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 Europe, serving markets around the world. We achieve this through nurturing the talent
and aspirations of our employees to realise their highest potential.
Avon Protection Systems is the recognised global market leader in advanced Chemical, Biological, Radiological and Nuclear (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 1920’s, Avon Protection Systems’ 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 whether land, air or sea based.
Our world-leading Dairy supplies business and its Milkrite | InterPuls brand has 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. The acquisition of InterPuls in 2015, a specialist in electro-mechanical milking components, such as pulsators, milk
meters, automatic cluster removers and milking clusters, has added significantly to our product range, making us the complete milking
point solutions provider, improving every farm we touch.
Working with 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 more efficient. As our market share and milking experience continue to improve, so does our global presence.
O V E R V I E W O F
T H E Y E A R
H O W W E R U N
O U R B U S I N E S S
C O N T E N T S
IFC
01 - 07
08 - 10
Introduction and Contents
Who we are, where we are and what we do
Chairman’s Statement
11 - 33
34 - 41
Strategic Report
Environmental and Corporate
Social Responsibility
42
43 - 46
47 - 51
Board of Directors
Directors’ Report
Corporate Governance
52
53 - 54
55 - 73
Nominations Committee Report
Audit Committee Report
Remuneration Report
H O W W E
P E R F O R M E D
114 - 121
Independent Auditors’ Reports
122 - 132 Parent Company Financial Statements
74 - 113
Financial Results
133
Five year record
134 - 139 Notice of Annual General Meeting
IBC
Shareholder information
S H A R E H O L D E R
I N F O R M AT I O N
IFC
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G R O U P
Revenue
£142.9m £8.6m
Operating Profit*
£21.8m £1.6m
G R O U P
Diluted earnings per share (EPS)*
18.2p
72.8p
Operating Profit* (£m)
EPS (pence)*
£21.8m
£20.2m
72.8p
54.6p
£17.0m
£14.2m
£11.1m
£11.6m
£9.3m
42.3p
34.0p
25.4p
23.3p
14.4p
10
11
12
13
14
15
16
10
11
12
13
14
15
16
P R O T E C T I O N & D E F E N C E
D A I R Y
Revenue
£100.9m £2.1m
Operating Profit*
£16.0m £0.1m
Revenue
£42.0m £6.5m
Operating Profit*
£7.2m
£0.8m
Operating Profit* (£m)
Operating Profit* (£m)
£15.9m
£16.0m
£13.6m
£11.0m
£7.5m
£7.5m
£6.5m
£5.5m
£6.0m
£5.2m
£5.7m
£4.6m
£7.2m
£6.4m
10
11
12
13
14
15
16
10
11
12
13
14
15
16
* All profit and earnings per share figures above relate to adjusted
business performance as defined on page 19.
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“
SIGNIFICANT OPPORTUNITIES
FOR 2017 INCLUDE
PRODUCTION OF OUR
AIRCREW MASK, FURTHER
SALES OF OUR NEW CBRN/
CO ESCAPE HOOD AND
ARGUS THERMAL IMAGING
CAMERAS TOGETHER WITH
A NUMBER OF NON-DOD
MILITARY CONTRACTS.
”
“
THE LARGE INSTALLED
BASE OF GAS MASKS
IN THE US CREATES
SIGNIFICANT
OPPORTUNITY BOTH
FOR OUR EXISTING
PRODUCTS AND OUR
NEW UNIQUE CBRN/CO
ESCAPE HOOD.
”
O U T L O O K 2 0 17
O U R 2 0 1 6
“
DOD DELIVERIES WERE
ON SCHEDULE AND
THE BUILDING BLOCKS
FOR THE FUTURE HAVE
BEEN PUT IN PLACE
THROUGH PRODUCT
DEVELOPMENT AND
ROUTES TO MARKET.
”
“
OUR DOD RELATIONSHIP
PROVIDES OPPORTUNITIES
TO EXPAND INTO AIRCREW
AND NAVY PRODUCTS AND
IS A FANTASTIC REFERENCE
CUSTOMER AS WE TENDER
FOR PROGRAMMES IN
OTHER COUNTRIES.
”
“
WE HAVE A LONG-
TERM SOLE-SOURCE
CONTRACT WITH THE
DOD FOR THE SUPPLY
OF MASK SYSTEMS
AND OUR RESPIRATORY
PROTECTION PRODUCTS
ARE SOLD TO FOREIGN
MILITARY CUSTOMERS
AROUND THE GLOBE.
”
M A R K E T
C O N D I T I O N S
M A R K E T S
P R O D U C T S
02
M I L I TA R Y
L A W E N F O R C E M E N T
“
THE ADDITION OF
THE ARGUS THERMAL
IMAGING CAMERA AND
THE NIOSH APPROVAL
OF OUR CBRN/CO
ESCAPE HOOD HAVE
BEEN THE HIGHLIGHTS
OF THE YEAR.
”
“
OUR PRODUCTS HAVE
EARNED A REPUTATION
FOR QUALITY, COMFORT
AND OPERATIONAL
EFFECTIVENESS AND
ARE SOLD TO LAW
ENFORCEMENT AND
FIRST RESPONDER
USERS GLOBALLY.
”
“
IN THE SCBA MARKET
WE ARE A RELATIVELY
SMALL PLAYER GIVING
US OPPORTUNITY TO
GROW. THE ARGUS
THERMAL IMAGING
CAMERA IS ONE OF THE
MARKET LEADERS IN ITS
CATEGORY.
”
“
WE PROVIDE HIGH
PERFORMANCE
PERSONAL PROTECTION
EQUIPMENT AND
ADVANCED THERMAL
IMAGING CAMERAS
FOR THE FIRE SERVICE
INDUSTRY.
”
L A W E N F O R C E M E N T
F I R E
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“
WE HAVE SEEN THE EARLY
SIGNS THAT THE CYCLICAL
DOWNTURN IN MILK PRICE
WILL REVERSE IN 2017 AND
EXPECT THE DEMAND
FOR OUR PRODUCTS TO
NORMALISE.
”
“
WE HAVE SEEN A
CYCLICAL DOWNTURN IN
MILK PRICES, REDUCING
DEMAND FOR OUR
CONSUMABLE AND SEMI-
CONSUMABLE PRODUCTS
AS FARMERS OVERUSE
EQUIPMENT.
”
O U T L O O K 2 0 17
O U R 2 0 1 6
“
IN A SOFT MARKET WE
HAVE GROWN MILKRITE
| INTERPULS’ MARKET
SHARE AND THE
PROPORTION OF OUR
OWN BRAND SALES.
”
THE GENERAL MARKET
CONDITIONS FOR DAIRY
FARMERS HAVE BEEN
WEAK AS MILK PRICES
HAVE BEEN LOW.
”
“
MILKRITE | INTERPULS IS
THE LEADING SUPPLIER AT
THE INTERFACE BETWEEN
THE ANIMAL AND THE
MILKING MACHINE. OUR
PRODUCTS RAISE THE
QUALITY OF THE MILK,
IMPROVE ANIMAL HEALTH
AND MAXIMISE FARM
EFFICIENCY.
”
M A R K E T
C O N D I T I O N S
“
M A R K E T S
P R O D U C T S
04
I N T E R F A C E
P R E C I S I O N , C O N T R O L A N D I N T E L L I G E N C E
“
DEFERRED FARMER
INVESTMENT DECISIONS
WILL RESULT IN INCREASED
DEMAND FOR INTERPULS
PRODUCTS, ALONG WITH
THE LAUNCH OF INTERPULS
PRODUCTS IN THE US.
“
TOGETHER WITH
THE INCREASED
RANGE OF PRODUCTS
AND DISTRIBUTION
CHANNELS, WE WILL
EXIT THIS DOWNTURN
A MORE ROBUST
BUSINESS.
”
”
“
THROUGH THE USE OF
PRECISION, CONTROL AND
INTELLIGENCE PRODUCTS,
SUCH AS PULSATORS,
FARMS CAN INCREASE
THEIR PROFITABILITY AND
EFFICIENCY THROUGH
SYSTEMS INTEGRATION,
CALIBRATION AND
RELIABILITY.
”
“
THE DIFFICULT MARKET
CONDITIONS ARE
LEADING TO FARM
CONSOLIDATION AND
THE CONSEQUENT
PROFESSIONALISATION
OF FARMING.
”
“
OUR CLUSTER EXCHANGE
MODEL, LAUNCHED THREE
YEARS AGO, HAS BEEN
WELL RECEIVED BY THE
MARKET AND WE ARE
PILOTING A WIDER FARM
SERVICES CONCEPT WITH
PULSATORS, LEG TAGS
AND NECK TAGS.
”
P R E C I S I O N , C O N T R O L A N D I N T E L L I G E N C E
F A R M S E R V I C E S
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G L O B A L P R E S E N C E
Avon Rubber p.l.c.
Corporate Headquarters
Melksham, UK
Avon Protection
Melksham, UK
Avon Dairy Solutions
Melksham, UK
Avon Protection
Cadillac, MI
Avon Protection
Baltimore, MD
9
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4
3
7
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Avon Dairy Solutions
Johnson Creek, WI
Milkrite | InterPuls
Modesto, CA
13
Avon Protection - AEF
Picayune, MS
10
Avon Dairy Solutions
Rudnik, Czech Republic
Avon Protection
Kuala Lumpur, Malaysia
11
Milkrite | InterPuls
Albinea, Italy
Avon Protection
Brussels, Belgium
Avon Electronics Centre
West Palm Beach, FL
12
13
Milkrite | InterPuls
Shanghai, China
Milkrite | InterPuls
Castro, Brazil
1
1
1
2
3
4
5
6
7
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1
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6
10
11
12
5
Agents and Distributors
Distribution countries
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2331,210
C H A I R M A N ’ S S TAT E M E N T
“Avon’s strategy has delivered strong earnings growth
and cash generation. Our business has proved to be
resilient in difficult market conditions and we exit the
year a more robust business with a range
of good opportunities for growth”.
David Evans, Chairman, Avon Rubber p.l.c.
I am pleased to report that Avon’s strategy has delivered strong earnings
growth and cash generation resulting in the Group ending the year with
net cash of £2.0m.
During the year we have successfully integrated the acquisitions made
late in 2015 and early 2016 and, in difficult market conditions, both sides
of our business have proved to be resilient. We exit the year a more
robust business with both a broader product range and increased routes
to market.
We continue to maintain our focus on creating a healthy and
sustainable business and, by investing in and integrating technology
in both divisions, we are creating exciting future international growth
opportunities.
Continuing sound financial and operational management has both
protected our margins and delivered strong operating cash flows,
enabling us to fund the recent acquisitions whilst reducing our debt by
£15.2m, thus maintaining a strong balance sheet.
Revenue of £142.9m (2015: £134.3m) increased by £8.6m or 6%.
Operating profit increased by 8% to £21.8m (2015: £20.2m). Diluted
earnings per share rose to 72.8p (2015: 54.6p).
In Protection & Defence we are growing in all our international
market sectors and now have a range of products for military and first
responders wherever their threat may be, across land, air or sea.
Our mask systems production has, as planned, been focused on fulfilling
deliveries to the US Department of Defense (DOD) under our ten year
sole-source contract for the JSGPM M50 mask and we still see several
higher margin export opportunities for military masks although the
timing of order receipt remains difficult to predict. However, these
remain live and are progressing, and we expect to receive and deliver
them in our 2017 financial year.
152%
OPERATING CASH
CONVERSION
In the final quarter of our financial year we announced
that our unique CBRN/CO (carbon monoxide)
Escape Hood had received NIOSH approval and that
immediately after the launch of this product we
received an order worth $9m from the New York Police
Department (‘NYPD’), of which approximately a third is
carried forward for delivery in the first quarter of 2017.
This is an exciting new and unique product which we
believe will be attractive to many customers in the
33%
INCREASE IN DILUTED EPS
future. In addition, we received a 15,000 non-DOD mask order late in
this financial year for delivery in the first quarter of 2017.
In the Dairy business, the general market conditions for farmers were
weak throughout the year as milk prices have been low. This typically
cyclical market dynamic has had the expected consequence of
reducing demand for our consumable products as farmers extend the
life through over-using product. This has been more noticeable in the
InterPuls business which we acquired late in 2015, where the nature of
the product is more capital/semi-consumable than consumable.
We are encouraged that our own brand Milkrite | InterPuls products
and Cluster Exchange service have continued to gain market share
leaving us well positioned as the cyclical downturn in milk price
reverses. We are extending the exchange service concept to include
pulsators and tags under a new Farm Services umbrella.
The roll out programme of InterPuls products through Milkrite
distribution in the US has commenced with the first revenues seen
in the final quarter of our financial year. We have also seen the
early signs of increases in the global milk price which provides an
encouraging backdrop against which to start our new financial year.
In this context, the Board is confident of the Dairy business’s ability to
make progress in 2017.
Acquisition
In October 2015 we acquired the Argus thermal imaging camera
business from e2v technologies plc for £3.3m. The thermal imaging
product is complementary to our offering in both fire service and law
enforcement markets and has been successfully integrated into our
sales and distribution structure with good demand for the products.
Protection & Defence
Protection & Defence revenue increased 2% to £100.9m.
Under our long-term DOD M50 mask contract we supplied 189,000
mask systems during the financial year, bringing the total to over 1.6m
systems so far under this contract.
Having received orders for 169,000 mask systems during the year, this
left us with an order book of 30,000 systems as we entered our 2017
financial year. Since the year end we have received a further order for
131,000 mask systems from the DOD.
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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. As expected, the DOD qualified a second
source to provide filters during 2015 and in 2016 we received orders
under this new arrangement for 122,000 filter pairs, with 37,000 pairs
carried forward for delivery in the first quarter of 2017.
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. During 2016 the DOD continued to test the product on
the aircraft platforms it will be deployed on. We continue to expect that
when this concludes it should lead to a production contract which could
be worth in excess of $70m, with the first revenues expected in 2017.
The non-DOD side of the business includes the US 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 several geographies around the world.
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, as less effective equipment
procured post 9/11 is replaced. In addition, our expanded product
portfolio being delivered under Project Fusion is creating further
opportunities within this sector, including the recently approved CBRN/
CO Escape Hood which, with NYPD as an important customer for, and
source of information about, the Escape Hood, we believe could provide
significant opportunities in large cities in the future.
Whilst the timing of end-user procurement remains difficult to predict
in the Rest of World markets, we are the CBRN respiratory protection
provider of choice and we continue to build business, particularly in
the Middle East. The number of individual opportunities in the Middle
East continues to grow and we have also seen several NATO countries
commence their procurement process to replace their legacy mask
systems which will provide opportunities in the short to medium term.
The closing order book in Protection & Defence was £20m (2015: £20m),
which, together with the 131,000 mask system order received in the new
year, provides good visibility for 2017.
Dairy
Dairy revenue increased by 18% to £42.0m. Market conditions have been
weak during the year as the milk price has been cyclically low, causing
farmers to overuse consumables and defer investment.
sales of our own higher margin Milkrite | InterPuls branded products and
services. Six years ago our own brand customers represented 53% of our
revenue; at the end of this financial year this had risen to 80%, reflecting
the growth of the higher margin Milkrite | InterPuls brand and some OEM
re-sourcing.
In recent years the business has demonstrated through the launch of our
Impulse Air liner that the industry is receptive to new technology which
improves farm efficiency and animal health. This proprietary product
now enjoys a 29% market share in the US and continues to gain traction
in the more fragmented market in Europe with market share increasing
to 6% following its launch in this market late in 2013.
Our Cluster Exchange service was launched in the US and Europe in
2013 and growth rates since launch have exceeded our expectations.
Under this programme farmers outsource their liner change process to
us through Milkrite | InterPuls service centres with the support of our
dealers and third-party logistics specialists. By the end of the year it
was servicing 467,000 cows on 1,530 farms in the US and Europe. This
added-value service enhances the value of each direct liner sale we make
and has led to a more robust and sustainable business model, with the
potential to grow a significant recurring revenue stream in the years to
come as more farms continue to sign up.
We are piloting an extension of the exchange concept in 2017 to include
pulsator, neck tag and leg tag exchange schemes. These will fall under
the Farm Services banner as we continue to develop the concept of
delivering farmers products that enhance their efficiency in a manner
that provides us with a diversified and recurring revenue stream.
Huge potential remains 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
opened a sales and distribution centre in Brazil in 2015 to service Brazil
and the wider South American market following the same model as our
Chinese operation where we established a sales and distribution facility
during 2012. Sales in both regions have grown substantially and these
operations are progressing to plan.
The opportunity to take the high specification InterPuls products through
our strong Milkrite US dealer network has been developed during the year.
Our sales team and dealers have been trained, products demonstrated to
end users and we saw our first revenues in this area late in the financial year,
laying the foundations for delivery of significant sales synergies in 2017.
Group results
In the second half of our financial year we saw milk prices stabilise as
supply and demand came back within equilibrium and in the last few
months we have seen global milk prices increase month on month
which gives us cause for optimism as we enter 2017.
Our focus in these cyclically challenging market conditions has been
to ensure we exit the cycle well placed to benefit from the upturn we
expect to come in 2017. We have focused on ensuring the integration
of InterPuls happened successfully and that our own brand
Milkrite | InterPuls continued to develop.
Group revenue increased 6% to £142.9m (2015: £134.3m) with Protection
& Defence higher by 2% at £100.9m (2015: £98.8m) and Dairy up 18%
to £42.0m (2015: £35.5m). Operating profit before depreciation and
amortisation (EBITDA) rose 13% to £30.8m (2015: £27.3m) and operating
profit rose 8% to £21.8m (2015: £20.2m).
The progressive strengthening of the US dollar during the year gave the
Group a foreign exchange translation tailwind. The US $/£ average rate
was $1.42 (2015: $1.54) and this 12 cent tailwind was equivalent to £9.4m
at a revenue level and £1.4m at an operating profit level.
Our Dairy business has become substantially less dependent on original
equipment manufacturers (OEMs) in recent years as we continue to grow
EBITDA in Protection & Defence grew 4% to £22.4m (2015: £21.6m) and
operating profit was £16.0m (2015: £15.9m) reflecting contribution from
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C H A I R M A N ’ S S TAT E M E N T
the CBRN/CO Escape Hood order and the addition of the Argus product
range together with improved operational performance and continuing
better pricing on the DOD contract. Dairy EBITDA and operating profit
grew 27% and 12% to £9.8m (2015: £7.7m) and £7.2m (2015: £6.4m)
respectively, reflecting the acquisition of InterPuls, the success of our
Cluster Exchange service and the growth of the Milkrite | InterPuls
brand, offsetting lower volumes caused by the impact of the low milk
price and some OEM resourcing.
Interest costs were £0.2m (2015: £0.2m). Group tax resulted in a credit
to the income statement of £0.9m (2015: charge of £2.9m) reflecting
credits in relation to the positive outcome of certain tax enquiries and
the finalisation of the 2015 tax returns in which we could take the benefit
of certain deductions allowed by legislation enacted after our 2015
financial statements were approved, offset by the change in geographic
mix of profits. Post-tax profit for the year was £22.5m (2015: £16.9m). This
equates to earnings per share of 74.2p (2015: 56.1p).
On a fully-diluted basis, earnings per share rose 33% to 72.8p (2015: 54.6p).
We continue to invest in product development which is reflected in
our expanding product range in both sides of the business. Our total
investment in research and development (capitalised and expensed)
amounted to £8.3m (2015: £7.1m), 6% of revenue, of which £4.3m (2015:
£3.9m) was customer funded.
After completing the acquisition of Argus for £3.3m, net cash at year end
was £2.0m (2015: £13.2m net debt), reflecting the strong operating cash
conversion from disciplined financial management within the business.
Committed bank facilities of £30.9m run to 30 November 2019.
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 6.32p per
ordinary share (2015: 4.86p). This, combined with the 2016 interim dividend
of 3.16p, results in a full year dividend of 9.48p (2015: 7.29p), 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, particularly in respect of the challenges of integrating new
businesses and we have been pleased to welcome the employees in
Albinea, West Palm Beach and Chelmsford to the Avon team. I thank
everyone for their valued contribution on behalf of the Board.
further opportunities for growth. We will continue to invest in innovative
new technologies and products and in building our brand and market
reach to bring these opportunities to fruition.
Board changes
Rob Rennie joined as Chief Executive on 1 December 2015.
After serving as a Non-Executive Director since December 2012 Richard
Wood stood down at the AGM in January 2016.
Chloe Ponsonby was appointed on 1 March 2016. Chloe is a founding
partner at the Lazarus Partnership, an independent equity research and
advisory firm.
After eight years as Group Finance Director, Andrew Lewis will step
down on 30 November 2016.
The Board thanks Andrew for his significant contribution to Avon’s
success. He has been instrumental in the successful transformation of
the Group, helping to build the foundations that have led to the recent
consistent growth in profits. His stewardship of the Group’s finances has
placed it in a good position to take advantage of the many opportunities
ahead. The Board wishes him every success in the future.
The Board is pleased to confirm the appointment of Paul Rayner as
Interim Group Finance Director with effect from 1 December 2016.
Outlook
Our strategy of integrating new technologies from product
development and acquisitions with our existing strong brands and
routes to market has created a business that is resilient to adverse
market conditions with strong foundations for growth in both divisions.
In our global Protection & Defence business we continue to see a
number of higher margin export opportunities, have good visibility of
DOD revenues for 2017 and a strong underlying portfolio of non-DOD
business, which we expect to be enhanced by the increasing impact of
the recently launched new products.
In Dairy, after the weak market conditions in 2016, the acquisition of
InterPuls and the encouraging gains in Milkrite | InterPuls market share
provide us with significant opportunity as the milk prices improve
in 2017. This, together with the sales and distribution platforms we
have established in China and Brazil to service these rapidly growing
emerging markets, means we have a Dairy business with excellent short
and longer term growth prospects.
The majority of the Group’s earnings are US dollar denominated and
hence the continued strengthening of the US dollar against Sterling
provides a potentially significant foreign exchange translation tailwind
in 2017 should it be maintained throughout the year.
Opportunities
I am pleased to report that the acquisitions we completed late in 2015
and early 2016 have been successfully integrated into the existing
Group, enhancing our global market leading positions and delivering
David Evans
Chairman
16 November 2016
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S T R AT E G I C R E P O R T
Strategic overview
Group objectives
The Group is committed to generating shareholder value through
the development of 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 businesses, 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 Europe, serving markets around the world. We achieve this
through nurturing the talent and aspirations of our employees 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 1920’s, Avon Protection System’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 whether land,
air or sea based.
Our world-leading Dairy supplies business and its Milkrite | InterPuls
brand has 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. The acquisition of InterPuls in
2015, a specialist in electro-mechanical milking components, such
as pulsators, milk meters, automatic cluster removers and milking
clusters, has added significantly to our product range, making us
the complete milking point solutions provider, improving every
farm we touch.
Working with 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 more efficient. As our market share and milking
experience continue to grow, so does our global presence.
Group strategy
We have two strategic priorities at Group level:
n Expanding our Protection & Defence business in military, first
responder and industrial markets globally; and
n Developing our Dairy operation through its Milkrite | InterPuls
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 19) and a broader
set of key performance indicators (KPIs) which are shown on pages
26 to 27.
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S T R AT E G I C R E P O R T
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. 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 manufacturing capability 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
Leverage our relationship with the DOD to aid
and facilitate next generation products for
commercialisation.
Successfully design, develop and launch advanced
respiratory protection products which sustain our
position as the leader in our field.
Develop a global operating platform which is
efficient, stable, scaleable and responsive to
business demands.
Integrate technology across our product range
through partnerships or acquisitions.
Sustain organic growth through long-term
quality relationships with customers, agents and
distributors.
Attract, retain and develop our employees and
make Avon a Great Place to Work.
Apprentice engineers in Melksham
Avon has recruited two apprentices to join its engineering team in
Melksham.
Jack Alexander joined as an apprentice CNC machinist and is following a
BTEC L3 Diploma in Mechanical Engineering qualification.
Callum Demkiv joined as an apprentice Maintenance Engineer on a City &
Guilds 2850 L3 Diploma in Installation, Commissioning and Maintenance
(ICM) qualification.
Jack and Callum are continuing a family tradition, both having
grandfathers who worked at Avon for many years.
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Dairy strategy
Our strategy for long-term sustainable profit growth is to be the complete milking point solutions provider, improving every farm we
touch. Our Dairy business comprises liners and tubing, precision and control components and our service offering.
Our liners and tubing are already established as market-leading products in developed markets. Our growth strategy in developed
markets is to continue to convert customers to more technical own brand products. In emerging markets, as the automation of the milking
process continues, our investment in in-country distribution centres leaves us well positioned to grow our market share.
The acquisition of InterPuls gives us a market leading position in Europe and Asia in precision and control systems, including pulsators,
which will allow us to leverage our position in liners and tubing, combine our global distribution networks and maximise our sales of
precision and control systems by launching these products into the US.
The success of our innovative Cluster Exchange service has demonstrated the benefits to the farmer of such a service offering. We plan to
expand the concept further by piloting exchange schemes for pulsators, neck tags and leg tags in 2017.
Innovative new product and service offerings and continued world class low cost manufacturing excellence should allow our enhanced
Dairy 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 including
world class logistics.
brand development and positioning.
Expansion of distribution and dealer network.
Leverage the benefit of our world class
manufacturing operations and efficient supply
chain.
Attract, retain and develop our employees and
make Avon a Great Place to Work.
Moving on to bigger and better
things in China
In July, Avon Dairy Solutions (ADS) China relocated to the Shanghai Jia
Ding District in China and moved to a larger facility.
In this new space, ADS China has doubled its warehouse storage
capacity and added a professional training room with full installation of
Milkrite | InterPuls demonstration equipment ready for customer visits.
This was a big task for ADS China who are continuously working to
improve service levels and optimise allocation of resources. We expect a
bright future for ADS China.
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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 four 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 Corporate activities.
Protection & Defence business model
Markets
Our respiratory protection products are sold direct to military markets where our primary customer is the DOD (Army, Navy, Marine Corps,
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 law enforcement and other emergency services and are addressed either directly or through distribution channels.
Self Contained Breathing Apparatus (SCBA) and thermal imaging equipment is targeted at fire services and other industrial users, primarily
through a distribution network. 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.
MILITARY
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 and
thermal imaging cameras that employ 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.
LAW ENFORCEMENT AND
FIRST RESPONDER
AEF
Our respiratory protection products are
sold to foreign military, law enforcement
and first responder customers in over 60
countries around the globe.
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.
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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, M53 and FM12) together with a range of spares and accessories; the NIOSH-approved emergency hood (NH15
and NH15 CO); rebreathers for escape and underwater use; and SCBA (primarily the Deltair product range and ST53). 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 hovercraft skirts and fuel and water storage tanks.
MILITARY
LAW ENFORCEMENT
FIRE
M50
The most advanced
general service respiratory
protection mask to
date, offering advanced
comfort, usability,
operational effectiveness
and protection.
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 and commercial
shipping industries.
MCM100
We are designing an
underwater product
range for military use
including the MCM100,
a multi-capability mine
counter-measures
rebreather.
JSAM
We are developing
upgraded CBRN
respiratory protection
equipment for aircrew on
the DOD’s fleet of fixed
wing aircraft.
M61
Pioneering conformal
filter technology for closer
integration and designed
with bayonet quick fit for
use only with the M50
mask.
MILCF50
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.
C50
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.
NH15 CO
The smallest NIOSH-certified
CBRN/CO air purifying
escape respirator on the
market is ideal for police,
emergency medical services
and fire officers seeking
immediate or emergency
respiratory protection in a
CBRN/CO scenario.
CS-PAPR
Our latest product is the
CS-PAPR, a combination
system powered air
purifying respirator, which
can be used as a complete
system or as individual
modules. It allows
the wearer to switch
seamlessly between
purified air and SCBA
modes of protection.
MI-TIC S
The most advanced
thermal imaging camera
available which improves
operational effectiveness
in difficult conditions.
DELTAIR
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.
AEF
HOVERCRAFT
SKIRTS
Hovercraft skirts are used
in military air cushioned
vehicles which transport
equipment and personnel
at sea and onto land. The
US Navy have a large
fleet of hovercraft which
require skirt sets to be
regularly replaced.
STORAGE TANKS
Storage tanks are
manufactured to provide
an ideal collapsible and
flexible storage solution
for temporary or long-
term storage of water and
most aqueous solutions
including fuel.
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Product development
Our product development combines the skills and expertise of our
design and engineering teams to enhance our product range for
multiple users in different threat scenarios.
Our unique CBRN/CO Escape Hood which received NIOSH approval
during the year provides protection against both CBRN and carbon
monoxide in a small, lightweight and portable package which
has applications for a range of customers across law enforcement,
industrial and corporate markets.
