, assurance against material misstatements or losses. The section on internal control in the Audit Committee Report on pages 52 to 53 and the following paragraphs describe relevant key procedures within the Group’s systems of internal control and the process by which the Directors have reviewed their effectiveness. Systems exist throughout the Group which provide for the creation of three year plans and annual budgets; monthly reports enable the Board to compare performance against budget and to take action where appropriate. Procedures are in place to identify all major business risks and to evaluate their potential impact on the Group. These risks are described within the Strategic Report on pages 30 and 31. Assessment and analysis Identification Risk register Elimination / minimise / control or transfer Review of effectiveness of control Risk management Risk is managed by the Group Executive management team at its quarterly meetings during the year, led by the Company Secretary and the Chief Executive. At each meeting the Group Executive team sets its key priorities for successfully managing the Group’s businesses in the coming quarter. This process inherently addresses risk and the Company Secretary sponsors an exercise that ensures the known risks to the businesses, together with any newly identified risks, are assessed and analysed effectively and that the priorities eliminate, minimise, control or transfer risk (or the effect thereof) as appropriate. The Company Secretary also sponsors a review of the continuing effectiveness of other aspects of the control environment by the executive team. The Board carried out quarterly reviews of the key risks facing the Group during the year, following the quarterly reviews conducted by the Group Executive management team. The Board also carried out an annual review of the major business risks affecting the Group, including the macro risks. In the year under review, the risk assessments carried out both at business level and at Board level continue to be reviewed and strengthened as part of the Board’s ongoing response to the Turnbull Guidance. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 49 C O R P O R AT E G O V E R N A N C E The risk management process Disclosure and transparency rules Disclosures in respect of the DTR requirements under DTR 7.2.6 are given in the Directors’ Report on page 44 and have been included by reference. Going concern After making appropriate enquiries, the Directors have, at the time of approving the financial statements, formed a judgement that there is a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. Stella Pirie OBE Chairman of the Audit Committee 19 November 2014 There is a clearly defined delegation of authority from the Board to the business units, with appropriate reporting lines to individual Executive Directors. There are procedures for the authorisation of capital expenditure and investment, together with procedures for post-completion appraisal. Internal controls are in existence which provide reasonable assurance of the maintenance of proper accounting records and the reliability of financial information used within the business or for publication. The Group finance department manages the financial reporting process to ensure that there is appropriate control and review of the financial information including the production of the consolidated annual accounts. Group Finance is supported by the operational finance managers throughout the Group, who have the responsibility and accountability for providing information in keeping with our policies, procedures and internal best practices as documented in the internal finance manual. The Board has issued a Code of Conduct which reinforces the importance of a robust internal control framework throughout the Group. The Board recognises that an open and honest culture is key to understanding concerns within the business and to uncovering and investigating any potential wrongdoing. The Code sets out the procedure whereby individuals may raise concerns in matters of financial reporting or any other matter of concern with management and directly with the Chairman of the Audit Committee to ensure independent investigation and appropriate follow up action. The Code is reviewed annually. Although the Board itself retains the ultimate power and authority in relation to decision making, the Audit Committee meets at least three times a year with management and, on two occasions, external auditors to review specific accounting, reporting and financial control matters. This Committee also reviews the interim, preliminary and annual statements and has primary responsibility for making a recommendation on the appointment, reappointment and removal of external auditors. 50 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 N O M I N AT I O N S C O M M I T T E E R E P O R T The Committee met twice during the year in connection with identifying a replacement for Mrs Pirie, who will retire from the Board at the next AGM. Further information, including the number of women in senior management and within the organisation is shown in the Environmental and Corporate Social Responsibility Report on pages 34 to 40. David Evans Chairman 19 November 2014 The Nominations Committee, to which the Chief Executive is normally invited, reviews the Board structure, leads the process for Board appointments and makes recommendations to the Board, including on Board succession planning. The Nominations Committee evaluates the balance of skills, knowledge and experience on the Board and, in the light of this evaluation, prepares a description of the role for new appointments. In identifying potential candidates for positions as Non-Executive Directors, the Committee has full regard to the principles of the Code regarding the independence of Non- Executive Directors. The main responsibilities of the Committee are as follows:  To lead the process for identifying and nominating candidates for the approval of the Board, to fill Board vacancies as and when they arise  To put in place plans for succession  To regularly review the Board's structure, size and composition taking into account the challenges and opportunities facing the Group and the skills, knowledge and experience needed by the Board and make recommendations to the Board with regard to any changes The Nominations Committee is also responsible for the Board’s policy on diversity which was adopted in September 2014. The Board recognises the benefits of diversity. Diversity of skills, background, knowledge, international and industry experience, and gender, amongst many other factors, will be taken into consideration when seeking to appoint new directors to the Board. Notwithstanding the foregoing, all Board appointments will always be made on merit. The Board’s diversity policy can be found in the Corporate Governance section of the website. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 51 A U D I T C O M M I T T E E R E P O R T Main responsibilities  Reviewing the effectiveness of the Company’s financial reporting, internal control policies and procedures for the identification, assessment and reporting of risk  Reviewing significant financial reporting issues and judgements  Monitoring the integrity of the Company’s financial statements  Keeping the relationship with the auditors under review, including their terms of engagement, fees and independence  Monitoring the role and effectiveness of the internal audit function  Advising the Board on whether the Committee believes the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy Activities during the year The Audit Committee meets three times a year. Meetings are also attended by the Executive Directors and on at least two occasions by representatives of the Group’s external auditors. At meetings attended by the external auditors time is allowed for the Audit Committee to discuss issues with the external auditors without the Executive Directors being present. An annual rolling agenda is reviewed to ensure that all matters within the Audit Committee’s Terms of Reference during the year are appropriately covered. The Committee operates under formal terms of reference and these are reviewed annually. The Committee considers that it has discharged its responsibilities as set out in its terms of reference to the extent appropriate during the year. Financial reporting During the year the Committee reviewed the appropriateness of the Group’s half year and full year financial statements including considering significant financial reporting judgments made by management, taking into account the reports of the Group Finance Director and the external auditors. The main areas of focus considered by the Committee during 2014 were as follows:  The presentation of the financial statements and in particular, the presentation of adjusted performance and the adjusting items, including the exceptional item in respect of the closure of the Lawrenceville facility. The Committee agreed that the position taken in the financial statements is appropriate  Review of the key judgements made in estimating the Group’s tax charge. The Committee agreed that the position taken in the financial statements is appropriate  The need to perform an impairment review in respect of intangible assets. The Committee concurred with management's assessment that there were no triggering events in 2014 requiring an impairment review  Review of the on-going funding level of the defined benefit pension scheme. The Committee agreed this was being managed appropriately  At the request of the Board the Committee considered whether the 2014 annual report was fair, balanced and understandable and whether it provided the necessary information for shareholders to assess the Company’s performance, business model and strategy. The Committee was satisfied that, taken as a whole, the annual report was fair, balanced and understandable  Review and approval of a new Code of Conduct The Committee was content after due challenge and debate with the assumptions made and the judgements applied and therefore agreed with management’s recommendations. In addition the Committee reviewed and recommended the approval of the statements on corporate governance, internal control and risk management in the annual report and the half year and interim management statements. External auditors The Committee oversees the relationship with the external auditors and monitors all services provided by and fees payable to them, to ensure that potential conflicts of interest are considered and that an objective and professional relationship is maintained. In particular the Committee reviews and monitors the independence and objectivity of the external auditors and the effectiveness of the audit process. At the outset of the audit process, the Committee receives from the auditors a detailed audit plan, identifying their assessment of the key risks and their intended areas of focus. This is agreed with the Committee to ensure coverage is appropriately focused. Feedback on the audit process is requested from management and for the 2014 financial year, management were satisfied that there had been appropriate focus and challenge on the primary areas of audit risk and assessed the quality of the audit process to be satisfactory. The Committee concurred with the view of management. The Committee also keeps under review the nature, extent, objectivity and cost of non-audit services provided by the external auditors. 52 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 PricewaterhouseCoopers LLP ('PwC') have been the Company’s external auditors for a number of years. The Committee last reviewed the external audit mandate in 2012 and confirmed the continuing appointment of PwC. This was on the basis that the Committee was comfortable that the PwC audit team remained objective and independent on the basis of the regular rotation of the audit partner and specific assurance provided by PwC to the Committee on the arrangements it has in place to maintain its independence. The provision of external audit and tax compliance are separated and tax compliance services are provided by BDO in the US and Tax Partner in the UK. The Committee considers the reappointment of the external auditor and their independence on an annual basis. The new regulatory requirement to rotate the external audit mandate does not affect the Company until 2020 however, in order to ensure the independence and objectivity of the external auditors and avoid a situation where the auditor’s familiarity with the Group’s affairs results in excessive trust, the Committee maintains a formal Auditor Independence Policy. This policy provides clear definitions of services that the external auditors can and cannot provide. They may only provide non- audit services where those services do not conflict with their independence. A formal authorisation policy is in place for the provision of non-audit services to ensure that appropriate pre- approval is obtained as necessary. The latest version provides that non-audit services with a value of more than £50,000 or which cumulatively exceed the annual audit fee require the approval of the Board. This approach was preferred to capping the value of non-audit services performed by the external auditor by reference to the external audit fee. The policy also establishes guidelines for the recruitment of employees or former employees of the external auditor. To ensure compliance with this policy the Audit Committee carried out a review during the year of the remuneration received by PwC for audit services, audit-related services and non-audit work. The breakdown of the fees paid to the external auditor, including the split between audit and non-audit fees, is included in note 5 on page 87 of the financial statements. These reviews ensure a balance of objectivity, value for money and compliance with this policy. The outcome of these reviews was that no conflicts of interest existed between such audit and non-audit work. Internal control The Committee regularly reviews the effectiveness of the Group’s system of internal controls and risk management. This involves the monitoring and reviewing of the effectiveness of internal audit activities, which included a review of the audits carried out and the results thereof, the management response and the programme and resourcing for 2014 and 2015. The Committee believes it is appropriate that the internal audit process is undertaken by members of the finance team who conduct financial reviews of the sites on a rotational basis. In addition, site controllers and plant managers are obliged to positively confirm, on a bi-annual basis, that the controls as documented in the internal control manual are in place and are being adhered to, with specific reference to key controls such as bank and control account reconciliations. This process has been in place for the year under review and up to the date of approval of the annual report and financial statements. It has been reviewed by the Board and continues to be monitored by the Committee, which remains satisfied with the arrangements. During the year, the new business management software system continued to be rolled out throughout the Group. The 2014 internal audit programme included two post- implementation reviews to ensure the new system was operating effectively and assess the need for any modification prior to implementation at the next site. The rollout will continue towards completion in 2015. No significant failings or weaknesses were identified by the internal audit process but several minor improvements were identified and implemented. As part of its work, and in line with its terms of reference, the Committee also considers the discharge of the Board’s responsibilities in the areas of corporate governance, financial reporting and internal control, including the internal management of risk, as identified in the Turnbull Guidance. Risk management activities are dealt with in more detail in the Corporate Governance Report on pages 46 to 50. Stella Pirie OBE Chairman of the Audit Committee 19 November 2014 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 53 R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Letter from the Chairman of the Remuneration Committee I wrote to you last year setting out a proposal for a three year remuneration package for Executive Directors and to outline the general remuneration policy that we would adopt for the Company to prepare for the challenges ahead and to align remuneration with changing City guidelines. Before proposing this new policy I consulted and took into account the views of a number of leading shareholders. The new policy and the package for Executive Directors was overwhelmingly supported by shareholders at the Annual General Meeting in February 2014. It has since been used to incentivise the Executive team during the current financial year with great effect. Conceptually, it aimed to reward success for driving sustained high levels of growth based on a new strategic approach introduced by the new Chairman and approved by the Board. The remuneration changes were aimed at rewarding success and not failure and included a greater proportion of variable pay for achievement together with a 25% deferment to protect against under or variable performance and a claw back for mis- statements. It is apparent from the impressive results being reported this year that the new remuneration policy has contributed significantly. Last year we did not review the fees for Non-Executive Directors, although they were due for review in 2012, but informed shareholders that we would do so this year on a new three year cycle under the new remuneration policy. I will comment on that review later in this letter and explain how we propose to align fees better with the challenges placed on a small board while keeping them within the guiding benchmark levels for similarly sized companies. As was the case last year, my report covers the remuneration of both Executive and Non-Executive Directors and is split into a section that sets out the policy approved last year and which will remain in force for another two years, together with an annual remuneration section that gives details of remuneration for this year. The section on annual remuneration will be subject to an advisory vote by shareholders, but it will not be necessary to hold a shareholder vote on remuneration policy as it is not being changed. Key features of the current remuneration policy are:- 1. Base salaries 1.1 Executive Directors The current remuneration policy for Executive Directors froze basic salaries for three years from October 2013. Accordingly, the 2% annual cost of living increase awarded to the wider workforce this year will not be paid to the Executive Directors. 1.2 Non-Executive Directors Non-Executive Director fees have not been reviewed since 2009 and the Company Chairman’s fee has not been reviewed since 2011. Last year the review was postponed to allow the Company Chairman to assess the composition and demands required of the Board to implement the new growth strategy approved by the Board. Both fees have now been reviewed with effect from 1 October 2014 in line with the methodology proposed in the remuneration policy and approved by shareholders in February 2014. The policy aims to provide compensation in line with the demands of the roles at a level that attracts high calibre individuals and reflects their experience and knowledge. The new fees will be fixed for three years from 1 October 2014. Having taken into account the EY benchmark study, which reviewed fees against those paid in other similar sized UK listed companies, together with the different demand pattern of Board work required by the Company, we have decided to increase base fee levels from £35,000 to £38,500 per year. In addition we have adjusted committee fees to reflect the increased level of work expected in a small board where non-executive directors have overlapping roles and are required to sit on several committees. Whilst the Committee Chairman fee will remain at £10,000 per year we have introduced a new fee for committee membership of £2,000 per year. In order to maintain the Company Chairman’s independence we do not propose to make any form of committee payments to him, although he does sit on all the Company committees and chairs the Nominations Committee. Instead, we have increased his total fee from £100,000 to £125,000, which is the median level of fee in the benchmarking study of similar sized businesses prepared by EY in October 2014. 54 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 2. Executive Directors' variable pay Last year the Committee increased the cap on the quantum of variable pay in order to reward exceptional performance but this increase was counterbalanced by measures designed to protect against under or variable performance. For the first 100% of salary, the split of targets is consistent with those used in previous years. The additional 50% of salary is calculated according to a ratchet based on earnings per share growth occurring in excess of 20% growth over the previous year earnings per share. Details of the ratchet are set out in the remuneration policy report. This has been the first year of operation for the new maximum award levels and given the strength of the financial results, the Committee firmly believes that the ratcheted performance condition and the increased level of the bonus cap have been sensibly applied to good effect. The new deferral rule requires 25% of all annual bonus payments related to the performance of the business to be deferred into shares to be held for two years, and then treated as shares that are not subject to the executive shareholding guidelines. In this way, if earnings are not sustained over that period, any reduction in the share price will reduce the value of the bonus. The number of shares subject to the deferral arrangement is set out in the annual remuneration report. 3. Long-term incentives for Executive Directors To balance the increased short and medium-term incentives introduced last year, the Committee decided to make no changes to the conditional awards made under the Performance Share Plan approved by shareholders in 2010. Grants for both the Chief Executive and Group Finance Director were therefore equal to 100% of salary in December 2013 and the same will apply to the awards that will be made in December 2014. The Committee regularly monitors changes in market practice and shareholder expectations concerning the operation of long-term incentive schemes. To coincide with the half-way point in the life of the Performance Share Plan, the Committee will review the operating conditions of the current plan during the coming financial year with a view to making the changes that are necessary to bring future awards made under the Plan in to line with market practice by the end of 2015. With regard to the three-year performance period for awards under the Performance Share Plan which ended on 30 September 2014, the earnings per share target is expected to be met in full and the total shareholder return is expected to lie between the median and upper quartiles. Under the scheme rules, approximately 90% of the awards are therefore likely to vest in December 2014. An announcement on the vesting will be made at the time. Conclusions The Committee takes an active interest in shareholder views and developments in best practice. I held a constructive consultation with major shareholders last year and will do so in future years when we seek to make changes to the remuneration policy beyond the existing discretion it contains. The Committee believes that the new remuneration structure has incentivised the Executive team this year to deliver strong and sustainable growth by offering increased reward for exceptional performance. We remain comfortable that the policy has not encouraged undue risk taking as the performance metrics have been fully aligned with targeted improvements in the Company's key performance indicators. Incentive bonuses are subject to claw back provisions and part of the annual bonus will, for the first time this year, be deferred into Company shares. These features, allied to our share ownership guidelines, continue to ensure that the current remuneration policy is aligned with short, medium and long- term shareholder interests. On behalf of the Board, I would like to thank shareholders for their continued support. The Committee hopes that the new form of reporting we adopted for the first time last year is clear but I would welcome your feedback and suggestions for improvements. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 55 R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Remuneration Policy Report Executive Directors Remuneration Committee The Remuneration Committee is responsible for developing and implementing remuneration policy and for determining the Executive Directors' individual packages and terms of service together with those of the other members of the Group Executive management team. The Committee comprises Mr R K Wood (Chairman), Mr D R Evans and Mrs S J Pirie. The Committee uses external independent professional advisers when needed. KPMG are the Company's independent actuarial advisor on pension matters and will provide the Committee with information on executive pension arrangements when this cannot be provided by the pension scheme actuary AonHewitt. EY provide annual performance monitoring data and share award valuations for review by the Committee in relation to the Performance Share Plan. EY also provide remuneration benchmarking of the reward packages received by the Executive Directors, the Group Executive and the fees received by the Chairman and the other Non-Executive Directors. The Committee addressed the following main issues during the last year:  Reviewed the remuneration of the Executive Directors and the other members of the Group Executive management team and decided to make adjustments with effect from 1 October 2013  Approved the annual bonus payments to the Executive Directors in November 2013  Approved the annual bonus plan for the Executive Directors for the 2014 financial year  Reviewed and confirmed the vesting of the 2010/11 Performance Share Plan awards in December 2013  Reviewed and approved the 2013/14 Performance Share Plan awards granted in December 2013 and monitored the performance of the outstanding awards against their performance targets  Reviewed the executive management succession and talent management plan Since the end of the 2014 financial year, the Committee has:  Recommended fee increases for the Non-Executive Directors for the 2015 financial year effective 1 October 2014, which were approved by the Chairman and the Executive Directors  Recommended a fee increase for the Chairman for the 2015 financial year effective 1 October 2014, which was approved by the Senior Independent Director and the Executive Directors  Approved the annual bonus payments to the Executive Directors and the Group Executive management team, following completion of the external audit in November 2014  Approved the annual bonus plan for the Executive Directors and the Group Executive management team for the 2015 financial year  Made preparations for the 2014/15 Performance Share Plan awards to be granted in December 2014 Guiding policy The Remuneration Committee's terms of reference are available on the Company's website and include:  Determining and agreeing with the Board the policy for the remuneration of the Company's Chief Executive, Group Finance Director, Chairman, the Company Secretary and such other members of the senior management team as it chooses to consider or is designated to consider (currently the Group Executive management team)  Within the terms of the agreed policy, determining the total individual remuneration package of each Executive Director including, where appropriate, bonuses, incentive payments, share options and pension arrangements. The remuneration of Non-Executive Directors is a matter for the Chairman and the Executive Directors  Reviewing the design of all share incentive plans for approval by the Board and shareholders. For any such discretionary plans, determining each year whether awards will be made, the overall amount of such awards, the individual awards to Executive Directors and the Group Executive management team (and others) and the performance targets to be used  Determining the targets for any performance-related bonus schemes operated by the Company  Reviewing the remuneration trends across the Group, including the salary increases proposed annually for all Group employees  Agreeing termination arrangements for senior executives 56 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 The Committee aims to provide a remuneration structure that supports the achievement of the Company's performance objectives and, in turn, increases shareholder value. The Company's guiding policy on executive remuneration is that: consulted in this regard. Consistent with this approach annual cost of living increases granted to the wider workforce are not paid to the Executive Directors or to the other members of the Group Executive management team.  