Dialight
Annual Report 2017

Plain-text annual report

I I L T A P G H 7D 1 0 2 N N U C A A L L R E P O R T A N D A C C O U N T S 2 0 1 7 S T N U O C C A D N A T R O P E R L A U N N A Dialight is the world leader in LED industrial technology with over 1 million led fixtures installed worldwide. Our sustainable, energy efficient and intelligent LED lighting technologies are market leaders. We enable industrial customers operating in demanding environments to reduce their energy costs, maintenance costs and carbon footprint while maximising their safety and productivity. 2017 HIGHLIGHTS Revenue (£’m) Underlying gross profit (£’m) 2017 2016 2015 181.0 2017 182.2 2016 66.7 69.5 161.4 2015 56.2 Underlying basic EPS (p) Net cash debt (£’m) 2017 2016 17.9 2017 12.8 26.9 2016 8.0 2015 13.3 2015 (3.8) Underlying operating profit (£’m) 2017 2016 2015 6.1 9.7 13.1 Statutory measures Profit/(Loss) from operating activities (£’m) Profit/(Loss) for the year (£’m) Earnings per share (p) 2017 £’m 3.3 1.7 4.8 2016 £’m (3.3) (2.8) (8.4) 2015 £’m (3.4) (2.0) (6.4) Financial highlights _ revenue broadly flat (4% Operational highlights _ operational difficulties due to: below at constant currency) _ reduced production output _ lighting division order intake from our manufacturing 4% down at constant partner; currency _ procurement planning _ underlying profit decline due issues at our to the operational difficulties manufacturing partner; and _ net cash of £12.8m _ strong balance sheet _ delays in new product launches of High Bay and supported by good working Area Light capital management and _ actions underway to resolve five-year credit facility production issues maturing in December 2021 Strategic report IFC 2017 highlights 02 Our business at a glance 04 Chairman’s letter 08 Group Chief Executive’s review 12 Market drivers 14 Our business model 16 What makes us different 20 Our strategy at a glance 22 Key performance indicators 24 Our people 28 Sustainability 32 Risk management 34 Principal risks and uncertainties 38 Financial review Governance 42 Chairman’s introduction to governance 44 Board of Directors 46 Leadership 51 Effectiveness 54 Nominations Committee report 56 Accountability 58 Audit Committee report 62 Directors’ remuneration report 64 Directors’ remuneration policy 73 Annual report on remuneration 82 Other statutory information 85 Directors’ responsibility statement Financial Statements 86 Independent auditor’s report 92 Consolidated income statement 93 Consolidated statement of comprehensive income 94 Consolidated statement of changes in equity 95 Consolidated statement of total financial position 96 Consolidated statement of cash flows 97 Notes to the consolidated financial statements 128 Company balance sheet 129 Notes to the Company financial statements 139 Five-year summary 140 Directory and shareholder information FIND MORE ONLINE: WWW.IR.DIALIGHT.COM 0 1 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 OUR BUSINESS AT A GLANCE £54.3M Underlying gross profit (2016: £57.4m) £137.5M Revenue (2016: £136.6m) £11.2M Underlying operating profit (2016: £13.5m) DIALIGHT IS A GLOBAL LEADER IN SUSTAINABLE LED LIGHTING FOR INDUSTRIAL APPLICATIONS LIGHTING Overview Dialight’s LED lighting for industrial applications is providing the next generation of lighting solutions that deliver reduced energy consumption and create a safer working environment. Our products are specifically designed to provide superior operational performance, reliability and durability, reducing energy consumption and ongoing maintenance and achieving a rapid return on investment. Competing in this segment requires significant development costs and regulatory certifications which create barriers to entry. What’s driving demand _ LED market penetration of only 3% with significant opportunity for growth _ customer sustainability targets to reduce CO2 _ productivity and safety benefits of better quality light _ reliability of our fixtures in the harshest environments, at both extremes of the temperature scales _ long term cost savings of LED through lower energy use and reduced maintenance demands _ Industrial Internet of Things/connectivity in the industrial environment FIND MORE ONLINE: WWW.IR.DIALIGHT.COM 2 0 Industries we work in _ heavy industry – steel processing, pulp and paper, automotive plants _ oil and gas – upstream and downstream _ mining – surface and underground _ chemical and pharmaceutical _ power generation – from oil and coal to nuclear and wind powered _ collision avoidance lighting for towers, chimneys and wind farms _ food and beverage – processing, grain storage, flour milling and cold storage areas Fixture types We have a broad range of fixtures that can be used hazardous and non-hazardous locations, examples are: _ process areas _ steam rooms _ catwalks _ blast furnaces _ cold storage _ cranes _ conveyor belts Dialight plc Annual Report and Accounts 2017Strategic report£12.4M Underlying gross profit (2016: £12.1m) £43.5M Revenue (2016: £45.6m) £3.9M Underlying operating profit (2016: £4.9m) SIGNALS AND COMPONENTS Overview The Signals and Components division consists of the Traffic and Transportation and Components businesses. Traffic and Transportations is focused on supplying traffic lights plus niche lights for specialist vehicles. The Components businesses sells status indicators to electronic original equipment manufacturers (“OEMs”). This is a mature market with low barriers to entry and this segment is being managed for value. Revenue by division Underlying operating profit 76% 74% 24% 26% Lighting Signals and Components Lighting Signals and Components Underlying gross profit by division Revenue by geography What’s driving demand Our brand reputation and consequent repeat business help us maintain sales volumes in this mature and competitive market. 81% 19% Industries we work in _ traffic management, typically for municipalities _ vehicle manufacturing, supply of niche lights _ electronic equipment manufacturing, supply of status indicators Lighting Signals and Components 75% 13% 12% North America Europe ROW SEE PAGE 38 FOR OUR FINANCIAL REVIEW 0 3 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 lead the Group through the transition of our manufacturing capabilities and as discussed in the Group Chief Executive Review, his operations action plan is the short-term focus for the Group. Dividend The Board believes in balancing returns to shareholders with investment in the business to support future growth. The Board is not proposing any final dividend payment for 2017. Board changes As previously discussed, Michael Sutsko resigned as Group Chief Executive Officer and Director on 8 January 2018 and Marty Rapp was appointed. Marty orginally joined us on 26 April 2016 as a Non-Executive Director. Michael made a significant contribution to Dialight’s strategic direction over the past two years and I would like to thank him for his contribution and wish him well for the future. People In testing times, a company depends on the resilience and commitment of its people. We would like to thank all our employees for their hard work and efforts in 2017. We are confident that they will enable Dialight to deliver growth and success in 2018 and beyond. Outlook Despite a disappointing year in 2017, we remain confident about the potential of Dialight to deliver for our shareholders. We have a good market position and technology in a fast-growing market and the new management team is committed to delivering value and growth for our business. We look forward to an improved performance in 2018. Wayne Edmunds Chairman 26 February 2018 CHAIRMAN’S LETTER 2017 was a poor year for Dialight, one in which we disappointed both our shareholders and ourselves. While we made significant progress in improving our products, our core product design platforms and our go-to- market capabilities, the execution of our manufacturing outsourcing significantly impacted our 2017 financial performance. The Dialight product family is designed for use in some of the most challenging processes of manufacturing and work environments. In 2017 we continued work on our outsourcing project which was expected to raise the capacity and the quality of our manufacturing capabilities. However, the execution of the transition has been disappointing, with frequent delays, raw material sourcing challenges and cost overruns resulting in a significant number of orders being unfulfilled in the year. In response, we have made changes to our senior management team so that we can return to sustainable, profitable growth. We have entered 2018 with a new Group Chief Executive Officer and a new Chief Operating Officer (“COO”). Michael Sutsko stepped down on 8 January 2018 and Martin (“Marty”) L. Rapp has been appointed Group Chief Executive Officer. Marty’s prior experience is ideally suited to Wayne Edmunds, Chairman 4 0 Dialight plc Annual Report and Accounts 2017Strategic reportD E G N A H C N U S L A T N E M A D N U F S S E N I S U B POSITIONED FOR GROWTH Our global footprint and diverse customer base ideally positions us to capture the potential of an industrial market which is largely unpenetrated by LED and whereby the majority of lighting is antiquated, dangerous and environmentally damaging. LED lighting represents the future. DIFFERENTIATED Our best-in-class designs offer superior performance backed by a ten-year warranty, low maintenance, high efficiency and long- life. That’s how we provide our customers with faster payback and a better Return on Investment. INTELLIGENT Controlled lighting solutions that seamlessly integrate with existing factory automation and building management systems to conveniently optimise site safety and productivity. TRUSTED Significant expertise exclusively in LED and decades of experience as a lighting partner to many of the world’s leading organisations have helped us achieve the largest installed base with over one million industrial LED fixtures around the world. SUSTAINABLE A strategic focus on environmentally friendly LED technology and a commitment to helping all organisations, including our own, reach corporate sustainability goals. SCALABLE Strong cash flow that allows operational scalability without the requirement for significant fixed investment. 