We are developing a multi-capability mine counter-measures
diving rebreather for use by the military.
We continue to enhance our suite of modular personal protection
comprising smaller modules with multiple functionalities that can
be combined or used independently.
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.
Argus acquisition – Avon becomes
the eyes of the firefighter
n
n
n
n
During the year we acquired the trade and assets of the “Argus”
thermal imaging camera business from e2v technologies plc.
Argus is a leading designer and manufacturer of thermal imaging
cameras for the first responder and fire markets.
Argus is a strategic addition to our fire and first responder product
range, offering the leading camera to enhance sales in our US
markets and access to distribution in Europe and Asia.
The Argus team brings a wealth of technical expertise in this
area which will generate longer-term product development
opportunities for the Protection & Defence business.
n
Argus manufacturing has been consolidated into our Melksham
facility during the year.
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Dairy business model
Markets
Our Dairy business designs, manufactures and sells products and services used in the automated milking process. We are the complete
milking point solutions provider, supplying rubberware, such as liners and tubing, and electro-mechanical components, such as pulsators,
milk meters, automatic cluster removers and milking clusters.
Our 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. The electro-mechanical components form the basis of the control system of a milking parlour and are
replaced periodically, either through usage or to enhance farm efficiency. We also have a range of intelligence products that give farmers
management information, allowing them to make more informed decisions to drive farm efficiency, improving every farm we touch.
Our customer base consists mainly of customers buying our own-brand Milkrite | InterPuls products and we also sell to OEMs.
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, South America, Russia, Eastern
Europe and India, all of which are currently experiencing rapidly increasing demand for dairy products which is being satisfied through
mechanised milking. To harness this potential we have opened sales and distribution facilities in China and Brazil.
US
CHINA
n Our Milkrite | InterPuls brand has
established a 51% market share in the
liner market with a total Avon market
share of 61%.
Impulse Air has 29% share of the market.
n
n Our Milkrite | InterPuls precision, control
and intelligence products were launched
in the last quarter of the financial year.
n Cluster Exchange is servicing 338,000
cows on 271 farms.
n Contracts have been secured with
China’s largest milk suppliers and
distributors, Mengniu and Yili.
n Our dealer network is growing.
n We have built a strong Milkrite |
InterPuls presence.
EU
SOUTH AMERICA
n The rate of Milkrite | InterPuls liner
market share growth has accelerated
with Milkrite | InterPuls market
share increasing to 32% of which 6%
represents Impulse Air, launched in
2013. Total Avon market share is 73%.
n Our Milkrite | InterPuls pulsator market
share is 10% in the EU and 30% in the rest
of the world.
n Cluster Exchange is servicing 129,000
cows on 1,259 farms.
n We have opened a sales and
distribution centre in Brazil to service
the wider South American market
which will allow further opportunity for
growth.
n Our dealer network has grown rapidly
from 12 to 180 dealers.
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EU
NA
China
Brazil
Russia
India
Avon market share
Other machine milked
Hand milked
Products
Our products are sold through distributors under our own Milkrite
| InterPuls brand. We also manufacture for major OEMs. 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 own brands, enhancing the farmer’s view
of us as the primary technical solutions provider in the milk
extraction process. The success of the innovative mouthpiece
vented liner, Impulse Air, continues and this product has
established a 29% market share in the US since its launch in 2010
and a 6% market share in Europe since its launch there in 2013.
Product development
We have invested considerably in the development of products
and services.
Our Cluster Exchange service, recently launched in the US and
Europe, means Milkrite | InterPuls 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.
During the year we completed our Impulse Air cluster offering with
the launch of our Impulse Claw 300. This is an important chapter for
the Milkrite | InterPuls brand and completes the transition from liner
expert to cluster expert. The lightweight and ergonomic design makes
the claw easier to handle and reduces the overall weight of the cluster.
In addition, the claw is a combination of quality components made
from high quality material which makes it extremely durable.
We also launched our iMilk600 during the year, part of the next
generation of intelligence products. iMilk600 is a state-of-the-art
milk meter with advanced electronics and reliable sensors. The
user-friendly panel displays in real time: milk yield, temperature,
milking time, cow number and conductivity. This data can be
analysed by the farmer to help maximise profit from the dairy herd.
The acquisition of InterPuls brings capability in the fields of herd
management, sensor technology and telemetry, all of which provide
opportunities for integration with our existing product range.
INTERFACE
PRECISION, CONTROL, INTELLIGENCE
LINERS
The Impulse and Impulse Air range provides
triangular liners designed for less slip and
improved animal health with their unique
interlocking anti-twist shell design. Impulse
Air takes innovation one step further using a
unique air flow to draw the milk away quickly.
TUBING
Ultraclean tubing is the first to combine
a smooth sanitary interior surface with a
durable, flexible rubber exterior, resulting in
long-lasting tubing.
CLAWS
The Impulse Claw 300 completes our story
from liner expert to cluster expert. The
durable, lightweight and ergonomic design
makes the claw easier for the operator to
hold and reduces the overall weight of the
cluster therefore improving cow comfort.
PULSATORS
We are the world-leading manufacturer of
state of the art electronic pulsators designed
to facilitate gentle, complete and uniform
milking.
MILK METERS
We manufacture advanced electronics and
sensors placing us at the cutting edge of
milk analysis.
FARM SERVICES
CLUSTER EXCHANGE SERVICE
Under this programme farmers outsource
their liner change process to us, which we
deliver through service centres established in
our existing facilities, with the support of our
dealers and third-party logistics specialists.
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Business review – the year under review
In challenging market conditions, Avon has demonstrated the robustness of our business in delivering another strong set of financial
results, building on the solid foundations laid by the investments we have made in products and routes to market.
Strong operating cashflow, demonstrating the robust financial disciplines embedded in the business, meant we ended the year with net
cash of £2.0m which gives the Group the ability to continue to pursue organic and inorganic growth opportunities.
The Group’s key achievements in 2016 have been:
n Revenue growth of 6% to
n Profit before tax up 9% to £21.6m
n Successful integration of the acquisitions of
£142.9m
n Diluted earnings per share up
InterPuls, Hudstar and Argus
n EBITDA growth of 13% to
33% to 72.8p
n $9m order for recently approved CBRN/CO
£30.8m
n Dividend increase of 30% to
Escape Hood
n Operating profit growth of
9.48p
8% to £21.8m
n Operating margins
improved by 0.2% to 15.2%
n Cash generated from operating
activities of £33.1m, representing
152% of operating profit
n Market share growth of Impulse Air to 29% in
the US and 6% in Europe in a soft dairy market
n Cluster Exchange servicing 467,000 cows on
1,530 farms across US and Europe
NOTE: The Directors believe that adjusted measures provide a more useful comparison of business trends and performance. Adjusted results
exclude discontinued operations, 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:
2016
2016
2016
2015
2015
2015
Statutory
Adjustments
Adjusted
Statutory
Adjustments
Adjusted
Group EBITDA (£m)
Group operating profit (£m)
Other finance expense (£m)
Group profit before taxation (£m)
Tax (credit)/charge (£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)
Dairy EBITDA (£m)
Dairy operating profit (£m)
30.0
17.6
0.7
16.8
(1.8)
18.3
60.4
59.2
21.9
14.0
9.8
5.4
The adjustments comprise:
n Amortisation of acquired intangibles of £3.3m
(2015: £1.0m)
n Net defined benefit pension scheme cost of
£0.3m (2015: credit £0.3m), which relates to a
scheme closed to future accrual and therefore
does not relate to current operations
0.8
4.2
(0.6)
4.8
0.9
4.2
13.8
13.6
0.5
2.0
-
1.8
30.8
21.8
0.1
21.6
(0.9)
22.5
74.2
72.8
22.4
16.0
9.8
7.2
27.0
18.9
0.9
17.8
2.7
13.7
45.4
44.2
21.4
15.3
7.5
5.6
0.3
1.3
(0.7)
2.0
0.2
3.2
10.7
10.4
0.2
0.6
0.2
0.8
27.3
20.2
0.2
19.8
2.9
16.9
56.1
54.6
21.6
15.9
7.7
6.4
n Exceptional items of £0.5m (2015: £0.6m)
relating to acquisition integration
costs (2015: executive search fees and
acquisition costs)
n Tax effect of adjustments of £0.9m (2015:
£0.2m)
n Loss on discontinued
operations of £0.3m
(2015: £1.5m) relating to
dilapidations costs of former
leased premises of a business
disposed of in 2006
Further details are provided in note 3 of the financial statements.
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
19
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Results
Avon has enjoyed another positive year, successfully integrating
our recent acquisitions which broaden our product range and
routes to market.
Revenue increased 6% to £142.9m (2015: £134.3m) with Protection
& Defence up 2% and Dairy up 18%.
Operating profit increased to £21.8m (2015: £20.2m) and earnings
before interest, taxation, depreciation and amortisation (EBITDA)
were £30.8m (2015: £27.3m). This represents a return on sales
(defined as EBITDA divided by revenue) of 21.6% (2015: 20.3%).
The progressive strengthening of the US dollar during the year gave the
Group a foreign exchange translation tailwind. The US $/£ average rate
was $1.42 (2015: $1.54) and this 12 cent tailwind was equivalent to £9.4m
at a revenue level and £1.4m at an operating profit level.
After net interest and other finance costs the profit before tax was
£21.6m (2015: £19.8m). After tax, the profit for the year was £22.5m
(2015: £16.9m).
Finance expenses
Net interest costs were £0.2m (2015: £0.2m) and other (non-cash)
finance expenses associated with the unwinding of discounts on
provisions were £0.1m (2015: £0.2m).
Taxation
The statutory tax credit totalled £1.8m (2015: charge £2.7m) on a
statutory profit before tax of £16.8m (2015: £17.8m). The effective
tax rate for the period is a credit of 11% (2015: charge of 15%),
reflecting the geographic split of taxable profits for 2016, the
finalisation of the 2015 tax returns and the positive outcome of
certain tax enquiries.
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 a credit of 4% (2015: charge of 15%). In 2016 the US
Federal tax rate was 34%, the UK rate was 20% and the combined
Federal and Regional Italian tax rate was 31%. The Group’s current
year tax charge reflects a blended rate of these jurisdictions which
will vary over time depending on the geographic mix of profits.
Prior period adjustments related to the positive outcome of
certain tax enquiries and taxation payable in the US where
legislation concerning the timing of deductibility of certain
expenditure was passed by Congress after the 2015 financial
statements were approved but before we filed our US tax returns.
Hence we were able to take the benefit of this in our tax filings
but we had not assumed such a benefit when calculating our tax
liability at the time of approving the 2015 financial statements.
Unrecognised deferred tax assets in respect of tax losses in UK
non-trading companies amounted to £nil (2015: £0.3m).
Key factors impacting the future effective tax rate are as follows:
n Material changes in the geographic mix of profits
n Changes in tax rates in the jurisdiction in which the
Group operates
n Resolution of tax judgements arising from current or future
tax issues since the Group can be subject to a number of
challenges by tax authorities and the outcome of these
challenges is inherently uncertain
Earnings per share
Basic earnings per share were 74.2p (2015: 56.1p) and diluted
earnings per share were 72.8p (2015: 54.6p).
Finance Director of the Year Winner
Congratulations to Andrew Lewis who won Finance Director of the Year at the
Quoted Company Awards.
The 12th annual Grant Thornton Quoted Company Awards celebrate the huge
contribution that the small-cap community makes to the UK economy.
The awards celebrated the best PLCs, executive and non-executive board
directors, fund managers and advisers that drive the fast-growth sector.
The judges commented that they were impressed by Andrew’s commercial
mind-set, great involvement with the operations of the company and deep
understanding of the industry, which is reflected in the way he manages
shareholder expectations and communicates with investors.
20
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
Segmental performance
Protection & Defence performance
Protection & Defence represented 71% (2015: 74%) of total Group
revenues. The business saw revenues increase by 2% from £98.8m
to £100.9m.
Operating profit grew to £16.0m (2015: £15.9m) and EBITDA was
up 4% to £22.4m (2015: £21.6m), representing a return on sales (as
defined above) of 22.2% (2015: 21.9%). Our margins have improved
due to the mix of product shipped, efficiencies, the careful
management of discretionary spend and increased prices under
our long-term DOD contract.
As expected, sales of mask systems and filter spares to the DOD
decreased from £44.5m to £40.1m as production scheduling
returned to normal levels following the higher level of DOD
activity in 2015.
We delivered 189,000 mask systems and 122,000 pairs of filter
spares, compared with 240,000 mask systems and 92,000 pairs of
filter spares in 2015.
Having received orders for 169,000 mask systems during the year,
this leaves us with an order book of 30,000 systems as we enter
2017. Since the year end we have received a further order for
131,000 mask systems from the DOD.
Sales to US law enforcement and non-US military and law
enforcement were £31.6m (2015: £27.7m) as a result of a good
performance from the underlying portfolio and a $9m order for
our recently approved CBRN/CO Escape Hood, the majority of
which was delivered in the final quarter of the year.
We saw growth in sales to the fire market this year following
the acquisition and successful integration of the Argus thermal
imaging camera business.
AEF has experienced a softer year, reflecting the variability in
timing of certain DOD procurement programmes for fuel and
water storage tanks.
DOD spares sales have increased this year, as expected given the
increase in the installed base of masks. Long term, as the installed
base of masks continues to grow so will the DOD’s requirement to
fill its supply chain.
2016
2015
5%
11%
10%
8%
£100.9m
40%
£98.8m
45%
31%
28%
13%
9%
DOD
DOD SPARES
EMEA/NA
FIRE
AEF
Fire Department Instructors
Conference (FDIC) International 2016
Avon Protection had another great year at FDIC International, the world’s
largest firefighter training conference and exhibition.
FDIC, which is held in Indianapolis attracts firefighters from around
the world to train, network and learn from the industry’s most elite
instructors, including Avon, where we demonstrated our award winning
Deltair SCBA.
After the acquisition of Argus in October 2015, this was the first chance
to display the Mi-TIC range of thermal imaging cameras under the Avon
Protection brand at a major show and this product was well received by
firefighters and distributors.
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
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Dairy performance
Dairy revenues increased by 18% to £42.0m (2015: £35.5m)
following the acquisition of InterPuls in August 2015 which
offset softer market conditions caused by low milk prices. An
increasing proportion of higher margin Milkrite | InterPuls product
and service sales, together with disciplined management of
discretionary spend, contributed to an increased operating profit
of £7.2m (2015: £6.4m).
EBITDA was £9.8m (2015: £7.7m), giving a return on sales (as
defined above) of 23.3%, up from 21.7% in 2015.
Return on Sales % Dairy
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2009
2010
2011
2012
2013
2014
2015
2016
Market conditions for dairy farmers have been weak as milk
prices have been low. This typically cyclical market dynamic has,
as expected, reduced demand for our consumable products as
farmers extend the life through over-using our products. The
capital nature of the InterPuls products makes the replacement
cycle longer, meaning InterPuls is more affected by the cyclical
market dynamics than Milkrite consumable products.
Our Dairy business has become substantially less dependent on
original equipment manufacturers (OEMs) in recent years
as we continue to grow sales of our own higher margin
Milkrite | InterPuls branded products and services. In difficult
market conditions we are encouraged that our Milkrite | InterPuls
market share continues to increase, meaning that we exit this
cyclical downturn with a more robust business.
US Cluster Exchange
Monthly Revenue
Sep
2012
Mar
2013
Sep
2013
Mar
2014
Sep
2014
Mar
2015
Sep
2015
Mar
2016
Sep
2016
EU Cluster Exchange
Monthly Revenue
320
300
280
260
240
220
200
180
160
140
120
100
80
60
40
20
0
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
0
0
0
$
’
0
0
0
£
’
Sep
2012
Mar
2013
Sep
2013
Mar
2014
Sep
2014
Mar
2015
Sep
2015
Mar
2016
Sep
2016
Milkrite | InterPuls sales increased as a proportion of total revenue,
providing a richer sales mix. Only six years ago OEM customers
represented 47% of our revenue; at the end of this year this had
fallen to 20%, reflecting the success of the higher margin
Milkrite | InterPuls brand and the decision of certain OEMs to
insource or dual source production.
22
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
Dairy Revenue Analysis by Year
US Market Share
m
£
50
40
30
20
10
0
2011
2012
2013
2014
2015
2016
OEM
Milkrite | InterPuls
Total
In Europe, where Avon-manufactured liners have a 73% market
share, Milkrite | InterPuls’s liner market share has increased to 32%
due to growth in traditional own brand products and the success
of our Impulse Air mouthpiece vented liner, first launched in
Europe late in 2013. This product continues to gain traction, with
its market share increasing to 6%.
EU Market Share
6%
5.5%
5%
4.5%
4%
3.5%
3%
2.5%
2%
1.5%
1%
0.5%
0%
Mar
2013
Sep
2013
Mar
2014
Sep
2014
Mar
2015
Sep
2015
Mar
2016
Sep
2016
In the US, where Avon-manufactured liners have a 61% market
share, the Impulse Air mouthpiece vented liner continued to
perform well, with its market share increasing to 29%. The total
Milkrite | InterPuls market share in the US is 51%.
30%
28%
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Sep
2013
Mar
2014
Sep
2014
Mar
2015
Sep
2015
Mar
2016
Sep
2016
We are encouraged that in poor market conditions retention of
existing farmers and the take up by new farmers of our innovative
Cluster Exchange service remains strong in both North America
and Europe. By the end of the year we were servicing 467,000
cows on 1,530 farms in the US and Europe, up from 430,000 cows
and 1,262 farms at the same time last year. This added-value
service enhances the value of each direct liner sale we make and
has led to a more robust and sustainable business model, with
the potential to grow a significant recurring revenue stream in
the years to come, as more farms sign up. We are extending the
exchange service concept to include pulsators and tags under a
new Farm Services umbrella.
Milk prices in our major markets appear to have bottomed-out and
started to improve in the final quarter of our financial year, a trend
which has continued since the year end.
We are pleased with the integration of InterPuls, acquired in
August 2015, into the wider Dairy business and are on track to
realise the long-term strategic benefits that have been identified,
in particular the sales synergies available in the North American
market. The programme for the roll out of InterPuls products
through existing Milkrite distribution in the US has commenced,
with the first revenues seen in the final quarter of the financial
year. This, together with our expectation that the recent
improvement in milk price will continue and positively impact
demand for our products, leaves the Board confident of the ability
of the Dairy business to make progress in 2017.
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 of which, our Impulse Claw
300, was successfully launched early in the year and the next
generation of intelligence products, the iMilk600, was launched in
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
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the final quarter of the year. The InterPuls acquisition further adds
to our product portfolio and product development capability, the
benefits of which we expect to see in future years.
Group position
Acquisition
In China, our customer base continues to grow, demonstrating the
continuation of the industrialisation of the milking process and the
strength of the local presence we have established in this market.
We remain encouraged by the excellent long-term potential for
our products.
In South America, where we opened our sales and distribution
facility in the first half of 2015, we have started to make good
progress in establishing a strong dealer network and expect to
see growth in this region, with revenue growing in line with our
expectations.
In many other emerging markets, including 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
using the distribution network which InterPuls has already
established in these regions.
On 8 October 2015, the Group completed the acquisition of the
Argus thermal imaging camera business from e2v technologies plc
for £3.3m from existing debt facilities.
Net cash and cash flow
Net cash at the end of the year was £2.0m (2015: net debt of
£13.2m). At the year end, our main bank facility was £30.9m, which
is US dollar denominated and committed to 30 November 2019.
In the year we invested £3.3m in the Argus acquisition and £6.8m
(2015: £6.2m) in property, plant and equipment and new product
development. In the Protection & Defence business this focused
on the completion of our new product development programme,
Project Fusion. In Dairy we invested in the development of our
iMilk600 milk meter, the completion of our new claw and the
hardware required to support our Cluster Exchange service offering.
Operating activities generated cash of £33.1m (2015: £24.1m),
representing 152% of operating profit (2015: 119%). Through
disciplined financial management the Group has driven strong
conversion of profits into cash. The timing of shipments to
customers can impact all aspects of working capital and at the
2016 year end inventory was higher from a combination of foreign
exchange translation, the acquisition of Argus and being mid-way
through the manufacture of a large order. Receivables increased
due to a combination of foreign exchange translation and the
timing of shipment on part of a large order prior to our year end.
Payables have increased due to a combination of foreign exchange
translation and the timing of procurement of materials for a
large order.
Three new training rooms at our
Dairy sites
Three new training centres have been installed at our Wisconsin, Brazil and
China facilities.
The training centres contain a suite of the latest Milkrite | InterPuls product
technology which can be used to train dealers, farmers and also our own
team members.
The training centres are an important step towards delivering on the
opportunity of selling InterPuls products into these markets.
24
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
In Dairy we have started to expand our product range under
the Milkrite | InterPuls brand beyond liners and tubing into
non-rubber goods such as liner shells, claws and farm
intelligence systems.
We have started to see the benefits of these efforts, which
underpin the long-term prosperity of the Group, during our 2016
financial year.
Research and development expenditure
Protection & Defence
£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
7.5
(4.3)
3.2
(2.5)
0.7
2.3
3.0
100.9
7.4%
Dairy
£m
0.8
-
0.8
(0.6)
0.2
0.2
0.4
42.0
1.9%
Total
£m
8.3
(4.3)
4.0
(3.1)
0.9
2.5
3.4
142.9
5.8%
UK retirement benefit obligations
The balance, as measured under IAS 19 (revised), associated with
the Group’s UK retirement benefit obligation, which has been
closed to future accrual, has moved from a £16.6m deficit at
30 September 2015 to a £40.0m deficit at 30 September 2016.
This movement has resulted from an increase in liabilities as
the AA corporate bond rate has fallen, partially offset by strong
performance from our return-seeking assets and Liability
Driven Investment.
During 2016, the Group paid total contributions of £0.7m
(2015: £0.8m).
The last 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 under the deficit recovery plan, the
payments for the Group financial years ending 30 September are
as follows: 2017: £0.7m and 2018: £0.7m. These amounts include
£0.3m p.a. in respect of administration expenses.
The Trustee is currently undertaking the 31 March 2016 valuation,
the results of which are due by 30 June 2017.
Research and development
Intangible assets relating to development costs totalling £19.2m
(2015: £16.2m) form a significant part of the balance sheet as we
invest in new product development. This can be seen from our
expanding product range in both Protection & Defence and Dairy.
The annual charge for amortisation of development costs was
£2.5m (2015: £1.9m).
Our total investment in research and development (capitalised
and expensed) amounted to £8.3m (2015: £7.1m) of which
£4.3m (2015: £3.9m) was customer funded and has been
recognised as revenue.
NH15 CO receives full NIOSH approval
Our unique CBRN/CO Escape Hood received NIOSH approval in the final
quarter of our financial year.
The NH15 CO is a revolutionary new carbon monoxide resistant, extremely
compact CBRN escape hood, based on Avon’s widely acclaimed NH15.
The NH15 CO offers unsurpassed levels of respiratory protection against
the dual threat of carbon monoxide and CBRN agents. It provides the
user the protection to escape from hazardous environments, particularly
when dangerously high levels of carbon monoxide are present or likely
in combination with other toxic materials and gases such as found in a
smoke filled environment.
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
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Key Performance Indicators (KPIs)
The Group uses a variety of performance measures which are detailed below.
12 MONTH MOVING TOTAL REVENUE
m
£
145
140
135
130
125
120
115
110
105
100
95
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 has increased in 2016, as both divisions have benefited from
the translation effect of a stronger US dollar. Dairy also benefited from
the acquisition of InterPuls in August 2015.
Sep
2015
Oct
2015
Nov
2015
Dec
2015
Jan
2016
Feb
2016
Mar
2016
Apr
2016
May
2016
Jun
2016
Jul
2016
Aug
2016
Sep
2016
I N C R E A S E D BY
6%
PROTECTION & DEFENCE ORDERS IN HAND
REASON FOR CHOICE
This demonstrates the orders in hand for fulfilment and future sales.
£33m
£21m
£12m
2014
£20m
£14m
£6m
2015
£20m
£9m
£11m
2016
DOD
NON DOD
RETURN ON SALES
18.4%
20.3%
21.6%
2014
2015
2016
HOW WE CALCULATE
This is measured at sales value.
COMMENTS ON RESULTS
We focused on fullfilling our DOD order book in 2016, hence as
expected our year end DOD order book is lower than in prior years.
This is offset by a higher non-DOD order book.
N O C H A N G E AT
£20m
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,
discontinued operations, defined benefit pension scheme costs and
exceptional items (EBITDA) divided by revenue.
COMMENTS ON RESULTS
We have succeeded in growing profit in our Protection & Defence
business through operational efficiencies and improved pricing on
our long-term DOD contract. In Dairy, an increasing proportion of
higher margin Milkrite | InterPuls sales and the careful management
of discretionary spending contributed to an increased return on sales.
I N C R E A S E D T O
21.6%
26
D E L I V E R I N G A N D B U I L D I N G G R O W T H n 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 6
TRADE WORKING CAPITAL
TO REVENUE RATIO
17.8%
20.8%
19.6%
2014
2015
2016
DILUTED EARNINGS PER SHARE
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
- trade payables and advance receipts from customers, expressed as
a percentage of revenue.
COMMENTS ON RESULTS
Overall, working capital was reasonably stable during the year
but was impacted at the year end by the strengthening of
the US dollar. Had the year end working capital balances been
translated at average exchange rates the ratio would have been lower
at 18.1%.
D E C R E A S E D T O
19.6%
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 discontinued operations,
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
2016 have contributed to an improved EPS position.
42.3p
54.6p
72.8p
2014
2015
2016
I N C R E A S E D T O
72.8p
Our non-financial KPIs in relation to health and safety are detailed in our Environmental and Corporate Social Responsibility report
on pages 34 to 41.
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
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Principal risks and uncertainties
The Group has an established process for the identification and
management of risk across the two divisions working within
the governance framework set out in our corporate governance
statement (see pages 47 to 51). 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,
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.
Each risk 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:
n Strategic risks – risks affecting
the strategic aims of the business, or
those issues that affect the strategic
objectives faced by the Group
n Financial risks – issues that
could affect the finances of the
business both externally and from
the perspective of internal controls
n Operational risks – matters arising
from the operational activities
of the Group relating to areas
such as procurement, product
development and interaction
with commercial partners
Risk management within the business involves:
n Identification and assessment
of individual risk
The principal risks identified through the risk management process
in October 2015 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.
n Design of controls
KEY
n Testing of controls through
internal audits
n Formulating a conclusion on
the effectiveness of the control
environment in place
LIKELIHOOD COLOUR INDICATOR:
n MOST LIKELY n LESS LIKELY
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 .
28
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
DUE TO THE ACQUISITION AC TIVIT Y, INTEGRATION RISK WAS CONSIDERED THE GROUP’S HIGHEST RISK .
TALENT MANAGEMENT IS CONSIDERED AN INCREASINGLY IMPORTANT PRIORIT Y FOR THE BUSINESS. THE
REMAINING RISKS HAVE BEEN RE- ORDERED ACCORDINGLY.
1
ACQUISITION INTEGR ATION
BUSINESS RISK
MITIGATION
LOSS OF KEY CUSTOMERS
PREPAR ATION AND EXECUTION OF
LOSS OF KEY EMPLOYEES
EROSION OF INTELLEC TUAL
PROPERT Y BASE
FAILURE TO INTEGR ATE
MANAGEMENT REPORTING
STRUC TURES AND DISCIPLINES
CROSS - FUNC TIONAL INTEGR ATION PL ANS
EARLY EMPLOYEE ENGAGEMENT BY ON -SITE
PRESENCE OF AVON MANAGEMENT
EARLY INTEGR ATION INTO EXISTING INTERNAL
CONTROL FR AMEWORK
LIK E LIH O O D
IM PAC T O N
SA L E S , COS T S &
PR O FI TA B I L I T Y
2
TALENT MANAGEMENT
BUSINESS RISK
MITIGATION
INSUFFICIENT SKILLS OF EMPLOYEES
FOCUS ON CELEBR ATING AND REWARDING
POOR ENGAGEMENT AND MOR ALE
DYSFUNC TIONAL ORGANISATIONAL
STRUC TURE /REPORTING LINES
ACHIEVEMENTS AND PROMOTING POSITIVE AC TION
BY EMPOWERING OUR PEOPLE AND ENGAGING
AND INVOLVING THEM THROUGH EFFEC TIVE
COMMUNICATION
CONTINUE TO REALIGN TEAMS AND STRUC TURES,
RECRUITING WHERE APPROPRIATE TO ENSURE
THAT AS THE BUSINESS GROWS THE STRUC TURE
REMAINS FIT FOR PURPOSE
LIK E LIH O O D
IM PAC T O N
AC TIVE MANAGEMENT BY SUCCESSION PL ANNING,
THE ANNUAL PERFORMANCE MANAGEMENT PROCESS
M ED I UM -T ER M COS T
& Q UA L I T Y I SSU E S
AND THE REWARD AND INCENTIVES STRUC TURE
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Principal risks and uncertainties (continued)
3
MARKET THREAT
BUSINESS RISK
L ACK OF SALES GROW TH
LOSS OF MA JOR CONTR AC T OR
BUSINESS TO COMPE TITOR E.G .
