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STRONG
FOUNDATIONS
FOR GROWTH
ANNUAL REPORT
AND ACCOUNTS
2018
Avon Rubber p.l.c. | Annual Report & Accounts 2018
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
OTHER
INFORMATION
STRONG FOUNDATIONS FOR GROWTH
Avon Rubber is an innovative technology
group which designs and produces
specialist products and services to
maximise the performance and
capabilities of its customers.
We specialise in Chemical, Biological,
Radiological and Nuclear (‘CBRN’) and
respiratory protection systems, as well
as milking point solutions through our
two businesses Avon Protection and
milkrite | InterPuls.
Pages 14–15
Pages 16–17
Overview
1 Highlights
2 At a Glance
24 Divisional review
86
Independent Auditors’ Report
131 Parent Company Accounting Policies
Financial Statements
24 Divisional Review – Avon Protection
92
Consolidated Statement
of Comprehensive Income
133 Notes to the Parent Company
Financial Statements
4 Why Invest in Avon Rubber?
26 Divisional Review – milkrite | InterPuls
6
Chairman’s Statement
28 Financial Review
Strategic Report
10 Our Business Model
12 Our Strategy
14 Divisional Strategy
14 Divisional Strategy – Avon Protection
16 Divisional Strategy – milkrite | InterPuls
18
How We Measure Our Performance
20
Chief Executive Officer’s Review
34
Principal Risks and Risk Management
38
Environment and Corporate
Social Responsibility
Governance
46
Board of Directors
48
Corporate Governance Report
53
Nomination Committee Report
54 Audit Committee Report
59 Remuneration Report
80 Directors’ Report
93 Consolidated Balance Sheet
137 Five Year Record
94
Consolidated Cash Flow Statement
138 Glossary of Financial Terms
95
96
Consolidated Statement of
Changes in Equity
Accounting Policies and Critical
Accounting Judgements
102 Notes to the Group
Financial Statements
129 Parent Company Balance Sheet
130 Parent Company Statement of
Changes in Equity
138 Abbreviations
Other Information
139 Notice of Annual General Meeting
149 Shareholder Information
2018
Strategy in
action
First deliveries of
MCM100 underwater
rebreather
Product readiness
of UK MOD General
Service Respirator
for first deliveries
in 2019
Expansion
of powered air range
Pages 8–9
Page 33
Pages 84–85
Group highlights
Orders received
Closing book order
Revenue
2018
20171
20161
£173.3m
£166.0m
£137.9m
2018
20171
20161
£30.0m
£23.3m
£37.8m
2018
20171
20161
£165.5m
£159.2m
£138.1m
£173.3m
£37.8m
£165.5m
Adjusted operating profit
Operating profit
Net cash
2018
20171
20161
£27.3m
£26.1m
2018
20171
20161
£20.5m
£22.8m
£20.1m
2018
2017
£24.7m
£46.5m
£16.6m
2016
£2.0m
£27.3m
£22.8m
£46.5m
Adjusted basic earnings per share
Basic earnings per share
Dividend per share
2018
20171
20161
77.1p
77.1p
83.8p
71.8p
2018
20171
20161
64.9p
71.6p
58.0p
2018
2017
2016
16.02p
12.32p
9.48p
64.9p
16.02p
2018
Strategy in
action
Farm Services
expansion
Precision, Control
and Intelligence
growth opportunity
in North America
Acquisition of
Merrick’s calf nurser
product line
Pages 44–45
Page 22
Page 32
1 Restated to reflect the continuing operations of the Group following the sale of Avon Engineered Fabrications, Inc on 30 March 2018.
A full glossary of terms is available on page 138.
1
Avon Rubber p.l.c. | Annual Report & Accounts 2018
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
OTHER
INFORMATION
At a Glance
Geographic Overview
We are a global business operating from
10 sites around the world serving customers
in over 90 countries.
Avon Protection
milkrite | InterPuls
USA
– Cadillac
– Belcamp
UK
– Melksham
– Poole
– Chelmsford
USA
– Johnson Creek
– Modesto
Italy
– Albinea
UK
– Melksham
Brazil
– Castro
China
– Shanghai
800
EMPLOYEES
Key
milkrite | InterPuls
Avon Protection
Distribution Countries
10
SITES
90+
COUNTRIES
30% – milkrite | InterPuls
£49.8m
Revenue split
by business
70% – Avon Protection
£115.7m
16% – Rest of the World
£26.1m
19% – Europe
£31.4m
Revenue split
by destination
65% – North America
£108.0m
Avon Protection is the recognised
global leader in advanced Chemical,
Biological, Radiological and Nuclear
(CBRN) respiratory protection
systems for the world’s Military,
Law Enforcement and Fire markets.
Agents &
Distributors
283
Pages 14–15
Pages 16–17
milkrite | InterPuls is a global leader
providing complete milking point
solutions to dairy farmers across
the world with the aim of improving
every farm it touches.
Agents &
Distributors
1,754
2
3
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Why Invest in Avon Rubber?
We have a clear strategy to
generate long-term earnings
growth through maximising the
opportunity from our current
portfolio and selective product
development to maintain our
technology leadership position.
Our strong financial position
and cash generation will allow
us to enhance the returns from
our organic strategy with additional
value enhancing acquisitions,
whilst maintaining a progressive
dividend policy.
There are significant medium term growth opportunities for both Avon
Protection and milkrite | InterPuls. Our strong foundations for growth
provide us with the ability to continue delivering value to our customers,
our people and our shareholders in the future.
Organic sales
growth
Value enhancing
acquisitions
3%+
Through a focus on innovative
products designed for global
growth markets we target 3%+ per
annum constant currency organic
revenue growth
We are targeting carefully selected,
value enhancing acquisitions to
complement our organic growth
Attractive
EBITDA margins
Strong cash
generation
Dividend
growth
20%+
Using our proprietary product
expertise to develop market
leading products, we target sustainable
EBITDA margins of greater than 20%
90%+
Our objective of delivering cash EBITDA
conversion of 90% or more provides the
cash flow to fund our growth strategy
30%+
Under our progressive dividend policy,
we expect to continue to grow dividends
ahead of earnings until we reach a cover
of two times adjusted earnings per share
4
5
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Chairman’s Statement
“ 2018 has been another successful
year. We have delivered
a strong performance and have
made good progress implementing
our strategic objectives.”
David Evans
Chairman
During 2018 we have continued to make
excellent progress delivering our strategy to
generate shareholder value. By continuing to
maintain our focus on creating a healthy and
sustainable business and by investing in and
integrating technology in both businesses,
we are creating exciting medium-term
growth opportunities.
Our employees are fundamental to delivering
our strategy for growth and our achievements
would not have been possible without the
commitment and dedication of all of our
people. On behalf of the Board I would like to
once more thank our employees, who have
worked tirelessly to deliver these results.
Strategy
Last year the Board presented its strategy
to deliver long-term sustainable growth.
This strategy aims to deliver organic growth
by maximising sales from our current
product portfolio and selective product
development. We aim to complement our
organic growth through carefully selected
value enhancing acquisitions.
I am pleased to report that the
management team have made excellent
progress in implementing the strategy.
We are already seeing positive, tangible
evidence of this strategy delivering results
and I am confident it will continue to deliver
future growth and sustainable value for all
our stakeholders.
I am pleased to report that the Board
continues to function effectively as a
cohesive body with a good balance of
support and challenge.
This year a revised Remuneration Policy is
being put to shareholders for approval at our
AGM. The Board is firmly of the view that the
proposed remuneration arrangements achieve
the right balance in aligning management’s
interests with shareholders and will support
sustainable value creation for our shareholders.
Delivering Strong Results
2018 was another strong year of delivery.
I remain confident that we have the right
strategy, the right product portfolio and the
right management team to generate further
value for shareholders in 2019.
David Evans
Chairman
14 November 2018
We have continued to broaden our product
portfolio obtaining NIOSH safety approval
for our powered air range in March and
making the first shipments of the MCM100
underwater rebreather. In milkrite | InterPuls
we obtained ICAR approval for our milk
meter and launched our heavy duty range
of PCI products in the US.
We continue to work with the US Department
of Defence on a number of new platforms
including the M69 aircrew mask and the
M53A1 mask and powered air system, which
will offset the expected reduction in M50
mask system volumes as we move into the
sustainment phase of the contract as well as
support the future growth of the business.
In February of this year we were delighted to
announce that we had secured the UK Ministry
of Defence as a customer and had entered into
a five year contract to re-supply and support its
General Service Respirator programme.
The strength of our technology offering
and market reputation is helping us make
significant strides in the Law Enforcement
market both in the US and internationally.
Shareholder Returns
During 2018 we delivered a total shareholder
return of 39.1%. The Company’s share
price rose from £9.37 at the start of October
2017 to £12.90 on 30 September 2018,
and dividends totalling £4.1m were paid
to shareholders.
The Board considers the dividend to be
an important component of shareholder
returns and as such has a policy to deliver a
progressive dividend year on year. The Board
is pleased to be recommending an increased
final dividend of 10.68p per share, making a
total dividend for the year of 16.02p, which
is a 30% increase on the previous year and
reflects our confidence in our outlook.
Governance and the Board
We have a strong and stable Board. There
have been no changes to the membership
of the Board during 2018 and I confirm that
the Board has continued to set the right
tone from the top during the year, visiting
all the main sites and meeting regularly with
senior management.
In order to strengthen the Board further and
to facilitate succession planning we intend
to add an additional non-executive director
to the Board in 2019.
The Board is committed to the highest
standards of corporate governance and
compliance. We note the newly published
Corporate Governance Code 2018 and will
consider how to address the changes that it
has introduced in the coming year.
Our internal Board evaluation in 2018 robustly
challenged all aspects of the Board including
my performance and that of each Director, the
Board Committees and the Board as a whole.
Orders received
2018
20171
20161
£173.3m
£166.0m
£137.9m
£173.3m
1 Restated to reflect the continuing operations of the Group following the sale of Avon Engineered Fabrications, Inc on 30 March 2018.
Dividend
per share
16.02p
30%
6
7
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Strategic Report
The MCM100 is a high performance, deep diving, air
and mixed gas, electronically controlled rebreather
“ We are extremely excited to have brought to market an underwater diving product
with such high levels of innovation. Avon Protection continues to remain at the
forefront of technology; we continue to meet the needs of our customers to ensure
they remain protected against the continually evolving threat.”
Avon Protection received their first
significant order to supply the Norwegian
Armed Forces with MCM100 underwater
rebreathers together with in-service
support. In selecting the MCM100, the
Norwegian government has recognised
the high level of innovation within the
product and the technical expertise of
Avon Protection.
Strong reference
customer with
Norwegian Military
Building on its position at the forefront of
diving rebreather designs, advanced data
handling and decompression physiology,
Avon Protection has launched its new
mine counter measures rebreather.
The MCM100 is a high performance, deep
diving, air and mixed gas, electronically
controlled rebreather that is designed for
explosive ordnance disposal and mine
countermeasures diving operations.
The MCM100 has been CE tested to
100m, which is suitable for a range of
military or tactical diving disciplines
such as Mine Countermeasure, Explosive
Ordnance Disposal shallow or deep, Mine
Investigation and Exploration and Special
Operations Forces.
Strategic Report
10
12
14
18
20
24
28
34
38
Our Business Model
Our Strategy
Divisional Strategy
14 Divisional Strategy – Avon Protection
16 Divisional Strategy – milkrite | InterPuls
How We Measure Our Performance
Chief Executive Officer’s Review
Divisional Review
24 Divisional Review – Avon Protection
26 Divisional Review – milkrite | InterPuls
Financial Review
Principle Risks and Risk Management
Environment and Corporate Social Responsibility
8
9
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Our Business Model
We are committed to
generating shareholder
value through pushing the
boundaries of innovation to
maximise the capabilities of
our customers through the use
of our products and services.
What we do
How we
create value
How we
share value
We operate through two businesses,
selling equipment, consumables and
services to customers in over 90 countries:
Avon Protection
(70% of revenues)
Advanced respiratory protection
systems for military, law
enforcement and fire applications.
Read more on page 14
milkrite | InterPuls
(30% of revenues)
Milking point solutions
for dairy farms.
Read more on page 16
Leading positions
in attractive growth
markets
Differentiated
technology
Deep product
expertise
Skilled people
Entrepreneurial
culture
Experienced
management
Our people
73% employee engagement
Our agents and distributors
90+ distribution countries
Our shareholders
16.02p dividend
Our communities
£39,000 charitable contributions
How we
operate
Our values
Read more on page 40
Responsible
approach to
sustainability
Read more on page 38
Robust risk
Effective
management
Read more on page 34
governance
Read more on page 48
10
11
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Our Strategy
WIN G
E CORE
H
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SEL
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How we
CREATING SHAREHOLDER
grow value
VALUE
M
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G
V
ALUE ENH A N C I N
ACQUISI T I O N S
GROWING
THE CORE
WE ARE RECOGNISED AS THE LEADER WITHIN OUR
CHOSEN MARKET SEGMENTS. THERE ARE FURTHER
OPPORTUNITIES TO MAXIMISE GROWTH FROM OUR
PRODUCT AND SERVICE PORTFOLIO THROUGH:
• Leveraging the product and customer base. There is considerable
scope to cross sell the wider product portfolio to our existing
customers and further improve margins. We have seen with the
acquisitions of argus, InterPuls and Merrick’s that strong brand
positions in complementary markets provide an opportunity to
accelerate multi-product sales.
• Responding to customers’ growing needs. Through our focus
on innovation we are constantly enhancing the functionality and
capability of our product range. As the demands of our customers
grow, we see a clear opportunity to migrate them to our premium
product offerings as their requirements increase.
• Offering new models and solutions. The success of our
Farm Services programmes have demonstrated the benefits of
combining our leading product technology with a service that
the customer values. We see alternative ownership models and
value-added services as an additional differentiator that has scope
to open up a broader market.
• Expanding our reach through distribution. We participate in
growing global markets with a large and diverse base of potential
customers. Expanding our distribution network of agents and
dealers will allow us to access wider market opportunities more
quickly, in both new and existing territories.
• Enhancing our commercial effectiveness. As we target a wider
market with increasingly sophisticated technical offerings, we are
investing in our people to improve the effectiveness of our sales
teams to ensure that we optimise the relationship with
our global distribution partners and customers.
• Continuing focus on operational excellence.
We have invested in a global manufacturing capability and supply
chain to meet the high quality requirements of our products and
customers. We pursue a continuous improvement culture to
further reduce costs and enhance product
margins and will benefit from
improved operational
gearing as we optimise
the utilisation of our
global operations.
Revenue growth
+8.7%
at constant currency
Our strategy is to generate shareholder value through growing the core business by
maximising sales growth from our current product portfolio, supported by selective
product development, and value enhancing acquisitions.
SELECTIVE
PRODUCT
DEVELOPMENT
VALUE
ENHANCING
ACQUISITIONS
WE HAVE A REPUTATION FOR TECHNOLOGICAL EXCELLENCE
AND INNOVATION, WITH A STRONG TRADITION OF
NEW PRODUCT DEVELOPMENT. WE SEE GROWTH
OPPORTUNITIES THROUGH:
WE ARE TARGETING CAREFULLY SELECTED, VALUE
ENHANCING ACQUISITIONS WITHIN AVON PROTECTION
AND MILKRITE | INTERPULS TO COMPLEMENT OUR
ORGANIC GROWTH.
• Moving up the value chain in respiratory protection. Whilst we
will continue to expand the portfolio of mask platforms, variant
systems and consumables to cater for the specific needs of
particular customers or applications, we are actively developing
more advanced systems such as the powered air and Magnum
SCBA ranges targeted at more specialist customer groups.
Commercial Criteria
• Strong brand recognition
• Technology which broadens our product range
• Expands our geographic reach
• Secure revenue streams or another source of profitable growth
• Enabling technologies and integrated systems. The equipment
• Strong management
of the military fighter of the future is expected to be increasingly
sophisticated, with seamless integration of protection and
technology systems. We are investing in our expertise in enabling
technologies, following an Internet of Things principle, to allow
greater integration of respiratory protection systems with data
and communications technology.
• Building the milkrite | Interpuls portfolio around the service
proposition. We have expanded the Farm Services product
portfolio to include Cluster Exchange,
Pulsator Exchange and
Tag Exchange to leverage
the unique value of
this product range.
Investment
in R&D
£9.7m
(2017: £8.3m)
Financial Criteria
• EPS enhancement
• Organic revenue growth, margins and cash conversion potential
in line with our strategic growth objectives
• Returns exceeding our WACC
• Post-acquisition net debt to EBITDA less than two times
Acquisition
of Merrick’s
calf nurser
product line
12
13
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Divisional
Strategy
Pages 24–25
Strategic imperatives
• Launch M69 aircrew mask and M53A1 mask
and powered air system
• Maximise M50 mask systems revenue and
ongoing spares supply
• Target the major Military customers with our
world leading CBRN capabilities
• Target major Military diving teams with our
MCM100 underwater rebreather
• Target global Military and Law Enforcement
customers with our powered air solution
• Launch Magnum Self-Contained Breathing
Apparatus (SCBA) with product upgrades and
obtain 2019 NFPA SCBA approval
• Expand global distribution network for both
Law Enforcement and Fire
Read more about our products
www.avon-rubber.com
14
Key Strengths
• Technology and innovation leader with the reputation and
capability to design, test and manufacture new products
to provide enhanced user performance and capability
• Market leader for Military respirators with long-term
pedigree for performance and quality
• High barriers to entry due to long Military
programme life cycles
• Regulatory approvals, intellectual property protection
and technical know how create high barriers to entry for
competitors
• Capability and distribution network to provide a
range of commercial products for Law Enforcement
and Fire markets
Markets
Military
Global leader within Military CBRN for masks and filters, with
leading portfolio of respirators, filters, powered and supplied
air and long term pedigree for military contracting and supply
chain excellence. Avon Protection is the sole source supplier to
the US DOD of the joint service general purpose mask (JSGPM),
whilst expanding into wider respiratory technology applications
in both air and sea.
Law Enforcement
Supplying a range of NIOSH and CE approved mask solutions for
global law enforcement customers, whilst organically expanding
a wider portfolio of filters, hoods and powered air offerings
to complement the mask, to increase capability of the law
enforcement community in responding to global threats.
Fire
Leading provider of thermal imaging camera technology
and self-contained breathing apparatus suppliers.
Military, Law Enforcement and Fire
Military
Law Enforcement
Fire
New Product
GSR
M50
FM54
M53A1
M69
With an unrivalled pedigree in mask design dating back to the 1920’s we have developed an extensive range of mask systems
for military and civil use. We have leveraged the design of the market leading M50 mask system to develop a range of masks
for Law Enforcement and first responder use (PC50 and C50) and for Military special forces (FM53 and FM54). The latest
offerings in our range include the M69 aircrew mask for use in the DOD’s fixed wing aircraft and the M53A1 mask and
powered air system. In addition, we have entered into a five year contract with the UK MOD for the resupply and in-service
support of its General Service Respirator (GSR).
MP-PAPR
CS-PAPR
ST54
CS-Elite
We have developed a modular range of supplied and powered air products. This range combines our mask systems
with self-contained breathing apparatus (‘SCBA’) and powered air purifying respirators (‘PAPR’).
Our PAPR range has received both NIOSH approval and CE European safety approvals enabling sales in both Europe
and North America.
Mi-TIC E L
Deltair
Magnum
Our fire range is comprised of the argus thermal
imaging camera range and the Deltair SCBA. We
are in the process of upgrading our SCBA system to
comply with the new NFPA fire safety standards and
will market the upgraded range under the Magnum
brand name.
During the year, we launched the NFPA certified
Mi-TIC E L camera, which can now be sold into
the US market. This model of the thermal imaging
camera is the most cost effective entry-level
solution for Fire services, without compromising
on technology or quality.
Product range:
• FM12
• PC50
• C50
• GSR
• M50
• FM53
• FM54
• HMK150
• M69
• M53A1
Product range:
• EZAir
• MP-PAPR
• ST53
• ST53SD
• CS-PAPR
• ST54
• CS-Elite
Product range:
• Mi-TIC E L
• Mi-TIC S
• Mi-TIC E
• Mi-TIC 320
• P-Type
• TT-Type
• Deltair
• Magnum
The NH15 Escape Hood range is the smallest
NIOSH-certified CBRN/CO air purifying escape
respirator on the market and is ideal for police,
emergency medical services and fire officers
seeking immediate or emergency respiratory
protection in a CBRN/CO escape scenario.
MCM100 is a state of the art underwater
rebreather range for military diving use which
has the benefit of CE safety approval. During
2018 we have delivered the first orders for
this product from military customers. Our
underwater product range also includes
the MDC150 dive computer designed for
military use.
NH15
NH15 Combo
MCM100
MDC150
ACCESSORIES
Vision
Filters
Communications
Hydration systems
15
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Divisional
Strategy
Pages 26–27
Strategic imperatives
• Continue to grow market share of own brand
products in each region
• Market penetration of our PCI offering into
North America
• Expand global distribution network
• Grow Pulsator and Tag Exchange
Read more about our products
www.avon-rubber.com
16
Key Strengths
• Long-term growth market due to growing global population
and demand for dairy protein and products
• Patented technology delivers improvements in farm
efficiency over the alternative competitive offerings
• Market leader for pulsation and cluster technology in food
regulated environment
• Global distribution reach via network of independent dealers
•
Farm Services provides alternative ownership model
through lease hire business
Markets
Interface
milkrite | InterPuls is the market leader for cluster technology
to remove milk from the animal in the most efficient way and
maximise the performance of the farm with improved cost
benefits for the farmer and improved animal health for
the animal.
Precision, Control & Intelligence (PCI)
Precision refers to the set up of the air system within the milking
process to maximise the performance and efficiency of the
system to provide the most efficient milking process.
Control is the physical control of the milking system to provide
automation opportunities to minimise labour inputs.
Intelligence is the critical part of the dairy system which extracts
data from the animal and integrates this within the farm herd
management system or dairy management system when
supplied as an integrated solution.
Farm Services
Whilst offering the entire product range on a resale basis,
milkrite | InterPuls have developed the unique Farm Services
offering, where clusters, pulsators and tags are offered to the
farm on a lease hire basis, with a fully incorporated service and
warranty scheme managed directly with the farm.
Precision, Control & Intelligence
Interface
milkrite | InterPuls
New Product
Precision refers to the set up of the air system within
the milking process to maximise the performance
and efficiency of the system to provide the most
efficient milking process. We are the world-leading
manufacturer of state of the art electronic pulsators
designed to facilitate gentle, complete and uniform
milking.
LO2Air
Products:
• Pneumatic Pulsator
• Electronic Pulsator
• Control Valves
• Controller
• Bucket Milker
Control is the physical control of the milking system
to provide automation opportunities to minimise
labour inputs. An example product in our Control
range is the iMilk600 HD which is a state of the art
milking point controller with advanced electronics
and sensors. The user-friendly panel displays real
time milk yield, temperature, milking time, animal
number and conductivity.
Products:
• Milk meters
• Automatic cluster
removal
• Power Units
• Cylinders
• Sorting gate
Intelligence is the critical part of the dairy system
which extracts data from the animal and integrates
this within the farm herd management system or
dairy management system when supplied as an
integrated solution. An example product in our
Intelligence range is the iFC myfarm.cloud. This
software consolidates and analyses data captured
from neck and leg tags as well as the milking process
to drive improved efficiency and farm performance.
Products:
iFC myfarm.cloud
•
• Leg Tag
• Neck Tag
• Precision Farming
iMilk600 HD
iFC myfarm.cloud
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The Impulse and Impulse Air ranges
are designed to minimise slip and
improve 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.
Our premium silicone tubing is
made from a strong material, with
superior tear strength, with proven
performance from benchmark
testing against similar products.
The Impulse Claw 300 with its
durable, lightweight and ergonomic
design makes the claw easier for
the operator to handle and reduces
the overall weight of the cluster,
improving animal comfort.
For use in feeding newborn calves,
the Merrick’s calf nurser features a
patented teat design which prevents
milk leakage yet allows air to be
released into the bottle as the calf
Is nursing.
Farm Services
E
G
N
A
H
C
X
E
R
O
T
A
S
L
U
P
Through the Cluster Exchange Service,
farmers lease complete milking clusters
and outsource their liner change
process to us. This is managed through
service centres established in our
existing facilities, with the support of
our dealers and third-party logistics
specialists.
The Pulsator Exchange Service enables
farmers to lease our market leading
pulsators and we provide ongoing
servicing and maintenance.
E
G
N
A
H
C
X
E
G
A
T
The Tag Exchange Service enables
farmers to lease leg and neck tags with
servicing and maintenance provided by
us. This enables farmers to remove the
burden of capital investment and to flex
the number of tags according to changes
in the size of their herds.
17
N
O
I
S
I
C
E
R
P
L
O
R
T
N
O
C
E
C
N
E
G
I
L
L
E
T
N
I
E
G
N
A
H
C
X
E
R
E
T
S
U
L
C
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
How We Measure Our Performance
The Group uses a variety of key performance indicators which are in line with our updated
strategy and investor proposition.
Closing order
book
£37.8m
+26.0%
Constant currency
revenue growth1
8.7%
+4.2%
Adjusted EBITDA
margin1 %
21.3%
-1.1%
2018
2017
2016
£37.8m
2018
8.7%
2018
£30.0m
2017
4.5%
£23.3m
-0.6%
2016
2017
2016
21.3%
22.4%
21.1%
Reason for choice
Provides an indication of revenue
to be recognised in the next
financial period.
Indicates the rate at which
the Group’s business activity
is changing over time.
How we calculate
Orders received by the Group
and not yet fulfilled. This is
measured by the value of future
revenue attached to
orders not yet fulfilled.
The growth in revenue
comparing current year
revenue with prior year revenue
retranslated at current year
exchange rates.
Provides a measure of the
underlying profitability of
the ordinary activities of the
business and their potential
to generate cash.
The ratio of Adjusted
EBITDA to revenue. Adjusted
EBITDA is defined as operating
profit before depreciation,
amortisation, exceptional items
and defined benefit pension
scheme costs. It excludes
any effect of discontinued
operations.
Comments on results
Strong order intake in the second
half of the year has resulted in
a closing order book of £37.8m
providing excellent revenue
visibility for 2019.
Strong core revenue growth in
milkrite | InterPuls and across
Military and Law Enforcement
has resulted in constant currency
growth of 8.7%, significantly
ahead of our 3%+ objective.
The sales product mix, with
the delivery of more M50 mask
systems in the year has reduced
our EBITDA margin by 110bps;
this remains ahead of our 20%+
objective.
Product development
% of revenue
Cash
conversion %
Adjusted earnings
per share1
Return on capital
employed % (ROCE)
5.9%
+0.8%
2018
2017
2016
108.2%
+10.1%
77.1p
-8.0%
23.3%
-1.7%
5.9%
2018
108.2%
2018
77.1p
2018
5.2%
2017
98.1%
2017
83.8p
2017
5.8%
2016
110.7%
2016
71.8p
2016
23.3%
25.0%
23.2%
Provides a measure of the
Group’s investment in new
products and processes.
Investment provides a
foundation for the Group’s
future growth.
Provides a measure of the
management of working capital
and the ability of the Group to
convert profits to cash.
Measures the ability to generate
a return to shareholders. It takes
into account our success in
growing our business organically
and by acquisition coupled with
management of the Group’s
financing and tax.
Measures profitability and the
efficiency with which capital
is employed.
The ratio of cash generated
from operations before the
effect of exceptional items
to adjusted EBITDA.
Total expenditure on research
and development including
amounts funded by customers,
development expenditure
capitalised and amounts
expensed directly to the
Income Statement expressed
as a percentage of revenue.
Adjusted operating profit as a
percentage of average capital
employed. Capital employed
is the sum of shareholders’
funds, non-current liabilities
and current borrowings.
Adjusted profit for the year
divided by the weighted
average number of shares
in issue. Adjusted profit
excludes the amortisation of
acquired intangibles and the
after tax effect of exceptional
items, defined benefit
pension scheme costs and
discontinued operations.
Our continued focus on cash
management has resulted
in 108.2% of EBITDA being
converted into cash.
Strong core revenue and profit
growth has been offset by lower
tax provision releases in 2018
which resulted in a reduction in
adjusted earnings per share
of 8.0%.
Our improved profitability
has been offset by the strong
net cash position throughout
the year which has caused a
reduction in our ROCE to 23.3%.
5.9% of revenue has been
spent on product development
including investment in the
UK GSR, MCM100 and next
generation hoods programmes
in Avon Protection. milkrite
| InterPuls development
expenditure included investment
in the Milk Meter equipment
upgrade and the PCI heavy
duty range.
1 The Directors believe that adjusted measures provide a more useful comparison of business trends and performance.
The metrics are also used internally to measure and manage the business.
18
2016 and 2017 numbers have been restated to reflect the continuing operations of the Group following the sale of Avon
Engineered Fabrications, Inc on 30 March 2018.
19
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Chief Executive Officer’s Review
“ There are significant medium term growth
opportunities for both Avon Protection
and milkrite | InterPuls. I am confident that
our strong foundations for growth provide
us with the ability to continue delivering
value to our customers, our people and our
shareholders in the future.”
Paul McDonald
Chief Executive Officer
I am delighted to report on another strong
set of results which confirms the progress
of our growth strategy. We have built
momentum with a continued focus on
growing the core revenue of the business to
deliver sustainable and improving operating
profits and cash flows.
Our ability to generate cash has allowed
us to increase our investment in product
development to support future growth.
Investing in our product portfolio enables us
to maintain the competitive advantage of our
existing range and to develop new products
that meet the future needs of our widening
customer base.
We have made a conscious effort to enhance
the predictability and sustainability of our
business. This has resulted in us growing our
order book in 2018 to establish strong visibility
that will enable us to target new contract
opportunities whilst retaining the flexibility to
manage scheduling and timing effectively.
Closing order book
2018
2017
2016
£37.8m
£30.0m
£23.3m
£37.8m
We continue to explore acquisition
opportunities where we see the potential to
complement our existing businesses and to
deliver additional growth opportunities to
create further value for our shareholders. Our
strong balance sheet will enable us to execute
on acquisition opportunities meeting our
clear investment criteria.
There are significant medium and long-
term growth opportunities for both Avon
Protection and milkrite | InterPuls. I am
confident that our strong foundations for
growth provide us with the ability to continue
delivering value to our customers, our people
and our shareholders in the future.
Strategy
The updated strategy, launched last year,
is based upon creating shareholder value
through three key elements:
• growing the core by maximising organic
sales growth from our current product
portfolio and maximising the operational
efficiency of our existing facilities;
• pursuing selective product development
to maintain our innovation leadership
position; and
•
targeting value enhancing acquisitions to
complement our existing businesses and
add additional growth opportunities for
the Group.
Net cash
£46.5m
(2017: £24.7m)
Grow the Core
Avon Protection
Strong growth in Military and Law
Enforcement has resulted in Avon Protection
delivering another record year through our
continued focus on expanding our customer
base and product offering to provide a
broader portfolio of products and extracting
more value from our existing customers.
Expanding our global Military
customer base
Our world leading expertise and reputation
for quality in respiratory protection systems
has been recognised by the UK Ministry
of Defence (‘MOD’) through the signing
in February of a five year contract for the
resupply and in-service support of its General
Service Respirator (‘GSR’).
Since re-establishing our relationship with
the UK MOD through the GSR contract, we
have been able to demonstrate to them
our technical capabilities and track record
of service and delivery that meets the most
exacting quality standards of our Military
customers. We anticipate that in time this will
generate further opportunities to deepen our
relationship with the UK MOD.
The launch of our MCM100 underwater
rebreather has provided further opportunities
to establish and strengthen relationships with
a number of European and Rest of World
Militaries and demonstrate our innovation
and delivery capabilities.
Our strong relationship with the US Military
has enabled us to develop a broad product
portfolio ranging from our general service
respiratory systems through to complex
integrated and modular powered and
supplied air systems. As a result of the
modularity of our product offering, we can
offer a bespoke solution to meet the budgets
and differing usage requirements of potential
Military customers.
Reshaping our Fire strategy
The Fire market has seen tougher trading
conditions through the year as customers
have delayed purchasing commitments on
older legacy ranges in advance of the arrival
of the new 2019 National Fire Protection
Association (‘NFPA’) compliant products. The
launch of products compliant with the 2019
NFPA standards is later than expected due to
delays at the NFPA in finalising the standards.
With a breadth of product offering, and
ongoing investment in research and
development, we are in a strong position to
deepen our existing customer relationships
and pursue the new opportunities that our
world leading reputation is creating.
Growing the Law Enforcement market
This year has seen a greatly expanded market
demand for our protection products as the
needs of the Law Enforcement community to
meet the diverse CBRN threats has increased.
This has been reflected in the significant sales
momentum in the US market for our range of
supplied and powered air products, following
NIOSH safety approval in March of this year, and
the strong sales performance of hoods and mask
systems in Europe, the Middle East and Asia.
We have seen good market penetration with
US Law Enforcement municipalities, where we
have been able to leverage our differentiated
modular product range to grow our market
share. In the medium term, we expect our
share of the law enforcement market to grow
in both the US and other jurisdictions as we
take advantage of our product innovation
leadership position.
The market for self-contained breathing
apparatus (‘SCBA’) in the Fire sector
remains highly competitive and includes a
fragmented customer base. We continue to
see opportunities in this segment with our
upgraded Magnum SCBA range, designed to
comply with the new 2019 NFPA standards,
which we expect to launch in the spring of
2019 and we have revised our sales strategy
for the Fire market to ensure we return to
growth in the short-term.
The argus thermal imaging camera
technology has made a significant cumulative
contribution to Fire market sales. During the
year, we launched the NFPA certified Mi-TIC
E L camera, which can now be sold into
the US market. This model of the thermal
imaging camera is the most cost effective
entry-level solution for Fire services, without
compromising on technology or quality. The
argus range is a trusted brand for firefighters
and this latest approval adds more options
and variety for our customers and will help
to maintain Avon Protection’s position as a
leading global supplier of certified thermal
imaging cameras.
Strategy in action:
Stronger underlying M50 mask system demand
• 179,000 M50 mask systems delivered in the year with an FY19 opening
order book of 89,000
• Product life cycle anticipated for a further 20 years
• Ongoing demand of minimum 50,000 per annum volumes from FY20 with
further upside potential from allied RoW militaries
• M50 mask system is designed to last up to 10 years dependent on
use requirements
• Follow on sustainment contract anticipated during 2019
• Growing spares and filter demand for in service requirements
20
21
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Chief Executive Officer’s Review continued
Continuous focus on
operational efficiency
Building on our existing manufacturing and
service operation is a constant focus for Avon
Protection to maximise the service delivery for
our expanding customer base and widening
product portfolio. Our well established and
efficient manufacturing operation has enabled
us to maintain excellent product quality
control and reliability across our product
range. As we move up the value chain in
respiratory protection, with greater focus on
more technical solutions for mask systems and
supplied and powered air products, we are
focused on ensuring that we maintain high
productivity levels whilst being able to meet
all of our customers’ requirements.
To achieve a greater level of production
efficiency, during the year we relocated
our West Palm Beach, Florida electronics
assembly facility to our main US
manufacturing facility in Cadillac, Michigan.
This is part of our commitment to continually
improve our production processes and to
deliver scale efficiencies.
During the year, working with a local partner,
we installed a production assembly line in
Kazakhstan for the production of escape
hoods primarily for the oil and gas sector.
We will continue to explore additional
opportunities, where appropriate, to deploy
flexible manufacturing solutions, including
local assembly operations to support regional
customers, and optimise our production cost
base to meet our future growth aspirations.
milkrite | InterPuls
We have maintained our focus on expanding
our position as milking point experts
across each line of business for milkrite |
InterPuls. The growing demand for dairy
foodstuffs underpins medium and long-
term opportunities for broadening the
geographic reach of our products through
the enhancement of our dealer network
and the growth of Farm Services.
Retaining our Interface leadership
We have a global market-leading position in
Interface, with our Impulse and Impulse Air
ranges designed to maximise animal health
and milking efficiency. Our innovation in
Interface products ensures that we maximise
our competitive advantage and counter
competitor challenge. In addition, we remain
committed to expanding the global dealer
network to maximise our market coverage
and access new customers.