0 5 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 TRUSTED TO DELIVER … Y R T S U D N I G N I N I M T N E M N O R I V N E H S R A H E H T M O R F S ’ A I L A R T S U A F O 6 0 The Nammuldi mine The Nammuldi mine lies within an arid region of Western Australia where summer temperatures exceed 32° Celsius and cyclones are common. Lighting is needed for the iron ore conveyor belts and much of the rest of the site. Exposed to the elements year round and with high vibration from fully loaded conveyor belts, traditional fixtures were regularly shaken apart and required frequent replacement. Dialight replaced the traditional lights with its Linear, Conveyor and Bulkhead lights. This improved safety by reducing voltage spikes and ensured that the site was fully lit at all times. Maintenance costs were significantly reduced as the number of fixtures required was reduced and with the rugged fixture design, they are built to work in these environments for ten years. 60% Energy reduction S E R U T X I F R E W E F % 0 3 D E S U Dialight plc Annual Report and Accounts 2017Strategic report M U N N A R E P H W K M 1 Y B E G A S U Y G R E N E T U C A S U , S A S N A K R A N I S T N A L P E G A R O T S D O O F O R E Z - B U S O T Zero Mountain Cold Storage Two cold storage facilities, a 0.3m square We replaced the Metal Halide fixtures with our High Bay product, utilising 20% fewer feet limestone cave and a 7m square feet fixtures. Maintenance costs were reduced warehouse, with temperatures as low as as the High Bay fixtures provide a more -38° Celsius, had metal halide fixtures. The durable solution for the harsh underground existing fixtures were slow to warm-up, had environment. Fewer fixtures, lower power to be left on 24/7 and generated excess heat usage and occupancy sensors all contribute that required the chillers to work harder. to significant electricity savings. £78K Annual savings on energy and maintenance 0 7 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 GROUP CHIEF EXECUTIVE’S REVIEW has been related to materials not being In 2015, we outlined a plan to rebuild ordered in time and/or in sufficient our operations to enable scalable and quantities. This was compounded by industry cost-efficient production. This plan wide material shortages of some of our included transitioning to outsourced critical components, which we estimate manufacturing, streamlining our product to be the cause of about 15% of our late portfolio and moving to common order performance. product platforms. A further issue stemming from the platform Whilst much has been achieved, problems engineering concept relates directly to in execution of our outsource manufacturing the manufacturing process itself. Our transfer resulted in a poor year for reported manufacturing partner operates in a small financial results. Our results were adversely batch-size environment, resulting in a more affected by reduced production output job-shop approach rather than a large from our manufacturing partner principally scale manufacturing process and as a as a result of procurement planning issues consequence has lost productivity due to and delays in the new product launches frequent changeovers. There are nuances of High Bay and Area Light. in scheduling lines to maximise throughput and minimise changeovers that come I have been on board as the full time Group Chief Executive since 8 January 2018. I have with experience. Our joint challenge is to increase the speed of learning. visited each of our Lighting manufacturing locations and have spent time at our The issues that we face came to the forefront manufacturing partner site in Guadalajara, in Q4 2017 as our two largest product lines Mexico. The whole business is very focused transferred to our manufacturing partner. on resolving the issues we have and ensuring With the benefit of hindsight, we placed an the Group has a robust and scalable over reliance on their ability to ramp up in manufacturing platform. our busiest quarter of the year and under estimated the difficulties of the transition. We are taking aggressive action to address these operational issues. We are confident We have taken two key steps in order to these will be significantly improved by the address these short term challenges. First, end of H1 2018 and we will start to see we have significantly increased the level the benefits in the second half of the year. of support we are providing at the plant We have the right products and a market level to our manufacturing partner. We with good growth prospects; it is incumbent now have a group of our most experienced on us to better serve our customers in order supply chain and production management to maximise the opportunities open to us employees nearly full time on-site until we Martin L. Rapp, Group Chief Executive as a Group. Operations The product requirements for the market we serve result in a low volume/high mix have sustainable performance at acceptable levels. Their mission is to review every raw material line item, side by side with our manufacturing partner employees, and take immediate action to relieve the shortages. product portfolio. In addition, given the They will also review the production planning variety of our customers and applications, schedule to help ensure that the lines are and the difficulty in accurately predicting scheduled as efficiently as possible and future demand to the part number level, our that we are using raw materials to the forecasts of required raw materials change maximum advantage. significantly over time. In order to address this issue we platform engineered all of our The second key step is the removal of product lines to reduce the sku count and complexity from our manufacturing partner thereby simplify the forecasting process. The by transferring the more complex product concept of platform engineering and building types back to our Ensenada, Mexico to a sub assembly level was, with the benefit facility, where we have retained assembly of hindsight, not fully recognised by our capabilities. We feel this will significantly manufacturing partner. help the overall production throughput at our manufacturing partner. The biggest issue affecting production continues to be, having materials available when required. The majority of the issue 8 0 Dialight plc Annual Report and Accounts 2017Strategic reportOur complete focus is on ensuring we get We launched major upgrades to our Corporate responsibility and delivery times back to normal with a High Bay and Area Light product lines. manufacturing process that is stable and Controls enablement is a significant feature sustainability is at Dialight’s core Dialight delivers energy savings and efficient. We need to make our overall of the High Bay upgrade. This allows workplace safety to its customers. We live fulfilment process more robust by multi- customers to use them as data harvesting by the same values and are committed to sourcing key components to reduce points that can relay information to the reducing our own carbon footprint. These the impact of shortages from a single facility control system for added safety market characteristics and our commitment supplier. This is one of the keys to building and security. These products also provide to health and safety, the environment and a robust operational platform. customers with greater energy efficiency people development are reflected in the and global certifications. values held by our employees and our It is important as we navigate through these operating culture. operational challenges that we measure Growth requires the right products, our recovery. The key lighting performance the preferred distribution channels, and A detailed report on our approach to indicators we will focus on are order growth, experienced sales teams. Dialight has gross margin and on-time delivery. built its strongest capabilities in the U.S. Business fundamentals Despite the short term challenges we providing a model that can be scaled around the world. Europe represents an advanced customer base and significant must not forget that Dialight remains well opportunity, yet has been under served by corporate responsibility, including our CO2 emissions reduction performance, is on pages 30 to 31. Outlook 2017 was a disappointing year, in which positioned in a growing market. We remain the market leader in terms of our technology Dialight. Our new product road map will include the breadth of product features and operational issues hampered our ability to deliver orders to our customers. We are and continue to have a strong balance sheet certification requirements needed in Europe. taking corrective action and in the near term and remain cash positive. With strong sales teams and a number of are wholly focused on the manufacturing Customers convert to LED lighting and buy is well positioned to begin to seize the our results in H1. As a consequence our Dialight’s products because it remains the European opportunity. most efficient way to drive down energy results for 2018 will be heavily weighted to H2 reflecting the successful resolution newly signed distributor partners, Dialight challenges which will continue to impact usage. We are delivering the next generation Dialight’s Australian team has