PRICE COMPE TITION IN THE DAIRY
MARKE T AND THE IMPAC T OF
MILK PRICES AND FEED COSTS
MITIGATION
SAFE T Y APPROVALS AND SOLE-SOURCE SUPPLY
CONTR AC TS PROVIDE SIGNIFICANT BARRIERS TO ENTRY
LIK E LIH O O D
CONTINUED INVESTMENT IN PRODUC T DEVELOPMENT
TO ENSURE COMPE TITIVE ADVANTAGE
SE T TING THE STR ATEGY 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
IM PAC T O N
SA L E S VO LUM E
& PR O FI TA B I L I T Y
4
PRODUC T DEVELOPMENT
BUSINESS RISK
MITIGATION
FAILURE TO MEE T REGUL ATORY
PUBLICATION OF AND ADHERENCE TO AN
PRODUC T/SYSTEM REQUIREMENTS
INTELLEC TUAL PROPERT Y MANUAL AND NEW
L ACK OF INVESTMENT IN
NEW PRODUC TS
FAILURE TO IDENTIFY AND IMPLEMENT
NEW PRODUC TS
PRODUC T INTRODUC TION (NPI) PROCESS
FOCUS ON DELIVERY OF PROJEC TS IN THE ROADMAP
ON TIME, TO BUDGE T AND COST
SALES AND PRODUC T DEVELOPMENT HAVE THE
OBJEC TIVE OF DELIVERING EX TERNAL FUNDING
AND NEW REVENUE STREAMS
LIK E LIH O O D
IM PAC T O N
SA L E S VO LUM E
& PR O FI TA B I L I T Y
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BUSINESS INTERUPTION – SUPPLY CHAIN
BUSINESS RISK
MITIGATION
LIK E LIH O O D
DEPENDENC Y ON SOLE
PR OAC T I V E A PPR OACH TO T H E A PPR OVA L O F
SUPPLIER /SUBCONTR AC TOR
SECO N D S O U R CE S A N D R ED U CI N G COS T
AVAIL ABILIT Y/QUALIT Y OF
R AW MATERIALS
FAILURE TO MANAGE DISTRIBUTORS
T H R O U G H PU R CHA SI N G I N I T IAT I V E S
R O B US T SU PPL I ER Q UA L I T Y
M A NAG E M EN T PR O CED U R E S
AND DEALERS CORREC TLY
N EG OT IAT I O N S W I T H CUS TO M ER S TO PA SS
O N I N CR E A SE S I N R AW M AT ER IA L PR I CE S
IM PAC T O N
COS T S , SA L E S &
PR O FI TA B I L I T Y
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6
QUALIT Y RISK S AND PRODUC T RECALL
BUSINESS RISK
MITIGATION
POOR QUALIT Y SYSTEMS
FOCUS ON SIX SIGMA MANUFAC TURING
ALLOW FAULT Y PRODUC T TO
DISCIPLINES, SITE QUALIT Y PROCEDURES
REACH CUSTOMER
AND EMPLOYEE ENGAGEMENT
PROCESS/MATERIAL /EQUIPMENT
FOCUS ON PRODUC T DEVELOPMENT TO
INADEQUAC Y E.G . OUR PROTEC TION
IMPROVE DESIGN OF PRODUC TS
PRODUC TS ARE SAFE T Y CRITICAL
THEREFORE ALL PRODUC T
REACHING THE END CONSUMER
MUST MEE T SPECIFICATION
CONTINUE WITH EQUIPMENT AND
PROCESS IMPROVEMENTS
LIK E LIH O O D
IM PAC T O N
FI NAN CIA L LOSS ,
R EPU TAT I O NAL
DA M AG E
7
CUSTOMER DEPENDENC Y
BUSINESS RISK
MITIGATION
OVER RELIANCE ON A FEW
FOCUS ON CUSTOMER SERVICE
CUSTOMERS E.G . US GOVERNMENT
GROWING SALES TO OTHER CUSTOMERS
POOR CUSTOMER REL ATIONSHIPS
E.G . CONTINUING TO EXPAND PROTEC TION SALES
AND COMMUNICATION DUE TO
INTO NEW COUNTRIES AND MARKE TS AND EXPANDING
INCOMPLE TE UNDERSTANDING
DAIRY SALES INTO DEVELOPING MARKE TS
OF CUSTOMERS OR FAILURE TO
MEE T EXPEC TATIONS
SE T TING AND REGUL AR MONITORING OF
SALES BUDGE TS AND MA JOR SALES PROSPEC TS
BY THE GROUP EXECUTIVE AND THE BOARD
LIK E LIH O O D
IM PAC T O N
SAL E S AN D
PR O FI TA B I L I T Y
8
NON - COMPLIANCE WITH LEGISL ATION
BUSINESS RISK
MITIGATION
LIK E LIH O O D
FAILURE TO COMPLY WITH
REGUL AR FOCUS AND REVIEW OF THE EXPORT
EXPORT CONTROLS,
AND ITAR CONTROL FR AMEWORK , NPI PROCESS
THE INTERNATIONAL TR AFFIC
AND THE INTERNAL CONTROL PROCEDURES
IN ARMS REGUL ATIONS (ITAR),
BRIBERY AC T AND
PRODUC T APPROVALS
INTERNAL AND EX TERNAL AUDIT
IM PAC T O N
FI NAN CIA L LOSS ,
R EPU TAT I O NAL
DA M AG E
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
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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 war
fighter 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 war fighter to remain stable, although
the timing of orders may again be unpredictable. At the year
end we carried forward orders for 30,000 M50 masks for delivery
in 2017. Since the year end we have received a further order for
131,000 mask systems from the DOD.
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. Avon is now one of two sources for filters for the DOD.
Protection & Defence – timing of non-DOD orders
The opportunity to sell our Protection & Defence products outside
of the DOD exists, and has been a successfully executed part of our
strategy and growth. It is however difficult to predict the timing
of when these opportunities will arise and how long the bid and
contract award processes will take. The material nature of these
opportunities means the timing of shipment can positively or
negatively impact any given reporting period.
Dairy – market conditions
The market for our consumable products can be affected by macro
issues that impact farmers’ short-term cash flow and thus their
purchasing patterns. Our semi-consumable products are affected
by these market cycles to a greater degree, although in this case
we see spend deferred to a period when market conditions are
more favourable to the farmer.
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 as well as global macro matters such as trading
sanctions and quotas. 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.
Argus manufacturing fully integrated
in Melksham
The Argus manufacturing cell has been successfully transferred from the
e2v site in Chelmsford to Melksham, with the first cameras coming off the
line in January.
Avon Protection acquired Argus, world leaders in thermal imaging
for firefighters and law enforcement officers, in October 2015. The
manufacturing cell was up and running in our existing facility in just four
months, demonstrating our operational flexibility and dedication of our
people to quickly integrate an acquired business.
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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 Treasury
Committee who report to the Board. The Group faces translation
currency exposure on its overseas subsidiaries and is exposed in
particular to changes in the US dollar and, following the acquisition
of InterPuls in 2015, the euro.
Brexit is not expected to have a significant impact on the Group.
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:
n Based on the 2016 results a 5¢ movement in the average US
dollar rate would have impacted reported operating profit by
£0.6m (2015: £0.7m) and profit after tax by £0.6m (2015: £0.6m).
n Based on the 2016 results a 5¢ movement in the average euro
rate would have impacted reported operating profit by £nil
(2015: £nil) and profit after tax by £nil (2015: £nil).
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 US dollar asset exposure is not hedged
as there are no dollar borrowings, the euro exposure is 9% hedged.
(2015: 10% dollar, 9% euro).
As a result of the remaining balance sheet exposure, the Group was
exposed to the following:
n Based on the 2016 balance sheet a 5¢ movement in the year-
end US dollar rate would have impacted Group net assets by
£2.2m (2015: £1.3m).
n Based on the 2016 balance sheet a 5¢ movement in the year-
end euro rate would have impacted Group net assets by £1.0m
(2015: £0.8m).
The Group is exposed to interest rate fluctuations but with net
cash at the year end (2015: net debt of £13.2m), a 1% movement in
interest rates would not impact the interest costs (2015: £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 (2015: £nil).
Rob Rennie
Chief Executive Officer
16 November 2016
Eric Fielding: 50 years service
Eric Fielding joined Avon Rubber on 18 July 1966 as a trainee estimator,
when he was just 16 years old. As part of his job, he worked out the costs of
supplying products and services. Eric commented “when I got the job I was
fortunate enough that there were not many people who were as good at
mental arithmetic as I was”.
Fast forward 50 years and Eric has become the longest serving employee at
Avon Rubber and has watched the business transform over the years.
Presenting his award, Sarah Matthews-DeMers commented “Eric has been
an invaluable, committed member of my team who has been happy to turn
his hand to anything the business needed”.
Congratulations and thank you for your hard work and dedication Eric!
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
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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 and corporate
social responsibility
The sustainability of the business is directly impacted by the
environment in which we operate. In order to secure the future of
the business we are committed to contributing to economic, social
and environmental sustainability both locally and globally. 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. At many of our sites we remain
one of the largest employers in the local area. As an integral part
of these communities we ensure our impact is one of being an
economic, intellectual and social asset.
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, restricting
unnecessary travel and saving water and energy.
As a company with many manufacturing sites a forward thinking
approach to the health and safety of our employees is of
paramount importance and we constantly endeavour to improve
our systems to maintain our excellent health and safety record.
We strive to:
n Manage the Group as a sustainable business for the benefit of
shareholders and other stakeholders
n Develop and motivate our employees, ensuring they are fully
engaged in the Group’s strategy
n Minimise waste and emissions that contribute to climate change
n Maintain our excellent standards of health and safety in
the workplace
Code of Conduct
Our Code of Conduct (‘The Code’) sets out the values and
standards of behaviour expected from employees with a guide
as to what is expected of them as representatives of Avon and
provides information on how to report concerns.
All those working for or on behalf of Avon are required to confirm
each year that they have read and understood the Code.
Ethics and anti-corruption
The Code covers a wide range of rules and responsibilities for
employees to ensure they carry out 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, adherence to
export controls, our approach to gifts and hospitality, bribery and
corruption and managing relationships with third parties.
We are committed to acting professionally, fairly and with integrity
in all our business dealings and relationships.
We implement and enforce effective systems to uphold our zero-
tolerance approach to bribery and corruption. To ensure we only
work with third parties whose standards are consistent with our
own, all agents and third parties who act on behalf of the Group
are obliged by written agreement to comply with the standards set
out in the Code. A programme of supplier audits exists to ensure
suppliers adhere to Avon’s standards.
Upholding the Code is the responsibility of all employees at Avon.
We encourage everyone to report any behaviour which may be
a breach of the Code, or is unethical or illegal. This is achieved
by fostering a culture of openness and accountability and by
providing a formal procedure that enables any individual working
Contributing to local youth
Andrew Lewis volunteers as a cricket coach at Goatacre Cricket Club,
coaching the Under 11 and Under 13 teams.
In 2015 the Under 11 team was unbeaten, winning both leagues they entered
and Andrew was honoured to be selected as Coach of the Year for Wiltshire
by the English Cricket Board.
He is pictured receiving his award this summer from the England team
batting coach Graham Thorpe at an international match played in
Southampton.
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for the Group to raise breaches of policy or malpractice directly at
the highest level.
A copy of the Code is available to all employees in addition to
being available on the Group website.
Human rights
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.
Modern slavery
The Modern Slavery Act addresses the role of businesses in
preventing modern slavery within their organisation and down
into their supply chain. The Company has a zero-tolerance
approach to modern slavery and is committed to acting ethically
and with integrity in all of its business dealings and relationships
and to implementing and enforcing effective systems and controls
to ensure modern slavery is not taking place anywhere in its
business or in any of its supply chains. Our first Modern Slavery Act
statement is being prepared and will be published on our website.
The statement will show the steps Avon has taken to ensure
slavery and human trafficking is not taking place in any part of our
business or supply chains.
Environmental responsibility
We consider protection of the environment and the environmental
impact of our business to be an essential part of our business operations.
We are committed to complying with all relevant legislation and to
operating in an environmentally responsible manner.
We are committed to minimising the impact of our operations
on the environment and encourage all employees to think
about ways of modifying their behaviour to reduce the impact
on the environment by for example, reducing waste, restricting
unnecessary travel, saving water and by reducing energy usage.
At the start of each year we set significant environmental
improvement goals. Each site has delivered a number of
improvements including:
Cadillac, US
n
Installed light sensors for energy savings
n Replaced lighting with LEDs
Picayune, US
Melksham, UK
n
Improved efficiency in our use of compressed air by replacing
site compressors with independent units on each press,
meaning they are utilised only when the press is running
n Heating timers introduced on infrequently used moulding presses
n Replacement of dated overhead lighting with fluorescent LEDs
throughout the facility
Recycling
At our UK sites we continue to recycle:
n Waste cardboard
n Paper
n Used products
n Toners and inks
n Waste polythene
n Metal
n WEEE
Environmental concerns
We have experienced no external environmental incidents or
concerns throughout 2016 at any of our locations.
Energy
The three main energy sources of electricity, gas and water used
at our Melksham site are being monitored on a weekly basis for
trends which differ from the normal distribution. The aim of this
is to recognise spikes in usage and implement improvements to
reduce energy consumption on these processes. It is hoped to roll
this approach out to the US sites in due course.
ISO 14001
External auditors visited Avon in 2016 to conduct a re-certification
of our ISO 14001 standard. The audit was very successful with no
deficiencies recorded.
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 preserving and protecting the
environment by:
n Reducing harmful effects on the environment
n Providing evidence of continual improvement of
environmental management
n Purchased new lifting equipment to improve the handling of
Environmental management system
chemicals, reducing the potential of spillages
n
Installed a berm liner in our test site to eliminate the use of
weed control chemicals
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; ISO 14001 accreditation is also beneficial
when tendering for new business.
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Legislation
Health and Safety (H&S)
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).
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.
Greenhouse Gas (GHG) emissions
Description
GHG
emissions
in tons
2014
GHG
emissions
in tons
2015
GHG
emissions
in tons
2016
2,378
2,340
2,198
Scope
1
Greenhouse gas
emissions derived
directly from our
operations including
gas usage and company
owned transport.
Scope
2
Mandatory reporting
of emissions from
electricity usage.
Avon is committed to safeguarding the health and safety of its
employees and contractors. All employees are encouraged to
take an active role in ensuring that our working environment
is a safe place to work and visit by actively reporting all safety
observations, being involved in safety audits, assessments and
regular training sessions.
Over the year monthly global H&S meetings are held at the UK
and US sites. Through information sharing, knowledge and ideas
we are able to implement best practice across our global sites and
create positive safety attitudes.
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.
Our management teams put considerable focus on potential
hazard reporting. This reporting ensures that any potential hazards
are reported early and appropriate action taken before they cause
an incident or an accident. These actions are key to ensure our
facilities are safe places in which to work.
Safety teams
Safety teams have been established at each of our facilities to
conduct internal audits, inspections and to lead by example,
further increasing the positive safety culture throughout our
organisation. The safety teams share best practice initiatives,
ensuring they are embedded throughout the group.
6,146
7,068
5,351
Below are listed some examples of health and safety
improvements implemented at our sites during 2016:
Cadillac, US
Total
8,524
9,408
7,549
n First aid and CPR training conducted
n
Improved security by updating all lock out procedures
Facility
Albinea
Belcamp
Cadillac
West Palm Beach
Johnson Creek
Melksham
Picayune
Total Annual
Scope 2 Emissions
Scope 2 tons CO²
emissions
2014
2014
average number of
employees
Scope 2 tons CO²
emissions
2015
2015
average number of
employees
Scope 2 tons CO²
emissions
2016
2016
average number of
employees
146
155
1,700
n/a
1,658
1,909
578
6,146
n/a
n/a
304
n/a
160
205
37
706
48
148
1,719
n/a
1,980
2,378
795
7,068
n/a
n/a
275
n/a
160
205
43
683
5
113
1,277
92
1,415
1,996
453
5,351
82
54
244
25
160
217
32
814
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n Added ergonomic desks to allow computer operators to stand
or sit
Picayune, US
n Use of protective eyewear implemented throughout the plant
n Bloodborne pathogens training conducted
n Plant-wide sound exposure level survey updated
Melksham, UK
n Re-introduction of monthly plant safety tours by management
n Review of work processes and introduction of more ergonomic
equipment for employees
n Lowest number of recorded accidents for five years
West Palm Beach, US
employees by matching the right people to the right roles and by
ensuring professional development opportunities are available
throughout their employment within the Group.
We strive to make Avon a great place to work and are committed
to providing a working environment where everyone feels
respected and valued and we pursue equality of opportunity in
all employment practices, policies and procedures regardless of
race, nationality, gender, age, marital status, sexual orientation,
disability and religious or political beliefs. A formal diversity policy
is in place, setting out our approach to diversity. A copy can be
found in the corporate governance section of our website.
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.
n Safety Kaizens completed throughout the factory
The gender of our staff at 30 September 2016 was as follows:
n
Installation of roll up doors with swinging doors and panic bars
Male
Female
n
Improved lighting throughout
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.
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
Non-Executive Directors
Executive Directors
Senior Managers
Other Employees
Total
2
2
16
485
505
1
-
5
320
326
Six of the senior managers (four male, two female) are also
Directors or officers of subsidiary undertakings.
Learning English at InterPuls
To help with the integration of InterPuls, we provided English language
training to staff with the aim of strengthening the language skills inside
the company.
The training involved 12 employees from different departments, with
varying levels of language capability. It was a challenging course with
over 60 hours of training involved which has improved communication
with their colleagues in the UK and the US ever since.
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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
Recognition
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.
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. 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. The
Melksham Annual Site winner, Ross Heard, is pictured below with
Rob Wills, Plant Manager and Rob Rennie, Chief Executive Officer.
Communication
We recognise the importance of employee
engagement, and effective communication
throughout the business is vital in
achieving this. We regularly communicate
our strategy, performance and business
priorities to all employees in a variety of
ways, including through our intranet sites,
email and regular newsletters as well as through regular employee
meetings at all levels of the organisation. We also encourage
employees to communicate and feed back to the business, either
face to face or through discussion boards on our intranet. All
employees have the ability to make suggestions directly to the CEO.
Part of the communication programme is our employee opinion
survey. The survey gives employees the opportunity 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 each level of management and it
will continue to be a platform that helps Avon invest in its people
and drive success.
Great Place to Work
Great Place to Work is a framework that gives every employee an
opportunity to contribute towards a culture that truly does make
Avon a great place to work. The framework is made up of five key
areas: Recognition, Communication, Training & Development,
Wellbeing and Community.
Our core values
C
R
E
E
D
Understanding and delivering
our customer (internal/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.
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Training and Development
Wellbeing
We want to attract, retain and develop
talented individuals.
We strive to provide an environment
which offers the right training and
development to ensure we retain our
employees, providing the support needed
to enable them to achieve their potential
Under our wellbeing initiative, we offer
healthy lifestyle support and advice, with
the aim of encouraging better health and
wellbeing for all employees.
We believe wellbeing works best when
the experience is a shared one, we have
regular global wellness challenges for
and become the future leaders of our business. We provide a
combination of formal training opportunities and on the job
experience.
our employees to take part in to help stimulate small changes to
improve their overall health. These include challenges related to
increasing activity levels, eating healthier and drinking more water.
Our flagship global Professional Development Programme has
just finished its second cycle (pictured below). The programme
enables participants across our business to manage their own
career development through setting self-learning objectives with
the help and guidance of a mentor from the senior leadership
team and an external facilitator. We will be rolling out this style of
learning on a wider basis throughout our 2017 financial year.
Through a new initiative, employees can apply for training grants
for qualifications they wish to work towards. Avon funds half of
the tuition fees and loans the other half to the employee, to be
paid back over time. So far, the initiative has helped the continued
development of our marketing, PR and engineering departments.
On top of this we also offer numerous positions for placement
students in our engineering team, both in the US and the UK.
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 also offer work experience placements.
Our graduate recruitment scheme is now in its second year, with
two further individuals joining the company in September to
support the growing need of our business. The scheme is based
on a two year ‘work and learn’ programme designed to bring new
talent to our organisation.
We also had our first global wellness week earlier in the year.
There were a variety of activities on offer at all of our sites
including healthy eating options in our canteens, a wellness fair
and health quizzes.
Community
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.
Our community programme is led from the bottom up rather than
top down, which means each site is empowered to create their
own initiatives to help benefit their local community. 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 are involved
in some way with 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.
It’s not just about supporting our local communities, it’s also about
creating a community at work. That’s why we offer opportunities
for our employees to establish relationships with each other
outside of their day to day job. From football matches to bake
sales and even a few charity drives, we want our employees to feel
embedded within the culture of the organisation.
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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
Listed below are just a few examples of the organisations we have
helped this year across our US and UK sites:
Iain’s mad mask dash
Wiltshire Community Foundation
The Company established a fund with a local community charity in
Wiltshire, the Wiltshire Community Foundation (WCF), in 1993. This
fund was invested by the WCF and the interest earned to date has
been used to support a wide range of charities and groups in the
Wiltshire area.
Since 2001, £42,858 has been donated from this fund to the local
community surrounding the Melksham headquarters.
In March, Iain Thomson, our
Training and Consultancy
Manager from Avon Protection,
ran, jogged and walked the
eight miles from his home to
our head office in Melksham
wearing Avon’s CS-PAPR to raise
funds for Sport Relief. He raised
£967 - a fantastic achievement
- and proved the capabilities of
our CS-PAPR!
Iain also helped to raise
awareness for combat veterans
suffering from PTSD by
completing the 22 day push-up
challenge whilst wearing Avon
respirators.
In total 46 projects have been supported. Here are a few examples:
Splash Pad project at the Friendship Park
Alzheimer’s Support is an independent charity offering a range
of services to people living with all types of dementia and their
family carers in East and West Wiltshire. A grant helped to fund
Art Projects for people with Alzheimer’s and their carers to enable
them to both enjoy taking part in creative activities together.
Dorothy House Hospice offers end of life care and support, as well
as therapies and clinics for life-limiting illnesses. Funding went
towards the overhead costs of staff for the Trowbridge outreach
centre over three years.
Hope Nature Centre provides education, training and support of
adults with special needs to promote independence and personal
development through employment and leisure opportunities. A
grant contributed to the purchase of play equipment for children
with disabilities.
Jamie Rogers, AEF General
Manager, presented a donation
on behalf of AEF employees to
contribute to the construction
of the Splash Pad project at the
Friendship Park in Picayune.
The Lower Pearl River Valley
Foundation granted $50,000 for
the project but the total cost
of construction was $77,280
so the city had to raise the difference by community donation.
The purpose of the Splash Pad is to bring people into the local
area, increase revenues for local businesses and to provide family
centered entertainment.
Avon celebrates its first global
wellness week
As part of the Great Place to Work Programme, Avon celebrated its first
global wellness week across all sites in March 2016. Employees were invited
to take part in various activities which all encouraged a healthy lifestyle.
Some of the highlights included a wellness fair at Belcamp, where our
employees were educated on financial health, spinal wellbeing and
relaxation techniques, and a health quiz at our Melksham site, the winners
of which (pictured) were presented with a selection of fruit and vegetables.
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Jefferson County Humane Society
Project Christmas
Johnson Creek has been giving back to the local community by
participating in multiple donation drives this year. One of these
drives was for the Jefferson County Humane Society whose
mission is to care for the lost, homeless and abused animals of
Jefferson County and help place them in forever homes. Over five
boxes of food, toys and cleaning supplies for pets were collected.
APS Cadillac donated a total of
3,442lbs of food to the Project
Christmas program. Project
Christmas has had the privilege
of serving Wexford county since
1989 and is built on the guiding
principle “to provide a Christmas
for families that otherwise might
FC Chippenham Youth Girls
With a focus on fun, long-term player development and a friendly,
inclusive team spirit, FC Chippenham Youth Girls are an FA Charter
Standard football club that play competitive league and cup games
in the Wiltshire County Womens & Girls League.
There are more than 65 girls affiliated over five teams ranging from
Under 10s to Under 12s - Emeralds, Onyx, Amethyst, Sapphires and
Diamonds. To support the girls to play football, develop their skills,
make new friends and just have a great time, Avon Protection are
pleased to have sponsored the teams for the 2015-2016 season to
help fund kit as well as directly providing coaching support.
not have one by joining together in a collaborative effort”. With
the caring support of individuals, organizations and churches they
were able to serve 974 families in 2015.
Other organisations
Listed below are a few more examples of the organisations we
have helped this year across our US and UK sites:
n Wiltshire Citizens Advice
n West Wilts Multi Faith Forum
n Carer Support Wiltshire
n Wiltshire Music Centre
n SPLITZ Support Services
n Red Nose Day
n Wiltshire Air Ambulance
n Macmillan Cancer Support
n Stehouwer Free Clinic
n Back Pack Programme
n United Way
n The Salvation Army
n Michigan Advanced Technician Training
n City of Picayune Community Splash Pad
n Cadillac Chamber of Commerce Leadership
n Cancer Research UK
n Royal Marines Charity
n Melksham & Corsham Gateway Club
Miles Ingrey-Counter
Company Secretary
16 November 2016
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B O A R D O F D I R E C T O R S
D A V I D E V A N S | C H A I R M A N
Aged 70. 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.
R O B R E N N I E | C H I E F E X E C U T I V E O F F I C E R
Aged 52. Rob joined as Chief Executive in December 2015 from the global engineering company
Invensys p.l.c. where he worked for more than 20 years. As a member of the Executive Team at
Invensys, Rob was President of the Energy Controls Division which operated internationally under
the Eurotherm, Residential Controls, IMServ, and Eliwell brands. Previous Executive roles included
responsibility for Foxboro M&I, Eckhardt and the EURA region for Invensys operations management. He
began his career on the shop floor then moved through to sales and marketing roles before taking up
business leadership positions.
A N D R E W L E W I S | G R O U P F I N A N C E D I R E C T O R
Aged 45. 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. He was awarded the Finance Director of the Year Award at the
Quoted Company Awards in 2016 and 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.
P I M V E R V A AT | N O N - E X E C U T I V E D I R E C T O R
Aged 51. Pim joined the Board in March 2015 and chairs the Audit Committee. Pim is Chief Executive of
RPC Group Plc, the UK based manufacturer of rigid plastic packaging and a FTSE 250 listed company.
Pim was appointed RPC’s CEO in 2013, having previously been their Finance Director since 2007.
Prior to this, Pim worked for Dutch metals producer, Hoogovens Groep, before joining Dutch ship
propulsion producer Lips Group as Chief Financial Officer in 1996. In 1999 he returned to Hoogovens
Groep (acquired by Corus) and in 2004 became divisional Finance Director of the £3bn turnover Corus
Distribution and Building Systems Division.
C H L O E P O N S O N B Y | N O N - E X E C U T I V E D I R E C T O R
Aged 40. Chloe joined the Board in March 2016 and chairs the Remuneration Committee. Chloe is a
founding partner at The Lazarus Partnership, an independent equity research and advisory firm based
in London. Prior to Lazarus, Chloe was a senior corporate broker at stockbrokers Oriel Securities and
Altium Capital, where she set up and managed the Corporate Broking and Investor Relations teams.
Chloe started her career as a fund manager at Jupiter Asset Management.
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D I R E C T O R S ’ R E P O R T
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 2016. The Company is registered in England and Wales with company
registration number 32965. The Company’s principal subsidiary undertakings and branches, including those located outside the UK, are
listed in note 27 to the financial statements.
Strategic Report
The Strategic Report, which contains a review of the Group’s
business (including by reference to key performance indicators),
a description of the principal risks and uncertainties facing the
Group, and commentary on likely future developments is set out
on pages 11 to 33 and is incorporated into this Directors’ report
by reference.
Financial results and dividend
The Group statutory profit for the year after taxation amounts
to £18,279,000 (2015: £13,666,000). Full details are set out in the
Consolidated Statement of Comprehensive Income on page 74.
An interim dividend of 3.16p per share was paid in respect of the
year ended 30 September 2016 (2015: 2.43p).