Executive remuneration packages should take into account the linkage between pay and performance by both rewarding effective management and by making the enhancement of shareholder value a critical success factor in the setting of incentives, both in the short and the long term  The overall level of salary, incentives, pension and other benefits should be competitive when compared with other companies of a similar size and global spread to attract, retain and motivate executive directors of superior calibre in order to deliver continued growth of the business  Performance related components should form a significant proportion of the overall remuneration package, with maximum total potential rewards being earned through the achievement of challenging performance targets based on measures that represent the best interests of shareholders Approach to recruitment remuneration The Committee's policy on recruitment remuneration is that new Executive Directors will be offered a base salary below the median level in the applicable benchmarking report until proven, at which point they will receive an uplift to the benchmark median salary level determined and maintained by reference to independent benchmarking studies carried out every three years. Annual bonus awards, performance share plan awards and pension contributions would not be in excess of the current levels stated for the Chief Executive and the Group Finance Director. In unusual circumstances it may be necessary to pay a joining incentive to secure the right candidate. The Committee might consider paying up to 2.5 times base salary in these circumstances with the actual amount being defined by market requirements at the time. However, any such payment would be subject to performance conditions and a claw back on underperformance during the first two years of employment. No joining incentives were paid in connection with the promotion of Mr Slabbert to the role of Chief Executive or for the recruitment of Mr Lewis as Group Finance Director, both of which occurred in 2008. Consideration of conditions elsewhere in the Company The experience of Committee members and the 2013 EY benchmarking report have been relied upon in setting the remuneration packages for the Executive Directors and this remuneration policy. Employees have not been specifically The Committee monitors the remuneration of the wider workforce and, in particular, the divisional management teams as well as other key employees. As with the proposed policy for the Executive Directors, general practice across the Group is to recruit employees at market rates and this tends to be at the median salary level or above to attract them to the Group. Because of the numbers involved and the need to absorb new recruits at salaries comparable with those already employed, salaries are normalised upwards over time to the median level so that the pay level of the workforce is always kept close to the median level and maintained at that level by cost of living increases. Employees are then able to earn annual bonuses in excess of the mid-market rate in return for delivering exceptional performance. In addition, the Group Executive management team maintains a benchmarking survey of all management employees in the Group with the aim of ensuring that each is being paid at the median benchmark level for their role and that each has a career and associated salary progression plan. It is possible that some of the more senior personnel within that group will be brought within the Committee's benchmarking study but for now the Committee is comfortable that the Group Executive management team sets the remuneration for the divisional management levels beneath it in the organisation structure. Consideration of shareholder views Last year the Chairman of the Remuneration Committee consulted with the three largest Company shareholders with a combined holding of 40% on the (then) proposed remuneration policy. Two of the shareholders indicated their support for the policy without proposing any amendments. The third proposed some wording changes to aid the understanding of the position being taken on the increases to annual bonus, which were adopted. There has been no further engagement with shareholders in relation to the remuneration policy since the last annual general meeting. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 57 R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Detailed policy The table below summarises the main components of the remuneration policy approved by shareholders at the February 2014 annual general meeting for the three year period commencing 6 February 2014. The Remuneration Committee has discretion to amend the remuneration policy in 2015 and 2016 to the extent described in the table and the written sections that follow it below. Element of remuneration Purpose and link to strategy Operation Maximum potential value* Performance targets Changes from 2013 Base Salary To provide competitive fixed remuneration To attract and retain Executive Directors of superior calibre in order to deliver growth for the business Intended to reflect that paid to senior management of comparable companies Reflects individual experience and role Benefits As above Annual Bonus Rewards the achievement of annual financial and strategic business targets and delivery of personal objectives Maximum bonus only payable for achieving demanding targets Deferred element encourages long- term shareholding and discourages excessive risk taking Reviewed every three years by the Remuneration Committee Individual salary adjustments take into account each Executive Director's performance against agreed challenging objectives and the Group's financial circumstances, as well as relative to the external market as identified in a benchmarking study based on an appropriate comparator group Executive Directors are entitled to medicals every two years and private health insurance. Cash for car payments were phased out in 2009. Life assurance is a benefit under the pension scheme but paid for by the Company. Small loans have been made in connection with the jointly owned equity awards under the Performance Share Plan 2013/14: PC Slabbert £330,000 AG Lewis £252,000 2014/15 and 2015/16: No change No increase in 2016 unless found to be below the median level shown in a benchmarking report to be commissioned in September 2016 and any adjustments will be effective from 1 October 2016 Full cost of healthcare benefits is circa £2k per Executive Director Life assurance is provided as part of a Group-wide policy and therefore a specific cost cannot be attributed to the Executive Directors. Paid in cash except 25% is deferred into shares to be held for two years 2013/14 (% of salary): PC Slabbert 150% AG Lewis 150% 2014/15 and 2015/16 (% of salary): No change Not pensionable Up to 150% of basic salary for the CEO and the FD in 2014 Deferral does not apply to the percentage award relating to achievement of personal objectives Claw back applies if the financial results which led to the bonus being paid are restated due to an error in the subsequent two years Not applicable No change Not applicable No change No change The first 100% is based upon a combination of Group profit budget achievement (Group PBITE), year on year PBITE growth and Group cash generation (ratio of operating cash flow to operating profit) plus specific personal performance targets Any bonus in excess of 100% of salary is based upon EPS growth occurring in excess of 20% over the previous year 58 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Element of remuneration Purpose and link to strategy Operation Maximum potential value* Performance targets Changes from 2013 Performance Share Plan Designed to align Executive Directors' interests with both the strategic objectives of delivering sustainable earnings growth and the interests of shareholders The Company has one Performance Share Plan, which was approved by shareholders in 2010. Annual grants of conditional share awards which vest after a three year performance period, subject to achievement of performance targets and continued service 2013/14 (% of salary) PC Slabbert 100% AG Lewis 100% 2014/15 and 2015/16 (% of salary) No change No change 50% TSR (of which 30% vests for median increasing to 100% vesting for upper quartile of the FTSE Small Cap Index excluding investment trusts) 50% EPS (which starts vesting at nil for RPI +3% rising to 100% at RPI +8%) Share ownership guidelines To increase alignment between executives and shareholders Executive Directors are required to retain a proportion of their net of tax vested awards until the guideline is met 200% of salary for Executive Directors for awards vesting from December 2014 Not applicable No change Pension To reward sustained contribution by providing retirement benefits Mr Slabbert is a deferred member of the now closed final salary section of the Plan Both Mr Slabbert and Mr Lewis are members of the money purchase section of the Plan. Where the promised level of benefits cannot be provided through the money purchase scheme the Company provides benefits through the provision of salary supplements Not applicable No change 2013/14 (% of salary) PC Slabbert 15% AG Lewis 15% 2014/15 and 2015/16 (% of salary) No change R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S * All dates are for the year ending 30 September in any referenced year A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 59 R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 There are no elements of remuneration other than basic salary, benefits and pension that are not subject to performance requirements. The chart below illustrates for both the Chief Executive and Group Finance Director how the remuneration packages vary at different levels of performance under the current policy, shown as a percentage of total remuneration opportunity. 100% of variable pay vests (maximum award) 32% 41% 27% 50% of variable pay vests (target) 48% 31% 21% 0% of variable pay vests 100% 0% 20% 40% 60% 80% 100% Salary, benefits and pension Bonus Performance shares Basic salary and benefits The basic salary for each Executive Director is reviewed every three years by the Remuneration Committee. It is intended that basic salary levels should reflect the median of a suitable comparator group selected according to size, industry sector or location as a suitable benchmark group for the Company and will be paid subject to the Group's wider financial circumstances. Current basic salary levels are as follows: P C Slabbert A G Lewis Year ended 30 September 2014 £330,000 £252,000 Year commencing 1 October 2014 £330,000 £252,000 Percentage increase 0% 0% The Group's employees have received an increase of approximately 2.6% over the same period, including annual cost of living, promotional increases and increases based on exceptional performance. The Committee first used EY to conduct a benchmarking review of the reward packages received by the Executive Directors and the Group Executive management team in 2011. The report benchmarked these by reference to the directors and management in a comparator group of 18 UK listed companies selected according to size, industry sector or location as a suitable benchmark group for the Company. Comparator group of companies for reward benchmarking: Consort Medical plc Renold plc Cosalt plc Diploma PLC Hamworthy Plc Scapa Group plc Trifast plc Victrex plc Hampson Industries PLC Corin Group PLC James Latham plc Future plc Lonrho plc Haynes Publishing Group PLC Melrose Resources plc Helphire Group plc Renishaw plc Latchways plc Based upon the report, the significant growth delivered and the future prospects for growth, the Committee implemented a remuneration strategy in October 2011 which targeted the median pay level identified in the EY report, not by a single large increase, but in stages when performance justified a change that the Company could then afford to pay. The first incremental step towards the target median was made with effect from 1 October 2011 when Mr Slabbert's salary was increased from £235,000 to £280,000 (a 19% increase) and Mr Lewis's salary was increased from £162,000 to £200,000 (a 24% increase). In September 2012, the Committee considered whether to grant a further increase towards the median level for Mr Slabbert and Mr Lewis but decided against this. No inflationary related salary increase was made at that time either. In September 2013, in recognition of the impressive growth and shareholder return consistently delivered by the Executive Directors and the Group Executive management team, the Committee confirmed that the final incremental step increase to 60 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 salaries should be made to achieve the median level identified in the EY report. However, before doing so the report was revalidated by referring to the publicly available Deloitte report dated March 2013 on directors' remuneration in smaller companies. With effect from 1 October 2013, Mr Slabbert's salary was increased from £280,000 to £330,000 (an 18% increase) and Mr Lewis's salary was increased from £200,000 to £252,000 (a 26% increase). These salaries are now frozen until the next benchmarking review to be carried out in 2016. Details of the comparator group used in the 2011 EY benchmarking study are set out above. Future comparator groups may be slightly different to reflect the Company's development. Except where roles are significantly widened, the Committee believes the median salary of the benchmark group to be an appropriate target for the Company's Executive Directors given its size, industry sectors and geographical positioning, notwithstanding the spectacular growth delivered over the last five years. Private medical insurance, life assurance and small loans in connection with the jointly owned equity awards under the Performance Share Plan are the only benefits in kind received by the Executive Directors. Annual cash bonus The Executives' annual bonus arrangements are focused on the achievement of the Company's short and medium term financial objectives. Before the start of each year, the Remuneration Committee sets financial performance targets for the year. These are designed to be stretching. Bonus payments are not pensionable. 2013/14 For the year ended 30 September 2014, 120% of the Executive Directors’ bonus potential, capped at 150% of salary, was based on the achievement of Group financial targets. The remaining 30% was based on achieving measurable personal performance targets, as shown below: PC Slabbert AG Lewis 1. FINANCIAL TARGETS (a) Group profit budget achievement (Group PBITE) 25% 25% Less than 90% of budget pays nothing. Bonus is earned from 90% of budget pro-rata up to 110% of budget on a straight line basis. Measured (for foreign exchange translation) at budget exchange rates. (b) Profit growth on previous year (year on year PBITE growth) 25% 25% Bonus will be earned for growth between 0% and 10% on a straight line basis. Measured (for foreign exchange translation) at prior year exchange rates (i.e. constant currency measure). (c) Group cash generation (ratio of operating cash flow to operating profit) 20% 20% As reported in the Annual Report and Accounts each year. Pays on a straight line basis where the ratio exceeds 80% up to a maximum of 100%. Excludes exceptional items and other adjustments from both measures. (d) Earnings per share growth in excess of 20% over the previous year 50% 50% Calculated according to a ratchet mechanism set in more detail below. 2. PERSONAL PERFORMANCE TARGETS A portion of bonus can be earned based on an individual reviewer's assessment of personal performance against personal performance targets set at the beginning of the financial year. 30% 30% TOTAL potential bonus 2014 as a percentage of basic salary 150% 150% R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 61 R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Performance measures (a) to (c) were the same as in previous years and closely align the performance of the Executive Directors with the strategy of the Company's business and shareholder value creation. The personal performance targets are a set of non- financial personal targets which also support the delivery of the strategy. Performance measure (d) was introduced for the first time for the 2013/14 year and allows the Executive Directors to earn annual bonus in excess of 100% of salary in return for delivering exceptional EPS growth in excess of 20% each year. These percentages are fixed for the three years of the current policy and will be reviewed in 2016. The additional 50% of salary is only payable for truly exceptional performance, calculated according to a ratchet based on EPS. The ratchet only applies to EPS growth in excess of 20% over the previous year. For an additional 10% of EPS growth above 20% over the previous financial year EPS (i.e. up to a maximum of 30% EPS growth over the previous financial year EPS) additional bonus can be earned on a pro rata basis up to the maximum as follows: PC Slabbert AG Lewis EPS measure 5% 10% 15% 20% 5% 10% 15% 20% for the first 2.5% of additional growth for the second 2.5% of additional growth for the third 2.5% of additional growth for the fourth 2.5% of additional growth "EPS" means, in relation to any year, the fully diluted earnings per share of the Company as adjusted to exclude the charge/ credit in respect of exceptional items, the revaluation or impairment of assets, the charge or credit related to IAS 19 (revised) and the amortisation of acquired intangible assets. % ADDITIONAL BONUS EARNED V EPS GROWTH % Y R A L A S F O % 0 0 1 F O S S E C X E 50 40 30 20 10 0 N I S U N O B I L A N O T D D A % I 22.5 25.0 27.5 30.0 EPS GROWTH %  % ADDITIONAL BONUS EARNED V EPS GROWTH % The Committee strongly believes it is necessary to incentivise the Executive Directors to deliver truly exceptional performance and to counterbalance the restriction placed on salaries moving forward only at the median level when the Committee is trying to implement a strategy for growth targeted to be well above the median in the comparator group. It is expected that this bonus policy will be fixed for the life of the current remuneration policy to reflect the challenge placed on the team of achieving sustainable high growth in a non-turnaround situation. At the same time the Committee introduced a claw back rule that applies if the Group's financial results are restated due to an error during the two years following their release and a deferral rule which provides for 25% of annual bonus payments to be deferred into shares to be held for two years, then treated as shares which are not subject to the executive shareholding guidelines. This will be applied for the first time this year in connection with the annual bonus payments to be made in November 2014. Long-term incentive plan - Performance Share Plan (the Plan) The Remuneration Committee introduced this Plan with shareholder approval at the AGM in 2002 and in 2010 shareholders approved an updated plan. The existing Plan therefore came into effect from 2 March 2010, with the aim of motivating Executive Directors and other senior executives to achieve performance superior to the Company's peers and to maintain and increase earnings levels whilst at the same time ensuring that it is not at the expense of longer-term shareholder returns. This is reflected in the Plan's performance conditions which are based on total shareholder return (TSR) and earnings per share (EPS). These financial performance conditions remain appropriate for a growing business and the expectations of shareholders over the life of the current policy. They will therefore be applied to the next cycle of awards in December 2014. Non-financial performance conditions 62 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 are not considered appropriate at the current stage in the development of the Group although this will be kept under review. The TSR measure takes the total return received by the Company's shareholders in terms of share price growth and dividends over a three year period and compares it with the total returns received by shareholders in companies within a predetermined and appropriate comparator group. The EPS measure is based on real growth in earnings over the performance period where real growth is expressed as a percentage above inflation. Under the Plan, Executive Directors and a limited number of other senior executives and employees receive conditional share awards (which may be in the form of nil-cost options) in respect of the Company's shares. The awards are split so that 50% vests in accordance with the TSR target and 50% in accordance with the EPS target. The Committee has considered whether to make the targets apply concurrently but decided against this, preferring the balance of measures relating to earnings growth and long term strategic performance that are assessed independently of each other. The actual number of shares that each participant receives depends on the Company's performance over a three-year performance period against the combined EPS/TSR target. The Committee believes that a three-year performance period remains appropriate for the Company and in line with market practice amongst the FTSE Small Cap community. For the TSR measure, the performance of the Company's shares over the performance period is compared with the TSR performance within a comparator group comprising the FTSE Small Cap Index, excluding investment trusts. The Committee has considered whether to create a bespoke comparator group but concluded that there are insufficient direct comparator companies of the right size and diversity in the relevant industries to warrant a specific peer group and the FTSE Small Cap Index remains an appropriate comparator group. Over the three-year period:  If the Company's TSR performance is below the median TSR of the comparator group, no shares will vest  If the Company's TSR performance is equal to the median TSR of the comparator group, 30% of the shares may vest  If the Company's TSR performance is equal to, or exceeds, the upper quartile TSR of the comparator group, 100% of the shares may vest The above schedule reflects the Remuneration Committee's intention to reward only TSR performance which outperforms the comparator group and the Committee's view is that measuring this by reference to median and upper quartile placing remains appropriate. In 2011 the Committee reduced the minimum TSR vesting target from 40% to 30%. In the coming year the Committee intends to review the operating conditions of the Plan with a view to making the changes that are necessary to bring future awards in line with current market practice by the end of 2015. This may include a further reduction in the minimum TSR vesting target. Vesting according to the ranking of the Company's TSR in the peer group Below median Median Upper quartile % of award vesting Nil 30% 100% For the EPS measure, the earnings per share over the performance period are compared with a scale which provides for nil vesting at RPI +3% and maximum vesting at RPI +8%, with vesting on a pro rata basis for performance between these two figures. This range was first introduced for the awards made in December 2011 and the Committee believes it remains appropriate. It is difficult to link the EPS target to broker forecasts which only look out one year, but if inflation is assumed to be 3%, then under the EPS measure the Group has to grow profits by 20% over three years to achieve minimum vesting and by 35% to achieve maximum vesting. These targets are ahead of the expectations for those businesses in the Company's sector where longer-term forecasts are published. EPS growth targets At or less than RPI +3% % of award vesting Nil 100%  If the Company's TSR performance is between the median At or greater than RPI +8% and upper quartile TSR of the comparator group, shares may vest on a pro rata basis In addition, the Committee has discretion to reduce the number of shares which will vest or decide that no shares will vest if it considers that the financial performance of the Company or the performance of the participant does not justify vesting. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 63 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 The maximum value that can currently be granted under the Plan rules in any year remains at 100% of salary. The current remuneration policy is that both Mr Slabbert and Mr Lewis should receive awards equal to 100% of salary, being the median level identified in the 2011 EY benchmarking report. This is fixed until 2016 when it will be reviewed by reference to a new benchmarking report. On a change of control, any vesting of awards will be pro-rated by reference to time and performance. Under the Plan as introduced in 2010 joint ownership awards were permitted for the first time. In the Company's case, savings in National Insurance Contributions resulting from this are not offset by the loss of corporation tax credits because of the presence of historic corporation tax losses in the UK. The Company loans recipients the small up-front cost of purchasing their interest in the joint ownership award shares. For consistency the Executive Directors have been treated in the same way as other recipients and have therefore received small loans in connection with their outstanding awards. The total value of the loans received by the Executive Directors is capped at £10,000. As announced to shareholders in December 2013, joint ownership awards, nil cost options and conditional awards of shares were granted under the 2010 Plan to the Executive Directors, members of the Group Executive management team and other valued employees. A further award will be made in December 2014 within the parameters of the Plan as described above and at 100% of salary for both the Chief Executive and Group Finance Director. Shareholding guidelines Under shareholding guidelines approved in 2004, executives participating in the Performance Share Plan are required to build up and retain a shareholding in the Company. For Executive Directors the shareholding requirement was equivalent to 1.5 times base salary and for other recipients the shareholding requirement was equivalent to one times base salary. The Executive Directors and other members of the Group Executive management team are required to retain a portion of any awards that vest under the Plan until their respective shareholding guideline is met. In September 2011 the Remuneration Committee amended the shareholding guidelines so that for awards that vest from December 2014 the Executive Directors are obliged to build up and retain a shareholding equivalent to two times base salary, after which they are not required to retain any portion of future awards that vest. Dilution The Company reviews the awards of shares made under the all-employee and executive share plans in terms of their effect on dilution limits in any rolling ten-year period. The current position is set out on page 71. Other share plans Shareholders approved the introduction of the Avon Rubber p.l.c. Share Incentive Plan (the SIP) at the AGM in February 2012. All UK tax resident employees of the Company and its subsidiaries are entitled to participate. Under the SIP, participants purchase shares in the Company monthly using deductions from their pre-tax pay. The maximum contribution each month under the SIP is £150, a sum which is set by the Government. Both Mr Slabbert and Mr Lewis participate in the SIP at the maximum level. Shareholders also approved the introduction of the Avon Rubber p.l.c. Employee Stock Purchase Plan (the ESPP) at the AGM in February 2012. The ESPP is open to all US tax resident employees and allows participants to accumulate deductions from their post-tax pay over an offering period of 12 months. The maximum contribution for each 12 month period is $3,000 at the conclusion of the offering period the accumulated funds are used to purchase the Company's shares at a discount. Neither Mr Slabbert nor Mr Lewis are eligible to participate in the ESPP. Pension arrangements Mr Slabbert and Mr Lewis are both based in the UK and are members of the Avon Rubber Retirement and Death Benefits Plan. Until 30 September 2009, when the final salary section of the Plan closed to future accrual of benefits, Mr Slabbert was a member of the Senior Executive Section which provided members with a defined level of benefit on retirement depending on length of service and earnings. Members can receive a pension of up to two-thirds of pensionable salary on retirement from age 60, provided the minimum service requirement of 20 years has been met. On death in service, a lump sum of four times pensionable salary is paid, along with a spouses' pension of one half of the member's prospective pension. When an executive director dies after retirement, a spouse's pension of one half of the member's pension is paid. At the time the final salary section of the Plan closed to future accrual of benefits, in return for Mr Slabbert giving up this valuable benefit, the Company and the Trustee agreed to enter into a special benefit arrangement. Under this arrangement for each complete year subsequently worked by Mr Slabbert, the age by reference to which a reduction would be applied to his pension if he chose to draw it early would reduce by 5/8ths of a year, with the end result that after eight years, no reduction would apply if Mr Slabbert retired on or after his 55th birthday. 64 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Thus, each year over an eight year period the age at which Mr Slabbert can retire early, on an unreduced basis, reduces by 7.5 months. The Company will fund this benefit. During the year to 30 September 2014 Mr Slabbert has been a member of the money purchase section of the Plan. Under the current remuneration policy any UK-based Executive Directors joining the Company are offered defined contribution arrangements. Mr Lewis is a member of the money purchase section of the Plan. Under this section members receive a pension based upon the size of their retirement account on retirement from age 65. On death in service, a lump sum of four times pensionable salary is paid, along with a spouse's pension of one quarter of the member's pensionable salary. Both Mr Slabbert and Mr Lewis receive a company pension contribution of 15% of salary. In January 2012 Mr Slabbert's total pension benefits reached the standard lifetime allowance of £1.8m and he ceased making contributions into the money purchase section of the Plan. Monthly contributions have been paid to Mr Slabbert as a salary supplement since then. Mr Slabbert remains covered by the death in service insurance notwithstanding that he is no longer an active member of the Plan. Executive Directors' basic salaries are the only pensionable element of their remuneration packages. There is no intention to increase pension contributions to the Executive Directors during the life of the current policy. The Remuneration Committee may vary these terms if the particular circumstances surrounding the appointment of a new executive director demand it but this would be exceptional and has never occurred. The parameters for varying the contractual terms on recruitment are described in the guiding policy section above. The Remuneration Committee strongly endorses the obligation on an executive director to mitigate any loss on early termination and will seek to reduce the amount payable on termination where it is appropriate to do so. The Committee will also take care to ensure that, while meeting its contractual obligations, poor performance is not rewarded. The Executive Directors' contracts contain early termination provisions consistent with the policy outlined above. The table below summarises key details in respect of each Executive Director's contract. Neither of the Executive Directors is currently appointed as a non-executive director of any limited company outside the Group. The Remuneration Committee will establish a policy on the treatment of any fees received by Executive Directors in respect of such non-executive roles when required. No payments were made during the year to former Executive Directors as none left employment. Contract date Years to expected retirement Company notice period Executive notice period Service contracts and policy on payments for loss of office P.C. Slabbert 28 September 2009 A.G. Lewis 28 September 2009 8 22 12 months 12 months 12 months 12 months The Company's policy is that Executive Directors should normally be employed under a contract which may be terminated by either the Company or the Executive Director giving 12 months' notice and which otherwise expires on retirement. The Company may terminate the contract early without cause by making a payment in lieu of notice by monthly instalments of salary and benefits to a maximum of 12 months, with reductions for any amounts received from providing services to others during this period. There are no obligations to make payments beyond those disclosed elsewhere in this report. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 65 There are no provisions for compensation payments on early termination in the Chairman's and the Non-Executive Directors' letters of appointment. The date of each appointment is set out below, together with the date of their last re-election. D.R. Evans S.J. Pirie OBE R.K. Wood Date of initial appointment Date of last re-election 1 June 2007 7 February 2013 1 March 2005 6 February 2014 1 December 2012 7 February 2013 R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Chairman and Non-Executive Directors The Chairman and Non-Executive Directors receive a fixed fee for their services. Fee levels are determined by the Board in light of market research and benchmarking advice provided by EY. Under the policy approved by shareholders in February 2014, fee levels for the Chairman and Non-Executive Directors are benchmarked every three years and adjusted to the median level of the comparator group. The aim is to provide compensation in line with the demands of the roles at a level that attracts high calibre individuals and reflects their experience and knowledge. The first benchmarking recently took place and increases have been made, effective on 1 October 2014. The Chairman and the Non-Executive Directors do not participate in any Board discussions or vote on their own remuneration, nor do they participate in any incentive or benefit plans. Current fees are as follows: 2015 2014 % increase Chairman £125,000 £100,000 Base fee Non-Executive Committee Chairman fee Committee attendance fee £38,500 £10,000 £2,000 £35,000 £10,000 n/a 25% 10% - n/a The Chairman and the Non-Executive Directors each have a letter of appointment. The initial period of appointment for Mrs SJ Pirie was three years and this was extended for a further three years on 1 March 2008 and on a rolling annual basis on 1 March 2011. The initial period of appointment for Mr DR Evans was also three years and this was extended on a rolling annual basis on 31 May 2010. Mr RK Wood was appointed on a rolling annual basis with effect from 1 December 2012. Chairman and Non-Executive Director appointments are subject to Board approval and election by shareholders at the annual general meeting following appointment and, thereafter, re- election by rotation every three years. The Chairman and any Non-Executive Director who has served for more than nine years since first election are subject to annual re-election by shareholders. Mrs Pirie reached nine years' service on 1 March 2014 and is standing down from the Board at the annual general meeting on 29 January 2015. Details of her successor will be communicated in due course, but his or her remuneration will be at the levels described above. 66 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Annual report on remuneration The information that follows has been audited by the Company's auditors PricewaterhouseCoopers LLP. Directors' remuneration for the year ended 30 September 2014 was as follows: Basic salary Pension/ other and fees £000 supplements £000 Annual bonus* £000 Other benefits** £000 Executive Directors A.G. Lewis P.C. Slabbert (highest paid Director) Non-Executive Directors D.R. Evans (Chairman) S.J. Pirie OBE R.K. Wood (appointed 1 December 2012) The Rt Hon. Sir Richard Needham (resigned 7 February 2013) Total 2014 Total 2013 252 330 100 45 45 - 772 677 38 50 - - - - 88 72 370 452 - - - - 822 390 2 3 4 - - - 9 5 Total 2014 £000 662 835 104 45 45 - 1,691 Total 2013 £000 381 566 100 45 36 16 1,144 * 2014 bonus payments as a percentage of salary were 137% for Mr Slabbert and 147% for Mr Lewis, against maximum percentages of 150%. ** This is the cost of private health insurance, executive medical and the benefit of loans made in relation to PSP awards. No Director waived emoluments in respect of the year ended 30 September 2014 (2013: nil). Single total figure of remuneration The following table gives a single total figure of remuneration for the Chief Executive and Group Finance Director for 2014 and 2013. The principal additional component included in this single figure is the Performance Share Plan. Fixed pay Pay for performance Basic salary £000 Pension/ other supplements £000 Benefits in kind £000 P.C. Slabbert 2014 A.G. Lewis 2013 2014 2013 330 280 252 200 50 42 38 30 3 3 2 2 Subtotal £000 383 325 292 232 Annual bonus £000 PSP* Subtotal £000 £000 452 241 370 149 703 808 388 397 1,155 1,049 758 546 Total Remuneration £000 1,538 1,374 1,050 778 * Calculated by multiplying the number of shares that vested (in both cases the maximum number subject to the award) by the share price on the day of vesting, which in 2014 was 570p and in 2013 was 351p. The table of Directors' remuneration for the year ended 30 September 2014 above gives the single total figure for the Non-Executive Directors for 2014 and 2013. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 67 R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Percentage change in remuneration of the CEO compared with other employees (unaudited) Last year the Committee decided it was not appropriate to compare the percentage change in remuneration of the CEO with the wider workforce because increases had been made to bring the CEO’s salary (and those of other executives) up to the median level, whereas the wider workforce were largely already at the median level. This year, in line with current practice, we have reported changes in the CEO’s remuneration against the wider workforce. The following table sets out the percentage change in remuneration between the reported year and the preceding year in certain aspects of the CEO's remuneration and the average of employees across the Group: CEO All employees 2012/2013 2013/2014 2012/2013 2013/2014 Salary Benefits 0% 0% Annual Bonus +126% +18% 0% +88% +3% 0% +74% +3% 0% +15% The ratio of CEO fixed pay to average employee fixed pay is 11:1 for the year under review. Relative importance of spend on pay (unaudited) The following table shows actual expenditure of the Group and the change in expenditure between current and previous financial periods on remuneration paid to all employees globally, set against distributions to shareholders and other uses of profit or cash flow being profits retained within the business and investments in research and development and property, plant and equipment: Other expenditure in £'000 and as a percentage of global remuneration spend Global remuneration spend Dividends to shareholders Profit retained Research and development expenditure Expenditure on property, plant and machinery 2014 2013 2012 £'000 32,423 33,314 30,261 £'000 1,422 1,132 941 % £'000 % £'000 % £'000 % 4.4% 3.4% 3.1% 9,389 29.0% 7,046 21.7% 3,731 11.5% 7,705 23.1% 6,407 19.2% 6,175 18.5% 6,888 22.8% 6,627 21.9% 4,789 15.8% 68 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Annual bonus The Remuneration Committee determined at its meeting on 13 November 2014 that the criteria for making an award under the annual bonus scheme had been met. No discretion was exercised by the Committee to reduce or increase payments. The breakdown is as follows: 1. Financial Targets (a) Group profit budget achievement (Group PBITE) (b) Profit growth on previous year (year on year PBITE growth) (c) Group cash generation (ratio of operating cashflow to operating profit) (d) Earnings Per Share growth (ratchet based on additional EPS growth above 20% over the previous financial year) 2. Personal Performance Targets PC Slabbert AG Lewis Actual Max. Actual Max. 25% 25% 20% 50% 17% 25% 25% 20% 50% 30% 25% 25% 20% 50% 27% 25% 25% 20% 50% 30% Total potential bonus as a percentage of basic salary 137% 150% 147% 150% Actual performance against the targets has not been reproduced because it is commercially sensitive. Pensions The following information relates to the pension of Mr P C Slabbert under the defined benefit scheme: Increase in accrued pension during 2013/14 Accrued pension at 30 September 2014 £ 1,762 68,138 The age at which Mr P C Slabbert may take his pension unreduced was reduced by 5/8ths of a year over the year to 30 September 2014. On closure of the defined benefit scheme Mr Slabbert joined the money purchase section of the plan. Company contributions in respect of Mr Slabbert during the year were nil (2013: nil) because Mr Slabbert reached the standard lifetime allowance in January 2012. During the year £50,000 (2013: £42,000) was paid to Mr Slabbert in monthly instalments as a salary supplement. In respect of Mr A G Lewis, Company contributions to the money purchase section of the plan were £38,000 (2013: £30,000). All transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 69 R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 The transfer values of the accrued entitlement represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme's liability in respect of Director's pension benefits. They do not represent sums payable to individual Directors and, therefore, cannot be added meaningfully to annual remuneration. The accrued entitlement shown is the amount that would be paid each year at normal retirement age, based on service to the end of the current year. The accrued lump sum, under the defined benefit scheme, for Mr Slabbert at 30 September 2014 was £328,157 (2013: £318,748). Directors' shareholdings and share interests Beneficial interests of Directors, their families and trusts in ordinary shares of the Company were: S.J. Pirie D.R. Evans R.K. Wood P.C. Slabbert A.G. Lewis At the end of the year At the beginning of the year 73,000 40,000 - 202,645 121,110 82,710 40,000 - 187,116 100,496 Interests in jointly owned shares held by the Executive Directors under the Performance Share Plan are excluded from the above and detailed separately on page 71. The only change in the interests set out above between 30 September 2014 and 19 November 2014 were the additional shares bought by Mr P C Slabbert and Mr A G Lewis under the Share Incentive Plan, which increased their total shareholdings to 202,690 and 121,155 respectively. The register of Directors' interests contains details of Directors' shareholdings and share options. The position under the shareholding guidelines for the Executive Directors is set out on page 71. Performance Share Plan 2010 (the Plan) For grants of joint ownership awards, options or conditional awards made to date pursuant to the Plan, the performance conditions have been based on the Company's TSR relative to the TSR of a comparator group, comprising the FTSE Small Cap companies (excluding investment trusts). For the Cycles granted in 2011/12, 2012/13 and 2013/14 a split performance condition applied so that 50% of the award vests in accordance with the TSR target and 50% in accordance with an EPS target based on real growth in earnings over the performance period where real growth is expressed as a percentage above inflation. The twofold test based on TSR performance and EPS is in line with market practice and encourages management to maintain and increase earnings levels whilst at the same time ensuring that it is not at the expense of longer term shareholder return. The twofold test was used again for the 2013/14 awards. In 2011, the Committee set the EPS target as nil vesting at RPI +3% and maximum vesting at RPI +8% with vesting on a pro rata basis in between these two figures. This EPS target was used again for the 2013/14 awards. The Committee determined in December 2013 that the 2010/11 award vested in full on the basis that the TSR over the three years from 1 October 2010 to 30 September 2013 was significantly ahead of the upper quartile of the comparator group. As a consequence, and as announced to shareholders in December 2013, 123,424 shares were awarded to Mr Slabbert and 68,067 shares were awarded to Mr Lewis. The Directors' contingent interests in ordinary shares under the Plan at 30 September 2014 were as follows: Outstanding awards granted annually under the Plan were as follows: 30 Sept 2013 Granted in Exercised in the year** the year* Lapsed in 30 Sept the year 2014*** P.C. Slabbert 292,987 A.G. Lewis 164,960 56,926 43,471 (123,424) (68,067) - 226,489 - 140,364 Other senior employees**** 695,745 159,296 (268,810) (26,168) 560,063 Total 1,153,692 259,693 (460,301) (26,168) 926,916 * ** The award price at the date of grant was 579.7 pence The market price at the vesting date for the 2010/11 award was 570.0 pence *** The weighted average remaining life of the awards outstanding at the year-end is 1.6 years (2013: 1.1 years). **** This figure includes 201,755 (2013: 241,267) in respect of key management as defined in note 9 of the financial statements. 70 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Outstanding awards granted annually under the Plan were as follows: Position under shareholding guidelines 2011 2012 2013 Total at 30 Sept 2014* 87,500 50,000 82,063 46,893 56,926 43,471 226,489 140,364 203,258 206,820 149,985 560,063 P.C. Slabbert A.G. Lewis Other senior employees Shareholding as Actual Target Achievement**** Shares held voluntarily in at 30 Sept 2014* Value** Value*** excess of guideline Number of shares £000 £000 % Number of shares PC Slabbert 202,645 1,247 AG Lewis 121,110 745 495 378 378 296 122,223 59,697 Total 340,758 335,776 250,382 926,916 * Taken from the table on page 70. * In relation to the awards outstanding at 30 September 2014, deferred loan payments for the awards granted in 2011/2012, 2012/2013 and 2013/2014 will become due to the Company as follows: PC Slabbert £10,000 (2013: £10,000); AG Lewis £10,000 (2013: £6,642). ** Using the closing share price on 30 September 2014 of 615p. *** 150% of current salary for Executive Directors for awards vesting up to December 2014. Salaries used are those effective 1 October 2014. **** Actual value as a percentage of current salary. The award price for the 2013/14 award was 579.7 pence, for the 2012/13 award was 349.5 pence, for the 2011/12 award it was 300.0 pence and for the 2010/11 award it Dilution was 196.0 pence. PSP performance 30 Sept 30 Sept 30 Sept period years 2011 2012 2013 30 Sept 2014*** 30 Sept 2015**** 30 Sept 2016**** ending (Cycle A) (Cycle B) (Cycle C) (Cycle D) (Cycle E) (Cycle F) TSR element* 100% 100% 100% 50% 50% 50% EPS element** - - - 50% 50% 50% Total exercisable rate (% of grant) 100%***** 100%****** 100%******* - - - * ** *** Based on Avon Rubber p.l.c.'s Total Shareholder Return ranked relative to companies in the FTSE Small Cap Index at the start of the period. Based on the real growth in earnings over the performance period where real growth is expressed as a % above inflation. The three-year performance period in respect of these awards is complete but vesting is not determined until the end of November following release of the Group results. 90% of the awards are currently expected to vest. **** The three year performance periods in respect of these awards is not yet complete. ***** These awards were reduced to 69% of entitlement to remain within the 5% dilution limit previously contained in the Plan rules. They vested in full in December 2011 on the basis of a Company TSR of 905% compared to the upper quartile of the comparator group at 131%. ****** These awards vested in full in December 2012 on the basis of a Company TSR of 265% compared to the upper quartile of the comparator group at 63%. ******* These awards vested in full in December 2013 on the basis of a Company TSR of 214% compared to the upper quartile of the comparator group at 122% In respect of the 5% and 10% limits recommended by the Association of British Insurers, the relevant percentages were 7.6% and 9.7% respectively based on the issued share capital at 30 September 2014. Under the Plan the 5% limit was increased to 10% and, in 2011, the 10% limit was increased to 15% to preserve the 10% limit for discretionary plans in connection with the introduction of the all employee Share Incentive Plan. As at 30 September 2014, the number of shares committed under discretionary share-based incentive schemes since 30 September 2002, less the number of shares purchased in the market to satisfy previous awards that had vested and the shares held in the Employee Share Ownership Trust gives 2,356,214 shares. This represents 7.6% dilution against the 10% discretionary plan dilution limit. As at 30 September 2014, the number of shares committed under all employee share-based incentive schemes since 30 September 2002, less the number of shares purchased in the market to satisfy previous awards that had vested and the shares held in the Employee Share Ownership Trust gives 3,006,760 shares which represents 9.7% dilution against the 15% all employee plan dilution limit. It remains the Company's practice to use employee share ownership trusts in order to meet its liability for shares awarded under the Plan. Two trusts have been established, the second in March 2010 in connection with the jointly owned equity awards. In December 2013 the Avon Rubber p.l.c. Employee Share Ownership Trust No. 1 subscribed to 300,000 new shares to be used in relation to future awards under the Plan. At 30 September 2014 there were 1,081,810 shares held in the Employee Share Ownership Trust which will either be used to satisfy awards granted under the Plan to date, or in connection with future awards. Of these, 624,214 were held on a jointly owned equity basis. A Hedging Committee ensures that the employee share ownership trusts hold sufficient shares to satisfy existing and future awards made under the Plan by buying shares in the market or causing the Company to issue new shares. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 71 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S R E M U N E R AT I O N R E P O R T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Total shareholder return performance graph The following graph illustrates the total return, in terms of share price growth and dividends on a notional investment of £100 in the Company over the last five years relative to the FTSE Small Cap Index (excluding investment trusts). This index was chosen by the Remuneration Committee as a competitive indicator of general UK market performance for companies of a similar size. A V O N R U B B E R P L C - T O TA L R E T U R N O N I N V E S T M E N T r e k n a B e n O n o s m o h T - l a i c n a n F n o s i m o h T : e c r u o S 900.00 800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 01 October 2009 30 September 2014  AVON RUBBER PLC  FTSE SMALL CAP Table of historic data CEO 2014 P.C. Slabbert 2013 P.C. Slabbert 2012 P.C. Slabbert 2011 P.C. Slabbert 2010 P.C. Slabbert CEO single figure of total remuneration £000 1,538 1,374 1,864 404 428 Annual bonus Long term incentive pay out vesting rates against maximum against maximum opportunity opportunity 91% 86% 40% 74% 90% 100% 100% 100% nil nil 72 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Share Incentive Plan During the year to 30 September 2014 Mr Slabbert and Mr Lewis each purchased 263 shares pursuant to the Share Incentive Plan. As at 30 September 2014, the market price of Avon Rubber p.l.c. shares was £6.155 (2013: £5.50). During the year the highest and lowest market prices were £6.67 and £5.16 respectively. Payments to past Directors and payments for loss of office There have been no payments to past Executive Directors or payments for loss of office. Statement of implementation of remuneration policy in the following year Information required under this disclosure is contained in the table on pages 58 to 59 and associated commentary. Details of the advisors to the Remuneration Committee and their fees During the year to 30 September 2014 the Company incurred costs of £11,750 (2013: £3,750) in respect of fees for advisors to the Remuneration Committee. Statement of shareholder voting on the Remuneration Report The shareholder vote on the Remuneration Report for the year ended 30 September 2013 at the AGM which took place on 6 February 2014 was as follows: Resolution text Votes for % for Votes against % against Total votes cast Votes withheld Approval of the renumeration report 21,434,185 99.23 166,591 0.77 21,600,776 355,188 The Remuneration Report has been approved by the Board of Directors and signed on its behalf by: Richard Wood Chairman of the Remuneration Committee 19 November 2014 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 73 C O N S O L I D AT E D S TAT E M E N T O F C O M P R E H E N S I V E I N C O M E F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Note 1 Revenue Cost of sales Gross profit Selling and distribution costs General and administrative expenses 2014 2014 Statutory Adjustments* £’000 £’000 2014 Adjusted £’000 2013 2013 Statutory** Adjustments* £’000 £’000 2013 Adjusted £’000 124,779 (83,264) 41,515 (11,505) (15,685) - - 124,779 (83,264) - - 2,678 41,515 (11,505) (13,007) 124,851 (91,140) 33,711 (9,101) (11,607) - 124,851 (91,140) - - - 1,220 33,711 (9,101) (10,387) Operating profit 1 14,325 2,678 17,003 13,003 1,220 14,223 Operating profit is analysed as: Before depreciation and amortisation Depreciation and amortisation Operating profit Finance income Finance costs Other finance expense Profit before taxation Taxation Profit for the year 11,12 20,486 (6,161) 2,417 261 22,903 (5,900) 19,220 (6,217) 803 417 20,023 (5,800) 14,325 2,678 17,003 13,003 1,220 14,223 4 4 4 5 6 1 (275) (187) - - 12 1 (275) (175) 13,864 (3,053) 2,690 (450) 16,554 (3,503) 1 (348) (253) 12,403 (3,566) - - 33 1 (348) (220) 1,253 (122) 13,656 (3,688) 10,811 2,240 13,051 8,837 1,131 9,968 Other comprehensive expense Items that are not subsequently reclassified to the income statement Actuarial loss recognised on retirement benefit scheme Items that may be subsequently reclassified to the income statement Net exchange differences offset in reserves 10 (4,851) (306) - - (4,851) (9,180) (306) (74) Other comprehensive expense for for the year, net of taxation (5,157) - (5,157) (9,254) - - - (9,180) (74) (9,254) Total comprehensive income / (expense) for the year 5,654 2,240 7,894 (417) 1,131 714 Earnings per share Basic Diluted 8 36.2p 35.0p 43.7p 42.3p 30.0p 28.8p 33.8p 32.5p * See page 19 for further details of adjustments. ** Restated for the change in accounting for pension costs. See Accounting Policies. 74 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 C O N S O L I D AT E D B A L A N C E S H E E T AT 3 0 S E P T E M B E R 2 0 1 4 Assets Non-current assets Intangible assets Property, plant and equipment Current assets Inventories Trade and other receivables Derivative financial instruments Cash and cash equivalents Liabilities Current liabilities Trade and other payables Provisions for liabilities and charges Current tax liabilities Net current assets Non-current liabilities Borrowings Deferred tax liabilities Retirement benefit obligations Provisions for liabilities and charges Net assets Shareholders’ equity Ordinary shares Share premium account Capital redemption reserve Translation reserve Accumulated losses Total equity Note 2014 £’000 2013 £’000 11 12 13 14 19 15 16 18 17 6 10 18 20 20 17,240 19,575 36,815 12,887 19,157 2 2,925 34,971 17,755 1,846 6,852 26,453 16,541 20,387 36,928 13,374 20,677 214 184 34,449 16,680 616 6,073 23,369 8,518 11,080 - 2,315 16,029 1,973 20,317 11,059 2,977 11,279 1,997 27,312 25,016 20,696 31,023 34,708 500 (932) (40,283) 25,016 30,723 34,708 500 (626) (44,609) 20,696 These financial statements on pages 74 to 112 were approved by the Board of Directors on 19 November 2014 and signed on its behalf by: Peter Slabbert Andrew Lewis A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 75 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S C O N S O L I D AT E D C A S H F L O W S TAT E M E N T F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Cash flows from operating activities Cash generated before the impact of exceptional items Cash impact of exceptional items Cash generated from operations Finance income received Finance costs paid Retirement benefit deficit recovery contributions Tax paid Net cash generated from operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Capitalised development costs and purchased software Acquisition of VR Technology Holdings Net cash used in investing activities Cash flows from financing activities Net movements in loans Dividends paid to shareholders Purchase of own shares Net cash used in financing activities Note 21 26 22 7 20 Net increase in cash, cash equivalents and bank overdrafts Cash, cash equivalents and bank overdrafts at beginning of the year Effects of exchange rate changes Cash, cash equivalents and bank overdrafts at end of the year 22 2014 £’000 2013 £’000 26,500 (983) 25,517 1 (315) (513) (2,903) 21,787 19 (3,753) (3,062) (50) 15,541 (241) 15,300 1 (365) (592) (2,229) 12,115 2 (6,339) (4,715) (439) (6,846) (11,491) (10,805) (1,422) - (12,227) 2,714 184 27 2,925 2,281 (1,132) (1,765) (616) 8 176 - 184 76 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 C O N S O L I D AT E D S TAT E M E N T O F C H A N G E S I N E Q U I T Y F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 At 1 October 2012 Profit for the year ** Unrealised exchange differences on overseas investments Actuarial loss recognised on retirement benefit scheme ** Total comprehensive expense for the year Dividends paid Purchase of shares by the employee benefit trust Movement in respect of employee share scheme At 30 September 2013 Profit for the year Unrealised exchange differences on overseas investments Actuarial loss recognised on retirement benefit scheme Total comprehensive income / (expense) for the year Dividends paid Issue of shares Purchase of shares by the employee benefit trust Movement in respect of employee share scheme Note Share capital £’000 30,723 - Share premium £’000 34,708 - - - - - - - - - - - - - 30,723 - 34,708 - - - - - 300 - - - - - - - - 10 20 24 10 7 20 20 24 Other reserves £’000 Accumulated losses £’000 Total equity £’000 (52) - (74) - (74) - - - (41,482) 8,837 23,897 8,837 - (74) (9,180) (9,180) (343) (1,132) (1,765) 113 (417) (1,132) (1,765) 113 (126) - (306) (44,609) 10,811 20,696 10,811 - (306) - (4,851) (4,851) (306) - - - - 5,960 (1,422) - (300) 88 5,654 (1,422) 300 (300) 88 At 30 September 2014 31,023 34,708 (432) (40,283) 25,016 Other reserves consist of the capital redemption reserve of £500,000 (2013: £500,000) and the translation reserve of £932,000 (2013: £626,000). All movement in other reserves relates to the translation reserve. ** Restated for the change in accounting for pension costs. See Accounting Policies. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 77 A C C O U N T I N G P O L I C I E S A N D C R I T I C A L A C C O U N T I N G J U D G E M E N T S F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation These financial statements have been prepared in accordance with EU Endorsed International Financial Reporting Standards (IFRSs) and IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared on a going concern basis under the historical cost convention except for financial assets and financial liabilities (including derivative instruments) held at fair value through profit or loss. The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed below. Recent accounting developments The following standards, amendments and interpretations have been issued by the International Accounting Standards Board (IASB) or by the International Financial Reporting Interpretations Committee (IFRIC). The Group’s approach to these is as follows: a) Standards, amendments and interpretations effective in 2014  Costs associated with investment management are deducted from the return on plan assets (which is unchanged from the previous standard). Other expenses are recognised in the income statement as incurred. This has resulted in an increase in the costs charged to the income statement of £0.8m for the year ending 30 September 2014 over the cost under the previous standard and a 2.6p reduction in earnings per share, with a similar impact on the comparatives for the year ended 30 September 2013 as shown below: Year to 30 September 2013 Reported £’000 Restate £’000 Restated £’000 13,423 1 (348) 118 13,194 (3,566) 9,628 (420) - - (371) (791) - (791) 13,003 1 (348) (253) 12,403 (3,566) 8,837 Operating profit Finance income Finance costs Other finance income/(expense) Profit before taxation Taxation Profit for the year Actuarial loss recognised on retirement benefit scheme (9,971) 791 (9,180) Net exchange differences offset in reserves (74) - (74) The following standards and amendments have been adopted for the year ended 30 September 2014: Other comprehensive expense for the year, net of taxation (10,045) 791 (9,254) IFRS 10, ‘Consolidated financial statements’ Total comprehensive expense - - - - - - IFRS 11, ‘Joint arrangements’ IFRS 12, ‘Disclosure of interests in other entities’ IFRS 13, ‘Fair value measurement’ IAS 27 (revised), ‘Separate financial statements’ IAS 28 (revised), ‘Associates and joint ventures’ - Amendment to IAS 12, ‘Income taxes’ - Amendment to IAS 19, ‘Employee benefits’ (IAS 19 (R)) The amendment to IAS 19, ‘Employee Benefits’ is effective for the financial year beginning 1 October 2013. The main changes affecting the Group are as follows:  Interest income or expense will now be calculated by applying the discount rate to the net defined benefit liability or asset. Previously interest cost was calculated on the defined benefit obligation and expected return calculated on plan assets. for the year (417) - (417) Earnings per share Basic Diluted 32.7p 31.4p (2.7p) (2.6p) 30.0p 28.8p In the analysis above, the discount rate has been applied to the net deficit. Administration costs have been charged against operating profit and investment management costs have been included in other comprehensive expense. On the face of the consolidated statement of comprehensive income, adjusted results have been disclosed which exclude defined benefit pension scheme costs as these relate to a scheme closed to future accrual and are not therefore relevant to current operations. No adjustment has been made to other comprehensive expense. The classification of overhead costs between selling and distribution costs and general and administrative expenses has been represented to provide more relevant information. There is no impact on operating profit. 78 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 b) Standards, amendments and interpretations to existing standards issued but not yet effective in 2014 and not early adopted The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning 1 October 2013 and have not been adopted early: - Amendment to IFRS 7, ‘Financial instruments: disclosures’ - - IFRS 9, ‘Financial instruments’ IFRS 15, ‘Revenue from Contracts with Customers’ - Amendment to IAS 32, ‘Financial instruments: presentation’ - Amendment to IAS 36, ‘Impairment of assets’ - Amendment to IAS 39, ‘Financial instruments: recognition and measurement’ - Annual improvements cycle 2009-2011. Basis of consolidation The consolidated financial statements incorporate the financial results and position of the Group and its subsidiaries. Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. Intra- group transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless costs cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. Foreign currencies The Group’s presentation currency is sterling. The results and financial positional of all subsidiaries and associates that have a functional currency different from sterling are translated into sterling as follows: - assets and liabilities are translated at the closing rate at the balance sheet date; and - income and expenses are translated at average rates. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, the cumulative amount of such exchange difference is recognised in the consolidated statement of comprehensive income as part of the gain or loss on sale. Foreign currency transactions are initially recorded at the exchange rate ruling at the date of the transaction. Foreign exchange gains and losses resulting from settlement of such transactions and from the transaction at exchange rates ruling at the balance sheet date of monetary assets or liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income, except when deferred in equity as qualifying hedges. Revenue Revenue comprises the fair value of the consideration received for the sale of goods and services, net of trade discounts and sales- related taxes. Revenue is recognised when the risks and rewards of the underlying sale have been transferred to the customer, and when collectability of the related receivables is reasonably assured, which is usually when title passes or a separately identifiable phase of a contract or development has been completed and accepted by the customer. Segment reporting Segments are identified based on management information provided to the chief operating decision-maker. The chief operating decision- maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Group Executive team. A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. The chief operating decision-maker assesses the performance of the operating segments based on the measures of revenue, EBIT and EBITDA. Central overheads, finance income and expense and taxation are not allocated to the business segments. Exceptional items Transactions are classified as exceptional where they relate to an event that falls outside of the ordinary activities of the business and where individually or in aggregate they have a material impact on the financial statements. Employee benefits All resulting exchange differences are recognised as a separate component of equity. Pension obligations and post-retirement benefits The Group has both defined benefit and defined contribution plans. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 79 A C C O U N T I N G P O L I C I E S A N D C R I T I C A L A C C O U N T I N G J U D G E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 The defined benefit plan’s asset or liability as recognised in the balance sheet is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in full in the period in which they occur, as part of other comprehensive income. Costs associated with investment management are deducted from the return on plan assets, (which is unchanged from the previous standard). Other expenses are recognised in the income statement as incurred. For the defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Contributions are expensed as incurred. Share based compensation The Group operates a number of equity-settled, share-based compensation plans, under which the entity receives service from employees as consideration for equity instruments (options) of the Group. The fair value of the employee service received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted: - including any market performance conditions; - excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and - including the impact of any non-vesting conditions (for example, the requirement for employees to save). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the entity revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the consolidated statement of comprehensive income, with a corresponding adjustment to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable net assets of the acquired subsidiary at the date of acquisition. Identifiable net assets include intangible assets other than goodwill. Any such intangible assets are amortised over their expected future lives unless they are regarded as having an indefinite life, in which case they are not amortised, but subjected to annual impairment testing in a similar manner to goodwill. Since the transition to IFRS, goodwill arising from acquisitions of subsidiaries after 3 October 1998 is included in intangible assets, is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill arising from acquisitions of subsidiaries before 3 October 1998, which was set against reserves in the year of acquisition under UK GAAP, has not been reinstated and is not included in determining any subsequent profit or loss on disposal of the related entity. Goodwill is tested for impairment at least annually or whenever there is an indication that the asset may be impaired. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Any impairment is recognised immediately in the consolidated statement of comprehensive income. Subsequent reversals of impairment losses for goodwill are not recognised. Development Expenditure Expenditure in respect of the development of new products where the outcome is assessed as being reasonably certain as regards viability and technical feasibility is capitalised and amortised over the expected useful life of the development. Expenditure that does not meet these criteria is expensed as incurred. The capitalised costs are amortised over the estimated period of sale for each product, commencing in the year sales of the product are first made. Development costs capitalised are tested for impairment at least annually or whenever there is an indication that the asset may be impaired. Any impairment is recognised immediately in the consolidated statement of comprehensive income. Subsequent reversals of impairment losses for research and development are not recognised. Computer Software Computer software is included in intangible assets at cost and amortised over its estimated life. Property plant and equipment Property, plant and equipment is stated at historical cost or deemed cost where IFRS 1 exemptions have been applied, less accumulated depreciation and any recognised impairment losses. Costs include the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use including any qualifying finance expenses. Land is not depreciated. Depreciation is provided on other assets estimated to write off the depreciable amount of relevant assets by equal annual instalments over their estimated useful lives. 80 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 In general, the rates used are: · Freehold – 2.5% if longer). If not, they are presented as non-current liabilities. They are initially recognised at fair value and subsequently held at amortised cost. · Short leasehold property – over the period of the lease · Plant and machinery – 6% to 50%. The residual values and useful lives of the assets are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated net realisable value. Gains and losses on disposal are determined by comparing proceeds with carrying amounts. These are included in the consolidated statement of comprehensive income. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease. The sale and lease back of property, where the sale price is at fair value and substantially all the risks and rewards of ownership are transferred to the purchaser, is treated as an operating lease. The profit or loss on the transaction is recognised immediately and lease payments charged to the consolidated statement of comprehensive income on a straight- line basis over the lease term. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable incremental selling expenses. Trade and other receivables Trade and other receivables are initially recognised at fair value and subsequently held at amortised cost after deducting provisions for impairment of receivables. Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand, highly liquid interest-bearing securities with maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business Provisions Provisions are recognised when: - - the Group has a legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Where there are a number of similar obligations, for example where a warranty has been given, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligation may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation. Where a leasehold property, or part thereof, is vacant or sub-let under terms such that the rental income is insufficient to meet all outgoings, provision is made for the anticipated future shortfall up to termination of the lease, or the termination payment, if smaller. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred and subsequently stated at amortised cost. Borrowing costs are expensed using the effective interest method. Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of prior years. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that is probable that future taxable profit will be available against which the temporary differences can be utilised. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 81 A C C O U N T I N G P O L I C I E S A N D C R I T I C A L A C C O U N T I N G J U D G E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Income tax is charged or credited in the consolidated statement of comprehensive income, except where it relates to items recognised in equity, in which case it is dealt with in equity. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Dividends Final dividends are recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by shareholders, while interim dividends are recognised in the period in which the dividends are paid. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. Critical accounting judgements The Group’s principal accounting policies are set out above. Management is required to exercise significant judgement and make use of estimates and assumptions in the application of these policies. Areas which management believes require the most critical accounting judgements are: Retirement benefit obligations The Group operates a defined benefit scheme. Actuarial valuations of the schemes are carried out as determined by the trustees at intervals of not more than three years. The pension cost under IAS 19 (R) is assessed in accordance with the advice of an independent qualified actuary based on the latest actuarial valuation and assumptions determined by the actuary. The assumptions are based on information supplied to the actuary by the Group, supplemented by discussions between the actuary and management. The assumptions and sensitivities are disclosed in note 10 of the financial statements. Inventory provisions At each balance sheet date, each subsidiary evaluates the recoverability of inventories and records provision against these based on an assessment of net realisable values. The actual net realisable value of inventory may differ from the estimated realisable values, which could impact on operating results positively or negatively. Impairment of intangible assets The Group records all assets and liabilities acquired in business acquisitions, including goodwill, at fair value. Intangible assets which have an indefinite useful life, principally goodwill, are assessed annually for impairment. The Group is engaged in the development of new products and processes, the costs of which are capitalised as intangible assets or property, plant and equipment if, in the opinion of management, there is a reasonable expectation of economic benefits being achieved. The factors considered in making these judgements include the likelihood of future orders and the anticipated volumes, margins and duration associated with these. Impairment charges are made if there is significant doubt as to the sufficiency of future economic benefits to justify the carrying values of the assets based upon discounted cash flow projections using an appropriate risk weighted discount factor. Rates used were between 10% and 15%. Provisions Provisions are made in respect of receivables, deferred income, claims, onerous contractual obligations and warranties based on the judgement of management taking into account the nature of the claim or contractual obligation, the range of possible outcomes and the defences open to the Group. Taxation Management periodically evaluates positions taken in tax returns where the applicable tax regulation is subject to interpretation. The Group establishes provisions on the basis of amounts expected to be paid to tax authorities only where it is considered more likely than not that an amount will be paid or received. The Group applies this test to each individual uncertain position. The Group measures the uncertain positions based on the single most likely outcome. When determining whether to recognise deferred tax assets management considers the likely availability of future taxable profits in the relevant jurisdiction. 82 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 1 S E G M E N T I N F O R M AT I O N Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Group Executive team. The Group has two clearly defined business segments, Protection & Defence and Dairy, and operates out of the UK and the US. Business segments year ended 30 September 2014 Revenue 92,818 31,961 124,779 Protection & Defence £’000 Dairy £’000 Unallocated £’000 Group £’000 Segment result before depreciation, amortisation, exceptional items and defined benefit pension scheme costs Depreciation of property, plant and equipment Amortisation of development costs and software Segment result before amortisation of acquired intangibles, exceptional items and defined benefit pension scheme costs Amortisation of acquired intangibles Exceptional items Defined benefit pension scheme costs Segment result Finance income Finance costs Other finance expense Profit before taxation Taxation Profit for the year Segment assets Segment liabilities Other segment items Capital expenditure - intangible assets - property, plant and equipment 6,600 (771) (94) (2,239) (67) (9) 5,735 (2,315) 18,542 (3,289) (1,670) 13,583 (261) (2,017) 11,305 5,735 11,305 5,735 (400) (2,715) 1 (275) (187) (3,176) (3,053) 22,903 (4,127) (1,773) 17,003 (261) (2,017) (400) 14,325 1 (275) (187) 13,864 (3,053) 11,305 5,735 (6,229) 10,811 52,128 13,501 6,157 71,786 12,011 1,946 32,813 46,770 2,725 1,898 337 1,825 - 8 3,062 3,731 The Protection & Defence segment includes £43.4m (2013: £51.9m) of revenues from the US DOD, the only customer which individually contributes more than 10% to Group revenues. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 83 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 1 S E G M E N T I N F O R M AT I O N ( C O N T I N U E D ) year ended 30 September 2013 Revenue 93,137 31,714 Protection & Defence £’000 Dairy £’000 Unallocated £’000 Segment result before depreciation, amortisation, exceptional items and defined benefit pension scheme costs Depreciation of property, plant and equipment Amortisation of development costs and software Segment result before amortisation of acquired intangibles, exceptional items and defined benefit pension scheme costs Amortisation of acquired intangibles Exceptional items Defined benefit pension scheme costs Segment result Finance income Finance costs Other finance expense Profit before taxation Taxation Profit for the year Segment assets Segment liabilities Other segment items Capital expenditure - intangible assets - property, plant and equipment Geographical segments by origin year ended 30 September 2014 Revenue Non-current assets year ended 30 September 2013 Revenue Non-current assets Group £’000 124,851 20,023 (3,896) (1,904) 14,223 (417) (383) (420) 13,003 1 (348) (253) 12,403 (3,566) 5,835 (623) (32) (1,948) (52) (4) 5,180 (2,004) 16,136 (3,221) (1,868) 11,047 (417) (383) 10,247 5,180 10,247 5,180 (420) (2,424) 1 (348) (253) (3,024) (3,566) 10,247 5,180 (6,590) 8,837 57,556 11,748 2,073 71,377 10,691 3,371 36,619 50,681 3,474 4,665 304 1,419 809 91 4,587 6,175 UK £’000 US £’000 Group £’000 23,508 5,346 101,271 31,469 124,779 36,815 UK £’000 24,028 4,897 US £’000 100,823 32,031 Group £’000 124,851 36,928 84 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 2 E X P E N S E S B Y N AT U R E Changes in inventories of finished goods and work in progress Raw materials and consumables used Employee benefit expense (note 9) Depreciation and amortisation charges (notes 11 and 12) Transportation expenses Operating lease payments Travelling costs Legal and professional fees Other expenses 2014 £’000 3,343 50,139 32,423 6,161 1,457 1,809 2,377 2,573 10,172 2013 £’000 1,828 49,954 33,314 6,217 2,173 1,705 2,465 2,185 12,007 Total cost of sales, selling and distribution costs and general and administrative expenses 110,454 111,848 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 85 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 3 A M O R T I S AT I O N O F ACQ U I R E D I N TA N G I B L E A S S E T S A N D E XC E P T I O N A L I T E M S Amortisation of acquired intangible assets (note 11) Exceptional items Relocation of AEF facility Relocation of Lawrenceville facility Acquisition costs 2014 £’000 261 2014 £’000 - 2,017 - 2,017 2013 £’000 417 2013 £’000 304 - 79 383 The tax impact of the above is a £0.45m reduction in overseas tax payable (2013: £0.12m) The Lawrenceville relocation costs relate to the consolidation of our Protection & Defence operations from four US sites into three ahead of the expiry of the lease on our Lawrenceville, Georgia facility in 2015. The acquisition costs in 2013 relate to the purchase of VR Technology Holdings and other potential acquisitions investigated that year. 4 F I N A N C E I N CO M E A N D CO S T S Interest payable on bank loans and overdrafts Finance income Other finance expense Net interest cost: UK defined benefit pension scheme (note 10) Provisions: Unwinding of discount (note 18) 2014 £’000 (275) 1 (274) 2014 £’000 (12) (175) (187) 2013 £’000 (348) 1 (347) 2013 £’000 (33) (220) (253) 86 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 5 P R O F I T B E F O R E TA X AT I O N Profit before taxation is shown after crediting: Gain on foreign exchange and after charging: Loss on foreign exchange Loss on disposal of property, plant and equipment Loss on disposal of intangibles Depreciation on property, plant and equipment Repairs and maintenance of property, plant and equipment Amortisation of development costs and software Amortisation of acquired intangibles Research and development Impairment of inventories Impairment of trade receivables Operating leases Services provided to the Group (including its overseas subsidiaries) by the Company’s auditors: Audit fees in respect of the audit of the accounts of the Parent Company and consolidation Audit fees in respect of the audit of the accounts of subsidiaries of the Company Compensation received regarding taxation services Total fees 2014 £’000 - 137 209 149 4,127 735 1,773 261 2,533 182 - 1,809 30 80 110 - 110 2013 £’000 230 - 24 62 3,896 848 1,904 417 2,780 438 5 1,705 30 80 110 (128) (18) During 2013 £128,000 was received from the Group's auditors in relation to a claim for compensation regarding taxation services provided in the US for previous years. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 87 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 6 TA X AT I O N Overseas current tax Overseas adjustment in respect of previous periods Total current tax Deferred tax – current year Deferred tax – adjustment in respect of previous periods Total deferred tax Total tax charge 2014 £’000 4,605 (961) 3,644 (185) (406) (591) 3,053 2013 £’000 3,313 (139) 3,174 253 139 392 3,566 The tax on the Group’s profit before taxation differs from the theoretical amount that would arise using the standard UK tax rate applicable to profits of the consolidated entities as follows: Profit before taxation Profit before taxation at the average standard rate of 22.0% (2013: 23.5%) Permanent differences Losses for which no deferred taxation asset was recognised Differences in overseas tax rates Adjustment in respect of previous periods Tax charge The income tax charged directly to equity during the year was £nil (2013: £nil). 2014 £’000 13,864 3,050 179 397 794 (1,367) 3,053 2013 £’000 12,403 2,915 (238) 255 634 - 3,566 88 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 6 TA X AT I O N ( C O N T I N U E D ) Deferred tax liabilities At 1 October 2012 Charged against/(credited to) profit for the year Exchange differences At 30 September 2013 (Credited to)/charged against profit for the year Exchange differences At 30 September 2014 Accelerated capital allowances £’000 Other temporary differences £’000 3,538 (415) 4 3,127 (1,003) (121) 2,003 (954) 807 (3) (150) 412 50 312 Total £’000 2,584 392 1 2,977 (591) (71) 2,315 Deferred tax assets have been recognised in respect of temporary differences giving rise to deferred tax assets where it is probable that these assets will be recovered. The standard rate of corporation tax in the UK changed from 23% to 21% with effect from 1 April 2014. Accordingly the average standard rate for the year is 22%. A number of changes to the UK corporation tax system were announced in the March 2013 Budget Statement. The Finance Bill 2013, which was substantively enacted on 2 July 2013, includes legislation reducing the main rate of corporation tax to 20% from 1 April 2015. Starting 1 April 2015 the small profits rate will be unified with the main rate, so there will be only one corporation tax rate for non ring-fenced profits set at 20%. The change in rate had no material impact on the Group's deferred tax assets and liabilities as the Group's deferred tax liabilities are held in the US. The Group has not recognised deferred tax assets in respect of the following matters in the UK, as it is uncertain when the criteria for recognition of these assets will be met. Losses Accelerated capital allowances Retirement benefit obligations Other 2014 £’000 (1,355) (733) (3,206) (1,529) (6,823) 2013 £’000 (2,753) (966) (2,256) (1,555) (7,530) R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 89 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 7 D I V I D E N D S On 6 February 2014 the shareholders approved a final dividend of 2.88p per qualifying ordinary share in respect of the year ended 30 September 2013. This was paid on 21 March 2014 absorbing £862,000 of shareholders' funds. On 30 April 2014 the Board of Directors declared an interim dividend of 1.87p (2013: 1.44p) per qualifying ordinary share in respect of the year ended 30 September 2014. This was paid on 5 September 2014 absorbing £560,000 (2013: £424,000) of shareholders' funds. After the balance sheet date the Board of Directors proposed a final dividend of 3.74p per qualifying ordinary share in respect of the year ended 30 September 2014, which will absorb an estimated £1,120,000 of shareholders' funds. Subject to shareholder approval, the dividend will be paid on 20 March 2015 to shareholders on the register at the close of business on 20 February 2015. In accordance with accounting standards this dividend has not been provided for and there are no corporation tax consequences. 8 E A R N I N G S P E R S H A R E Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held in the employee share ownership trust. The company has dilutive potential ordinary shares in respect of the Performance Share Plan (see page 70). Adjusted earnings per share removes the effect of the amortisation of acquired intangible assets, exceptional items and defined benefit pension scheme costs. Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below. Weighted average number of ordinary shares in issue used in basic calculations (thousands) Potentially dilutive shares (weighted average) (thousands) Fully diluted number of ordinary shares (weighted average) (thousands) 2014 2013 29,871 979 30,850 29,451 1,231 30,682 Profit attributable to equity shareholders of the Company Adjustments 2014 £’000 10,811 2,240 2014 Basic eps pence 36.2 7.5 2014 Diluted eps pence 35.0 7.3 2013 £’000 8,837 1,131 2013 Basic eps pence 30.0 3.8 2013 Diluted eps pence 28.8 3.7 Profit excluding amortisation of acquired intangible assets, exceptional items and defined benefit pension scheme costs 13,051 43.7 42.3 9,968 33.8 32.5 90 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 9 E M P L OY E E S The total remuneration and associated costs during the year were: Wages and salaries Social security costs Other pension costs US healthcare costs Share based payments (note 24) 2014 £’000 26,944 2,263 1,023 2,105 88 32,423 2013 £’000 27,181 2,563 822 2,635 113 33,314 Detailed disclosures of Directors' remuneration and share options, including disclosure of the highest paid director, are given on pages 67 to 73. The average monthly number of employees (including Executive Directors) during the year was: By business segment Protection & Defence Dairy Other At the end of the financial year the total number of employees in the Group was 757 (2013: 747). Key management compensation Salaries and other employee benefits Post employment benefits Share based payments 2014 Number 2013 Number 541 200 9 750 2014 £’000 2,436 120 54 2,610 533 200 9 742 2013 £’000 1,641 101 70 1,812 The key management compensation above includes the Directors plus three (2013: three) others who were members of the Group Executive during the year. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 91 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 10 P E N S I O N S A N D O T H E R R E T I R E M E N T B E N E F I T S Retirement benefit assets and liabilities can be analysed as follows: Pension liability Defined benefit pension scheme 2014 £’000 2013 £’000 16,029 11,279 Full disclosures are provided in respect of the UK defined benefit pension scheme below. The Group operated a contributory defined benefits plan to provide pension and death benefits for the employees of Avon Rubber p.l.c. and its Group undertakings in the UK employed prior to 31 January 2003. The scheme was closed to future accrual of benefit on 1 October 2009. The assets of the plan are held in separate trustee administered funds and are invested by professional investment managers. The Trustee is Avon Rubber Pension Trust Limited, the Directors of which are members of the plan. Four of the Directors are appointed by the Group and two are elected by the members. Pension costs are assessed on the advice of an independent consulting actuary using the projected unit method. The funding of the plan is based on regular actuarial valuations. The most recent finalised actuarial valuation of the plan was carried out at 31 March 2013 when the market value of the plan's assets was £311.5m. The actuarial value of those assets represented 98.0% of the value of the benefits which had accrued to members, after allowing for future increases in pensions. During the year the Group made payments to the fund of £513,000 (2013: £592,000) in respect of scheme expenses and deficit recovery plan payments. In accordance with the deficit recovery plan agreed following the 31 March 2013 actuarial valuation, the Group will make deficit recovery payments in 2015 of £300,000 in addition to £250,000 towards scheme expenses. The defined benefit plan exposes the Group to actuarial risks such as longevity risk, interest rate risk and investment risk. An updated actuarial valuation for IAS 19 (R) purposes was carried out by an independent actuary at 30 September 2014 using the projected unit method. 92 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 10 P E N S I O N S A N D O T H E R R E T I R E M E N T B E N E F I T S ( C O N T I N U E D ) Movement in net defined benefit liability Defined benefit obligation Defined benefit asset Net defined benefit liability 2014 £’000 2013 £’000 2014 £’000 2013 £’000 2014 £’000 2013 £’000 At 1 October Included in profit or loss Administrative expenses Net interest cost (300,326) (284,543) 289,047 282,305 (11,279) (400) (322) (420) (4,126) - 310 - 4,093 (400) (12) (2,238) - (420) (33) (722) (4,546) 310 4,093 (412) (453) Included in other comprehensive income Remeasurement (loss)/gain: - Actuarial gain/(loss) arising from: - demographic assumptions - financial assumptions - experience adjustment - Return on plan assets excluding - (23,277) (7,586) 2,197 (28,133) (1,078) - - - - - - - (23,277) (7,586) 2,197 (28,133) (1,078) interest income - - 26,012 17,834 26,012 17,834 (30,863) (27,014) 26,012 17,834 (4,851) (9,180) Other Contributions by the employer Net benefits paid out - 15,082 - 15,777 513 (15,082) 592 (15,777) 513 - 592 - At 30 September (316,829) (300,326) 300,800 289,047 (16,029) (11,279) R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 93 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 10 P E N S I O N S A N D O T H E R R E T I R E M E N T B E N E F I T S ( C O N T I N U E D ) Plan assets Equities Liability Driven Investment Corporate bonds Cash Total fair value of assets 30 Sept 2014 £’000 30 Sept 2013 £’000 146,224 97,286 31,016 26,274 300,800 130,293 84,689 30,696 43,369 289,047 The Liability Driven Investment (LDI) comprises a series of LIBOR-earning cash deposits which are combined with contracts to hedge interest rate and inflation rate risk over the expected life of the scheme's liabilities. All equity securities and corporate bonds have quoted prices in active markets. The aim of the Trustee is to invest the assets of the plan to ensure that the benefits promised to members are provided. In setting the investment strategy the Trustee first considered the lowest risk allocation that could be adopted in relation to the plan's liabilities. An asset allocation strategy was then designed to achieve a higher return than this lowest risk strategy which at the same time still represented a prudent approach to meeting the plan's liabilities. The target weightings are 50% allocation to liability driven investment funds and cash and 50% to return-seeking investments. Actuarial assumptions The main financial assumptions used by the independent qualified actuaries to calculate the liabilities under IAS 19 (R) are set out below: Inflation (RPI) Inflation (CPI) Pension increases post August 2005 Pension increases pre August 2005 Discount rate for scheme liabilities 2014 % p.a. 3.00 1.90 2.00 2.80 4.10 2013 % p.a. 3.10 2.10 2.10 3.00 4.50 94 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 10 P E N S I O N S A N D O T H E R R E T I R E M E N T B E N E F I T S ( C O N T I N U E D ) Mortality rate Assumptions regarding future mortality experience are set based on advice, published statistics and experience. The average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date is as follows: Male Female 2014 22.1 24.3 The average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date is as follows: 2014 23.5 25.8 Male Female Sensitivity analysis Inflation (RPI) (0.25% increase) Discount rate for scheme liabilities (0.25% increase) Future mortality (1 year increase) 2013 22.0 24.2 2013 23.4 25.7 Defined benefit obligation Increase/(decrease) £’000 6,967 (10,939) 9,853 The above sensitivity analysis shows the impact on the defined benefit obligation only, not the net pension liability as it does not take into account any impact on the asset valuation. Each sensitivity analysis disclosed in this note is based on changing one assumption while holding all other assumptions constant. In practice, this is unlikely to occur. Defined contribution pension scheme In addition commencing 1 February 2003, a defined contribution scheme was introduced for employees within the UK. The cost to the Group in respect of this scheme for the year ended 30 September 2014 was £415,000 (2013: £353,000). R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 95 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 11 I N TA N G I B L E A S S E T S At 1 October 2012 Cost Accumulated amortisation and impairment Net book amount Year ended 30 September 2013 Opening net book amount Exchange differences Additions Acquisition (note 26) Disposals Amortisation Closing net book amount At 30 September 2013 Cost Accumulated amortisation and impairment Net book amount Year ended 30 September 2014 Opening net book amount Exchange differences Additions Disposals Amortisation Closing net book amount At 30 September 2014 Cost Accumulated amortisation and impairment Net book amount Goodwill £’000 Acquired intangibles £’000 Development expenditure £’000 Computer software £’000 Total £’000 - - - - - - 63 - - 63 63 - 63 63 - - - - 63 63 - 63 - - - - - 167 923 - (417) 673 1,090 (417) 673 673 - - - (261) 412 1,090 (678) 412 21,778 (9,136) 12,642 12,642 68 3,317 - (62) (1,837) 14,128 22,450 (8,322) 14,128 14,128 (168) 2,535 (123) (1,497) 14,875 22,138 (7,263) 14,875 1,736 (1,097) 23,514 (10,233) 639 13,281 639 2 1,103 - - (67) 1,677 2,848 (1,171) 1,677 1,677 (12) 527 (26) (276) 1,890 2,604 (714) 1,890 13,281 70 4,587 986 (62) (2,321) 16,541 26,451 (9,910) 16,541 16,541 (180) 3,062 (149) (2,034) 17,240 25,895 (8,655) 17,240 Development expenditure is amortised over a period between 5 and 15 years. Computer software is amortised over a period between 3 and 7 years. The remaining useful economic life of the development expenditure is between 5 and 12 years. Acquired intangibles include customer relationships, order book on acquisition and brands and are amortised over 3 years. 96 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 12 P R O P E R T Y, P L A N T A N D E Q U I P M E N T At 1 October 2012 Cost Accumulated depreciation and impairment Net book amount Year ended 30 September 2013 Opening net book amount Exchange differences Additions Acquisition (Note 26) Reclassifications Disposals Depreciation charge Closing net book amount At 30 September 2013 Cost Accumulated depreciation and impairment Net book amount Year ended 30 September 2014 Opening net book amount Exchange differences Additions Disposals Depreciation charge Closing net book amount At 30 September 2014 Cost Accumulated depreciation and impairment Net book amount Freeholds £’000 Short leaseholds £’000 Plant and machinery £’000 Total £’000 1,382 (255) 1,127 1,127 5 2,017 - 28 - (142) 3,035 3,402 (367) 3,035 3,035 (24) - - (191) 2,820 3,179 (359) 2,820 425 (253) 38,128 (21,549) 39,935 (22,057) 172 16,579 17,878 172 4 32 - - - (127) 16,579 138 4,126 109 (28) (26) (3,627) 17,878 147 6,175 109 - (26) (3,896) 81 17,271 20,387 261 (180) 42,080 (24,809) 45,743 (25,356) 81 17,271 20,387 81 (2) - (52) (27) - - - - 17,271 (162) 3,731 (176) (3,909) 20,387 (188) 3,731 (228) (4,127) 16,755 19,575 42,469 (25,714) 45,648 (26,073) 16,755 19,575 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 97 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 13 I N V E N T O R I E S Raw materials Work in progress Finished goods 2014 £’000 8,876 2,151 1,860 2013 £’000 6,020 2,481 4,873 12,887 13,374 Provisions for inventory write downs were £1,554,000 (2013: £1,710,000). The cost of inventories recognised as an expense and included in cost of sales amounted to £53,482,000 (2013: £51,782,000). 14 T R A D E A N D O T H E R R E C E I VA B L E S Trade receivables Less: provision for impairment of receivables Trade receivables – net Prepayments Other receivables 2014 £’000 15,544 (249) 15,295 1,316 2,546 19,157 2013 £’000 17,009 (269) 16,740 1,141 2,796 20,677 Other receivables include £956,000 (2013: £956,000) in respect of a rent deposit relating to the Company's premises in Melksham, Wiltshire, UK. The remaining balance comprises sundry receivables. Movements on the Group provision for impairment of receivables are as follows: At 1 October Provision for impairment of receivables Receivables written off during the year as uncollectable At 30 September 2014 £’000 269 - (20) 249 2013 £’000 381 5 (117) 269 The creation and release of provision for impaired receivables have been included in general and administrative expenses in the consolidated statement of comprehensive income. 98 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 15 C A S H A N D C A S H E Q U I VA L E N T S Cash at bank and in hand 2014 £’000 2,925 2013 £’000 184 Cash at bank and in hand balances are denominated in a number of different currencies and earn interest based on national rates. 16 T R A D E A N D O T H E R PAYA B L E S Trade payables Other taxation and social security Other payables Accruals and deferred income Other payables comprise sundry items which are not individually significant for disclosure. 17 B O R R O W I N G S Non-current Bank loans Total borrowings The maturity profile of the Group’s borrowings at the year end was as follows: In one year or less, or on demand Between one and two years Between two and five years 2014 £’000 440 629 152 16,534 17,755 2014 £’000 - - - - - - 2013 £’000 4,139 282 3,289 8,970 16,680 2013 £’000 11,059 11,059 - 11,059 - 11,059 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 99 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 17 B O R R O W I N G S ( C O N T I N U E D ) The Group has the following undrawn committed facilities: Expiring beyond one year Total undrawn committed borrowing facilities Bank loans and overdrafts utilised Utilised in respect of guarantees Total Group facilities All facilities are at floating interest rates. 2014 £’000 24,191 24,191 - 337 24,528 2013 £’000 12,518 12,518 11,059 341 23,918 On 9 June 2014 the Group agreed new bank facilities with Barclays Bank and Comerica Bank. The combined facility comprises a revolving credit facility of $40m and expires on 30 November 2017. This facility is priced on the dollar LIBOR plus margin of 1.25% and includes financial covenants which are measured on a quarterly basis. The Group was in compliance with its financial covenants during 2014 and 2013. The Group has provided the lenders with a negative pledge in respect of certain shares in Group companies. The effective interest rates at the balance sheet dates were as follows: Bank loans 2014 Sterling % 2014 Dollar % 2013 Sterling % - - 2.2 2013 Dollar % 2.8 100 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 18 P R O V I S I O N S F O R L I A B I L I T I E S A N D C H A R G E S Balance at 1 October 2012 Unwinding of discount Payments in the year Balance at 30 September 2013 Charged in the year Unwinding of discount Payments in the year Exchange difference Facility relocation £’000 Property obligations £’000 - - - - 1,637 - (1,191) 8 2,993 220 (600) 2,613 1,632 175 (1,056) 1 Total £’000 2,993 220 (600) 2,613 3,269 175 (2,247) 9 Balance at 30 September 2014 454 3,365 3,819 Analysis of total provisions Non-current Current 2014 £’000 1,973 1,846 3,819 2013 £’000 1,997 616 2,613 Property obligations include an onerous lease provision of £2.3m in respect of unutilised space at the Group's leased Hampton Park West facility in the UK. £0.5m of this provision is expected to be utilised in 2015, and the remaining £1.8m over the following six years. Other property obligations relate to former premises of the Group which are subject to dilapidation risks and are expected to be utilised within the next seven years. Property provisions are subject to uncertainty in respect of the utilisation, non-utilisation, or subletting of surplus leasehold property and the final negotiated settlement of any dilapidation claims with landlords. Facility relocation relates to the cost of consolidating our Protection & Defence operations from four US sites into three ahead of the expiry of the lease on the Lawrenceville, GA facility. This is expected to be utilised within 12 months. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 101 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 19 F I N A N C I A L I N S T R U M E N T S Financial instruments by category Trade and other receivables (excluding prepayments) and cash and cash equivalents are classified as 'loans and receivables'. Borrowings and trade and other payables are classified as 'other financial liabilities at amortised cost'. Both categories are initially measured at fair value and subsequently held at amortised cost. Derivatives (forward exchange contracts) are classified as 'derivatives used for hedging' and accounted for at fair value with gains and losses taken to reserves through the consolidated statement of comprehensive income. Financial risk and treasury policies The Group's treasury management team maintains liquidity, manages relations with the Group’s bankers, identifies and manages foreign exchange risk and provides a treasury service to the Group’s businesses. Treasury dealings such as investments, borrowings and foreign exchange are conducted only to support underlying business transactions. The Group has clearly defined policies for the management of foreign exchange rate risk. The Group treasury management team is not a profit centre and, therefore, does not undertake speculative foreign exchange dealings for which there is no underlying exposure. Exposures resulting from sales and purchases in foreign currency are matched where possible and the net exposure may be hedged by the use of forward exchange contracts. (i) 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 and monies on deposit with financial institutions. The US Government through the Department of Defense is a major customer of the Group. Credit evaluations are carried out on all non- Government customers requiring credit above a certain threshold, with varying approval levels set above this depending on the value of the sale. At the balance sheet date there were no significant concentrations of credit risk, except in respect of the US Government noted above. Counterparty risk arises from the use of derivative financial instruments. This is managed through credit limits, counterparty approvals and rigorous monitoring procedures. Where possible, goods are sold subject to retention of title clauses, so that in the event of non-payment the Group may have a secure claim. The Group establishes an allowance for impairment in respect of receivables where recoverability is considered doubtful. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Carrying amount Trade receivables Other receivables Cash and cash equivalents Forward exchange contracts used for hedging The maximum exposure to credit risk for financial assets at the reporting date by currency was: Carrying amount of financial assets Sterling US dollar Euro Other currencies 2014 £’000 15,295 2,546 2,925 2 20,768 2014 £’000 4,307 14,967 928 566 20,768 2013 £’000 16,740 2,796 184 214 19,934 2013 £’000 2,331 16,380 585 638 19,934 102 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 19 F I N A N C I A L I N S T R U M E N T S ( C O N T I N U E D ) Provisions against trade receivables The ageing of trade receivables and associated provision for impairment at the reporting date was: Not past due Past due 0-30 days Past due 31-60 days Past due 61-90 days Past due more than 91 days Gross 2014 £’000 Provision 2014 £’000 13,914 1,111 369 135 15 - - (131) (103) (15) Net 2014 £’000 13,914 1,111 238 32 - Gross 2013 £’000 Provision 2013 £’000 14,818 1,369 634 116 72 - (19) (130) (62) (58) Net 2013 £’000 14,818 1,350 504 54 14 15,544 (249) 15,295 17,009 (269) 16,740 The total past due receivables, net of provisions is £1,381,000 (2013: £1,922,000). The individually impaired receivables mainly relate to a number of independent customers. A portion of these receivables is expected to be recovered. (ii) 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. The Group uses weekly cash flow forecasts to monitor cash requirements and to optimise its borrowing position. Typically the Group ensures that it has sufficient borrowing facilities to meet foreseeable operational expenses and at the year end had facilities of £24.5m (2013: £23.9m). The following shows the contractual maturities of financial liabilities, including interest payments, where applicable and excluding the impact of netting agreements and on an undiscounted basis: Analysis of contractual cash flow maturities Carrying Contractual cash flows amount £’000 £’000 Less than 12 months £’000 1 - 2 Years £’000 2 - 5 More than 5 Years £’000 Years £’000 30 September 2014 Trade and other payables Forward exchange contracts used for hedging - Outflow - Inflow 17,126 17,126 17,126 - (2) 922 - 922 - 17,124 18,048 18,048 - - - - - - - - - - - - R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 103 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 19 F I N A N C I A L I N S T R U M E N T S ( C O N T I N U E D ) Analysis of contractual cash flow maturities 30 September 2013 Secured bank loans Trade and other payables Forward exchange contracts used for hedging - Outflow - Inflow Carrying Contractual Cash flows Amount £’000 £’000 Less than 12 months £’000 1 - 2 Years £’000 2 - 5 Years £’000 More than 5 Years £’000 11,059 16,398 11,507 16,398 299 16,398 11,208 - - (214) 4,125 - 4,125 - - - 27,243 32,030 20,822 11,208 - - - - - - - - - - (iii) Market risks Market risk is the risk that changes in market prices, such as currency rates and interest rates, will affect the Group’s results. The objective of market risk management is to manage and control risk within suitable parameters. (a) Currency risk The Group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than Sterling. The currencies giving rise to this risk are primarily the US dollar and related currencies and the Euro. The Group hedges material forecast US dollar or euro foreign currency transactional exposures using forward exchange contracts. 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. The Group classifies its forward exchange contracts hedging forecasted transactions as cash flow hedges and states them at fair value through the consolidated statement of comprehensive income. Fair value is assessed by reference to year end spot exchange rates, adjusted for forward points associated with contracts of similar duration. The fair value of forward exchange contracts used as hedges at 30 September 2014 was a £2,000 asset (2013: £214,000 asset) comprising an asset of £2,000 (2013: £214,000) and a liability of nil (2013: nil). All forward exchange contracts in place at 30 September 2014 mature within one year. 104 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 19 F I N A N C I A L I N S T R U M E N T S ( C O N T I N U E D ) Sensitivity analysis It is estimated that, with all other variables held equal (in particular other exchange rates), a general change of five cents in the value of the US dollar against sterling would have had a £415,000 (2013: £368,000) impact on the Group's current year profit before interest and tax and a £317,000 (2013: £294,000) impact on the Group's profit after tax. The method of estimation, which has been applied consistently, involves assessing the translation impact of the US dollar. The following significant exchange rates applied during year: US dollar Euro (b) Interest rate risk Average rate 2014 Closing rate 2014 Average rate 2013 Closing rate 2013 1.654 1.221 1.631 1.281 1.559 1.188 1.612 1.191 The Group does not undertake any hedging activity in this area. All foreign currency cash deposits are made at prevailing interest rates and where rates are fixed the period of the fix is generally not more than one month. The main element of interest rate risk concerns borrowings which are made on a floating LIBOR-based rate and short-term overdrafts in foreign currencies which are also on a floating rate. The Group is exposed to interest rate fluctuations but with net cash of £2.9m (2013: net debt £10.9m) a 1% increase in interest rates would have no impact on interest costs (2013: increase of £0.1m). The floating rate financial liabilities in 2013 comprised bank loans bearing floating interest rates fixed by reference to the relevant LIBOR or equivalent rate. All cash deposits are on floating rates or overnight rates based on the relevant LIBOR or equivalent rate. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 105 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 19 F I N A N C I A L I N S T R U M E N T S ( C O N T I N U E D ) (iv) Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure. In order to maintain or adjust the capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares. The Group monitors capital on the basis of the gearing ratio, calculated as net debt divided by capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is measured by the current market capitalisation of the Group, plus net debt. The Group’s net cash/(debt) at the balance sheet date was: Total borrowings Cash and cash equivalents Group net cash/(debt) Market capitalisation of the Group at 30 September Gearing ratio 2014 £’000 - 2,925 2,925 190,947 N/A 2013 £’000 (11,059) 184 (10,875) 168,978 6.0% At 30 September 2014 the Group had net cash, therefore calculation of the gearing ratio is not applicable. 106 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 19 F I N A N C I A L I N S T R U M E N T S ( C O N T I N U E D ) (v) Fair values The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: Trade receivables Other receivables Cash and cash equivalents Forward exchange contracts Secured loans Trade and other payables Carrying amount 2014 £’000 15,295 2,546 2,925 2 - (17,126) Fair value 2014 £’000 15,295 2,546 2,925 2 - (17,126) Carrying amount 2013 £’000 16,740 2,796 184 214 (11,059) (16,398) Fair value 2013 £’000 16,740 2,796 184 214 (11,059) (16,398) 3,642 3,642 (7,523) (7,523) Basis for determining fair value The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments reflected in the table above. Derivatives The fair value of forward exchange contracts is determined by using valuation techniques using year-end spot rates, adjusted for the forward points to the contract’s value date. No contract's value date is greater than one year from the year end. These instruments are included in level 2 in the fair value hierarchy as the valuation is based on inputs that are either directly or indirectly observable. Secured loans As the loans are floating rate borrowings, amortised cost is deemed to reflect fair value. Trade and other receivables/payables As the majority of receivables/payables have a remaining life of less than one year, the notional amount is deemed to reflect the fair value. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 107 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 2 0 S H A R E C A P I TA L Called up, allotted and fully paid ordinary shares of £1 each At the beginning of the year Issued during the year 2014 No. of shares 2014 Ordinary shares £’000 2014 Share premium £’000 2013 No. of shares 2013 Ordinary shares £’000 2013 Share premium £’000 30,723,292 300,000 30,723 300 34,708 - 30,723,292 - 30,723 - 34,708 - At the end of the year 31,023,292 31,023 34,708 30,723,292 30,723 34,708 During the year, 300,000 ordinary shares with a nominal value of £1 per share were issued at par to the Avon Rubber p.l.c. Employee Share Ownership Trust No. 1. Details of outstanding share options and movements in share options during the year are given in the Remuneration Report on pages 54-73. Ordinary shareholders are entitled to receive dividends and are entitled to vote at meetings of the Company. At 30 September 2014 1,081,810 (2013: 1,242,111) ordinary shares were held by a trust in respect of obligations under the 2010 Performance Share Plan. Dividends on these shares have been waived. The market value of the shares held by the trust at 30 September 2014 was £6,659,000 (2013: £6,832,000). These shares are held at cost as treasury shares and deducted from shareholders' equity. During 2013 the trust acquired 522,000 shares at a cost of £1,765,000. In 2014, 460,301 (2013: 680,070) shares were used to satisfy awards following the vesting of shares relating to the 2010 Performance Share Plan. 108 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 21 C A S H G E N E R AT E D F R O M O P E R AT I O N S Profit for the year Adjustments for: Taxation Depreciation Amortisation of intangible assets Defined benefit pension scheme cost Finance income Finance costs Other finance expense Loss on disposal of intangibles Loss on disposal of property, plant and equipment Movement in respect of employee share scheme Decrease in inventories Decrease/(increase) in receivables Increase/(decrease) in payables and provisions 2 2 A N A LY S I S O F N E T C A S H / ( D E B T ) 2014 £’000 10,811 3,053 4,127 2,034 400 (1) 275 187 149 209 88 370 1,479 2,336 25,517 2013 £’000 8,837 3,566 3,896 2,321 420 (1) 348 253 62 24 113 2,259 (6,295) (503) 15,300 This note sets out the calculation of net cash/(debt), a measure considered important in explaining our financial position. Cash at bank and in hand Net cash and cash equivalents Debt due in more than 1 year At 1 Oct 2013 £’000 Cash flow £’000 Exchange movements £’000 At 30 Sept 2014 £’000 184 2,714 184 (11,059) 2,714 10,805 (10,875) 13,519 27 27 254 281 2,925 2,925 - 2,925 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 109 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 2 3 O T H E R F I N A N C I A L CO M M I T M E N T S Capital expenditure committed 2014 £’000 738 2013 £’000 918 Capital expenditure committed represents the amount contracted in respect of property, plant and equipment at the end of the financial year for which no provision has been made in the financial statements. The future aggregate minimum lease payments under non-cancellable operating leases are: Within one year Between 1 and 5 years Later than 5 years The majority of leases of land and buildings are subject to rent reviews. 24 S H A R E B A S E D PAY M E N T S 2014 £’000 1,983 4,024 5,755 2013 £’000 2,052 5,025 6,472 11,762 13,549 The Group operates an equity-settled share-based performance share plan (PSP). Details of the Plan, awards granted and options outstanding are set out in the Remuneration Report on page 70 and are incorporated by reference into these financial statements. The charge against profit of £88,000 (2013: £113,000) in respect of PSP options granted after 7 November 2002 has been calculated using the Monte Carlo pricing model and the following principal assumptions: Weighted average fair value (£) Key assumptions used: Weighted average share price (£) Volatility (%) Risk-free interest rate (%) Expected option term (yrs) Divided yield (%) Volatility is estimated based on actual experience over the last three years. 2014 0.38 5.75 31 0.9 3.0 1.1 2013 0.21 3.41 39 1.75 3.0 1.0 110 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 2 5 R E L AT E D PA R T Y T R A N S AC T I O N S There were no related party transactions during the year or outstanding at the end of the year (2013: £nil). Key management compensation is disclosed in note 9. 2 6 ACQ U I S I T I O N On 26 April 2013 Avon Polymer Products Limited acquired 100% of the share capital of VR Technology Holdings Limited (VR), a market leader in diving rebreather systems and dive computers, for consideration of £833,000. Book value £’000 Accounting policy alignment £’000 Fair value adjustment £’000 Fair value £’000 Intangible assets Property, plant and equipment Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Net assets acquired Goodwill Total consideration Satisfied by: Cash at completion Deferred consideration paid Deferred/contingent consideration due in future years - 109 36 137 64 (499) (153) 301 - - - - - 301 622 - - - - - 622 923 109 36 137 64 (499) 770 63 833 483 50 300 833 The Directors have reviewed the goodwill for impairment and concluded that the carrying value is recoverable. Full details of the review are not disclosed given the immateriality of the goodwill balance. The contingent consideration becomes payable over the next two years, providing certain performance conditions are met, based on both qualitative and quantitative factors. The range of outcomes is expected to be between nil and £200,000. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 111 N O T E S T O T H E G R O U P F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 27 G R O U P U N D E R TA K I N G S Held by Parent Company Avon Polymer Products Limited Avon Rubber Overseas Limited Avon Rubber Pension Trust Limited Avon Dairy Solutions (Shanghai) International Trading Company Limited Held by Group undertakings Avon Engineered Fabrications, Inc. Avon Hi-Life, Inc. Avon Protection Systems, Inc. Avon Rubber & Plastics, Inc. Avon-Ames Limited VR Technology Holdings Limited Avon International Safety Instruments, Inc. Avon-Dairy America do sul Solucoes Para Ordentia LTDA Country in which incorporated UK UK UK China US US US US UK UK US Brazil Shareholdings are ordinary shares and all undertakings are wholly owned by the Group and operate primarily in their country of incorporation. All companies have a year ending in September, except Avon Dairy Solutions (Shanghai) which has a year ending in December. For the purpose of the Group accounts the results are consolidated to 30 September. Avon Rubber Pension Trust Limited is a pension fund trustee. Avon Rubber Overseas Limited and Avon Rubber & Plastics, Inc. are investment holding companies. VR Technology Holdings Limited designs and manufactures diving rebreather systems and dive computers. The activities of all of the other companies listed above are the manufacture and/or distribution of rubber and other polymer based products. A number of non-trading and small Group undertakings have been omitted, on the grounds of immateriality. All UK subsidiaries are exempt from the requirement to file audited accounts by virtue of Section 479A of the Companies Act 2006. 112 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 I N D E P E N D E N T A U D I T O R S ' R E P O R T T O T H E M E M B E R S O F A V O N R U B B E R p . l . c . Report on the Group financial statements Our opinion In our opinion, Avon Rubber p.l.c.’s Group financial statements (the “financial statements”):  give a true and fair view of the state of the Group’s affairs as at 30 September 2014 and of its profit and cash flows for the year then ended;  have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; and  have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. What we have audited Avon Rubber p.l.c.’s financial statements comprise:  the Consolidated Balance Sheet as at 30 September 2014;  the Consolidated Statement of Comprehensive Income for the year then ended;  the Consolidated Cash Flow Statement for the year then ended;  the Consolidated Statement of Changes in Equity for the year then ended;  the Accounting Policies and Critical Accounting Judgements;  the notes to the Group financial statements which include other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as adopted by the European Union. Our audit approach Overview M A T E R I A L I T Y A U D I T S C O P E  Overall Group materiality: £815,000 which represents 5% of the Group profit before tax, excluding the exceptional item of £2.0m relating to the closure of the facility in Lawrenceville, and the impact of IAS 19 (revised) on defined benefit pension scheme administrative costs which have been reclassified into the income statement.  The UK audit team performed an audit of the complete financial information of the two main operating units in the USA (Avon Protection NA and Avon Dairy Solutions NA) and the two main operating units in the UK (Avon Polymer Products Ltd (comprising of Avon Protection UK and Avon Dairy Solutions) and Avon Rubber p.l.c.).  Taken together, these four reporting units account for 92% of Group revenue and £15.3m of the total Group profit before tax, excluding the exceptional item of £2.0m and pension administritive costs of £0.4m  Specific audit procedures were also performed by the UK audit team on certain other balances and transactions at the remaining five reporting units.  Provisions for uncertain tax positions. A R E A S O F F O C U S  Pension liabilities.  Intangible assets (development expenditure) impairment assessment.  Adequacy of working capital provisions.  Fraud in revenue recognition. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 113 I N D E P E N D E N T A U D I T O R S ' R E P O R T C O N T I N U E D T O T H E M E M B E R S O F A V O N R U B B E R p . l . c . The scope of our audit and our areas of focus  We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ("ISAs (UK & Ireland)"). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management overide of internal controls, including evaluating whether there is evidence of bias by the directors that may represent a risk of material misstatement due to fraud.  The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as "areas of focus" in the table below together with an explanation of how we tailored our audit to address these specific areas. This is not a complete list of all risks identified by our audit. Area of focus How our audit addressed the area of focus Provisions for uncertain tax positions As noted in the critical accounting judgements section on page 82 and included in note 6, liabilities are recognised for any tax positions which are uncertain in each relevant tax jurisdiction. We focused on this area because there are material uncertain tax positions arising from the judgemental interpretation of the impact of the application of aspects of tax regulation in certain jurisdictions. The directors have had to estimate the likelihood of the future outcome in each case, with the valuation of any provision involving a high degree of judgement. In conjunction with this assessment, the directors have determined that no deferred tax assets in respect of tax losses should be recognised. This is based on a number of factors including whether there will be sufficient taxable profits in future periods to support recognition. Valuation of the Group’s net pension deficit We focussed on this area because of the magnitude of the defined benefit pension deficit of £16.0m recognised under IAS19, in the context of the overall Group Balance Sheet. The valuation of the net pension deficit is subject to the directors’ judgements regarding the selection of appropriate actuarial assumptions based on the nature of the scheme, including the discount rate, inflation rate and mortality rates that impact the measurement of future liabilities. A change in each of the above assumptions by 0.25% can cause a material change in the value of the underlying pension deficit (as highlighted on page 95). We requested and obtained correspondence between the Group and the relevant tax authorities in each tax jurisdiction for which an uncertain tax position has been recognised, and based on our understanding of the relevant tax regulation and independent consideration of the correspondence with the authorities, challenged the directors' assumptions surrounding:  the interpretation of the relevant regulation and likely outcome;  the nature of the taxable deductions taken and the consistency in the basis for the provision; and  the likelihood of settlement and the amount of provisions required in each jurisdiction, taking into consideration historic precedent. We also obtained the filing positions for each jurisdiction which we read, considered in light of our understanding of the business and reconciled to the balances in the financial statements. We evaluated the directors' assessment of the availability of future taxable profits in each jurisdiction to determine whether a deferred tax asset should be recognised, by comparing the forecasts of future profits to historical results, and considering the impact of any uncertain tax strategies. We considered and challenged the reasonableness of the key actuarial assumptions selected by the directors by comparing these to our ‘in-house’ benchmark ranges based on our assessment of current market conditions and the available actuarial data. We evaluated whether the directors' judgements and assumptions had been made on a consistent basis including in comparison to prior financial years. We also obtained supporting evidence for each of the key inputs into the overall pension deficit calculation including independently agreeing changes in membership census data to pension scheme records and agreeing the scheme asset values used by actuaries in the IAS 19 calculation to independent sources, such as fund manager confirmations and/or quoted market prices where available. 114 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Area of focus How our audit addressed the area of focus Intangible assets (development expenditure) impairment assessment We focussed on this area because of the magnitude of capitalised development expenditure in the overall context of the Group Balance Sheet (£17.2m) and the risk that, as the Group’s product portfolio continues to expand, and as costs associated with new product development are capitalised, the resulting assets may not be recoverable if estimated future sales orders cannot be delivered or regulatory approvals are not obtained. In particular we focussed on the capitalised development costs relating to the suite of Protection & Defence and Dairy products currently under development including Project Fusion, Deltair, PAPRs and EEBD; all of which are described on pages 15-16 of the Annual report. Adequacy of provisions As set out in the critical accounting judgements section on page 82, the directors review year-end working capital balances, such as inventory and trade receivables, in each of the operating units and make provisions to adjust the carrying value of those assets to the directors’ view of their recoverable amount. Provisions are also made for contractual obligations such as onerous lease arrangements and dilapidation provisions, where the directors believe that the likelihood of settlement is probable. We focus on this area due to the importance of working capital to the Group's ongoing operations and the degree of judgement the directors have to apply in determining the amount of provision required for each different element of the Group’s working capital and operational requirements, and taking into consideration the aggregation of provisions across the individual operating locations. Risk of fraud in revenue recognition Provisions made against revenue require judgements based on certain contractual arrangements, which require the directors to estimate the amount which may be due back to customers and which should not be recognised as revenue. ISAs (UK & Ireland) also presumes there is a risk of fraud in revenue recognition on every audit engagement. We focused on whether the judgements made by the directors across the portfolio of contracts were made on a consistant basis in accordance with contractual terms. We tested a sample of capitalised development costs against the criteria set out in IAS38 ‘Intangible assets’ and the Group's accounting policies, in particular focussing on the technical feasibility, the viability of the completion of the project and the ability for the project to generate future economic benefits and gain necessary regulatory approvals. We met with key operational personnel to update our understanding of the status of major projects and assessed the controls and governance which have been put in place around project approval, authorisation and ongoing monitoring. We assessed individually each of the major projects for indicators of impairment, such as an inability to obtain regulatory approval or not achieving forecast sales orders. We obtained evidence to support that regulatory approvals and future sales orders have been secured. We note the Deltair and EEBD products both now have NIOSH approval, and Deltair products have been launched in the US. We evaluated whether provisions have been made on a consistent basis, in line with the Group’s accounting policies. We obtained evidence over the recoverability of material trade receivables, including assessing the ageing analysis and the extent of cash collected post year end, and challenged the directors’ assumptions over the need to provide for potentially irrecoverable amounts. We attended physical inventory counts at a variety of locations where material levels of inventory were held to assess the existence and physical condition of inventory held at 30 September 2014, and considered the adequacy of inventory provisions by comparing the outcomes of our visits with systems data along with reviewing the ageing of inventory held at 30 September 2014. We also evaluated the adequacy of property related provisions, shown in note 18, by obtaining evidence of the onenous contractual obligations. We also obtained external valuation reports commissioned by the directors and assessed the assumptions underpinning the calculation of the provisions required against the value of properties held and our knowledge of the business and the property portfolio. We obtained the calculations of contractual revenue provisions and challenged the key assumptions and judgements made by the directors and the expected timing of settlement, based on our independent reading of the relevant contractual terms and understanding of the contracts. In doing so, we also assessed whether the Group was entitled to, and appropriately recognised, revenue in line with their contractual obligations and their revenue recognition policy. We also examined the associated contracts and sales activity in the year to create our own expectation of the provision required. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 115 I N D E P E N D E N T A U D I T O R S ' R E P O R T C O N T I N U E D T O T H E M E M B E R S O F A V O N R U B B E R p . l . c . How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group comprises two divisions, being Protection & Defence and Dairy and we focused our audit work on the Group’s largest operating units, within these divisions, in the USA and UK. The UK audit team conducted an audit of the complete financial information of four operating units (the two largest in the USA, and two largest in the UK) due to their size and risk characteristics. Taken together, these four operating units account for 92% of the Group’s revenue and £15.3m of Group profit before tax, excluding the exceptional item of £2.0m and the defined benefit pension scheme administrative costs of £0.4m. Specific audit procedures were also performed by the UK team on certain balances and transactions material to the Group financial statements at the five remaining reporting units. This, together with additional procedures performed at the Group level over centralised processes and functions, including the audit of consolidation journals, gave us the evidence we needed for our opinion on the Group financial statements as a whole. Materiality The scope of our audit is influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall Group materiality £815,000 (2013: £650,000). How we determined it 5% of profit before tax, excluding the ‘one off’ exceptional item of £2.0m relating to the closure of the Lawrenceville location based in the USA, and the £0.4m impact of the reclassification of pension scheme administrative costs to the income statement on adoption of IAS19 (revised). Rationale for benchmark applied We have applied this profit based benchmark, a generally accepted auditing practice, in the absence of indicators that an alternative benchmark would be appropriate. The exceptional item has been excluded as it is considered to be a one-off non-recurring item. The costs for the defined benefit pension scheme, which is closed to new entrants, have been added back as these costs have previously been included in the actuarial movements in other comprehensive income and have not previously been included within profit before tax. The exclusion of these items provides us with a consistent year-on- year basis for determining materiality. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £50,000 (2013: £32,500), as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern Under the Listing Rules we are required to review the directors’ statement, set out on page 50, in relation to going concern. We have nothing to report having performed our review. As noted in the directors’ statement, the directors have concluded that it is appropriate to prepare the financial statements using the going concern basis of accounting. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to continue as a going concern. 116 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Other required reporting Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility. Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from these responsibilities. Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: Corporate governance statement Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the parent company’s compliance with nine provisions of the UK Corporate Governance Code. We have nothing to report having performed our review. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors’ Responsibilities set out on page 44, 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 ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We have no exceptions to report arising from this responsibility. We have no exceptions to report arising from this responsibility.  information in the Annual Report is: − materially inconsistent with the information in the audited financial statements; or − apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or − otherwise misleading.  the statement given by the directors on page 45, in accordance with provision C.1.1 of the UK Corporate Governance Code (“the Code”), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s performance, business model and strategy is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit.  the section of the Annual Report on pages 52 and 53, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report arising from this responsibility. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 117 I N D E P E N D E N T A U D I T O R S ' R E P O R T C O N T I N U E D T O T H E M E M B E R S O F A V O N R U B B E R p . l . c . What an audit of financial statements involves Other matter We have reported separately on the parent company financial statements of Avon Rubber p.l.c. for the year ended 30 September 2014 and on the information in the Directors’ Remuneration Report that is described as having been audited. Mark Ellis Senior Statutory Auditor for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Bristol 19 November 2014 An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:  whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed;  the reasonableness of significant accounting estimates made by the directors; and  the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. 118 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 I N D E P E N D E N T A U D I T O R S ' R E P O R T T O T H E M E M B E R S O F A V O N R U B B E R p . l . c . Report on the Parent Company financial statements Our opinion In our opinion, Avon Rubber p.l.c.’s Parent Company financial statements (the “financial statements”):  apparently materially incorrect based on, or materially inconsistent with, our knowledge of the company acquired in the course of performing our audit; or  otherwise misleading. We have no exceptions to report arising from this responsibility  give a true and fair view of the state of the Parent Company’s affairs as at 30 September 2014; Adequacy of accounting records and information and explanations received  have been properly prepared in accordance with United Under the Companies Act 2006 we are required to report to you if, Kingdom Generally Accepted Accounting Practice; and in our opinion:  have been prepared in accordance with the requirements  we have not received all the information and explanations we of the Companies Act 2006. require for our audit; or What we have audited  adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been Avon Rubber p.l.c.’s financial statements comprise: received from branches not visited by us; or  the Parent Company Balance Sheet as at 30 September 2014; and  the financial statements and the part of the Directors’  the Parent Company Accounting Policies; and  the Notes to the Parent Company financial statements, and other explanatory information. Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Certain required disclosures have been presented elsewhere in the Directors’ remuneration Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and United Directors’ remuneration report - Companies Act 2006 opinion In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Kingdom Accounting Standards (United Kingdom Generally Accepted Other Companies Act 2006 reporting Accounting Practice). Other required reporting Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion, information in the Annual Report is:  materially inconsistent with the information in the audited financial statements; or Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors’ Responsibilities set out on page 44, 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 ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 119 I N D E P E N D E N T A U D I T O R S ' R E P O R T C O N T I N U E D T O T H E M E M B E R S O F A V O N R U B B E R p . l . c . This report, including the opinions, has been prepared for and Other matter only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material We have reported separately on the Group financial statements of Avon Rubber p.l.c. for the year ended 30 September 2014. Mark Ellis Senior Statutory Auditor for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Bristol misstatement, whether caused by fraud or error. This includes an 19 November 2014 assessment of:  whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed;  the reasonableness of significant accounting estimates made by the directors; and  the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. 120 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 PA R E N T C O M PA N Y B A L A N C E S H E E T AT 3 0 S E P T E M B E R 2 0 1 4 Fixed Assets Tangible assets Investments Current assets - debtors Creditors - amounts falling due within one year Net current assets Total assets less current liabilities Creditors - amounts falling due after more than one year Bank loans and overdrafts Provisions for liabilities Net assets Capital and reserves Share capital Share premium account Capital redemption reserve Profit and loss account Total shareholders’ funds Note 2014 £’000 2014 £’000 2013 £’000 2013 £’000 4 5 7 8 9 10 11 12 12 12 13 56,600 6,573 - 2,211 346 75,540 75,886 50,027 125,913 2,211 123,702 31,023 34,708 500 57,471 123,702 53,304 5,412 3,208 2,613 788 75,540 76,328 47,892 124,220 5,821 118,399 30,723 34,708 500 52,468 118,399 These financial statements on pages 121 to 130 were approved by the Board of Directors on 19 November 2014 and were signed on its behalf by: Peter Slabbert Andrew Lewis R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 121 PA R E N T C O M PA N Y A C C O U N T I N G P O L I C I E S F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation The accounts have been prepared on a going concern basis and in accordance with the Companies Act 2006 and with all applicable accounting standards in the United Kingdom (UK GAAP) on the going concern basis and under the historical cost convention except for financial assets and liabilities (including derivative instruments) held at fair value through profit and loss. The Company does not publish its own cash flow statement, as its cash flows are included within the consolidated cash flow statement of the Group. Foreign currencies The Company’s functional currency is sterling. Foreign currency transactions are recorded at the exchange rate ruling on the date of transaction. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the retranslation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account. Deferred taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. A net deferred tax asset is considered as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on an undiscounted basis. Impairment of fixed assets Impairment reviews are undertaken if events or changes in circumstances indicate that the carrying amount of the tangible fixed assets may not be recoverable. If the carrying amount exceeds its recoverable amount (being the higher of the value in use and the net realisable value) then the fixed asset is written down accordingly. Where recoverable amounts are based on value in use, discount rates of typically between 10% and 15% are used depending on the risk attached to the underlying asset. Investments in subsidiary undertakings Investments in subsidiary undertakings are recorded at cost plus incidental expenses less any provision for impairment. Impairment reviews are performed by the Directors when there has been an indication of potential impairment. Leased assets Operating lease rentals are charged against profit over the term of the lease on a straight line basis. Pensions The Company operated a contributory defined benefits plan to provide pension and death benefits for the employees of Avon Rubber p.l.c. and its Group undertakings in the UK employed prior to 31 January 2003. The scheme is closed to new entrants and was closed to future accrual of benefits from 1 October 2009. Scheme assets are measured using market values while liabilities are measured using the projected unit method. The multi-employer exemption has been taken and no asset or provision has been reflected in the parent company’s balance sheet for any surplus or deficit arising in respect of pension obligations. The Company also provides pensions by contributing to defined contribution schemes. The charge in the profit and loss account reflects the contributions paid and payable to these schemes during the period. Full disclosures of the UK pension schemes have been provided in the Group financial statements. Provisions for liabilities Provisions are recognised when a liability exists at the year end that can be measured reliably, there is an obligation to one or more third parties as a result of past transactions or events and there is an obligation to transfer economic benefits in settlement. Provisions are calculated based on management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date, after due consideration of the risks and uncertainties that surround the underlying event. Provision for reorganisation costs are made where a detailed plan has been approved and an expectation has been raised in those affected by the plan that the Company will carry out the reorganisation. Where a leasehold property, or part thereof, is vacant, or sub-let under terms such that the rental income is insufficient to meet all outgoings, provision is made for the anticipated future shortfall up to termination of the lease, or the termination payment, if smaller. 122 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Tangible fixed assets Tangible fixed assets are stated at cost, less amounts provided for Dividends Final dividends are recognised as a liability in the Company’s financial depreciation and any provision for impairment. Cost includes the original statements in the period in which the dividends are approved by purchase price of the asset and the costs attributable to bringing the shareholders, while interim dividends are recognised in the period in asset to its working condition for its intended use. Plant and machinery is which the dividends are paid. Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where the Company purchases its own share capital (treasury shares) through Employee Share Ownership Trusts, the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from shareholders’ funds until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in shareholders’ funds. depreciated using the straight line method at rates varying between 6% and 50% per annum. Related parties The Company has taken advantage of the dispensation under FRS 8, ‘Related Party Disclosures’, not to disclose transactions or balances with other Group companies. Share based payment The Company operates a number of equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non- market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the profit and loss account. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. Debtors Debtors are initially recognised at fair value and subsequently measured at amortised cost after deduction of provisions for impairment of receivables. Trade creditors Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade creditors are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as amounts falling due after more than one year. They are initially recognised at fair value and subsequently measured at amortised cost. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred and subsequently stated at amortised cost. Costs are expensed using the effective interest method. Financial instruments As permitted by FRS 29, ‘Financial Instruments: Disclosures’ the Company has elected not to present the disclosures required by FRS 29 in the notes to its individual financial statements as full equivalent disclosures are presented in the consolidated financial statements. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 123 N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 1 PA R E N T CO M PA N Y As a consolidated statement of comprehensive income is published, a separate profit and loss account for the parent company is omitted from the accounts by virtue of section 408 of the Companies Act 2006. The parent company's profit for the financial year was £6,637,000 (2013: £3,222,000). The audit fee in respect of the parent company was £30,000 (2013: £30,000). 2 D I V I D E N D S On 6 February 2014 the shareholders approved a final dividend of 2.88p per qualifying ordinary share in respect of the year ended 30 September 2013. This was paid on 21 March 2014 absorbing £862,000 of shareholders' funds. On 30 April 2014 the Board of Directors declared an interim dividend of 1.87p (2013: 1.44p) per qualifying ordinary share in respect of the year ended 30 September 2014. This was paid on 5 September 2014 absorbing £560,000 (2013: £424,000) of shareholders' funds. After the balance sheet date the Board of Directors proposed a final dividend of 3.74p per qualifying ordinary share in respect of the year ended 30 September 2014, which will absorb an estimated £1,120,000 of shareholders' funds. Subject to shareholder approval, the dividend will be paid on 20 March 2015 to shareholders on the register at the close of business on 20 February 2015. In accordance with accounting standards this dividend has not been provided for and there are no corporation tax consequences. 3 E M P L OY E E S The total remuneration and associated costs during the year were: Wages and salaries Social security costs Other pension costs Share based payments 2014 £’000 2,441 300 145 88 2,974 2013 £’000 1,535 299 205 113 2,152 Detailed disclosures of Directors’ remuneration and share options are given on pages 54 to 73 of the Annual Report and Accounts. The average monthly number of employees (including Executive Directors) during the year was 7 (2013: 7), all of whom were classified as administrative staff. 124 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 4 TA N G I B L E A S S E T S Cost At 1 October 2013 Additions at cost Transfers to other Group companies At 30 September 2014 Accumulated depreciation At 1 October 2013 Charge for the year At 30 September 2014 Net book amount at 30 September 2014 Net book amount at 30 September 2013 5 I N V E S T M E N T S Cost and net book value At 1 October 2013 At 30 September 2014 The investments consist of a 100% interest in the following subsidiaries: Plant and machinery £’000 1,071 311 (710) 672 283 43 326 346 788 Investment in subsidiaries £’000 75,540 75,540 Principal activity Country in which incorporated Avon Polymer Products Limited Avon Rubber Overseas Limited Avon Rubber Pension Trust Limited Avon Dairy Solutions (Shanghai) International Trading Company Limited The manufacture and distribution of rubber and polymer based products Investment company Pension Fund Trustee Trading company UK UK UK China Details of investments held by these subsidiaries are given in note 27 to the Group accounts on page 112. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 125 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 6 O T H E R F I N A N C I A L CO M M I T M E N T S Capital expenditure committed 2014 £’000 - 2013 £’000 4 Capital expenditure committed represents the amount contracted at the end of the financial year for which no provision has been made in the financial statements. The annual commitments of the Company for non-cancellable operating leases are: For leases expiring Within 1 year In 2-5 years Over 5 years The majority of leases of land and buildings are subject to rent reviews. 2014 Land and buildings £’000 2013 Land and buildings £’000 - 814 153 967 - 814 153 967 126 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 7 D E B T O R S Amounts owed by Group undertakings Other debtors Prepayments 2014 £’000 54,317 1,948 335 2013 £’000 51,627 1,001 676 56,600 53,304 Other debtors include £956,000 (2013: £956,000) in respect of a rent deposit relating to the Company's premises in Melksham, Wiltshire, UK. The remaining balance comprises sundry receivables which are not individually significant for disclosure. 8 C R E D I T O R S – A M O U N T S FA L L I N G D U E W I T H I N O N E Y E A R Bank overdrafts Amounts due to Group undertakings Other creditors Accruals 2014 £’000 38 4,040 43 2,452 6,573 2013 £’000 - 3,051 486 1,875 5,412 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 127 N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 9 B O R R O W I N G S Current Bank overdrafts Non-current Bank loans Total borrowings The maturity profile of the Company's borrowings at the year end was as follows: In 1 year or less or on demand Between 1 and 2 years The carrying amounts of the Company's borrowings are denominated in the following currencies: Sterling US dollars 2014 £’000 38 - 38 2014 £’000 38 - 38 2014 £’000 38 - 38 2013 £’000 - 3,208 3,208 2013 £’000 - 3,208 3,208 2013 £’000 1,347 1,861 3,208 On 9 June 2014 the Company agreed new bank facilities with Barclays Bank and Comerica Bank. The facility comprises a revolving credit facility of $40m and expires on 30 November 2017. The facility is priced on the dollar LIBOR plus a margin of 1.25% and includes financial covenants which are measured on a quarterly basis. The Company was in compliance with its financial covenants during 2014 and 2013. The Company has provided the lenders with a negative pledge in respect of certain shares in Group companies. 128 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 10 P R O V I S I O N S F O R L I A B I L I T I E S Balance at 1 October 2012 Unwinding of discount Payments in the year Balance at 30 September 2013 Charged in the year Unwinding of discount Payments in the year Balance at 30 September 2014 Analysis of provisions Non-current Current Property obligations £’000 2,993 220 (600) 2,613 408 175 (985) 2,211 2013 £’000 1,997 616 2,613 2014 £’000 1,129 1,082 2,211 Property obligations relate to an onerous lease provision in respect of unutilised space at the Company's leased Hampton Park West facility in the UK and former premises of the Company which are subject to dilapidation risks. All are expected to be utilised within the next seven years. Property provisions are subject to uncertainty in respect of the utilisation, non-utilisation, or subletting of surplus leasehold property and the final negotiated settlement of any dilapidation claims with landlords. 11 C A L L E D U P S H A R E C A P I TA L Called up, allotted and fully paid ordinary shares of £1 each 31,023,292 (2013: 30,723,292) ordinary shares of £1 each 2014 £’000 2013 £’000 31,023 30,723 During the year, 300,000 ordinary shares with a nominal value of £1 per share were issued at par to the Avon Rubber p.l.c. Employee Share Ownership Trust No. 1. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 129 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 12 S H A R E P R E M I U M ACCO U N T A N D R E S E R V E S At 1 October 2012 Retained profit for the year Movement in respect of employee share scheme At 30 September 2013 Retained profit for the year Purchase of shares by the employee benefit trust Movement in respect of employee share scheme At 30 September 2014 Share premium account £’000 34,708 - - 34,708 - - - 34,708 13 R E CO N C I L I AT I O N O F M O V E M E N T S I N S H A R E H O L D E R S’ F U N D S At the beginning of the year Profit for the financial year attributable to equity shareholders Dividends paid Purchase of shares by the employee benefit trust Movement in respect of employee share scheme Capital redemption reserve £’000 Profit and loss account £’000 52,030 2,090 (1,652) 52,468 5,215 (300) 88 500 - - 500 - - - 500 Total £’000 87,238 2,090 (1,652) 87,676 5,215 (300) 88 57,471 92,679 2014 £’000 118,399 6,637 (1,422) - 88 2013 £’000 117,961 3,222 (1,132) (1,765) 113 At 30 September 123,702 118,399 During the year 300,000 ordinary shares with a nominal value of £1 per share were issued at par to the Avon Rubber p.l.c. Employee Share Ownership Trust No. 1. At 30 September 2014 1,081,810 (2013: 1,242,111) ordinary shares were held by a trust in respect of obligations under the 2010 Performance Share Plan. Dividends on these shares have been waived. The market value of the shares held in the trust at 30 September 2014 was £6,659,000 (2013: £6,832,000). These shares are held at cost as treasury shares and deducted from shareholders' equity. During 2013 the trust acquired 522,000 shares at a cost of £1,765,000. 460,301 (2013: 680,070) shares were used to satisfy awards following the vesting of shares relating to the 2010 Performance Share Plan. 14 S H A R E B A S E D PAY M E N T S The Company operates an equity-settled share-based performance share plan (PSP). Details of the Plan, awards granted and options outstanding are set out in the remuneration report on page 70 and are incorporated by reference into these financial statements. The charge against profit of £88,000 (2013: £113,000) in respect of PSP options granted after 7 November 2002 has been calculated using the Monte Carlo pricing model and the following principal assumptions: Weighted average fair value (£) Key assumptions used: Weighted average share price (£) Volatility (%) Risk-free interest rate (%) Expected option term (yrs) Dividend yield (%) Volatility is estimated based on actual experience over the last three years. 130 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 2014 0.38 5.75 31 0.9 3.0 1.1 2013 0.21 3.41 39 1.75 3.0 1.0 F I V E Y E A R R E C O R D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 2014 £’000 2013 £’000 2012 £’000 2011 £’000 2010 £’000 Revenue 124,779 124,851 106,636 107,600 117,574 Operating profit before amortisation of acquired intangibles, exceptional items and defined benefit pension costs Amortisation of acquired intangibles, exceptional items and defined benefit pension scheme costs 17,003 14,223 11,621 11,136 9,255 (2,678) (1,220) - - - Operating profit Net finance costs and other finance expense Profit before taxation Taxation 14,325 (461) 13,864 (3,053) 13,003 (600) 12,403 (3,566) Profit attributable to equity shareholders 10,811 8,837 Ordinary dividends Retained profit Intangible assets and property, plant and equipment Working capital Provisions Pension (liability)/asset Deferred tax liability Net cash/(borrowings) (1,422) (1,132) 9,389 7,705 6,888 36,815 7,439 (3,819) (16,029) (2,315) 2,925 36,928 11,512 (2,613) (11,279) (2,977) (10,875) 31,159 9,278 (2,993) (2,238) (2,584) (8,725) 11,621 (616) 11,005 (3,176) 7,829 (941) 11,136 (924) 10,212 (3,094) 7,118 (706) 6,412 27,187 11,714 (3,208) 280 (2,985) (11,816) 9,255 (2,121) 7,134 (2,808) 4,326 - 4,326 25,762 9,628 (4,373) (7,134) (2,517) (12,589) Net assets employed 25,016 20,696 23,897 21,172 8,777 Financed by: Ordinary share capital Reserves attributable to equity shareholders 31,023 (6,007) 30,723 (10,027) 30,723 (6,826) 30,723 (9,551) 30,723 (21,946) Total equity 25,016 20,696 23,897 21,172 Basic earnings per share Adjusted basic earnings per share Dividends per share paid in cash 36.2p 43.7p 4.75p 30.0p 33.8p 3.84p 26.9p 26.9p 3.2p 25.2p 25.2p 2.5p 8,777 15.2p 15.2p - 2010, 2011 and 2012 are as presented in the consolidated financial statements for those years. A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 131 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S N O T I C E O F A N N U A L G E N E R A L M E E T I N G F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to what action you should take, you are recommended to seek your own financial advice from your stockbroker or other independent adviser authorised under the Financial Services and Markets Act 2000. If you have sold or transferred all of your shares in Avon Rubber p.l.c., please forward this document, together with the accompanying documents, as soon as possible either to the purchaser or transferee or to the person who arranged the sale or transfer so they can pass these documents to the person who now holds the shares. Notice of Annual General Meeting for the year ended 30 September 2014 Notice is hereby given that the annual general meeting (‘AGM’) of shareholders of Avon Rubber p.l.c. (the 'Company') will be held at Hampton Park West, Semington Road, Melksham, Wiltshire on 29 January 2015 at 10.30 a.m. for the following purposes: Ordinary Business To consider and, if thought fit, pass resolutions 1- 7 as Ordinary Resolutions: Resolution 1 To receive the Company's accounts and reports of the Directors and the Auditors for the year ended 30 September 2014. Resolution 2 To approve the Directors’ Remuneration Report for the year ended 30 September 2014. Resolution 3 To declare a final dividend of 3.74p per ordinary share as recommended by the Directors. Resolution 4 To re-appoint Andrew Lewis as Director who retires by rotation. Resolution 5 To re-appoint Richard Wood as Director who retires by rotation. Resolution 6 To re-appoint PricewaterhouseCoopers LLP as auditors of the Company, to hold office from the conclusion of this meeting until the conclusion of the next general meeting at which accounts are laid before the Company. Resolution 7 To authorise the Directors to determine the auditors’ remuneration. Special Business To consider and if thought fit, pass resolution 8 as an Ordinary Resolution and resolutions 9, 10 and 11 as Special Resolutions: Resolution 8 That in accordance with section 551 of the Companies Act 2006 (the ‘Act’) the Directors be generally and unconditionally authorised to allot Relevant Securities (as defined in the notes to this resolution) comprising equity securities (as defined by section 560 of the Act) up to an aggregate nominal amount of £10,341,097 but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates, legal or practical problems in or under the laws of any territory or the requirements of any regulatory body or stock exchange, provided that this authority shall, unless renewed, varied or revoked by the Company, expire on the date 15 months after the date of this Resolution or, if earlier, the date of the next annual general meeting of the Company save that the Company may, before such expiry, make offers or agreements which would or might require Relevant Securities to be allotted and the Directors may allot Relevant Securities in pursuance of such offer or agreement notwithstanding that the authority conferred by this resolution has expired. This resolution revokes and replaces all unexercised authorities previously granted to the Directors to allot Relevant Securities but without prejudice to any allotment of shares or grant of rights already made, offered or agreed to be made pursuant to such authorities. 