proven to of these issues. of lighting solutions that not only reduce be very successful in driving growth and energy consumption further but create a building capabilities in the region. Extending Our market proposition remains compelling safer working environment. Our products that leadership with strong local support with the sustainability benefits of reduced are specifically designed to provide superior into South East Asia represents a significant energy usage, lower carbon emissions, operational performance, reliability and opportunity for growth. durability, reducing energy consumption and reduced maintenance and improved safety offering real value to our customers. We ongoing maintenance and achieving rapid The industrial LED opportunity remains remain excited by the Group’s prospects return on investment. largely untapped as the conservative over the medium to long term and are customer base has sought low-risk, proven confident of delivering future growth. We also recognise the opportunity to drive solutions. Dialight’s 10 years of experience focus on corporate-wide LED conversion has earned a predominant position and programmes. The majority of Dialight’s we have an installed product base of targeted strategic customers have a public over one million products. With the aim of commitment to sustainability, including carbon footprint reduction and energy improving our quality of earnings we have demonstrated our ability to sell across saving programmes. Driving awareness industrial sectors and reduce our reliance of the economic benefits as well as the on oil and gas markets. This initiative has sustainability and safety benefits of our continued despite the operational challenges lighting at the corporate level can change that we have faced. the perception of our lighting away from just maintenance cost savings. Dialight will use its ability to deploy new technology to drive a shift in spending and In addition, Dialight products are being built accelerate adoption of LED technology in with upgradeable and integrated controls. industrial customers. Our market proposition Our customers can optimise their lighting is compelling with the sustainability solution through direct lighting controls. The benefits of reduced energy usage, lower value for customers is that they will be able carbon emissions, reduced maintenance to take advantage of their built-in network and improved safety offering real value of intelligent lighting to provide access to to our customers. a wide array of sensors and applications in safety and productivity. 0 9 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 TRUSTED TO DELIVER E E R F - E C N A N E T N I A M R U O M O R F … A S U , E I R E E K A L N O M E T S Y S 0 1 Donjon Shipbuilding Being an open air facility on the shore of Lake Erie, Donjon Shipbuilding’s 0.2m square feet facility, with ceiling heights up to 125 feet over a dry dock is a damp and harsh environment which resulted in less than 25% of the company’s light fixtures working at any time. The poor-quality light meant that staff often extensively used flashlights to navigate the facility safely and the extreme height meant that changing any of the existing 266 metal halide fixtures was time-consuming and costly. The existing fixtures were replaced by Dialight’s 60,000 lumen Vigilant High Bays. The power output from the new fixtures resulted in a reduction of two thirds in the fixtures required whilst delivering increased quality light that improved safety and the working environment. The ten year performance warranty will eliminate the majority of maintenance costs on light replacement. 67% Reduction in number of fixtures E R U T X I F R E P N O I T P M U S N O C R E W O P N I N O I T C U D E R % 0 5 Dialight plc Annual Report and Accounts 2017Strategic report K U E H T D E L L A T S N I S E R U T X I F 0 5 2 , 2 E T I H W D E L L O R T N O C N I G N I T H G I L O T The National Exhibition Centre The National Exhibition Centre (NEC) is the largest exhibition centre in the UK consisting of 20 interconnected halls. It hosts a wide variety of shows annually, all of which have one common aim – for attendees to see what is on display. The high pressure sodium lighting was slow to light and its yellow tinged light rarely did justice to the merchandise on display. Following a five-year trial, the NEC chose to replace the high pressure sodium lights with Vigilant High Bays connected to the building control system. The result is instant and controllable white light that ensures that exhibitors can maximise their investment. 1 1 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 REGULATORY AND POLITICAL CHANGE In the US there is a movement to get high pressure sodium llights banned. The decision of the UK to leave the EU (“Brexit”) results in uncertainties surrounding potential tariffs on goods exported to the EU. Our response _ in May 2017, we co-presented with Ford on the benefits of LED lighting to the Department of Energy in the US at the Better Buildings Summit in order to promote potential legislative change to ban old lighting technology; and _ we manufacture in Mexico which has a trade agreement with the EU. Such sales will be unaffected by Brexit, though Mexico to UK sales may be impacted by potential tariffs. THE LED ADVANTAGE LED lighting has many advantages over traditional lighting, so why is it not more widely adopted in the market? Our response LED lights: _ are instantly on compared to strike time delays of 15 to 20 minutes for other lights; _ provide better quality and white light compared to the yellow-tinged light of high pressure sodium; _ have a much longer life as they run cool i.e. do not create light via heat; and _ consume much less electricity than conventional lighting. Our customers have seen the benefits of LED first hand (see case studies on pages 6, 7, 10, 11, 17, 18). For potential customers, there is sometimes a natural inertia that delays making the decision to change. MARKET DRIVERS RESPONDING TO A CHANGING ENVIRONMENT Market size The LED industrial lighting market is estimated to be worth £50bn based on a 20 year retrofit cycle (this was verified by IHS in a study commissioned by us in 2016). The market constitutes a wide variety of industries from heavy industrial to food and beverage. Our lighting portfolio ensures that most of our fixtures have explosion proof and non- explosion proof variants, which allows us to service these diverse markets. The market size is based on an assessment of the number of power plants, foundries, mines, petro-chemical plants, oil rigs, broadcast and telecoms towers, and other types of target locations. We have estimated the number of fixtures required per location and extrapolated the market value. Our assessment now is that the market potential is unchanged and the key to unlocking its potential lies in reducing the payback period, driving sales decisions at a corporate level and increasing market awareness of the benefits of LED. Our customer base is conservative seeking low risk, proven solutions. Dialight’s ten years of experience has earned a dominant position within this market. 2 1 CUSTOMER APPETITE FOR SUSTAINABLE PRODUCTS Sustainability is high on commercial and environmental agendas making our products more important to customers. Their appetite is not just based on being able to quote lower CO2 usage but the growing realisation that sustainable products can deliver savings in maintenance and energy costs. The corporate scenario can be set out as: _ the Sustainability Manager wants to lower CO2 usage; _ the Finance Director wants to lower costs; _ the Health and Safety Manager wants a safer working environment; and _ the Plant Manager wants controllable lighting to help achieve production targets. Our response Quite often competitor products will satisfy one criteria, but not all. Dialight fixtures “tick all the boxes”. Our products: _ significantly reduce CO2 generation; _ cut power usage and maintenance costs; _ lower accident risk by ensuring all areas are well lit; and _ instantly provide better quality light to operational areas, the intensity of which can be varied according to requirements. Dialight plc Annual Report and Accounts 2017Strategic report132CLIMATE CHANGE A global shift is underway to the low carbon economy. The Paris Agreement’s aim is to strengthen the global response to the threat of climate change by keeping temperature rise this century to well below 2° Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5° Celsius. Additionally, the agreement aims to strengthen the ability of countries to deal with the impacts of climate change. The Trump administration has issued written notification that the US intends to withdraw from the Paris Climate Agreement. However, in the notice to the United Nations the US State department said Washington would remain in the talks process. Even if the US pulls out of the Agreement, climate change is high on the agenda of many US states, who have indicated that they will introduce separate legislation to combat climate change. Our response To help both countries and customers reach these ambitious goals, we are developing new technologies that offer superior energy efficiency, reliability, longevity, improved light levels, visual clarity, and ultimately cost savings from reduced or eliminated lighting related maintenance and energy costs. MACRO ECONOMIC CONDITIONS The global recovery will continue, but at a slightly slower growth rate of around 3.5%. Low core inflation should also tick up in advanced economies as their labour markets continue to strengthen and the drag from low commodity and import prices unwinds. Our response We constantly strive to reduce the payback period on our fixtures which means we can