The Directors recommend a final dividend of 6.32p per share (2015:
4.86p) resulting in a total dividend distribution per share for the
year to 30 September 2016 of 9.48p (2015: 7.29p).
Share capital
The 718,789 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.
The Company is also not aware of any agreements between its
shareholders which may restrict the transfer of their shares or the
exercise of their voting rights. The only exception to this being the
Trustees of the two Employee Share Ownership Trusts have waived
their rights to dividends.
At the Company’s last annual general meeting (AGM) held on
26 January 2016, shareholders authorised the Company to make
market purchases of up to 4,653,492 of the Company’s issued
ordinary shares. No shares were purchased under this authority
during the year. A resolution will be put to shareholders at the
forthcoming AGM to renew this authority.
The Directors require authority to allot unissued share capital to
the Company and to disapply shareholders’ statutory pre-emption
rights. Such authorities were granted at the 2016 AGM and
resolutions to renew these authorities will be proposed at the 2017
As at 16 November 2016, the issued share capital of the Company
AGM, see explanatory note on page 136. No shares were allotted
was 31,023,292 ordinary shares of £1 each. Details of the shares in
under this authority during the year.
issue during the financial year are set out in note 20 of the
financial statements.
The rights and obligations attaching to the Company’s shares are
set out in the Company’s Articles of Association (Articles), copies
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
Substantial shareholdings
At 7 November 2016, the following shareholders held 3% or more
of the Company’s issued ordinary share capital:
BlackRock Investment Management
meetings, to exercise voting rights in person or by appointing
Schroder Investment Management
a proxy and to receive a dividend where declared or paid out of
profits available for that purpose. There are no restrictions on
Hargreave Hale & Co
the transfer of issued shares or on the exercise of voting rights
JPMorgan Asset Management
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 of the
Franklin Templeton Investments
Henderson Global Investors
Companies Act 2006, or where the holder is precluded from
River & Mercantile Asset Management LLP
transferring or voting by the Financial Services Authority’s Listing
Rules or the City Code on Takeovers and Mergers.
10.36%
9.85%
4.46%
4.30%
4.16%
3.55%
3.30%
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D I R E C T O R S ’ R E P O R T
Significant Agreements – change of control
The only significant agreements to which the Company is a party
which take effect, alter or terminate upon a change of control of
the Company following a takeover bid are:
n the Company’s revolving credit facility agreement; and
n the Performance Share Plan.
The unsecured revolving credit facility of $40 million provided by
The Board is satisfied that Mr D. Evans, Mr P. Vervaat and Miss C.
Ponsonby are independent Non-Executive Directors.
In accordance with the UK Corporate Governance Code and
the Company’s Articles, all Directors are subject to election by
shareholders at the first AGM after their appointment, and to re-
election thereafter at intervals of no more than three years. Non-
Executive Directors who have served longer than nine years are
subject to annual re-election.
Barclays Bank PLC and Comerica Bank Inc., contains a provision
Mr D. Evans retires by rotation and, being eligible, offers himself for
which, in the event of a change of control of the Company, gives
re-election. The Board confirms that Mr D. Evans has contributed
the lending banks the right to cancel all commitments to the
Company and to declare all outstanding credit and accrued
interest immediately due and payable.
A change of control will be deemed to have occurred if any person or
substantially to the performance of the Board. Mr P. Vervaat, the
Senior Independent Non-Executive Director, gives his full support
to Mr D. Evans’ offer of re-election and draws the attention of
shareholders to his profile on page 42.
persons acting in concert (as defined in the City Code on Takeovers
Mr R. Rennie retires by rotation and, being eligible, offers himself for
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 Company does not have agreements with any Director or
employee that would provide compensation for loss of office or
employment resulting from a change of control, except in relation
to the Performance Share Plan as described above.
Directors
re-election. The Board confirms that Mr R. Rennie has contributed
substantially to the performance of the Board since his appointment
and the Chairman gives his full support to Mr R. Rennie’s offer of re-
election and draws shareholders to his profile on page 42.
Miss C. Ponsonby, who, having been appointed since the
Company’s last AGM, retires in accordance with Article 79 of the
Articles and, being eligible, offers herself for re-election. The Board
confirms that Miss C. Ponsonby has contributed substantially to
the performance of the Board since her appointment and the
Chairman gives his full support to Miss C. Ponsonby’s offer of re-
election and draws shareholders to her profile on page 42.
All Executive Directors’ service contracts with the Company require
one year’s notice of termination. Neither Mr A. Lewis or Mr R.
Rennie is currently appointed as a Non-Executive Director of any
The names of the Directors as at 16 November 2016 are set out on
page 42 along with their photographs and biographies.
company outside the Group.
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.
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 ordinary
shares of the Company can be found on page 70.
During the year there have been three changes to the membership
Directors’ and Officers’ indemnity insurance
of the Board. Mr R. Rennie assumed the role of Chief Executive on
1 December 2015 following the retirement of Mr P. Slabbert on 30
September 2015. Mr R. Wood retired from the Board with effect
from the conclusion of the AGM on 26 January 2016 and Miss C.
Ponsonby was appointed as his replacement as Director and Chair
of the Remuneration Committee on 1 March 2016.
Mr P. Vervaat replaced Mr R. Wood as the Senior Independent Director.
In accordance with the Company’s Articles and subject to the
provisions of the Companies Act 2006 (‘the Act’), the Company
maintains at its expense, Directors and Officers insurance to
provide cover in respect of legal action against its Directors.
The Company’s Articles 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
On 18 October 2016 the Company announced that Mr A. Lewis,
Directors and Company Secretary which is a qualifying third party
Group Finance Director, will step down on 30 November 2016.
indemnity provision for the purposes of the Act.
Mr P. Rayner will be appointed Interim Group Finance Director on
1 December 2016.
44
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Conflicts of interest
Post balance sheet events
During the year no Director held any beneficial interest in any
There have been no material events from 30 September 2016 to
contract significant to the Company’s business, other than a
the date of this report.
contract of employment. The Company has procedures set out in
the Articles for managing conflicts of interest. Should a Director
become aware that they, or their connected parties, have an
interest in an existing or proposed transaction with the Group, they
are required to notify the Board as soon as reasonably practicable.
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 fields of respiratory protection, dairy milking
technology and polymer 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
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.
Statement of Directors’ responsibilities in
respect of the Annual Report and the Financial
Statements
The Directors are responsible for preparing the Annual Report and
the Group and Parent Company financial statements in accordance
with applicable law and regulations.
research and development in the year was £8,341,000 (2015:
Company law requires the Directors to prepare Group and
£7,139,000) further details of which are contained in the Strategic
Company financial statements for each financial year. The Directors
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.
Corporate governance
The Company’s statement on corporate governance can be
found in the Corporate Governance Report on pages 47 to 51. The
Corporate Governance Report forms part of this Directors’ Report
and is incorporated into it by cross-reference.
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 41.
Greenhouse gas emissions
The disclosures concerning greenhouse gas emissions required
by law are included in the Environment and Corporate Social
Responsibility Report, on page 36.
Political and charitable contributions
No political contributions were made during the year or the prior
year. Contributions for charitable purposes amounted to £15,528
(2015: £17,053) consisting exclusively of numerous small donations
to various community charities in Wiltshire, Maryland, Michigan,
Wisconsin and Mississippi.
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 Financial Reporting Standard 101 Reduced
Disclosure Framework (FRS 101). 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:
n Select suitable accounting policies and then apply them
consistently
n Make judgements and accounting estimates that are
reasonable and prudent
n 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
n 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
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45
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D I R E C T O R S ’ R E P O R T
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 for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
Statement that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
RETURN ON SALES
INCREASED TO
21.6%
Having taken advice from the Audit Committee, the Board
considers that the Annual Report and Accounts, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s performance,
business model and strategy.
Each of the Directors, whose names and functions are listed on
page 42 confirm that, to the best of their knowledge 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.
Independent auditors
Each of the Directors who held office at the date of approval of this
Directors’ Report confirm that, 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.
The auditors, PricewaterhouseCoopers LLP, have indicated their
willingness to continue in office and a resolution concerning their
reappointment will be proposed at the annual general meeting.
PROFIT BEFORE
TAX UP
9%
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 2 February 2017 at 10.30am. The Notice of Meeting can be found
on pages 134 to 139. Registration will be from 10:00am.
Miles Ingrey-Counter
Company Secretary
16 November 2016
46
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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 throughout 2016, Avon has complied
with the Code, save in the following three respects.
Firstly, the Senior Independent Director does not attend meetings
with the major shareholders to listen to their views (which is
explained further below).
Secondly, the annual performance review of the Board has been
postponed to take place in March 2017, outside the current
financial year to allow the new Board members sufficient time in
their roles before undertaking a formal evaluation.
Finally, our new Chief Executive, Mr R. Rennie, was appointed on
1 December 2015. Under the Code, Directors are required to retire
and be re-appointed at the first AGM after their appointment. As
Mr R. Rennie was appointed after the notice of AGM had been
circulated, Mr R. Rennie did not retire and offer himself for re-
appointment and will instead retire at this year’s AGM.
This statement will address 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 55 to 73.
The Board has an established framework of internal controls
covering both financial and non-financial controls. In addition,
there is an ongoing process for identifying, evaluating and
managing significant business risks faced by the Group. This
process was in place throughout the 2016 financial year and
accords with the Revised Guidance for Directors on Internal
Control (formerly called the Turnbull Guidance).
The Board
During the year there have been three changes to the membership
of the Board. Mr R. Rennie assumed the role of Chief Executive on
1 December 2015 following the retirement of Mr P. Slabbert on 30
September 2015. Mr R. Wood retired from the Board with effect
from the conclusion of the AGM on 26 January 2016 and Miss C.
Ponsonby was appointed as his replacement as Director and Chair
of the Remuneration Committee on 1 March 2016.
The Board comprises the Chairman, two 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. Following the retirement of Mr R. Wood
from the Board at the conclusion of last year’s AGM, Mr P. Vervaat
was appointed 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 42. 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.
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47
C O R P O R AT E G O V E R N A N C E
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:
n Approval of the annual operating budget and the three
year plan
n The extension of the Group’s activities into new business and
geographic areas (or their cessation)
n Changes to the corporate or capital structure
n Financial issues, including changes in accounting policy, the
approval of dividends, bank facilities and guarantees
n Changes to the constitution of the Board
n 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
n The approval of unbudgeted capital expenditure
exceeding £250,000
n The approval of quotations and sale contracts where the sales
commission payable to an intermediary exceeds 10% of the
net invoice price
n 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 a tailored induction to
the Group 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.
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. Mr P. Vervaat is Chairman of the Audit
Committee. The Board is satisfied that Mr P. Vervaat has recent
relevant financial experience and his profile appears on page 42.
Mr D. Evans is Chairman of the Nominations Committee and
Miss C. Ponsonby 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 55 to 73.
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.
48
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Attendance at meetings
The Board schedules eight regular meetings per year. This year
two further meetings were held on an ad hoc basis, by telephone
conference, in connection with the timing of the release of the
Company’s 2015 results and to provide an update to the 2016
trading position. All Committee and Board meetings held in the
year were quorate. Directors’ attendance during the year ended
30 September 2016 was as follows:
Meetings during year ended 30 September 2016
Board
Audit
Committee
Remuneration
Committee
Nominations
Committee
D. Evans
R. Wood**
R. Rennie ***
A. Lewis
P. Vervaat
C. Ponsonby ****
8
2
6
7
8
5
3
1
2*
3*
3
2
4
2
2*
2*
4
2
*
**
Attendance by invitation
R. Wood retired from the Board on 26 January 2016
*** R. Rennie was appointed to the Board on 1 December 2015
**** C. Ponsonby was appointed to the Board on 1 March 2016
Performance evaluation
2
-
2*
-
2
-
The formal performance evaluation of the Board is scheduled to
take place in March 2017, falling outside the financial year under
review. The review was delayed until after the end of the financial
year to enable the new appointees to the Board, Mr R. Rennie
(appointed 1 December 2015) and Miss C. Ponsonby (appointed
1 March 2016) to have sufficient time in their roles before taking
part in a formal evaluation.
Relations with shareholders
The Directors regard regular communications with shareholders as
extremely important. All members of the Board receive copies of
analysts’ reports of which the Company is made aware.
The Board reports formally to its shareholders in a number of ways,
including: regulatory news announcements or press releases in
response to events or routine reporting obligations, issuing a detailed
Annual Report and Accounts and, at the half year, an interim report.
Regular dialogue takes place with institutional shareholders
including presentations after the Company’s preliminary
announcements of the half and full year 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 AGM
and also have the opportunity to leave written questions with the
Company Secretary for the response of the Directors. The Directors
also make themselves available after the AGM to talk informally to
shareholders, should they wish to do so and respond throughout the
year to any correspondence from individual shareholders.
At the AGM on 2 February 2017, 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
level of proxies received for each AGM resolution is declared after
the resolution has been dealt with on a show of hands providing
no poll has been called for. 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.
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
all Non-Executive Directors. 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 through the Company Secretary.
Accountability and audit
The Code requires that Directors review the effectiveness of the
Group’s system of internal controls on a continuing basis. 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 a framework of internal controls 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.
152%
OF OPERATING
PROFIT CONVERTED
TO CASH
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49
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C O R P O R AT E G O V E R N A N C E
The section on internal control in the Audit Committee Report on
pages 53 to 54 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
28 to 31.
OPERATING
PROFIT UP
8%
Risk management
Risk is managed by the Group Executive team during the year, led
by the Company Secretary and the Chief Executive. The Group
Executive team sets its key priorities for successfully managing
the Group’s businesses. 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 FRC’s Revised
Guidance on Internal Control: Guidance to Directors.
The risk management process
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 control 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.
IDENTIFICATION
ASSESSMENT
AND
ANALYSIS
RISK
REGISTER
REVIEW OF
EFFECTIVENESS
OF CONTROL
ELIMINATION
/ MINIMISE /
CONTROL OR
TRANSFER
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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.
Long-term viability statement
The Directors have assessed the viability of the Group over a three
year period to September 2019, taking account of the Group’s
current position and the potential impact of the principal risks
documented in the Strategic Report. Based on this assessment, the
Directors have a reasonable expectation that the Company will be
able to continue in operation and meet its liabilities as they fall due
over the period to September 2019.
Disclosure and transparency rules (‘DTR’)
Disclosures in respect of the DTR requirements under DTR 7.2.6 are
given in the Directors’ Report on pages 43 to 46 and have been
included by reference.
In making this statement the Directors have considered the
resilience of the Group, taking account of its current position,
the principal risks facing the business in severe but reasonable
scenarios, and the effectiveness of any mitigating actions.
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.
This conclusion is based on a review of the resources available
to the Group, taking account of the Group’s financial projections
together with available cash and committed borrowing facilities.
In reaching this conclusion, the Board has considered the
magnitude of potential impacts resulting from uncertain future
events or changes in conditions, the likelihood of their occurrence
and the likely effectiveness of mitigating actions that the Directors
would consider undertaking.
This assessment has considered the potential impacts of these risks
on the business model, future performance, solvency and liquidity
over the period.
The Directors have determined that the three-year period to
September 2019 is an appropriate period over which to provide
its viability statement. In making their assessment, the Directors
have taken account of the Group’s net cash position (see note 19),
its ability to raise new finance in most market conditions and other
potential mitigating actions such as restricting dividend payments.
Pim Vervaat
Chairman of the Audit Committee
16 November 2016
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
51
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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 Board’s diversity policy can be found in the Corporate
Governance section of the Company’s website.
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 41.
Recent appointments to the Board
During the year, the Committee recommended to the Board the
appointment of Miss C. Ponsonby as Non-Executive Director and
Chair of the Remuneration Committee.
The Committee initiated the recruitment process following
the retirement of Mr R. Wood in January 2016. The Committee
re-visited the list of potential candidates provided to them by
external recruitment consultants, Korn Ferry in connection with
the appointment of Mr P. Vervaat in 2015 and considered some
suggested candidates put forward by the Group Executive team.
The potential candidates were considered on the basis of their
skills and experience in the context of the range of skills and
experience of the existing Board as a whole and shortlisted for
interview with members of the Nominations Committee and the
Chief Executive. On the recommendation of the Nominations
Committee, the Board approved the appointment of Miss C.
Ponsonby with effect from 1 March 2016.
Korn Ferry have no other connection with the Company and are an
independent provider of services to the Company.
David Evans
Chairman
16 November 2016
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 Committee met twice during the year in connection with
identifying a replacement for Mr R. Wood who retired on
26 January 2016.
Main responsibilities
The main responsibilities of the Committee are as follows:
n To lead the process for identifying and nominating candidates
for the approval of the Board, to fill Board vacancies as and
when they arise
n To put in place plans for succession
n 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
n The Committee’s terms of reference are available within the
Corporate Governance section of the Company’s website
All Directors are appointed by the Board following a rigorous
selection process and subsequent recommendation by the
Committee. Board appointments are made on merit, against
criteria identified by the Committee having regard to the benefits
of diversity on the Board, including gender.
The Nominations Committee is also responsible for the Board’s
policy on diversity.
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.
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A U D I T C O M M I T T E E R E P O R T
Main responsibilities
n Reviewing the effectiveness of the Company’s financial
reporting, internal control policies and procedures for the
identification, assessment and reporting of risk
n Reviewing significant financial reporting issues and judgements
n Monitoring the integrity of the Company’s financial
statements
n Keeping the relationship with the auditors under review,
including their terms of engagement, fees and independence
n Monitoring the role and effectiveness of the internal
audit function
n 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 reports from management and
the external auditors. The main areas of focus considered by the
Committee during 2016 were as follows:
n The presentation of the financial statements and, in particular,
the presentation of adjusted performance and the adjusting
items. The Committee reviewed a paper prepared by
management and reviewed the disclosure of adjusted items
within the Group’s full year and half year results, agreeing that
the position taken in the financial statements is appropriate
n Review of the key judgements made in estimating the Group’s
tax charge. The review and discussion included an update
on the current position and the status of discussions with
the relevant tax authorities. The Committee agreed that the
position taken in the financial statements is appropriate
n The need to perform an impairment review in respect of
intangible assets and goodwill on acquisition. Following
review of a report summarising the key issues in relation to
impairment, the Committee concurred with management’s
assessment that there were no triggering events in 2016
requiring an impairment review except for goodwill arising
on acquisitions where such a review is mandated by IFRS. The
Committee concurred with management’s assessment that
the carrying value of goodwill was not impaired
n Review of the value ascribed to the intangible assets of the
acquisition made during the year. The Committee reviewed
a paper prepared by management summarising the key
judgements and agreed that the position taken in the financial
statements is appropriate
n Review of the ongoing funding level of the defined benefit
pension scheme. As the costs, assets and liabilities are
regularly reviewed and advice is taken from an independent
actuary on the appropriateness of the assumptions used, the
Committee agreed this was being managed appropriately
n At the request of the Board, the Committee considered whether
the 2016 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. Having taken account of the other
information provided to the Board throughout the year, the
Committee was satisfied that, taken as a whole, the annual
report was fair, balanced and understandable
The Committee was content, after due challenge and debate,
with the assumptions made and the judgements applied in the
accounts and 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 trading 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.
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A U D I T C O M M I T T E E R E P O R T
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.
For the 2016 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
as 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.
PricewaterhouseCoopers LLP (PwC) have been the Company’s
external auditors for over 20 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, which occurred in 2015 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 with tax compliance services 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, after which
date the Company will undertake a full tender process. 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 86 of the financial
statements. No non-audit services were carried out by PwC during
the year. 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 2016 and 2017. 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.
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 FRC’s revised guidance on
Internal Control: Guidance to Directors.
Risk management activities are dealt with in more detail in the
Corporate Governance Report on pages 47 to 51.
Pim Vervaat
Chairman of the Audit Committee
16 November 2016
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R E M U N E R AT I O N R E P O R T
Letter from the Chairman of the Remuneration Committee
On behalf of the Board, I am pleased to present my first Directors’
Remuneration Report for the year ended 30 September 2016 following
my appointment to the Board and as Chair of the Remuneration
Committee on 1 March 2016.
The Remuneration Report is split into three sections:
n This Annual Statement summarising the work of the Remuneration
Committee in 2016;
n The Directors’ Remuneration Policy (the ‘Policy’) as approved at the
last AGM; and
n The Annual Report on Remuneration, which provides details of the
remuneration earned by Directors in the year ended 30 September
2016 under the Policy. This will be the subject of an advisory vote at
the forthcoming AGM.
n Vesting of the 2010 Performance Share Plan (PSP) in December
2015, based on the agreed measures of relative Total Shareholder
Return (TSR) and Earnings Per Share (EPS) growth over the three
years to 30 September 2015. The overall vesting level achieved for
these awards was 100%.
n The Directors’ Remuneration Policy was approved by shareholders
at the Annual General Meeting on 26 January 2016 and will remain
in effect for three years or until shareholders are asked to approve
an amended version. Although the Policy was comfortably
approved, we received some feedback from shareholders in
relation to the one off bonus and disclosure of actual bonus targets
and have therefore included some clarification on these matters in
the existing Policy to address these comments. The Policy Report is
not subject to a shareholder vote this year.
2016 Performance
As set out in the Strategic Report, the results for the year ended 30
September 2016 reflect a good performance for the year, in what have
been challenging market conditions. Increases were seen in revenue
(6%) adjusted operating profit (8%) and adjusted earnings per share
(33%). Strong financial management has produced excellent cash
conversion, meaning we ended the year with net cash of £2.0m.
In addition, we have successfully integrated our recent acquisitions,
which broaden our product range and routes to market.
Remuneration Committee activities in 2016
The key decisions made by the Remuneration Committee (‘the
Committee’) in respect of 2016 remuneration were as follows:
n
In accordance with our Policy, the basic salary for each Executive
Director is reviewed and benchmarked every three years, with
increases only implemented if current salary levels were found to
be below the median of a comparator group. The previous review
was in 2013 and therefore a review and benchmarking exercise
was conducted during this financial year. Non-Executive Director
fees were reviewed in 2014 and are frozen under the terms of the
existing Policy until October 2017.
n The bonus outcomes for the Executive Directors were determined
by reference to performance against the agreed financial and
strategic business targets, as well as the Committee’s assessment
of their individual performance and delivery of personal objectives.
The Company’s financial performance for the year, together with
the assessment of individual performance and contribution,
resulted in bonus awards for the Executive Directors at 67% of
maximum for Mr A. Lewis and 52% of maximum for Mr R. Rennie.
Link between remuneration and Company
strategy
The Committee seeks to support the delivery of the Group’s strategy
through establishing appropriate remuneration arrangements. The
Policy is designed to align the Executive Directors’ interests with those
of shareholders, and to incentivise the Executive Directors to meet the
Company’s financial and strategic objectives by making a significant
proportion of remuneration performance-related. The Group’s financial
and strategic objectives are set out in the Strategic Report on pages
11 to 33. The Committee reviews the application of the Policy regularly,
to ensure it remains appropriate. No amendments are proposed to the
Policy this year and it is not subject to a shareholder vote.
Communication with shareholders
I welcome all shareholder feedback on this report. We acknowledge the
support we have received in the past from our shareholders and hope
that we will continue to receive your support at the forthcoming AGM.
Should you have any queries in relation to this report please do not
hesitate to contact me through the Company Secretary.
Chloe Ponsonby
Chairman of the Remuneration Committee
16 November 2016
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R E M U N E R AT I O N R E P O R T
Remuneration Policy Report
The Company’s Remuneration Policy was approved by shareholders
at the AGM on 26 January 2016 and took effect from that date. The
Policy Report is not subject to a shareholder vote this year but has been
reproduced here for ease of reference.
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:
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.
Guiding policy
The Remuneration Committee’s terms of reference are available on the
Company’s website and include:
n 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)
n 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
n 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
n Determining the targets for any performance-related bonus
schemes operated by the Company
n Reviewing remuneration trends across the Group, including the
salary increases proposed annually for all Group employees
n Agreeing termination arrangements for senior executives
n 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
n 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
n 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. This is the approach that has been followed in setting the
remuneration package for the new Chief Executive.
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.
The Committee would be very cautious before using such flexibility
and would do so only when absolutely necessary to secure the right
candidate. Any proposed buyout would take account of remuneration
given up at the individual’s former employer and would be capped at
the value foregone. No joining incentives were paid in connection with
the recruitment of the new Chief Executive, Mr R. Rennie, except for
relocation expenses of £22,404.
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In addition, the Group Executive management team maintains a
benchmarking database of all management employees in the Group
with the aim of ensuring that each is being paid at or near the median
local benchmark level for their role and that, where applicable, 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 remit but the Committee remains 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 then Chairman of the Committee consulted with the three
largest Company shareholders on the proposed amendments to the
Policy and the changes to the Performance Share Plan. We received
some feedback from our shareholders in relation to the introduction of
the one off bonus and disclosure of bonus targets and have included
further information to clarify our position on these points within the
existing policy.
Consideration of conditions elsewhere in
the Company
The experience of Committee members and an independent
experts’ benchmarking report have been relied upon in setting
the remuneration packages for the Executive Directors and this
remuneration policy. Employees have not been specifically consulted in
this regard. In line with other small to mid-sized companies there is no
works council and therefore there is no established process or platform
to consult employees in relation to executive remuneration. 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.
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 current 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 salary level so that the
pay level of the workforce is always kept close to the median level and
maintained at that level by the 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.
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R E M U N E R AT I O N R E P O R T
Policy Table
Set out below is a summary of the main components of the remuneration policy for Directors, together with further information on how these
aspects of remuneration operate. The Directors’ Remuneration Policy was approved by shareholders at the Annual General Meeting on 26 January
2016 and will remain in effect for three years or until shareholders are asked to approve an amended version. The Remuneration Committee has
discretion to amend remuneration and benefits in 2017 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
Base
Salary
To provide competitive fixed
remuneration.
Reviewed every three years by the
Remuneration Committee.
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.
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.
An Executive Director may be paid
a salary supplement for fulfilling
the role of another higher paid
Executive Director when that
Executive Director retires or leaves
the Company.
Not applicable.
No prescribed
maximum triennial
increase. Basic salary
should reflect the
median of a suitable
comparator group.
Salary supplement
is capped at the
leaving Director’s
base salary.
Benefits
As above.
Annual Bonus
Performance
Share Plan
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.
Designed to align Executive
Directors’ interests with
both the strategic objectives
of delivering sustainable
earnings growth and the
interests of shareholders.
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.
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 Director.
Paid in cash except 25% is deferred
into shares to be held for two years.
CEO and FD: 150% of
salary.
Not pensionable.
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.
The Company has one Performance
Share Plan, which was originally
approved by shareholders in 2010
and most recently amended and
approved in 2016.
Annual grants of conditional share
awards which vest after a three year
performance period, subject to
achievement of performance targets
and continued service.
Under the rules of
the PSP, Executive
Directors may
receive a normal
award of up to 100%
of salary and up
to a further 100%
in exceptional
circumstances.
Not applicable.
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.
Bonus in excess of 100% of salary is based upon EPS
growth occurring in excess of 20% over the previous year.
For the normal 100% award:
50% TSR (of which 25% vests for median increasing to
100% vesting for upper quartile of the FTSE SmallCap
Index excluding investment trusts). For awards after
1 October 2015, the FTSE All-Share Index is used as the
comparator group.
50% EPS (which starts vesting at nil for RPI +3% rising to
100% at RPI +8%).
For awards after 1 October 2015, CPI is used instead of RPI.
For the additional 100% exceptional award:
Financial performance conditions dependent on
circumstances of award, measured over a three year
period.
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Element of
remuneration
Purpose and link
to strategy
Operation
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.
Performance targets
Not applicable.
Maximum
potential value*
Executive Directors
are required to build
up and maintain a
shareholding worth
200% of salary. An
additional two year
holding period
applies for awards
made in excess of
100% of salary.
Pension
To reward sustained
contribution by providing
retirement benefits.
The Company funds contributions to
a Director’s pension as appropriate,
through contribution to the
Company’s money purchase scheme
or through the provision of salary
supplements.
Company
contribution fixed at
15% of salary.
Not applicable.
One off bonus
To mitigate continuity risk
amongst Executive Directors
associated with the departure
of other Executive Directors
by retaining their services
and to reward extra work
and responsibility during the
recruitment and transition
period.
Executive Directors may be awarded
a one off bonus capped at one year’s
base salary, payable in instalments
over a defined period and subject
to an adjustment factor based on
the Company’s TSR compared to
a comparator group TSR over the
defined period.
One year’s base
salary.
Payment to be multiplied by an adjustment factor set
by reference to the Company’s relative TSR performance
when compared to the FTSE All-Share Index excluding
investment trusts over the previous 12 months. If
Avon tracks the FTSE All Share exactly over the period
the adjustment factor is 1. For example, if Avon
underperforms by 10% the adjustment factor is 0.9, if it
outperforms by 10% the adjustment factor is 1.1.