132 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Resolution 11 That a general meeting of the Company (other than an annual general meeting), may be called on not less than 14 clear days' notice. By order of the Board Miles Ingrey-Counter Company Secretary 19 November 2014 Resolution 9 That, subject to the passing of Resolution 8, the Directors be given the general power to allot equity securities (as defined by section 560 of the Act) for cash, either pursuant to the authority conferred by Resolution 8 or by way of a sale of treasury shares, as if section 561(1) of the Act did not apply to any such allotment, provided that this power shall: (a) be limited to the allotment of equity securities up to an aggregate nominal amount of £1,551,164; and (b) expire on the date 15 months after the date of this Resolution or, if earlier, the date of the next annual general meeting of the Company (unless renewed, varied or revoked by the Company prior to or on that date) save that the Company may, before such expiry make an offer or agreement which would or might require Relevant Securities to be allotted after such expiry and the Directors may allot Relevant Securities in pursuance of any such offer or agreement notwithstanding that the power conferred by this resolution has expired. Resolution 10 That the Company be and is hereby unconditionally and generally authorised for the purpose of section 701 of the Act to make market purchases (within the meaning of 693(4) of the Act) of ordinary shares of £1 each in the capital of the Company provided that: (a) the maximum number of shares which may be purchased is 4,653,492; (b) the minimum price which may be paid for each share is 1p; (c) the maximum price (excluding expenses) which may be paid for each ordinary share is an amount equal to the higher of: (i) 105% (one hundred and five per cent) of the average of the middle market quotations of the Company's ordinary shares as derived from the Official List of the London Stock Exchange for the 5 (five) business days immediately preceding the day on which such share is contracted to be purchased; and (ii) the value of an ordinary share calculated on the basis of the higher of the price quoted for the last independent trade of and the highest current independent bid for any number of the Company’s ordinary shares on the London Stock Exchange Official List at the time the purchase is agreed; and (d) this authority shall expire on the date 15 months after the date of this Resolution or, if earlier, the date of the next annual general meeting of the Company (except in relation to the purchase of shares the contract for which was concluded before the expiry of such authority and which might be executed wholly or partly after such expiry) unless such authority is renewed prior to such time. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 133 N O T I C E O F A N N U A L G E N E R A L M E E T I N G C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 Notes (1) Information regarding the annual general meeting (the 'AGM') including the information required by section 311A of the Act, is available at www.avon-rubber.com. (2) A form of proxy is enclosed for use by shareholders and, if appropriate, must be deposited with the Company’s registrars, Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU not less than 48 hours before the time of the AGM. Appointment of a proxy does not preclude a shareholder from attending the AGM and voting in person. (3) A member entitled to attend and vote at the AGM may appoint one or more proxies (who need not be a member of the Company) to attend and to speak and to vote on his or her behalf whether by show of hands or on a poll. A member can appoint more than one proxy in relation to the AGM, provided that each proxy is appointed to exercise the rights attaching to different shares held by him. In order to be valid an appointment of proxy (together with any authority under which it is executed or a copy of the authority certified notarially) must be returned by one of the following methods: (i) in hard copy form by post, by courier or by hand to the Company’s registrars, Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU; (ii) via www.capitashareportal.com; or (iii) in the case of CREST members, by utilising the CREST electronic proxy appointment service in accordance with the procedures set out below and in each case must be received by the Company not less than 48 hours before the time of the AGM. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the AGM and any adjournment thereof by using the procedures described in the CREST Manual (available from https://euroclear.com). CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s) should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment, or instruction, made by means of CREST to be valid, the appropriate CREST message (a ‘CREST Proxy Instruction’) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s (‘EUI’) specifications and must contain the information required for such instructions, as described in the CREST Manual. Regardless of whether it relates to the appointment of a proxy or to an amendment to the instruction given to a previously appointed proxy the message must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA 10) by the latest time(s) for receipt of proxy appointments specified in this Notice. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5) of the Uncertificated Securities Regulations 2001. CREST members and where applicable, their CREST sponsors or voting service providers should note that EUI does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy instructions. It is therefore the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his or her CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. (4) The right to appoint a proxy does not apply to persons whose shares are held on their behalf by another person and who have been nominated to receive communication from the Company in accordance with section 146 of the Act (‘nominated persons’). Nominated persons may have a right under an agreement with the registered shareholder who holds shares on their behalf to be appointed (or to have someone else appointed) as a proxy. Alternatively, if nominated persons do not have such a right, or do not wish to exercise it, they may have a right under such an agreement to give instructions to the person holding the shares as to the exercise of voting rights. (5) In order to be able to attend and vote at the AGM or any adjourned meeting (and also for the purpose of calculating how many votes a person may cast), a person must have his/her name entered on the register of members of the Company by 6.00 pm on 27 January 2015 (or 6.00 pm on the date two days before any adjourned meeting, ignoring non-working days). Changes to entries on the register of members after this time shall be disregarded in determining the rights of any person to attend or vote at the AGM. (6) To change your proxy instructions simply submit a new proxy appointment using the methods set out above. Note that the cut- off time for receipt of proxy appointments (see above) also applies in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be disregarded. (7) A corporation which is a member can appoint one or more corporate representatives who may exercise, on its behalf, all its powers as a member provided that no more than one corporate representative exercises powers over the same share. (8) Under section 319A of the Act, the Company must answer any question you ask relating to the business being dealt with at the AGM unless: (i) answering the question would interfere unduly with the preparation for the AGM or involve the disclosure of confidential information; 134 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 (ii) the answer has already been given on a website in the form (iii) copies of the letters of appointment of the non-executive of an answer to a question; or Directors of the Company. (iii) it is undesirable in the interests of the Company or the good order of the AGM that the question be answered. (14) Please note that the Company takes all reasonable precautions (9) Appointment of proxy by joint members In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Company's register of members in respect of the joint holding (the first-named being the most senior). to ensure no viruses are present in any electronic communication it sends out but the Company cannot accept responsibility for loss or damage arising from the opening or use of any email or attachments from the Company and recommends that the members subject all messages to virus checking procedures prior to use. Any electronic communication received by the Company, including the lodgement of an electronic proxy form, that is found to contain any virus will not be accepted. (10) Termination of proxy appointments (15) Pursuant to Chapter 5 of Part 16 of the Act (sections 527 to In order to revoke a proxy instruction you will need to inform the Company by sending a signed hard copy notice clearly stating your intention to revoke your proxy appointment to the Company’s registrars, Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU. In the case of a member which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the revocation notice. In either case, the revocation notice must be received by the Company’s registrars, Capita Asset Services Registrars, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU no later than 27 January 2015 at 10.30 am. If you attempt to revoke your proxy appointment but the revocation is received after the time specified then, subject to the paragraph directly below, your proxy appointment will remain valid. Appointment of a proxy does not preclude you from attending the AGM and voting in person. If you have appointed a proxy and attend the AGM in person, your proxy appointment will automatically be terminated. (11) Biographical details of the Directors are shown on page 41 of the Annual Report. (12) The issued share capital of the Company as at 19 November 2014 was 31,023,292 ordinary shares, carrying one vote each and representing the total number of voting rights in the Company. (13) The following documents are available for inspection at the registered office of the Company during normal business hours on any weekday and will be available at the place of the AGM from 15 minutes before the AGM until it ends: (i) the Register of Directors’ interests showing any transactions of Directors and their family interests in the share capital of the Company; and (ii) copies of all contracts of service under which the executive Directors of the Company are employed by the Company or any of its subsidiaries; and 531), where requested by a member or members meeting the qualification criteria set out below, the Company must publish on its website, a statement setting out any matter that such members propose to raise at the AGM relating to the audit of the Company's accounts (including the auditor's report and the conduct of the audit) that are to be laid before the AGM. Where the Company is required to publish such a statement on its website: (i) it may not require the members making the request to pay any expenses incurred by the Company in complying with the request; it must forward the statement to the Company's auditors no later than the time the statement is made available on the Company's website; and (ii) (iii) the statement may be dealt with as part of the business of the AGM. The request: (i) may be in hard copy form or in electronic form (see below); (ii) either set out the statement in full or, if supporting a statement sent by another member, clearly identify the statement which is being supported; (iii) must be authenticated by the person or persons making it (see below); and (iv) must be received by the Company at least one week before the AGM. In order to be able to exercise the members' right to require the Company to publish audit concerns the relevant request must be made by: (i) a member or members having a right to vote at the AGM and holding at least 5% of total voting rights of the Company; or (ii) at least 100 members having a right to vote at the AGM and holding, on average, at least £100 of paid up share capital each and may be made by: - a hard copy request which is signed by the member or members concerned, stating their full names and addresses and is sent to Hampton Park West, Semington Road, Melksham, Wiltshire, SN12 6NB. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 135 N O T I C E O F A N N U A L G E N E R A L M E E T I N G C O N T I N U E D F O R T H E Y E A R E N D E D 3 0 S E P T E M B E R 2 0 1 4 - - a request which is signed by the member or members concerned, stating their full names and addresses and is sent by fax to 01225 896898 marked for the attention of the Company Secretary. a request which states the full names and addresses of the member or members concerned, sent by email to miles.ingrey-counter@avon-rubber.com. (16) Pursuant to sections 338 and 338A of the Act, a members or members meeting the qualification criteria set out below, may, subject to conditions, require the Company to give to members notice of a resolution which may properly be moved and is intended to be moved at the AGM or require the Company to include in the business to be dealt with at the AGM a matter (other than a proposed resolution) which may properly be included in the business. The conditions are that: (i) The resolution must not, if passed, be ineffective (whether by reason of inconsistency with any enactment or the Company's constitution or otherwise). (ii) The resolution or the matter of business must not be defamatory of any person, frivolous or vexatious. The Company is required to give notice of a resolution or the matter of business once it has received requests that it do so from: (i) a member or members having a right to vote at the AGM and holding at least 5% of total voting rights of the Company; or (ii) at least 100 members having a right to vote at the AGM and holding, on average, at least £100 of paid up share capital each and may be made by: - a hard copy request which is signed by the member or members concerned, stating their full names and addresses and is sent to Hampton Park West, Semington Road, Melksham, Wiltshire, SN12 6NB. - a request which is signed by the member or members concerned, stating their full names and addresses and is sent by fax to 01225 896898 marked for the attention of the Company Secretary. a request which states the full names and addresses of the member or members concerned, sent by email to - miles.ingrey-counter@avon-rubber.com. The request: (i) for a resolution, must identify the resolution of which notice is to be given by either setting out the resolution in full or, if supporting a resolution sent by another member, clearly identifying the resolution which is being supported; (ii) for a matter of business, must identify the matter of business by either setting out the matter for business in full or, if supporting a statement sent by another member, clearly identify the matter of business which is being supported; and (iii) must be received by the Company not later than 6 weeks before the date of the AGM. Explanatory notes Resolution 1 – Report and Accounts The Directors are required by law to present to the AGM the accounts, and the reports of the Directors and Auditors, for the year ended 30 September 2014. These are contained in the Company’s 2014 Annual Report. Resolution 2 - Directors’ Remuneration Report This resolution seeks approval for the Directors’ Remuneration Report for the year ended 30 September 2014 contained on pages 54 to 73 of the Annual Report. The Company’s Remuneration Policy was approved by shareholders at the 2013 AGM and will remain in effect for three years or until shareholders are asked to approve an amended version. No amendments to the Directors’ Remuneration Policy are proposed at this year’s AGM. Resolution 3 – Declaration of a dividend A final dividend can only be paid after the shareholders have approved it at a general meeting. If the meeting approves this Resolution, a final dividend in respect of the financial year ended 30 September 2014 of 3.74p will be paid. Resolutions 4&5 – Re-election of Directors Andrew Lewis retires by rotation and, being eligible, offers himself for re-election. Richard Wood retires by rotation and, being eligible, offers himself for re-election. Stella Pirie will retire at the AGM and will not stand for re-election. Biographies of the Directors can be found on page 41 to of the Annual Report. Resolution 6&7 – Reappointment and remuneration of Auditors Resolutions 6&7 propose the reappointment of PricewaterhouseCoopers LLP as Auditor of the Company and authorise the Directors to set their remuneration. Resolution 8 – Directors’ authority to allot This Resolution deals with the Directors’ authority to allot Relevant Securities in accordance with section 551 of the Act. The authority granted at the last annual general meeting is due to expire at the conclusion of this year’s AGM and accordingly it is proposed to renew this authority. This Resolution complies with the Investment Management Association Share Capital Management Guidelines issued in July 2014 and will, if passed, authorise the Directors to allot Relevant Securities up to a maximum nominal amount of £10,341,097, which is equal to approximately one-third of the issued share capital of the Company as at 19 November 2014. The Directors have no present intention of exercising this authority except in connection with the Company’s employee share schemes. The authority granted by this resolution will expire on the date 15 months after the date of this Resolution or, if earlier, the date of the next annual general meeting of the Company. 136 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 In this resolution, Relevant Securities means: (i) shares in the Company other than shares allotted pursuant to: - an employee share scheme (as defined by section 1166 of the Act); -a right to subscribe for shares in the Company where the grant of the right itself constituted a Relevant Security; or - a right to convert securities into shares in the Company where the grant of the right itself constituted a Relevant Security; and (ii) any right to subscribe for or to convert any security into shares in the Company other than rights to subscribe for or convert any security into shares allotted pursuant to an employee share scheme (as defined by section 1166 of the Act). References to the allotment of Relevant Securities in this resolution include the grant of such rights. Resolution 9 – Disapplication of pre-emption rights This Resolution will, if passed give the Directors power, pursuant to the authority to allot granted by Resolution 8, to allot equity securities (as defined by section 560 of the Companies Act 2006) or sell treasury shares for cash without first offering them to existing shareholders in proportion to their existing holdings up to a maximum nominal amount of £1,551,164 which represents approximately 5% of the Company's issued share capital as at 19 November 2014 and renews the authority given at the annual general meeting in 2014. In compliance with the guidelines issued by the Pre-Emption Group, the Directors, will ensure that, other than in relation to a rights issue, no more than 7.5% of the issued ordinary shares (excluding treasury shares) will be allotted for cash on a non pre-emptive basis over a rolling three year period unless shareholders have been notified and consulted in advance. The power granted by this Resolution will expire on the date 15 months after the date of this Resolution or, if earlier, the date of the next annual general meeting of the company. Resolution 10 – Authority to purchase own shares This resolution seeks authority for the Company to make market purchases of its own shares and is proposed as a special resolution. If passed, the resolution gives authority for the Company to purchase up to 4,653,492 ordinary shares of £1 each, representing just under 15% of the Company's issued ordinary share capital as at 19 November 2014. The resolution specifies the minimum and maximum prices which may be paid for any ordinary shares purchased under this authority. The authority will expire on the earlier of the date 15 months after the date of this Resolution and the Company's next annual general meeting. As of 19 November 2014 there were options to subscribe outstanding over 932,765 ordinary shares, representing 3.01% of the Company’s ordinary issued share capital. If the authority given by Resolution 10 were to be fully exercised, these options would represent 3.5% of the Company’s ordinary issued share capital after cancellation of the re-purchased shares. As of 19 November 2014 there were no warrants outstanding over ordinary shares. The Directors intend to exercise the power given by Resolution 10 only when, in the light of market conditions prevailing at the time, they believe that the effect of such purchases will be to increase the earnings per ordinary share having regard to the intent of the guidelines of institutional investors and that such purchases are in the best interests of shareholders generally. Other investment opportunities, appropriate gearing levels and the overall position of the Company will be taken into account before deciding upon this course of action. Any shares purchased in this way will be cancelled and the number of shares in issue will be reduced accordingly. Bonus and incentive scheme targets for executive Directors would not be affected by any enhancement of earnings per share following a share re-purchase. In the opinion of the Directors, Resolution No. 10 is in the best interests of the shareholders as a whole and the Directors intend to seek renewal of these powers at subsequent annual general meetings. Resolution 11- Notice of Meeting Resolution 11 is a resolution to allow the Company to hold general meetings (other than annual general meetings) on 14 days' notice. Before the introduction of the Companies (Shareholders' Rights) Regulations in August 2009, the Company was able to call general meetings (other than annual general meetings) on 14 clear days’ notice. One of the amendments that the Companies (Shareholders' Rights) Regulations 2009 made to the Act was to increase the minimum notice period for listed company general meetings to 21 days, but with an ability for companies to reduce this period back to 14 days (other than for annual general meetings) provided that: (i) the Company offers facilities for shareholders to vote by electronic means; and (ii) there is an annual resolution of shareholders approving the reduction in the minimum notice period from 21 days to 14 days. Resolution 11 is therefore proposed as a special resolution to approve 14 days as the minimum period of notice for all general meetings of the Company other than annual general meetings. The approval will be effective until the Company's next annual general meeting, when it is intended that the approval be renewed. The Company will use this notice period when permitted to do so in accordance with the Companies Act 2006 and when the Directors consider it appropriate to do so. R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 137 N O T E S 138 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L 139 2 0 1 4 A N N U A L R E P O R T 140 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 S H A R E H O L D E R I N F O R M AT I O N Shareholding On 10 November 2014 the Company had 1,659 shareholders, of which 987 (59%) had 1,000 shares or fewer. Financial calendar Interim results announced in May and final results in November. In respect of the year ended 30 September 2014 the annual general meeting will be held on 29 January 2015 at Hampton Park West, Semington Road, Melksham, Wiltshire, SN12 6NB, England. Corporate information Registered office Hampton Park West, Semington Road, Melksham, Wiltshire, SN12 6NB, England. Registered In England and Wales No 32965 VAT No. GB 137 575 643 Board of Directors David Evans (Chairman) Peter Slabbert (Chief Executive) Andrew Lewis (Group Finance Director) Stella Pirie OBE (Non-Executive Director) Richard Wood (Non-Executive Director) Company secretary Miles Ingrey-Counter Independent auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Registrars & transfer office Capita Asset Services, The Registry, 34 Beckenham Road, Beckenham, BR3 4TU. Tel: 0871 664 0300 (calls cost 10p per minute plus network extras, lines are open 8.30am–5.30pm Mon-Fri) Brokers Arden Partners plc Solicitors TLT LLP Principal bankers Barclays Bank PLC Comerica Inc. Corporate financial advisor Arden Partners plc Corporate website www.avon-rubber.com R A E Y E H T F O W E I V R E V O S S E N I S U B R U O N U R E W W O H D E M R O F R E P E W W O H N O I T A M R O F N I R E D L O H E R A H S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 D E L I V E R I N G P E R F O R M A N C E & P O T E N T I A L IBC C O R P O R A T E H E A D Q U A R T E R S H A M P T O N P A R K W E S T • S E M I N G T O N R O A D M E L K S H A M • W I L T S H I R E • S N 1 2 6 N B • E N G L A N D T : + 4 4 ( 0 ) 1 2 2 5 8 9 6 8 0 0 F : + 4 4 ( 0 ) 1 2 2 5 8 9 6 8 9 8 E : e n q u i r i e s @ a v o n - r u b b e r . c o m w w w . a v o n - r u b b e r . c o m 

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