target a maintenance budget rather than a capital expenditure budget. This is particularly important as it allows companies to maintain their capital budgets for other purposes. RESPONDING TO MARKET DRIVERS THROUGH LEADING-EDGE TECHNOLOGY A significant feature of the new range is that they are controls enabled. As we continue to look at where the market requirement is trending, we are adding controls upgradeability as standard. This is part of our drive to make lights an integral part of the Industrial Internet of Things by allowing customers to use them as data In September, we launched a major harvesting points that can relay information upgrade to our High Bay product line which to the facility control system for added had been significantly re-engineered. safety and security. High Bay is the most installed fixture in the LED industrial lighting market and has In addition, all new fixtures have; contributed significantly to Dialight being the first to reach an installed base of one _ increased efficiency from 125 lumens per million fixtures. It is available in a full range of hazardous and non-hazardous options. watt up to 145 lumens per watt _ enhanced dimming capability as standard that further reduces energy usage _ additional lens options to provide variations of light as required for different work areas The significantly upgraded power supply unit, designed in-house, allows us to increase the warranty offered from five years to ten years. We have also added additional features: _ salt corrosion resistance for outstanding resilience in off-shore applications _ stainless steel hardware for added In July, we launched the next generation of the Area Light, available for hazardous installation security and non-hazardous applications. In the _ improved choice of optics to deliver most aggressive technology upgrade to more light precisely where it’s needed, date for this product line, we increased reduces fixture count and infrastructure the efficiency to deliver up to 143 lumens per watt and continue our drive to provide fixtures that reduce energy _ enhanced dimming options to significantly reduce energy use _ an integrated mounting system to usage. An improved wide-optic design simplify new installations significantly improves lighting footprint, _ an extensive range of retrofit adapters enabling one-for-two fixture replacements that allow customers to replace in conveyor and walkway applications competitors products easily to help customers reduce fixture count and improve safety. 1 3 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 201745 OUR BUSINESS MODEL OUR INPUTS WHAT WE DO Financial Strong financial performance through Our purpose is to improve the world we live in through sustainable, energy efficient innovation, cost control and high returns and intelligent LED lighting technologies. on capital. Sustainability Developing products to reduce We enable industrial customers operating in demanding environments to reduce their energy costs, maintenance costs and carbon footprint while maximising the maintenance and improve safety safety and productivity of their facilities. and environmental efficiency. We do this by offering the largest selection Product innovation Developing market-leading products at of rugged, cutting-edge products to suit virtually any industrial application. the forefront of technology within industrial Additionally, our controls solutions can markets. In 2017 we invested £6.9m in seamlessly integrate with existing factory research and development to extend automation and building management systems to deliver granular control and system-wide visibility that reduces lighting energy costs by as much as 60%. our product portfolio. Intellectual assets Protecting our product innovation by patents, trademarks and intellectual property licences. Human capital We hire and develop innovative engineers who, together with supporting teams and senior management, can develop and deploy Dialight’s sustainable, energy efficient and intelligent LED lighting solutions. Relationships Dialight has multiple routes to market through established distribution networks and selling directly to the end customer. Our sales approach targets plant managers as well as corporate decision makers. 4 1 SEE PAGE 12 FOR OUR MARKET DRIVERS SEE PAGE 32 FOR OUR RISKS DESIGN AND DESIGN REALISATION RESEARCH AND ANALYSIS 1 2 3 4 5 PROTOTYPING A FLEXIBLE SUPPLY CHAIN MULTI-CHANNEL DISTRIBUTION Dialight plc Annual Report and Accounts 2017Strategic reportHow we create value Investment in technology and product development to update and expand the product range. Integration of power supply, optics and lighting designs. How we create value Market-leading products to reduce maintenance, improve safety and reduce energy consumption. Proof of concept and product return on investment to ensure that key performance indicators (“KPIs”) are met. REVENUE THE VALUE WE SHARE Our revenue is mainly derived from the sale of lighting fixtures (76%). We sell Shareholders Our goal is to deliver long-term value for via distribution channels and direct to the shareholders. We do this by developing customer using our own sales force. Fixtures products that are sustainable and are installed by the customer or by third- stimulating demand in a market with How we create value The Group runs its new product prototypes in its facility in Mexico. It also has significant in house testing capabilities. How we create value The assembly part of our supply chain is a partnering arrangement in order to gain flexibility and speed. We establish distribution networks and sell directly to end customers. How we create value Established distribution networks through electrical wholesalers. Sales directly to end customers. Automation partnerships continue the expansion of the distribution channels. party contractors. CASH FLOW very low penetration. We use our capital allocation discipline to balance between investment, balance sheet management and shareholder returns. Employees We offer opportunities for personal Revenue is turned into cash flow, with a very development and competitive rewards small amount of bad debt, reflecting the linked to performance. We believe in quality of the customer base. This is used a creative working environment with to fund the operating costs of the business, scope for individual responsibility restructuring costs and any working capital and personal achievement. requirements. Cash generation has remained strong and cash conversion has increased to 143%, 39% higher than the prior year. REINVESTMENT Customers We add value to our customers’ businesses. Our staff work closely with our customers in order to understand their requirements and help them achieve their objectives. Communities Our operations create jobs for local Cash generated from operations is communities in 15 countries around reinvested in three main ways: to pay for the world. By supporting local supplier research and development to keep our development, where possible, we drive product offering up to date; to buy tooling sustainable value for shareholders and other equipment to ensure that products and further economic benefits for are manufactured to high standards; local communities. and in accord with our capital allocation methodology, the return of capital to shareholders via dividend. Governments We support local economies by creating employment and paying local taxes. We stimulate local economic prosperity which contributes to the maintenance of public infrastructure and services. 1 5 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 WHAT MAKES US DIFFERENT SUPERIOR FIXTURE PERFORMANCE & LONGEVITY ADVANCED CONTROLS ZERO REPLACEMENT PARTS SYSTEM-WIDE CONTROL The value that heavy industrial customers Dialight is able to deploy intelligent lighting receive encompasses the traditional energy in factories, which creates tremendous savings of an LED system, plus savings opportunities to add value beyond the in maintenance and installation costs that basic benefits of Dialight’s LED lighting. can surpass the energy savings. At the basic level, controlling the lights, Lighting in these sectors is safety critical through Dialight’s proprietary DACS and is installed in tough environments where system or through a system integrated maintenance is dangerous, disruptive and with leading factory automation partners, expensive. Dialight’s industry-leading ten- means customers can optimise their year warranty and proven engineering are savings and light utility. the best fit to deliver this value proposition. DATA-DRIVEN INSIGHTS At the second level, the lights can be used in applications that provide productivity and safety solutions. They are a great platform for providing location and tracking for staff and equipment, environment monitoring, emergency and safety indicators, audio and video applications. SEAMLESS INTEGRATION WITH FACTORY AUTOMATION One of the economic barriers to deploying Industrial Internet of Things solutions is the cost to wire or otherwise connect multiple sensors. Dialight lighting solutions provide wireless capability and connectivity allowing Industrial Internet of Things solutions to be deployed in a much more cost- effective manner. UPGRADEABLE Dialight products are built with upgradeable and integrated controls. This allows customers to subsequently retrofit controls and ensure future compatibility. REDUCED MAINTENANCE DOWNTIME Major causes of fixture failure are water ingress, excess vibration and extreme temperatures. Dialight fixtures are designed to withstand all these factors. OPTIMISED FIXTURE QUANTITIES Dialight uses lighting designers to determine the precise location of its fixtures. We use their knowledge of our fixture and lens capabilities to recommend the optimal installation. ENVIRONMENTALLY FRIENDLY AND ENERGY EFFICIENT Dialight’s technology and product roadmap features improvements in energy efficiency, longevity and electrical, optical and mechanical features that reduce maintenance and installation costs. With a small investment, customers reduce their CO2 footprint, reduce energy consumption, improve the quality of lighting and move to being a safer and more sustainable organisation. 