Chairman and
Non-
Executive
Directors’ fees
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.
Not applicable.
No maximum fee
or maximum fee
increase. Fees are
benchmarked every
three years and
adjusted to the
median level of the
comparator group.
Base fee for Chairman and Non-
Executive Directors.
Additional fees are paid to Non-
Executive Directors for additional
services, such as chairing a Board
Committee and sitting on a Board
Committee.
Fee levels are determined by the
Board in light of market research
and benchmarking advice provided
by an external advisor. Fees are
benchmarked every three years
and adjusted to the median level
of the comparator group. The
first increases pursuant to this
benchmarking were made on 1
October 2014 and fees are now fixed
until October 2017.
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R E M U N E R AT I O N R E P O R T
There are no elements of remuneration other than basic salary, benefits
and pension that are not subject to performance requirements.
Illustration of the application of the Policy
The chart below illustrates for both the Chief Executive and Group
Finance Director how the Policy would function for minimum, on target
and maximum performance for each Executive Director.
100%
80%
60%
40%
20%
0%
27%
41%
32%
21%
31%
48%
100%
100% of variable
pay vests
(maximum award)
50% of variable
pay vests
(target)
0% of variable
pay vests
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.
The Group’s employees have received an increase of approximately
8% over the same period, including annual cost of living, promotional
increases and increases based on exceptional performance.
The Company has the ability to pay a salary supplement where any
Executive Director takes on another Executive Director’s role in addition
to their own. The amount of supplement will always be capped at the
salary level of the Executive Director being replaced.
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.
R. Rennie
A. 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 on the previous year 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 out 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 2016 as a percentage of basic salary
150%
150%
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2016
For the year ended 30 September 2016, 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 at the bottom of page 60.
Performance measures (a) to (d) 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.
For an additional 10% of EPS growth above 20% over the previous
financial year’s EPS (i.e. up to a maximum of 30% EPS growth over the
previous financial year’s EPS) additional bonus can be earned on a pro
rata basis up to the maximum as follows:
R. Rennie
A. 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 Group as adjusted to exclude the charge/ credit in respect
of discontinued operations, exceptional items, the revaluation or
impairment of assets, the charge or credit related to IAS 19 (revised) and
the amortisation of acquired intangible assets.
The maximum bonus percentages were reviewed and confirmed as part
of the triennial benchmarking exercise during 2016 and the Committee
decided not to change them. The Committee believes it continues to be
necessary to retain the ability to incentivise the Executive Directors to
deliver truly exceptional performance. The Committee has decided to
review annually whether to include the 50% element for excess earnings
per share growth.
A claw back rule applies if the Group’s financial results are restated due
to an error during the two years following their release and a deferral
rule 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.
One off bonus arrangements
In order to mitigate continuity risk associated with the departure of an
Executive Director and to recognise any extra work and responsibility
carried out during this period, Executive Directors may be awarded a
one off bonus capped at one year’s base salary, payable in instalments
over a defined period and subject to an adjustment factor based on the
Company’s TSR compared to a comparator group TSR over the
defined period.
The Company amended its Remuneration Policy last year to include
the ability to make such payments, due to the specific circumstances
surrounding the departure of Mr P. Slabbert. Although the amended
Policy was approved by shareholders, the Committee recognises that
shareholders may have concerns in relation to such payments and the
Committee confirms it is unlikely to agree a further payment of this type
during the term of this Policy.
A one off bonus arrangement was implemented for Mr A. Lewis in
connection with the retirement of Mr P. Slabbert, in order to retain
his services while the recruitment and transition to a new CEO was
completed. The payment was also designed to reflect the extra work
and responsibility Mr A. Lewis had to carry out during this period.
% Additional bonus earned v EPS growth %
n
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d
A
%
y
r
a
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a
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f
o
%
0
0
1
f
o
s
s
e
c
x
e
50
40
30
20
10
0
20.0
22.5
25.0
27.5
30.0
EPS growth %
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R E M U N E R AT I O N R E P O R T
Long-term incentive plan
– Performance Share Plan (the ‘Plan’)
The Remuneration Committee introduced the Plan with shareholder
approval at the AGM in 2002 and in 2010 and 2016 shareholders
approved an updated plan. The existing version of the Plan therefore
came into effect from 26 January 2016, 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). The Plan will expire in 2020.
The current 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 2016. Non-financial performance conditions 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
considered as part of its 2015 review 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 following its review that a three-year
performance period remains appropriate for the Company and in line
with market practice. An extended retention period of two years applies
for ’exceptional’ awards in excess of 100% of salary.
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. For awards after 1 October 2015, the comparator
group is the FTSE All Share index (excluding investment trusts).
Over the three-year period:
n
If the Company’s TSR performance is below the median TSR of the
comparator group, no shares will vest
n
n
n
If the Company’s TSR performance is equal to the median TSR of
the comparator group, 25% 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
If the Company’s TSR performance is between the median and
upper quartile TSR of the comparator group, shares may vest on a
pro rata basis
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.
Vesting according to the ranking of the Company’s
TSR in the peer group
Below median
Median
Upper quartile
% of award vesting
nil
25%
100%
For the EPS measure, 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 remains appropriate, but
the Committee will keep it under review. It remains 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. For all PSP awards from 1
October 2015, the Committee has amended the calculation of the EPS
performance condition to CPI instead of RPI on the basis that RPI is no
longer an approved national statistic.
EPS growth targets
At or less than RPI/CPI +3%
At or greater than RPI/CPI +8%
% of award vesting
nil
100%
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.
62
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The maximum value that can currently be granted under the Plan rules
in any year for a ‘normal’ award is 100% of salary and up to a further
100% in exceptional circumstances, if an appropriate business challenge
warrants such treatment e.g. a major acquisition or strategic initiative.
The performance conditions for special awards will be financial and
will be set at the time the awards are made. They are likely to be a
more challenging version of the existing TSR/EPS conditions, but
the Committee may decide to use a different financial performance
condition if appropriate in the circumstances. The Committee has no
current plans to issue any exceptional awards.
The Committee has discretion to allow good leaver status on a case by
case basis. In addition, for added flexibility, the rules allow for a clean
break when an executive leaves. This permits vesting to be triggered
at the point of leaving by reference to performance at that date, rather
than waiting until the end of the performance period if the Committee
so decides. This, in turn, will allow vesting at rates appropriate to
the Board’s strategy for managing an exit, for example to offset cash
compensation by allowing earlier vesting conditions.
The current remuneration policy is that both the Chief Executive
and Group Finance Director should receive ‘normal’ awards of up to
100% of salary, being the median level originally identified in the 2011
EY benchmarking report and reconfirmed in the 2016 EY
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 amended in 2010, joint ownership awards were
permitted for the first time and have been issued to UK resident
employees ever since. In the Company’s case until 2016, savings in
employer National Insurance Contributions resulting from this were 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 2015, 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 2016 within the existing parameters of
the Plan as described above and at 100% of salary for the Chief Executive.
Shareholding guidelines
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 is two times base salary. For
other recipients the shareholding requirement is 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. Once the shareholding guideline is met executives are
not required to retain any portion of future awards that vest.
For the new special awards in excess of 100% of salary, a two year
mandatory holding period applies following the three year performance
period for such awards. At the end of this period the shares subject to
the award will not be subject to the shareholding guidelines for normal
awards and may be sold.
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 of this report and no change to this is proposed. In summary,
in 2011 shareholders approved a 15% dilution limit for all employee
schemes which is in excess of the 10% recommended by the ABI, and
a 10% dilution limit for discretionary (executive) schemes which is in
excess of the 5% recommended by the ABI. At the time the Company
committed to consult with certain institutional shareholders before
exceeding the 10% limit but has never had cause to do this and has
no plans to exceed 10% in future. In practice there is therefore a 10%
dilution limit on all schemes which the Company will continue to
operate within, including when utilising the higher salary cap proposed
under the Performance Share Plan and the new CSOP and ISO plans.
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. Mr A. Lewis participated in the SIP at the maximum level
during the year, Mr R. Rennie is not currently a member.
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. Executive Directors were not eligible to participate in the ESPP.
Last year shareholders approved the introduction of two new share
option schemes, the Avon Rubber p.l.c. 2015 Share Option Plan (the
‘CSOP’) in the UK and the Avon Rubber p.l.c. 2015 Incentive and Non-
Qualified Stock Option Plan (the ‘ISO’) in the US. Awards under both
schemes are targeted at junior management and may be supplemented
by unapproved share options. Neither Mr A. Lewis nor Mr R. Rennie
will be granted awards under the CSOP and neither will be entitled to
participate in the ISO.
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R E M U N E R AT I O N R E P O R T
Pension
Other appointments
Neither Mr R. Rennie nor Mr A. Lewis is currently appointed as a
Non-Executive Director of any company outside the Group. The
Remuneration Committee will consider its approach to the treatment
of any fees received by Executive Directors in respect of Non-Executive
roles as they arise.
Chairman and Non-Executive Directors
Non-Executive Directors are not employed under service contracts
and do not receive compensation for loss of office. All Non-Executive
Directors are appointed on a rolling annual basis, which may be
terminated on giving three months’ notice at any time.
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. Any Non-Executive Director who has served for more
than nine years since first election is subject to annual re-election by
shareholders. This will apply to Mr D. Evans from this year.
The date of each appointment is set out below, together with the date
of their last re-election by shareholders.
Date of initial
appointment
Date of last
re-election
1 June 2007
26 January 2016
1 March 2016
n/a
1 March 2015
26 January 2016
1 December 2012
29 January 2015
D. Evans
C. Ponsonby
P. Vervaat
R. Wood
(retired 26 January 2016)
Under the Policy, UK-based Executive Directors joining the Company
are offered defined contribution arrangements. Under the Company’s
money purchase scheme, members receive a pension based upon the
size of their retirement account on retirement from age 65. Membership
of the pension scheme entitles members to life assurance which pays
a lump sum of four times pensionable salary on death, together with a
spouse’s pension of one quarter of the member’s pensionable salary.
The Company funds contributions to an Executive Director’s pension as
appropriate, through contribution to the Company’s money purchase
scheme or through the provision of salary supplements. Both Mr R.
Rennie and Mr A. Lewis receive a company pension contribution equal
to 15% of annual salary.
Service contracts and policy on payments for loss of office
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. The
Company may terminate the contract with immediate effect with
or 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.
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.
Contract
date
Company
notice period
Executive
notice period
A. Lewis
28 September 2009
12 months
12 months
R. Rennie
30 September 2015
12 months
12 months
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Annual report on remuneration
Role and composition of the Remuneration
Committee
Implementation of the Remuneration Policy
for 2016
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 Miss C. Ponsonby, who became Chair of the
Committee on her appointment on 1 March 2016, Mr D. Evans and Mr P.
Vervaat. 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 as well as more general advice
on executive remuneration. The Company’s solicitors, TLT LLP, provide
advice on remuneration governance and all share plans.
The Committee addressed the following main issues during the last year:
n Approved the annual bonus payments to the Executive Directors in
November 2015
n Approved the annual bonus plan for the Executive Directors for the
2016 financial year
Result of 2016 benchmarking exercise
In accordance with our Policy, the basic salary for each Executive
Director is reviewed and benchmarked every three years, with increases
only implemented if current salary levels were found to be below the
median of a comparator group. The previous review was in 2013 and
therefore a review and benchmarking exercise was conducted during
this financial year. The review concluded that the median for the
Executive Directors had not increased in this time. In accordance with
our Policy, on Mr R. Rennie’s appointment as Chief Executive Officer,
his salary was set below the current median level , to be increased to
the median once proven. Mr R. Rennie’s salary will be increased to the
median of £330,000 as from 1 October 2016. Following the resignation
of Mr A. Lewis as Group Finance Director on 18 October 2016, his
permanent successor’s salary will be confirmed, in accordance with the
Policy, following appointment.
Basic salaries for Directors
Basic salary
R. Rennie
A. Lewis
Up to
30 September
2016
From
1 October
2016
£300,000
£330,000
£252,000
n/a
Increase
10%
n/a
n Reviewed and confirmed the vesting of the 2013 Performance Share
Plan awards in December 2015
Non-Executive Directors
n Reviewed and approved the 2016 Performance Share Plan awards
granted in December 2015 and monitored the performance of the
outstanding awards against their performance targets
n Reviewed the executive management succession plan
n Oversaw the remuneration benchmarking process for the Executive
As detailed in the Policy, the fees for Non-Executive Directors are
determined in light of market research and benchmarking advice
provided by an external advisor. Fees are benchmarked every three
years and adjusted to the median level of a comparator group. The first
increases pursuant to this benchmarking were made on 1 October 2014
and fees are now fixed until October 2017.
Directors and Group Executive management team
Current fees for Non-Executive Directors are as follows:
Since the end of the 2016 financial year, the Committee has:
2016
2017
% Increase
n Approved annual bonus payments to the Executive Directors and
the Group Executive management team, following completion of
the external audit in November 2016
n Made preparations for the 2017 Performance Share Plan awards to
be granted in December 2016
Chairman
£125,000
£125,000
Base fee Non-Executive
£38,500
£38,500
Committee Chairman fee
£10,000
£10,000
Committee attendance fee
£2,000
£2,000
-
-
-
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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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
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W
W
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E
M
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R E M U N E R AT I O N R E P O R T
The information that follows has been audited (except where indicated) by the Company’s auditors PricewaterhouseCoopers LLP.
Directors’ remuneration for the year ended 30 September 2016 was as follows:
Single total figure of remuneration for Directors for the year ended 30 September 2016:
Fixed Pay
Pay for performance
Year
Basic salary
and fees
£’000
Pension/other
supplements
£’000
Other
Benefits*
£’000
Sub-total
£’000
Annual
Bonus**
£’000
PSP
Subtotal
£’000***
£’000
Total
Remuneration
£’000
Executive Directors
R. Rennie
A. Lewis
2016
2015
2014
2016
2015
2014
Non-Executive Directors
D. Evans
P. Vervaat
C. Ponsonby1
Former Directors
R. Wood2
P. Slabbert3
S. Pirie4
Total
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
250 ⁵
-
-
265 ⁶
252
252
125
125
100
51
29
-
29
-
-
21
51
45
-
330
330
-
22
45
741
809
772
1 C. Ponsonby was appointed to the Board with effect from
*
1 March 2016.
2 R. Wood retired from the Board on 26 January 2016.
3 P. Slabbert retired from the Board on 30 September 2015.
4 S. Pirie retired from the Board on 29 January 2015.
5 R. Rennie was appointed to the Board with effect from
1 December 2015.
6 This amount includes a salary supplement for acting as
Interim Chief Executive during October and November 2015.
38
-
-
40
38
38
-
-
-
-
-
-
-
-
-
-
-
-
-
50
50
-
-
-
78
88
88
22
310
174
-
-
2
2
2
4
3
4
-
-
-
-
-
-
-
-
-
-
3
3
-
-
-
28
8
9
-
-
307
292
292
129
128
104
51
29
-
29
-
-
21
51
45
-
383
383
-
22
45
847
905
869
-
-
517
335
370
-
-
-
-
-
-
-
-
-
-
-
-
-
448
452
-
-
-
691
783
822
-
-
-
483
345
388
-
-
-
-
-
-
-
-
-
-
-
-
845
604
703
-
-
-
1,328
949
1,091
174
-
-
1,000
680
758
-
-
-
-
-
-
-
-
-
-
-
-
845
1,052
1,155
-
-
-
2,019
1,732
1,913
484
-
-
1,307
972
1,050
129
128
104
51
29
-
29
-
-
21
51
45
845
1,435
1,538
-
22
45
2,866
2,637
2,782
This is the cost of private health insurance, executive
medical and for R. Rennie, relocation costs paid. No Director
waived emoluments in respect of the year ended
30 September 2016 (2015: £nil).
*** Calculated by multiplying the number of shares that vested
by the share price on the day of vesting, which in 2016 was
1030p (100% vesting), 2015 was 720p (96% vesting), in 2014
was 570p (100% vesting).
** 2016 bonus payments as a percentage of salary were 77.5%
for R. Rennie and 100% for A. Lewis, against maximum
percentages of 150%. In respect of A. Lewis this includes a
£252,000 one off bonus as per the Remuneration Policy.
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Percentage change in remuneration of the CEO compared with other employees (unaudited)
The Committee continues to believe it is inappropriate to compare the percentage change in remuneration of the CEO with the wider workforce. This is
because the CEO’s salary is fixed and brought up to the median level every three years, whereas the wider workforce are, largely, already at the median
level and receive annual cost of living increases. Nevertheless in line with current practice, we have reported changes in the CEO’s remuneration against
the wider workforce. Last year we reported that, having brought the CEO’s salary up to the median level in 2013, we expected future increases, made to
keep track with the median, to start aligning with the annual increases made to other employees each year, when measured over a three-year period.
The result of the 2016 benchmarking exercise is that the CEO’s 2013 salary remains the median of the 2016 comparator group and the increase being
made for Mr R. Rennie in October 2016 brings his salary up to that level.
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:
Salary
Benefits
Annual Bonus
2014
+18%
0%
+88%
CEO
2015
0%
0%
-1%
2016
-9%
0%
-61%
2014
+3%
0%
+15%
All employees
2015
+3%
0%
+8%
2016
+2%
0%
-51%
The ratio of CEO fixed pay to average employee fixed pay is 9.6:1 for the year under review (2015: 11.3:1).
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 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
£’000
38,211
34,344
32,423
2016
2015
2014
£’000
2,430
1,859
1,422
%
6.4%
5.4%
4.4%
£’000
%
15,849
41.5%
11,807
34.4%
9,389
29.0%
£’000
8,341
7,139
7,046
%
21.8%
20.8%
21.7%
£’000
3,689
3,222
3,731
%
9.7%
9.4%
11.5%
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
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Annual bonus (unaudited)
The Remuneration Committee determined at its meeting on 10 November 2016 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:
R. Rennie
A. Lewis
Actual
Max.
Actual
Max.
1. Financial Targets
(a) Group profit budget achievement (Group PBITE)
(b) Profit growth on previous year (year on year PBITE growth)
0%
0%
25%
25%
0%
0%
25%
25%
(c) Group cash generation (ratio of operating cash flow to operating profit)
20%
20%
20%
20%
(d) Earnings Per Share growth (ratchet based on additional EPS growth above 20% over the
previous financial year)
50%
50%
50%
50%
2. Personal Performance Targets
7.5%*
30%
30%
30%
Total potential bonus 2016 as a percentage of basic salary
77.5%
150%
100%
150%
* As the 2016 financial targets were not met, a 50% reduction factor was applied to the personal performance element of Mr R. Rennie’s bonus under the rules of the Group Performance Management Process. Under
the terms agreed with Mr A. Lewis, in connection with his departure on 30 November 2016, it was confirmed that the 50% reduction factor would not be applied to the performance element of his bonus payment.
The Board considers the disclosure in advance of actual performance against the targets for the upcoming year to be commercially sensitive and the
Committee has taken the decision not to disclose them. The Committee is not of the view that such targets will necessarily always be confidential but
will keep this under review. The Committee is prepared to disclose financial performance targets and performance against them retrospectively as set
out below:
Financial Performance targets for the year ended 30 September 2016 (unaudited)
Threshold
(0% payable)
Target
(50% payable)
Stretch
(100% payable)
Actual/Reported
Applied
Bonus payable
Group PBITE
(£’000)
Year on year PBITE
growth (£’000)
Group cash
generation*
EPS growth**
22,724
22,493
80%
2.5%
25,249
23,618
90%
6.6%
27,774
24,742
100%
10%
21,763
21,763
152%
13.3%
0%
0%
100%
100%
0%
0%
20%
50%
*
ratio of operating cashflow to operating profit
** ratchet based on additional EPS growth above 20% over the previous financial year
Of the bonus payable 75% will be paid in cash and the remaining 25% to be deferred into shares to be held for two years. A claw back rule applies if the
Group’s financial results are restated due to an error during the two years following release.
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One off bonus
In 2015, Mr A. Lewis was granted a bonus award, subject to the performance conditions explained below, in connection with the retirement of the
CEO Mr P. Slabbert, in order to retain his services while the recruitment and transition to a new CEO was completed. The payment was also designed
to reflect the extra work and responsibility Mr A. Lewis had to carry out during this period. The total amount of the bonus was capped at Mr A. Lewis’s
annual salary of £252,000 and was only to be paid if he remained in post and performed satisfactorily, as determined in the Board’s sole discretion, at
the time payment was due to be made. This bonus payment is not pensionable.
Amount
Payable
Adjustment factor
£150,000
Within 14 days of the
announcement of the
2016 interim results
£50,000
Within 14 days of the
announcement of the
2016 final results
Payment to be multiplied by an adjustment factor set
by reference to the Company’s relative TSR performance
when compared to the FTSE All Share Index excluding
investment trusts over the previous 12 months (in respect of
the first payment) and 18 months (in respect of the second
payment). If Avon tracks the FTSE All Share exactly over
the period the adjustment factor is 1. For example, if Avon
underperforms by 10% the adjustment factor is 0.9, if it
outperforms by 10% the adjustment factor is 1.1
Amount paid
Calculation of
adjustment factor
£182,491
1.217
£69,509*
1.390
* To be paid to Mr A. Lewis on 30 November 2016 as part of the terms agreed in connection with his departure on 30 November 2016.
Pensions
As confirmed under the Policy, the Executive Directors are entitled to receive a contribution towards pension of 15% of basic salary, paid either as a
non-pensionable salary supplement or delivered though the group’s money purchase scheme.
Mr A. Lewis has capped his annual contributions into the Plan at £10,000 and the excess is paid to him as a monthly salary supplement. Mr A. Lewis’s
membership entitles him to life assurance which pays a lump sum of four times pensionable salary on death in service and a spouse’s pension of one
quarter of the member’s salary.
Mr R. Rennie has reached the lifetime allowance and has not joined the Plan. His pension contribution is paid entirely as a salary supplement which
Mr R. Rennie uses to purchase Company shares at market price every three months under a trading plan as defined and required under paragraphs
23 to 26 of the Model Code at Annex 1 of Listing Rule 9 and as announced to shareholders on 8 March 2016. Mr R. Rennie is not in receipt of life
assurance cover provided by the Company.
The employer pension contribution is shown in the table below:
Executive Director
R. Rennie
A. Lewis
Salary supplement
£’000
Contribution into the Plan
£’000
38
14
-
26
The Company does not contribute to any pension arrangements for Non-Executive Directors.
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Directors’ shareholdings and share interests
Beneficial interests of Directors, their families and trusts in ordinary
shares of the Company were:
At the end
of the year
At the beginning
of the year
R. Rennie
A. Lewis
D. Evans
R. Wood (retired 26 January 2016)
C. Ponsonby
P. Vervaat
12,157
60,146 *
40,000
n/a
-
2,000
* Includes 9,198 shares held under the annual bonus deferral scheme
n/a
87,055
40,000
-
n/a
-
Interests in jointly owned shares held by the Executive Directors under
the Performance Share Plan are excluded from the above and detailed
separately opposite.
The only change in the interests set out above between 30 September
2016 and 16 November 2016 were the additional shares bought by
Mr A. Lewis under the Share Incentive Plan, which increased his total
shareholding to 60,176.
The register of Directors’ interests contains details of the Directors’
shareholdings and share options. The position under the shareholding
guidelines for the Executive Directors is set out on page 71.
The Committee determined in December 2015 that the 2013 award vested
in full on the basis that the TSR over the three years from 1 October 2013
to 30 September 2015 was significantly ahead of the upper quartile of the
comparator group. As a consequence, and as announced to shareholders
in December 2015, 46,893 shares were awarded to Mr A. Lewis and 82,063
shares were awarded to Mr P. Slabbert.
The Directors’ contingent interests in ordinary shares under the Plan at
30 September 2016 were as follows:
30 Sep Granted in
the year*
2015
Exercised in
the year**
Lapsed in
the year
30 Sep
2016***
P. Slabbert 1
135,286
-
(82,063)
R. Rennie
A. Lewis
Other senior
-
125,354
27,650
23,226
-
(46,893)
-
-
-
53,223
27,650
101,687
employees****
508,983
114,806
(204,487)
(15,135)
404,167
769,623
165,682
(333,443)
(15,135)
586,727
1
*
P. Slabbert retired on 30 September 2015
The award price at the date of grant was 1085 pence
**
The market price at the vesting date for the 2013 award was 1073 pence
*** The weighted average remaining life of the awards outstanding at the year-end is 1.2 years
(2015: 1.1 years).
**** This figure includes 162,932 (2015: 180,383) in respect of key management as defined in note
9 of the financial statements.
Outstanding awards granted annually under the Plan were as follows:
Performance Share Plan 2010 (the Plan)
2014
2015
2016
Total*
P. Slabbert 1
R. Rennie
A. Lewis
Other senior employees
37,950
-
43,471
139,091
15,273
-
34,990
150,270
-
27,650
23,226
53,223
27,650
101,687
114,806
404,167
220,512
200,533
165,682
586,727
1 P. Slabbert retired on 30 September 2015
* In relation to the awards outstanding at 30 September 2016, deferred loan payments for the
awards granted in 2014, 2015 and 2016 will become due to the Company as follows: A. Lewis
£9,526.56 (2015: £10,000). R. Rennie £3,533.67 (2015: £nil)
The award price for the 2016 was 1085 pence, for the 2015 award it was 720.2 pence, for the 2014
award it was 579.7 pence and for the 2013 award it was 349.5 pence.
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 SmallCap companies (excluding investment
trusts). Under the amended Policy approved last year, the comparator
group for awards after 1 October 2015 will use the FTSE All-Share index
(excluding investment trusts).
For the Cycles granted in 2014, 2015 and 2016 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. 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. For all
awards from 1 October 2015, namely the 2016 awards, RPI was replaced
with CPI on the basis that RPI is no longer a national statistic.
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PSP
Performance
Period years
ending
TSR element¹
EPS element²
Total exercisable
rate (% grant)
30 Sep
2015
(Cycle E)⁵
30 Sep
2016
(Cycle F)³
30 Sep
2017
(Cycle G)⁴
30 Sep
2018
(Cycle H)⁴
50%
50%
50%
50%
50%
50%
50%
50%
100%
-
-
-
1 Based on Avon Rubber p.l.c.’s Total Shareholder Return ranked relative to companies in the FTSE
SmallCap Index at the start of the period.
2 Based on the real growth in earnings over the performance period where real growth is
expressed as a % above inflation.
3 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.
4 The three year performance periods in respect of these awards is not yet complete.
5 These awards vested in full in December 2015 on the basis of a Company TSR of 225% compared
to the upper quartile of the comparator group at 112%
Position under shareholding guidelines
Shareholding as
at 30 Sep 2016*
Number of shares
Actual Target Achievement
value**
****
£000
Value
£000
Shares held
voluntarily in
excess of guideline
Number of shares
A. Lewis
R. Rennie
60,146
12,157
607
123
504
660
241%
37%
10,245
-
*
**
Taken from the table on page 70.
Using the closing share price on 30 September 2016 of 1010 pence.
*** 200% of current salary for Executive Directors’ salaries used are those effective
1 October 2016.
****
Actual value as a percentage of current salary.
Dilution
In respect of the 5% and 10% limits recommended by the Association
of British Insurers, the relevant percentages were 8.15% and 9.23%
respectively based on the issued share capital at 30 September 2016.
As at 30 September 2016, the number of shares committed under
discretionary share-based incentive schemes since 30 September 2006,
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 2,527,306 shares. This represents 8.15% dilution
against the 10% discretionary plan dilution limit.
As at 30 September 2016, the number of shares committed under all
employee share-based incentive schemes since 30 September 2006, 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 2,864,612 shares which represents 9.23% dilution against the
15% all employee plan dilution limit.
It remains the Company’s practice to use Employee Share Ownership
Trusts (‘ESOTs’) in order to meet its liability for shares awarded under the
Plan. Two trusts have been established in connection with the jointly
owned equity awards. At 30 September 2016 there were 718,789 shares
held in the ESOTs which will either be used to satisfy awards granted
under the Plan to date, or in connection with future awards. Of these,
401,742 were held on a jointly owned equity basis. A hedging committee
ensures that the ESOTs 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. Shares held in the ESOTs do
not receive dividends.
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Total shareholder return performance graph (unaudited)
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 SmallCap Index (excluding investment trusts) and the FTSE AllShare Index (excluding investment trusts). These
indicies were chosen by the Remuneration Committee as a competitive indicator of general UK market performance for companies of a similar size.
Avon Rubber p.l.c.