Expanding Precision, Control &
Intelligence (PCI) distribution
We have an advanced range of PCI products
and our emphasis is on the technical dealer
network to provide an upgraded sale and
support capability to our customer base
across all geographies. During the year,
we have added technical sales specialists
to our North American team to leverage
our Interface platform and align the more
technical solution the PCI products can
deliver to the benefits they can bring to our
customers in the performance and efficiency
of milk production.
Growing the Farm Services
lease ownership model
We have once again seen very strong
growth in Farm Services as a wider base of
our customers sees the benefit of accessing
our product range on a lease hire basis. The
Cluster Exchange Service (‘CES’) in both US
and European markets has performed strongly
and the sales strategy is focused on delivering
on the opportunities to grow Pulsator
Exchange Service (‘PES’) and Tag Exchange
Service (‘TES’).
This ultimately provides us with the future
delivery platform for ever increasingly
advanced products, which provides a
direct contact for service and support
with our customers.
Selective Product Development
Continued investment to expand
our product range
We have made a substantial investment this
year in enhancing the technical capability of
our existing portfolio and developing new
products that will deliver future growth for the
business. The majority of our development
pipeline is designed in partnership with our
customers to ensure that their performance
requirements are met whilst ensuring the
highest commercial returns on our investment
are delivered.
Strategy in action:
PCI growth opportunity in North America
• Significant growth opportunity in North America to leverage our
market leading Interface platform
• Heavy duty PCI farm range launched in 2018 to meet usage requirements
of larger industrial farms
• Multi-site reference farms established in 2018 to demonstrate technical
product solution to distribution network
• Plug and play compatibility with legacy OEM dairy systems provides
flexibility for dealers to choose best equipment solution
• Technical sales specialists added to North American team to support
significant growth opportunity
The development expenditure in the
year has predominantly focused on Avon
Protection, with significant investment in the
UK GSR, MCM100 and next generation hood
programmes. We also invested in obtaining
NIOSH safety approval for our supplied
and powered air range and preparing
our upgraded Magnum SCBA for NFPA
verification. Development expenditure for
milkrite | InterPuls included the upgraded
Milk Meter equipment and subsequent ICAR
approval together with the PCI heavy duty
equipment for North America to meet the
needs of our larger industrial farm customers.
In 2018 we invested a total of £9.7m,
representing 5.9% of revenue, in research and
development. Over the medium-term we
expect to maintain the current level of funding
for product development. This reflects our
confidence in our ability to innovate to meet
the future technical needs of our customers
thereby generating profitable revenue growth.
Building on our long-term partnership
with the DOD
We have continued to work with the DOD on a
number of potentially significant new platform
programmes including the M69 aircrew mask,
the M53A1 mask and powered air system and a
follow on M50 mask system contract.
We currently expect to enter into multi-year
contracts with the DOD for the M69 aircrew
mask and the M53A1 mask and powered
air system in the new financial year with
production commencing in the second half
of the year. We are also in discussions with the
DOD to put in place a follow on contract for the
M50 mask system following the conclusion of
the initial 10 year contract in July.
Value Enhancing Acquisitions
We intend to complement the organic growth
strategy described above with carefully
selected value enhancing acquisitions within
both Avon Protection and milkrite | InterPuls.
Acquisitions are intended to complement and
extend the reach of our existing businesses.
This will have the effect of building a more
robust and diversified business, whilst
retaining the benefits of our technology
expertise and strong customer relationships.
As part of our acquisition strategy, we also
review our existing market segments to
ensure that they still meet our core strategic
objectives. The divestment of AEF, the US
based manufacturer of hovercraft skirts and
bulk liquid storage tanks, reflects this focus
on growing the core business in our chosen
market segments.
milkrite | InterPuls acquired the Merrick’s calf
nurser product line for a total cost of $2.1m in
June this year. milkrite | InterPuls has been the
long-standing manufacturer of the rubber
component of the calf nurser product and the
acquisition enables us to take full control of
the distribution of this product.
We continue to explore other acquisition
opportunities where we see the potential to
deliver significant strategic and financial value.
We have a strong balance sheet, including
net cash of £46.5m, together with undrawn
bank facilities of $40m, and a cash generative
business. This financial position, as well as
our willingness to extend leverage up to two
times EBITDA, means we are well positioned
to pursue potential acquisitions that meet our
criteria and act decisively where we find them.
People
Outlook
Our opening order book of £37.8m provides
good visibility as we enter the new financial
year, and we are well positioned to continue
our strong momentum into 2019.
Within Avon Protection, first deliveries of
the M69 aircrew masks, the M53A1 mask
and powered air system and the UK General
Service Respirator to the UK MOD will be
made in 2019. The revenue opportunities from
new products and customers is expected to
offset the impact of the anticipated reduction
in M50 mask system volumes. Alongside this,
we expect continued sustainable growth from
the widening customer and product base in
Law Enforcement and, following the launch
of our upgraded Magnum SCBA, we expect
a stronger performance in the Fire business.
There also remains a healthy pipeline of
potential further contract opportunities.
Dairy market conditions have remained stable,
although there has been some recent market
caution around expectations for future feed
prices. In this environment, we currently
anticipate that the growth trends experienced
by milkrite | InterPuls in 2018 will continue in
the new financial year.
Last year saw a significant transition of
leadership within the Executive leadership
teams of both businesses, and I have been
very pleased that these changes have resulted
in a clearer strategic direction and alignment
for the Group.
We have created a strong foundation to
deliver further growth in 2019 through
delivering against our three strategic
priorities of growing the core, selective
product development and value
enhancing acquisitions.
Paul McDonald
Chief Executive Officer
14 November 2018
In recognition of the extensive Military growth
opportunities within Avon Protection, I
am delighted to welcome James Wilcox to
the Executive leadership team to lead our
global Military business. James is an internal
appointment from within the Avon Protection
business and has many years of experience
developing and marketing products to our
Military customers. I believe that having
specific sector leadership for Military,
with Leon Klapwijk continuing to lead Law
Enforcement and Fire, will greatly enhance
our strategic delivery in Avon Protection to
support our ambitious and exciting growth
strategy for the future.
22
23
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Divisional
Review
“ Momentum in Military order
intake and international
growth in Law Enforcement
underpins confidence
in 2019.”
Growth in orders received to £124.6m (2017:
£116.0m) delivered an increase in revenue
of 5.4% to £115.7m (2017: £109.8m). On a
constant currency basis, revenue grew by
10.6% with Military revenue growing by 8.0%,
strong 28.1% growth in Law Enforcement and
Fire declining by 10.0%, reflecting a more
challenging Fire market.
Adjusted operating profit grew by 7.0%
to £21.5m (2017: £20.1m). Eliminating the
impact of currency movements, adjusted
operating profit grew by 13.4% on a
constant currency basis.
Our adjusted EBITDA margin softened to
23.0% (2017: 24.4%), being a reduction of
1.1% on a constant currency basis, primarily
reflecting product mix with a higher volume
of M50 mask systems shipped in 2018
compared to last year. Adjusted EBITDA
was £26.6m (2017: £26.8m); eliminating the
impact of currency movements, adjusted
EBITDA grew by 5.3% at constant currency.
Military
Military revenue of £66.1m (2017: £64.2m)
was up 3.0%. Excluding the impact of
unfavourable currency movements Military
revenues were up 8.0% on a constant
currency basis.
DOD revenue totalled £52.7m versus £50.5m
in 2017, reflecting higher M50 mask system
volumes and increased volumes of spares
and accessories more than offsetting
unfavourable currency movements.
We delivered 179,000 M50 mask systems and
150,000 filter pairs, compared with 150,000
mask systems and 144,000 pairs of filter
spares in 2017. DOD spares and development
costs revenue decreased to £12.0m (2017:
£15.6m) due to 2017 including higher
development costs relating to the M69 air
crew mask.
Having received orders for 219,000 M50
mask systems during the year, we enter the
new financial year with an order book of
89,000 systems.
Revenue from our Rest of World Military
business totalled £13.4m (2017: £13.7m). Initial
revenue from Military sales of our powered
and supplied air range and the MCM100
underwater rebreather largely offset the non-
repeat revenue in 2017 from the 37,000 FM50
general purpose masks delivery.
James Wilcox
President, Military
12% – Fire
£14.2m
31% – Law Enforcement
£35.4m
Revenue
£115.7m
57% – Military
£66.1m
Outlook
Our closing order book of £35.3m provides
good visibility as we enter the new financial
year, and we are well positioned to continue
our strong growth momentum into 2019.
In Military, we expect the first deliveries of
the M69 aircrew mask, M53A1 mask and
powered air system and the UK General
Service Respirator to the UK MOD to be made
in 2019. The revenue opportunities from new
products and customers is expected to offset
the impact of the reduction in anticipated
M50 mask system volumes.
We expect continued sustainable growth
at a more normalised rate from the
widening customer and product base in
Law Enforcement. We anticipate a stronger
performance in Fire in 2019 following the
launch of our upgraded Magnum SCBA, once
NFPA safety approval has been obtained.
First orders of M69
aircrew masks expected
for delivery in 2019
Law Enforcement
Fire
Law Enforcement revenue grew 22.1% to
£35.4m (2017: £29.0m) reflecting strong
growth of 28.1% on a constant currency basis
offset by adverse currency movements. This
was driven by strong performances in hoods
and mask systems across all regions as we
continue to make progress in converting
police forces to our products. In North
America, we also benefited from increased
sales of filters and spares to our expanding
customer base. Initial sales of our supplied
and powered air ranges also contributed to
the growth in the year and our expanded
product range provides an exciting
foundation for future growth.
Fire revenue dropped by 14.5% to £14.2m
(2017: £16.6m) including the impact of
unfavourable currency movements, or a
smaller reduction of 10.0% on a constant
currency basis, due to tougher market
conditions experienced in North America.
The NFPA approval of Magnum later in the
financial year will offer greater opportunity
for growth in Fire as we expect Fire services
to return to the market to procure the
updated and compliant SCBA range.
Leon Klapwijk
President, Protection
Orders received
Closing order book
Revenue
Adjusted EBITDA
Adjusted EBITDA margin
Adjusted operating profit
Operating profit
2018
£124.6m
£35.3m
£115.7m
£26.6m
23.0%
£21.5m
£19.5m
2017
(restated)
% Change
% Change at
constant currency
£116.0m
£26.5m
£109.8m
£26.8m
24.4%
£20.1m
£16.2m
7.4%
33.2%
5.4%
(0.7%)
(1.4%)
7.0%
20.4%
11.4%
30.6%
10.6%
5.3%
(1.1%)
13.4%
26.7%
24
25
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Divisional
Review
“ milkrite | InterPuls growth
momentum across all lines
of business following a
strong Interface recovery
in the second half of
the year.”
Craig Sage
Managing Director,
milkrite | InterPuls
10% – Farm Services
£5.2m
18% – PCI
£9.0m
26
Revenue increased by 0.8% to £49.8m
(2017: £49.4m); excluding the impact of
unfavourable currency movements revenue
grew 4.3% on a constant currency basis.
On a constant currency basis, Interface
grew revenue by 2.9%, PCI by 1.9% and
Farm Services by 19.8%. The growth trends
reflect the current stable global dairy
market conditions and the improved trading
conditions in North America in the second
half of the year.
Adjusted operating profit and adjusted
EBITDA were both flat at £8.0m (2017: £8.0m)
and £10.9m (2017: £10.9m) respectively, with
constant currency growth of 6.7% and 5.2%
respectively being offset by unfavourable
currency movements. The adjusted EBITDA
margin of 21.9% (2017: 22.1%) increased by
0.2% on a constant currency basis.
Interface
Interface revenue reduced by 0.8% to
£35.6m (2017: £35.9m), including the impact
of unfavourable currency movements.
On a constant currency basis, Interface
revenues grew by 2.9% driven by a stronger
performance in North America in the
second half of the year and strong growth
in Latin America, Europe, the Middle East
and Asia Pacific.
North America revenues of £17.8m (2017:
£19.2m) declined by 1.7% on a constant
currency basis, reflecting the weaker market
conditions in the first half of the year.
Improved market conditions in the second
half of the year and the acquisition of the
Merrick’s calf nurser product line in June,
resulted in second half constant currency
growth of 3.9%.
In Europe, revenue grew by 7.2% to £10.4m
at constant currency. Latin America grew
liner revenues by 11.5% on a constant
currency basis reflecting market share gains
in Brazil. Asia Pacific liner revenues increased
by 8.2%, at constant currency, as a result of
stronger market conditions experienced in
the important market of China during 2018.
Precision, Control & Intelligence
The sales of our PCI range and sales have
continued to perform well across our key
markets. Revenue was flat at £9.0m (2017:
£9.0m), but grew 1.9% at a constant currency
rate as dairy farmers continue to invest in
our PCI products to drive farm efficiency.
Constant currency growth was driven by
growth in Europe of 3.6% and of 10.5% in
the Middle East, and as with our Interface
products, we gained market share in Latin
America with PCI growth of 17.6%.
Revenue
£49.8m
72% – Interface
£35.6m
Farm Services
Farm Services has continued to show
exceptional growth with revenue of £5.2m
(2017: £4.5m), up 19.8% at constant currency,
reflecting the ongoing success of Cluster
Exchange which saw a 14% growth in cluster
points in the period. The constant currency
growth was driven by growth in North
America of 20.9% and 18.5% in Europe. The
extension of Farm Services to include Pulsator
Exchange and Tag Exchange provides
opportunities for growth in future years.
At the end of the year, Cluster Exchange had
grown by 14.0% to 40,000 cluster points (2017:
35,000) serving 637,000 cows on 2,100 farms,
up from 624,000 cows and 1,900 farms at the
same time last year.
Outlook
Dairy market conditions have remained stable,
although there has been some recent market
caution around expectations for future
feed prices. In this environment, we
currently anticipate that the
growth trends experienced
by milkrite | InterPuls in
2018 will continue in
the new financial year.
Farm Services
creates the future
direct to farm delivery
platform
Heavy duty PCI
farm range launched
in 2018 to meet usage
requirements of larger
industrial farms
Orders received
Orders received
Closing order book
Closing order book
Revenue
Revenue
Adjusted EBITDA
Adjusted EBITDA
Adjusted EBITDA margin
Adjusted EBITDA margin
Adjusted operating profit
Adjusted operating profit
Operating profit
Operating profit
2018
2018
£48.7m
£48.7m
£2.5m
£2.5m
£49.8m
£49.8m
£10.9m
£10.9m
21.9%
21.9%
£8.0m
£8.0m
£6.0m
£6.0m
2017
2017
£50.0m
£50.0m
£3.5m
£3.5m
£49.4m
£49.4m
£10.9m
£10.9m
22.1%
22.1%
£8.0m
£8.0m
£6.3m
£6.3m
% Change
% Change
% Change at
% Change at
constant currency
constant currency
(2.6%)
(2.6%)
(28.6%)
(28.6%)
0.8%
0.8%
0.0%
0.0%
(0.2%)
(0.2%)
0.0%
0.0%
(4.8%)
(4.8%)
0.6%
0.6%
(31.1%)
(31.1%)
4.3%
4.3%
5.2%
5.2%
0.2%
0.2%
6.7%
6.7%
3.6%
3.6%
27
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Financial Review
“ We have delivered
yet another strong
set of results
in 2018.”
Nick Keveth
Chief Financial Officer
The Group has delivered a strong financial
performance during the year with revenue
and adjusted operating profit increasing
at constant currency by 8.7% and 11.8%
respectively. Given our US businesses
constitute over 70% of the Group, the stronger
pound experienced during the year resulted
in reported revenue increasing by 4.0% to
£165.5m and reported adjusted operating
profit by 4.6% to £27.3m (2017: £26.1m) at
actual currency.
As a result of product mix, with the delivery of
more M50 mask systems, our adjusted EBITDA
margin of 21.3% was 0.8% lower than last year
on a constant currency basis.
After a tax charge of £3.7m (2017: £0.4m), an
adjusted effective rate of 13.6% (2017: 1.6%),
the Group recorded an adjusted profit for the
year after tax of £23.5m (2017: £25.5m). The
increased tax rate resulted in adjusted basic
earnings per share decreasing by 8.0% to 77.1p
(2017: 83.8p).
On a reported basis, after taking account
of the amortisation of acquired intangibles,
defined pension and administration costs and
the effect of the relocation of the West Palm
Beach manufacturing facility, operating profit
before tax grew by 13.4% to £22.8m (2017:
£20.1m) or 23.4% on a constant currency basis.
Profit before tax was £21.6m (2017: £18.9m)
and, after a tax charge of £1.8m (2017: £2.9m
tax credit), profit from continuing operations
was £19.8m (2017: £21.8m). Basic earnings per
share from continuing operations were 64.9p
(2017: 71.6p).
The disposal of AEF on 30 March 2018 resulted
in a profit from discontinued operations of
£1.6m (2017: £0.3m loss) to give an overall
profit for the year of £21.4m (2017: £21.5m).
Operational cash generation has continued
to be strong with EBITDA cash conversion of
108.2%. The operational cash performance,
taking into consideration the divestment
of AEF and investment in the Merrick’s calf
nurser product line, resulted in a £21.8m
increase in net cash during the year and a
closing net cash balance of £46.5m. This
strong cash position provides funding
to support our organic growth strategy,
investment in new product development
and value enhancing acquisitions.
Against this strong backdrop, the Board has
increased the final dividend by 30% to 10.68p
resulting in total dividends for the year of
16.02p, also up 30% on 2017. This level of
dividend increase is in line with our policy,
and reflects our ongoing confidence in future
performance of the Group.
The closing order book of £37.8m is 23.4%
higher than at the end of 2017 on a constant
currency basis, reflecting strong performances
across the markets in which we operate. On an
actual currency basis, the closing order book
grew by 26.0%. The opening order book for
2019 provides good visibility heading into the
new financial year.
£46.5m
Net Cash
2018
2017
2016
£2.0m
£24.7m
£46.5m
Final dividend
10.68p
30%
Segmental Information
Orders received
Avon Protection
milkrite | InterPuls
Total
Closing order book
Avon Protection
milkrite | InterPuls
Total
Revenue
Avon Protection
milkrite | InterPuls
Total
Adjusted EBITDA
Avon Protection
milkrite | InterPuls
Unallocated corporate costs
Total
Adjusted EBITDA margin
Avon Protection
milkrite | InterPuls
Total
Operating profit
Avon Protection
milkrite | InterPuls
Unallocated corporate costs
Total
Adjusted operating profit
Avon Protection
milkrite | InterPuls
Unallocated corporate costs
Total
2018
£m
124.6
48.7
173.3
35.3
2.5
37.8
115.7
49.8
165.5
26.6
10.9
(2.2)
35.3
23.0%
21.9%
21.3%
19.5
6.0
(2.7)
22.8
21.5
8.0
(2.2)
27.3
2017(1)
(restated)
£m
116.0
50.0
166.0
26.5
3.5
30.0
109.8
49.4
159.2
26.8
10.9
(2.0)
35.7
24.4%
22.1%
22.4%
16.2
6.3
(2.4)
20.1
20.1
8.0
(2.0)
26.1
Growth
at constant
currency
%
11.4%
0.6%
8.1%
30.6%
(31.1%)
23.4%
10.6%
4.3%
8.7%
5.3%
5.2%
12.4%
5.1%
(1.1%)
0.2%
(0.8%)
26.7%
3.6%
12.8%
23.4%
13.4%
6.7%
12.4%
11.8%
Growth
%
7.4%
(2.6%)
4.4%
33.2%
(28.6%)
26.0%
5.4%
0.8%
4.0%
(0.7%)
0.0%
10.0%
(1.1%)
(1.4%)
(0.2%)
(1.1%)
20.4%
(4.8%)
12.5%
13.4%
7.0%
0.0%
10.0%
4.6%
(1) 2017 has been restated to reflect the continuing operations of the Group following the sale of AEF on 30 March 2018.
28
29
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Financial Review continued
Profit for the Year
Net Cash and Cash Flow
Adjusted operating profit
Adjustments
Operating profit
Net finance costs
Profit before taxation
Taxation
Profit from continuing operations
Discontinued operations
Profit for the year
Adjustments
2018
£m
27.3
(4.5)
22.8
(1.2)
21.6
(1.8)
19.8
1.6
21.4
2017
(restated)
£m
26.1
(6.0)
20.1
(1.2)
18.9
2.9
21.8
(0.3)
21.5
Adjustments of £4.5m (2017: £6.0m) excluded from adjusted operating profit comprise the £0.9m costs for the relocation of the West Palm
Beach manufacturing facility to Cadillac, amortisation of acquired intangible assets of £3.1m (2017: £3.0m) and pension administration costs of
£0.5m (2017: £0.4m). Adjustments in 2017 included an exceptional write down of costs of £2.9m in developing the EEBD product and included
an exceptional credit of £0.3m for a post-acquisition working capital adjustment relating to the acquisition of InterPuls.
Finance costs
Net interest costs were nil (2017: £0.2m). Other finance expenses of £1.2m (2017: £1.0m) primarily represent the unwind of the discount on
the net pension liability and, as in previous years, have been excluded from adjusted profit for the year.
Taxation
Taxation was a charge of £1.8m (2017: credit of £2.9m) which consists of a £3.7m charge relating to the current year and a £1.9m credit
in respect of previous periods. The £1.9m credit in respect of previous periods includes a £0.7m credit in connection with the release of
provisions following an updated assessment of uncertain tax positions.
Profit from Discontinued Operations
The profit from discontinued operations of £1.6m (2017: (£0.3m)) is comprised of the profit after tax of AEF up to the date of disposal on
30 March 2018 of £0.5m (2017: (£0.3m)) and the post tax gain on disposal of £1.1m (see note 2.2 for further details).
Adjusted cash generated from operations was £37.9m, up 6.5% on 2017. Operating cash conversion from adjusted EBITDA continued to be
strong at 108.2% (2017: 98.1%) and operating cash conversion from adjusted operating profit was 139.9% (2017: 134.1%).
Cash flows from continuing operations before the impact of exceptional items
Cash impact of exceptional items and discontinued operations
Cash flows from operations
Net interest
Payments to pension plan
Tax
Purchase of property, plant and equipment
Capitalised development costs and purchased software
Acquisitions
Divestments
Purchase of own shares
Dividends to shareholders
Foreign exchange and other items
Increase in net cash
2018
£m
38.2
(0.3)
37.9
–
(1.5)
(5.0)
(3.3)
(5.6)
(1.4)
6.5
(1.1)
(4.1)
(0.6)
21.8
2017
(restated)
£m
35.0
0.6
35.6
(0.1)
(1.0)
(2.0)
(2.6)
(2.9)
–
–
(1.0)
(3.2)
(0.8)
22.0
At the year end, the Group had net cash of £46.5m (2017: £24.7m) and an undrawn US Dollar denominated bank facility of $40m (£30.7m),
which is committed to 28 June 2021 with options to extend for a further two years.
Our strong balance sheet gives us the capacity to fund our growth strategy and make further acquisitions. Our policy is to maintain a strong
financial position and keep the ratio of net debt to adjusted EBITDA under two times.
Merrick’s calf nurser acquisition
The acquisition of the Merrick’s calf nurser product line in June was for a total cost of $2.1m. The cost included $1.8m (£1.4m) in cash
consideration, associated acquisition costs of $0.1m, and the impact of a write-down of $0.2m in relation to a trade receivable balance due
from Merrick’s at the time of the acquisition.
Case Study:
Relocation of West Palm Beach manufacturing site
• West Palm Beach, FL was the location of the assembly line for electronic
components used in the Deltair SCBA, MCM100 underwater rebreather
and argus thermal imaging cameras
• The manufacturing facility was relocated to Cadillac, MI in September
at a cost of £0.9m
• This aligns our electronics assembly with the other production processes
in Cadillac
• Relocation will improve production efficiency and deliver product
margin improvements, with benefits already being realised
Strategy in action:
AEF non-core divestment provides better focus
• Avon Engineering Fabrications, Inc (AEF) divested for
$9.25m in March 2018
• Manufactured non-core product line focused on hovercraft
skirts and bulk liquid storage tanks
• Market segment was not a strategic priority for the business
with growth opportunities limited
• AEF’s portfolio had a more uncertain DOD procurement cycle which
contributed to unpredictable revenue and margin inefficiencies
• Sale delivered value for money and capital contribution to the
strong balance sheet for future acquisition opportunities
30
31
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Financial Review continued
Research and Development Expenditure
We continue to invest for the future and our total investment in research and development (capitalised and expensed) amounted to £9.7m
(2017: £8.3m) as shown below. Total research and development as a percentage of revenue was 5.9% (2017: 5.2%).
Total expenditure
Less customer funded
Group expenditure
Capitalised
Income statement impact of current year expenditure
Amortisation
Impairment
Total income statement impact
Revenue
R&D spend as % of revenue
Avon
Protection
£m
2018
milkrite |
InterPuls
£m
2017 (restated)
Group
£m
Avon
Protection
£m
milkrite |
InterPuls
£m
Group
£m
8.6
(3.0)
5.6
(5.0)
0.6
2.2
–
2.8
115.7
7.4%
1.1
–
1.1
(0.5)
0.6
0.3
–
0.9
49.8
2.2%
9.7
(3.0)
6.7
(5.5)
1.2
2.5
–
3.7
165.5
5.9%
7.5
(4.6)
2.9
(1.8)
1.1
3.0
2.6
6.7
109.8
6.8%
0.8
–
0.8
(0.8)
–
0.2
–
0.2
49.4
1.6%
8.3
(4.6)
3.7
(2.6)
1.1
3.2
2.6
6.9
159.2
5.2%
In Avon Protection, the most significant investments have been in the production preparation for the General Service Respirator for the
UK MOD and development of the MCM100 and the next generation hood programmes. We have also invested in obtaining approval for
Magnum SCBA and the supplied and powered air range, with the NFPA and NIOSH respectively. In milkrite | InterPuls, investment expenditure
has been focussed on the heavy duty PCI equipment range and an upgrade to our Milk Meter equipment.
The reduced charges in the year for amortisation and impairments reflects the non-recurrence of the one-off impacts in 2017 of the
termination of the EEBD programme.
Pensions
The Group has a UK pension scheme which is closed to future accrual. The net pension liability, as measured under IAS 19 (revised), is
£30.5m (2017: £44.1m). The £13.6m decrease in the deficit over the last year is due to the increase in discount rates reflecting the higher
corporate bond return outlook and the lower actuarial mortality assumptions which are being reflected in the market.
On October 26, 2018, the High Court handed down a judgment involving the Lloyds Banking Group’s defined benefit pension
schemes. The judgment concluded that pension schemes should be amended to equalise pension benefits for men and
women in relation to guaranteed minimum pension benefits. We are working with our actuarial advisers, to understand the
extent to which the judgment crystallises any additional liabilities for the Group UK defined benefit pension scheme.
Strategy in action:
Acquisition of Merrick’s calf nurser product line
• Acquisition of distribution rights for Merrick’s calf nurser product
line assets for $2.1m
• Strong brand recognition and long sales history in North America
• Smooth integration with milkrite | InterPuls having been the
exclusive rubber component manufacturer for over 25 years
• Control of the distribution rights will contribute to revenue
growth and margin efficiency in Interface
• Strong order pipeline with wider RoW opportunities
We are early in the evaluation process, but we estimate that the additional liability could be in the region of £3.0m. Subsequent to further
assessment with our advisors, any necessary adjustment is expected to be recognised in the first half of our 2019 financial year.
The results of the triennial funding valuation, as at 31 March 2016, showed the plan to be 90% funded on a continuing basis with a deficit of
£33.8m. As part of the deficit recovery plan contributions of £1.5m were paid to the pension fund during the year (2017: £1.0m). The level of
contributions will be reassessed next following the March 2019 triennial funding valuation.
Financial Risk Management
The Group has clearly defined policies for the management of foreign exchange risk. Exposures resulting from sales and purchases in foreign
currency are matched where possible and net exposure may be hedged by the use of forward exchange contracts. The Group does not
undertake foreign exchange transactions for which there is no underlying exposure.
Credit and counterparty risk are managed through the use of credit evaluations and credit limits. Cash deposits are made at prevailing interest
rates which are not generally fixed for more than one or two months. Borrowings and overdrafts are at floating interest rates. The Group does
not carry out any interest rate hedging.
Currency Effect
The Group has translational exposure arising on the consolidation of overseas company results into Sterling. Based on the current mix of currency
denominated profit, a one cent appreciation of the US Dollar increases revenue by approximately £0.9m and operating profit by approximately
£0.2m. A one cent appreciation of the Euro increases revenue by approximately £0.1m and has nil impact on operating profit.
Dividends
The Board is recommending a final dividend of 10.68p per share (2017: 8.21p) which together with the 5.34p per share interim dividend gives a
total dividend of 16.02p (2017: 12.32p), up 30% on last year. The final dividend will be paid on 15 March 2019 to shareholders on the register at
15 February 2019 with an ex-dividend date of 14 February 2019.
Our policy is to maintain a progressive dividend policy balancing dividend increases with the rates of adjusted earnings per share growth
achieved, taking into account potential acquisition spend and the Group’s financing position. Over recent years, we have grown the dividend
per share by 30% per annum and we expect to continue to grow dividends ahead of earnings over the medium-term. Our policy is to maintain
dividend cover (the ratio of dividend per share to adjusted earnings per share) above two times. This year dividend cover was 4.8 times (2017: 6.7
times). Once dividend cover has reduced to two times we intend to increase dividends in line with the growth in adjusted earnings per share.
Nick Keveth
Chief Financial Officer
14 November 2018
Strategy in action:
Production readiness of UK GSR for first deliveries in 2019
• Entered into a five year contract with the UK MOD in February 2018
for up to £16.0m
• Contract to resupply and provide in-service support for the UK General
Service Respirator
• MOD retains rights over the intellectual property in the GSR
• Capital expenditure of £3.0m to prepare for production readiness and
product approvals with the MOD
• Full production is expected to commence in the second half of FY19
• Key reference customer and provides further opportunities for expanding
the Avon portfolio with UK MOD
32
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Principal Risks and Risk Management
The Group has an established process
for the identification and management
of risk, working within the governance
framework set out in our corporate
governance statement (see pages 48 to 52).
Ultimately the management of risk is the
responsibility of the Board of Directors, and
our system of risk management, which is
intended to be comprehensive and robust,
continues to evolve as the Group and the
environment in which it operates increases
in size and complexity.
The Board’s role in risk management includes
promoting a culture that emphasises
integrity at all levels of business operations
and setting the overall policies for risk
management and control.
During the year the principal risks affecting
the Group were comprehensively reviewed
and re-categorised by the Group Executive
team and approved by the Board.
Each risk area continues to have priority
tasks allocated to it that are the responsibility
of the members of the Group Executive
to deliver during the financial year. This
process inherently manages risk by ensuring
the principal risks are being mitigated by
prioritised business activity.
As we move into 2019 increased focus is
being given to how effectively risk is also
being mitigated by the control structures
embedded throughout the Group.
Both divisional executive teams have
provided feedback on this to a newly
formed risk management steering group.
This group is in the process of implementing
a quarterly review of the effectiveness of
these control structures by reference to a
set of key risk indicators. We will report on
this enhancement to the risk management
process in more detail in next year’s report.
In the meantime, the following pages include
an insight into what happened in 2018 and
areas of focus for 2019.
The principal risks are listed on the following
pages in order of significance. We have made
this assessment by reference to the volume
and intensity of activity in each area and not
by assessing potential severity of impact, as
there are examples of severe impacts across
all risk areas and these are all mitigated to a
high degree. The recategorised risk themes
within the principal risk areas are shown
alongside. Available mitigations in the form
of control structures are shown next to each
identified risk area.
Risk Rating and Movement in 2018
h
g
H
i
1
2
3
4
5
6
7
8
9
Y
T
I
V
I
T
C
A
K
S
I
R
e
t
a
r
e
d
o
M
l
a
m
r
o
N
1. Strategic initiatives
4. Cybersecurity and information technology
7. Manufacturing risk
2. Market threat to core business
5. Customer dependency
8. Compliance and legal matters
3. Talent management
6. Financial management
9. Political and economic stability
There are three main risk categories:
Strategic
Risks
Financial
Risks
Operational
Risks
Risks affecting the
achievement of the
Group’s strategic objectives
Issues that could affect
the finances of the business
both externally and internally
Matters arising from the
operational activities of the
Group relating to areas such as sales,
product development, procurement,
and dealings with commercial partners
1. STRATEGIC INITIATIVES
Business Risk
What happened in 2018
Mitigation
• Failure to identify correct strategic
projects or to deliver them
• Failure to identify and implement
new products
• Failure to identify, complete and
integrate acquisitions
Impact on
• Strategy delivery
• Sales, costs and profitability
• Employee morale
• AEF divestment and the acquisition
of Merrick’s product line reflects
the strategic focus on operating in
our core markets
• Relocation of West Palm Beach
•
electronics production demonstrates
focus on operational efficiency
Increased capital investment to deliver
enhanced product range to meet
customer requirements
• First orders for key new products;
MCM100 and NIOSH approved
supplied and powered air SCBAs
• Board oversight of clear strategy
definition and communication
combined with effective management
• Product development linked to Group
strategy and customer requirements
Intellectual property protection
considered and implemented
• Clear acquisition strategy and
•
alignment with divisional structures
Focus for 2019
• Delivering new product
programmes to meet
customer requirements
within capital allocated
budget
• Continued focus on
operational efficiency
and value enhancing
acquisitions
2. MARKET THREAT TO CORE BUSINESS
Business Risk
What happened in 2018
Mitigation
Focus for 2019
• Lack of sales growth/threat to
• Sustainable growth achieved in
current sales
core lines of business
• Loss of major bids/tenders
• Threat from competitors
Impact on
• Sales volume and profitability
• Product sales base expanded with
strong growth in hoods and masks in
LE and the first orders for MCM100
• Enhanced dealer and distribution
network focused on core markets
• Focused Military leadership team to
support key customer relationships
and sales strategy
• Unique lease model in Farm Services
continues to provide wider access to
product range
• Customer relationships prioritised
and managed through dedicated
leadership channels
• Product differentiation/innovation and
• Sustainable growth in all
lines of business and
order growth in new
products
diversification and protection of
intellectual property
• Diversified sales channels with
comprehensive distribution/
intermediary network
• Effective and up to date competitor
monitoring and analysis to maintain
competitive advantage
3. TALENT MANAGEMENT
Business Risk
What happened in 2018
Mitigation
Focus for 2019
• Poor employee competence and
failure to train and develop
Inability to recruit and retain talent
•
• Dysfunctional organisational
•
Improved employee satisfaction scores
• Continuing commitment to graduate
and internal leadership training
programmes to develop talent base
• Robust succession planning and effective
performance management process
• Effective training and development
strategy and activities
structures
Impact on
• Strategy delivery
• Sales, costs and profitability
• Employee morale
• Focus on separate leadership for
Military and Law Enforcement
combined with extensive succession
planning for key roles in the
organisation
• Alignment of annual bonus scheme
targets across all employees
• Appropriate organisational structure
with clear lines of authority and
communication
• Maintaining positive Avon culture -
Great Place to Work
• Continued focus on
people and culture
including launch of new
training and
development strategy
34
35
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Principal Risks and Risk Management continued
4. CYBERSECURITY AND INFORMATION TECHNOLOGY
7. MANUFACTURING RISK
Focus for 2019
• Continued focus on
infrastructure stability
and IT operating
efficiency
Business Risk
What happened in 2018
Mitigation
•
IT strategy anticipates forthcoming
requirements. IT sufficiently resourced
with specialists to ensure compliance
• Robust network/IT controls and
security protocols/policy
• Cyber insurance and IT disaster
recovery plan and backup
• Business interruption/cash cost of
•
cyber-crime and fraud
IT system or communications
failure could lead to business
continuity event
• Third party cybersecurity review
• Transition to cloud based servers to
reduce infrastructure risk and deliver
enhanced security
• Employee wide cybersecurity training
• Military security requirements
and development programme
result in excess cost and
management time. Failure to
comply results in loss of contract
Impact on
• Ability to ship products
• Financial loss
• Reputational damage
• Completion of full GDPR assessment
and policy implementation
• DOD and MOD cybersecurity
assessments completed
5. CUSTOMER DEPENDENCY
Business Risk
What happened in 2018
Mitigation
Focus for 2019
• West Palm Beach facility consolidation
supports manufacturing efficiency
management
• Robust supplier audit and quality
• Continued focus on
operational efficiency
and better business
approach
• No product recalls or significant
• Written supply agreements in place
warranty claims in the year highlights
quality product control
• Very low rate of health and safety
incidents
including dual source where necessary
• Robust manufacturing/operational
disciplines and fully functioning and
effective systems
• Strong site leadership and engaged,
motivated manufacturing workforce
Insurance and effective business
continuity planning
•
• Poorly functioning supply chain
impacts production and cost of
manufacture
• Quality control process failure
leads to product recall
• Health and safety incident results
in plant closure and prosecution/
fines
• Poorly managed distribution or
logistics network impacts delivery
and reputation
• Delays in new product
introductions
Impact on
• Costs, sales and profitability
Business Risk
What happened in 2018
Mitigation
Focus for 2019
8. COMPLIANCE AND LEGAL MATTERS
• Over reliance on customers, e.g.
the US DOD, and its funding and
contract process
• Failure to diversify customer base
• Negative impact of Dairy market
cycle on customer buying
behaviour
Impact on
• Sales and profitability
• First orders expected for M69 and
• Strong customer relationship
• Continued focus on
M53A1 underpin strong relationship
with the DOD
• MCM100 product/market
differentiation bringing new Military
customers
• UK GSR contract win re-establishes
management with an appropriate
team structure, communication and
customer service
customer relationships
and strong dealer/
distribution network
• Understanding our Military customer
requirements and forthcoming
procurement requirements
relationship with UK MOD
• Strategy provides for diversification of
• Growth in Farm Services model
provides customers access to product
base through lease hire
• Expansion of Law Enforcement
customer base
customer base
• Regular tracking of Dairy market cycle
indicators and mitigation plan for
market downturn
6. FINANCIAL MANAGEMENT
Business Risk
What happened in 2018
Mitigation
• Net cash of £46.5m at the year end
provides capital allocation flexibility
• Operating cash conversion of 108.2%
delivers sustainable cash flows
• Renewal of undrawn $40m revolving
credit facility on more favourable
terms
• West Palm Beach facility relocation to
support operational efficiency
• Robust and professional corporate
finance function supported by
network of professional advisors
• Full compliance with bank facility
covenant requirements
• Robust internal financial control and
divisional reporting procedures
supported by the external and internal
audit process
• Effective currency hedging strategy
•
•
•
Insufficient management of risks
for tax, cash flows and foreign
currency exposure
Insufficient funding capacity to
meet strategic objectives
Insufficient overhead control and
working capital management
erode margins or impair
investment ability
• Poor quality financial reporting
and business information impacts
decision making
Impact on
• Costs and profitability
• Reputational damage
Focus for 2019
• Continued focus on
strong cash generation
and working capital
management
Business Risk
What happened in 2018
Mitigation
Focus for 2019
• UK Export Control audit passed
• No US voluntary disclosures or export
control breaches
• Code of Conduct reviewed and
communicated
• US Government audit at
Cadillac passed
• Effective export control policy
• Maintain high standards
and integration of
compliance teams within
the businesses
supported by training
• Effective anti-bribery and corruption
policy supported by training
• Embedded and effective Code of
Conduct
• Effective internal legal and finance
function
• Effective Government contract
specialist knowledge reporting at a
senior level
• Failure to comply with export
controls slows or removes ability
to ship abroad
• Prosecution, fines and negative
publicity resulting from bribery
and corruption
• Litigation drains cost and
management time negatively
impacting other areas
• Failure to comply with
government contract obligations
results in loss of contract
Impact on
• Ability to ship products
• Financial loss
• Reputational damage
9. POLITICAL AND ECONOMIC INSTABILITY
Business Risk
What happened in 2018
Mitigation
Focus for 2019
• Continual monitoring of potential
• Close monitoring of Federal funding
• Unpredictable timing/amount of
Federal funding for Fire and Law
Enforcement customers
Brexit implications and wider global
trading conditions
• DOD budgets/funding withdrawn
• Negative impact from Brexit on:
• US DOD budget agreed for the next
two years to provide funding certainty
trade, regulation, people,
contracts and IP
Impact on
• Sales and profitability
• Ability to ship products
• Financial loss
• Reputational damage
• Wider proliferation of chemical
weapons use raising awareness of
commercial and Military customers
readiness assessment and product
effectiveness
• Close monitoring of the milk to feed
price ratio to forecast changes in
farmer confidence
and budget position
• Lobbyist/Government advisers and
key influencers aligned to Avon’s
interests
• Brexit risk assessment and identified
mitigations ready for implementation
• Readiness and planning
for all potential changes
in global trading
conditions
• We are less exposed to
the political instability
and impact on trading of
Brexit with our US-based
businesses constituting
around seventy percent
of the Group and a facility
located in continental
Europe (Italy).