6 1 Dialight plc Annual Report and Accounts 2017Strategic reportThe future is about the connectivity of fixtures and building management systems to form an integrated data harvesting capability and action- deployment platform. The installed lights provide a wireless network in a strategic position to overview all activities in a plant. By harnessing this wireless data harvesting capability and connecting it to the building management systems the lighting system will enable two major improvements: Productivity _ equipment and space utilisation _ inventory management _ predictive maintenance _ driverless vehicle tracking Safety and Security _ emergency notification _ human-centric lighting – the right light at the right time _ unauthorised access notification _ lone worker monitoring A wireless system is significantly cheaper and less disruptive to install than a hardwired alternative. Our lights can integrate with Rockwell, Tridium and Schneider building management systems and we are using beta sites to test the system capabilities. E H T S E O D D E L F O E R U T U F T A H W ? E K I L K O O L 1 7 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 TRUSTED TO DELIVER The Hornsea1 wind farm The Hornsea1 offshore wind farm is being built 75 miles off the coast of England in the North Sea, a harsh and unforgiving body of water that separates the UK from mainland Europe. Once completed, it will consist of 174 turbines each rising 600 feet into the air and will provide enough power for 1,000,000 homes. It is a challenge to ensure that aircraft and shipping are warned of their presence, regardless of weather conditions. Dialight is able to provide a comprehensive range of Aviation Beacons that sit on top of the turbines and navigation systems. As an established provider of packaged solutions to off shore installations, Dialight tailors the solutions to customer specifications. Safety is the primary concern and it ensures connectivity to customers’ systems, allowing remote monitoring and instant alerts for any problems, thereby ensuring an immediate response. M R A F D N I W E R O H S F F O T S E G R A L S ’ D L R O W E H T R O F M E T S Y S E C N A D I O V A - N O I S I L L O C E H T G N I D I V O R P T P E W S D N I W E H T … A E S H T R O N M O R F 8 1 Dialight plc Annual Report and Accounts 2017Strategic report H W K M 2 S N O I T C U D E R Y G R E N E L A U N N A T S E W E V I S O R R O C N E D E W S F O T S A O C E H T O T Petrochem facility This facility is located on the western Dialight’s solution was to replace the existing units with its Stainless Steel Linear products coast of Sweden where temperatures which are designed to withstand such a range from +30°Celsius in summer to harsh environment. The result is a reduction -25°Celsius in the winter. Light fixtures in annual maintenance costs of £100k, are mainly external and the proximity to the improved site safety and lower energy costs. coast results in salt corrosion being a major problem. In addition, rapid temperature changes were causing the materials in the site’s fluorescent fixtures to expand at different rates and thus allow water ingress, leading to failure of the fixtures. £100K Annual savings 1 9 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 OUR STRATEGY AT A GLANCE OUR GOAL OUR VALUES Our goal is to deliver the most energy- efficient, reliable LED lighting solutions available – leading the way in the energy- efficient LED lighting revolution for industrial and hazardous applications. We improve safety while integrating as a key information node within our customers’ operations. Our values are at the core of our business. Our culture is one of openness, honesty and accountability. We believe that businesses thrive by sharing knowledge and experiences. In order to capitalise on the cross fertilisation of ideas, we employ people from a diverse range of backgrounds and industries. All our actions are based on commitments Commitments made to each other and our business We empower and are held accountable to deliver results Accountability We are proud of what we do and how we treat each other. We have high ethical standards Respect No one person or team can do it alone. The Company is Collaboration larger than any one individual We communicate with our teams; listening and partnering for faster Communication and wiser business decisions We lead the market through our ground breaking Innovation technology We thrive on talent and passion. We are a great place for smart people with a passion Excitement to work SEE PAGE 34 FOR OUR KPIs SEE PAGE 32 FOR OUR RISKS SEE PAGE 12 FOR OUR MARKET DRIVERS 0 2 Dialight plc Annual Report and Accounts 2017Strategic reportSTRATEGY PRIORITY REINFORCE OUR FOUNDATIONS STRENGTHEN OUR CAPABILITIES CREATE AND CAPTURE VALUE 1 2 3 We are focused Increase Improve our on Build a more on fixing the production time delivery for robust supply short-term capacity in new orders to an chain by supply issues the short term acceptable level. reducing the of 2017. Actions to eliminate in progress: backlog of orders. number of components. 1 2 3 4 5 After resolving We have a strong Improve our Enhance Expand our short term sales team that NPI process for the strategic existing product operational combines with speed and focus. and tactical portfolio by problems, the distribution develop a longer network to term operational platform for a ensure we understand global supply our customers’ chain. requirements. approach to enhancing our markets. controls and adding building management interface capabilities. 1 2 3 4 We will Concentration Reducing Lobbying Becoming a continue to on strategic the payback governments trusted partner in focus on the accounts to timescale on in order to the supply chain. major levers for accelerating secure large our fixtures multi-site supply to enhance influence legislative market adoption: contracts by the return on restrictions on becoming the investment older lighting supplier of and thus allow technology choice for large us to target and promote corporates. maintenance awareness of the budgets. benefits of LED. 2 1 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 KEY PERFORMANCE INDICATORS FINANCIAL Revenue (£’m) 2017 2016 2015 2014 2013 181.0 182.2 161.4 159.8 131.2 Description Revenue from sales. Link to strategy Definition Revenue of the business excluding items that are considered as non-recurring or not reflective of the underlying performance of the business. Revenue growth in territories and segments is part of capturing value enabled by reinforcing our foundations and strengthening our capabilities. Data is not accurate for design purposes, plus 10 to every number Underlying operating profit (£’m) Description The EBIT related to the performance of the underlying business. Link to strategy 2017 2016 2015 2014 2013 9.7 13.1 6.1 18.1 14.5 Definition Operating profit of the business excluding items that are considered as non-recurring or not reflective of the underlying performance of the business (see page 127). The key measure of the success of our near-term strategic goals is EBIT. Cash conversion (%) Description The ability to turn profits into cash. Link to strategy Definition Adjusted operating cash flow divided by adjusted EBITDA. Adjusted EBITDA is underlying operating profit, excluding depreciation and amortisation (see page 127). In order to fund our strategic objectives, cash management is very important. Remuneration linkage Revenue growth is a key element in achieving short term and long term incentive targets. Due to revenue reduction year on year, there were no management bonus payments in 2017. Target Year-on-year revenue growth (at constant currency). We did not achieve this in 2017 as there was a 4% decline. Remuneration linkage EBIT is one of the main measures used in short term and long term incentive targets. The target for 2017 was not achieved and therefore there were no management bonus payments. Target For 2017 the target was consensus EBIT at the start of the year, which was £17.5m. Remuneration linkage Cash conversion does not directly link to remuneration but is an enabler to achieving our EBIT target. Target This has been consistently over 80% for the past three years. 143 104 131 2017 2016 2015 2014 55 2013 55 NON-FINANCIAL Health and safety (Number) Data is not accurate for design purposes, plus 10 to every number 2 2 2017 6 2016 10 2015 2014 2013 000 000 Description A measure of how many serious accidents have occurred within the Group. 32 Definition A recordable incident is one that results in a member of staff being incapacitated for more than three days. Link to strategy Ensuring a safe working environment for employees is fundamental to attracting and retaining good calibre staff which will enable us to achieve our strategic goals. Remuneration linkage Health and safety does not directly link to remuneration but is an enabler to achieving our EBIT target. Target Zero recordable incidents. Dialight plc Annual Report and Accounts 2017Strategic report SEE PAGE 62 FOR OUR REMUNERATION REPORT Retention (%) 2017 2016 2015 2014 2013 Description A measure of how well the Group can retain its staff. Definition The number of staff at the end of the year divided by the total of the number of staff at the start of the year and joiners. This calculation excludes direct manufacturing staff. 