FTSE SmallCap Index (excluding investment trusts)
FTSE AllShare Index (excluding investment trusts)
1800
1600
1400
1200
1000
800
600
400
200
0
Sep 09
Mar 10
Sep 10
Mar 11
Sep 11
Mar 12
Sep 12
Mar 13
Sep 13
Mar 14
Sep 14
Mar 15
Sep 15
Mar 16
Sep 16
Avon Rubber - Total Return On Investment
72
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
Chief Executive Officer’s Remuneration (unaudited)
The total remuneration figures, including annual bonus and vested PSP awards (shown as a percentage of the maximum that could have been
achieved) for the Chief Executive Officer for each of the last eight financial years are shown in the table below.
Mr P. Slabbert retired on 30 September 2015 and was replaced by Mr R. Rennie on 1 December 2015.
Year
CEO
CEO single figure of
total remuneration
£000
Annual bonus
pay out against
maximum opportunity
Long-term incentive
vesting rates against
maximum opportunity
2016
2015
2014
2013
2012
2011
2010
2009
R. Rennie
P. Slabbert
P. Slabbert
P. Slabbert
P. Slabbert
P. Slabbert
P. Slabbert
P. Slabbert
484
1,435
1,538
1,374
1,864
404
395
366
52%
91%
91%
86%
40%
74%
90%
91%
-
96%
100%
100%
100%
nil
nil
nil
Statement of shareholder voting on the Remuneration Report (unaudited)
The shareholder vote on the Remuneration Report for the year ended 30 September 2015 at the AGM which took place on 26 January 2016 was as follows:
Resolution text
Votes For (including
discretionary)
% For
Votes Against
(excluding withheld)
% Against
Total (excl. withheld and
third party discretionary)
Withheld
Approval of Remuneration Policy
15,042,235
77.15
Approval of Remuneration Report
19,569,894
98.32
4,454,154
334,138
22.85
1.68
19,496,389
1,634,519
19,904,032
1,226,876
Share Incentive Plan
During the year to 30 September 2016 Mr A. Lewis purchased 201 shares
pursuant to the Share Incentive Plan (SIP). Mr R. Rennie is not currently a
member of the SIP.
As at 30 September 2016, the market price of Avon Rubber p.l.c. shares
was £10.10 (2015: £9.14). During the year the highest and lowest market
prices were £11.67 and £7.18 respectively.
Payments to past Directors and payments for
loss of office
No payments were made to past Directors during the year.
Details of the advisors to the Remuneration
Committee and their fees
During the year to 30 September 2016 the Company incurred costs of
£11,000 (2015: £16,350) in respect of fees for advisors to the Remuneration
Committee.
The Remuneration Report has been approved by the Board of Directors
and signed on its behalf by:
Chloe Ponsonby
Chairman of the Remuneration Committee
16 November 2016
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 6 n D E L I V E R I N G A N D B U I L D I N G G R O W T H
73
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 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 6
2016
2016
Statutory Adjustments*
£’000
£’000
2016
Adjusted
£’000
Note
2015
2015
Statutory Adjustments*
£’000
£’000
2015
Adjusted
£’000
Continuing operations
Revenue
Cost of sales
Gross profit
Selling and distribution costs
General and administrative expenses
1
142,884
(90,159)
-
-
142,884
(90,159)
134,318
(88,618)
-
-
134,318
(88,618)
52,725
(17,984)
(17,111)
-
-
4,133
52,725
(17,984)
(12,978)
45,700
(13,007)
(13,807)
-
-
1,329
45,700
(13,007)
(12,478)
Operating profit
1
17,630
4,133
21,763
18,886
1,329
20,215
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 from continuing operations
Discontinued operations - loss for the year
29,982
(12,352)
11,12
826
3,307
30,808
(9,045)
26,981
(8,095)
286
1,043
27,267
(7,052)
17,630
4,133
21,763
18,886
1,329
20,215
4
4
4
5
6
3
11
(165)
(675)
16,801
1,824
18,625
(346)
-
-
642
11
(165)
(33)
4,775
(924)
21,576
900
3,851
346
22,476
-
45
(192)
(901)
17,838
(2,672)
15,166
(1,500)
-
-
654
45
(192)
(247)
1,983
(253)
19,821
(2,925)
1,730
1,500
16,896
-
Profit for the year
18,279
4,197
22,476
13,666
3,230
16,896
Other comprehensive (expense)/income
Items that are not subsequently reclassified to the income statement
Actuarial loss recognised on retirement benefit scheme
Deferred tax relating to retirement benefit scheme
Items that may be subsequently reclassified to the income statement
Net exchange differences offset in reserves
Cash flow hedges
Tax relating to exchange differences offset in reserves
10
6
19
(23,084)
3,471
7,903
(898)
(1,698)
-
-
-
-
-
(23,084)
3,471
(1,040)
3,321
7,903
(898)
(1,698)
3,311
-
-
Other comprehensive (expense)/income
for the year, net of taxation
(14,306)
-
(14,306)
5,592
-
-
-
-
-
-
(1,040)
3,321
3,311
-
-
5,592
Total comprehensive income for the year
3,973
4,197
8,170
19,258
3,230
22,488
Earnings per share
Basic
Diluted
Earnings per share from continuing operations
Basic
Diluted
* See note 3 for further details of adjustments.
8
8
60.4p
59.2p
61.5p
60.3p
74.2p
72.8p
45.4p
44.2p
74.2p
72.8p
50.4p
49.0p
56.1p
54.6p
56.1p
54.6p
74
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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 6
Assets
Non-current assets
Intangible assets
Property, plant and equipment
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Liabilities
Current liabilities
Borrowings
Trade and other payables
Derivative financial instruments
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
2016
£’000
2015
£’000
11
12
6
13
14
19
15
17
16
19
18
17
6
10
18
20
20
47,357
30,112
7,775
85,244
20,648
19,968
-
4,495
45,111
2,499
24,185
895
745
8,317
36,641
8,470
-
10,007
39,951
1,755
51,713
42,001
41,309
28,212
4,574
74,095
17,123
17,023
3
332
34,481
2,350
17,150
-
855
6,823
27,178
7,303
11,143
9,734
16,605
1,712
39,194
42,204
31,023
34,708
500
8,584
(32,814)
31,023
34,708
500
2,379
(26,406)
42,001
42,204
These financial statements on pages 74 to 113 were approved by the Board of Directors on 16 November 2016 and signed on its behalf by:
Rob Rennie
David Evans
75
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
Cash flows from operating activities
Cash generated from continuing operating activities before the impact of exceptional items
Cash impact of exceptional items
Cash generated from continuing operations
Cash used in discontinued operations
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 subsidiaries and businesses
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)/generated from financing activities
Note
21
21
26
22
7
20
Net increase/(decrease) in cash, cash equivalents and bank overdrafts
Cash, cash equivalents, and bank overdrafts at beginning of the year
Cash, cash equivalents, and bank overdrafts acquired on acquisitions
Effects of exchange rate changes
Cash, cash equivalents, and bank overdrafts at end of the year
22
2016
£’000
2015
£’000
33,146
(449)
32,697
(317)
32,380
11
(320)
(700)
(1,031)
30,340
50
(3,565)
(3,273)
(3,300)
24,053
(1,192)
22,861
(1,529)
21,332
45
(192)
(800)
(3,270)
17,115
21
(3,222)
(2,961)
(21,249)
(10,088)
(27,411)
(11,973)
(2,430)
(1,812)
(16,215)
4,037
332
-
126
4,495
10,605
(1,859)
(1,152)
7,594
(2,702)
2,925
12
97
332
76
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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 6
At 1 October 2014
Profit for the year
Net exchange differences offset in reserves
Actuarial loss recognised on retirement benefit scheme
Deferred tax relating to retirement benefit scheme
Total comprehensive income for the year
Dividends paid
Movement in shares held by the employee benefit trust
Movement in respect of employee share schemes
Deferred tax relating to employee share schemes
At 30 September 2015
Profit for the year
Net exchange differences offset in reserves
Tax relating to exchange differences offset in reserves
Cash flow hedges
Actuarial loss recognised on retirement benefit scheme
Deferred tax relating to retirement benefit scheme
Total comprehensive income for the year
Dividends paid
Movement in shares held by the employee benefit trust
Movement in respect of employee share schemes
Deferred tax relating to employee share schemes
Share
capital
£’000
31,023
-
-
-
-
-
-
-
-
-
31,023
-
-
-
-
-
-
-
-
-
-
-
Note
10
6
7
20
24
6
6
19
10
6
7
20
24
6
Share
premium
£’000
34,708
-
-
-
-
-
-
-
-
-
34,708
-
-
-
-
-
-
-
-
-
-
-
Other
reserves
£’000
Accumulated
losses
£’000
Total
equity
£’000
25,016
13,666
3,311
(1,040)
3,321
(40,283)
13,666
-
(1,040)
3,321
15,947
(1,859)
(971)
85
675
19,258
(1,859)
(971)
85
675
(26,406)
18,279
-
-
(898)
(23,084)
3,471
42,204
18,279
7,903
(1,698)
(898)
(23,084)
3,471
(2,232)
(2,430)
(1,697)
83
(132)
3,973
(2,430)
(1,697)
83
(132)
(432)
-
3,311
-
-
3,311
-
-
-
-
2,879
-
7,903
(1,698)
-
-
-
6,205
-
-
-
-
At 30 September 2016
31,023
34,708
9,084
(32,814)
42,001
Other reserves consist of the capital redemption reserve of £500,000 (2015: £500,000) and the translation reserve of £8,584,000 (2015: £2,379,000).
All movements in other reserves relate to the translation reserve.
77
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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 IFRS Interpretations Committee (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 IFRIC.
The Group’s approach to these is as follows:
a) Standards, amendments and interpretations effective in 2016:
No new standards or amendments have been adopted for the year
ended 30 September 2016.
b) Standards, amendments and interpretations to existing
standards issued but not yet effective in 2016 and not
adopted early:
The following new standards, amendments to standards and
interpretations have been issued, but are not effective for the
financial year beginning 1 October 2015, have not been adopted
early and are not expected to have a material impact on the Group
financial statements:
n
IFRS 9, ‘Financial instruments’
n
IFRS 14, ‘Regulatory Deferral Accounts’
n Amendments to IFRS 11, ‘Accounting for Acquisition Interests
in Joint Operations’
n Amendments to IAS 12, ‘Recognition of Deferred Tax Assets for
Unrealised Losses’
n Amendments to IAS 16 and IAS 38, ‘Clarification of Acceptable
Methods of Depreciation and Amortisation’
n Amendments to IAS 16 and IAS 41, ‘Agriculture – Bearer Plants’
n Amendments to IAS 27, ‘Equity Method in Separate Financial
Statements’
n Annual improvements cycle 2012-2014
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 power, exposure
or rights to variable returns from its involvement with the entity
and the ability to use its power to affect the amount of the Group’s
returns.
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. Inter-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
position of all subsidiaries and associates that have a functional
currency different from sterling are translated into sterling as follows:
n
IFRS 15, ‘Revenue from Customer Contracts’
n assets and liabilities are translated at the closing rate at the
n
IFRS 16, ‘Leases’
n Amendments to IAS 1, ‘Disclosure Initiative’
n Amendments to IAS 7, ‘Disclosure Initiative’
n Amendment to IFRS 10 and IAS 28, ‘Sale or Contribution of
Assets between and Investor and its Associate or Joint Venture’
n Amendments to IFRS 10, IFRS 12 and IAS 28, ‘Applying the
consolidation exemption’
balance sheet date; and
n
income and expenses are translated at average rates.
All resulting exchange differences are recognised as a separate
component of equity.
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
78
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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. Transfer
of risks and rewards is determined with reference to shipping terms or
when a separately identifiable phase of a contract or customer-funded
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
Pension obligations and post-retirement benefits
The Group has both defined benefit and defined contribution plans.
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. 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:
n
including any market performance conditions;
n 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
n
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.
79
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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 (between 5 and 15
years). 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 in which
the product is available to sale. Development costs capitalised are
tested for impairment 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.
Other intangible assets
Other intangible assets that are acquired by the Group as part
of business combinations are stated at cost less accumulated
amortisation and impairment losses. The useful lives take account of
the differing natures of each of the assets acquired. The lives used are:
n Brands and trademarks - four to ten years
n Customer relationships - seven to ten years
n Order backlog - three months to one year
Amortisation is charged on a straight-line basis over the estimated
useful lives of the assets through general and administrative expenses.
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.
In general, the lives used are:
n Freehold – 40 years
n Short leasehold property – over the period of the lease
n Plant and machinery
- Computer hardware and motor vehicles – three years
- Presses – 15 years
- Other plant and machinery – five to ten years.
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.
Where fixed assets are financed by leasing agreements, which
give rights approximating to ownership, the assets are treated as
if they had been purchased and the capital element of the leasing
commitments are shown as obligations under finance leases. Assets
acquired under finance leases are initially recognised at the present
value of the minimum lease payments. The rentals payable are
apportioned between interest, which is charged to the consolidated
statement of comprehensive income, and the liability, which reduces
the outstanding obligation so as to give a constant rate of charge on
the outstanding lease obligations.
80
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
Inventories
Taxation
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
if longer). If not, they are presented as non-current liabilities. They are
initially recognised at fair value and subsequently held at amortised cost.
Provisions
Provisions are recognised when:
n
n
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.
Income tax on the profit or loss for the year comprises current and
deferred tax.
Taxable profit differs from accounting profit because it excludes
certain items of income and expense that are recognised in the
financial statements but are treated differently for tax purposes.
Current tax is the amount of tax expected to be payable or receivable
on the taxable profit or loss for the current period. This amount is
then amended for any adjustments in respect of prior periods.
Current tax is calculated using tax rates that have been written
into law (‘enacted’) or irrevocably announced/committed by the
respective government (‘substantively enacted’) at the period-end
date. Current tax receivable (assets) and payable (liabilities) are offset
only when there is a legal right to settle them net and the entity
intends to do so. This is generally true when the taxes are levied by
the same tax authority.
Because of the differences between accounting and taxable profits
and losses reported in each period, temporary differences arise on
the amount certain assets and liabilities are carried at for accounting
purposes and their respective tax values. Deferred tax is the amount
of tax payable or recoverable on these temporary differences.
Deferred tax liabilities arise where the carrying amount of an
asset is higher than the tax value (more tax deduction has been
taken). This can happen where the Group invests in capital assets,
as governments often encourage investment by allowing tax
depreciation to be recognised faster than accounting depreciation.
This reduces the tax value of the asset relative to its accounting
carrying amount. Deferred tax liabilities are generally provided on
all taxable temporary differences. The periods over which such
temporary differences reverse will vary depending on the life of the
related asset or liability.
Deferred tax assets arise where the carrying amount of an asset is
lower than the tax value (less tax benefit has been taken). This can
happen where the Group has trading losses, which cannot be offset in
the current period but can be carried forward. Deferred tax assets are
recognised only where the Group considers it probable that it will be
able to use such losses by offsetting them against future taxable profits.
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.
Taxable temporary differences can also arise on investments in foreign
subsidiaries and associates, and interests in joint ventures. Where
the Group is able to control the reversal of these differences and it is
probable that these will not reverse in the foreseeable future, then no
deferred tax is provided. Deferred tax is calculated using the enacted
or substantively enacted rates that are expected to apply when the
asset is realised or the liability is settled. Similarly to current taxes,
deferred tax assets and liabilities are offset only when there is a legal
right to settle them net and the entity intends to do so. This normally
requires both assets and liabilities to have arisen in the same country.
Income tax expense reported in the financial statements comprises
current tax as well as the effects of changes in deferred tax assets and
81
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
liabilities. Tax expense/credits are generally recognised in the same
place as the items to which they relate. For example, the tax associated
with a gain on disposal is recognised in the income statement,
in line with the gain on disposal. Equally, the tax associated with
pension obligation actuarial gains and losses is recognised in other
comprehensive income, in line with the actuarial gains and losses.
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. The
Board is required to exercise significant judgement and make use of
estimates and assumptions in the application of these policies.
Areas which the Board 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 Trustee at intervals
of not more than three years.
The pension cost under IAS 19 (revised) 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
ten of the financial statements.
Inventory provisions
At each balance sheet date, each subsidiary evaluates the recoverability
of inventories and records provisions 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
combinations, 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 8% and 12%.
Valuation of acquired intangible assets
Acquisitions may result in the recognition of customer relationships,
brands and trademarks, patents and order backlogs. These are valued
using discounted cash flow models or a relief from royalty method. In
applying these methodologies certain key judgements and assumptions
are made over discount rates, growth rates and royalty rates.
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
The Group operates in a number of countries around the world.
Uncertainties exist in relation to the interpretation of complex tax
legislation, changes in tax laws and the amount and timing of future
taxable income. In some jurisdictions agreeing tax liabilities with local
tax authorities can take several years. This could necessitate future
adjustments to taxable income and expense already recorded. At the
year-end date, tax liabilities and assets are based on management’s
best judgements around the application of the tax regulations and
management’s estimate of the future amounts that will be settled.
The Group’s operating model involves the cross-border supply of goods
into end markets. There is a risk that different tax authorities could seek to
assess higher profits (or lower costs) to activities being undertaken in their
jurisdiction, potentially leading to higher total tax payable by the Group.
At 30 September 2016 there is a provision of £7.7m in respect of uncertain
tax positions. Due to the uncertainties noted above, there is a risk that the
Group’s judgments are challenged, resulting in a different tax payable or
recoverable from the amounts provided. Management estimates that the
reasonably possible range of outcomes is between an additional liability
of up to £4.5m and a reduction in liabilities of up to £7.7m.
The key uncertainties impacting taxation arise from potential changes
to legislation such as the OECD’s Base Erosion and Profit Shifting
(BEPS) project.
82
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH 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 6
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 Europe and the US.
Business segments
Year ended 30 September 2016
Revenue
100,917
41,967
142,884
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
22,417
(3,895)
(2,536)
15,986
(1,487)
(506)
9,791
(1,968)
(608)
7,215
(1,820)
13,993
5,395
13,993
5,395
(1,400)
(28)
(10)
(1,438)
(320)
(1,758)
11
(165)
(675)
(2,587)
1,824
30,808
(5,891)
(3,154)
21,763
(3,307)
(506)
(320)
17,630
11
(165)
(675)
16,801
1,824
Profit for the year from continuing operations
13,993
5,395
(763)
18,625
Discontinued operations - loss for the year
(346)
(346)
Profit for the year
13,993
5,395
(1,109)
18,279
Segment assets
Segment liabilities
Other segment items
Capital expenditure
- intangible assets
- property, plant and equipment
69,240
48,624
12,491
130,355
14,180
12,383
61,791
88,354
2,616
1,970
640
1,719
17
-
3,273
3,689
The Protection & Defence segment includes £52.9m (2015: £54.6m) of revenues from the US DOD, the only customer which individually contributes
more than 10% to Group revenues.
83
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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 2015
Protection &
Defence
£’000
Dairy
£’000
Unallocated
£’000
Revenue
98,843
35,475
Segment result before depreciation, amortisation, exceptional items,
acquisition costs and defined benefit pension scheme credit
Depreciation of property, plant and equipment
Amortisation of development costs and software
Segment result before amortisation of acquired intangibles, exceptional items,
acquisition costs and defined benefit pension scheme credit
Amortisation of acquired intangibles
Exceptional items and acquisition costs
Defined benefit pension scheme credit
Segment result
Finance income
Finance costs
Other finance expense
Profit before taxation
Taxation
21,632
(3,513)
(2,206)
15,913
(384)
(209)
7,707
(1,121)
(153)
6,433
(659)
(180)
15,320
5,594
15,320
5,594
(2,072)
(50)
(9)
(2,131)
(215)
318
(2,028)
45
(192)
(901)
(3,076)
(2,672)
Group
£’000
134,318
27,267
(4,684)
(2,368)
20,215
(1,043)
(604)
318
18,886
45
(192)
(901)
17,838
(2,672)
Profit for the year from continuing operations
15,320
5,594
(5,748)
15,166
Discontinued operations - loss for the year
(1,500)
(1,500)
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 2016
Revenue
Non-current assets
Year ended 30 September 2015
Revenue
Non-current assets
84
15,320
5,594
(7,248)
13,666
59,487
42,645
6,444
108,576
8,378
10,336
47,658
66,372
2,800
1,320
146
1,902
15
-
2,961
3,222
Europe
£’000
31,701
45,046
Europe
£’000
23,704
39,150
US
£’000
111,183
40,198
US
£’000
110,614
34,945
Group
£’000
142,884
85,244
Group
£’000
134,318
74,095
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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
2016
£’000
1,498
53,860
38,211
12,352
1,891
2,327
2,823
1,529
10,763
2015
£’000
1,384
55,467
34,344
8,095
1,712
1,989
2,511
1,474
8,456
Total cost of sales, selling and distribution costs and general and administrative expenses
125,254
115,432
3 ADJUSTMENTS AND DISCONTINUED OPER ATIONS
Amortisation of acquired intangible assets (note 11)
Recruitment costs
Integration costs
Acquisition costs
Defined benefit pension scheme administration costs
Defined benefit pension scheme settlement gain
2016
£’000
3,307
-
506
-
320
-
4,133
2015
£’000
1,043
215
-
389
350
(668)
1,329
The tax impact of the above is a £nil reduction in tax payable (2015: £nil). The deferred tax impact gives rise to a credit to the income statement of
£924,000 (2015: £253,000).
The recruitment costs in 2015 relate to recruitment of main Board Directors.
The integration costs relate to the acquisition of the Argus thermal imaging camera business and the relocation of the manufacturing to our
Melksham, UK site.
The acquisition costs in 2015 relate to legal and professional fees on the acquisition of Hudstar Systems Inc. and InterPuls S.p.A.
Defined benefit pension scheme costs relate to administrative expenses of the scheme which is closed to future accrual and the defined benefit
pension scheme settlement gain in 2015 which arose following a trivial commutation exercise, both of which impact operating profit. £642,000
(2015: £654,000) of other finance expense relating to the pension scheme is also treated as an adjustment.
The impact on the cash flow statement of the exceptional items was £449,000 (2015: £1,192,000).
Loss from discontinued operations
2016
£’000
346
2015
£’000
1,500
The loss for the year from discontinued operations relates to dilapidations costs of former leased premises of a business which was disposed of in
2006. There was no tax impact of these costs.
The impact on the cash flow statement of the discontinued operations was £317,000 (2015: £1,529,000).
85
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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)
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 charging:
Loss on foreign exchange
Loss on disposal of property, plant and equipment
Loss on disposal of intangibles
Depreciation of 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
Total fees
2016
£’000
(165)
11
(154)
2016
£’000
(642)
(33)
(675)
2016
£’000
395
73
5
5,891
692
3,154
3,307
866
1,039
37
2,327
30
101
131
2015
£’000
(192)
45
(147)
2015
£’000
(654)
(247)
(901)
2015
£’000
196
7
-
4,684
565
2,368
1,043
648
329
35
1,989
30
98
128
86
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
6 TA X AT I O N
UK current tax
UK adjustment in respect of previous periods
Overseas current tax
Overseas adjustment in respect of previous periods
Total current tax (credit)/charge
Deferred tax - current year
Deferred tax - adjustment in respect of previous periods
Total deferred tax credit
Total tax (credit)/charge
2016
£’000
1,155
21
2,154
(3,774)
(444)
(722)
(658)
(1,380)
(1,824)
2015
£’000
-
-
4,049
(1,337)
2,712
(259)
219
(40)
2,672
The adjustment in respect of previous periods relates to the positive outcome of certain tax enquiries and the finalisation of the 2015 tax returns
which took advantage of deductions from legislation substantively enacted after the approval of the 2015 financial statements.
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 20% (2015: 20.5%)
Permanent differences
Losses for which no deferred taxation asset was recognised
Differences in overseas tax rates
Adjustment in respect of previous periods
Tax (credit)/charge
The income tax charged directly to equity during the year was £1,698,000 (2015: £nil).
The deferred tax credited directly to equity during the year was £3,339,000 (2015: £3,996,000).
2016
£’000
16,801
3,360
(984)
(614)
825
(4,411)
(1,824)
2015
£’000
17,838
3,657
(822)
(577)
1,532
(1,118)
2,672
87
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
6 TA X AT I O N ( C O N T I N U E D )
Deferred tax liabilities
At 1 October 2014
Arising on acquisition of subsidiaries
Charged against profit for the year
Exchange differences
At 30 September 2015
Arising on acquisition of subsidiaries
Credited to profit for the year
Exchange differences
At 30 September 2016
Accelerated
capital
allowances
£’000
Other
temporary
differences
£’000
2,003
177
265
30
2,475
-
(272)
287
312
6,585
273
89
7,259
455
(1,246)
1,049
Total
£’000
2,315
6,762
538
119
9,734
455
(1,518)
1,336
2,490
7,517
10,007
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.
Deferred tax assets
At 30 September 2014
Credited to profit for the year
Credited to equity on recognition
At 30 September 2015
(Charged against)/credited to profit for the year
Credited to/(charged against) equity
At 30 September 2016
The standard rate of corporation tax in the UK is 20%.
Retirement
benefit
obligation
£’000
-
-
3,321
3,321
-
3,471
6,792
Share
options
£’000
-
-
675
675
16
(132)
559
Accelerated
capital
allowances
£’000
Other
temporary
differences
£’000
-
481
-
481
(74)
-
407
-
97
-
97
(80)
-
17
Total
£’000
-
578
3,996
4,574
(138)
3,339
7,775
A number of changes to the UK corporation tax system were announced in the March 2016 Budget Statement which reduce the main rate of
corporation tax to 17% by 1 April 2020. These changes were substantively enacted at the balance sheet date. The overall effect of the change has
not had any material impact on the Group’s deferred tax liabilities as the majority of the Group’s deferred tax liabilities are not held in the UK. The
impact on the Group’s deferred tax asset was a reduction of £1.4m.
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
Other
88
2016
£’000
-
-
-
2015
£’000
(346)
(732)
(1,078)
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
7 D I V I D E N D S
On 29 January 2016, the shareholders approved a final dividend of 4.86p per qualifying ordinary share in respect of the year ended 30 September
2015. This was paid on 18 March 2016 absorbing £1,473,000 of shareholders’ funds.
On 28 April 2016, the Board of Directors declared an interim dividend of 3.16p (2015: 2.43p) per qualifying ordinary share in respect of the year
ended 30 September 2016. This was paid on 5 September 2016 absorbing £957,000 (2015: £732,000) of shareholders’ funds.
After the balance sheet date the Board of Directors proposed a final dividend of 6.32p per qualifying ordinary share in respect of the year ended 30
September 2016, which will absorb an estimated £1,915,000 of shareholders’ funds. Subject to shareholder approval, the dividend will be paid on 17
March 2017 to shareholders on the register at the close of business on 17 February 2017. 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, acquisition costs and defined benefit pension scheme costs.
Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below.
2016
2015
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)
30,276
612
30,888
Profit attributable to equity shareholders of the Company
Loss from discontinued operations
Profit from continuing operations
Adjustments
Profit excluding loss from discontinued operations, amortisation of
acquired intangible assets, exceptional items, acquisition costs
and defined benefit pension scheme costs
30,107
830
30,937
2015
Diluted
eps
pence
44.2
4.8
49.0
5.6
2016
£’000
18,279
346
18,625
3,851
2016
Basic
eps
pence
2016
Diluted
eps
pence
60.4
1.1
61.5
12.7
59.2
1.1
60.3
12.5
2015
£’000
13,666
1,500
15,166
1,730
2015
Basic
eps
pence
45.4
5.0
50.4
5.7
22,476
74.2
72.8
16,896
56.1
54.6
89
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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)
2016
£’000
30,970
3,596
921
2,641
83
38,211
2015
£’000
27,776
3,052
850
2,581
85
34,344
Detailed disclosures of Directors’ remuneration and share options, including disclosure of the highest paid Director, are given on pages 66 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 828 (2015: 852).
Key management compensation
Salaries and other employee benefits
Post employment benefits
Share based payments
2016
Number
2015
Number
569
282
13
864
2016
£’000
2,180
119
50
2,349
554
222
10
786
2015
£’000
2,508
121
53
2,682
The key management compensation above includes the Directors plus four (2015: three) others who were members of the Group Executive during
the year.
90
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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
2016
£’000
2015
£’000
39,951
16,605
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 plan was closed to future accrual of benefit on 1 October 2009 and has a
weighted average maturity of approximately 18 years. 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. Three of
the Directors are appointed by the Company 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 fair value of those assets represented 98.0% of the value of the benefits which had accrued to
members, after allowing for future increase in pensions.
During the year the Group made payments to the fund of £700,000, (2015: £800,000) 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 2017 of £450,000 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 (revised) purposes was carried out by an independent actuary at 30 September 2016 using the
projected unit method.