36
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Environment and
Corporate Social Responsibility
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 business operates.
The Group’s Approach
Environment
A forward thinking approach to health
and safety, the environment, responsible
business and employee engagement is of
paramount importance and we endeavour to
continuously improve our systems to maintain
our excellent record.
Health and Safety (H&S)
We are committed to safeguarding the health
and safety of our 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 reporting all safety observations, being
involved in safety audits, assessments and
regular training sessions.
During the year, monthly global H&S
meetings are held where information,
knowledge and ideas are shared to
implement best practice across our sites and
create positive safety attitudes. In addition,
our management teams put considerable
focus on potential hazard reporting, to ensure
the appropriate action is taken before they
can cause an incident or an accident.
We are committed to minimising the impact
of our operations on the environment and this
is reflected in the beliefs of our employees.
Our staff actively engage in waste material
separation with focus on the re-use, where
possible, and recycling of paper, metal, plastic,
cardboard and used products. Employees
attend environmental presentations on our
energy efficiency, during which all employees
are encouraged to make suggestions to
improve our energy efficiency.
In addition, we monitor our electricity, gas
and water usage frequently to establish
progress against our annual targets. We aim,
where possible, to make improvements to
reduce energy consumption and to reduce
waste going to landfill.
With evolving environmental legislation
within Europe and the USA, we ensure
compliance through regular environmental
updates from our membership of the
Institute of Environmental Management and
Assessment. Our UK operations also conform
to ISO14001:2015, which reinforces how we
manage our environmental responsibilities.
Some of the highlights during the year, which
supports the reduction of energy usage and
increased commitment to recycling were:
• Albinea operated using 100% green
energy
• Cadillac have reduced their energy usage
through a compressed workweek, this
has also reduced employee travel by
approximately 20%
•
the replacement of outdated air
conditioning units at Melksham and
Cadillac with higher efficiency units
• Melksham has managed to secure an
agreement with Grist recycling that
ensures our rubber waste is now classed
as recovered waste and will be used as
fuel in a local power plant
•
the introduction of dried mixed recycling
bins at our Melksham facility to increase
our recycling obligation
• we continue to install low energy
consumption LED lighting across our sites
• Albinea have started the collection
and recycling of bottle caps
There have been no external environmental
incidents or concerns throughout the 2018
financial year at any of our locations.
Sustainable Materials Group
Our in-house laboratory, Artis, provides research and development
capabilities in a wide range of rubbers and polymers. Their extensive
knowledge and innovative research into rubber recycling has delivered
ground breaking solutions that broaden the markets for rubber
recycled products.
In 2017 Artis launched the Sustainable Materials Group which is focused
on bringing together key players across the rubber industry into one
community, with the goal of accelerating the development and adoption
of ‘green’ alternatives. To date we have 22 members. milkrite | InterPuls is
one of these members and presented at the 2018 SMG meeting.
Carbon Emissions – Disclosure
Greenhouse Gas (GHG) Emissions
The Companies Act 2006 Regulations 2013
require 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.
We have employees in each of our facilities
who are responsible for collecting and acting
on the data.
The collected data allows the organisation to
monitor and examine carbon emission trends.
The chart below (left) illustrates the Group’s
greenhouse gas emissions in tonnes,
between 2015 and 2018.
The chart below (right) illustrates the Group’s
emissions intensity per £million of revenue
between 2015 and 2018.
A number of factors have contributed to
the Group’s energy performance during the
year including reduction in electricity and
energy use due to management activities.
For example changing to LEDs throughout
the Melksham facility has saved 343,700Kwh
per year on lighting.
With revenue for the year at £165.5 million
and the total emissions of carbon dioxide
equivalent to 4,906 tonnes, this gives an
intensity ratio as follows of 30 tonnes GHG
per £million revenue.
Scope 1 and 2 GHG emissions
Emissions intensity (Tonnes GHG per £m revenue)
10,000
s
e
n
n
o
T
8,000
6,000
4,000
2,000
0
7,068
5,351
2,340
2,198
2015
2016
e
u
n
e
v
e
r
m
£
r
e
p
G
H
G
s
e
n
n
o
T
80
70
60
50
40
30
20
10
0
70
53
42
30
2015
2016
2017
2018
4,621
2,012
2017
3,239
1,667
2018
Scope 1
Scope 2
Data collection methodology
We have followed the Defra ‘Guidance on how to measure and report your greenhouse gas emissions’. Defra/DECC ‘Conversion Factors for
Company Reporting’.
Scope 1 emissions are from those direct sources that are owned by the Group (e.g. from direct combustion of natural gases within our
facilities and company-owned transport).
Scope 2 emissions comprise those emissions for which the group is indirectly responsible excluding transmissions and distribution losses
(e.g. from the electricity we purchase to operate machinery and equipment).
Our Cadillac site
has reduced its utility
usage by
10%
Tonnes GHG
per £m revenue
30
(2017: 42)
38
39
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Environment and
Corporate Social Responsibility continued
Responsible Business
Our Code of Conduct (‘the Code’) sets out
the values and standards of behaviour
expected from all those working for or on
behalf of Avon Rubber and the 2018 version
is available on the Group’s website. The Code
requires all representatives of the Group to
comply with the laws and regulations in
the countries in which we operate. It 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 encourage everyone to report any
behaviour, which may be a breach of the
Code, or is unethical or illegal.
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. In addition,
a programme of supplier audits exists to
ensure suppliers adhere to our standards.
We are 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.
Female
1
Female
2
Female
302
We have a zero-tolerance approach to
modern slavery and are committed to acting
with integrity in all business dealings and
relationships and to implementing and
enforcing effective measures to ensure
modern slavery is not taking place in the
business or its supply chains. Our Modern
Slavery Act statement is available on our
website for further details.
Employees
Our success depends on our people.
The Group aims to support all employees
to develop their potential and we are
committed to recognising, encouraging
and nurturing talent across our business.
We 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
Board Diversity Policy is in place, setting out
our approach to diversity. A copy can be
found in the corporate governance section
of our website.
The gender of our staff at 30 September
2018 is illustrated opposite.
Gender diversity
on the Board
Gender diversity
within the Senior
Managers
Gender diversity
of other employees
Male
4
Male
17
Male
458
Year end total:
Female: 305
Male: 479
Great Place to Work
Understanding and acting on the concerns of our employees is the key
to our future and we encourage active engagement across our sites
throughout the year.
Great Place to Work is a framework that gives every employee an opportunity
to contribute towards a culture that truly does make Avon Rubber a great
place to work. The framework comprises five key areas: Recognition,
Communication, Wellbeing, Community and Training and Development.
Read more on pages 42 and 43
Graduate Scheme
Avon Rubber has now entered the fourth cycle of its
Graduate Scheme. The scheme is based on a two year
‘work & learn’ programme designed to bring new talent
to our organisation.
Two new graduates were accepted onto the scheme
in September and have both entered into their
operations placement.
Both graduates who have reached the end of the
two year programme have accepted permanent roles
within the company and will be based at the company’s
headquarters in Melksham.
Our core values
The Group’s core values are
embodied by the acronym CREED,
a set of principles and cultural values
rigorously pursued and adhered to
across the Group.
C
R
Understanding and
delivering our customer
(internal/external) needs
and expectations.
Motivating our people
through appropriate
recognition and reward
programmes.
E
E
D
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.
40
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Environment and
Corporate Social Responsibility continued
Great Place to Work continued
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
SHAREHOLDER
INFORMATION
Values
RECOGNITION
What We Do
Highlights
What have we done
RECOGNITION
Motivate our employees
through appropriate recognition
and reward programmes.
Recognise loyal employees.
Celebrate the achievements of
staff and teams.
• Employees can nominate colleagues whom they
• Our 2018 annual site winners were announced
believe embody CREED values.
• Monthly recognition awards from the Group.
• Quarterly and annual winners selected from
those nominated.
• Long service awards are a way for us to demonstrate
our appreciation to those that have reached
significant milestones.
• Site level activities.
•
in September.
In total we have celebrated 90 members of staff
who have achieved a long service milestone.
• Melksham celebrated the huge achievement of
shipping the first MCM100 order with a BBQ.
• Belcamp employee picnic.
COMMUNICATION
COMMUNICATION
Mollai Dolan was nominated the 2018 Belcamp Annual Site winner and was
presented with the award by James Wilcox, President, Military.
Mollai, as well as others across the Group, show exemplary commitment to the
business and have been awarded with a cash prize.
Employee engagement is
important to us and effective
communication throughout the
business is vital in achieving this.
We listen to employees
and strive for continuing
improvement and we encourage
employees to provide feedback
to the business.
WELLBEING
Offer healthy lifestyle and
financial support as a way of
safeguarding the health and
wellbeing of employees.
COMMUNITY
We aim to work with and for
the communities in which we
operate, recognising our role
as a major employer. We seek
to contribute to our local
economic, social and
environmental sustainability.
Support our employees, their
friends, families and charitable
organisations. We recognise and
support our employees that are
serving and those from service
families.
TRAINING & DEVELOPMENT
• Strategy, performance and business priorities are
• This year’s employee opinion survey response rate
communicated via our intranet sites, email, quarterly
newsletters and regular employee meetings at all levels
of the organisation.
• Face to face feedback and discussion boards on
achieved the 70% goal set for 2018.
• We have introduced changes such as a new
charitable giving policy and an improved bonus
scheme in response to the 2017 EOS results.
our intranet.
• Employee opinion survey aids anonymous feedback
to management.
• A CEO Roadshow takes place each year where the CEO
and CFO visit each site to present the progress we have
made against the strategy and the results of the
employee opinion survey.
• Global wellness challenges for all employees.
• Support employees to get active outside of working
hours by providing changing room facilities and
gym discounts.
• All UK employees are entitled to the Share incentive
Plan whilst US employees can join the Employee Stock
Purchase plan.
• 2018 Global wellness challenges included
healthy food options in the canteen, free fruit
and health quizzes.
• A group of Melksham employees have been
attending weekly circuit training sessions run
by staff members.
• The launch of Medicash at UK sites which helps
employees pay for everyday healthcare bills.
• Weekly wellness tips on our intranet.
• During the year, our charitable giving policy was
released enabling the Group to support via three
different methods: match funding, grant support
and one off donations.
• This year we have had 54 requests for funding and
donated £39,000 across our sites to charities
between September 2017 and September 2018.
• Creating a community at work through cake bakes,
• Opportunities for employees to establish relationships
food bank donations and charity runs.
with each other outside of their day to day job.
• Our STEM ambassadors attended several local
• Our #thinkSTEM campaign is committed to addressing
the issue of skills shortage in science, technology,
engineering and maths careers.
events.
• A #thinkSTEM event was held at HPW and hosted
30 girls from local schools.
• Cadillac employees raised £8,172 for United Way
which was match funded by Avon.
We want to attract, retain and
develop talented individuals to
safeguard our business.
We strive to provide an
environment that offers the right
training and development by
providing a combination of
formal training opportunities
and on the job experiences.
• Global Leadership Programme for individuals identified
• The Global Professional Development Programme
as having the potential to be future leaders.
was held in March.
• Our Global Professional Development Programme
provides a launch platform for career development.
• Albinea’s team leaders had the opportunity to take
part in a team building experience.
• Employees can apply for training grants for
qualifications they wish to work towards.
• Placement students within our US and UK engineering
teams help us tackle real-world engineering problems.
• Graduate recruitment scheme which is based on a two
year ‘work and learn’ programme.
• A number of placement students have taken up
full-time employment with the Group.
• The Graduate scheme is now in its fourth year and
two new graduates started in September.
• A range of training courses have taken place across
the sites including Level 3 Leadership, Excel, Word
and Train the Trainer.
81%
of employees believe
the current vision of the
company has been well
communicated
Employee Opinion Survey
This year we have achieved the company goal of 70% employee response rate. This is a
4% increase from the 2017 survey. A big part of this was the increased participation from
our Johnson Creek site, who increased their participation by 30%.
Wednesday Circuit training at Melksham has been successfully running with a high turnout
since November 2017. The sessions are 40 minutes long and run by members of staff in their
own time. The session is intended to develop an enthusiasm towards healthy activities and is
open to all abilities.
“ Circuit training is a great initiative; it’s free to take part in, you go at your own pace and
there’s a group of regulars to ensure it takes place every week making it totally inclusive.”
UK sites
£6,426
Belcamp
£2,884.62
In Cadillac, our employees started a challenge to donate to United Way via payroll deduction
over a one year period. A massive 90% of employees participated in the challenge which was a
15% increase from 2017.
Charity
donations
JC & Modesto
£9,692.31
United Way supports a range of local charities who can apply
for funds for specific programs.
Cadillac
£20,095.77
Thanks to the generous contributions from our employees, the
United Way Challenge ended with a total of £8,172 which Avon
match funded taking the total donation to £16,344.
The Group Leadership Programme (GLP) was held in 2018 with a mixed group of participants
from across the business being invited to participate. Four GLP programmes have been ran to
date and the number of GLP graduates who now occupy senior leadership roles is a testimony
to the value added to the business.
42
43
Avon Rubber p.l.c. | Annual Report & Accounts 2018
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
SHAREHOLDER
INFORMATION
Governance
Farm Services momentum continues to grow
40,000
Cluster points serviced
with Cluster Exchange
“ We see significant opportunity within Farm Services.
Its unique lease model includes value added services and
provides us with access direct to the farmer in line with
our mission of improving every farm we touch”
• Farm Services provides a lease rental
option for Interface, Precision and
Intelligence equipment.
• Cluster Exchange Service was the first
established customer base in North
America and Europe servicing 2,100
farms with 637,000 cows and 40,000
cluster points.
to be launched under the Farm Services
umbrella. This service allows farmers
to lease complete milking clusters and
outsource their liner change process
to us. This is managed through service
centres established in our existing
facilities, with the support of our dealers
and third-party logistics specialists.
• Since its launch, Cluster Exchange
has continued to build momentum
with excellent growth and now has an
• The extension of Farm Services in
2017 to include Pulsator Exchange and
Tag Exchange continues to progress
well with our pilot schemes being
oversubscribed and receiving positive
farmer feedback.
• The opportunity within Farm Services
is significant. It’s unique leasing model
also creates the future direct to farm
delivery platform for increasingly
complex technical offerings.
Governance
46
48
53
54
59
80
Board of Directors and Group Executive Team
Corporate Governance Report
Nomination Committee Report
Audit Committee Report
Remuneration Report
Directors’ Report
44
45
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Board of Directors
David Evans
Chairman
First Appointment: June 2007
Appointed Chairman: February 2012
Paul McDonald
Chief Executive Officer
Nick Keveth
Chief Financial Officer
Chloe Ponsonby
Non-Executive Director
Pim Vervaat
Non-Executive Director
Miles Ingrey-Counter
Group Counsel and Company Secretary
First Appointment: February 2017
First Appointment: June 2017
First Appointment: March 2016
First Appointment: March 2015
First Appointment: October 2007
Skills and Experience:
Skills and Experience:
Skills and Experience:
Skills and Experience:
Skills and Experience:
Skills and Experience:
David has been working in the defence sector
for over 30 years with extensive knowledge of
the US market. David spent 17 years with GEC-
Marconi before joining Chemring Group PLC in
1987 where he was appointed Chief Executive
in 1999. He remained on the Chemring Board
as a Non-Executive Director following his
retirement in 2005 but stood down from
this role during 2012 to focus on his role as
Chairman of Avon Rubber p.l.c.
Prior to his appointment as Chief Executive
Officer in 2017, Paul was Managing Director
of milkrite | InterPuls and, since 2007, a key
member of the Group Executive management
team. Paul joined the Group in 2003 and
spent the early part of his career at Avon
in commercial and operational roles which
included responsibility for all UK operations
and the European Protection and Dairy
business units.
Nick was appointed as Chief Financial Officer
in June 2017. Prior to joining Avon, Nick was
Director of Finance, Planning & Reporting at
Imperial Brands, the FTSE 20 tobacco group.
He was with Imperial for 12 years and held
a variety of senior finance roles during this
period. Nick also served as a Non-Executive
Director of the Spanish listed group Compania
de Distribucion Integral Logista Holdings, S.A.,
a leading distributor of products and services
to convenience retailers in Southern Europe,
from 2014 until 2017. Prior to joining Imperial
Nick worked for PricewaterhouseCoopers for
14 years in both audit and advisory roles.
Committee Membership:
Audit
Nomination (Chair)
Remuneration
Chloe has spent her 20 year career in financial
services, first in equity fund management at
Jupiter; and then in investment banking at
Altium, Oriel Securities (now owned by Stifel)
and currently at Panmure Gordon where she is
a Senior Managing Director. She is a Chartered
Financial Analyst and has a first class Economics
degree from the University of Manchester.
Pim joined the Board in March 2015. Pim
is Chief Executive of RPC Group Plc, the
leading design and engineering group for
plastic products, for both packaging and
non-packaging markets 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.
Miles is a qualified solicitor, he joined the
group in January 2004 and has been a member
of the Group Executive management team
since 2008. Miles also has responsibility for all
Group HR matters and is Chairman of the Avon
Rubber Retirement and Death Benefits Plan.
Prior to joining Avon, Miles was a solicitor with
Osborne Clarke LLP.
Committee Membership:
Committee Membership:
Audit
Nomination
Remuneration (Chair)
Audit (Chair)
Nomination
Remuneration
Secretary to:
Audit
Nomination
Remuneration
Female
1
Board Gender
Diversity
Independence
(including Chairman)
Executive
2
Non-
Executive
3
Male
4
46
An experienced
management team
with over 142
years’ combined
experience
47
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Corporate Governance Report
Statement of compliance with the UK Corporate Governance Code
The Board of Directors are committed to high
standards of corporate governance, and are
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 2018,
Avon complied with the Code, save that
the Senior Independent Director does not
attend meetings with the major shareholders
to listen to their views (which is explained
further below).
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 59 to 79.
The Board
The Board currently comprises two Executive
Directors and three Non-Executive Directors
(including the Chairman). The biographical
details of individual directors are set out
on page 46. The Board considers all of the
current Non-Executive Directors to be
independent in judgement and character, and
considered David Evans to be independent on
his appointment as Chairman.
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 Officer has been
agreed. The Chairman is responsible for
the leadership of the Board and ensuring
its effectiveness in all aspects of its role.
The Chief Executive Officer 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.
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. In
line with best practice reflected in the Code,
however, all current Directors will be standing
for reappointment at the forthcoming AGM to
be held on 31 January 2019.
The Non-Executive Directors are appointed
by the Board on terms which allow for
termination on three months’ notice. Copies
of Executive Directors’ service contracts and
terms and conditions of appointment for
Non-Executive Directors are available for
inspection at the Registered Office and will
also be available at the AGM.
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 Officer 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 and every Director is encouraged
to participate and provide opinions on 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, the Annual Report
and Accounts and certain strategic and
management issues.
Examples of strategic and management
issues include the following:
• Approval of the annual operating budget
and the three year strategic plan
• The extension of the Group’s activities
into new business and their geographic
areas (or their cessation)
• Changes to the corporate or
capital structure
48
David Evans is Chairman of the Nomination
Committee but, in accordance with the
Committee’s terms of reference, is not
permitted to chair meetings when the
Committee is dealing with matters relating
to the Board Chairman position.
Chloe Ponsonby is Chair 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 Remuneration Committee
also has regard to the remuneration of
the wider workforce. More details of the
activities of the Remuneration Committee
are set out in the Remuneration Report on
pages 59 to 79.
• Financial issues, including changes
in accounting policy, the approval of
dividends, bank facilities and guarantees
• Changes to the constitution of the Board
• The approval of significant contracts, for
example the acquisition or disposal of
assets worth more than £1,000,000 or the
exposure of the Company or the Group to
a risk greater than £1,000,000
• The approval of unbudgeted capital
expenditure exceeding £250,000
• The approval of quotations and sale
contracts where the sales commission
payable to an intermediary exceeds 10%
of the net invoice price
• Consideration and approval of all
proposed acquisitions and mergers
Each Director has full and timely access to all
relevant information and the Board meets
regularly with appropriate contact between
meetings. All Directors receive 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
and governance requirements 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 Nomination Committee and the Audit
Committee. Each Committee operates under
clear terms of reference, copies of which
are available on our website. Detail of the
operation of each Committee is provided
within the relevant Committee report.
The members of the Committees comprise
the Chairman and all the Non-Executive
Directors. The Company Secretary advises
and acts as a secretary to the Committees.
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. Pim Vervaat is
Chairman of the Audit Committee. The Board
is satisfied that Mr Vervaat has recent relevant
financial experience and his profile appears on
page 46.
Attendance at meetings
All Committee and Board meetings held in the year were quorate. Directors’ attendance during the year ended 30 September 2018 was as follows:
Paul McDonald
Nick Keveth
David Evans
Pim Vervaat
Chloe Ponsonby
*
Attended by invitation
Board
8/8
8/8
8/8
8/8
8/8
Audit
Committee
Remuneration
Committee
Nomination
Committee
3/3*
3/3*
3/3
3/3
3/3
4/5*
4/5*
5/5
5/5
5/5
1/1*
1/1*
1/1
1/1
1/1
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Corporate Governance Report continued
Performance evaluation
Accountability and audit
Risk management
The Board continually strives to improve its
effectiveness and conducts an annual review
of its performance and that of its Committees
and the individual Directors to enhance
overall Board effectiveness. The 2018 Board
evaluation process was conducted internally
using questionnaires and interviews, led by
the Chairman and facilitated by the Company
Secretary. The questionnaire completed
by all Board members and the Company
Secretary was structured to provide Directors
with the opportunity to express views on a
variety of topics including: Board remit and
responsibilities, skills and dynamics of the
Board, meetings and content, group strategy,
internal control and risk management,
decision making and communication.
The findings of the evaluation were
very positive with strategic decisions
and the communication of strategy
being highlighted as significant areas of
improvement during the past 12 months.
A detailed discussion of the findings from the
performance evaluation were reviewed at
the July Board meeting. The following areas
have been identified by the Board as areas
of focus for 2019 and beyond: succession
planning, interaction between the Board and
senior management and the Group’s
risk framework.
The results of the evaluation concluded that
the Board, its Committees and individual
Directors performed effectively during 2018,
both individually and as a collective unit.
The composition of the Board is considered
well balanced with appropriate experience,
independence and knowledge to carry out
its duties effectively.
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 2018 financial year and
accords with the FRC’s Guidance for Directors
on Internal Control.
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. The Audit Committee has
responsibility to review, monitor and make
policy recommendations to the Board upon
all such matters.
The Board, through the Audit Committee,
keeps this system under continuous review
and formally considers its content and its
effectiveness on an annual basis. Such a
system can provide only reasonable, and
not absolute, assurance against material
misstatements or losses. The section on
internal control in the Audit Committee
Report on pages 54 to 56 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 34 to 37.
Risk is managed by the Group Executive
team during the year, led by the Company
Secretary and the Deputy Chief Financial
Officer. The Group Executive team sets its
key priorities for successfully managing the
Group’s businesses. This process inherently
addresses risk and the Company Secretary
leads 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. There is
also a review of the continuing effectiveness
of other aspects of the control environment
by the Group and Divisional Executive teams
to ensure these controls are mitigating risk to
the fullest extent in practice.
The Board carried out quarterly reviews
of the key risks facing the Group and
risk management activities undertaken
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 macro risks. In the year
under review, the risk assessments carried
out both at business level and at Board level
continued to be reviewed and strengthened.
Internal control
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 the 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 of Conduct 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 of Conduct is
reviewed annually.
Although the Board itself retains the
ultimate power and authority in relation
to decision making, the Audit Committee
meets at least three times a year with
management and 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.
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 and receive an investor relations
report from the Chief Financial Officer at
every Board meeting.
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, 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 31 January 2019, 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 Officer 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.
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 80 to 83 and
have been included by reference.
Going concern
After making appropriate enquiries, the
Directors have, at the time of approving the
financial statements, formed a judgement
that there is a reasonable expectation that
the Company and Group have adequate
resources to continue in operational
existence for the foreseeable future. For
this reason, the Directors continue to adopt
the going concern basis in preparing the
financial statements.
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.
50
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Corporate Governance Report continued
Nomination Committee Report
The Directors consider the three year
lookout period to be the most appropriate
as this aligns with the Group’s own strategic
planning period. The Group has developed
an annual business planning process, which
comprises a strategic plan, a financial forecast
for the current year and a financial projection
for the forthcoming three years. This plan is
reviewed each year by the Board as part of
its strategy setting process. Once approved
by the Board, the plan provides a basis for
setting all detailed financial budgets and
strategic actions that are subsequently used
by the Board to monitor performance.
The forecast performance outlook is also
used by the Remuneration Committee to
establish the targets for both the annual and
longer term incentive schemes.
David Evans
Chairman
14 November 2018
Viability statement
The Directors have assessed the viability
of the Group over a three year period to
September 2021, 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 Group will be able
to continue in operation and meet its
liabilities as they fall due over the period to
September 2021.
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.
This assessment has considered the
potential impacts of these risks on the
business model, future performance,
solvency and liquidity over the period.
In making their assessment, the Directors
have taken account of the Group’s strong
net cash position and the renewal, during
the year, of the Group’s revolving credit
facility which covers the three year lookout
period. During the year the Group has
complied with all covenant requirements
attached to its financing facilities.
The Nomination Committee comprises all
the Non-Executive Directors, under the
chairmanship of the Chairman of the Board.
Main responsibilities
The main responsibilities of the Committee
are as follows:
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.
• To lead the process for Board
appointments and make
recommendations to the Board
• To put in place plans for succession
• To regularly review the Board’s structure,
size and composition taking into account
the challenges and opportunities facing
the Group and the skills, knowledge and
experience needed by the Board and
make recommendations to the Board
with regard to any changes
The Committee’s terms of reference are
available within the Corporate Governance
section of the Company’s website.
The Nomination 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. 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 38 to 43.
Activities during 2018
During the year the Committee focused on
the work that had been carried out within
the business on succession planning, talent
development and leadership at the senior
management level. In addition, the Board
discussed succession plans for the Executive
and Non-Executive Directors including
the Chairman.
The Committee agreed that all Directors
should be put forward for re-appointment
by shareholders each year at the AGM. Taking
into account the performance and value
that each Director has brought to the Board,
the Committee has considered whether
each Non-Executive and Executive Director
appointments should be renewed for a
further year and has confirmed that this is
indeed the case. Accordingly, resolutions
to re-appoint each Director will be put to
shareholders at the forthcoming AGM.
The effectiveness of the Committee is
monitored and assessed by David Evans as
Chairman of the Committee and as part of the
Board performance evaluation. The outcome
of the 2018 review was positive. Following
discussion of the results of the evaluation
it was agreed for 2019 that the Committee
would hold two formal Nomination
Committee meetings per year (and continue
to conduct ad hoc meetings as necessary).
In addition, following a detailed discussion
on Board succession planning and taking into
account the Group’s aspirations for growth,
the Committee has recommended to the
Board that an additional independent Non-
Executive Director be added to the Board
during 2019.
David Evans
Chairman of the Nomination Committee
14 November 2018
All Directors are
appointed by the Board
following a rigorous selection
process and subsequent
recommendation by
the Committee
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Audit Committee Report
Overview
During the year, the Audit Committee
continued its key oversight role for the Board
of the Group’s financial management and
reporting to reassure shareholders that their
interests are properly protected.
The Audit Committee works to a set
programme of activities, with agenda items
established to coincide with the annual
financial reporting calendar. The Committee
reports regularly to the Board on its work.
During the 2018 financial year, the
Committee has continued to monitor the
integrity of the Group’s financial statements
and supported the Board with its ongoing
monitoring of the Group’s risk management
and internal control systems. The Committee
also determined the focus of the Group’s
internal audit activity and reviewed its
findings and verified that recommendations
were being appropriately implemented.
In recognition of the importance of an
effective whistleblowing channel, the
Committee also reviewed the arrangements
for the Group’s employees to raise concerns
in confidence.
During 2018 the Audit Committee undertook
a full evaluation exercise of the PwC audit
approach to ensure the effectiveness of
the external audit function. Reviewing the
results of the evaluation of the external
audit process, we are satisfied with both the
auditor’s independence and audit approach.
The Audit Committee recommended to the
Board in November 2017 that the external
audit be tendered in 2018, which is discussed
in more detail below. Following the tender
process, the Board accepted the Audit
Committee’s recommendation to appoint
KPMG and a resolution for their appointment
will be put to shareholders at the 2019 AGM.
The Audit Committee acts on behalf of the
full Board, and the matters reviewed and
managed by the Committee remain the
responsibility of the Directors as a whole.
Main responsibilities of
the Audit Committee
The Audit Committee has delegated
authority from the Board set out in its written
terms of reference. The terms of reference
for the Audit Committee are available for
inspection at the Company’s registered office
and on our website.
The key objectives of the Audit
Committee are:
• To provide effective governance and
control over the integrity of the Group’s
financial reporting and review the
significant financial reporting judgements
• To support the Board with its ongoing
monitoring of the effectiveness of the
Group’s system of internal controls and
risk management systems
• To monitor the effectiveness of the
Group’s internal audit function and review
its material findings
• To oversee the relationship with the
external auditor, including managing
the tender process, and making
recommendations to the Board in relation
to the appointment of the external
auditor and monitoring the external
auditor’s objectivity and independence
The Audit Committee acts
on behalf of the full Board,
and the matters reviewed and
managed by the Committee
remain the responsibility of
the Directors as a whole
• Reviewing the adequacy of the
Committee meetings
Company’s whistleblowing arrangements
and the provision of appropriate
investigation of any matters raised
• 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
Composition of the
Audit Committee
The members of the Committee are set
out on pages 46 and 47.
The Committee members are all
independent Non-Executives and have
the appropriate range of financial and
commercial expertise necessary to fulfil the
Committee’s terms of reference. The Board
considers that as a serving Chief Executive
Officer, and previously the Finance Director,
of a FTSE 250 company, I have both the
current and relevant financial experience
required to Chair this Committee.
Meetings are attended by invitation by the
Chief Executive Officer, Chief Financial Officer
and the Deputy Chief Financial Officer.
I also invite our external auditors, PwC, to each
meeting. The Committee also regularly meets
separately with PwC without management
being present.
The Committee met three times during the
year and attendance at those meetings is
highlighted on page 49 of this Corporate
Governance Report.
Main activities of the
Committee during the year
Meetings of the Committee generally
take place prior to a Board meeting. The
Committee has a rolling annual agenda
developed from its terms of reference, with
recurrent items considered at each meeting
in addition to any specific matters arising and
topical business or financial items on which
the Committee has chosen to focus.
The Committee reviewed the half year and
annual financial statements and the significant
financial reporting judgements. As part of this
review, the Committee supported the Board
by reviewing the financial viability and the
basis for preparing the accounts on a going
concern basis. The Committee also reviewed
and challenged the external auditor’s report
on these financial statements.
As discussed above, the effectiveness of
the external audit function was considered
during 2018. During the evaluation process
the Committee considered the independence
and objectivity of the external auditor, the
make-up and quality of the audit team, the
proposed audit approach and the scope of
the audit, the execution of the audit and the
quality of the audit report to the shareholders
as well as the fee structure.
The Committee also reviewed and
proposed areas of focus for the internal
audit programme including the approach to
ensure that internal audit activity is aligned
to the principal Group risks.
The main areas of focus considered by the
Committee during 2018 were as follows:
• The presentation of the financial
statements and the quality and
acceptability of accounting policies and
practices, 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 half year and full year results,
agreeing that the position taken in the
financial statements is appropriate
• The clarity of the disclosures and
compliance with financial reporting
standards and relevant financial and
governance reporting requirements
• Material areas in which significant
judgements have been applied, discussed
separately in more detail below
• The external audit tender process as
described further below
• A full review and comprehensive update
of the auditor independence policy,
which was conducted alongside the
tender process, with policy changes
applied during the year
• At the request of the Board, the
Committee considered whether the
2018 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 and Accounts is fair,
balanced and understandable
54
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Audit Committee Report continued
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 Accounts and the half year
and all trading statements.