94 93 83 000 000 Link to strategy Reinforce our foundations Strengthen our capabilities Link to strategy Retaining high-calibre staff is part of creating and capturing value. Create and capture value Remuneration linkage Business growth will come from the intellectual property generated by our engineers and our knowledgeable sales teams. Target At least 90% retention. Description Orders received for lighting products. Link to strategy Definition Total orders received for lighting products in the year. Order growth is a lead indicator of the financial strength of our end markets and in resolving the current operational issues. Remuneration linkage Order growth drives revenue which in turn drives EBIT and EPS, both forming part of the remuneration targets. Target Year-on-year order growth. RECOVERY INDICATORS Lighting orders (£’m) 2017 2016 2015 At constant currency. 145 151 142 Lighting on-time delivery (%) 48 2017 2016 2015 Description The percentage of orders delivered on time. Link to strategy 74 70 Definition The value of orders shipped in the year meeting the customer request date over the total value of the orders shipped in the year. On-time delivery is a lead indicator of the operational issues being resolved. Underlying lighting gross profit (£’m) 2017 2016 2015 2014 2013 54.3 57.4 48.3 50.8 40.0 Description The gross profit related to the performance of the underlying lighting business. Definition Gross profit of the lighting business excluding items that are considered as non-recurring or not reflective of the underlying performance of the business (see page 104). Link to strategy One of the key near-term strategic goals is to build a robust and scalable operational platform. Lighting gross margin is a good indicator of the success of this target. Remuneration linkage A low level of on-time delivery will impact revenue and hence EBIT and EPS. Due to the poor on time delivery performance this impacted revenue and EBIT and no management bonuses are payable for 2017. Target 80%. Remuneration linkage Lighting gross profit expansion is a key part in achieving short term and long term incentive targets. Lighting gross margin contraction of 200 basis points was a key contributor to reduced EBIT and the fact that there were no management bonus payments in 2017. Target Year-on-year expansion of lighting gross margin. Due to operational issues there was a contraction in 2017. 2 3 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 Talent development We offer challenging personal development programmes to enhance the quality of leadership throughout the Group. A number of our senior leaders have individual development programmes that are reviewed regularly. Our development programmes are designed to promote personal growth and enhance leadership and relationship skills. Our objective is to provide these individuals with the tools and training they need to achieve more in their existing role and potentially to advance through the organisation if their achievements merit it. Employee involvement The Group places considerable value on the involvement of its employees, keeping them informed on matters affecting them as employees and on the various factors affecting the performance of the Group. We do this through formal and informal meetings, internal communications, and our Annual Report. Employee representatives are consulted routinely on a wide range of matters affecting employees’ current and future interests. OUR PEOPLE To unleash their potential, we provide Our policy reflects our commitment employees with: to employees and to those with whom we work. It outlines the commitments _ the opportunity to make a difference – we make to select and develop our our products make the world a safer and employees, and to establish a work healthier place; environment where everyone can take an active part in reaching our strategic _ an entrepreneurial business opportunity; _ a portfolio of cutting edge technologies goals while feeling a sense of pride and the ability to add more; in working in Dialight. _ in-house training for personal and professional development; Dialight falls within the scope of the new _ international career development non-financial regulations. On pages 26 and opportunities; 27, we have outlined the matters, policies and outcomes of those polices where _ performance-linked rewards; and _ the opportunity to learn from peers material to the business. tackling similar challenges. Autonomy We believe in empowerment. Our structure Innovation We are committed to innovation and customer allows managers to be autonomous and satisfaction. Creating and developing new responsible for making timely decisions products gives us a competitive edge. We in the best interests of our business. encourage the sharing of knowledge and We support personal and professional technology throughout the Company. development through a range of training programmes. The programmes enable Through collaboration and sharing and prepare leaders to continue to best practice, we continue to deliver grow the business. market-leading innovations that benefit our customers. Company leaders come Achievement Our employees are highly motivated by the together to learn from one another, identify ways to collaborate, share technologies or chance to make a difference. We strive each simply learn from each others’ experience. day to make products that protect lives and We believe that this combination of make the world a safer and healthier place. empowered business leaders is a key We invest a lot of time finding and developing part of our current and future success. the right people who have the initiative, 4 2 knowledge and leadership qualities to do this. Dialight plc Annual Report and Accounts 2017Strategic reportOur social responsibilities also extend to the communities in which we operate. We like to play a positive role in our local communities and participate in a range of activities and educational initiatives. Local management teams decide which community programmes to participate in and which charities to donate to or sponsor. Our involvement is very much built around the spirit of community. Many of the activities we undertake are aimed at supporting initiatives in the following areas: _ partnerships with local schools, charities and other community organisations to promote community cohesion; _ promote charitable giving and active volunteering in communities amongst our employees; _ support training, employment and education for local people on our sites and in our offices; _ utilise nearby businesses wherever possible to encourage local economic prosperity; and _ provide or fund appropriate physical and community infrastructures to ensure a positive legacy is left beyond our involvement. Leadership Team – Orlando As part of Dialight’s ongoing sustainability initiative the entire Dialight leadership team volunteered at the Second Harvest Food Bank, a non-profit organisation that relies on volunteers and donations to distribute food and dry goods to partner programmes such as food pantries, soup kitchens, women’s shelters, senior centres and day care centres. The team spent an afternoon helping out in their warehouse, sorting and re-packaging food donations to supply smaller distribution centres. London Office Staff at the London office spent a morning at the Whitechapel Mission which gives breakfast to those in need 365 days per year, along with providing hot showers and clean clothes. Service users also receive life skills advice, where needed, on basic administrative tasks from completing benefits forms and job applications to paying bills and finding a hostel. Perth office – Australia Dialight Australia has partnered with Oz Harvest, a non-profit organisation that organises daily fresh food deliveries to those in need. Staff at the Perth office volunteered during the year to assist in their warehouse. In addition, they found that the warehouse was a dark, hence dangerous, place to work. Our team provided replacement lights and also encouraged a local electrician to install them. Farmingdale office – New Jersey Staff from Farmingdale established their “WE CARE” programme. “WE CARE” works with two local non-profit charitable organisations: the “FUFILL” Food Bank and “MONMOUTH CARES”. All Farmingdale employees across multiple functions are invited to participate and contribute. 2 5 E C N E R E F F I D ? S E I T I N U M M O C R U O N I A E K A M E W O D W O H Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 OUR PEOPLE CONTINUED Diversity and inclusion We see diversity and inclusiveness as Diversity and inclusion policy We recognise that the diversity of the being essential to our productivity, creativity, people in our business and the inclusion of innovation and competitive advantage. all enriches our products and performance, Gender diversity: Board1 5 They are the foundation of a performance and the lives of our employees. Our culture that promotes understanding approach is formalised in the Group’s and appreciation of, and respect for, all diversity and inclusion policy. 2 perspectives, backgrounds and experiences. Applications of employment from disabled We believe in developing policies and actions which support our long term people and disabled employees Applications for employment from disabled aims, as well as establishing appropriate people are always fully considered, bearing Male Female measurable targets. in mind the aptitudes of the applicant Gender diversity: senior management concerned. In the event of members of staff The result is that we have significant diversity becoming disabled, every effort will be made 24 throughout our operations in 15 countries. to ensure that their employment with the Geographic diversity As our business continues to expand Group continues and that any appropriate training is arranged. It is the policy of the Group that the training, career development globally, it is important that the insights and and promotion of disabled people should, perspectives of local markets be represented as far as possible, be identical to that of on our leadership teams. We continue to other employees. seek ways to ensure that local leadership is contributing to our global business strategies. 