91
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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
At 1 October
Included in profit or loss
Administrative expenses
Settlements
Net interest cost
Included in other comprehensive income
Remeasurement (loss)/gain:
- Actuarial (loss)/gain arising from:
- demographic assumptions
- financial assumptions
- experience adjustment
- Return on plan assets excluding
interest income
2016
£’000
2015
£’000
2016
£’000
2015
£’000
2016
£’000
2015
£’000
(316,092)
(316,829)
299,487
300,800
(16,605)
(16,029)
(320)
-
(12,027)
(350)
668
(12,692)
-
-
11,385
-
-
12,038
(320)
-
(642)
(350)
668
(654)
(12,347)
(12,374)
11,385
12,038
(962)
(336)
7,225
(73,862)
5,690
(480)
(4,945)
1,515
-
-
-
-
-
-
7,225
(73,862)
5,690
(480)
(4,945)
1,515
-
-
37,863
2,870
37,863
2,870
(60,947)
(3,910)
37,863
2,870
(23,084)
(1,040)
Other
Contributions by the employer
Net benefits paid out
-
15,873
-
17,021
700
(15,873)
800
(17,021)
700
-
800
-
At 30 September
(373,513)
(316,092)
333,562
299,487
(39,951)
(16,605)
92
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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
2016
£’000
166,187
95,028
29,709
42,638
333,562
2015
£’000
151,782
62,022
28,485
57,198
299,487
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 plan’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 40% allocation to LDI funds and cash and 60% to return-seeking investments.
Actuarial assumptions
The main financial assumptions used by the independent qualified actuaries to calculate the liabilities under IAS 19 (revised) are set out below:
Inflation (RPI)
Inflation (CPI)
Pension increases post August 2005
Pension increases pre August 2005
Discount rate for scheme liabilities
2016
% p.a.
2.85
1.65
2.05
2.75
2.45
2015
% p.a.
2.80
1.70
2.10
2.70
3.90
93
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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
2016
21.9
23.9
The average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date is as follows:
Male
Female
Sensitivity analysis
Inflation (RPI) (0.25% increase)
Discount rate for scheme liabilities (0.25% increase)
Future mortality (1 year increase)
2015
22.2
24.4
2015
23.5
25.9
2016
23.2
25.4
Defined benefit obligation
Increase/(decrease)
£’000
10,751
(16,134)
16,056
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 2016 was £496,000 (2015: £442,000).
94
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
11 I N TA N G I B L E A S S E T S
At 1 October 2014
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 30 September 2015
Opening net book amount
Exchange differences
Additions
Acquisitions (note 26)
Amortisation
Closing net book amount
At 30 September 2015
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 30 September 2016
Opening net book amount
Exchange differences
Additions
Acquisitions (note 26)
Disposals
Amortisation
Closing net book amount
At 30 September 2016
Cost
Accumulated amortisation and impairment
Net book amount
63
-
63
63
109
-
2,201
-
2,373
2,373
-
2,373
2,373
368
-
487
-
-
3,228
3,228
-
3,228
Goodwill
£’000
Acquired
intangibles
£’000
Development
expenditure
£’000
Computer
software
£’000
1,090
(678)
412
412
1,165
-
20,149
(1,043)
20,683
22,304
(1,621)
20,683
20,683
3,151
-
2,277
-
(3,307)
22,138
(7,263)
14,875
14,875
684
2,567
-
(1,947)
16,179
25,481
(9,302)
16,179
16,179
2,360
3,142
-
-
(2,482)
22,804
19,199
2,604
(714)
1,890
1,890
211
394
-
(421)
2,074
3,800
(1,726)
2,074
2,074
598
131
-
(5)
(672)
2,126
Total
£’000
25,895
(8,655)
17,240
17,240
2,169
2,961
22,350
(3,411)
41,309
53,958
(12,649)
41,309
41,309
6,477
3,273
2,764
(5)
(6,461)
47,357
27,098
(4,294)
22,804
34,129
(14,930)
4,690
(2,564)
69,145
(21,788)
19,199
2,126
47,357
Development expenditure is amortised over a period between five and 15 years.
Computer software is amortised over a period between three and seven years.
The remaining useful economic life of the development expenditure is between five and 12 years.
Acquired intangibles include customer relationships, development costs, order book on acquisition and brands and are amortised over a period
between three and ten years.
95
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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 2014
Cost
Accumulated depreciation and impairment
Net book amount
Year ended 30 September 2015
Opening net book amount
Exchange differences
Additions
Acquisitions (note 26)
Disposals
Depreciation charge
Closing net book amount
At 30 September 2015
Cost
Accumulated depreciation and impairment
Net book amount
Year ended 30 September 2016
Opening net book amount
Exchange differences
Reclassifications
Additions
Acquisitions (note 26)
Disposals
Depreciation charge
Closing net book amount
At 30 September 2016
Cost
Accumulated depreciation and impairment
Net book amount
Freeholds
£’000
Short
leaseholds
£’000
Plant and
machinery
£’000
Total
£’000
3,179
(359)
2,820
2,820
484
29
4,511
-
(176)
7,668
8,879
(1,211)
7,668
7,668
1,656
2,558
108
-
-
(314)
11,676
14,257
(2,581)
11,676
-
-
-
42,469
(25,714)
45,648
(26,073)
16,755
19,575
-
131
-
2,404
-
(9)
16,755
981
3,193
1,616
(28)
(4,499)
19,575
1,596
3,222
8,531
(28)
(4,684)
2,526
18,018
28,212
3,162
(636)
57,589
(39,571)
69,630
(41,418)
2,526
18,018
28,212
2,526
105
(2,558)
-
-
-
(73)
-
-
-
-
18,018
2,222
-
3,581
242
(123)
(5,504)
28,212
3,983
-
3,689
242
(123)
(5,891)
18,436
30,112
65,808
(47,372)
80,065
(49,953)
18,436
30,112
The net book amount of short leaseholds and £33,000 (2015: £106,000) included within plant and machinery relates to assets held under finance leases.
96
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
13 I N V E N T O R I E S
Raw materials
Work in progress
Finished goods
2016
£’000
13,382
389
6,877
20,648
Provisions for inventory write downs were £4,216,000 (2015: £2,412,000).
The cost of inventories recognised as an expense and included in cost of sales amounted to £55,358,000 (2015: £56,851,000).
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
Other receivables comprise sundry items which are not individually significant for disclosure.
Movements on the Group provision for impairment of receivables are as follows:
At 1 October
Provision for impairment of receivables
Acquisitions
Receivables written off during the year as uncollectable
At 30 September
2016
£’000
18,351
(401)
17,950
673
1,345
19,968
2016
£’000
421
37
-
(57)
401
2015
£’000
9,581
712
6,830
17,123
2015
£’000
14,904
(421)
14,483
1,344
1,196
17,023
2015
£’000
249
35
137
-
421
The creation and release of provisions for impaired receivables have been included in general and administrative expenses in the consolidated
statement of comprehensive income.
97
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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
2016
£’000
4,495
2015
£’000
332
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
Other payables comprise sundry items which are not individually significant for disclosure.
17 B O R R O W I N G S
Current
Bank loans
Finance lease liabilities
Non-current
Bank loans and overdrafts
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 two and five years
98
2016
£’000
6,527
550
373
16,735
24,185
2016
£’000
2,460
39
2,499
-
2,499
2,499
-
2,499
2015
£’000
1,505
408
1,093
14,144
17,150
2015
£’000
1,864
486
2,350
11,143
13,493
2,350
11,143
13,493
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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 within one year
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.
2016
£’000
-
30,550
30,550
2,499
309
33,358
2015
£’000
-
15,194
15,194
13,007
362
28,563
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 2019. 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 2016 and 2015.
InterPuls S.p.A. has a fixed term loan of €2.5m which was due for renewal on 31 October 2016. This facility is priced on EURIBOR plus margin of 1.3%.
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
Finance lease liabilities
2016
Sterling
%
-
-
2016
Dollar
%
-
-
2016
Euro
%
1.0
3.0
2015
Sterling
%
1.8
-
2015
Dollar
%
1.4
-
2015
Euro
%
0.9
3.0
99
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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
Facility
relocation
£’000
Property
obligations
£’000
Balance at 1 October 2014
Charged in the year
Unwinding of discount
Payments in the year
Exchange difference
Balance at 30 September 2015
Unwinding of discount
Payments in the year
Balance at 30 September 2016
Analysis of total provisions
Non-current
Current
454
-
-
(485)
31
-
-
-
-
Total
£’000
3,819
1,500
247
(3,030)
31
2,567
33
(100)
3,365
1,500
247
(2,545)
-
2,567
33
(100)
2,500
2,500
2016
£’000
1,755
745
2,500
2015
£’000
1,712
855
2,567
Property obligations include an onerous lease provision of £1.5m in respect of unutilised space at the Group’s leased Melksham facility in the UK.
£0.3m of this provision is expected to be utilised in 2017 and the remaining £1.2m over the following five 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 ten 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.
100
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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, letters of credit or payments in advance are received
for significant export sales.
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
2016
£’000
17,950
1,345
4,495
-
23,790
2016
£’000
2,571
16,123
4,116
980
2015
£’000
14,483
1,196
332
3
16,014
2015
£’000
2,076
11,372
1,879
687
23,790
16,014
101
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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
2016
£’000
Provision
2016
£’000
14,864
2,403
516
227
341
-
(2)
(50)
(49)
(300)
Net
2016
£’000
14,864
2,401
466
178
41
Gross
2015
£’000
Provision
2015
£’000
11,020
1,631
1,922
135
196
-
(85)
(87)
(82)
(167)
Net
2015
£’000
11,020
1,546
1,835
53
29
18,351
(401)
17,950
14,904
(421)
14,483
The total past due receivables, net of provisions is £3,086,000 (2015: £3,463,000).
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 £33.4m (2015: £28.6m).
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
amount
£’000
Contractual
cash flows
£’000
Less than
12 months
£’000
1-2
Years
£’000
2-5 More than
5 Years
£’000
Years
£’000
30 September 2016
Bank loans and overdrafts
Finance lease liabilities
Trade and other payables
Forward exchange contracts used for hedging
- Outflow
- Inflow
2,460
39
23,635
895
-
2,460
39
23,635
11,949
-
2,460
39
23,635
11,949
-
27,029
38,083
38,083
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
102
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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 2015
Bank loans and overdrafts
Finance lease liabilities
Trade and other payables
Forward exchange contracts used for hedging
- Outflow
- Inflow
Carrying
amount
£’000
Contractual
cash flows
£’000
Less than
12 months
£’000
13,007
486
16,742
-
(3)
13,026
486
16,742
3,923
-
1,872
486
16,742
3,923
-
1-2
Years
£’000
338
-
-
-
-
2-5
Years
£’000
More than
5 Years
£’000
10,816
-
-
-
-
-
-
-
-
-
-
30,232
34,177
23,023
338
10,816
(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 2016 was a
£895,000 liability (2015: £3,000 asset) comprising an asset of £nil (2015: £3,000) and a liability of £895,000 (2015: £nil).
All forward exchange contracts in place at 30 September 2016 mature within one year.
103
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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 £576,000 (2015: £700,000) impact on the Group’s current year profit before interest and tax, a £559,000
(2015: £609,000) impact on the Group’s profit after tax and a £2,196,000 (2015: £1,300,000) impact on shareholders’ funds. The method of
estimation, which has been applied consistently, involves assessing the translation impact of the US dollar.
A general change of five cents in the value of the euro against sterling would have had a £27,000 (2015: £nil) impact on the Group’s current
year profit before interest and tax, a £19,000 (2015: £nil) impact on the Group’s profit after tax and a £972,000 (2015: £800,000) impact on
shareholders’ funds. The method of estimation which has been applied consistently, involves assessing the translation impact of the euro.
The following significant exchange rates applied during the year:
US dollar
Euro
(b) Interest rate risk
Average rate
2016
Closing rate
2016
Average rate
2015
Closing rate
2015
1.423
1.282
1.296
1.161
1.542
1.351
1.517
1.359
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 £2.0m (2015: net debt £13.2m) a 1% increase in interest rates would have
no impact on interest costs (2015: £0.1m).
The floating rate financial liabilities 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.
104
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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
2016
£’000
(2,499)
4,495
2015
£’000
(13,493)
332
1,996
(13,161)
313,335
283,550
n/a
4.4%
105
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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
Bank loans, overdrafts and finance leases
Trade and other payables
Carrying
amount
2016
£’000
17,950
1,345
4,495
(895)
(2,499)
(23,635)
Fair
value
2016
£’000
17,950
1,345
4,495
(895)
(2,499)
(23,635)
Carrying
amount
2015
£’000
14,483
1,196
332
3
(13,493)
(16,742)
Fair
value
2015
£’000
14,483
1,196
332
3
(13,493)
(16,742)
(3,239)
(3,239)
(14,221)
(14,221)
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
two in the fair value hierarchy as the valuation is based on inputs that are either directly or indirectly observable.
Bank loans, overdrafts and finance leases
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.
106
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
2 0 S H A R E C A P I TA L
Called up allotted and fully
paid ordinary shares of £1 each
No. of
shares
2016
Ordinary
shares
2016
£’000
Share
premium
2016
£’000
No. of
shares
2015
Ordinary
shares
2015
£’000
Share
premium
2015
£’000
At the beginning of the year
31,023,292
31,023
34,708
31,023,292
31,023
34,708
At the end of the year
31,023,292
31,023
34,708
31,023,292
31,023
34,708
Details of outstanding share options and movements in share options during the year are given in the Remuneration Report on pages 55 to 73.
Ordinary shareholders are entitled to receive dividends and are entitled to vote at meetings of the Company.
At 30 September 2016 718,789 (2015: 887,315) 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 2016 was £7,260,000 (2015:
£8,110,000). These shares are held at cost as treasury shares and deducted from shareholders’ equity.
During 2016 the trust acquired 181,890 (2015: 162,095) shares at a cost of £1,812,000 (2015: £1,152,000).
343,526 (2015: 327,130) shares were used to satisfy awards following the vesting of shares relating to the 2010 Performance Share Plan.
6,890 (2015: 29,460) ordinary shares of £1 each were awarded in relation to the 2015 annual incentive plan.
107
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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
Continuing operations
Profit for the year
Adjustments for:
Taxation
Depreciation
Amortisation of intangible assets
Defined benefit pension scheme cost/(credit)
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
Increase in inventories
(Increase)/decrease in receivables
Increase/(decrease) in payables and provisions
Cash generated from continuing operations
Analysed as:
Cash generated from continuing operations prior to the effect of exceptional operating items
Cash effect of exceptional operating items
Discontinued operations
Loss for the year
Increase/(decrease) in payables and provisions
Cash used in discontinued operations
Cash generated from operations
Cash flows relating to the discontinued operations are as follows:
Cash flows from operating activities
Cash used in discontinued operations
2 2 A N A LY S I S O F N E T C A S H /( D E B T )
2016
£’000
18,625
(1,824)
5,891
6,461
320
(11)
165
675
5
73
83
(422)
(677)
3,333
32,697
33,146
(449)
(346)
29
(317)
32,380
(317)
(317)
2015
£’000
15,166
2,672
4,684
3,411
(318)
(45)
192
901
-
7
85
(1,264)
4,225
(6,855)
22,861
24,053
(1,192)
(1,500)
(29)
(1,529)
21,332
(1,529)
(1,529)
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
Overdrafts
Net cash and cash equivalents
Debt due in less than one year
Debt due in more than one year
108
At 1 Oct
2015
£’000
332
-
332
(2,350)
(11,143)
(13,161)
Cash flow
£’000
4,037
-
4,037
247
11,726
16,010
Exchange
movements
£’000
At 30 Sep
2016
£’000
126
-
126
(396)
(583)
(853)
4,495
-
4,495
(2,499)
-
1,996
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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
2016
£’000
426
2015
£’000
560
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 one and five years
Later than five 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
2016
£’000
1,384
6,103
13,399
20,886
2015
£’000
1,372
5,900
15,419
22,691
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 pages 55 to 73 and are incorporated by reference into these financial statements. The charge against profit
of £83,000 (2015: £85,000) 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 (years)
Dividend yield (%)
Volatility is estimated based on actual experience over the last three years.
2016
0.38
10.65
36
1.7
3.0
0.8
2015
0.48
7.28
36
0.8
3.0
0.9
109
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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 (2015: £nil). Key management compensation is
disclosed in note 9.
2 6 ACQ U I S I T I O N S
Hudstar Systems Inc.
On 19 June 2015, Avon Protection Systems, Inc. acquired 100% of the share capital of Hudstar Systems Inc. (Hudstar), a leading US based designer
and manufacturer of electronic control systems used in powered air respiratory systems, for consideration of $5,576,000.
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
Deferred tax liabilities
Net assets acquired
Goodwill
Total consideration
Satisfied by:
Cash at completion
Deferred/contingent consideration due in future years
-
313
454
242
20
(582)
-
447
1,536
-
-
(186)
-
-
(538)
812
1,787
-
-
-
-
-
(625)
1,162
3,323
313
454
56
20
(582)
(1,163)
2,421
1,100
3,521
3,205
316
3,521
The goodwill is attributable to the acquired workforce and control over key technology providing barriers to entry to competitors.
Intangible assets comprise development costs (£2.8m), customer relationships (£0.2m) and brands and patents (£0.3m).
The contingent consideration becomes payable over the next ten 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 $500,000.
110
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
2 6 ACQ U I S I T I O N S ( C O N T I N U E D )
InterPuls S.p.A.
On 5 August 2015, Avon Rubber Italia S.r.l. acquired 100% of the share capital and shareholder loan notes of InterPuls S.p.A. (InterPuls), an Italian
supplier of specialist milking components, for consideration of €25,750,000.
Book value
£’000
Accounting
policy alignment
£’000
Fair value
adjustment
£’000
319
8,218
1,569
1,395
(2,541)
(2,609)
(318)
6,033
2,243
-
-
(70)
(321)
-
(718)
1,134
Intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Trade and other payables
Bank loans and other borrowings
Deferred tax liabilities
Net assets acquired
Goodwill
Total consideration
Satisfied by:
Cash at completion
Fair value
£’000
16,826
8,218
1,569
1,325
(2,862)
(2,609)
(5,599)
14,264
-
-
-
-
-
(4,563)
9,701
16,868
1,101
17,969
17,969
17,969
The goodwill is attributable to sales synergies from integration of distribution channels, access to new markets and the workforce of the acquired
businesses.
Intangible assets comprise customer relationships (£12.1m), development costs (£2.2m), brand (£1.7m), order book (£0.4m) and software and
other (£0.4m).
Goodwill is tested annually for impairment. For goodwill in relation to the Hudstar and InterPuls acquisitions, value in use calculations are used
to determine the recoverable amount of goodwill using cash flow projections based on the budget and three year plan. The key assumptions
are the discount rate and the long term growth rate. The discount rate is the weighted average cost of debt financing and equity finance of
8.5%. In the period after the three year plan the growth rate is forecast to be 10% for the next four years, being derived from the expected
growth rate for the related products. There is significant headroom in each value in use calculation.
111
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
2 6 ACQ U I S I T I O N S ( C O N T I N U E D )
Argus
On 8 October 2015, the Group acquired the trade and assets of the Argus thermal imaging business from e2v technologies plc. for consideration of
£3,300,000. Based in Chelmsford UK, Argus is a leading designer and manufacturer of thermal imaging cameras for the first responder and fire markets.
Book value
£’000
Accounting
policy alignment
£’000
Fair value
adjustment
£’000
Fair value
£’000
Intangible assets
Property, plant and equipment
Inventories
Deferred tax liabilities
Net assets acquired
Goodwill
Total consideration
Satisfied by:
Cash at completion
-
242
749
-
991
753
-
-
(150)
603
1,524
-
-
(305)
1,219
2,277
242
749
(455)
2,813
487
3,300
3,300
3,300
The goodwill is attributable to sales synergies from integration of distribution channels, access to new markets and the workforce of the acquired
businesses.
The Directors have reviewed the goodwill for impairment and concluded that the carrying value is recoverable as the fair value less costs to sell
exceeds the carrying amount of the net assets and goodwill recognised.
Intangible assets comprise customer relationships (£0.6m), development costs (£0.8m), order book (£0.4m) and brand (£0.5m).
The results of the acquired business have been included in the Group’s consolidated statement of comprehensive income from 8 October 2015 and
contributed revenue of £5.5m and profit of £0.5m to the profit for the year.
112
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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
Avon Rubber Italia S.r.l.
Held by Group undertakings
Avon Engineered Fabrications, Inc.
Avon Hi-Life, Inc.
Avon Protection Systems, Inc.
Avon Rubber & Plastics, Inc.
Avon Group Limited
Avon Protection Systems UK Limited
Avon-Dairy America do sul Solucoes Para Ordenha LTDA
Interpuls S.p.A.
Country in which
incorporated
UK
UK
UK
China
Italy
US
US
US
US
UK
UK
Brazil
Italy
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, Avon Rubber Italia S.r.l. and Avon Rubber & Plastics, Inc. are investment holding companies.
InterPuls S.p.A. designs and manufactures specialist milking components for use in the dairy industry.
The activities of all of the other companies listed above are the manufacture and/or distribution of rubber and other polymer based products.
Avon Polymer Products Limited and Avon Rubber Overseas Limited are exempt from the requirement to file audited accounts by virtue of Section
479A of the Companies Act 2006 (‘the Act’). All remaining UK subsidiaries are exempt from the requirement to file audited accounts by virtue of
Section 480 of the Act.
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ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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”):
n give a true and fair view of the state of the Group’s affairs as at
30 September 2016 and of its profit and cash flows for the year
then ended;
n have been properly prepared in accordance with International
Financial Reporting Standards (“IFRSs”) as adopted by the
European Union; and
n have been prepared in accordance with the requirements of the
Companies Act 2006 and Article 4 of the IAS Regulation.
What we have audited
The financial statements, included within the Annual Report, comprise:
n
n
n
n
n
n
the Consolidated Balance Sheet as at 30 September 2016;
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; and
the notes to the 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 IFRSs as adopted by the
European Union, and applicable law.
MATERIALITY
AUDIT
SCOPE
Our audit approach
Overview
n Overall Group materiality:
£850,000 which represents 5%
of Group profit before taxation.
n 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 EU)
and Avon Rubber p.l.c.).
n Taken together, these four reporting units account for 87% of
Group revenues and in excess of 90% of Group profit before
taxation.
n Specific audit procedures were also performed by the UK audit
team on certain other balances and transactions at the remaining
seven reporting units.
n Provisions for uncertain tax
positions and deferred tax.
n Valuation of the Group’s
pension.
n
Intangible assets (development
expenditure) impairment
assessment.
n Risk of fraud in revenue
recognition.
AREAS OF
FOCUS
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
override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented 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 opposite. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the
financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete
list of all risks identified by our audit.
114
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
Area of focus
How our audit addressed the area of focus
Provisions for uncertain tax positions and deferred tax
As noted in the critical accounting judgements section on page
82, and included within note 6, there are a number of significant
judgements involved in the determination of taxation balances,
particularly in relation to the recognition of deferred taxation
assets in the UK which were £7.8m at 30 September 2016.
The Group also has material uncertain taxation positions
resulting from the interpretation of the impact of the application
of tax regulations in certain jurisdictions. Management have
applied judgement in estimating the magnitude of the risk and
probability of a future outflow in each case to derive the level
of provisions held. The provision for uncertain tax positions is
described on page 82.
Given the number of judgements involved and the complexities
of dealing with taxation rules and regulations in different countries
and states within the US, this was an area of focus for us.
We evaluated the Directors’ assessment of the availability of
future taxable profits in the UK to determine whether a deferred
taxation asset should be recognised, by considering the forecasts
of future profits. We determined that the Director’s assessment
was reasonable in identifying and recognising deferred taxation
assets in relation to the retirement benefit obligation, share
options, capital allowances and temporary timing differences.
We assessed the adequacy of the level of provision established
in relation to a number of uncertain taxation positions primarily
in respect of risks across the Group. The judgements made
by management took account of the level and nature of the
risks giving rise to the uncertain tax positions, together with
their assessment of the likely outcome. We considered the
judgements made by management to be reasonable based on
our understanding of the relevant tax regulations.
Valuation of the Group’s pension
We focused on this area because of the magnitude of the
defined benefit pension deficit of £40.0m and the material
judgements involved in determining the actuarial assumptions
which are set out in note 10.
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 rate, being the assumptions to which
the deficit is most sensitive
A change in each of these assumptions by 0.25% can cause a
material change in the value of the underlying pension deficit (as
highlighted on page 94).
The Directors employed an independent actuary to assist them
with the valuation of the deficit.
We used our actuarial experts to assess the methodology
adopted by the Directors and their actuary to determine the net
pension deficit. We concluded that the requirements of IAS 19
’Employee benefits’ had been applied.
We also used our actuarial experts to assess the reasonableness
of the key actuarial assumptions selected, by comparing these
to our own independent benchmark ranges based on our
assessment of current market conditions and available actuarial
data. We noted that the discount rate, inflation rate and mortality
rate were within our acceptable range.
We considered the competence and objectivity of the Directors’
independent actuary including the experience and reputation
of the firm together with the length of service. We were satisfied
that the actuary was competent and objective.
We evaluated whether the Directors’ judgements and
assumptions had been made on a consistent basis including in
comparison to prior financial years.
We also assessed the actuary’s valuation by obtaining 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 to independent sources, such
as fund manager confirmations and/or quoted market prices
where available, noting no exceptions.
115
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR 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 .
Area of focus
How our audit addressed the area of focus
Intangible assets (development expenditure) impairment
assessment
We focused on this area because of the magnitude of capitalised
development expenditure of £19.2m and the risk that amounts
may not be recoverable if estimated future sales orders cannot
be delivered or regulatory approvals are not obtained. This risk is
set out in the critical accounting judgments on page 82 and the
amounts capitalised are included in note 11.
In particular we focused on the capitalised development costs
relating to the PAPR, CBRN/CO Escape Hood and EEBD Protection
& Defence products, given the amounts held in the balance
sheet and the stage of their development. These products are
described on page 15.
We tested a sample of capitalised development costs against the
criteria set out in IAS38 ‘Intangible assets’ including the technical
feasibility and the viability of the completion of the projects and
the ability for the projects 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
process and governance which have been put in place around
project approval, authorisation and ongoing monitoring. We
considered that these processes were appropriate.
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. As a result of our work
we determined that the judgement by management that no
impairment was required for these and other major development
projects was reasonable.
Risk of fraud in revenue recognition
We focused on this area as judgements are made by the
Directors in determining whether provisions should be made
against revenue on certain contractual arrangements in the US
Protection & Defence business.
The Directors made an estimate of amounts which could be
due back to customers reflecting the risks inherent within the
performance of the contracts over a number of years.
We obtained the calculations of contractual revenue provisions
and evaluated the Directors’ assessment of the risk of claw back
based on our independent reading of the relevant contractual
terms and the revenue recognised.
In doing so, we concluded that the Group recognised revenue
in line with their contractual obligations and their revenue
recognition accounting policy.
116
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above £43,000 (2015:
£45,000) 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 51, in relation to going concern. We have
nothing to report having performed our review.
Under ISAs (UK & Ireland) we are required to report to you if we have
anything material to add or to draw attention to in relation to the
Directors’ statement about whether they considered it appropriate to
adopt the going concern basis in preparing the financial statements.
We have nothing material to add or to draw attention to.
As noted in the Directors’ statement, the Directors have concluded
that it is appropriate to adopt the going concern basis in preparing
the financial statements. 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.
Other required reporting
Consistency of other information
Companies Act 2006 reporting
In our opinion:
n
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.
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 where we performed audit
work accounted for approximately 87% of Group revenues and in
excess of 90% of Group profit before taxation.
Specific audit procedures were also performed by the UK team on
certain balances and transactions material to the Group financial
statements at the remaining reporting units. The Parent Company’s
complete financial information was also subject to audit.
The procedures set out above, 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 was 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 on the individual financial statement line items
and disclosures and in evaluating 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
£850,000 (2015: £900,000).
How we determined it
5% of Group profit before
taxation.
Rationale for benchmark
applied
We believe that profit before
tax is the primary measure
used by the shareholders in
assessing the performance
of the Group.
117
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 .
ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
n
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.
We have no exceptions to
report.
n
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 position and performance, business model and strategy is
materially inconsistent with our knowledge of the Group acquired in the course of performing
our audit.
We have no exceptions to
report.
n
the section of the Annual Report on page 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.
The Directors’ assessment of the prospects of the Group and of the principal risks that would
threaten the solvency or liquidity of the Group
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:
n
the Directors’ confirmation on page 43 of the Annual Report, in accordance with provision C.2.1
of the Code, that they have carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model, future performance, solvency
or liquidity.