Significant judgements
considered by the Committee
After discussions with management and the
external auditor, the Committee determined
that the key risk of material misstatement
of the Group’s 2018 financial statements
was concentrated in the following key
judgement areas:
• Valuation of intangible assets
• The funding level of the defined benefit
pension scheme
• Calculation of the Group tax charge
Intangible assets valuation
The Group’s principal assets are intangible
assets, which are either the result of
acquisitions, or have been capitalised
through the internal development of new
products. The valuation of intangible assets
involves significant judgement and changes
in the underlying assumptions could have a
significant impact on the carrying value of
these assets.
The classification of intangible
assets represents three asset classes:
goodwill, acquired intangibles and
development expenditure:
• The Group assesses whether goodwill
is impaired on an annual basis and this
requires an estimation of the value in use
by the segmental division to which the
intangible assets is allocated. This involves
estimation of future cash flows, a growth
rate for extrapolation purposes and a
suitable discount rate
• Acquisitions may result in the recognition
of acquired intangibles which include
customer relationships, brands and
trademarks, patents and order books.
Valuation estimates are used to determine
the fair value of these intangible assets.
This includes estimation of future cash
flows, weighted average cost of capital
and useful lives
• The Group capitalises the development
of new products and processes as
intangible assets or property, plant and
equipment. Initial capitalisation and any
subsequent impairment is based on the
Group’s judgement that technological
and economic feasibility is demonstrated.
In determining the amounts to be
capitalised the Group makes assumptions
regarding the expected future cash
generation of the project, discount rates
to be applied and the expected period
of benefits
Following a review of a report summarising
the key issues in relation to the valuation
of the Group’s intangible assets, the
Committee concurred with management
that the carrying value of the intangible
assets was appropriate.
The auditors explained their audit procedures
to test the carrying value of intangible assets
and, on the basis of the work undertaken,
the auditor reported no inconsistencies or
misstatements that were material in the
context of the financial statements as a whole.
Further analysis and detail on the Group’s
intangible assets is set out in note 3.1 of the
financial statements.
The funding level of the defined
benefit pension scheme
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 before 31 January 2003.
The plan was closed to future accrual of
benefits on 1 October 2009. Calculating the
funding level of the pension scheme involves
significant judgements concerning the future
performance and valuation of the pension
fund’s assets and liabilities and, as such,
changes in the core assumptions could have
a significant impact on those requirements.
The defined benefit plan exposes the Group
to actuarial judgements of the defined
benefit pension obligations that requires
estimation of future changes in inflation,
mortality rates, and the selection of a suitable
discount rate.
An independent actuary regularly reviews the
costs of administering the pension scheme,
and undertakes a valuation of the pension
scheme assets and an assessment of current
and future pension liabilities.
The Committee reviewed a report
from the independent actuary on the
appropriateness of the assumptions used
in assessing the assets and liabilities of the
scheme and agreed that this was being
managed appropriately with reasonable
judgements applied.
The auditors PwC have explained their
audit procedures to test the carrying value
of net pension liabilities and, based on the
work undertaken, and an assessment of the
actuarial judgements used, have reported
no inconsistencies or misstatements that
were material in the context of the financial
statements as a whole.
Further analysis and detail on the Group’s
defined benefit pension scheme is set out
in note 6.2 of the financial statements.
Three firms were invited to tender for the
external audit. Each firm was sent a list of
proposal requirements, given access to a
secure data room containing information on
the Group and offered the opportunity to
meet with key business contacts to deepen
their understanding of the business.
All three firms submitted an extensive
written proposal to the Company in January
2018 and met with members of the senior
management team.
Based on a review of each proposal and the
meetings with senior management, two of
the firms were invited to present to the Audit
Committee in February 2018. This was an
interactive session with questions and answers.
The Audit Committee met to evaluate each
firm using the agreed selection criteria and at
the conclusion of the process recommended
to the Board that KPMG be appointed as
external auditors. The selection criteria
included areas that allowed the Committee
to conclude the new auditors would be
independent and objective and would
be able to carry out an effective and high
quality audit.
The Board accepted the Audit Committee’s
recommendation to appoint KPMG and a
resolution for their appointment is being put
to shareholders at the 2019 AGM. The Audit
Committee confirms this recommendation is
free from influence by any third party and that
no contractual term has been imposed on the
Company limiting the choice of auditor.
The Audit Committee has reviewed plans
for the transition to the new auditors
during 2018 and will receive regular
reports on the transition at future Audit
Committee meetings.
Calculation of the Group tax charge
The Group operates in a number of countries
where 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
judgements around the application of the
tax regulations and management’s estimate
of the future amounts that will be settled.
At the start of the year the Internal Revenue
Service (‘IRS’) started a scheduled tax audit
in the United States where the majority of
the provisions for uncertain tax positions
are located. This audit is ongoing at the
balance sheet date, but we expect the levels
of judgment in relation to the uncertain tax
provisions to reduce in the medium term as
the IRS conclude their review work.
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 allocate higher profits (or lower costs) to
activities being undertaken in their jurisdiction,
potentially leading to higher tax being payable
by the Group.
At 30 September 2018 there is a provision of
£5.8m 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 amount
of tax being payable or recoverable to
the amounts provided for. Management
estimates that a reasonable possible range
of outcomes is between an additional
liability of up to £0.7m and a reduction
in liabilities of up to £5.8m.
Following a review of the Group’s tax
charge, which included a conversation and
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.
Further analysis and detail on the Group’s
tax charge is set out in note 2.6 of the
financial statements.
External auditors
The Committee oversees the relationship
with the external auditors, and monitors all
services provided by, and fees payable to
them, to ensure that potential conflicts of
interest are considered and that an objective
and professional relationship is maintained.
In particular the Committee reviews and
monitors the independence and objectivity
of the external auditors and the effectiveness
of the audit process. At the outset of the
audit process, the Committee receives from
the auditors a detailed audit plan, identifying
their assessment of the key risks and their
intended areas of focus. This is agreed
with the Committee to ensure coverage is
appropriately focused.
The Audit Committee has kept the
assessment of the requirement to tender
the audit mandate under continual review.
As reported in last year’s annual report, PwC
have been the Company’s external auditors
for over 20 years and the Committee decided
in 2017 to undertake a tender process for the
external auditor role in 2018.
The Committee approved and oversaw
the competitive tender process, including
agreeing the timetable and the request
for proposal tender document, which was
prepared in accordance with the relevant
requirements. A description of the process
undertaken during the audit tender is below.
External audit tender process
The Audit Committee recommended to the
Board in November 2017 that in view of the
forthcoming mandatory audit re-tendering in
2019, the external audit be tendered in 2018.
The Audit Committee agreed the timetable
for the tender, the tender document,
the tender shortlist and the key decision
criteria it would use in deciding to make a
recommendation to the Board.
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Audit Committee Report continued
Remuneration Report
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 Code and the FRC guidance on Risk
Management, Internal Control and Related
Financial Business Reporting.
Risk management activities are dealt with
in more detail in the Corporate Governance
Report on page 50.
Audit Committee
effectiveness review
The evaluation of the effectiveness of the
Committee was conducted alongside the
Board effectiveness review, information
on which is provided in the Corporate
Governance report on page 50. The
effectiveness of the Committee continued
to be rated highly. It was agreed that one
of the key areas of focus for the Committee
over the following year would be ensuring
a successful transition to the new external
auditor, KPMG.
Pim Vervaat
Chairman of the Audit Committee
14 November 2018
Review of the effectiveness and the
independence of the external auditor
At its April meeting the Committee reviewed
an evaluation report of the previous
year’s audit process prepared including
obtaining feedback from employees who
had interaction with PwC during the 2017
audit. The report concluded that the audit
was conducted to a good standard with
appropriate focus and challenge on the key
audit risks. The members of the Committee
have declared themselves satisfied with
the performance of PwC as the Company’s
auditor in the last financial year.
PwC confirmed to the Committee that it
maintained appropriate internal safeguards
to ensure its independence and objectivity.
As part of the Committee’s assessment
of the on-going independence of the
auditor, the Committee receives details
of any relationships between the Group
and PwC that may have a bearing on their
independence and receives confirmation
that they are independent of the Group.
Policy on auditor independence and
non-audit fees
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. The policy sets out that
non-audit work may only be undertaken by
the External Auditor in limited circumstances
where these services do not conflict with the
auditor’s independence. All permissible non-
audit services need the specific approval of
the Audit Committee.
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 is
included in note 2.5 on page 108 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 review 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 2018 and 2019. The Committee
believes it is appropriate that the internal
audit process is primarily undertaken by
members of the finance team who conduct
financial reviews of the sites on a rotational
basis. As appropriate, the Committee
recommends working with independent
experts to support and facilitate the internal
audit programme. During the year a full
review of the Group’s foreign currency
and treasury management processes was
undertaken by a third party independent
consultant who confirmed that the controls
in place were appropriate and in line with the
Group’s treasury risk management approach.
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 Accounts. It has
been reviewed by the Board and continues
to be monitored by the Committee, which
remains satisfied with the arrangements.
LETTER FROM THE CHAIR OF THE
REMUNERATION COMMITTEE
On behalf of the Board, I am pleased to
present the Directors’ Remuneration Report
for the year ended 30 September 2018.
The Remuneration Report is split into
three sections:
last and this year, reflects best practice
expectations of investors and is appropriately
positioned relative to the market. In doing so,
the Committee engaged with institutional
shareholders as well as the leading
shareholder advisory organisations, who
were broadly positive about the changes
we are proposing.
practice expectations of investors, (iii)
ensure the Policy is sufficiently flexible to
operate effectively over the next three year
period, (iv) ensure packages are sufficiently
competitive and drive performance and (v)
further strengthen the alignment between
shareholders and Executives. We outline
these changes below:
1. Rebalancing of salaries and
variable pay opportunity
The Committee has taken a prudent approach
to setting salaries historically. In 2013 we
set out our intention to align salaries to the
market but sought to be able to recognise
exceptional future performance by setting a
policy under which the maximum variable
pay opportunity that could be earned was
250% of salary (350% of salary exceptionally).
In recognition that this quantum of variable
pay opportunity exceeds market practice,
we are proposing to change that balance by
repositioning salaries to take account of the
growth and performance of the business,
whilst reducing the variable pay opportunity
to 225% of salary.
• This Annual Statement summarising the
work of the Remuneration Committee
(the ‘Committee’) in 2018
• The Directors’ Remuneration Policy (the
‘Policy’) which is intended to take effect
from the date of our 2019 AGM, subject
to shareholder approval
• The Annual Report on Remuneration,
which provides details of the
remuneration earned by Directors in the
year ended 30 September 2018 under the
Remuneration Policy that was approved
at the 2016 AGM and how we intend to
implement the new Policy in 2019. This
will be the subject of an advisory vote at
the forthcoming AGM
Strategic remuneration review
The Company’s Remuneration Policy
was last approved by shareholders at the
AGM on 26 January 2016 and therefore, as
required, we are submitting a new policy
for shareholder approval at the 2019 AGM.
Throughout 2018 the Committee have
reviewed all aspects of Executive Director
remuneration to ensure the proposed new
Remuneration Policy is aligned with the new
strategy communicated to shareholders
Our executive remuneration framework
consists of a base salary, modest benefits
and pension provision, and annual
and long-term incentive arrangements.
The Committee seeks to support the delivery
of the Group’s strategy through establishing
simple remuneration arrangements which
support sustainable value creation for
our shareholders, incentivising 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 8 to 43.
Our arrangements are also structured to
provide strong risk mitigation and alignment
between the interests of Executives and
shareholders by incorporating elements of
bonus deferral, recovery and withholding
provisions, post-vesting holding periods and
share ownership guidelines.
As such we are not proposing fundamental
changes to the overarching structure
but changes designed to (i) simplify our
arrangements where possible, (ii) bring
the Policy further into line with the best
The Committee seeks to
support the delivery of the
Group’s strategy through
establishing simple
remuneration arrangements
which support sustainable
value creation for
our shareholders
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Remuneration Report continued
Reference salaries of £330,000 and £240,000
for the CEO and CFO respectively have
remained in place since 2013 and we
believe it is now appropriate to reposition
these, particularly since the Group is now
significantly larger, more profitable and cash
generative than it was in 2013. Furthermore,
since their appointment in 2017, Paul
McDonald and Nick Keveth have more
than proved themselves in their current
roles, successfully defining, communicating
and implementing our new strategy and
delivering organic sales growth. This is also
reflected in increases in orders received
(4.4%), revenue (4%) and adjusted operating
profit (4.6%) over 2018 as well as a 22.7%
growth in market capitalisation as at 30
September 2018 since their appointment.
Taking all of the above into account, we intend
to increase the CEO’s salary from £330,000 to
£390,000 (+18.2%) and the CFO’s salary from
£240,000 to £270,000 (+12.5%) – both effective
1 October 2018. The current salaries of the
CEO and CFO roles are at the October 2013
benchmark levels which have not increased,
even to reflect inflation. An adjustment is
therefore now necessary to ensure salaries
remain competitive and help us retain our
talent. These new salary levels are at or below
current mid-market levels for businesses of
similar market size relative to the Company.
Following this repositioning, we will be
moving away from the concept of fixing
salaries for set periods to an annual review,
with future increases in normal circumstances
in-line with the level of the workforce.
2. Rebalancing of the short- and
long-term incentive opportunities and
enhanced shareholder alignment
The current Policy caps bonus at 150%
of salary (with bonus normally limited
to 100% of salary) and awards under the
long-term incentive plan, the Performance
Share Plan (‘PSP’) at 100% of salary (with
an additional 100% of salary in exceptional
circumstances).
We are proposing to reduce the bonus cap
from 150% to 100% of salary and increase the
new Long Term Incentive Plan (‘LTIP’) grant
limit from 100% to 150% of salary (removing
the exceptional award limit completely),
with the current intention that grants would
normally be at 125% of salary.
3. Other key changes
Other changes include further amendments
designed to bring the Policy more in line
with the best practice expectations of
investors and to maximise the clarity and
simplicity of our remuneration arrangements,
including:
We are also increasing the proportion of
the bonus delivered in shares from 25%
of bonus awarded based on the financial
objectives only to 25% of the whole of the
bonus (including personal objectives) and
are extending the two year post-vesting
holding period provisions to all LTIP awards
(which previously applied to exceptional
awards only).
Furthermore, we are extending the recovery
and withholding provisions, which currently
only apply to the annual bonus and only
in circumstances where there has been a
misstatement of the accounts, to cover both
the bonus and LTIP in circumstances of
misstatement, corporate failure, error in the
calculation of awards or gross misconduct by
the individual.
The current Policy limits the Committee’s
flexibility with respect to the selection and
balance of performance metrics and targets
that can be used. The new Policy will provide
the Committee more flexibility to ensure we
can select the right performance measures
and targets annually for the annual bonus
and LTIP, taking account of the Company’s
evolving strategy and any other relevant
factors, over the life of the three year Policy.
The Committee believes these changes
will result in a higher proportion of our
variable pay being linked to the Group’s
longer-term strategic objectives and greater
alignment between the Executives and
shareholder interests.
• Removing the scope to make one-off
retention bonuses and pay a joining
incentive to new recruits
• Reducing the pension contribution for
future appointments to be consistent
with that for the general workforce, as
recommended by the new UK Corporate
Governance Code.
In light of the proposed changes, we will also
be asking shareholders to approve the rules
of the new 2019 Long Term Incentive Plan, to
replace the PSP at the forthcoming AGM.
Implementation of the policy in 2019
In 2019, as outlined above, under the
new Policy the maximum annual bonus
opportunity will be 100% of salary, with
25% of any bonus earned deferred into
shares for two years. In order to provide
a more balanced assessment of financial
performance with greater alignment to the
Group’s communicated investor proposition,
bonuses for 2019 will be based on Group
revenue growth on previous year (20%),
operating profit growth on previous year
(40%) and Group cash conversion (40%).
Targets will be set on a sliding scale with
20% payable at threshold and 50% at target.
The 2019 bonus will not include any personal
performance objectives. The targets and
outcomes will be disclosed retrospectively in
next year’s Annual Report on Remuneration.
The 2019 LTIP awards will be granted after
the AGM at 125% of salary and subject to
relative Total Shareholder Return (‘TSR’) and
Earnings Per Share (‘EPS’) growth measures
as in previous years (weighted 50% and
50% respectively). Given the increased
grant quantum the performance conditions
have been reviewed to ensure they remain
stretching. In doing so the Committee has
reviewed, amongst other things, the impact
on EPS of the expected normalisation, during
the performance period, of the Group’s
effective rate of corporate tax. The EPS targets
will range from 5 to 10%, and the threshold
level of vesting under the TSR element has
been reduced to 20% from 25%.
In addition, the Committee must be satisfied
with the level of ROCE performance during
the performance period taking account of
a range of factors. If the Committee is not
satisfied with the level of ROCE performance
it may reduce (potentially to zero) the outturn
against the EPS performance measure.
Implementation of the policy in 2018
2018 performance
Paul McDonald and Nick Keveth, both
appointed in the last financial year, have
settled well into their roles and have made
excellent progress to date. As set out in
the Strategic Report, they have overseen
the delivery of sustained strong financial
performance for the year ended 30
September 2018, confirming the progress the
Group has made over the past 12 months
in delivering growth. Increases were seen
in orders received (4.4%), revenue (4.0%)
and adjusted operating profit (4.6%). Strong
financial management has produced good
cash conversion, meaning the Group ended
the year with net cash of £46.5m.
Basic salary
As detailed in last year’s report, the annual
salaries of both Paul McDonald and Nick
Keveth were reviewed during the year with
the Committee increasing these to the market
level on the anniversary of their appointments,
with Paul and Nick having more than proved
themselves in their current roles.
Performance related pay
Agenda for 2019
As the primary focus of the Committee’s
work throughout the past year has been
the review of the Remuneration Policy,
accounting for changes to best practice
in the wider market and the views of our
shareholders in the consultation process,
we are confident that the new Policy will
continue to encourage a keen focus on the
delivery of superior financial and operational
performance which will, in turn, support the
long-term success of the Group. During 2019,
we will continue to keep the remuneration
arrangements under review, although
no material changes in how the Policy
is implemented are currently expected.
We remain mindful of the developing
remuneration landscape and a key priority
for 2019 will be to continue to monitor the
executive pay environment, governance
developments and market practice,
particularly in light of the new UK Corporate
Governance Code.
I welcome all shareholder feedback on
this report. We acknowledge the support
we have received in the past from our
shareholders and thank those that
participated in our consultation process.
We 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
Chair of the Remuneration Committee
14 November 2018
The annual bonus measures incentivise and
reward delivery of our business strategy and
annual plan. The bonus outcomes for the
Executive Directors were determined by
reference to performance against the agreed
financial business targets of Group profit
budget achievement (25%), profit growth on
previous year (25%), Group cash generation
(20%), as well as the Committee’s assessment
of their individual performance and delivery
of personal objectives (30%). 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
80% of maximum for Paul McDonald and
83% of maximum for Nick Keveth. Full details
can be found on page 73.
Vesting of the 2010 PSP awards made on
1 December 2014 took place in December
2017, based on the agreed measures of
relative Total Shareholder Return (‘TSR’)
and Earnings Per Share (‘EPS’) growth over
the three years to 30 September 2017. The
Group’s three year TSR was 61.6% which
placed it just outside the upper quartile and
the EPS growth was RPI +23% compared to
the maximum target of RPI + 8%. The overall
vesting level achieved for these awards was
therefore 99%.
The Committee considers that within the
broader context of the overall performance
of the Company and the individual
performance of Executive Directors, the
payouts achieved under the bonus and
PSP are justified and has not applied any
discretionary adjustment to these outcomes,
nor in any other area of remuneration
throughout the year.
PSP awards were granted in December 2017
at 100% of salary and are subject to the same
equally weighted TSR and EPS conditions as
previous awards, over the three year period
to 30 September 2020.
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Remuneration at a glance
Remuneration Report continued
The Company’s Remuneration Policy was last approved by shareholders at the AGM on 26 January 2016 and therefore, as required, a new policy will
be submitted for shareholder approval at the 2019 AGM. The key elements of the Directors’ Remuneration Policy, as it applied in 2018 and how it is
proposed to apply in 2019 are summarised below:
Current Policy 2018
Proposed Policy 2019
FIXED PAY
Salary
(annual base)
CEO: £330,000
CFO: £240,000
Pension
15% of salary
CEO: £390,000
CFO: £270,000
15% of salary
Benefits
Includes private health insurance
and life assurance
Includes private health insurance and life
assurance
ANNUAL BONUS
Maximum
opportunity
Opportunity
applied
150% of salary
100% of salary
100% of salary
100% of salary
Operation
• Performance measures: range of
• Performance measures: range of
financial and strategic business targets
financial and strategic business targets
and personal objectives
and personal objectives
• Paid annually in cash, except 25%
• Paid annually in cash, except 25% of
which is deferred into shares. Deferral
the overall amount which is deferred
does not apply to the percentage
into shares
award relating to achievement of
personal objectives
• Malus and clawback provisions apply
• Malus and clawback provisions apply
LONG TERM
INCENTIVE
Maximum
opportunity
100% and an additional 100% in
exceptional circumstances
Opportunity
applied
100%
150%
125%
Operation
• Subject to three year performance
• Subject to three year performance
conditions (TSR and EPS)
conditions (TSR and EPS with a
ROCE underpin)
• Two year additional holding period
applies to vested awards
• Malus and clawback provisions apply
Executive remuneration
Actual vs maximum under policy
Paul McDonald
£804,000
LTIP
Annual Bonus
Fixed Pay, Pension
and Benefits
62
£804,000
£865,060
Nick Keveth
23%
32%
45%
22%
36%
42%
£463,000
£463,000
42%
58%
£502,000
46%
54%
2018 Actual
2018 Maximum
2018 Actual
2018 Maximum
REMUNERATION POLICY REPORT
The Company’s Remuneration Policy (the
‘Policy’) was last approved by shareholders at
the AGM on 26 January 2016 and took effect
from that date. The policy in this report will be
put to a binding shareholder vote at the 2019
AGM and will take formal effect from that date,
subject to shareholder approval. It is intended
that the Policy will formally apply for the three
years beginning on the date of approval.
Guiding policy
The Company’s guiding policy on executive
remuneration is that:
• Executive remuneration packages
should be clear and simple, taking
into account the linkage between pay
and performance by both rewarding
effective management and by making
the enhancement of shareholder value
a critical success factor in the setting
of incentives, both in the short and the
long-term
• The overall level of salary, incentives,
pension and other benefits should be
competitive when compared with other
companies of a similar size and global
spread to attract, retain and motivate
Executive Directors of superior calibre in
order to deliver continued growth of the
business
• Performance related components
should form a significant proportion of
the overall remuneration package, with
maximum total potential rewards being
earned through the achievement of
challenging performance targets based
on measures that represent the best
interests of shareholders
Considerations when determining
remuneration policy
As described in the Annual Statement, the
Remuneration Committee (the ‘Committee’)
undertook a review of the current Executive
Directors’ Remuneration Policy during the year
to ensure that it is aligned with the business
strategy and culture, reflects best practice
expectations of investors and is appropriately
positioned relative to the market.
The experience of Committee members
and advice from independent experts have
been relied upon in setting the remuneration
packages for the Executive Directors and this
Remuneration Policy. The Committee also
engages pro-actively with the Company’s
major shareholders and in reviewing
the Policy engaged with institutional
shareholders as well as the leading
shareholder advisory organisations, who
were broadly positive about the changes
we are proposing.
In line with other small to mid-sized
companies, there is no works council and
therefore there is currently no established
process or platform to consult employees
in relation to executive remuneration.
The Company does hold an annual Employee
Opinion Survey that is shared with the Board
and the Committee is kept informed of
pay and conditions applying to the general
population across the Group. The Committee
and indeed the Board are considering the
appropriate method to facilitate more direct
engagement with its workforce in light of
the new UK Corporate Governance Code.
Chloe Ponsonby has been appointed as the
Non-Executive Director with designated
responsibility and will report on the steps
taken in future reports.
The Committee monitors the remuneration
of the wider workforce and considers this,
where appropriate, when setting Executive
remuneration. As for the Executive Directors,
general practice across the Group is to
recruit employees at competitive market
levels of remuneration, incentives and
benefits to attract and retain employees,
accounting for national and regional talent
pools. When considering salary increases
for Directors, the Company will be sensitive
to pay and employment conditions across
the wider workforce and the pension
contribution for future Executive Director
appointments will be consistent with that
for the general workforce. All employees are
able to earn annual bonuses for delivering
exceptional performance, with corporate
performance measures aligned to those set
for the Executive Directors. All employees,
including the Executive Directors, have
the opportunity to participate in the tax-
approved share incentive plans.
There are some differences in the structure
of the Remuneration Policy for the Executive
Directors compared to that for other
employees within the organisation, which
the Committee believes are necessary to
reflect the differing levels of seniority and
responsibility. At senior levels, remuneration
is increasingly long-term, and ‘at risk’ with an
increased emphasis on performance related
pay and share-based remuneration.
This ensures the remuneration of the
Executives is aligned with both the long-
term performance of the Company and
therefore the interests of shareholders.
We set out below the changes proposed in
the new Remuneration Policy below.
Changes to the Remuneration Policy
As outlined in the Chair’s Annual Statement,
the changes proposed are designed to (i)
simplify our arrangements where possible,
(ii) bring the Policy further into line with the
best practice expectations of investors, (iii)
ensure the Policy is appropriately flexible to
operate effectively over the next three year
period, (iv) ensure packages are sufficiently
competitive and drive performance and (v)
further strengthen the alignment between
shareholders and Executives. In summary,
the key proposed changes include:
• Moving away from the concept of fixing
salaries for three years to an annual
review; future increases in normal
circumstances will be in-line with the
level of the workforce
• Rebalancing the short- and long-term
incentive opportunities by reducing the
cap for the former from 150% to 100% of
basic salary and increasing the cap for the
latter from 100% to 150% of basic salary
(with the current intention to make grants
at 125%)
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Remuneration Report continued
•
Increasing the proportion of the bonus
delivered with shares from 25% of bonus
awarded based on the financial objectives
to 25% of the whole of the bonus, with
deferred shares subject to risk of forfeiture
• Extending post-vesting holding period
provisions to all LTIP awards (previously
this applied to exceptional awards only)
• Providing more flexibility to ensure
the Committee can select the right
performance measures and targets
annually for the annual bonus and LTIP,
taking account of the Company’s evolving
strategy and any other relevant factors,
over the life of the three year Policy
• Extending the recovery and withholding
provisions, which currently only apply
to the annual bonus and only in
circumstances where there has been a
misstatement of the accounts, to cover
both the bonus and LTIP in circumstances
of misstatement, corporate failure, error
in the calculation of awards or gross
misconduct by the individual
• Removing the scope to make one-off
retention bonuses, pay a joining incentive
to new recruits and to make exceptional
awards of 100% of basic salary under
the LTIP
• Reducing the pension contribution for
future appointments to be consistent
with that for the general workforce
Policy table
Set out on the following pages is a summary
of the main components of the proposed
Remuneration Policy for Directors, together
with further information on how these
aspects of remuneration operate, subject to
approval by shareholders at the 2019 AGM.
The existing policy approved at the AGM
on 26 January 2016 and set out in the 2015
Annual Report will remain in effect until
shareholders approve the new Policy. The
Remuneration Committee has discretion to
amend remuneration and benefits to the
extent described in the table and the written
sections that follow it.
Element of
remuneration
Purpose and
link to strategy
Operation
Maximum potential value
Performance targets
Basic Salary
To provide competitive
fixed remuneration.
Normally reviewed annually by
the Remuneration Committee.
No prescribed maximum or
maximum increase.
Not applicable.
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,
with significant adjustments
infrequent and normally reserved
for material changes in role, a
significant increase in the size/
complexity of the Group, or where
an individual has been appointed
on a low salary with an intention to
bring them to market levels over
time and subject to performance.
The normal approach will be to
limit increases to the average level
across the wider workforce, though
increases above this level may be
awarded subject to Committee
discretion to take account of certain
circumstances, as stated under
‘Operation’.
On recruitment or promotion, the
Committee will consider previous
remuneration and pay levels for
comparable companies (for
example, companies of a similar size
and complexity, industry sector or
location), when setting salary levels.
This may lead to salary being set at
a lower or higher level than for the
previous incumbent.
Element of
remuneration
Purpose and
link to strategy
Operation
Maximum potential value
Performance targets
Benefits
As above.
Not applicable.
As it is not possible to calculate
in advance the cost of all
benefits, a maximum is not
pre-determined.
The maximum level of
participation in all-employee
share plans is subject to the
limits imposed by the relevant
tax authority from time to time.
Executive Directors are entitled to benefits
such as medicals every two years, private
health insurance and life assurance.
Any reasonable business-related expenses
(and any tax thereon) can be reimbursed if
determined to be a taxable benefit.
Executive Directors will be eligible to
participate in any all-employee share plan
operated by the Company, on the same
terms as other eligible employees.
For external and internal appointments or
relocations, the Company may pay certain
relocation and/or incidental expenses as
appropriate.
Executives will be eligible for any other
benefits which are introduced for the
wider workforce on broadly similar terms
and additional benefits might be provided
from time to time if the Committee
decides payment of such benefits is
appropriate and in line with emerging
market practice.
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 up to
15% of salary. Future
appointments will be in line
with the general workforce
contribution level at the time.
Not applicable.
Paid annually in cash, except 25% which is
deferred into shares for two years.
Capped at 100% of salary.
Not pensionable.
Recovery and withholding provisions
apply in cases of gross misconduct,
corporate failure, error in calculation of
award and if the financial results which led
to the bonus being paid are restated due
to an error within the subsequent two
years.
Dividends will be paid on deferred shares
which vest.
The Committee will
review performance
measures and targets
each year. Any payment
is discretionary and will
be subject to the
achievement of
stretching performance
targets. Financial
measures will normally
determine at least 75%
of the bonus
opportunity.
Annual Bonus
Rewards the
achievement of
annual financial and
strategic business
targets and delivery
of personal
objectives.
Maximum bonus
only payable for
achieving
demanding targets.
Deferred element
encourages
long-term
shareholding and
discourages
excessive risk
taking.
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Remuneration Report continued
Element of
remuneration
Purpose and
link to strategy
Operation
Maximum potential value
Performance targets
The charts below illustrate how the Policy would function for minimum, on target and maximum performance for each Executive Director.
Illustration of the application of the Policy
Current performance
measures are relative TSR and
EPS growth, each with a 50%
weighting. The Committee
may reweight the measures
for each performance period.
The Committee retains
discretion to set alternative
performance measures for
future awards but will consult
with major shareholders
before making any changes
to the currently applied
measures.
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 underlying business
performance of the Company
or the performance of the
participant does not
justify vesting.
Not applicable.
Not applicable.
Long Term
Incentive Plan
Designed to
align Executive
Directors’ interests
with both the
strategic objectives
of delivering
sustainable
earnings growth
and the interests
of shareholders.
Annual grants of conditional share or
nil-cost option awards which vest after a
three year performance period, subject to
achievement of performance targets and
continued service.
An additional two year holding period
applies after the end of the three year
vesting period.
Recovery and withholding provisions apply
in cases of gross misconduct, corporate
failure, error in calculation of award and if
the financial results which led to the bonus
being paid are restated due to an error
within the subsequent two years.
Dividend equivalents may be paid on
shares which vest.
Executive Directors may
receive an award of up to
150% of basic salary per
annum although the current
intention is to grant 125%.
Any such increase on an
ongoing basis will be subject
to prior consultation with
major shareholders.
100% of awards vest for
stretch performance, up to
20% of an award vests for
threshold performance and
no awards vest below this.
Executive Directors are
required to build up and
maintain a shareholding
worth 200% of salary
(100% for other senior
management).
No maximum fee or
maximum fee increase. Fees
are set taking into account
internal benchmarks such as
the salary increase for the
general workforce and
external benchmarks of fees
paid by companies of a
similar size and complexity.
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.
Chairman and
Non-Executive
Directors’ fees
and benefits
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.
Base fee for Chairman and Non-Executive
Directors. Normally reviewed annually.
Additional fees are paid to Non- Executive
Directors for additional responsibilities or
services undertaken, such as chairing a
Board Committee and/or fulfilling a Senior
Independent role.
The Company repays any reasonable
expenses that a Non-Executive Director
incurs in carrying out their duties as a
Director, including travel, hospitality-
related and other modest benefits and
any tax liabilities thereon, if appropriate.
If there is a temporary yet material
increase in the time commitments for
Non-Executive Directors, the Board may
pay extra fees on a pro-rata basis to
recognise the additional workload.
There are no elements of remuneration other than basic salary/fees, benefits and pension that are not subject to performance requirements.
Chief Executive Officer – Paul McDonald
Chief Financial Officer – Nick Keveth
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
£1,569,751
47%
£1,326,001
36%
£887,251
27%
22%
51%
£448,501
100%
36%
25%
28%
29%
0% of variable
pay vests
50% of variable
pay vests
(target)
100% of variable
pay vests
100% of variable
pay vests with
50% share price
growth
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
£1,086,750
47%
25%
29%
£918,000
27%
41%
32%
£614,250
27%
22%
51%
£310,500
100%
0% of variable
pay vests
50% of variable
pay vests
(target)
100% of variable
pay vests
100% of variable
pay vests with
50% share price
growth
Salary, benefits and pension
Bonus
Performance Shares
Assumptions for charts above:
1)
2)
3)
Salary levels are based on those applying from 1 October 2018. The pension cost is 15% of annual basic salary. Other benefits relate to
private health insurance and executive medical.
The on-target level of bonus is 50% of the maximum opportunity, i.e. 50% of salary. The on-target level of vesting under the LTIP is taken
to be 50% of the face value of the award at grant, i.e. 62.5% of salary.
The maximum level of bonus is 100% of the maximum opportunity, i.e. 100% of salary. The maximum level of vesting under the LTIP is
taken to be 100% of the face value of the award at grant, i.e. 125% of salary.
4)
Share price appreciation of 50% has been assumed for the LTIP awards under the final scenario (but excluded for the first three).
5) Amounts relating to all-employee share schemes have, for simplicity, been excluded from the charts.
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Remuneration Report continued
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
Remuneration Committee’s intention is
to reward only TSR performance which
outperforms the comparator group.
The EPS measure is based on growth
in adjusted earnings per share over the
performance period. The target range is a
sliding scale set at the time of award taking
account of internal and external forecasts,
to encourage continuous improvement
and incentivise the delivery of stretch
performance. For the 2019 awards, the
Committee will also assess the Group’s ROCE
when approving the vesting outcome under
the EPS element of awards.
Legacy arrangements
For the avoidance of doubt, in approving
this Remuneration Policy, authority is given
to the Company to honour any previous
commitments entered into with current or
former Directors (such as the payment of a
pension or the unwinding of legacy share
schemes) that remain outstanding.
Flexibility, discretion and judgement
The Committee will operate the Group’s
incentive plans according to their respective
rules and consistent with normal market
practice, the Listing Rules and HMRC rules
where relevant, including flexibility in a
number of regards. These include making
awards and setting performance criteria each
year, dealing with leavers, granting and/or
settling an award in cash and adjustments to
awards and performance criteria following
acquisitions, disposals, changes in share
capital and to take account of the impact of
other merger and acquisition activity.
The Committee also retains discretion within
the Policy to adjust the targets, set different
measures and/or alter weightings between
measures, pay dividend equivalents on vested
shares up to the date those shares can first
reasonably be exercised and, in exceptional
circumstances, under the rules of the LTIP
to adjust targets to ensure that the awards
fulfil their original purposes. All assessments
of performance are ultimately subject to the
Committee’s judgement and discretion is
retained to adjust payments in appropriate
circumstances as outlined in this Policy.
Any discretion exercised (and the rationale)
will be disclosed.
Approach to recruitment remuneration
New Executive Directors will be offered a
basic salary in line with the Policy. Where
the Committee has set the salary of a new
appointment at a discount to the market level
initially until proven, they may receive an uplift
or a series of planned increases to bring the
salary to the appropriate market position.
For external and internal appointments,
the Committee may agree that the Company
will meet certain relocation and/or incidental
expenses as appropriate.