12 Male Female 6 2 Gender diversity: other employees 775 725 Male Female 1 At the date of this report. Dialight plc Annual Report and Accounts 2017Strategic reportWe are committed to ensuring that our best people can thrive at Dialight, including enabling female leaders who might otherwise exclude themselves for promotions and new challenges. E C A L P K R O W E H T N I N E M O W On an overall level Dialight has a very We will look to develop leadership balanced workforce with 52% male and 48% programmes to provide more support female staff. This is consistent with the prior for women with the establishment of year where the balance was 50% male and a mentoring group. 50% female. The gender balance differs between leadership teams to investigate how we different levels within the organisation. can allow employees to work in ways that In senior management we have 33% female best suits their personal responsibilities staff whereas in all other management and and circumstances. We are working with our local business operative roles we have 48%. 12Women in senior management Winnie Lu Winnie joined the Group as Global Kathy Sohrabi Kathy joined Dialight in May 2017 as Director Supply Chain Director in 2016 and has of Technology in charge of our controls and been instrumental in driving material cost automation initiatives. She will be key in driving reductions. She has also played a pivotal role the next phase of our controls strategy. in the transition to outsource manufacturing. 2 7 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 SUSTAINABILITY Health and safety We are committed to safeguarding the health and safety of our employees while at work. This is demonstrated by our culture of safety and our excellent health and safety record. READ MORE P.31 Corporate responsibility and sustainability Our commitment to managing our business activities in a sustainable way and minimising our environmental impact is evidenced by our performance against the Group’s carbon reduction target. READ MORE P.30 Human rights and ethics A commitment to respecting human rights and operating in an ethical way is embedded throughout the Group and underpins the way that we work. READ MORE P.31 Dialight is involved in the design and manufacture of a wide range of products that improve safety in industrial environments, many of them hazardous and where safety is mission critical. We are committed to achieving continual improvement in our environmental management system to enhance environmental performance, and regard compliance with the relevant laws, regulations and other obligations as a minimum standard. This section of the Annual Report focuses on areas of progress and our performance in all areas of sustainability considered material by our stakeholders and which are important to the success of the business. Our key performance indicators (KPIs) reflect the importance that we place on sustainability and enable the Board to monitor our progress in meeting the objectives and responsibilities in these areas. The Group’s non-financial KPIs are set out on pages 22 and 23. Areas of emphasis include health and safety, employee engagement and development, human rights, ethics and sustainability. The safety of its employees and of the products it designs are critical to the Group and are a major priority. We recognise the necessity of safeguarding the health and safety of our 8 2 own employees while at work and operate so as to provide a safe and comfortable working environment for employees, visitors and the public. Our policy is to manage our activities to avoid causing any unnecessary or unacceptable risks to health and safety and the environment. Dialight has an excellent health and safety record and a culture of safety is deeply embedded within the Group. Our core values are respect, innovation, collaboration and commitment, and our culture is one of openness, integrity and accountability. We encourage our employees to act fairly in their dealings with fellow employees, customers, suppliers and business partners. We recognise that our employees determine our success and we continue to invest in, and encourage, further development of our employees each year, by providing clear leadership and decisive action. We work with our leadership teams to ensure they find the best talent to fulfil our growth ambition. We support the concept of sustainability and recognise that our business has an environmental impact. To that end, we constantly strive to reduce our carbon footprint. The environment We make environmentally friendly products. We have an excellent long-term record and a clear strategy for addressing the environmental issues that affect our business. Our products Our products and solutions serve to protect our market-leading position and enhance organic growth. Our products are becoming increasingly sophisticated, many have artificial intelligence features that facilitate their direct linkage to our customers’ IT infrastructure, increasing customer control while reducing total cost of ownership. We lead the market in low environmental impact LED products and have the most efficient power supply units in the industry. All our products benefit from temperature compensation technology, maximising their life-span, and enhanced optics that direct light precisely where it is needed. All products have an industry leading ten-year warranty. Dialight plc Annual Report and Accounts 2017Strategic reportAs part of its sustainability commitments, in 2010, the Ford Motor Company pledged to reduce the energy used to produce each of its vehicles by 25%. Ford’s philosophy is that improved sustainable performance is not just an environmental target, but a business opportunity. Ford found that their existing high intensity discharge (HID) and fluorescent lighting were inefficient and costly to maintain, and turned to Dialight for a solution. In 2012 they performed an on-site trial of Dialight lights and in 2013 Dialight was globally specified. Today, Ford has 75,000 fixtures installed across 51 facilities in seven countries, with the benefits including: _ CO2 output reduced by 75,000 tons per annum; _ maintenance hours cut by 100,000 per annum; _ the amount of energy saved could run one plant for a year; and _ anticipated electricity use cut by 56kWh annually, saving £5m per annum. ? R E T R A M S S T N E I L C K R O W P L E H E W O D W O H 2 9 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 SUSTAINABILITY CONTINUED Emissions from combustion of fuel and operation of facilities Emissions from purchased electricity Total 2017 Resource Electricity Water 2017 Tonnes CO2 271 5,756 6,027 Total consumption (m’s) 11.0 6.1 2016 Tonnes CO2 729 6,651 7,380 Unit kWh litre 2015 Tonnes CO2 849 6,642 7,491 Consumption per £ turnover 0.060 0.033 Recommendations of the Task Force on Climate-related Financial Disclosures The Task Force reported in June 2017, highlighting four key areas that companies should report on as part of their public disclosures. Compliance with these recommendations is voluntary and we intend to incorporate them within our compliance framework. The four areas we will be focused on as part of our public disclosure are as follows: a) governance: the level of governance around climate-related risks and opportunities; b) strategy: actual and potential impacts of climate-related risks and opportunities on an organisation’s business, strategy and financial planning; c) risk management: the processes used to identify, assess and manage climate-related risks; and d) metrics and targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities. Our impact The environmental effect of our operations We are committed to raising employee awareness of environmental issues and the is relatively low compared to manufacturers effects of their activities through company- in other sectors. We place a high level of wide promotion and communication. importance on the quality of our products We recognise that simple, small measures and the service levels we provide to our taken in the workplace can have a large customers. We strive to make our operations impact on reducing environmental damage. more flexible and responsive to our end markets and customers. Environmental management system (EMS) We are committed to developing and Carbon footprint We are committed to reducing our carbon footprint. The Group set a target of reducing its total carbon emissions relative to implementing an EMS throughout the revenues by 10% over the three years from Group to measure, control and reduce our December 2017. Our emissions have reduced environmental impact. We have performance as we continue to focus our energy reduction indicators to assist local management in initiatives and partly due to the move to an implementing the policy and, ultimately, outsourced manufacturing model. We are in developing an EMS. All Group companies are certified to ISO 14001 accreditation, working with our manufacturing partner to reduce their carbon footprint. where warranted. Group companies are encouraged to improve energy efficiency, to The table above sets out Dialight’s emissions reduce waste and emissions and to reduce from 2015 to 2017 in accordance with the the use of materials in order to minimise