We have nothing material to
add or to draw attention to.
n
the disclosures in the Annual Report that describe those risks and explain how they are being
managed or mitigated.
We have nothing material to
add or to draw attention to.
n
the Directors’ explanation on page 51 of the Annual Report, in accordance with provision
C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period
they have done so and why they consider that period to be appropriate, and their statement
as to whether they have a reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the period of their assessment, including
any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing material to
add or to draw attention to.
Under the Listing Rules we are required to review the Directors’ statement that they have carried out a robust assessment of the principal
risks facing the Group and the Directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in
scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking
that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with
the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
118
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
Adequacy of information and explanations received
What an audit of financial statements involves
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
this responsibility.
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:
n whether the accounting policies are appropriate to the
Group’s circumstances and have been consistently applied and
adequately disclosed;
n
the reasonableness of significant accounting estimates made by
the Directors; and
Corporate governance statement
n
the overall presentation of the financial statements.
Under the Listing Rules we are required to review the part of the
Corporate Governance Statement relating to ten further provisions of
the Code. We have nothing to report having performed our review.
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.
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 45, 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 parent 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 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.
Other matter
We have reported separately on the parent company financial
statements of Avon Rubber p.l.c. for the year ended 30 September
2016 and on the information in the Directors’ Remuneration Report
that is described as having been audited.
Colin Bates
Senior Statutory Auditor
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Bristol
16 November 2016
119
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR 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 .
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”):
n give a true and fair view of the state of the parent company’s
affairs as at 30 September 2016;
n have been properly prepared in accordance with United
Kingdom Generally Accepted Accounting Practice; and
n have been prepared in accordance with the requirements of the
Companies Act 2006.
What we have audited
The financial statements, included within the Annual Report,
comprise:
Other required reporting
Consistency of other information
Companies Act 2006 reporting
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 International Standards on Auditing (UK and Ireland) (“ISAs
(UK & Ireland)”) we are required to report to you if, in our opinion,
information in the Annual Report is:
n materially inconsistent with the information in the audited
financial statements; or
n apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the parent company
acquired in the course of performing our audit; or
the Parent Company Balance Sheet as at 30 September 2016;
n otherwise misleading.
n
n
n
n
the Parent Company Statement of Changes in Equity for the year
then ended;
the Parent Company accounting policies; and
the notes to the Parent Company 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 United Kingdom
Accounting Standards, comprising FRS 101 “Reduced Disclosure
Framework”, and applicable law (United Kingdom Generally Accepted
Accounting Practice).
120
We have no exceptions to report arising from this responsibility.
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to you if, in
our opinion:
n we have not received all the information and explanations we
require for our audit; or
n adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been
received from branches not visited by us; or
n
the financial statements and the part of the Directors’
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.
Directors’ remuneration
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.
Other Companies Act 2006 reporting
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.
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH 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 .
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 45, 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 parent 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
We conducted our audit in accordance with ISAs (UK & Ireland). 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:
n whether the accounting policies are appropriate to the parent
company’s circumstances and have been consistently applied
and adequately disclosed;
n
the reasonableness of significant accounting estimates made by
the Directors; and
n
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.
Other matter
We have reported separately on the Group financial statements of
Avon Rubber p.l.c. for the year ended 30 September 2016.
Colin Bates
Senior Statutory Auditor
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Bristol
16 November 2016
121
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR 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 6
Assets
Non-current assets
Intangible assets
Plant and equipment
Investments in subsidiaries
Deferred tax assets
Current assets
Trade and other receivables
Amounts owed by Group undertakings
Cash and cash equivalents
Liabilities
Current Liabilities
Trade and other payables
Amounts owed to Group undertakings
Provisions for liabilities and charges
Net current assets
Non-current liabilities
Borrowings
Provisions for liabilities and charges
Net assets
Shareholders’ equity
Ordinary shares
Share premium account
Capital redemption reserve
Retained Earnings
Total equity
Note
2016
£’000
2015
£’000
4
5
6
7
8
9
10
11
10
12
2
26
70,800
645
8
43
64,219
806
71,473
65,076
517
73,225
129
930
75,402
-
73,871
76,332
3,228
8,347
745
12,320
2,616
-
855
3,471
61,551
72,861
-
1,755
1,755
8,748
867
9,615
131,269
128,322
31,023
34,708
500
65,038
31,023
34,708
500
62,091
131,269
128,322
These financial statements on pages 122 to 132 were approved by the Board of Directors on 16 November 2016 and signed on its behalf by:
Rob Rennie
David Evans
122
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
PA R E N T C O M PA N Y 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 6
At 1 October 2014
Profit for the year
Dividends paid
Movement in shares held by the employee benefit trust
Movement in respect of employee share schemes
Deferred tax relating to employee share schemes
At 30 September 2015
Profit for the year
Dividends paid
Movement in shares held by the employee benefit trust
Movement in respect of employee share schemes
Deferred tax relating to employee share schemes
Share
capital
£’000
Share
premium
£’000
Note
Capital
redemption
reserve
£’000
31,023
-
-
-
-
-
31,023
-
-
-
-
-
1
2
12
14
7
1
2
12
14
7
34,708
-
-
-
-
-
34,708
-
-
-
-
-
500
-
-
-
-
-
500
-
-
-
-
-
Retained
earnings
£’000
57,471
6,690
(1,859)
(971)
85
675
62,091
7,123
(2,430)
(1,697)
83
(132)
Total
equity
£’000
123,702
6,690
(1,859)
(971)
85
675
128,322
7,123
(2,430)
(1,697)
83
(132)
At 30 September 2016
31,023
34,708
500
65,038
131,269
123
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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.
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.
Basis of preparation
Share based payment
The accounts have been prepared on a going concern basis and in
accordance with the Companies Act 2006 and with Financial Reporting
Standard 101 Reduced Disclosure Framework (FRS 101) and under
the historical cost convention except for financial assets and liabilities
(including derivative instruments) held at fair value through profit and loss.
FRS 101 became applicable for the year ended 30 September 2016 and
the impact of the transition is set out in note 15.
The Company has taken advantage of the disclosure exemptions available
under FRS 101 in relation to the following:
n presentation of a cash flow statement and related notes
n comparative period reconciliations for share capital and intangible
and tangible fixed assets
n transactions with wholly owned subsidiaries
n capital management
n share based payments
n financial instruments
n compensation of key management personnel
n additional balance sheet for the beginning of the earliest comparative
period following transition.
Where required, equivalent disclosures are given in the Group financial
statements.
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.
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.
One of the Company’s subsidiaries, Avon Polymer Products Limited is
the employer that is legally responsible for the scheme and the pension
obligations are included in full in its accounts. No asset or provision has
been reflected in the Company’s balance sheet for any surplus or deficit
arising in respect of pension obligations.
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.
Intangible assets
Computer software is included in intangible assets at cost and amortised
over its estimated life.
Impairment charges are made if there is significant doubt as to the sufficiency
of future economic benefits to justify the carrying values of the intangible
assets based upon discounted cash flow projections using an appropriate risk
weighted discount factor.
Plant and equipment
Property, plant and equipment is stated at historical cost 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.
Depreciation is provided estimated to write off the depreciable amount of
relevant assets by equal annual instalments over their estimated useful lives.
In general, the lives used are:
n Computer hardware – 3 years
n Other plant and machinery – 5 – 10 years.
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.
124
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH Leased assets
Operating lease rentals are charged against profit over the term of the
lease on a straight line basis.
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.
Deferred taxation
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
if longer). If not, they are presented as non-current liabilities. They are
initially recognised at fair value and subsequently held at amortised cost.
Provisions
Provisions are recognised when:
n the Company has a legal or constructive obligation as a result of a past
event;
n
it is probable that an outflow of resources will be required to settle the
obligation and the amount has been reliably estimated.
Because of the differences between accounting and taxable profits and
losses reported in each period, temporary differences arise on the amount
certain assets and liabilities are carried at for accounting purposes and
their respective tax values. Deferred tax is the amount of tax payable or
recoverable on these temporary differences.
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.
Deferred tax liabilities arise where the carrying amount of an asset is higher
than the tax value (more tax deduction has been taken). This can happen
where the Company invests in capital assets, as governments often
encourage investment by allowing tax depreciation to be recognised
faster than accounting depreciation. This reduces the tax value of the
asset relative to its accounting carrying amount. Deferred tax liabilities are
generally provided on all taxable temporary differences. The periods over
which such temporary differences reverse will vary depending on the life
of the related asset or liability.
Deferred tax assets arise where the carrying amount of an asset is lower
than the tax value (less tax benefit has been taken). Deferred tax assets are
recognised only where the Company considers it probable that it will be
able to use such losses by offsetting them against future taxable profits.
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.
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.
Dividends
Final dividends are recognised as a liability in the Company’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.
Deferred tax is calculated using the enacted or substantively enacted rates
that are expected to apply when the asset is realised or the liability is settled.
Share Capital
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.
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.
125
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR 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 6
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 £7,123,000 (2015:
£6,690,000).
The audit fee in respect of the parent company was £30,000 (2015: £30,000).
2 D I V I D E N D S
On 29 January 2016, the shareholders approved a final dividend of 4.86p per qualifying ordinary share in respect of the year ended 30
September 2015. This was paid on 18 March 2016 absorbing £1,473,000 of shareholders’ funds.
On 28 April 2016, the Board of Directors declared an interim dividend of 3.16p (2015: 2.43p) per qualifying ordinary share in respect of the year
ended 30 September 2016. This was paid on 5 September 2016 absorbing £957,000 (2015: £732,000) of shareholders’ funds.
After the balance sheet date the Board of Directors proposed a final dividend of 6.32p per qualifying ordinary share in respect of the year ended
30 September 2016, which will absorb an estimated £1,915,000 of shareholders’ funds. Subject to shareholder approval, the dividend will be paid
on 17 March 2017 to shareholders on the register at the close of business on 17 February 2017. 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
2016
£’000
1,983
287
228
83
2,581
2015
£’000
2,408
279
388
85
3,160
Detailed disclosures of Directors’ remuneration and share options are given on pages 55 to 73 of the Annual Report and Accounts.
The average monthly number of employees (including Executive Directors) during the year was: 11 (2015: 7), all of whom were classified as
administrative staff.
126
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
4 I N TA N G I B L E A S S E T S
Cost
At 1 October 2015
At 30 September 2016
Amortisation charge
At 1 October 2015
Charge for the year
At 30 September 2016
Net book value
At 30 September 2016
At 30 September 2015
5 P L A N T A N D E Q U I P M E N T
Cost
At 1 October 2015
At 30 September 2016
Amortisation charge
At 1 October 2015
Charge for the year
At 30 September 2016
Net book value
At 30 September 2016
At 30 September 2015
Computer software
£’000
106
106
98
6
104
2
8
£’000
305
305
262
17
279
26
43
127
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
6 I N V E S T M E N T S I N S U B S I D I A R I E S
Cost and net book value
At 1 October 2015
Increase in investment in Avon Rubber Overseas Limited
At 30 September 2016
The Directors believe that the carrying value of the investments is supported by their underlying net assets.
The investments consist of a 100% (unless indicated as otherwise) interest in the following subsidiaries:
£’000
64,219
6,581
70,800
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
Avon Rubber Italia S.r.l.
Avon-Dairy America do sul Solucoes Para Ordenha LTDA (1%)
The manufacture and distribution of rubber and polymer based products
Investment company
Pension Fund Trustee
Trading company
Investment company
Trading company
UK
UK
UK
China
Italy
Brazil
Details of investments held by these subsidiaries are given in note 27 to the Group accounts on page 113.
Share
Options
£’000
-
-
675
675
16
(132)
559
Accelerated
capital
allowances
£’000
Other
temporary
differences
£’000
-
41
-
41
29
-
70
-
90
-
90
(74)
-
16
Total
£’000
-
131
675
806
(29)
(132)
645
7 D E F E R R E D TA X A S S E T S
At 30 September 2014
Credited to profit for the year
Credited to equity on recognition
At 30 September 2015
(Charged)/credited to profit for the year
Charged to equity
At 30 September 2016
128
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
8 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
Other receivables
Prepayments
9 T R A D E A N D O T H E R PAYA B L E S
Trade payables
Other payables
Accruals
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 A N D C H A R G E S
Balance at 1 October 2014
Charged in the year
Unwinding of discount
Payments in the year
Balance at 30 September 2015
Charged in the year
Unwinding of discount
Payments in the year
Balance at 30 September 2016
Analysis of provisions
Non-current
Current
2016
£’000
40
300
177
517
2016
£’000
90
40
3,098
3,228
2016
£’000
1,755
745
2,500
2015
£’000
37
577
316
930
2015
£’000
-
40
2,576
2,616
Property obligations
£’000
2,211
1,500
247
(2,236)
1,722
845
33
(100)
2,500
2015
£’000
867
855
1,722
Property obligations include an onerous lease provision of £1.5m in respect of unutilised space at the Company’s leased Melksham facility in the
UK. £0.3m of this provision is expected to be utilised in 2017 and the remaining £1.2m over the following five years. Other property obligations
relate to former premises of the Company which are subject to dilapidation risks and are expected to be utilised within the next ten 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.
129
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
11 B O R R O W I N G S
Current
Bank overdrafts
Non-current
Bank loans
Total bank loans and overdrafts
The maturity profile of the Company’s borrowings at the year end was as follows:
In one year or less or on demand
Between two and five years
The carrying amounts of the Company’s borrowings are denominated in the following currencies:
Sterling
US dollars
2016
£’000
-
-
-
2016
£’000
-
-
-
2016
£’000
-
-
-
2015
£’000
-
8,748
8,748
2015
£’000
-
8,748
8,748
2015
£’000
2,155
6,593
8,748
On 9 June 2014 the Company 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 2019. This 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 2016 and 2015.
The Company has provided the lenders with a negative pledge in respect of certain shares in Group companies.
12 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 (2015: 31,023,292) ordinary shares of £1 each
2016
£’000
2015
£’000
31,023
31,023
At 30 September 2016 718,789 (2015: 887,315) 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 2016 was £7,260,000 (2015:
£8,110,000). These shares are held at cost as treasury shares and deducted from shareholders’ equity.
During 2016 the trust acquired 181,890 (2015: 162,095) shares at a cost of £1,812,000 (2015: £1,152,000).
343,526 (2015: 327,130) shares were used to satisfy awards following the vesting of shares relating to the 2010 Performance Share Plan.
6,890 (2015: 29,460) ordinary shares of £1 each were awarded in relation to the 2015 annual incentive plan.
130
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
13 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
2016
£’000
-
2015
£’000
-
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 future aggregate minimum lease payments under 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.
2016
£’000
402
3,189
10,927
14,518
2015
£’000
402
2,738
12,776
15,916
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 55 to 73 and are incorporated by reference into these financial statements. The charge against profit
of £83,000 (2015: £85,000) in respect of PSP options granted after 7 November 2002 has been calculated using the Monte Carlo pricing model. The
principal assumptions used in the calculation are set out in note 24 of the Group financial statements.
131
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
15 E X P L A N AT I O N O F T R A N S I T I O N T O F R S 101
As stated in the accounting policies, these are the Company’s first financial statements prepared in accordance with FRS 101.
The accounting policies have been applied in preparing the financial statements for the year ended 30 September 2016, the comparative
information presented in these financial statements for the year ended 30 September 2015 and in preparation of an opening FRS 101 balance sheet
at 1 October 2014 (the Company’s date of transition).
In preparing its FRS 101 balance sheet, the Company has adjusted amounts reported previously in financial statements prepared in accordance
with UK GAAP. An explanation of how the transition from UK GAAP to FRS 101 has affected the Company’s financial position is set out in the
following table and the notes that accompany the table.
Note
1 Oct 2014
UK GAAP
1 Oct 2014
Effect of
transition to
FRS 101
1 Oct 2014
FRS 101
30 Sep 2015
UK GAAP
30 Sep 2015
Effect of
transition to
FRS 101
30 Sep 2015
FRS 101
a
a
b
b
c
c
Non-current assets
Intangible assets
Plant and equipment
Investments in subsidiaries
Deferred tax assets
Current assets
Trade and other receivables
Amounts owed by Group undertakings
Current liabilities
Trade and other payables
Amounts owed to Group undertakings
Provisions for liabilities and charges
Net current assets
Non-current liabilities
Borrowings
Provisions for liabilities and charges
Net assets
Shareholders’ equity
Ordinary shares
Share premium account
Capital redemption reserve
Retained Earnings
Total equity
-
346
75,540
-
75,886
2,283
54,317
56,600
2,533
4,040
-
6,573
89
(89)
-
-
-
-
-
-
-
-
1,082
1,082
89
257
75,540
-
75,886
2,283
54,317
56,600
2,533
4,040
1,082
7,655
-
51
64,219
-
64,270
1,736
75,402
8
(8)
-
806
806
8
43
64,219
806
65,076
(806)
-
930
75,402
77,138
(806)
76,332
2,616
-
-
2,616
-
-
855
855
2,616
-
855
3,471
50,027
(1,082)
48,945
74,522
(1,661)
72,861
-
2,211
2,211
123,702
31,023
34,708
500
57,471
123,702
-
(1,082)
(1,082)
-
1,129
1,129
8,748
1,722
10,470
-
(855)
(855)
-
-
-
-
-
-
123,702
128,322
31,023
34,708
500
57,471
31,023
34,708
500
62,091
123,702
128,322
-
-
-
-
-
-
8,748
867
9,615
128,322
31,023
34,708
500
62,091
128,322
a) Computer software previously included in plant and equipment has been reclassified as an intangible asset.
b) Deferred tax assets which were previously included within current assets have been reclassified as non-current assets.
c) Provisions for liabilities and charges which were previously included within creditors falling due after more than one year have been split
between current and non-current liabilities on the face of the balance sheet.
132
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
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 6
2016
£’000
2015
£’000
2014
£’000
2013
£’000
2012 *
£’000
Revenue
142,884
134,318
124,779
124,851
106,636
Operating profit before amortisation of acquired intangibles, exceptional
items, acquisition costs and defined benefit pension scheme costs
21,763
20,215
17,003
14,223
11,621
Amortisation of acquired intangibles, exceptional items, acquisition costs
and defined benefit pension scheme costs
(4,133)
(1,329)
(2,678)
(1,220)
-
Operating profit
Net finance costs and other finance expense
Profit before taxation
Taxation
Profit for the year from continuing operations
Discontinued operations - loss for the year
Profit attributable to equity shareholders
Ordinary dividends
17,630
(829)
16,801
1,824
18,625
(346)
18,279
(2,430)
18,886
(1,048)
17,838
(2,672)
15,166
(1,500)
13,666
(1,859)
14,325
(461)
13,864
(3,053)
10,811
-
10,811
(1,422)
13,003
(600)
12,403
(3,566)
8,837
-
8,837
(1,132)
11,621
(616)
11,005
(3,176)
7,829
-
7,829
(941)
Retained profit
15,849
11,807
9,389
7,705
6,888
Intangible assets and property,plant and equipment
Working capital
Provisions
Pension liability
Net deferred tax liability
Net cash/(borrowings)
77,469
7,219
(2,500)
(39,951)
(2,232)
1,996
69,521
10,176
(2,567)
(16,605)
(5,160)
(13,161)
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)
Net assets employed
42,001
42,204
25,016
20,696
23,897
Financed by:
Ordinary share capital
Reserves attributable to equity shareholders
31,023
10,978
31,023
11,181
31,023
(6,007)
30,723
(10,027)
30,723
(6,826)
Total equity
42,001
42,204
25,016
20,696
23,897
Basic earnings per share
Adjusted basic earnings per share
Dividends per share paid in cash
60.4p
74.2p
8.02p
45.4p
56.1p
6.17p
36.2p
43.7p
4.75p
30.0p
33.8p
3.84p
26.9p
26.9p
3.2p
* As presented in the consolidated financial statements for that year.
133
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTHHOW WE PERFORMEDHOW WE RUN OUR BUSINESSSHAREHOLDER INFORMATIONOVERVIEW OF THE YEAR
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 6
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 2016
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 2 February
2017 at 10.30am for the following purposes:
Ordinary Business
To consider and, if thought fit, pass resolutions 1- 9 (inclusive) as Ordinary
Resolutions:
Resolution 1
To receive the Company’s accounts and the reports of the Directors and
the Auditors for the year ended 30 September 2016.
Resolution 2
To approve the Directors’ Remuneration Report (excluding the Directors’
remuneration policy) for the year ended 30 September 2016.
Resolution 3
To declare a final dividend of 6.32p per ordinary share as recommended
by the Directors.
Resolution 4
To re-appoint Mr R. Rennie as Director who retires by rotation.
Resolution 5
To re-appoint Mr D. Evans as Director who retires by rotation.
Resolution 6
To re-appoint Miss C. Ponsonby as Director who has been appointed since
the last AGM.
Resolution 7
To re-appoint Mr P. Rayner as Director who has been appointed since the
last AGM.
Resolution 8
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 9
To authorise the Directors to determine the auditors’ remuneration.
Special Business
To consider and if thought fit, pass resolution 10 as an Ordinary Resolution
and resolutions 11-14 (inclusive) as Special Resolutions:
Resolution 10
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.
Resolution 11
That, subject to the passing of Resolution 10, the Directors be authorised to
allot equity securities (as defined by section 560 of the Act) for cash under
the authority conferred by that resolution and/or to sell ordinary shares held
by the Company as treasury shares for cash, as if section 561 of the Act did
not apply to any such allotment or sale, provided that this power shall:
(a) be limited to the allotment of equity securities or sale of treasury
shares 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 equity securities
to be allotted (or treasury shares to be sold) after such expiry and
the Directors may allot equity securities (or sell treasury shares) in
pursuance of any such offer or agreement notwithstanding that the
power conferred by this resolution has expired.
134
ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
Resolution 12
That, subject to the passing of Resolution 10, the Directors be authorised,
in addition to any authority granted under Resolution 11, to allot equity
securities (as defined by section 560 of the Act) for cash under the
authority conferred by that resolution and/or to sell ordinary shares held
by the Company as treasury shares for cash, as if section 561 of the Act did
not apply to any such allotment or sale, provided that this power shall:
(a) be limited to the allotment of equity securities or sale of treasury
shares up to an aggregate nominal amount of £1,551,164; and
(b) be used for the purposes of financing (or refinancing, if the authority
is to be used within six months after the original transaction) a
transaction which the Directors have determined to be an acquisition
or other capital investment of a kind contemplated by the Statement of
Principles on Disapplying Pre-Emption Rights most recently published
by the Pre-Emption Group prior to the date of this notice; and
(c) 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 equity securities
to be allotted (or treasury shares to be sold) after such expiry and
the Directors may allot equity securities (or sell treasury shares) in
pursuance of any such offer or agreement notwithstanding that the
power conferred by this resolution has expired.
Resolution 13
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 percent) 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.
Resolution 14
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
16 November 2016
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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
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.
(iii) in the case of CREST members, by utilising the CREST electronic
proxy appointment service in accordance with the procedures
set out below
(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 6.00pm on 31 January 2017
(or 6.00pm 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;
(ii) the answer has already been given on a website in the form of an
answer to a question; or
(iii) it is undesirable in the interests of the Company or the good
order of the AGM that the question be answered.
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
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ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
(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).
(10) Termination of proxy appointments
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 31 January
2017 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 42 of the
Annual Report.
(12) The issued share capital of the Company as at 16 November 2016 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 until the close of the AGM 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
(iii) copies of the letters of appointment of the Non-Executive
Directors of the Company.
(14) Please note that the Company takes all reasonable precautions 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.
(15) Pursuant to Chapter 5 of Part 16 of the Act (sections 527 to 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.
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 member 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.
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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;
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
(ii)
(iii) must be received by the Company not later than 6 weeks before
the date of the AGM.
Explanatory notes
The Company’s Remuneration Policy, which is re-stated in the
Remuneration Report was approved by shareholders at the 2016 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 2016 of
6.32p will be paid.
Resolutions 4 to 7 – Election and re-election of Directors
In accordance with the UK Corporate Governance Code and the
Company’s Articles, all Directors are subject to election by shareholders
at the first AGM after their appointment, and to re-election thereafter at
intervals of no more than three years. Non-Executive Directors who have
served longer than nine years are subject to annual re-election.
Mr D. Evans and Mr R. Rennie retire by rotation and, being eligible, offer
themselves for re-election.
Miss C. Ponsonby was appointed as a Director with effect from 1 March
2016 and Mr P. Rayner will be appointed as a Director with effect from
1 December 2016. In accordance with the Company’s Articles, both retire
at this year’s AGM and Resolutions 6 and 7 propose their re-appointment.
Resolution 8 & 9 – Re-appointment and remuneration of Auditors
Resolutions 8 & 9 propose the re-appointment of PricewaterhouseCoopers
LLP as Auditor of the Company and authorise the Directors to set their
remuneration.
Resolution 10 – 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.
The Board believes that the adoption of resolutions 1 to 14 will promote
the success of the Company and is in the best interests of the Company
and its shareholders as a whole. The Board unanimously recommends that
all shareholders should vote in favour of all the resolutions to be proposed
at the AGM. Each of the Directors of the Company intends to vote in
favour of all resolutions in respect of their own beneficial holdings.
This Resolution complies with the Investment Association Share Capital
Management Guidelines issued in July 2016.
This Resolution 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 16 November 2016.
Resolution 1 – Report and Accounts
The Directors have no present intention of exercising this authority.
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 2016. These are contained in the Company’s 2016
Annual Report.
Resolution 2 - Directors’ Remuneration Report
Resolution 2 seeks approval for the Directors’ Remuneration Report for
the year ended 30 September 2016 contained on pages 55 to 73 of the
Annual Report. As in previous years, the vote on this resolution is advisory
only and the Directors’ entitlement to remuneration is not conditional on
it being passed.
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.
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
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ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH
(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 11 – Disapplication of pre-emption rights
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 16 November 2016.
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 AGM.
This Resolution will, if passed, give the Directors power, pursuant to the
authority to allot granted by Resolution 10, to allot equity securities (as
defined by section 560 of the Act, 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 16 November
2016 and renews the authority given at the AGM in 2016.
As of 16 November 2016 there were options to subscribe outstanding over
605,862 ordinary shares, representing 1.95% of the Company’s ordinary
issued share capital. If the authority given by Resolution 13 were to be
fully exercised, these options would represent 2.29% of the Company’s
ordinary issued share capital after cancellation of the re-purchased
shares. As of 16 November 2016 there were no warrants outstanding over
ordinary shares.
The figure of 5% reflects the Pre-Emption Group 2015 Statement of
Principles for the disapplication of pre-emption rights (the ‘Statement
of Principles’). The Directors will have due regard to the Statement of
Principles in relation to any exercise of this power, in particular they do not
intend to allot shares for cash on a non-pre-emptive basis pursuant to this
power in excess of an amount equal to 7.5% of the total issued ordinary
share capital of the Company in any rolling three-year period, without
prior consultation with shareholders save as permitted in connection with
an acquisition or specified capital investment as described in the notes for
Resolution 12.
The Directors intend to exercise the power given by Resolution 13 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.
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.
Bonus and incentive scheme targets for Executive Directors would not
be affected by any enhancement of earnings per share following a share
re-purchase.
The Directors have no preset intention to exercise the authority conferred
by this resolution.
Resolution 12 – Additional disapplication of pre-emption rights
This Resolution seeks a further power pursuant to the authority granted
by Resolution 10, 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 16 November 2016. This is in
addition to the 5% referred to in Resolution 11 above.
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.
The Directors will have due regard to the Statement of Principles in
relation to any exercise of this power and in particular they confirm that
they intend to use this power only in connection with a transaction
which they have determined to be an acquisition or other capital
investment (of a kind contemplated by the Statement of Principles most
recently published prior to the date of this Notice) which is announced
contemporaneously with the announcement of the issue, or which has
taken place in the preceding six month period and is disclosed in the
announcement of the issue.
Resolution 13 – 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.
In the opinion of the Directors, Resolution 13 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 14 – Notice of Meeting
Resolution 14 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 14 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 Act and when the
Directors consider it appropriate to do so.
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N O T E S
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ANNUAL REPORT AND ACCOUNTS 2016 n DELIVERING AND BUILDING GROWTH S H A R E H O L D E R I N F O R M AT I O N
Shareholding
On 7 November 2016 the Company had 1,600 shareholders, of which
959 (60%) 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 2016 the annual general
meeting will be held on 2 February 2017 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)
Rob Rennie (Chief Executive Officer)
Andrew Lewis (Group Finance Director)
Pim Vervaat (Non-Executive Director)
Chloe Ponsonby (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
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