Annual bonus awards, LTIP awards and
pension contributions would not be in
excess of the current levels stated in the
Policy. Depending on the timing of the
appointment, the Committee may deem
it appropriate to set different annual
bonus performance conditions to the
current Executive Directors for the first
performance year of appointment. An LTIP
award can be made shortly following an
appointment (assuming the Company is
not in a close period). In the case of an
internal appointment, any variable pay
element awarded in respect of the prior role
would be allowed to pay out according to
its terms, adjusted as relevant to take into
account the appointment.
Selection of performance
measures and targets
Annual bonus
The Executives’ annual bonus arrangements
are focused on the achievement of the
Company’s short and medium-term financial
objectives, selected to closely align the
performance of the Executive Directors
with the strategy of the Company’s business
and shareholder value creation. If personal
performance targets are set, these will consist
of non-financial personal targets which also
support the delivery of the longer-term
strategic milestones and non-financial KPIs
relevant to each Director's responsibilities.
Before the start of each year, the
Remuneration Committee confirms
performance targets for the year. ‘Target’
performance is typically set in line with the
budget for the year, following thorough
debate and approval by the Board. Threshold
to stretch targets are then set based on
a sliding scale. Payout at stretch requires
substantial outperformance, whilst only
modest payouts are available for delivering
threshold performance levels. Details of the
measures used for the annual bonus are
given in the Annual Report on Remuneration.
Long Term Incentive Plan
The aim of the Plan is to motivate 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 for the first year of the
new Policy will be based on TSR and EPS.
The current performance conditions
remain appropriate for a growing business
and the expectations of shareholders.
The Committee will review the choice
of performance measures and the
appropriateness of the performance targets
prior to each LTIP grant. 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.
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 each annual
general meeting.
All service contracts and letters of
appointment are available for inspection
at the Company's registered office.
Other appointments
The Company recognises that its Executive
Directors may be invited to become Non-
Executive Directors of other companies.
Such Non-Executive duties can broaden a
Director’s experience and knowledge which
can benefit Avon Rubber. Subject to approval
by the Board, Executive Directors are allowed
to accept Non-Executive appointments,
provided that these appointments are not
likely to lead to conflicts of interest, and the
Committee will consider its approach to the
treatment of any fees received by Executive
Directors in respect of Non-Executive roles as
they arise.
The Group may pay outplacement and
professional legal fees incurred by Executives
in finalising their termination arrangements,
where considered appropriate, and may
pay any statutory entitlements or settle
compromise claims in connection with
a termination of employment, where
considered in the best interests of the
Company. Outstanding savings/shares
under all-employee share plans would be
transferred in accordance with the terms of
the plans.
A pro-rated bonus may be paid subject to
performance, for the period of active service
only. Outstanding share awards will vest in
accordance with the provisions of the various
scheme rules. Under the Defined Bonus Plan,
the default treatment is that any outstanding
awards will continue on the normal
timetable, save for forfeiture for serious
misconduct. Clawback and malus provisions
will also apply. On a change of control,
awards will generally vest on the date of a
change of control, unless the Committee
permits (or requires) awards to roll over into
equivalent shares in the acquirer.
Under the LTIP, the default treatment is
also that any outstanding awards will lapse,
however the Committee has discretion to
allow good leaver status on a case-by-case
basis for which the default treatment is
that awards will vest subject to the original
performance condition and time proration.
For added flexibility, the rules allow for the
Committee to decide not to pro-rate in
exceptional circumstances if it decides it
is appropriate to do so, as well as 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. On a change of control, any vesting
of awards will normally be pro-rated by
reference to time and performance.
In addition, the Committee may offer
additional cash and/or share-based buyout
awards when it considers these to be in
the best interests of the Company (and
therefore shareholders) to take account of
remuneration given up at the individual’s
former employer. This includes the use
of awards made under 9.4.2 of the Listing
Rules. Such awards would be capped
at a reasonable estimate of the value
foregone and would reflect the delivery
mechanism, time horizons and whether
performance requirements are attached
to that remuneration. Shareholders will be
informed of any such payments at the time
of appointment.
For the appointment of a new Chairman or
Non-Executive Director, the fee arrangement
would be set in accordance with the
approved Remuneration Policy.
Service contracts, letters of appointment
and policy on payments for loss of office
Executive Directors
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,
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 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.
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Remuneration Report continued
ANNUAL REPORT
ON REMUNERATION
Role and composition of the
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. When setting the
remuneration policy for Directors, the
Committee reviews and has regard to the
remuneration trends across the Group.
The Remuneration Committee’s terms of
reference are available on the Company’s
website and include:
• Determining and agreeing with the Board
the policy for the remuneration of the
Company’s Chief Executive Officer, Chief
Financial Officer, 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), having regard to
remuneration trends across the Group
• Reviewing the pay arrangements put in
place for the broader workforce
• 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
• Determining the targets for the
performance related bonus schemes for
the Executive Directors and the Group
Executive management team
• 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
• Agreeing termination arrangements
for senior Executives
• Providing a remuneration structure
that supports the achievement of the
Company’s performance objectives and,
in turn, increases shareholder value
The Committee comprises Chloe Ponsonby,
David Evans and Pim Vervaat. By invitation of
the Committee, meetings are also attended
by the CEO, CFO and the Company Secretary
(who acts as secretary to the Committee),
who are consulted on matters discussed
by the Committee, unless those matters
relate to their own remuneration. Advice or
information is also sought directly from other
employees where the Committee feels that
such additional contributions will assist the
decision-making process.
The Committee uses external independent
professional advisers when needed. During
2018, the Committee was assisted in its
work by external advisors, appointing Aon
as its independent advisors, previously EY.
Aon provided advice for the review and
amendment of the Executive Directors’
Remuneration Policy, including remuneration
benchmarking of the reward packages
received by the Executive Directors,
assistance with the shareholder consultation
process, implementation advice with respect
to the new LTIP as well as more general
advice on executive remuneration. Aon also
provided annual performance monitoring
data for review by the Committee in
relation to the PSP. During the year to
30 September 2018 the Company incurred
costs of £0.2m (2017: £nil) in respect of fees
for Aon’s services, charged on a time/cost
basis. Aon are members of the Remuneration
Consultants Group and, as such, voluntarily
operate under the Code of Conduct
in relation to executive remuneration
consulting in the UK. The Committee is
satisfied that the advice they received is
objective and independent. The Company’s
solicitors, TLT LLP, provided advice on share
plans in the year for which fees of £7,166 were
incurred, charged on a time cost basis.
The Committee addressed the following
main issues during the last year:
• Reviewed and amended the
Remuneration Policy, consulting with
major shareholders
• Reviewed and approved all remuneration
packages paid to current Directors
• Approved the annual bonus payments to
the Executive Directors in November 2017
• Approved the annual bonus plan for
the Executive Directors for the 2018
financial year
• Reviewed and confirmed the vesting
of the 2015 PSP awards granted in
December 2014
• Reviewed and approved the 2018 PSP
awards granted in December 2017
and monitored the performance of
the outstanding awards against their
performance targets
Since the end of the 2018 financial year, the
Committee has:
• Approved annual bonus payments to
the Executive Directors and the Group
Executive management team, following
completion of the external audit in
November 2018
• Approved the rules for the new LTIP
and made preparations for the 2019 LTIP
awards to be granted after the 2019 AGM
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 2018 was as follows:
Single total figure of remuneration for Directors for the year ended 30 September 2018:
Fixed Pay
Pay for performance
Basic salary
and fees
£’000
Pension/other
supplements
£’000
Other
Benefits
£’000
Subtotal
£’000
Annual
Bonus
£’000
Year
PSP3
£’000
Subtotal
£’000
Total
Remuneration
£’000
Executive Directors
Paul McDonald1
Nick Keveth2
2018
2017
2018
2017
Non–Executive Directors
David Evans
Pim Vervaat
Chloe Ponsonby
Total
2018
2017
2018
2017
2018
2017
2018
2017
314
261
233
77
125
125
51
51
51
51
774
565
47
33
35
12
–
–
–
–
–
–
82
45
1
1
1
–
4
4
–
–
–
–
6
5
362
295
269
89
129
129
51
51
51
51
862
615
255
181
194
48
–
–
–
–
–
–
187
208
–
–
–
–
–
–
–
–
442
389
194
48
–
–
–
–
–
–
449
229
187
208
636
437
804
684
463
137
129
129
51
51
51
51
1,498
1052
1
2
3
Paul McDonald was appointed to the Board with effect from 15 February 2017. The 2017 remuneration shown for Paul McDonald includes all remuneration received during the
year, including that received in the period prior to his appointment as Director.
Nick Keveth was appointed to the Board with effect from 1 June 2017.
The three year performance period for EPS in respect of these awards finished on 30 September 2017 but vesting was not determined until the end of November 2017,
with TSR performance measured following the release of the Group results.
Basic salary
As detailed in last year’s report, the salaries of Paul McDonald and Nick Keveth were set at £300,000 and £230,000 respectively on
appointment, below the respective market reference levels of £330,000 and £240,000 previously established for their roles in 2013, with a view
to increasing to the market level on the anniversary of their appointment upon proving themselves in their roles. As such, their salaries were
increased in the year to £330,000 and £240,000 respectively. However, as explained in the Chair’s Annual Statement, the Committee believe
it is now appropriate to reposition the salaries, particularly since the Group is now significantly more complex, profitable and cash generative
than when previously set and as the variable pay opportunity is being reduced from 250% of salary (350% exceptionally) to 225% of salary.
The Committee therefore intends to undertake a one-off repositioning of their salaries, as set out below:
Paul McDonald
Nick Keveth
2018
£330,000
£240,000
2019
£390,000
£270,000
% Increase
+18.2
+12.5
Subject to the approval of the new Policy, these changes will be effective from 1 October 2018.
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Avon Rubber p.l.c. | Annual Report & Accounts 2018
Remuneration Report continued
Non-Executive Director Fees
Annual bonus
The fees of Non-Executive Directors were reviewed and benchmarked in 2017 which concluded that current fees remained appropriate
and therefore no increases were made for 2018. In order to align with the Executive Directors, the Non-Executive Director fees were again
benchmarked during the year. For 2019 it was decided that the Chairman’s fee would increase to £140,000 and an additional fee would
be paid to the Senior Independent Director. The Committee attendance fee would be included within the Non-Executive Director fee,
all changes to be effective from 1 October 2018, subject to the approval of the new Policy.
Current fees for Non-Executive Director fees are:
The Remuneration Committee determined at its meeting on 8 November 2018 that certain 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:
Threshold
(0% payable)
Target
(50% payable)
Stretch
(100% payable)
Actual/
Reported
Applied
Bonus
payable
Bonus
payable
Max
Max
Paul McDonald
Nick Keveth
CEO
CFO
Chairman
Non-Executive Director
Committee Chairman
Committee attendance
Senior Independent Director
*
Includes Committee attendance fee, previously separated out.
Benefits and pension
2018
£125,000
£38,500
£10,000
£2,000
–
2019
£140,000
£40,500*
£10,000
–
£5,000
% Increase
+12%
+5.2%
–
+100%
–100%
These will be paid and provided in accordance with the approved Policy. Benefits include the cost of private health insurance and executive
medical. No Director waived emoluments in respect of the year ended 30 September 2018 (2017: £nil). For 2019 benefits will be in line with
those received in 2018. All employees including the Executive Directors are entitled to life insurance which pays out a lump sum of six times
salary on death.
As confirmed under the Policy, the Executive Directors are currently 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. Under the Company’s money
purchase scheme, members receive a pension based upon the size of their retirement account on retirement from age 65.
1. Financial Targets
(a) Group profit
budget
achievement
(Group PBITE)
£25.3m
£28.1m
£30.9m
£28.0m
48%
12%
25%
12%
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)
£26.1m
£27.4m
£28.7m
£28.5m
92%
23%
25%
23%
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)
80%
90%
100%
139.9%
100%
20%
20%
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.
Paul McDonald is a member of the money purchase scheme. Part of his company pension contribution is paid into the pension scheme with
the remainder paid as a salary supplement.
2. Personal Performance Targets
See below
25%
30%
28%
30%
Nick Keveth has reached the lifetime allowance and has not joined the Plan. His pension contribution is paid entirely as a salary supplement.
The employer pension contribution is shown in the table below.
Based on an individual reviewer’s assessment of personal performance against personal performance targets set at the beginning
of the financial year.
Total bonus 2018 as a percentage of basic salary
80%
100%
83%
100%
Executive Director
Paul McDonald
Nick Keveth
The Company does not contribute to any pension arrangements for Non-Executive Directors.
Salary supplement
£’000
42
35
Contribution
into the Plan
£’000
5
–
Detail of achievement against personal objectives for the year ended 30 September 2018
The personal objectives for the Executive Directors are set out in the table below
Paul McDonald
Nick Keveth
Personal objectives related to:
Personal objectives related to:
• Developing the Military business strategy and organisation
• Creating and maintaining dialogue with potential acquisition targets
• Continuing the review of key executive positions and refining succession planning
• Reviewing and refreshing the current investor relations strategy and holding a
capital markets day
• Re-engineering the strategic planning and forecasting process
• Overhauling the management reporting
• Supporting the Chief Executive Officer in reviewing and refreshing the current
investor relations strategy and holding a capital markets day
• Defining a pension liability management strategy.
The Committee was pleased with the significant progress and outcomes achieved during the year by both Paul and Nick regarding their
personal objectives and assessed that a payout of 83% for Paul McDonald and 93% for Nick Keveth in relation to their personal objectives
was warranted.
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Avon Rubber p.l.c. | Annual Report & Accounts 2018
Remuneration Report continued
In accordance with the Policy in force in the year, of the bonus payable for meeting the financial targets, 75% will be paid in cash and the
remaining 25% will be deferred into shares to be held for two years.
For the year ending 30 September 2019, the maximum opportunity under the annual bonus plan will be 100% of base salary for both
Executive Directors. 25% of the total bonus payment will now be deferred into shares for two years.
Bonuses will be based on Group revenue growth on previous year (20%), operating profit growth on previous year (40%) and Group cash
conversion (40%), with 20% of the maximum bonus payable at threshold levels of performance and 50% for on-target performance.
The Committee has chosen not to disclose, in advance, the detailed financial performance targets for the forthcoming year as these include
matters which the Committee considers commercially sensitive. Retrospective disclosure of the performance against them will be made in
next year’s Annual Report on Remuneration to the extent the targets are not commercially sensitive at that time.
Performance Share Plan
The Committee determined in November 2017 that 99% of the 2015 award granted on 1 December 2014 vested on the basis of TSR and EPS
performance over the three years from 1 October 2014 to 30 September 2017. The Company’s TSR of 61.6% compared to the upper quartile
of the comparator group at 63%. The Company’s EPS growth was 95% compared to the threshold and maximum targets of 16% and 34% (RPI
+3% to RPI +8%) respectively. The Committee considers that the financial performance of the Company and Paul McDonald’s performance
fully justifies this level of vesting.
As a consequence, and as announced to shareholders in November 2017, 16,221 shares were awarded to Paul McDonald, which at the market
share price on the day of vesting of 11.50p were worth £186,542. The amount of this figure attributable to share price appreciation is £67,751.
The Committee did not consider it necessary to apply any discretion to adjust the outcome for these awards.
The Directors’ contingent interests in ordinary shares under the Plan at 30 September 2018 were as follows:
30 September
2017
Granted
in the year*
Exercised
in the year
Lapsed
in the year
30 September
2018**
Paul McDonald
Nick Keveth
Other senior employees***
42,161
–
370,920
26,511
20,325
127,511
(16,221)
–
(138,419)
(219)
–
(5,407)
52,232
20,325
354,605
*
The award price at the date of grant (6 December 2017) was 1132 pence based which was the average price of the Company’s shares over the five days following announcement
of the Company’s annual results for the year ended 30 September 2017 and which was used make face value awards of nil-cost options at 100% of salary.
**
The weighted average remaining life of the awards outstanding at the year end is 1.6 years (2017: 1.2 years).
*** This figure includes 107,747 (2017: 129,310) in respect of key management as defined in note 6.1 of the financial statements.
Outstanding awards granted annually under the Plan were as follows:
Paul McDonald1
Nick Keveth2
Other senior employees
2016
10,912
–
97,026
107,938
2017
14,809
–
130,068
144,877
2018
26,511
20,325
127,511
174,347
Total*
52,232
20,325
354,605
427,162
1
2
*
Paul McDonald was appointed as a Director on 15 February 2017.
Nick Keveth was appointed as a Director on 1 June 2017.
In relation to the awards outstanding at 30 September 2018, deferred loan payments for the awards granted in 2016, 2017 and 2018 will become due to the Company as follows:
Paul McDonald £5,839.79, Nick Keveth nil.
The award price for the 2018 awards was 1132 pence, for the 2017 awards it was 1053 pence and for the 2016 awards it was 1085 pence.
PSP performance conditions
PSP
30 September
2017
30 September
2018
30 September
2019
30 September
2020
Performance Period years ending
(Cycle G)
(Cycle H)3
(Cycle I)4
(Cycle J)4
TSR element1
EPS element2
Total exercisable rate (% grant)
50%
50%
100%
50%
50%
100%
50%
50%
100%
50%
50%
100%
1
2
3
Based on Avon Rubber p.l.c.’s TSR ranked relative to companies in the FTSE SmallCap Index at the start of the period. For awards after 1 October 2015 the FTSE All-Share index
(excluding investment trusts) is used. Over the three year period the Company’s TSR performance is compared with a scale which provides for 25% vesting if TSR is equal to
median of the comparator group and maximum vesting if TSR is equal to, or exceeds, the upper quartile, with vesting on a pro-rata basis for performance between these two
figures (and nil vesting below median).
For the EPS measure, adjusted 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. For all awards from 1 October 2015, the Committee amended the calculation of the EPS
performance condition to CPI instead of RPI.
The three year performance period for EPS in respect of these awards is complete but vesting is not determined until the end of November 2018, with TSR performance
measured following the release of the Group results.
4
The three year performance periods in respect of these awards is not yet complete.
2019 Long Term Incentive Plan Awards
The Remuneration Committee has decided that the 2019 LTIP awards will take the form of nil-cost options with a market value at
grant of 125% of salary for the Executive Directors. Vesting will be subject to the following performance conditions over three years
to 30 September 2021:
• 50% will be based on relative TSR performance with 20% vesting at median increasing to 100% for upper quartile performance.
The comparator group will be the FTSE All-Share index (excluding investment trusts)
• 50% will be based on EPS growth. EPS growth will be compared on a scale which provides for nil vesting at 5% and maximum vesting at 10%,
with vesting on a pro-rata basis between these two figures. In addition, the Committee must be satisfied with the level of ROCE performance
during the period taking account of a range of factors. If the Committee is not satisfied with the level of ROCE performance it may reduce
(potentially to zero) the outturn against the performance measure
Given the increased grant quantum, the performance conditions have been reviewed to ensure they remain stretching. In doing so the
Committee has reviewed, amongst other things, the impact on EPS of the expected normalisation, during the performance period, of the
Group’s effective rate of corporate tax. It was agreed that the threshold level of vesting under the TSR element be reduced to 20% from 25%.
Subject to approval of the new Policy, any shares which vest from this award will be subject to a compulsory two year post-vesting
holding period.
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Avon Rubber p.l.c. | Annual Report & Accounts 2018
Remuneration Report continued
Directors’ shareholdings and share interests and position under shareholding guidelines
Beneficial interests of Directors, their families and trusts in ordinary shares of the Company were:
At the
beginning
of the year
At the end
of the year
Actual
value**
£’000
Target
value***
£’000 Achievement ****
Shares
held voluntarily in
excess of guideline
Number of shares
Paul McDonald
Nick Keveth
David Evans
Pim Vervaat
Chloe Ponsonby
26,531*
4,260
40,000
2,000
2,000
28,346
11,581
25,000
3,000
3,400
366
149
387
39
44
780
540
n/a
n/a
n/a
110%
62%
n/a
n/a
n/a
–
–
n/a
n/a
n/a
*
Includes 1,664 shares held under the annual bonus deferral scheme.
** Using the closing share price on 30 September 2018 of 12.90 pence.
*** 200% of current salary for Executive Directors. Salaries used are those effective 1 October 2018.
**** Actual value as a percentage of current salary.
Interests in jointly owned shares held by the Executive Directors under the PSP are excluded from the above.
The only change in the interests set out above between 30 September 2018 and 14 November 2018 were the additional 23 shares bought by
Nick Keveth under the Share Incentive Plan, which increased his total shareholding to 11,604.
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 10 year period. In respect of the 5% and 10% limits recommended by the Investment Association, the relevant percentages were
7.73% and 7.73% respectively based on the issued share capital at 30 September 2018 and no change to this is proposed. In 2011 shareholders
approved a 15% dilution limit for all employee schemes which is in excess of the 10% recommended by the Investment Association, and a
10% dilution limit for discretionary (executive) schemes which is in excess of the 5% recommended by the Investment Association. 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.
It remains the Company’s practice to use Employee Share Ownership Trusts (‘ESOTs’) in order to meet its liability for shares awarded under the
LTIP. Two trusts have been established in connection with the jointly owned equity awards. At 30 September 2018 there were 499,264 shares
held in the ESOTs which will either be used to satisfy awards granted under the PSP to date, or in connection with future awards. A hedging
committee ensures that the ESOTs hold sufficient shares to satisfy existing and future awards made under the PSP and LTIP by buying shares
in the market or causing the Company to issue new shares. Shares held in the ESOTs do not receive dividends.
As at 30 September 2018, the market price of Avon Rubber p.l.c. shares was £12.90 (2017: £9.40). During the year the highest and lowest market
prices were £9.27 and £14.75 respectively.
Share incentive plan
The Company currently operates the Avon Rubber p.l.c. Share Incentive Plan (the ‘SIP’), approved by shareholders 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. Paul McDonald is not a member of the SIP. Nick Keveth is a member and
as at 30 September 2018 had purchased 145 shares through this scheme. The maximum contribution each month under the SIP is currently
£150, a sum which is set by the Government. Nick Keveth has participated in the SIP at the maximum level since July 2017.
Payments to past Directors and payments for loss of office
The Committee’s approach when exercising its discretion under the Policy is to be mindful of the particular circumstance of the departure
and the contribution the individual made to the Group. There were no payments for loss of office during the year and the payments made to
Rob Rennie as a past director were as set out in last year’s report.
Service contracts and letters of appointment (unaudited)
The table below summarises key details in respect of each Executive Director’s contract.
Paul McDonald
Nick Keveth
Contract date
14 February 2017
9 May 2017
Company notice period
Executive notice period
12 months
12 months
12 months
12 months
The date of each Non-Executive 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
David Evans
Chloe Ponsonby
Pim Vervaat
1 June 2007
1 March 2016
1 March 2015
1 February 2018
2 February 2017
26 January 2016
All service contracts and letters of appointment are available for inspection at the Company’s registered office.
Other appointments (unaudited)
Neither Paul McDonald nor Nick Keveth is currently appointed as a Non-Executive Director of any company outside the Group.
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 10 years relative to the FTSE SmallCap Index (excluding investment trusts) and the FTSE All Share Index (excluding
investment trusts). These indices were chosen by the Remuneration Committee as a competitive indicator of general UK market performance
for companies of a similar size.
Avon Rubber
FTSE Small Cap excluding investment trusts
FTSE All Share excluding investment trusts
2,500
2,000
1,500
1,000
500
0
76
77
Sep 2008
Sep 2009
Sep 2010
Sep 2011
Sep 2012
Sep 2013
Sep 2014
Sep 2015
Sep 2016
Sep 2017
Sep 2018
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Remuneration Report continued
Chief Executive Officer’s remuneration (unaudited)
Relative importance of spend on pay (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 11 financial years are shown in the table below.
Mr Slabbert retired on 30 September 2015. Mr Rennie stood down from the Board on 15 February 2017 and was replaced by Paul McDonald
on 15 February 2017.
Year
2018
2017
2017
2016
2015
2014
2013
2012
2011
2010
2009
CEO
Paul McDonald
Paul McDonald
Rob Rennie
Rob Rennie
Peter Slabbert
Peter Slabbert
Peter Slabbert
Peter Slabbert
Peter Slabbert
Peter Slabbert
Peter Slabbert
CEO single figure of
total remuneration
£’000
Annual bonus pay out against
maximum opportunity
Long-term incentive
vesting rates
804
684 1
213
484
1,435
1,538
1,374
1,864
404
395
366
80%
81%
57%
52%
91%
91%
86%
40%
74%
90%
91%
99%
100%
–
–
96%
100%
100%
100%
nil
nil
nil
1
includes remuneration received in the period prior to his appointment as Director during the year.
Percentage change in remuneration of the CEO compared with other employees (unaudited)
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
2016
-9%
0%
-61%
CEO
2017
0%
0%
+4%
2018
+18.2%
0%
+41%
All employees
2017
+2%
0%
+109%
2016
+2%
0%
-51%
2018
+2.5%
0%
+77.2%
We note that requirements for CEO pay ratio disclosures from 2020 have been published. We will be seeking to comply with these in due
course but have decided not to publish a ratio this year whilst we prepare for the new requirements.
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:
Global
remuneration
spend
£’000
2018
2017
2016
44,616
43,673
38,211
Other expenditure as a percentage of global remuneration spend
Dividends to
shareholders
Profit retained
Research and
development expenditure
Expenditure on property,
plant and machinery
£’000
4,136
3,176
2,430
%
9.3%
7.3%
6.4%
£’000
17,297
18,311
15,849
%
£’000
38.8%
41.9%
41.5%
9,692
8,394
8,341
%
21.7%
19.2%
21.8%
£’000
3,494
2,644
3,689
%
7.8%
6.1%
9.7%
Statement of shareholder voting on the remuneration report (unaudited)
The shareholder vote on the Remuneration Report for the year ended 30 September 2017 at the AGM which took place on 1 February 2018
was as follows:
Resolution
Votes For
(including
discretionary)
Votes Against
% For
(excluding withheld) % Against
Total
(excluding
withheld and
third party
discretionary)
Withheld
Approval of Remuneration Report
19,134,112
96.97
598,550
3.03
19,732,662
1,729,130
The Remuneration Report has been approved by the Board of Directors and signed on its behalf by:
Chloe Ponsonby
Chair of the Remuneration Committee
14 November 2018
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Directors’ Report
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 2018. The Company is a public limited company incorporated and domiciled in
England and Wales with company registration number 32965. The Company’s subsidiary undertakings, including those located outside the
UK, are listed in note 7.4 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 34 to 37 and is
incorporated into this Directors’ Report by reference.
Financial results and dividend
The Group statutory profit for the year after taxation amounts to £21.4m (2017: £21.5m). Full details are set out in the Consolidated Statement
of Comprehensive Income on page 92.
An interim dividend of 5.34p per share was paid in respect of the year ended 30 September 2018 (2017: 4.11p).
The Directors recommend a final dividend of 10.68p per share (2017: 8.21p) resulting in a total dividend distribution per share for the year to
30 September 2018 of 16.02p (2017: 12.32p).
Share capital
As at 14 November 2018, the issued share capital of the Company was 31,023,292 ordinary shares of £1 each. Details of the shares in issue during
the financial year are set out in note 5.5 of the financial statements.
The rights and obligations attaching to the Company’s shares are set out in the Company’s Articles of Association (‘the 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 meetings, to exercise voting rights in person or by appointing a proxy and to receive
a dividend where declared or paid out of profits available for that purpose. There are no restrictions on the transfer of issued shares or on
the exercise of voting rights attached to them, except where the Company has suspended their voting rights or prohibited their transfer
following a failure to respond to a notice to shareholders under section 793 of the Companies Act 2006, or where the holder is precluded
from transferring or voting by the Financial Services Authority’s Listing Rules or the City Code on Takeovers and Mergers.
The 499,264 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.
Substantial shareholdings
As at 30 October 2018, the following shareholders held 3% or more of the Company’s issued share capital.
Capital Group Co’s Inc
Schroder Investment Management
JPMorgan Asset Management (UK)
Kempen Capital Management
BlackRock Investment Management
Threadneedle Asset Management
Janus Henderson Investors
Hargreave Hale & Co
Fidelity Management & Research
8.12%
6.22%
5.88%
5.64%
5.19%
5.01%
4.16%
3.42%
3.11%
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:
•
•
the Company’s revolving credit facility agreement
the Performance Share Plan / proposed Long Term Incentive Plan (‘the Plans’)
The unsecured revolving credit facility of $40 million provided by Barclays Bank PLC and Comerica Bank Inc. contains a provision which, in the
event of a change of control of the Company, gives 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 persons acting in concert (as defined in the City Code on Takeovers and
Mergers) gains direct or indirect control of the Company.
Under the rules of the Plans, 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.
It is also possible that the trustee of the pension plan would seek to review the current funding arrangements and deficit recovery plan as
part of or following a change of control, particularly if that resulted in a weakening of the employer covenant.
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.
During the year the trust acquired 100,000 shares (2017: 100,000) at a cost of £1.1m (2017: £1.0m).
Directors
154,641 (2017: 247,099) shares were used to satisfy awards following the vesting of shares relating to the 2010 Performance Share Plan.
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 AGM held on 1 February 2018, shareholders authorised the Company to make market purchases of up to 3,102,329 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 of the Company and to disapply shareholders’ statutory pre-emption rights.
Such authorities were granted at the 2018 AGM and resolutions to renew these authorities will be proposed at the 2019 AGM, see explanatory
notes on pages 141 to 143. No shares were allotted under this authority during the year.
There were no changes to the Board of Directors during 2018. The Directors of the Company who were in office during the year and up to
14 November 2018 are set out on pages 46 and 47 along with their photographs and biographies.
According to the Articles of Association, all Directors are subject to election by shareholders at the first AGM following their appointment, and
to re-election thereafter at intervals of no more than three years. In line with best practice reflected in the UK Corporate Governance Code,
however, all current Directors will be standing for reappointment at the forthcoming AGM to be held on 31 January 2019. The remuneration
of the Directors including their respective shareholdings in the Company is set out in the Remuneration Report on pages 59 to 79.
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. An amendment to the Articles will be put before
shareholders for approval at the 2019 AGM, details of which are set out in the Notice of AGM on pages 139 to 148.
Directors’ and officers’ indemnity insurance
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, Director’s and Officer’s insurance to provide cover in respect of legal action against its Directors. This was in force throughout the
financial year and remains in force as at the date of this report.
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 Directors and Company Secretary which is a qualifying third party
indemnity provision for the purposes of the Act.
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Directors’ Report continued
Conflicts of interest
Annual General Meeting
During the year no Director held any beneficial interest in any contract significant to the Company’s business, other than a 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 research and development in the year was £9.7m (2017: £8.3m) further details of which are contained in the Strategic
Report on page 32.
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 48 to 52. The Corporate
Governance Report forms part of this Directors’ Report and is incorporated into it by cross-reference.
Environmental and corporate social responsibility
The Company’s Annual General Meeting will be held at our Hampton Park West facility, Semington Road, Melksham, Wiltshire SN12 6NB on
31 January 2019 at 10.30am. Registration will be from 10.00am. The Notice of the AGM and an explanation of the resolutions to be put to the
meeting are set out in the Notice of Meeting and can be found on pages 139 to 148.
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 financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared
the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union
and Parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’, and applicable law). Under company law the Directors must not
approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and Parent
Company and of the profit or loss of the group and Parent Company for that period. In preparing the financial statements, the Directors are
required to:
•
•
select suitable accounting policies and then apply them consistently;
state whether applicable IFRSs as adopted by the European Union have been followed for the group financial statements and United
Kingdom Accounting Standards, comprising FRS 101, have been followed for the company financial statements, subject to any material
departures disclosed and explained in the financial statements;
• make judgements and accounting estimates that are reasonable and prudent; and
Matters relating to Environmental and Corporate Social Responsibility including reference to our policy on diversity are set out on pages 38 to 43.
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and Parent Company will
Greenhouse gas emissions
The disclosures concerning greenhouse gas emissions required by law are included in the Environment and Corporate Social Responsibility
Report on page 39.
Political and charitable contributions
No political contributions were made during the year or the prior year. Contributions for charitable purposes amounted to £39,098 (2017: £10,915)
consisting exclusively of numerous small donations to various community charities in Wiltshire, Albinea, Maryland, Michigan and Wisconsin.
Post balance sheet events
On October 26, 2018, the High Court handed down a judgment involving the Lloyds Banking Group’s defined benefit pension schemes. The
judgment concluded that pension scheme benefits should be amended to equalise guaranteed minimum pension benefits for men and
women. We are working with our actuarial advisers, to understand the extent to which the judgment crystallises any additional liabilities for
the Group’s UK defined benefit pension scheme. We are early in the evaluation process, but we estimate that the additional liability could be
in the region of £3m. Subsequent to further assessment with our advisors, any necessary adjustment is expected to be recognised in the first
half of our 2019 financial year.
Financial instruments
An explanation of the Group policies on the use of financial instruments and financial risk management objectives are contained in note 5.4
of the financial statements.
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.
Auditor
PwC will not be standing for reappointment at the 2019 AGM and 2018 will be the last year that PwC will carry out the external audit.
Following completion of a tender process during the year, the Board is recommending the appointment of KPMG LLP as auditor and a
resolution concerning their appointment is being put to the 2019 AGM. A separate resolution will also be put to the AGM authorising the
Board to agree the auditor’s remuneration.
continue in business.
The Directors are also responsible for safeguarding the assets of the group and Parent Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and Parent
Company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and Parent Company and
enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as
regards the group financial statements, Article 4 of the IAS Regulation.
The Directors are responsible for the maintenance and integrity of the Parent Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors’ confirmations
Each of the Directors, whose names and functions are listed on pages 46 and 47, confirms that to the best of their knowledge:
•
•
•
the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
the Strategic Report/Directors’ Report include a fair review of the development and performance of the business and the position of
the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and
uncertainties that they face; and
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.
The Directors’ Report and responsibility statement was approved by the Board of Directors on 14 November 2018 and is signed on its behalf by:
Paul McDonald
Chief Executive Officer
14 November 2018
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Financial Statements
NIOSH Approval of powered air Range
“ After five years of development, working alongside the end-user community,
Avon has produced the next generation of modular powered CBRN respiratory
protection. With their NIOSH CBRN approval, these products now provide the
wearer with lighter, modular and fully integrated solutions. In addition, the
ability for customers to configure systems depending on operational needs
dramatically lowers their ownership and maintenance costs.”
Avon Protection has received NIOSH CBRN
approval on its AvonAir™ modular powered
air range. The EZAir, MP-PAPR and CS-PAPR
usher in a new era of multipurpose and
adaptable respiratory protection.
The single filter EZAir is the smallest
and lightest CBRN breathe assist device
available with cost of ownership per use at
nearly half that of PAPRs. The low profile
MP-PAPR provides supreme user comfort
through its unique flexible construction
and hydration integration capability.
The market leading in-mission response
flexibility of the CS-PAPR provides the
tools necessary to keep pace with rapidly
changing threats. These three modular
CBRN hardened systems provide the
level of protection needed to meet ever-
changing mission demands.
An intelligent CBRN blower with its flow
control technology and alarm systems is
used in all AvonAir systems. The modularity
even extends as far as the mask and filters
with owners of Avon masks able to connect
to their new powered air system and meet
NIOSH CBRN requirements using the Avon
CBRN canister.
The patented design approach delivers
maximum operational flexibility –
interchangeable performance modules
allow for multiple protection level
configurations that can be rapidly assembled
to accommodate changing threats. With
reduced breathing burden and greater
integration with legacy equipment,
enhanced protection against toxic industrial
chemicals, ease of weapon sighting, and
integrated communications, the AvonAir™
range enables the wearer to stay comfortable
and effective in physically taxing scenarios.
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92
93
94
95
96
Financial Statements
Independent Auditors’ Report
Consolidated Statement of
Comprehensive Income
Consolidated Balance Sheet
122
Section 6 – Key Management
& Employee Benefits
122
6.1 Employees
123
6.2 Pensions and Other Retirement Obligations
Consolidated Cash Flow Statement
125
6.3 Share Based Compensation
Consolidated Statement of Changes in Equity
Section 1 – Accounting Policies and
Critical Accounting Judgements
102
Section 2 – Results for the Year
102
2.1 Operating Segments
105
2.2 Adjustments and Discontinued Operations
106
2.3 Earnings Per Share
107
2.4 Expenses by Nature
108
2.5 Profit Before Taxation
108
2.6 Taxation
126
126
126
127
Section 7 – Other
7.1 Provisions for Liabilities and Charges
7.2 Acquisitions & Disposals
7.3 Financial Commitments
128
7.4 Group Undertakings
128
7.5 Related Party Transactions
128
7.6 Post Balance Sheet Event
129
Section 8 – Parent Company Financial
Statements & Five Year Record
129
Parent Company Balance Sheet
110
110
111
112
112
112
112
113
114
114
115
115
116
Section 3 – Non Current Assets
130
Parent Company Statement of Changes in Equity
3.1 Intangible assets
131
Parent Company Accounting Policies
3.2 Property, Plant and Equipment
Section 4 – Working Capital
4.1 Inventories
4.2 Trade and Other Receivables
4.3 Cash and Cash Equivalents
4.4 Trade and Other Payables
Section 5 – Funding
5.1 Borrowings
5.2 Net Finance Income
5.3 Net Debt
5.4 Financial Instruments
133
Notes to the Parent Company
Financial Statements
137
Five Year Record
138 Glossary of Financial Terms
138
Abbreviations
Other Information
139
Notice of Annual General Meeting
149
Shareholder Information
120
5.5 Equity
121
5.6 Dividends
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Independent Auditors’ Report
to the Members of Avon Rubber p.l.c.
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
The scope of our audit
OPINION
In our opinion:
• Avon Rubber p.l.c.’s Group financial statements and Parent Company financial statements (the ‘financial statements’) give a true and fair
view of the state of the Group’s and of the Parent Company’s affairs as at 30 September 2018 and of the Group’s profit and cash flows for
the year then ended;
•
•
•
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union;
the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’, and applicable law); and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts (the ‘Annual Report’), which comprise: the
Consolidated and Parent Company Balance Sheets as at 30 September 2018; the Consolidated Statement of Comprehensive Income, the
Consolidated Cash Flow Statement, and the Consolidated and Parent Company Statements of Changes in Equity for the year then ended; and
the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe
that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements
in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the
Group or the Parent Company.
We have provided no non-audit services to the Group or the Parent Company in the period from 1 October 2017 to 30 September 2018.
OUR AUDIT APPROACH
Overview
Materiality
Audit scope
Key audit
matters
• Overall Group materiality: £1.1m (2017: £0.9m), based on 5% of profit before tax
• Overall Parent Company materiality: £1.0m (2017: £0.7m), based on 1% of total assets
• 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 milkrite|InterPuls NA) and the two main operating units in the
UK (Avon Polymer Products Ltd (comprising of Avon Protection UK and milkrite|InterPuls Europe)) and
Avon Rubber p.l.c.
• Taken together, these four reporting units account for 90% of Group revenue and in excess of 85% of
the total Group profit before tax
• Specific audit procedures were also performed by the UK audit team on certain other balances and
transactions at the remaining six reporting units
• Provisions for uncertain tax provisions (Group)
• Valuation of the Group’s net pension deficit (Group)
86
• Risk of fraud in revenue recognition (Group)
•
Intangible assets (development expenditure) impairment assessment (Group)
As part of designing our audit, we determined materiality and assessed 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.
We gained an understanding of the legal and regulatory framework applicable to the Group and the industries in which it operates,
and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. We designed
audit procedures at Group and significant component level to respond to the risk, recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by,
for example, forgery or intentional misrepresentations, or through collusion. We focused on laws and regulations that could give rise to a
material misstatement in the Group and parent company financial statements, including, but not limited to, IFRS, the Companies Act 2006
and the Listing Rules. Our tests included, but were not limited to, review of the financial statement disclosures to underlying supporting
documentation, review of correspondence with legal advisors and enquiries of management. There are inherent limitations in the audit
procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions
reflected in the financial statements, the less likely we would become aware of it.
We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk of
management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the Directors that
represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon,
were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Provisions for uncertain tax positions (Group)
As noted in the significant accounting judgements and estimates
section on page 101, and included within note 2.6, there are a
number of significant judgements involved in the determination
of taxation balances.
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. In total the provision for uncertain tax provisions was £5.8m
at 30 September 2018.
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 assessed the adequacy of the level of provision established in relation to a
number of uncertain taxation positions primarily in respect of risks in the US.
The judgements made by management took account of the level and nature
of the risks giving rise to the uncertain tax positions, together with advice from
their external advisors and management’s assessment of the likely outcome.
We evaluated the competence of management’s experts. We considered the
judgements made by management to be reasonable based on our understanding
of the relevant tax regulations.
We also obtained the filing positions for each jurisdiction which we read,
considered in light of our understanding of the business and reconciled to
the underlying taxation calculations used to prepare the taxation balances
in the financial statements, noting no material differences.
We also obtained and reviewed correspondence with the relevant tax
authorities, noting no circumstances not factored into management’s
assessment of the likely outcome.
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Independent Auditors’ Report continued
to the Members of Avon Rubber p.l.c.
Key audit matter
How our audit addressed the key audit matter
Valuation of the Group’s net pension deficit (Group)
We focused on this area because of the magnitude of the
defined benefit pension deficit of £30.5m and the material
judgements involved in determining the actuarial assumptions
which are set out in note 6.2.
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 125).
The Directors employed an independent actuary to assist them
with the valuation of the deficit.
Risk of fraud in revenue recognition (Group)
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
Avon Protection 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 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.
We reviewed the disclosure of the High Court judgement over the equalisation of
pension benefits for men and women in defined benefit pension schemes as a post
balance sheet event and agreed the potential liability to correspondence from the
directors’ independent actuary.
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.
Intangible assets (development expenditure) impairment assessment (Group)
We focused on this area because of the magnitude of
capitalised development expenditure of £18.7m 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 significant accounting
judgments and estimates on page 101 and the amounts
capitalised are included in note 3.1.
In particular we focused on the capitalised development costs
relating to the PAPR, Deltair, Magnum, MCM100 and General
Service Respirator Avon Protection 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 it was reasonable that no
impairment was required for PAPR, Deltair, Magnum, MCM100, General Service
Respirator or other major development projects.
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 structure of the Group and the Parent Company, the accounting processes and controls, and the industry in
which they operate.
The Group comprises two divisions, being Avon Protection and milkrite|InterPuls 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 90% of Group revenues and in
excess of 85% 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 in aggregate
on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent Company financial statements
Overall materiality
£1.1m (2017: £0.9m).
How we determined it
5% of profit before tax.
£1.0m (2017: £0.7m).
1% of total assets.
Rationale for benchmark applied
Based on the benchmarks used in the Annual
Report, profit before tax is the primary measure
used by the shareholders in assessing the
performance of the Group, and is a generally
accepted auditing benchmark.
We believe that total assets is the most suitable
measure as the parent entity is not a trading
company, and is a generally accepted auditing
benchmark. Overall materiality applied is limited to
£1m, which is lower than 1% of total assets, due to
being restricted for Group reporting for the
purposes of the audit of the consolidated financial
statements of the Group.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range
of materiality allocated across components was between £0.7m and £1.0m. Certain components were audited to a local statutory audit
materiality that was also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.06m (Group audit)
(2017: £0.05m) and £0.06m (Parent company audit) (2017: £0.04m) as well as misstatements below those amounts that, in our view, warranted
reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw attention to in
respect of the Directors’ statement in the financial statements about whether the
Directors considered it appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the Directors’ identification of any material
uncertainties to the Group’s and the Parent Company’s ability to continue as a going
concern over a period of at least twelve months from the date of approval of the
financial statements.
We have nothing material to add or to draw attention
to. However, because not all future events or
conditions can be predicted, this statement is not a
guarantee as to the Group’s and Parent Company’s
ability to continue as a going concern.
We are required to report if the Directors’ statement relating to going concern in
accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge
obtained in the audit.
We have nothing to report.
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Independent Auditors’ Report continued
to the Members of Avon Rubber p.l.c.
REPORTING ON OTHER INFORMATION
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report
thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any
form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to
be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to
conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based
on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that
fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act
2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK)
and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below
(required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the year
ended 30 September 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit, we did
not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
The Directors’ assessment of the prospects of the Group and of the principal risks
that would threaten the solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:
• The Directors’ confirmation on page 50 of the Annual Report 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.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The Directors’ explanation on page 52 of the Annual Report 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 to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the principal
risks facing the Group and the 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 UK Corporate Governance Code (the ‘Code’); and considering whether the statements are consistent
with the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
• The statement given by the Directors, on page 83, that they consider the Annual Report taken as a whole to be fair, balanced and understandable,
and provides the information necessary for the members to assess the Group’s and Parent Company’s position and performance, business model
and strategy is materially inconsistent with our knowledge of the Group and Parent Company obtained in the course of performing our audit.
• The section of the Annual Report on page 54 describing the work of the Audit Committee does not appropriately address matters communicated
by us to the Audit Committee.
• The Directors’ statement relating to the Parent Company’s compliance with the Code does not properly disclose a departure from a relevant
provision of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
2006. (CA06)
RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT
Responsibilities of the Directors for the financial statements
As explained more fully in the Statement of Directors’ Responsibilities set out on page 83, the Directors are responsible for the preparation of
the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors
are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue
as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
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.
OTHER REQUIRED REPORTING
COMPANIES ACT 2006 EXCEPTION REPORTING
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; or
• 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
• certain disclosures of Directors’ remuneration specified by law are not made; or
•
the parent company 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.
APPOINTMENT
Following the recommendation of the Audit Committee, we were appointed by the members prior to 1955 which is as far back as records
have been located, and therefore the length of uninterrupted engagement is at least 63 years.
Colin Bates (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Bristol
14 November 2018
90
91
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Consolidated Statement of Comprehensive Income
For the year ended 30 September 2018
Consolidated Balance Sheet
At 30 September 2018
2018
2017
Note
Adjusted
£m
Adjustments*
£m
Adjusted
(restated)**
£m
Total
£m
Adjustments*
£m
Total
(restated)**
£m
2.1
165.5
Continuing operations
Revenue
Cost of sales
Gross profit
Selling and distribution costs
General and administrative expenses
Operating profit
2.1
Operating profit is analysed as:
Before depreciation and amortisation
Depreciation and amortisation
3.1, 3.2
Operating profit
Interest income
Finance costs
Other finance expense
Profit before taxation
Taxation
5.2
5.2
5.2
2.5
2.6
Profit for the year from continuing operations
Discontinued operations – gain/(loss) for the year
2.2
Profit for the year
Other comprehensive income/(expense)
Items that are not subsequently reclassified
to the income statement
Actuarial gain/(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
Other comprehensive income/(expense)
for the year, net of taxation
Total comprehensive income for the year
Earnings per share
Basic
Diluted
6.2
2.6
5.4
2.3
Earnings per share from continuing operations
2.3
Basic
Diluted
(99.9)
65.6
(20.3)
(18.0)
27.3
35.3
(8.0)
27.3
0.2
(0.2)
(0.1)
27.2
(3.7)
23.5
–
23.5
–
–
1.3
(0.6)
(0.3)
0.4
23.9
77.1p
76.6p
77.1p
76.6p
–
–
–
–
(4.5)
(4.5)
(1.4)
(3.1)
(4.5)
–
–
(1.1)
(5.6)
1.9
(3.7)
1.6
(2.1)
13.7
(2.3)
–
–
–
11.4
9.3
165.5
(99.9)
65.6
(20.3)
(22.5)
22.8
33.9
(11.1)
22.8
0.2
(0.2)
(1.2)
21.6
(1.8)
19.8
1.6
21.4
13.7
(2.3)
1.3
(0.6)
(0.3)
11.8
33.2
(7.0p)
(7.0p)
70.1p
69.6p
(12.2p)
(12.2p)
64.9p
64.4p
159.2
(97.6)
61.6
(19.9)
(15.6)
26.1
35.7
(9.6)
26.1
0.1
(0.3)
–
25.9
(0.4)
25.5
–
25.5
–
–
(2.3)
1.1
0.2
(1.0)
24.5
83.8p
83.3p
83.8p
83.3p
–
–
–
–
(6.0)
(6.0)
(0.1)
(5.9)
(6.0)
–
–
(1.0)
(7.0)
3.3
(3.7)
(0.3)
(4.0)
(3.8)
0.6
–
–
–
(3.2)
(7.2)
(13.2p)
(13.1p)
(12.2p)
(12.1p)
159.2
(97.6)
61.6
(19.9)
(21.6)
20.1
35.6
(15.5)
20.1
0.1
(0.3)
(1.0)
18.9
2.9
21.8
(0.3)
21.5
(3.8)
0.6
(2.3)
1.1
0.2
(4.2)
17.3
70.6p
70.2p
71.6p
71.2p
* See note 2.2 for further details of adjustments.
** Restated to reflect the continuing operations of the Group following the sale of Avon Engineered Fabrications, Inc.
92
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
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
Retained earnings/(deficit)
Total equity
Note
2018
£m
2017
£m
3.1
3.2
2.6
4.1
4.2
5.4
4.3
5.1
4.4
5.4
7.1
2.6
6.2
7.1
5.5
5.5
41.5
22.6
8.2
72.3
23.0
24.2
–
46.6
93.8
0.1
34.5
0.4
0.3
6.1
41.4
52.4
6.9
30.5
2.5
39.9
84.8
31.0
34.7
0.5
7.5
11.1
84.8
40.4
26.3
8.2
74.9
21.8
23.8
0.2
26.5
72.3
1.8
30.1
–
0.3
6.8
39.0
33.3
6.8
44.1
1.7
52.6
55.6
31.0
34.7
0.5
6.5
(17.1)
55.6
These financial statements on pages 92 to 128 were approved by the Board of Directors on 14 November 2018 and signed on its behalf by:
Paul McDonald
Chief Executive Officer
Nick Keveth
Chief Financial Officer
93
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Consolidated Cash Flow Statement
For the year ended 30 September 2018
Cash flows from operating activities
Cash flows from continuing operating activities
before the impact of exceptional items
Cash impact of exceptional items
Cash flows from continuing operations
Cash flows from/(used in) discontinued operations
Cash flows from operations
Interest income received
Finance costs paid
Retirement benefit deficit recovery contributions
Tax paid
Net cash flows from operating activities
Cash flows used in investing activities
Proceeds from disposal of discontinued operations
Purchase of property, plant and equipment
Capitalised development costs and purchased software
Acquisition
Net cash used in investing activities
Cash flows used in financing activities
Net movements in loans
Dividends paid to shareholders
Purchase of own shares
Net cash used in financing activities
Net increase in cash, cash equivalents and bank overdrafts
Cash, cash equivalents, and bank overdrafts at beginning of the year
Effects of exchange rate changes
Cash, cash equivalents, and bank overdrafts at end of the year
Note
2018
£m
2017
(restated)
£m
4.3
4.3
7.2
7.2
5.3
5.6
5.5
5.3
38.2
(0.1)
38.1
(0.2)
37.9
0.2
(0.2)
(1.5)
(5.0)
31.4
6.5
(3.3)
(5.6)
(1.4)
(3.8)
(1.7)
(4.1)
(1.1)
(6.9)
20.7
26.5
(0.6)
46.6
35.0
0.3
35.3
0.3
35.6
0.1
(0.2)
(1.0)
(2.0)
32.5
–
(2.6)
(2.9)
–
(5.5)
(0.8)
(3.2)
(1.0)
(5.0)
22.0
4.5
–
26.5
Consolidated Statement of Changes in Equity
For the year ended 30 September 2018
At 30 September 2016
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
Own shares acquired
Fair value of share based payments
Deferred tax relating to employee share schemes
At 30 September 2017
Profit for the year
Net exchange differences offset in reserves
Tax relating to exchange differences offset in reserves
Cash flow hedges
Actuarial gain recognised on retirement benefit scheme
Deferred tax relating to retirement benefit scheme
Total comprehensive income for the year
Dividends paid
Own shares acquired
Fair value of share based payments
Deferred tax relating to employee share schemes
Note
Share
capital
£m
31.0
Share
premium
£m
34.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
31.0
34.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.6
5.4
6.2
2.6
5.6
5.5
6.3
2.6
2.6
5.4
6.2
2.6
5.6
5.5
6.3
2.6
Other
reserves
£m
9.1
–
(2.3)
0.2
–
–
–
(2.1)
–
–
–
–
7.0
–
1.3
(0.3)
–
–
–
1.0
–
–
–
–
At 30 September 2018
31.0
34.7
8.0
Retained
earnings/
deficit
£m
(32.8)
21.5
–
–
1.1
(3.8)
0.6
19.4
(3.2)
(1.0)
0.9
(0.4)
(17.1)
21.4
–
–
(0.6)
13.7
(2.3)
32.2
(4.1)
(1.1)
1.2
–
11.1
Total
equity
£m
42.0
21.5
(2.3)
0.2
1.1
(3.8)
0.6
17.3
(3.2)
(1.0)
0.9
(0.4)
55.6
21.4
1.3
(0.3)
(0.6)
13.7
(2.3)
33.2
(4.1)
(1.1)
1.2
–
84.8
Other reserves consist of the capital redemption reserve of £0.5m (2017: £0.5m) and the translation reserve of £7.5m (2017: £6.5m).
All movements in other reserves relate to the translation reserve.
94
95
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Accounting Policies and Critical Accounting Judgements
For the year ended 30 September 2018
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.
IFRS 16 Leases – applicable from year ending
30 September 2020
The International Accounting Standards Board issued the new lease
standard, IFRS 16, to replace the existing lease standard (IAS 17).
BASIS OF PREPARATION
Avon Rubber p.l.c. is a public limited company incorporated and
domiciled in England and Wales and its ordinary shares are traded
on the London Stock Exchange.
The underlying principle of IFRS 16 is that all leased assets should be
reported on the balance sheet of the lessee, although exemptions
are available for leases of less than 12 months or where the
underlying asset has a low value when new.
These financial statements have been prepared in accordance with
EU Endorsed International Financial Reporting Standards (IFRSs) and
IFRS Interpretations Committee 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 derivative instruments which are
held at fair value through profit or loss.
RECENT ACCOUNTING DEVELOPMENTS
At the balance sheet date there are a number of new standards, and
amendments to existing standards in issue, but not yet effective.
The Group has not early adopted the new or amended standards
in preparing these consolidated financial statements.
IFRS 15 Revenue from Contracts with Customers –
applicable from year ending 30 September 2019
IFRS 15 provides a comprehensive framework for recognising
revenue from contracts with customers, replacing IAS 18 Revenue.
The new standard is more detailed and prescriptive than existing
guidance, in particular it requires that different performance
obligations in a contract should be unbundled and revenue is
recognised when control of the asset is passed to the customer.
It is not expected that the transition to the new revenue standard
will have an impact on revenue recognition.
IFRS 9 Financial Instruments – applicable from year
ending 30 September 2019
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and
Measurement. It sets out the rules for valuing financial instruments
and method for adopting hedge accounting.
It is not expected that the transition will have any impact on
the carrying value of the following assets and liabilities within
the consolidated financial statements of the Avon Group:
• Trade receivables
• Forward exchange contracts
• Trade payables
• Loans
The Group believes that its current hedge relationships will qualify
as continuing hedges upon the adoption of IFRS 9.
Under IFRS 16, a lessee will be required to recognise an asset for
the right to use the leased item and a liability for the present
value of its future lease payments for all leases currently treated
as operating leases.
The change in treatment will impact the balance sheet, the income
statement and related performance measures.
An initial assessment of the impact of IFRS 16 has been carried out
and a number of leases currently in operation within the Group will
fall under the scope of IFRS 16.
The Group continues to assess the full impact of IFRS 16, which will
depend on the transition approach adopted and the lease contracts
in effect at the time of adoption. It is therefore not yet practicable
to provide a reliable estimate of the financial impact on the Group’s
consolidated results.
The Directors plan to adopt these standards in line with their
effective dates.
BASIS OF CONSOLIDATION
The consolidated financial statements incorporate the financial
results and position of the Group and its subsidiaries.
Subsidiaries are those 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 until 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.
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 geographic
segments reported for the years ended 30 September 2018 and
30 September 2017 are North America, Europe and Other.
The Group Executive team assesses the performance of the
operating segments based on the measures of revenue, EBIT
and EBITDA.
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.
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:
• assets and liabilities are translated at the closing rate at the
balance sheet date; and
•
income and expenses are translated at the rate of exchange
at the date of the transaction
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 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 translation 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 how management monitors
the business.
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. The
segments reported for the years ended 30 September 2018 and
30 September 2017 are Avon Protection and milkrite | InterPuls.
96
97
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Accounting Policies and Critical Accounting Judgements continued
For the year ended 30 September 2018
Share based compensation
The Group operates a number of equity-settled, share based
compensation plans, under which the entity receives service from
employees as consideration for equity instruments (options) of the
Group. The fair value of the employee service received in exchange
for the grant of the options is recognised as an expense. The total
amount to be expensed is determined by reference to the fair value
of the options granted:
•
including any market based performance conditions;
• excluding the impact of any service and non-market
performance vesting conditions (for example, profitability, sales
growth targets and remaining an employee of the entity over a
specified time period); and
•
including the impact of any non-vesting conditions (for example,
the requirement for employees to save).
Non-market vesting conditions are included in assumptions about
the number of options that are expected to vest. The total expense
is recognised over the vesting period, which is the period over
which all of the specified vesting conditions are to be satisfied. At
the end of each reporting period, the entity revises its estimates
of the number of options that are expected to vest based on the
non-market vesting conditions. It recognises the impact of the
revision to original estimates, if any, in the consolidated statement of
comprehensive income, with a corresponding adjustment to equity.
The proceeds received net of any directly attributable transaction
costs are credited to share capital (nominal value) and share
premium when the options are exercised.
INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the cost of an acquisition over the
fair value of the Group’s share of the identifiable net assets of the
acquired subsidiary at the date of acquisition. Identifiable net assets
include intangible assets other than goodwill. Any such intangible
assets are amortised over their expected future lives unless they
are regarded as having an indefinite life, in which case they are not
amortised, but subjected to annual impairment testing in a similar
manner to goodwill.
Since the transition to IFRS, goodwill arising from acquisitions of
subsidiaries after 3 October 1998 is included in intangible assets. It
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 five 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 for 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:
• Brands and trademarks – four–10 years
• Customer relationships – seven–10 years
• Order backlog – three months to 1 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 down the depreciable amount of relevant assets
by equal annual instalments over their estimated useful lives.
In general, the lives used are:
• Freehold – 40 years
• Short leasehold property – over the period of the lease
• Plant and machinery
– Computer hardware and motor vehicles – three years
– Presses – 15 years
– Other plant and machinery – five–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.
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.
INVENTORIES
Inventories are stated at the lower of cost and net realisable value.
Cost is determined using the first-in, first-out (FIFO) method. The
cost of finished goods and work in progress comprises raw materials,
direct labour, other direct costs and related production overheads
(based on normal operating capacity). It excludes borrowing costs.
Net realisable value is the estimated selling price in the ordinary
course of business, less applicable incremental selling expenses.
TRADE AND OTHER RECEIVABLES
Trade and other receivables are initially recognised at fair value
and subsequently held at amortised cost less any provisions
for impairment.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash at bank and in hand and
highly liquid interest-bearing securities with maturities of three
months or less. 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.
98
99
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Accounting Policies and Critical Accounting Judgements continued
For the year ended 30 September 2018
PROVISIONS
Provisions are recognised when:
•
•
the Group has a legal or constructive obligation as a result of a
past event
it is probable that an outflow of resources will be required to
settle the obligation and the amount has been reliably estimated
Where there are a number of similar obligations, for example
where a warranty has been given, the likelihood that an outflow
will be required in settlement is determined by considering the
class of obligations as a whole. A provision is recognised even if the
likelihood of an outflow with respect to any one item included in the
same class of obligation may be small.
Provisions are measured at the present value of the expenditures
expected to be required to settle the obligation.
Where a leasehold property, or part thereof, is vacant or sub-let
under terms such that the rental income is insufficient to meet all
outgoings, provision is made for the anticipated future shortfall up
to termination of the lease, or the termination payment, if smaller.
BORROWINGS
Borrowings are recognised initially at fair value, net of transaction
costs incurred and subsequently stated at amortised cost. Borrowing
costs are expensed using the effective interest method.
TAXATION
Income tax on the profit or loss for the year comprises current and
deferred tax.
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 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
Valuation of acquired intangible assets
Acquisitions may result in the recognition of customer
relationships, brands and trademarks, patents and order backlogs.
Valuation estimates are used to determine the fair values of these
intangible assets. This includes estimation of future cash flows,
weighted average cost of capital and useful lives.
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 judgements around the application of the tax
regulations and management’s estimate of the future amounts that
will be settled.
At the start of the year the Internal Revenue Service (‘IRS’) started
a scheduled tax audit in the United States where the majority of
the provisions for uncertain tax positions are located. This audit
is ongoing at the balance sheet date, but we expect the levels of
judgment in relation to the uncertain tax provisions to reduce in the
medium term as the IRS conclude their review work.
At 30 September 2018 there is a provision of £5.8m in respect of
uncertain tax positions. Due to the uncertainties noted above, there
is a risk that the Group’s judgements 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 £0.7m and a
reduction in liabilities of up to £5.8m.
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.
SIGNIFICANT ACCOUNTING JUDGEMENTS
AND ESTIMATES
The preparation of financial statements requires the use of estimates
and assumptions that affect the reported amounts of assets and
liabilities, income and expenses. 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.
Estimating the defined benefits pension scheme obligations
Measurement of defined benefit pension obligations requires
estimation of future changes in inflation and mortality rates, and
the selection of a suitable discount rate (see note 6.2).
Valuation of intangible assets
The Group capitalises the development of new products and
processes as intangible assets or property, plant and equipment.
Initial capitalisation and any subsequent impairment is based on
the Group’s judgement that technological and economic feasibility
is demonstrated. In determining the amounts to be capitalised
the Group makes assumptions regarding the expected future cash
generation of the project, discount rates to be applied and the
expected period of benefits.
100
101
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Notes to the Group Financial Statements
For the year ended 30 September 2018
SECTION 2 – RESULTS FOR THE YEAR
This section presents the results for the year using both IFRS and ‘adjusted’ measures and includes a reconciliation between the primary
statements and the ‘adjusted’ performance measures. The ‘adjusted’ measures reflect how the Directors monitor the business and are
intended to aid the comparison of business trends and performance.
Within this section you will find disclosures explaining the Group’s results for the year, segmental information, earnings per share and
taxation, as well as details of the ‘adjustments’ and discontinued operations.
Performance measures*
Earnings basic
Basic earnings per share (pence)
Diluted earnings per share (pence)
Operating profit
EBITDA
Adjusted performance measures*
Adjusted earnings
Adjusted earnings per share (pence)
Adjusted operating profit
Adjusted EBITDA
Note
2.3
2.3
2.1
Note
2.2
2.3
2.1
2018
£m
19.8
64.9
64.4
22.8
33.9
2018
£m
23.5
77.1
27.3
35.3
2017
(restated)
£m
21.8
71.6
71.2
20.1
35.6
2017
£m
25.5
83.8
26.1
35.7
*
All performance measures are stated based on continuing operations.
2.1 Operating segments
The Group Executive team is responsible for allocating resources and assessing performance of the operating segments. Operating segments
are therefore reported in a manner consistent with the internal reporting provided to the Group Executive team.
The Group has two clearly defined business segments, Avon Protection and milkrite | InterPuls, and operates primarily out of Europe and
the US.
Business segments
Year ended 30 September 2018
Revenue
Earnings before interest, taxation, depreciation and amortisation
Depreciation of property, plant and equipment
Amortisation of development costs and software
Operating profit before adjustments
Amortisation of acquired intangibles
Restructuring costs
Defined benefit pension scheme costs
Operating profit
Interest income
Finance costs
Other finance expense
Profit before taxation
Taxation
Profit for the year from continuing operations
Discontinued operations – profit for the year
Profit for the year
Segment assets
Segment liabilities
Other segment items
Capital expenditure
– intangible assets
– property, plant and equipment
Avon
Protection
£m
milkrite |
InterPuls
£m
Unallocated
£m
115.7
26.6
(2.5)
(2.6)
21.5
(1.1)
(0.9)
–
19.5
57.4
18.0
5.1
1.7
49.8
10.9
(2.4)
(0.5)
8.0
(2.0)
–
–
6.0
49.5
13.8
0.5
1.8
–
(2.2)
–
–
(2.2)
–
–
(0.5)
(2.7)
59.2
49.5
–
–
Total
£m
165.5
35.3
(4.9)
(3.1)
27.3
(3.1)
(0.9)
(0.5)
22.8
0.2
(0.2)
(1.2)
21.6
(1.8)
19.8
1.6
21.4
166.1
81.3
5.6
3.5
Avon Protection includes £52.7m (2017: £50.5m) of revenues from the US DOD, the only customer which individually contributes more than
10% to Group revenues.
102
103
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 2 – RESULTS FOR THE YEAR CONTINUED
2.2 Adjustments and Discontinued Operations
Year ended 30 September 2017
Revenue
Earnings before interest, taxation, depreciation and amortisation
Depreciation of property, plant and equipment
Amortisation of development costs and software
Operating profit before adjustments
Amortisation of acquired intangibles
Exceptional items
Defined benefit pension scheme costs
Operating profit
Interest income
Finance costs
Other finance expense
Profit before taxation
Taxation
Profit for the year from continuing operations
Discontinued operations – loss for the year
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 2018
Revenue
Non-current assets
Year ended 30 September 2017
Revenue
Non-current assets
Avon
Protection
(restated)
£m
milkrite |
InterPuls
£m
Unallocated
£m
109.8
26.8
(3.4)
(3.3)
20.1
(1.0)
(2.9)
–
16.2
62.3
15.6
2.2
1.1
Europe
£m
41.2
45.6
Europe
£m
36.8
46.7
49.4
10.9
(2.3)
(0.6)
8.0
(2.0)
0.3
–
6.3
50.2
15.3
0.7
1.5
US
£m
120.4
26.4
US
£m
119.0
27.8
–
(2.0)
–
–
(2.0)
–
–
(0.4)
(2.4)
34.7
60.7
–
–
RoW
£m
3.9
0.3
RoW
£m
3.4
0.4
Total
(restated)
£m
159.2
35.7
(5.7)
(3.9)
26.1
(3.0)
(2.6)
(0.4)
20.1
0.1
(0.3)
(1.0)
18.9
2.9
21.8
(0.3)
21.5
147.2
91.6
2.9
2.6
Total
£m
165.5
72.3
Total
£m
159.2
74.9
This document contains certain financial measures that are not defined or recognised under IFRS including adjusted operating profit
and adjusted earnings per share. The Directors believe that adjusted measures provide a more useful comparison of business trends and
performance. These adjusted measures exclude the effect of exceptional items, defined benefit scheme pension costs, the amortisation of
acquired intangible assets and discontinued operations. The Group uses these measures for planning, budgeting and reporting purposes and
for its internal assessment of the operational performance of individual businesses within the Group. Given the term adjusted is not defined
under IFRS, the adjusted measures may not be comparable with similarly titled measures used by other companies.
The following table shows the adjustments made to arrive at adjusted operating profit and adjusted profit for the year.
Operating profit
Amortisation of acquired intangibles (note 3.1)
Exceptional restructuring costs
Defined benefit pension administration costs
Exceptional impairment of capitalised development expenditure
Exceptional impairment of plant and machinery
Exceptional post-acquisition working capital adjustment
Adjusted operating profit
Profit for the year
Amortisation of acquired intangibles (note 3.1)
Exceptional restructuring costs
Defined benefit pension administration costs
Exceptional impairment of capitalised development expenditure
Exceptional impairment of plant and machinery
Exceptional post-acquisition working capital adjustment
Defined benefit pension net interest cost
Tax on exceptional items
(Profit) / loss from discontinued operations
Adjusted profit for the year
2018
£m
22.8
3.1
0.9
0.5
–
–
–
27.3
2018
£m
21.4
3.1
0.9
0.5
–
–
–
1.1
(1.9)
(1.6)
23.5
2017
(Restated)
£m
20.1
3.0
–
0.4
2.6
0.3
(0.3)
26.1
2017
(Restated)
£m
21.5
3.0
–
0.4
2.6
0.3
(0.3)
1.0
(3.3)
0.3
25.5
The restructuring costs in 2018 represent an exceptional charge in respect of the relocation of the West Palm Beach facility.
The impairment of capitalised development expenditure and plant and machinery in 2017 represents the write-off of costs of developing the
Emergency Escape Breathing Device (EEBD) product. Further development of this product was terminated as there were limited commercial
opportunities for this technology.
Defined benefit pension scheme costs relate to administrative expenses of the scheme which is closed to future accrual.
The impact on the cash flow statement of the exceptional items was £0.1m (2017: £0.3m).
104
105
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 2 – RESULTS FOR THE YEAR CONTINUED
Discontinued operations
In March 2018, the Group disposed of Avon Engineered Fabrications, Inc. its US based hovercraft skirt and bulk liquid storage tank business.
This non-core business was included in Avon Protection. The business has been classified as discontinued and prior periods have been
restated to reflect this. The results of discontinued operations are as follows:
Revenue
Total cost of sales, selling and distribution costs and general administrative expenses
Profit before taxation
Taxation
Profit/(loss) for the period
Gain on disposal (note 7.2)
Tax on gain on disposal
Profit/(loss) from discontinued operations
Basic earnings/(loss) per share
Diluted earnings/(loss) per share
Further details in relation to the discontinued operations can be found in note 7.2.
Cash flows from discontinued operations included in the cash flow statement are as follows:
Net cash flows (used in)/from operating activities
Net cash flows from investing activities
Net cash flows from discontinued operations
2.3 Earnings Per Share
2018
£m
4.9
(4.2)
0.7
(0.2)
0.5
1.4
(0.3)
1.6
5.2p
5.2p
2018
£m
(0.2)
6.5
6.3
2017
£m
4.0
(4.3)
(0.3)
–
(0.3)
–
–
(0.3)
(0.1)p
(0.1)p
2017
£m
0.3
–
0.3
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. Adjusted earnings per share removes the effect of the amortisation of acquired
intangible assets, exceptional items, acquisition costs and defined benefit pension scheme costs, reflecting the basis on which the business
is managed and measured on a day to day basis.
Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:
Weighted average number of shares
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)
2018
30,511
218
30,729
2017
30,434
186
30,620
Earnings
Basic
Basic – continuing operations
Adjusted
Adjusted – continuing operations
Earnings per share (pence)
Basic
Basic – continuing operations
Diluted
Diluted – continuing operations
Adjusted
Adjusted – continuing operations
Adjusted Diluted
Adjusted Diluted – continuing operations
2.4 Expenses by Nature
Changes in inventories of finished goods and work in progress
Raw materials and consumables used
Employee benefit expense (note 6.1)
Depreciation and amortisation charges (notes 3.1 and 3.2)
Transportation expenses
Operating lease payments
Travelling costs
Legal and professional fees
Impairment of intangibles
Other expenses
Total cost of sales, selling and distribution costs and general and administrative expenses
Other expenses include £2.6m of capitalised staff costs and overheads in relation to development expenditure.
2018
£m
21.4
19.8
23.5
23.5
2018
70.1
64.9
69.6
64.4
77.1
77.1
76.6
76.6
2018
£m
(0.1)
64.5
44.6
11.1
2.5
1.7
3.4
2.1
–
12.9
142.7
2017
(restated)
£m
21.5
21.8
25.5
25.5
2017
(restated)
70.6
71.6
70.2
71.2
83.8
83.8
83.3
83.3
2017
(restated)
£m
1.3
59.7
42.2
12.6
2.3
2.3
3.0
1.5
2.9
11.3
139.1
106
107
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 2 – RESULTS FOR THE YEAR CONTINUED
2.5 Profit Before Taxation
Profit before taxation is shown after charging/(crediting):
(Gain)/Loss on foreign exchange
Loss on disposal of property, plant and equipment
Depreciation of property, plant and equipment
Impairment of plant and machinery
Repairs and maintenance of property, plant and equipment
Amortisation of development expenditure and software
Impairment of development expenditure
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
2.6 Taxation
UK current tax
UK adjustment in respect of previous periods
Overseas current tax
Overseas adjustment in respect of previous periods
Total current tax charge
Deferred tax – current year
Deferred tax – adjustment in respect of previous periods
Total deferred tax credit
Total tax charge/(credit)
2018
£m
2017
(restated)
£m
(0.5)
0.1
4.9
–
0.9
3.1
–
3.1
0.2
(0.1)
0.2
1.7
0.1
0.1
0.2
2018
£m
1.1
–
4.1
(1.2)
4.0
(1.5)
(0.7)
(2.2)
1.8
1.1
–
5.7
0.3
0.8
3.9
2.6
3.0
1.2
(0.7)
0.1
2.3
–
0.2
0.2
2017
£m
2.2
(0.3)
1.5
(2.6)
0.8
0.6
(4.3)
(3.7)
(2.9)
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 19.0% (2017: 19.5%)
Permanent differences
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 £0.3m (2017: £0.2m credit).
The deferred tax charged directly to equity during the year was £2.3m (2017: £0.2m credit).
108
2018
£m
21.6
4.1
(1.4)
1.0
(1.9)
1.8
2017
(restated)
£m
18.9
3.7
(0.1)
0.7
(7.2)
(2.9)
Deferred tax liabilities
At 1 October 2016
Charged against profit for the year
Exchange differences
At 30 September 2017
Charged/(credited) to profit for the year
At 30 September 2018
Accelerated
capital allowances
£m
Other temporary
differences
£m
2.5
(0.7)
0.1
1.9
(0.6)
1.3
7.5
(2.8)
0.2
4.9
0.7
5.6
Total
£m
10.0
(3.5)
0.3
6.8
0.1
6.9
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
Retirement
benefit obligation
£m
Share options
£m
Accelerated
capital allowances
£m
Other temporary
differences
£m
At 30 September 2016
Credited/(charged) to profit for the year
Credited/(charged) to equity on recognition
At 30 September 2017
Credited/(charged) against profit for the year
Charged to equity
At 30 September 2018
6.8
0.1
0.6
7.5
–
(2.3)
5.2
0.6
0.2
(0.4)
0.4
0.2
–
0.6
0.4
(0.1)
–
0.3
–
–
0.3
–
–
–
–
2.1
–
2.1
Total
£m
7.8
0.2
0.2
8.2
2.3
(2.3)
8.2
The standard rate of corporation tax in the UK is 19%.
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 Group has no unrecognised deferred tax assets (2017: £0.7m).
109
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 3 – NON CURRENT ASSETS
The Group holds both Intangible and Tangible assets for long term within the business. The following notes provide information regarding
the carrying value of these assets, their expected useful economic lives and movements in these balances during the year.
3.1 Intangible Assets
At 1 October 2016
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 30 September 2017
Opening net book amount
Exchange differences
Additions
Impairment
Amortisation
Closing net book amount
At 30 September 2017
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 30 September 2018
Opening net book amount
Exchange differences
Additions
Acquisitions (note 7.2)
Discontinued
Amortisation
Closing net book amount
At 30 September 2018
Cost
Accumulated amortisation and impairment
Net book amount
Goodwill
£m
Acquired
intangibles
£m
Development
expenditure
£m
Computer
software
£m
3.2
–
3.2
3.2
–
–
–
–
3.2
3.2
–
3.2
3.2
0.1
–
–
–
–
3.3
3.3
–
3.3
27.1
(4.3)
22.8
22.8
0.4
–
–
(3.0)
20.2
27.5
(7.3)
20.2
20.2
0.1
–
1.2
–
(3.1)
18.4
29.1
(10.7)
18.4
34.1
(14.9)
19.2
19.2
(0.4)
2.7
(2.6)
(3.5)
15.4
30.9
(15.5)
15.4
15.4
0.3
5.5
–
–
(2.5)
18.7
34.5
(15.8)
18.7
4.7
(2.6)
2.1
2.1
–
0.2
–
(0.7)
1.6
4.8
(3.2)
1.6
1.6
0.1
0.1
–
(0.1)
(0.6)
1.1
4.9
(3.8)
1.1
Total
£m
69.1
(21.8)
47.3
47.3
–
2.9
(2.6)
(7.2)*
40.4
66.4
(26.0)
40.4
40.4
0.6
5.6
1.2
(0.1)
(6.2)
41.5
71.8
(30.3)
41.5
*
Includes £0.3m of amortisation presented within discontinued operations
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 10 years.
Goodwill acquired in a business combination is allocated to the groups of cash generating units (CGUs) that are expected to benefit
from that business combination. Goodwill of £1.8m (2017: £1.8m) is allocated to Avon Protection and £1.5m (2017: £1.4m) is allocated to
milkrite | InterPuls.
The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. Goodwill
values are compared against the value in use of the relevant CGU groups. The value in use calculations were based on projected cash flows
for 2019 to 2021 derived from the latest three year plan approved by the Board. Cash flows for 2022 onwards for both divisions were projected
to grow by 2.0% per annum. Cash flows were discounted to give a present value using a pre-tax discount rate of 9.3%.
Sensitivity analysis suggests that a decrease in forecast revenue of more than 70% in relation to Avon Protection and 50% in relation to
milkrite | InterPuls could be sustained before an impairment was required.
Management considers that there are no reasonably likely changes to the above key assumptions which would lead to an impairment
being recognised.
3.2 Property, Plant and Equipment
At 1 October 2016
Cost
Accumulated depreciation and impairment
Net book amount
Year ended 30 September 2017
Opening net book amount
Exchange differences
Additions
Impairment
Depreciation charge
Closing net book amount
At 30 September 2017
Cost
Accumulated depreciation and impairment
Net book amount
Year ended 30 September 2018
Opening net book amount
Exchange differences
Additions
Acquisitions (note 7.2)
Discontinued
Disposals
Depreciation charge
Closing net book amount
At 30 September 2018
Cost
Accumulated depreciation and impairment
Net book amount
*
Includes £0.3m of depreciation presented within discontinued operations
Freeholds
£m
Plant and
machinery
£m
14.3
(2.6)
11.7
11.7
0.1
0.2
–
(0.5)
11.5
14.6
(3.1)
11.5
11.5
(0.1)
0.1
–
(2.1)
–
–
9.4
12.4
(3.0)
9.4
65.8
(47.4)
18.4
18.4
(0.2)
2.4
(0.3)
(5.5)
14.8
66.2
(51.4)
14.8
14.8
(0.1)
3.4
0.4
(0.3)
(0.1)
(4.9)
13.2
66.7
(53.5)
13.2
Total
£m
80.1
(50.0)
30.1
30.1
(0.1)
2.6
(0.3)
(6.0)*
26.3
80.8
(54.5)
26.3
26.3
(0.2)
3.5
0.4
(2.4)
(0.1)
(4.9)
22.6
79.1
(56.5)
22.6
110
111
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 4 – WORKING CAPITAL
The Group generates cash from its operating activities as follows:
This section presents disclosures around the Group’s working capital balances; inventories, trade receivables, payables and cash. You will also
find information regarding cash generated from operating activity. The Group has a strong cash position but careful management of working
capital remains a key focus of the business.
4.1 Inventories
Raw materials
Work in progress
Finished goods
2018
£m
15.3
0.4
7.3
23.0
Provisions for inventory write downs were £3.6m (2017: £3.7m).
The cost of inventories recognised as an expense and included in cost of sales amounted to £64.5m (2017: £59.7m (restated)).
4.2 Trade and Other Receivables
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
At 30 September
2018
£m
21.2
(0.5)
20.7
1.1
2.4
24.2
2018
£m
0.3
0.2
0.5
The creation and release of provisions for impaired receivables have been included in general and administrative expenses in the
consolidated statement of comprehensive income.
4.3 Cash and Cash Equivalents
Cash at bank and in hand
2018
£m
46.6
Cash at bank and in hand balances are denominated in a number of different currencies and earn interest based on national rates.
2017
£m
15.1
0.8
5.9
21.8
2017
£m
20.4
(0.3)
20.1
0.8
2.9
23.8
2017
£m
0.4
(0.1)
0.3
2017
£m
26.5
Continuing operations
Profit for the year
Adjustments for:
Taxation
Depreciation
Amortisation of intangible assets
Impairment of intangible assets
Defined benefit pension scheme cost
Interest income
Finance costs
Other finance expense
Loss on disposal of property, plant and equipment
Fair value of share based payments
Increase in inventories
Increase in receivables
Increase in payables and provisions
Cash flows from continuing operations
Analysed as:
Cash flows from continuing operations prior to the effect of exceptional operating items
Cash effect of exceptional operating items
Discontinued operations
Profit/(loss) for the year
Gain on disposal and net effect of operating activities
Cash (used in)/from discontinued operations
Cash flows from operations
4.4 Trade and Other Payables
Trade payables
Other taxation and social security
Other payables
Accruals
Other payables comprise sundry items which are not individually significant for disclosure.
2018
£m
19.8
1.8
4.9
6.2
–
0.5
(0.2)
0.2
1.2
0.1
1.2
(2.1)
(1.8)
6.3
38.1
38.2
(0.1)
1.6
(1.8)
(0.2)
37.9
2018
£m
13.2
0.3
1.2
19.8
34.5
2017
(restated)
£m
21.8
(2.9)
5.7
6.9
2.9
0.4
(0.1)
0.3
1.0
–
0.9
(1.7)
(4.7)
4.8
35.3
35.0
0.3
(0.3)
0.6
0.3
35.6
2017
£m
12.0
0.4
0.8
16.9
30.1
112
113
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 5 – FUNDING
The effective interest rates at the balance sheet dates were as follows:
The Group has maintained a strong balance sheet in order to fund its growth strategy and make further acquisitions. Additional funding is
available via undrawn committed facilities.
Forward exchange contracts are used to hedge material foreign currency risk arising on sales and purchases denominated in a currency
other than Sterling.
The following section provides disclosures about the Group’s funding position, including borrowings, hedging instruments, its exposure to
market risks and its capital management policies.
5.1 Borrowings
Current and total borrowings
Bank loans
The Group has the following undrawn committed facilities:
Expiring beyond one year
Total undrawn committed borrowing facilities
Bank loans and overdrafts utilised
Utilised in respect of guarantees
Total Group facilities
All facilities are at floating interest rates.
2018
£m
0.1
2018
£m
30.7
30.7
0.1
0.3
31.1
2017
£m
1.8
2017
£m
29.9
29.9
1.8
0.3
32.0
During the year the Group renewed its $40m revolving credit facility with Barclays Bank and Comerica Bank which expires on 28 June 2021
with an option to extend for a further two years. This facility is priced on the dollar LIBOR plus margin of 1–1.75% depending on leverage and
includes financial covenants which are measured on a quarterly basis. The Group was in compliance with its financial covenants during 2018
and 2017.
During the year InterPuls S.p.A. renewed its loan facility which now expires on 31 October 2019. This facility is priced on Euribor plus margin
of 1.15%
The Group has provided the lenders with a negative pledge in respect of certain shares in Group companies.
Bank loans
5.2 Net Finance Costs
Interest payable on bank loans and overdrafts
Interest income
Other finance expense
Net interest cost: UK defined benefit pension scheme (note 6.2)
Amortisation of finance fees
Sterling
%
–
2018
Dollar
%
–
Euro
%
0.8
Sterling
%
–
2017
Dollar
%
–
Euro
%
0.8
2017
£m
(0.3)
0.1
(0.2)
2017
£m
(1.0)
–
(1.0)
2018
£m
(0.2)
0.2
–
2018
£m
(1.1)
(0.1)
(1.2)
5.3 Analysis of Net Cash/Debt
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
Debt due in less than one year
Net cash
At 1 October
2017
£m
26.5
(1.8)
24.7
Cash flow
£m
20.7
1.7
22.4
Exchange
movements
£m
At 30 September
2018
£m
(0.6)
–
(0.6)
46.6
(0.1)
46.5
114
115
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 5 – FUNDING CONTINUED
5.4 Financial Instruments
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 finance 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 finance 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
2018
£m
20.7
2.4
46.6
–
69.7
2017
£m
20.1
2.9
26.5
0.2
49.7
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
2018
£m
38.2
26.3
3.0
2.2
69.7
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
2018
£m
18.1
2.3
0.2
0.3
0.3
21.2
Provision
2018
£m
–
–
–
(0.3)
(0.2)
(0.5)
Net
2018
£m
18.1
2.3
0.2
–
0.1
20.7
Gross
2017
£m
16.7
1.9
0.4
0.1
1.3
20.4
Provision
2017
£m
–
–
–
–
(0.3)
(0.3)
2017
£m
18.1
24.9
4.5
2.2
49.7
Net
2017
£m
16.7
1.9
0.4
0.1
1.0
20.1
The total past due receivables, net of provisions is £2.6m (2017: £3.4m).
The individually impaired receivables mainly relate to a number of independent customers. A portion of these receivables is expected to
be recovered.
116
117
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 5 – FUNDING CONTINUED
(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 cash or borrowing facilities to meet foreseeable operational expenses and at the year end had net cash of £46.5m
(2017: £24.7m) and undrawn facilities of £30.7m (2017: £29.9m).
The following shows the contractual maturities of financial liabilities, including interest payments, where applicable, and excluding the
impact of netting agreements and on an undiscounted basis:
Analysis of contractual cash flow maturities
30 September 2018
Bank loans and overdrafts
Finance lease liabilities
Trade and other payables
Forward exchange contracts used for hedging
– Outflow
– Inflow
Analysis of contractual cash flow maturities
30 September 2017
Bank loans and overdrafts
Finance lease liabilities
Trade and other payables
Forward exchange contracts used for hedging
– Outflow
– Inflow
(iii) Market risks
Carrying
amount
£m
Contractual
cash flows
£m
Less than
12 months
£m
0.1
–
34.2
0.4
–
34.7
0.1
–
34.2
11.9
–
46.2
0.1
–
34.2
11.9
–
46.2
Carrying
amount
£m
Contractual
cash flows
£m
Less than
12 months
£m
1.8
–
29.7
–
0.2
31.7
1.8
–
29.7
–
8.9
40.4
1.8
–
29.7
–
8.9
40.4
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
2018 was a £0.4m liability (2017: £0.2m asset).
All forward exchange contracts in place at 30 September 2018 mature within one year.
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 £0.8m (2017: £0.7m) impact on the Group’s current year profit before interest and tax, a £0.7m
(2017: £0.7m) impact on the Group’s profit after tax and a £1.5m (2017: £1.7m) 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 5 cents in the value of the euro against sterling would have had an £0.1m (2017: £0.1m) impact on the Group’s
current year profit before interest and tax, a £0.1m (2017: £0.1m) impact on the Group’s profit after tax and a £1.0m (2017: £1.0m) 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
2018
Closing rate
2018
Average rate
2017
Closing rate
2017
1.346
1.132
1.305
1.127
1.267
1.147
1.339
1.134
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 £46.5m (2017: £24.7m) a 1% increase in interest rates would have no
impact on interest costs (2017: nil).
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.
(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 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
2018
£m
(0.1)
46.6
46.5
400.2
n/a
2017
£m
(1.8)
26.5
24.7
290.8
n/a
118
119
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 5 – FUNDING CONTINUED
(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
Basis for determining fair value
Carrying amount
2018
£m
Fair value
2018
£m
Carrying amount
2017
£m
Fair value
2017
£m
20.7
2.4
46.6
(0.4)
(0.1)
(34.2)
35.0
20.7
2.4
46.6
(0.4)
(0.1)
(34.2)
35.0
20.1
2.9
26.5
0.2
(1.8)
(29.7)
18.2
20.1
2.9
26.5
0.2
(1.8)
(29.7)
18.2
Own shares held
Balance at 1 October
Acquired in the year
Disposed of on exercise of options
At 30 September
2018
No. of shares
m
2017
No. of shares
m
0.6
0.1
(0.2)
0.5
0.8
0.1
(0.3)
0.6
At 30 September 2018, 499,264 (2017: 565,803) 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 2018 was £6.4m
(2017: £5.3m). These shares are held at cost as treasury shares and deducted from shareholders’ equity.
During 2018 the trust acquired 100,000 (2017: 100,000) shares at a cost of £1.1m (2017: £1.0m).
154,641 (2017: 247,099) shares were used to satisfy awards following the vesting of shares relating to the 2010 Performance Share Plan.
3,031 (2017: 5,887) ordinary shares of £1 each were awarded in relation to the annual incentive plan.
The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments reflected in the
table above.
5.6 Dividends
Derivatives
The fair value of forward exchange contracts is determined by using valuation techniques using year-end spot rates, adjusted for the forward
points to the contract’s value date. No contract’s value date is greater than one year from the year end. These instruments are included in
level 2 in the fair value hierarchy as the valuation is based on inputs that are either directly or indirectly observable.
Secured loans
As the loans are floating rate borrowings, amortised cost is deemed to reflect fair value.
Trade and other receivables/payables
As the majority of receivables/payables have a remaining life of less than one year, the notional amount is deemed to reflect the fair value.
5.5 Equity
Share Capital
Called up allotted and fully
paid ordinary shares of £1 each
At the beginning of the year
At the end of the year
No. of
shares
2018
Ordinary
shares
2018
£m
Share
premium
2018
£m
No. of
shares
2017
Ordinary
shares
2017
£m
Share
premium
2017
£m
31,023,292
31,023,292
31.0
31.0
34.7
34.7
31,023,292
31,023,292
31.0
31.0
34.7
34.7
Details of outstanding share options and movements in share options during the year are given in the Remuneration Report.
Ordinary shareholders are entitled to receive dividends and to vote at meetings of the Company.
On 1 February 2018, the shareholders approved a final dividend of 8.21p per qualifying ordinary share in respect of the year ended
30 September 2017. This was paid on 16 March 2018 utilising £2.5m of shareholders’ funds.
The Board of Directors declared an interim dividend of 5.34p (2017: 4.11p) per qualifying ordinary share in respect of the year ended
30 September 2018. This was paid on 7 September 2018 utilising £1.6m (2017: £1.3m) of shareholders’ funds.
After the balance sheet date the Board of Directors proposed a final dividend of 10.68p per qualifying ordinary share in respect of the year
ended 30 September 2018, which will utilise an estimated £3.3m of shareholders’ funds. Subject to shareholder approval, the dividend will be
paid on 15 March 2019 to shareholders on the register at the close of business on 15 February 2019. In accordance with accounting standards,
this dividend has not been provided for and there are no corporation tax consequences.
120
121
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 6 – KEY MANAGEMENT & EMPLOYEE BENEFITS
Recruiting and retaining the right people is key to the success of the business. The remuneration policies in place are aimed at ensuring this
is possible and to celebrate and reward the contribution that the Group’s employees make to the performance of the Group.
The following pages include disclosures on wages and salaries and share option schemes which allow employees of the Group to take an
equity interest in the Group.
This section also includes full disclosures in relation to both the UK defined benefit scheme which was closed to future accrual of benefit in
2009, and the contributions made to current defined contribution schemes.
6.1 Employees
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 6.3)
2018
£m
36.5
3.6
1.0
2.3
1.2
44.6
2017
(restated)
£m
33.7
3.7
1.1
2.8
0.9
42.2
Detailed disclosures of Directors’ remuneration and share options, including disclosure of the highest paid director, are given on pages
71 to 79.
6.2 Pensions and Other Retirement Benefits
Retirement benefit assets and liabilities can be analysed as follows:
Net pension liability
Defined benefit pension scheme
2018
£m
30.5
2017
£m
44.1
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 14 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. Four of the Directors are appointed by the Company and two are elected by the members.
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 2016 when the market value of the plan’s assets was £298.6m. The fair value of those assets represented 90% 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 £1.5m (2017: £1.0m) in respect of scheme expenses and deficit recovery plan
payments. In accordance with the deficit recovery plan agreed following the 31 March 2016 actuarial valuation, the Group will make payments
in 2019 of £1.5m in respect of deficit recovery plan payments and scheme expenses.
The defined benefit plan exposes the Group to actuarial risks such as longevity risk, inflation risk and investment risk.
An updated actuarial valuation for IAS 19 (revised) purposes was carried out by an independent actuary at 30 September 2018 using the
projected unit method.
The average monthly number of employees (including Executive Directors) during the year was:
Movement in net defined benefit liability
By business segment
Avon Protection
milkrite | InterPuls
Other
At the end of the financial year the total number of employees in the Group was 784 (2017: 750).
Key management compensation
Salaries and other employee benefits
Post employment benefits
Share based payments
2018
Number
2017
(restated)
Number
493
272
16
781
2018
£m
1.9
0.1
0.5
2.5
462
281
12
755
2017
(restated)
£m
1.9
0.1
0.3
2.3
The key management compensation above includes the Executive Directors plus six (2017: five) others who were members of the Board
during the year.
At 1 October
Included in profit or loss
Administrative expenses
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
Other
Contributions by the employer
Net benefits paid out
At 30 September
Defined benefit obligation
Defined benefit asset
Net defined benefit liability
2018
£m
(368.4)
(0.5)
(9.2)
(9.7)
2.2
9.1
0.8
–
12.1
–
19.1
2017
£m
(373.4)
(0.4)
(9.0)
(9.4)
(3.9)
(10.7)
13.2
–
(1.4)
–
15.8
(346.9)
(368.4)
2018
£m
324.3
–
8.1
8.1
–
–
–
1.6
1.6
1.5
(19.1)
316.4
2017
£m
333.5
–
8.0
8.0
–
–
–
(2.4)
(2.4)
1.0
(15.8)
324.3
2018
£m
(44.1)
(0.5)
(1.1)
(1.6)
2.2
9.1
0.8
1.6
13.7
1.5
–
(30.5)
2017
£m
(39.9)
(0.4)
(1.0)
(1.4)
(3.9)
(10.7)
13.2
(2.4)
(3.8)
1.0
–
(44.1)
122
123
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 6 – KEY MANAGEMENT & EMPLOYEE BENEFITS CONTINUED
Sensitivity analysis
Plan assets
Equities
Liability Driven Investment
Corporate bonds
Cash
Total fair value of assets
2018
£m
184.7
88.0
28.8
14.9
316.4
2017
£m
200.1
85.5
30.0
8.7
324.3
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. The target weightings
under the current asset allocation strategy are 50% to growth assets, 20% to mid-risk assets and 30% to LDI.
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
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
2018
% p.a.
3.20
2.20
2.20
3.10
2.80
2018
22.1
24.0
The average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date is as follows:
2018
23.8
25.8
Male
Female
124
2017
% p.a.
3.10
2.10
2.15
3.05
2.55
2017
22.2
24.1
2017
23.9
25.9
Inflation (RPI) (0.25% increase)
Discount rate for scheme liabilities (0.25% increase)
Future mortality (one year increase)
Defined benefit obligation
Increase/(decrease) £m
9.5
(11.3)
12.5
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
The charge in respect of defined contribution pension schemes was £1.0m (2017: £0.9m).
6.3 Share Based Payments
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 and are incorporated by reference into these financial statements. An expense of £1.2m (2017: £0.9m)
was recognised in the year.
The table below summarises the movements in the number of share options outstanding for the Group:
Outstanding at 1 October
Forfeited during the year
Exercised during the year
Granted during the year
Outstanding at 30 September
Number of options
(thousands)
2018
Number of options
(thousands)
2017
413
(5)
(155)
174
427
587
(107)
(248)
181
413
A Monte Carlo simulation was used to calculate the fair value of awards granted that are subject to a Total Shareholder Return performance
condition. The fair value of other awards was calculated as the market price of the shares at the date of grant reduced by the present value
of the dividends expected to be paid over the vesting period. The principal assumptions used were:
Weighted average fair value (£)
Key assumptions used:
Weighted average share price (£)
Expected volatility (%)
Risk-free interest rate (%)
Expected option term (yrs.)
Dividend yield (%)
Volatility is estimated based on actual experience over the last three years.
2018
8.62
11.94
29
0.5
3.0
1.0
2017
8.02
10.40
28
0.2
3.0
0.9
125
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 7 – OTHER
7.1 Provisions for Liabilities and Charges
Balance at 30 September 2016
Payments in the year
Balance at 30 September 2017
Reclassification from other payables
Provision utilised
Payments in the year
Balance at 30 September 2018
Analysis of total provisions
Non-current
Current
Property
obligations
£m
2.5
(0.5)
2.0
1.5
(0.4)
(0.3)
2.8
2017
£m
1.7
0.3
2.0
2018
£m
2.5
0.3
2.8
Property obligations include an onerous lease provision of £0.9m 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 2019 and the remaining £0.6m over the following two years. Other property
obligations relate to leased premises of the Group which are subject to dilapidation risks and are expected to be utilised within the next
10 years. Property provisions are subject to uncertainty in respect of the utilisation, non-utilisation, subletting of surplus leasehold property
and any final negotiated settlement of any dilapidations claims with landlords.
7.2 Acquisitions & Disposals
Disposal – Avon Engineered Fabrications
In March 2018, the Group disposed of Avon Engineered Fabrications, Inc. Further details are given in note 2.3.
Total consideration received
Net assets disposed
Disposal cost
Gain on disposal
Assets and liabilities at the date of disposal were:
Intangible assets
Property, plant and equipment
Inventories
Receivables
Payables
Total net assets disposed
£m
7.1
(5.1)
(0.6)
1.4
£m
0.1
2.4
1.2
2.0
(0.6)
5.1
Acquisition – Merricks Inc. calf nurser product line
In June 2018, the Group acquired the Merrick’s Inc. calf nurser product line. The consideration was $1.8m in cash and associated costs of
acquisition were $0.3m, giving a total cost of acquisition of $2.1m. The acquisition involved the purchase of both tangible assets – tooling
equipment, and intangible assets comprising customer lists, order book and the Merrick’s brand.
Intangible assets
Tangible assets
Total net assets acquired
7.3 Other Financial Commitments
Capital expenditure committed
£m
1.2
0.4
1.6
2017
£m
1.0
2018
£m
2.3
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.
2018
£m
2.2
7.2
9.5
18.9
2017
£m
1.5
6.9
11.3
19.7
126
127
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
SECTION 7 – OTHER CONTINUED
7.4 Group Undertakings
Registered Office Address
Activity
Country
in which
incorporated
Held by Parent Company
Avon Polymer Products Limited
Hampton Park West, Melksham, SN12 6NB, UK
The manufacture and distribution of
rubber and polymer based products
Avon Rubber Overseas Limited
Hampton Park West, Melksham, SN12 6NB, UK
Investment company
Avon Rubber Pension Trust Limited
Hampton Park West, Melksham, SN12 6NB, UK
Pension fund trustee
Avon Dairy Solutions (Shanghai)
International Trading Company Limited
Section B1, 1F, District D12C, 207 Taigu road,
Waigaoqiao Free Trade Zone, Shanghai, PRC
Trading company
Avon Rubber Italia S.r.l.
Corso di Porta Vittoria 9, 20122, Milano, Italy
Investment company
Held by Group undertakings
Avon Hi-Life, Inc.
110 Lincoln St, Johnson Creek, WI 53038,
United States
Avon Protection Systems, Inc.
503 8th St, Cadillac, MI 49601, United States
The manufacture and distribution of
rubber and polymer based products
The manufacture and distribution of
respiratory protection systems
Avon Rubber & Plastics, Inc.
503 8th St, Cadillac, MI 49601, United States
Investment company
Avon Group Limited
Hampton Park West, Melksham, SN12 6NB, UK
Dormant company
Avon Protection Systems UK Limited
Hampton Park West, Melksham, SN12 6NB, UK
Dormant company
Avon-Dairy America do sul
Solucoes Para Ordentia LTDA
City of Castro, State of Parana, at Rua José Antonio de
Oliveira, 80, Jardim das Araucárias, Zip Code 84174620
Trading company
Interpuls S.p.A.
via F. Maritano, 11 | 42020, Albinea RE, Italy
The manufacture and distribution of
milking point technology
UK
UK
UK
China
Italy
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.
7.5 Related Party Transactions
There were no related party transactions during the year or outstanding at the end of the year (2017: £nil). Key management compensation is
disclosed in note 6.1.
7.6 Post balance sheet event
On October 26, 2018, the High Court handed down a judgment involving the Lloyds Banking Group’s defined benefit pension schemes.
The judgment concluded that pension scheme benefits should be amended to equalise guaranteed minimum pension benefits for men and
women. We are working with our actuarial advisors to understand the extent to which the judgment crystallises any additional liabilities for
the Group’s UK defined benefit pension scheme. We are early in the evaluation process, but we estimate that the additional liability could be
in the region of £3m. Subsequent to further assessment with our advisors, any necessary adjustment is expected to be recognised in the first
half of our 2019 financial year.
Parent Company Balance Sheet
At 30 September 2018
Assets
Non-current assets
Intangible assets
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
Provisions for liabilities and charges
Net assets
Shareholders’ equity
Ordinary shares
Share premium account
Capital redemption reserve
Translation reserve
Retained Earnings
Total equity
Note
2018
£m
2017
£m
4
5
6
7
8
9
9
11
0.1
70.8
0.7
71.6
0.5
69.1
32.4
102.0
3.6
29.5
0.3
33.4
68.6
1.7
1.7
138.5
31.0
34.7
0.5
3.2
69.1
138.5
–
70.8
0.5
71.3
0.4
70.4
14.7
85.5
3.6
21.0
0.3
24.9
60.6
1.2
1.2
130.7
31.0
34.7
0.5
3.2
61.3
130.7
The company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the company profit and loss
account. The profit for the Company for the year was £11.5m (2017: £3.1m).
These financial statements on pages 129 to 137 were approved by the Board of Directors on 14 November 2018 and signed on its behalf by:
Paul McDonald
Chief Executive Officer
Nick Keveth
Chief Financial Officer
128
129
Notes to the Group Financial Statements continuedFor the year ended 30 September 2018STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Parent Company Statement of Changes in Equity
For the year ended 30 September 2018
Parent Company Accounting Policies
For the year ended 30 September 2018
At 30 September 2016
Profit and total comprehensive income for the year
Dividends paid
Own shares acquired
Fair value of share based payments
Deferred tax relating to employee share schemes
At 30 September 2017
Profit and total comprehensive income for the year
Dividends paid
Own shares acquired
Fair value of share based payments
Deferred tax relating to employee share schemes
Share
capital
£m
31.0
Share
premium
£m
Capital
redemption
reserves
£m
34.7
0.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
31.0
34.7
0.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Note
1
2
11
13
6
1
2
11
13
6
At 30 September 2018
31.0
34.7
0.5
Retained
earnings
£m
65.1
3.1
(3.2)
(1.0)
0.9
(0.4)
64.5
11.5
(4.1)
(1.1)
1.2
0.3
72.3
Total
equity
£m
131.3
3.1
(3.2)
(1.0)
0.9
(0.4)
130.7
11.5
(4.1)
(1.1)
1.2
0.3
138.5
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
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.
The Company has taken advantage of the disclosure exemptions
available under FRS 101 in relation to the following:
• presentation of a cash flow statement and related notes (IAS 7)
• comparative period reconciliations for share capital and
intangible and tangible fixed assets (paragraph 38, IAS 1)
•
transactions with wholly owned subsidiaries (IAS 24)
• capital management (paragraph 134–136, IAS 1)
SHARE BASED PAYMENT
The Company operates a number of equity-settled, share based
compensation plans. The fair value of the employee services
received in exchange for the grant of the options is recognised as an
expense. The total amount to be expensed over the vesting period
is determined by reference to the fair value of the options granted,
excluding the impact of any non-market vesting conditions (for
example, profitability and sales growth targets). Non-market vesting
conditions are included in assumptions about the number of options
that are expected to vest. At each balance sheet date, the entity
revises its estimates of the number of options that are expected to
vest. It recognises the impact of the revision to original estimates, if
any, in the profit and loss account. The proceeds received net of any
directly attributable transaction costs are credited to share capital
(nominal value) and share premium when the options are exercised.
share based payments (paragraph 45(b) and 46 to 52, IFRS 2)
INTANGIBLE ASSETS
•
•
financial instruments (IFRS 7)
• compensation of key management personnel
(paragraph 17, IAS 24)
Where required, equivalent disclosures are given in the
Group financial statements.
RECENT ACCOUNTING DEVELOPMENTS
No new accounting standards, or amendments to accounting
standards, or IFRIC interpretations that are effective for the year ended
30 September 2018 have had a material impact on the Company.
FOREIGN CURRENCIES
The Group’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 Group operated a contributory defined benefits plan to provide
pension and death benefits for the employees of Avon Rubber p.l.c. and
its Group undertakings in the UK employed prior to 31 January 2003.
The scheme 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.
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 down the depreciable
amount of relevant assets by equal annual instalments over their
estimated useful lives.
In general, the lives used are:
• Computer hardware – three years
• Other plant and machinery – five to 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.
LEASED ASSETS
Operating lease rentals are charged against profit over the term of
the lease on a straight line basis.
130
131
STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Parent Company Accounting Policies continued
For the year ended 30 September 2018
Notes to the Parent Company Financial Statements
For the year ended 30 September 2018
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.
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.
DEFERRED TAXATION
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 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 which 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.
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.
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.
PROVISIONS
Provisions are recognised when:
•
•
the Company 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.
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.
SHARE CAPITAL
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares or options are shown in
equity as a deduction, net of tax, from the proceeds.
Where the Company purchases its own share capital (treasury
shares) through employee share ownership trusts, the consideration
paid, including any directly attributable incremental costs (net
of income taxes), is deducted from shareholders’ funds until the
shares are cancelled, reissued or disposed of. Where such shares are
subsequently sold or reissued, any consideration received, net of any
directly attributable incremental transaction costs and the related
income tax effects, is included in shareholders’ funds.
1 PARENT COMPANY
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 £11.5m (2017: £3.1m).
The audit fee in respect of the Parent Company is set out in note 2.5 to the Group financial statements.
2 DIVIDENDS
Details of the Company’s dividends are set out in note 5.6 to the Group financial statements.
3 EMPLOYEES
The total remuneration and associated costs during the year were:
Wages and salaries
Social security costs
Other pension costs
Share based payments
2018
£m
2.4
0.3
0.1
1.2
4.0
2017
£m
2.4
0.3
0.9
0.9
4.5
Detailed disclosures of Directors’ remuneration and share options, including disclosure of the highest paid Director, are given on pages 59 to 79.
The average monthly number of employees (including Executive Directors) during the year was: 17 (2017: 12), all of whom were classified as
administrative staff.
4 INTANGIBLE ASSETS
Cost
At 1 October 2017
Additions
At 30 September 2018
Amortisation charge
At 1 October 2017
Charge for the year
At 30 September 2018
Net book value
At 30 September 2018
At 30 September 2017
Computer software
£m
0.1
0.1
0.2
0.1
–
0.1
0.1
–
132
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Notes to the Parent Company Financial Statements continued
For the year ended 30 September 2018
5 INVESTMENTS IN SUBSIDIARIES
7 TRADE AND OTHER RECEIVABLES
Cost and net book value
At 1 October 2017
At 30 September 2018
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:
Avon Polymer Products Limited
The manufacture and distribution of
rubber and polymer based products
Hampton Park West, Melksham,
SN12 6NB, UK
Principal activity
Registered office
Avon Rubber Overseas Limited
Investment company
Avon Rubber Pension Trust Limited
Pension Fund Trustee
Hampton Park West, Melksham,
SN12 6NB, UK
Hampton Park West, Melksham,
SN12 6NB, UK
£m
70.8
70.8
Country in which
incorporated
UK
UK
UK
Avon Dairy Solutions (Shanghai)
International Trading Company Limited
Trading company
Section B1, 1F, District D12C, 207 Taigu road,
Waigaoqiao Free Trade Zone, Shanghai, PRC
China
Avon Rubber Italia S.r.l.
Investment company
Corso di Porta Vittoria 9, 20122, Milano, Italy
Italy
Avon-Dairy America do sul Solucoes
Para Ordenha LTDA (1%)
Trading company
City of Castro, State of Parana, at Rua José
Antonio de Oliveira, 80, Jardim das Araucárias,
Zip Code 84174620
Brazil
Details of investments held by these subsidiaries are given in note 7.4 to the Group financial statements.
6 DEFERRED TAX ASSETS
At 30 September 2016
(Charged)/credited to profit for the year
Charged to equity
At 30 September 2017
(Charged)/credited to profit for the year
Credited to equity
At 30 September 2018
Share
Options
£m
Accelerated
capital
allowances
£m
0.6
0.2
(0.4)
0.4
(0.1)
0.3
0.6
0.1
–
–
0.1
–
–
0.1
Total
£m
0.7
0.2
(0.4)
0.5
(0.1)
0.3
0.7
Other receivables
Prepayments
8 TRADE AND OTHER PAYABLES
Trade payables
Accruals
2018
£m
0.1
0.4
0.5
2018
£m
0.5
3.1
3.6
2017
£m
0.2
0.2
0.4
2017
£m
0.4
3.2
3.6
Amounts due to Group undertakings are unsecured, interest free, have no fixed date of repayment and are repayable on demand.
9 PROVISIONS FOR LIABILITIES AND CHARGES
Balance at 30 September 2016
Payments in the year
Balance at 30 September 2017
Reclassification from other payables
Payments in the year
Balance at 30 September 2018
Analysis of total provisions
Non-current
Current
Property
obligations
£m
2.5
(1.0)
1.5
0.8
(0.3)
2.0
2017
£m
1.2
0.3
1.5
2018
£m
1.7
0.3
2.0
Property obligations include an onerous lease provision of £0.9m 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 2019 and the remaining £0.6m over the following two years. Other property
obligations relate to leased premises of the Group which are subject to dilapidation risks and are expected to be utilised within the next
10 years. Property provisions are subject to uncertainty in respect of the utilisation, non-utilisation, or subletting of surplus leasehold
property and any final negotiated settlement of any dilapidation claims with landlords.
134
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Notes to the Parent Company Financial Statements continued
For the year ended 30 September 2018
Five Year Record
For the year ended 30 September 2018
10 BORROWINGS
During the year the Group renewed its $40m revolving credit facility with Barclays Bank and Comerica Bank which expires on 28 June 2021
with an option to extend for a further two years. This facility is priced on the dollar LIBOR plus margin of 1–1.75% depending on leverage and
includes financial covenants which are measured on a quarterly basis. The Company was in compliance with its financial covenants during
2018 and 2017.
The Company has provided the lenders with a negative pledge in respect of certain shares in Group companies.
There was no drawdown of loans in 2018 and 2017.
11 SHARE CAPITAL
Details of the Company’s share capital are set out in note 5.5 to the Group financial statements.
12 OTHER FINANCIAL COMMITMENTS
The Company has no capital expenditure committed at the year end (2017: nil).
The future aggregate minimum lease payments under non-cancellable operating leases are:
Within one year
Between one and five years
Later than five years
2018
£m
1.0
3.6
8.5
13.1
2017
£m
0.4
3.7
9.6
13.7
The majority of leases of land and buildings are subject to rent reviews.
13 SHARE BASED PAYMENTS
The Company operates an equity-settled share based performance share plan (PSP), details of which are disclosed in note 6.3 to the Group
financial statements.
Revenue
Operating profit before amortisation of acquired intangibles,
exceptional items, acquisition costs and defined benefit
pension scheme costs
Amortisation of acquired intangibles, exceptional items,
acquisition costs and defined benefit pension scheme costs
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
Retained profit
Intangible assets and property, plant and equipment
Working capital
Provisions
Pension liability
Net deferred tax liability
Net cash/(borrowings)
Net assets employed
Financed by:
Ordinary share capital
Reserves attributable to equity shareholders
Total equity
Basic earnings per share – continuing operations
Adjusted basic earnings per share
Dividends per share paid in cash
2018
£m
165.5
27.3
(4.5)
22.8
(1.2)
21.6
(1.8)
19.8
1.6
21.4
(4.1)
17.3
64.1
6.2
(2.8)
(30.5)
1.3
46.5
84.8
31.0
53.8
84.8
2017
(restated)
£m
2016
(restated)
£m
2015
(restated)
£m
2014
(restated)
£m
159.2
138.1
123.9
117.6
26.1
(6.0)
20.1
(1.2)
18.9
2.9
21.8
(0.3)
21.5
(3.2)
18.3
66.7
8.9
(2.0)
(44.1)
1.4
24.7
55.6
31.0
24.6
55.6
20.5
(4.1)
16.4
(0.9)
15.5
2.1
17.6
–
17.6
(2.4)
15.2
77.4
7.2
(2.5)
(39.9)
(2.2)
2.0
42.0
31.0
11.0
42.0
58.0p
71.8p
8.02p
16.1
(1.3)
14.8
(1.0)
13.8
(2.3)
11.5
1.4
12.9
(1.9)
11.0
69.5
10.3
(2.6)
(16.6)
(5.2)
(13.2)
42.2
31.0
11.2
42.2
41.7p
52.5p
6.17p
15.1
(2.7)
12.4
(0.5)
11.9
(3.0)
8.9
1.8
10.7
(1.4)
9.3
36.8
7.4
(3.8)
(16.0)
(2.3)
2.9
25.0
31.0
(6.0)
25.0
35.6p
43.1p
4.75p
64.9p
77.1p
13.56p
71.6p
83.8p
10.43p
The results for 2014–2017 have been restated to present AEF as a discontinued operation (see note 2.2 to the Group financial statements).
136
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Glossary of Financial Terms
Definition
Adjusted basic earnings per share
Adjusted profit for the year divided by the weighted average number of shares in issue
Adjusted EBITDA
Adjusted EBITDA is defined as operating profit before depreciation, amortisation, exceptional items
and defined benefit pension scheme costs. It excludes any effect of discontinued operations
Adjusted EBITDA margin
The ratio of Adjusted EBITDA to revenue
Adjusted operating profit
Cash conversion
Closing order book
Constant currency
Operating profit adjusted to exclude amortisation of acquired intangibles, pension administration
costs and any exceptional items
The ratio of cash generated from operations before the effect of exceptional items, as a percentage
of adjusted EBITDA
Orders held by the Group at the end of the year which are not yet fulfilled
Comparative performance measures are retranslated at current year exchange rates to present a
comparison unaffected by currency movements
Continuing operations
The segments of the Group that are expected to still be operating in the future
Discontinued operations
The segments of the Group that no longer function within the core business and which are
separately disclosed within the Income Statement
Dividend per share
Dividends paid / proposed, divided by the weighted average number of shares in issue
EBITDA
Exceptional Items
Intellectual Property
Net cash / debt
Orders received
Return on capital employed
The Group’s earnings before charging interest, tax, depreciation and amortisation
Significant non recurring items such as significant restructuring and project cancellation costs
Intangible property created by the Group through research and development, that is protected
through patents, copyrights or trademarks
Net cash is the Group’s cash net of any drawn debt or overdraft. Net debt is the Group’s drawn
debt and overdrafts net of any cash balance
The orders received throughout the year and recognised as revenue together with orders in the
closing order book
Adjusted operating profit as a percentage of average capital employed. Capital employed is the
sum of shareholders’ funds adjusted for non-current liabilities and current borrowings
Abbreviations
Term
Explanation
50 Series
Range of masks based on the proven technology of the M50 mask system
AEF
BPS
CBRN
CE
CES
DOD
FX
FY
GSR
H1/H2
MOD
NFPA
NIOSH
OEM
PAPR
PCI
PES
RoW
SCBA
TES
138
Avon Engineered Fabrications, Inc. was the US based hovercraft skirt and bulk liquid storage tank business
Basis Points
Chemical, Biological, Radiological, Nuclear
CE markings indicate conformity to health and safety standards sold within the European Economic area
Cluster Exchange Service
Department of Defense
Foreign Exchange
Financial Year
General Service Respirator
First half of the financial year (October – March) / Second half of financial year (April – September)
Ministry of Defence
National Fire Protection Association, a North American trade association that maintains usage standards for the Fire service
National Institute of Occupational Safety and Health. NIOSH approval indicates conformity to health and safety standards of
products sold within North America
Original equipment manufacturer
Powered Air Breathing Apparatus
Precision, Control and Intelligence
Pulsator Exchange Service
Rest of World
Self Contained Breathing Apparatus
Tag Exchange Service
Notice of Annual General Meeting
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 bank
manager, stockbroker, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets
Act 2000. If you have sold or otherwise 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 2018
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 31 January 2019 at 10.30am for the purposes set out below.
You will not receive a form of proxy for the Annual General Meeting
in the post. Instead, you will receive instructions to enable you to vote
electronically and how to register to do so. You will still be able to vote
in person at the Annual General Meeting, and may request a hard copy
proxy form directly from the registrars, Link Asset Services, 34 Beckenham
Road, Beckenham, BR3 4TU (telephone number: 0871 664 0300).
ORDINARY BUSINESS
To consider and, if thought fit, pass resolutions 1–11 (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 2018.
Resolution 2
To approve the Directors’ Remuneration Report (other than the part
containing the Directors’ Remuneration Policy) for the financial year
ended 30 September 2018.
Resolution 3
To approve the Directors’ Remuneration Policy set out on pages 59
to 79 of the Annual Report.
Resolution 4
To declare a final dividend of 10.68p per ordinary share as
recommended by the Directors.
Resolution 5
To re-elect David Evans as a Director of the Company.
Resolution 6
Resolution 11
To authorise the Directors to determine the auditors’ remuneration.
SPECIAL BUSINESS
To consider and if thought fit, pass resolution 12 as an Ordinary
Resolution and resolutions 13–18 (inclusive) as Special Resolutions:
Resolution 12
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.
To re-elect Pim Vervaat as a Director of the Company.
Resolution 13
Resolution 7
To re-elect Chloe Ponsonby as a Director of the Company.
Resolution 8
To re-elect Paul McDonald as a Director of the Company.
Resolution 9
To re-elect Nick Keveth as a Director of the Company.
Resolution 10
To appoint KPMG LLP as auditor of the Company, to hold office until
the conclusion of the next general meeting at which accounts are
laid before the Company.
That, subject to the passing of resolution 12, 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
139
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Notice of Annual General Meeting continued
(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.
Resolution 14
That, subject to the passing of resolution 12, the Directors be
authorised, in addition to any authority granted under resolution 13,
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)
(b)
(c)
be limited to the allotment of equity securities or sale of
treasury shares up to an aggregate nominal amount of
£1,551,164; and
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
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 15
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)
(b)
(c)
the maximum number of shares which may be purchased is
3,102,329;
the minimum price (excluding expenses) which may be paid
for each share is £1;
the maximum price (excluding expenses) which may be paid
for each ordinary share is an amount equal to the higher of:
(i)
(ii)
105% (one hundred and five per cent) of the average of
the middle market quotations of the Company’s ordinary
shares as derived from the Daily 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
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 Daily 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 16
That a general meeting of the Company (other than an annual general
meeting), may be called on not less than 14 clear days’ notice.
Resolution 17
That the rules of the Avon Rubber p.l.c. Long Term Incentive Plan (the
‘LTIP’), the principal terms of which are summarised in the Appendix
to this Notice of Annual General Meeting, and produced in draft to
this meeting and, for the purposes of identification, are initialled by
the Chairman of the meeting, be and are hereby approved and the
Directors be authorised to:
(a)
(b)
make such modifications to the LTIP as they may consider
appropriate to take account of the requirements of best
practice and for the implementation of the LTIP and to adopt
the LTIP as so modified and to do all such other acts and things
as they may consider appropriate to implement the LTIP; and
establish further plans based on the LTIP but modified to take
account of local tax, exchange control or securities laws in
overseas territories, provided that any shares made available
under such further plans are treated as counting against the
limits on individual or overall participation in the LTIP.
Resolution 18
That the Articles of Association of the Company be amended by
deleting the words ‘one and one quarter times’ in Article 101.2
(borrowing powers), and replacing them with the words ‘two times’.
By order of the Board
Miles Ingrey-Counter
Company Secretary
14 November 2018
EXPLANATORY NOTES RELATING TO THE RESOLUTIONS
The Board believes that the adoption of resolutions 1 to 18 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.
Resolution 4 – Declaration of a dividend
A final dividend can only be paid after the shareholders have approved
it at a general meeting. The Directors recommend that a final dividend
in respect of the financial year ended 30 September 2018 of 10.68p be
paid. Subject to approval, the final dividend will be paid on 15 March
2019 to eligible shareholders on the Company’s register of members at
close of business on 15 February 2019.
Resolution 1 – Report and Accounts
The Directors are required by law to present to the AGM the
accounts, and the reports of the Directors and Auditors, for the year
ended 30 September 2018. These are contained in the Company’s
2018 Annual Report.
Resolution 2 – Directors’ Remuneration Report
This resolution seeks shareholders’ approval of the Directors’
Remuneration Report for the year ended 30 September 2018
contained on pages 59 to 79 of the Annual Report. As in previous
years, the vote is advisory only and the Directors’ entitlement to
remuneration is not conditional on it being passed.
Resolution 3 – Directors’ Remuneration Policy
This resolution seeks shareholders’ approval for the new Directors’
Remuneration Policy which is contained on pages 59 to 79 of the
Annual Report.
It is intended that the Directors’ Remuneration Policy will take effect
immediately after the AGM and will replace the existing policy that
was approved by shareholders in 2016 and which is due to expire this
year. The vote is a binding vote and, subject to limited exceptions,
no remuneration payment or loss of office payment may be made to
a prospective, current or former Director unless consistent with the
approved remuneration policy (or otherwise specifically approved
by shareholders). It is anticipated that the Directors’ Remuneration
Policy will be in force for three years although the Board will closely
monitor regulatory changes and market trends and, if necessary, may
present a revised policy within that three year period.
The Directors’ Remuneration Policy has been developed taking into
account the principles of the UK Corporate Governance Code and
the views of the Company’s major shareholders.
Resolutions 5 to 9 – Re-appointment of Directors
Each member of the Board has offered himself/herself for re-election
in accordance with best practice corporate governance standards.
The Board unanimously recommends that they each be re-elected
as Directors of the Company. The Chairman confirms that each of the
Non-executive Directors who are seeking re-election at the Annual
General Meeting continues to be an effective member of the Board
and to demonstrate their commitment to their role. The Chairman
himself is also seeking re-election to the Board. Pim Vervaat, in his
capacity as Senior Independent Director, has confirmed that the
Chairman continues to be an effective Chairman and demonstrates
commitment to his role as Chairman.
Biographical details for each Director are set out on pages 46 and 47
of the Annual Report.
Resolutions 10 & 11 – Appointment of auditor and
authorisation for the Directors to set the auditor’s
remuneration
The Company is required to appoint an auditor at each general
meeting at which its accounts are presented. During 2018, the
Board oversaw a formal tender process for the external auditor
appointment. PwC, due to their length of tenure and having been
appointed for over 20 years, did not participate in the tender.
Following the audit tender process and on the Audit Committee’s
recommendation, the Board is recommending to shareholders the
appointment of KPMG LLP to succeed PwC as the Company’s auditor
for the financial year commencing on 1 October 2018. Full details of
the audit tender process are set out in the Audit Committee report
on pages 54 to 58 of the Annual Report. The outgoing auditor,
PwC, will provide the Company with a statement of the reasons for
their departure, as required by the Act and this will be circulated to
shareholders once received.
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION
Avon Rubber p.l.c. | Annual Report & Accounts 2018
Notice of Annual General Meeting continued
EXPLANATORY NOTES RELATING TO THE RESOLUTIONS CONTINUED
Resolution 12 – 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 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 have no present intention to exercise the authority
conferred by this resolution.
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 14 November 2018 in accordance with institutional
shareholder guidelines. The Directors have no present intention of
exercising this authority. 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
(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 13 – General disapplication of pre-emption rights
This resolution will, if passed, give the Directors power, pursuant
to the authority to allot granted by resolution 12, 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 14 November 2018 and renews
the authority given at the AGM in 2018.
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 14.
Resolution 14 – Additional disapplication of pre-emption
rights
This resolution seeks a further power pursuant to the authority
granted by resolution 12, 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 14 November 2018. This is in addition to the 5% referred to in
resolution 13 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 15 – Authority to purchase own shares
This resolution seeks authority for the Company to make market
purchases of its own shares and is proposed as a special resolution.
If passed, the resolution gives authority for the Company to
purchase up to 3,102,329 ordinary shares of £1 each, representing
10 per cent of the Company’s issued ordinary share capital as at
14 November 2018.
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. The
Company purchased no ordinary shares in the period from the last
AGM to 14 November 2018 under the existing authority.
The Directors have no present intention of exercising the authority
to make market purchases; however, the authority provides the
flexibility to allow them to do so in the future.
The Directors will exercise this authority 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. In the event of any
purchase under this authority, the Directors would either hold the
purchased ordinary shares in treasury or cancel them.
Resolution 17 – Approval of LTIP
The Company’s existing long-term incentive arrangement for
the Company’s Executive Directors and other selected senior
management is the Avon Rubber p.l.c. Performance Share Plan
(the ‘PSP’).
Bonus and incentive scheme targets for Executive Directors would
not be affected by any enhancement of earnings per share following
a share re-purchase.
As of 14 November 2018 there were options to subscribe outstanding
over 443,138 ordinary shares, representing 1.42 per cent of the
Company’s ordinary issued share capital. If the authority given by
resolution 15 were to be fully exercised, these options would represent
1.59% of the Company’s ordinary issued share capital after cancellation
of the re- purchased shares. As of 14 November 2018, there were no
warrants outstanding over ordinary shares.
Resolution 16 – Notice of Meeting
Resolution 16 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 16 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 only when permitted to do
so in accordance with the Act and when the Directors consider it
appropriate to do so.
Since its first approval by shareholders in March 2010, the PSP has
provided for annual share-based awards ordinarily vesting following
a three year performance period subject to the participant’s
continued service and the extent to which objective performance
criteria are met over the performance period. The Remuneration
Committee has recently undertaken a review of the PSP and
concluded that shareholder authority should be sought under
resolution 17 for a new arrangement, the Avon Rubber p.l.c Long
Term Incentive Plan (the ‘LTIP’).
The terms of the LTIP have been designed to materially continue
with the main features of the PSP but with appropriate changes to
bring the LTIP in line with prevailing best practice expectations and
to facilitate the long-term incentive aspects of the new Directors’
Remuneration Policy proposed for approval under resolution 3 as
referred to above.
The PSP will be closed to further awards upon shareholder approval
of the LTIP and therefore ahead of the expiry of its 10 year life that
would have otherwise expired in March 2020.
A summary of the principal terms of the LTIP is set out in the
Appendix to this Notice of Annual General Meeting.
Resolution 18 – Increase in the Company’s borrowing
powers
Article 101.2 (Borrowing Powers) of the Company’s articles of
association provides that the Company’s borrowings should not
exceed one and one quarter times its capital and consolidated
reserves (as defined in the articles). As part of the Board’s ongoing
analysis of the Group’s borrowing requirements, the Board has
identified that this current limit (adopted over 25 years ago) may
become unduly restrictive and that it is not in the longer-term
interests of the Company or its shareholders. The Board therefore
considers it commercially prudent and timely to increase the
borrowing limit in conjunction with the Company’s growth plans.
As such, this would allow greater flexibility for the Company to
respond to any future needs of the Group, including strategic
investment and acquisition opportunities. Accordingly, the Directors
are proposing this resolution to sanction an increase in permitted
borrowings of up to two times share capital and consolidated
reserves. The Directors consider this to be the appropriate borrowing
limit for the Group going forward.
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Avon Rubber p.l.c. | Annual Report & Accounts 2018
Notice of Annual General Meeting continued
NOTICE OF MEETING NOTES
The following notes explain your general rights as a shareholder and
your right to attend and vote at this Meeting or to appoint someone
else to vote on your behalf.
·
in the case of CREST members, by utilising the CREST
electronic proxy appointment service in accordance with
the procedures set out below.
1.
2.
3.
4.
5.
To be entitled to attend and vote at the Meeting (and for the
purpose of the determination by the Company of the number
of votes they may cast), shareholders must be registered in
the Register of Members of the Company at close of business
on 28 January 2019. Changes to the Register of Members after
the relevant deadline shall be disregarded in determining the
rights of any person to attend and vote at the Meeting.
Shareholders, or their proxies, intending to attend the Meeting
in person are requested, if possible, to arrive at the Meeting
venue at least 20 minutes prior to the commencement of the
Meeting at 10:30am (UK time) on 31 January 2019 so that their
shareholding may be checked against the Company’s Register
of Members and attendances recorded.
Shareholders are entitled to appoint another person as a proxy
to exercise all or part of their rights to attend and to speak and
vote on their behalf at the Meeting. A shareholder may appoint
more than one proxy in relation to the Meeting provided
that each proxy is appointed to exercise the rights attached
to a different ordinary share or ordinary shares held by that
shareholder. A proxy need not be a shareholder of the Company.
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).
A vote withheld is not a vote in law, which means that the vote
will not be counted in the calculation of votes for or against the
resolution. If no voting indication is given, your proxy will vote
or abstain from voting at his or her discretion. Your proxy will
vote (or abstain from voting) as he or she thinks fit in relation to
any other matter which is put before the Meeting.
6.
You can vote either:
·
·
by logging on to www.signalshares.com and following the
instructions;
you may request a hard copy form of proxy directly from
the registrars, Link Asset Services (previously called Capita),
on Tel: 0371 664 0300. Calls cost 12p per minute plus your
phone company’s access charge. Calls outside the United
Kingdom will be charged at the applicable international
rate. Lines are open between 09:00–17:30, Monday to
Friday excluding public holidays in England and Wales.
7.
8.
9.
10.
In order for a proxy appointment to be valid a form of proxy
must be completed. In each case the form of proxy must
be received by Link Asset Services at 34 Beckenham Road,
Beckenham, Kent, BR3 4ZF by 10:30 am on 29 January 2019.
If you return more than one proxy appointment, either by
paper or electronic communication, the appointment received
last by the Registrar before the latest time for the receipt of
proxies will take precedence. You are advised to read the terms
and conditions of use carefully. Electronic communication
facilities are open to all shareholders and those who use them
will not be disadvantaged.
The return of a completed form of proxy, electronic filing or
any CREST Proxy Instruction (as described in note 11 below)
will not prevent a shareholder from attending the Meeting and
voting in person if he/she wishes to do so.
CREST members who wish to appoint a proxy or proxies
through the CREST electronic proxy appointment service
may do so for the Meeting (and any adjournment of the
Meeting) by using the procedures described in the CREST
Manual (available from www.euroclear.com/site/public/EUI).
CREST Personal Members or other CREST sponsored members,
and those CREST members who have appointed a 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
specifications and must contain the information required
for such instructions, as described in the CREST Manual. The
message must be transmitted so as to be received by the
issuer’s agent (ID RA10) by 10:30am on 29 January 2019. For this
purpose, the time of receipt will be taken to mean the time (as
determined by the timestamp applied to the message by the
CREST application host) from which the issuer’s agent is able
to retrieve the message by enquiry to CREST in the manner
prescribed by CREST. After this time, any change of instructions
to proxies appointed through CREST should be communicated
to the appointee through other means.
11.
CREST members and, where applicable, their CREST sponsors
or voting service providers should note that Euroclear UK &
Ireland Limited does not make available special procedures
in CREST for any particular message. Normal system timings
15.
Any shareholder attending the Meeting has the right to ask
questions. The Company must cause to be answered any
such question relating to the business being dealt with at the
Meeting but no such answer need be given if: (a) to do so
would interfere unduly with the preparation for the Meeting
or involve the disclosure of confidential information; (b) the
answer has already been given on a website in the form of an
answer to a question; or (c) it is undesirable in the interests
of the Company or the good order of the Meeting that the
question be answered.
16.
The following documents are available for inspection during
normal business hours at the registered office of the Company
on any business day from the date of this Notice until the time
of the Meeting and may also be inspected at the Meeting
venue, as specified in this Notice, from 30 minutes before the
Meeting until the conclusion of the Meeting:
• copies of the Directors’ letters of appointment or service
contracts;
•
•
a copy of the draft rules of the Long Term Incentive Plan;
and
a copy of the current Articles of Association of the
Company.
In addition a copy of the draft rules of the Long Term Incentive
Plan will be available for inspection at the offices of Aon Hewitt
at The Aon Centre, The Leadenhall Building, 122 Leadenhall
Street, London EC3V 4AN during normal business hours on
any weekday (Saturdays, Sundays and English public holidays
excepted) until the close of the Annual General Meeting and at
the place of the Annual General Meeting for at least 15 minutes
prior to and during the Annual General Meeting.
17.
You may not use any electronic address (within the meaning of
Section 333(4) of the Companies Act 2006) provided in either
this Notice or any related documents (including the form of
proxy) to communicate with the Company for any purposes
other than those expressly stated.
12.
13.
14.
and limitations will, therefore, apply in relation to the input of
CREST Proxy Instructions. It is 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 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 system providers are referred, in particular, to those
sections of the CREST Manual concerning practical limitations
of the CREST system and timings. The Company may treat
as invalid a CREST Proxy Instruction in the circumstances
set out in Regulation 35(5)(a) of the Uncertificated Securities
Regulations 2001.
Any corporation which is a shareholder can appoint one or
more corporate representatives who may exercise on its behalf
all of its powers as a shareholder provided that no more than
one corporate representative exercises powers in relation to
the same shares.
As at 14 November 2018 (being the latest practicable business
day prior to the publication of this Notice), the Company’s
ordinary issued share capital consists of 31,023,292 ordinary
shares, carrying one vote each. Therefore, the total voting
rights in the Company as at 14 November 2018 are 31,023,292.
Under Section 527 of the Companies Act 2006, shareholders
meeting the threshold requirements set out in that section
have the right to require the Company to publish on a
website a statement setting out any matter relating to: (i) the
audit of the Company’s financial statements (including the
Auditor’s Report and the conduct of the audit) that are to be
laid before the Meeting; or (ii) any circumstances connected
with an auditor of the Company ceasing to hold office since
the previous meeting at which annual financial statements
and reports were laid in accordance with Section 437 of the
Companies Act 2006 (in each case) that the shareholders
propose to raise at the relevant meeting. The Company may
not require the shareholders requesting any such website
publication to pay its expenses in complying with Sections
527 or 528 of the Companies Act 2006. Where the Company is
required to place a statement on a website under Section 527
of the Companies Act 2006, it must forward the statement to
the Company’s auditor not later than the time when it makes
the statement available on the website. The business which
may be dealt with at the Meeting for the relevant financial
year includes any statement that the Company has been
required under Section 527 of the Companies Act 2006 to
publish on a website.
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Avon Rubber p.l.c. | Annual Report & Accounts 2018
Notice of Annual General Meeting continued
APPENDIX
Summary of the principal terms of the Avon Rubber p.l.c. Long Term Incentive Plan (the ‘LTIP’)
A copy of this Notice, and other information required by Section 311A
of the Companies Act 2006, can be found on the Company’s website
at www.avon-rubber.com
Operation
The Remuneration Committee of the Board (the ‘Committee’) will
supervise the operation of the LTIP.
Eligibility
Any employee (including any executive director) of the Company
and its subsidiaries will be eligible to participate in the LTIP at the
discretion of the Committee.
It is currently anticipated that participation in the LTIP will be limited to
the Company’s Executive Directors and selected senior management.
Grant of awards
The Committee may grant awards to acquire shares within six weeks
following the Company ceasing to be in a closed period under
the Market Abuse Regulation (EU) 596/2014. The Committee may
also grant awards within six weeks of shareholder approval of the
LTIP or at any other time when the Committee considers there are
exceptional circumstances which justify the granting of awards.
The Committee may grant awards as conditional share awards or nil
(or nominal) cost options.
The Committee may also grant cash-based awards of an equivalent
value to share-based awards or to satisfy share-based awards in cash,
although in practice, this is only expected to be the case (if at all) in
exceptional circumstances.
An award may not be granted more than 10 years after shareholder
approval of the LTIP.
No payment is required for the grant of an award. Awards are not
transferable, except on death. Awards are not pensionable.
The first awards under the LTIP would be made within six weeks
following shareholder approval of the LTIP or as soon as reasonably
practicable thereafter.
Individual limit
An employee may not receive awards in any financial year over
shares having a market value in excess of 150% of their annual base
salary in that financial year.
Market value for the purposes of the above limit shall ordinarily be
based on the market value of shares on the dealing day immediately
preceding the grant of an award or by reference to a short averaging
period ending on such dealing day.
Performance conditions
Holding period
The extent of vesting of awards granted to the Company’s Executive
Directors will be subject to performance conditions set by the
Committee. Performance conditions may also apply in the case of
awards to others.
For the first awards granted under the LTIP to the Company’s
Executive Directors and other senior management, the vesting
of such awards will be subject to the satisfaction of performance
conditions comprising measures of relative total shareholder return
and earnings per share performance over a performance period
comprising three years.
Fuller details of such performance conditions are explained in
the Directors’ Remuneration Report within the Company’s
Annual Report.
The terms of the performance conditions for awards to the
Company’s Executive Directors shall be set in line with the applicable
Directors’ Remuneration Policy from time to time.
The Committee may vary the performance conditions applying to
any award if an event occurs which causes the Committee to consider
that it would be appropriate to amend the performance conditions,
provided the Committee considers the varied conditions are fair and
reasonable and, in the case of awards to Executive Directors, not
materially more or less challenging than the original conditions
would have been but for the event in question.
Vesting of awards
Awards shall vest on such normal vesting date specified for the
award or, if later, when the Committee determines the extent to
which any performance conditions have been satisfied.
In the case of awards to Executive Directors, the normal vesting date
specified for the award shall ordinarily be no earlier than the third
anniversary of the grant of the award. Earlier dates however may
be specified for such awards to take account of delays in normal
grant timetable. For example, a normal vesting date of 1 December
2021 is proposed in respect of the first awards under the LTIP to the
Executive Directors.
Where awards are granted in the form of options, once vested, such
options will then be exercisable up until the tenth anniversary of
grant (or such shorter period specified by the Committee at the time
of grant) unless they lapse earlier. Shorter exercise periods shall apply
in the case of ‘good leavers’ and/or vesting of awards in connection
with corporate events.
The terms of the LTIP require that Executive Director participants
(and such others if any as the Committee requires) will ordinarily be
required to retain any vested shares (on an after-tax basis) acquired
under the LTIP until at least the second anniversary of the vesting of
the relevant award.
Exceptionally, the Committee may, in its discretion, allow such
participants to sell, transfer, assign or dispose of some or all of
these shares before the end of the holding period, subject to such
additional terms and conditions that the Committee may specify.
Dividend equivalents
The Committee may decide that participants will receive a payment
(in cash and/or shares) of an amount equivalent to the dividends
that would have been payable on an award’s vested shares between
the date of grant and the vesting of the award (or if later, and only
whilst the award remains unexercised in respect of vested shares,
the expiry of any holding period). This amount may assume the
reinvestment of dividends and shall be paid at the same time as the
delivery of the related vested shares (or cash payment as relevant).
Leaving employment
As a general rule, an award will lapse upon a participant’s
termination of employment within the Group or giving or receiving
notice of such termination. However, if a participant ceases to be
an employee or gives or receives notice because of death, injury,
ill-health, disability, redundancy, retirement with the agreement of
the Committee, their employing company or the business for which
they work being sold out of the Group or in other circumstances
at the discretion of the Committee, then their award will normally
vest on normal timetable. The extent to which an award will vest
in these situations will depend upon two factors: (i) the extent to
which the performance conditions (if any) have, in the opinion
of the Committee, been satisfied over the original performance
measurement period, and (ii) pro rating of the award to reflect the
period spent in service relative to the award’s normal vesting period.
The Committee can decide to pro-rate an award to a lesser extent
(including as to nil) if it regards it as appropriate to do so in the
particular circumstances.
Alternatively, in such ‘good leaver’ circumstances specified above
(including in the case of a discretionary good leaver), the Committee
can decide that the participant’s award will vest when they leave,
subject to: (i) the performance conditions being measured at
that time; and (ii) pro-rating as described above (including the
Committee’s discretion as described above in respect of pro-ration).
Corporate events
In the event of a takeover or winding up of the Company (not
being an internal corporate reorganisation) all awards will vest early
subject to: (i) the extent that the performance conditions (if any)
have been satisfied at that time; and (ii) pro-rating of the awards to
reflect the reduced period of time between their grant and vesting,
although the Committee can decide not to pro-rate an award (or
pro-rate to a lesser extent) if it regards it as appropriate to do so in
the particular circumstances.
In the event of an internal corporate reorganisation awards will be
replaced by equivalent new awards over shares in a new holding
company unless the Committee decides that awards should vest on
the basis which would apply in the case of a takeover.
In the event of a demerger, special dividend or other similar event
which, in the opinion of the Committee, would affect the market
price of shares to a material extent, the Committee may decide that
awards shall vest early on such basis as considered appropriate.
Override
Notwithstanding any other provision of the LTIP, and irrespective of
whether any performance condition attached to an award has been
satisfied, the Committee retains discretion under the LTIP to scale
back the level of vesting that would otherwise result by reference to
formulaic outcomes alone.
Such discretion would only be used in exceptional circumstances
and may include regard to corporate and personal performance.
Participants’ rights
Awards settled in shares will not confer any shareholder rights until
the awards have vested or the options have been exercised as
relevant and the participants have received their shares.
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Avon Rubber p.l.c. | Annual Report & Accounts 2018
Notice of Annual General Meeting continued
Shareholder Information
APPENDIX CONTINUED
Summary of the principal terms of the Avon Rubber p.l.c. Long Term Incentive Plan (the ‘LTIP’) continued
Rights attaching to shares
Recovery and withholding
Any shares allotted when an award vests or is exercised will rank
equally with shares then in issue (except for rights arising by
reference to a record date prior to their allotment).
Variation of capital
In the event of any variation of the Company’s share capital or in
the event of a demerger, payment of a special dividend or similar
event which materially affects the market price of the shares, the
Committee may make such adjustment as it considers appropriate
to the number of shares subject to an award and/or the exercise
price payable (if any).
The Committee may apply the LTIP’s recovery and withholding
provisions if, at any point prior to the third anniversary of the
date of vesting of an award, it is discovered that there has been a
material misstatement of the Company’s financial results, an error
of calculation (including on account of inaccurate or misleading
information) or in the event of serious misconduct, serious
reputational damage or corporate failure.
The recovery and withholding may be satisfied by way of a reduction
in the amount of any future bonus, subsisting award or future share
awards and/or a requirement to make a cash payment.
Overall Plan limits
Overseas plans
The shareholder resolution to approve the LTIP will allow the Board
to establish further plans for overseas territories, any such plan to
be similar to the LTIP, but modified to take account of local tax,
exchange control or securities laws, provided that any shares made
available under such further plans are treated as counting against
the limits on individual and overall participation in the LTIP.
The LTIP may operate over new issue shares, treasury shares or
shares purchased in the market.
In any 10 calendar year period, the Company may not issue (or
grant rights to issue) more than 10% of the issued ordinary share
capital of the Company under the LTIP and any other employee
share plan adopted by the Company.
Treasury shares will count as new issue shares for the purposes of
these limits unless institutional investor guidelines provide that they
need not count.
Alterations to the Plan
The Committee may, at any time, amend the LTIP in any respect,
provided that the prior approval of shareholders is obtained for any
amendments that are to the advantage of participants in respect
of the rules governing eligibility, limits on participation, the overall
limits on the issue of shares or the transfer of treasury shares, the
basis for determining a participant’s entitlement to, and the terms of,
the shares or cash to be acquired and the adjustment of awards.
The requirement to obtain the prior approval of shareholders will
not, however, apply to any minor alteration made to benefit the
administration of the LTIP, to take account of a change in legislation
or to obtain or maintain favourable tax, exchange control or
regulatory treatment for participants or for any company in the
Company’s group. Shareholder approval will also not be required
for any amendments to any performance condition applying to an
award varied on its terms.
SHAREHOLDING
As at 30 October 2018 the Company had 1,423 shareholders,
of which 844 had 1,000 shares or fewer.
FINANCIAL CALENDAR
CORPORATE INFORMATION
Registered office
Hampton Park West, Semington Road, Melksham,
Wiltshire, SN12 6NB, England
Interim results are announced in May and final results in November.
Registered
In respect of the year ended 30 September 2018 the annual general
meeting will be held on 31 January 2019 at Hampton Park West,
Semington Road, Melksham, Wiltshire, SN12 6NB, England.
In England and Wales No. 32965
VAT No. GB 137 575 643
Board of Directors
David Evans (Chairman)
Paul McDonald (Chief Executive Officer)
Nick Keveth (Chief Financial Officer)
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 and transfer office
Link 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, Monday to Friday excluding UK public holidays)
Brokers
Peel Hunt LLP
Solicitors
TLT LLP
Principal bankers
Barclays Bank PLC
Comerica Inc.
Lloyds Bank Plc
Website
www.avon-rubber.com
© Copyright Avon Rubber p.l.c 2018
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STRATEGIC REPORT OVERVIEW GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION A
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8
Hampton Park West
Semington Road
Melksham, Wiltshire
SN12 6NB
England
Telephone:
Email:
+44 (0) 1225 896 800
enquiries@avon-rubber.com
www.avon-rubber.com