Companies Act 2006 (Strategic Report their environmental impact. and Directors’ Report) Regulation 2013. The Group does not operate a fleet of The EMS includes procedures for the distribution vehicles, although it does own management of waste, trade effluent, a number of cars. To support the Group’s hazardous substances, environmental commitment to sustainability, our policy, processes and procedure, enforcement actions, and compliance with regulatory frameworks and legislation. which is subject to regular review, operates a cap on permissible CO2 emissions for all company-owned vehicles and vehicles bought by employees who have taken a cash allowance in lieu of a company car. 0 3 Dialight plc Annual Report and Accounts 2017Strategic report Waste management The Group has two zero-waste-to-landfill Ethics Dialight’s culture is one of openness, A responsible investment Investing in Dialight shares meets the criteria sites: one in Australia and one in Denmark. integrity and accountability. The Company of many professional and private investors We work with our manufacturing partner and requires employees to act fairly in their who base their decisions on environmental, suppliers to identify recycling opportunities. dealings with fellow employees, customers, ethical and social considerations. The Group All administrative offices have a recycling suppliers and business partners. We require has a reputation for honesty and integrity in policy to help reduce waste-to-landfill. suppliers to be of high quality and to operate its relationships with employees, customers, to accepted international standards. Our business partners and shareholders. The Group will continue to report its policy and internal guidance in this area are environmental performance in the Annual routinely reviewed and compliance with the Report and Accounts. policy is checked as part of the half year and Human rights Dialight’s core requirements for human Health and safety Dialight’s products protect and improve the year-end processes. The Company does rights prohibit forced labour, child labour, not make political donations and charitable non-discrimination, freedom of association donations are made only where legal and and right to collective bargaining. We do not quality of life for people worldwide. Safety ethical according to local laws and practices. tolerate practices which contravene these is critical to the Group and is a major priority for management. The Board has endorsed the inclusion of the Group’s accident Whistleblowing We require our employees and business and respect for, these core requirements are integrated within our organisation. Managers international standards. Compliance with, frequency rate as one of its non-financial partners to maintain the highest standards and supervisors must provide leadership that KPIs on page 23. of integrity and act in good faith. Dialight has a Group-wide whistleblowing policy which promotes human rights as an equal priority to other business issues. All employees The Group manages its activities to avoid applies to all employees and to joint venture are responsible for ensuring that their own causing any unnecessary or unacceptable partners, suppliers, customers and distributors actions do not impair the human rights of risks to the health and safety of our relating to our businesses. We encourage others, and are encouraged to bring forward, employees in the workplace or to the public an open culture whereby any issues can in confidence, any concerns they may as a result of our activities. Health and safety be raised, we recognise that there will be have about human rights. Our Group Chief performance is closely monitored to ensure times when it is not appropriate, or a person Executive Officer has overall responsibility that adequate processes, procedures and will not be comfortable, raising a concern for ensuring that human rights considerations reporting are in place, and are in operation, through line management. An independent are integral to the way in which existing to ensure a safe working environment for third-party provider, Safecall, has been operations and new opportunities are our employees and visitors to our sites. appointed to operate a confidential reporting developed and managed. service which enables employees to raise any We have an excellent health and safety concerns they may have in confidence and, record and a culture of safety is deeply if they wish, anonymously via the telephone Modern Slavery Act Dialight published its first Modern Slavery embedded within the Group. Health and or by web-reporting. All reports are treated Act Statement in 2017. Since the introduction safety performance is regularly reviewed confidentially and are provided to the Group of the Act, we have worked to raise throughout all levels of the Group. Each site Company Secretary and Chair of the Audit awareness of this important agenda. must have an independent health and safety Committee for review and to ensure that they review every three years, with a view to are appropriately investigated and concluded. During the year, a guidance note was ensuring a consistent approach in the quality We are committed to ensuring that anyone prepared and sent to all businesses raising of reporting, adherence to internal processes raising a concern in good faith is not subject awareness of the Act and the issue of and procedures, adequate reporting and investigation and to further promote our to any victimisation or detrimental treatment, although a malicious allegation may result modern slavery in business and supply chains. Each business was requested to health and safety culture. We thoroughly in disciplinary action. review the root cause of any accidents to ensure that we take preventative measures, including further training and education Anti-bribery and corruption Dialight has a zero-tolerance policy on consider the potential issue of modern slavery and human trafficking within their business and supply chain. In addition, we rolled out Modern Slavery Act training to of our employees. Our goal is to have bribery and corruption which extends to all all employees across the Group to ensure no accidents. business dealings and transactions in which that our business management understand we are involved. We have a policy of not their responsibilities and consider the Act The number of recordable incidents, i.e. making political donations and a prohibition in their operations. an incident that results in a member of staff on offering or receiving inappropriate gifts being incapacitated for more than three days or making undue payments to influence the was as follows: Recordable incidents 2017 6 2016 10 outcome of business dealings. Our robust policy and guidance in this area are routinely reviewed and compliance with the policy is checked as part of the half-year and year- end process. During 2017, we rolled out anti-bribery and corruption training to all employees across the Group. 3 1 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 RISK MANAGEMENT Risk landscape and key risk drivers Our risk landscape consists of: _ to assess and transfer or avoid those risks which are beyond our appetite for risk; and _ by consideration of materiality, establish the authority layers within the Group _ strategic risks – market, technology, at which decisions on acceptance and mergers and acquisitions; mitigation of levels of risk are taken. _ hazard risks – political and economic instability, natural disasters, fraud and corruption; Embedding internal controls and risk management further into the operations _ operational risks – people, supply chain, of the business is an ongoing process. order fulfilment and IT; Key areas of the Group’s system of _ compliance risks – laws and regulations, internal controls are shown below. health and safety, and code of conduct; and _ financial risks – financial management, funding, foreign exchange, financial reporting and tax. Risk management approach The effective understanding, acceptance and management of risk is fundamental Risk appetite and culture The Risk Committee is responsible for overseeing the risk management processes and procedures; it reports to the Board through the Audit Committee on the key risks facing the Group. It monitors the mitigating actions put in place by the relevant operational managers to address to the long-term success of the Group. the identified risks. The Board has approved The Group has developed specialist the acceptance of certain risks which are knowledge in products, services, processes considered appropriate to achieve the and regions which allows us to understand Group’s strategic objectives. The degree of the associated risks and accept them in an risk to be accepted within the business is informed way. Our approach is encapsulated managed on a day-to-day basis through the in the key principles of our new risk Board delegated authority levels. These are management process: the framework for informed risk-taking within the businesses and the route for escalating _ to understand the nature and extent of decision making up to the Board. SEE PAGE 57 FOR OUR VIABILITY STATEMENT SEE PAGE 41 FOR GOING CONCERN risks facing the Group; _ to accept and manage within the business those risks which our employees have the skills and expertise to understand and leverage; GROUP INTERNAL CONTROL SYSTEM Daily and weekly data on cash, sales and orders are sent to the Group Finance Team by regional management. A weekly report is issued to the Group Chief Executive Officer and Group Finance Director which provides an early warning system on potential risks and helps to direct mitigating actions. Each month the Group Chief Executive Officer reports to the Board outlining the Group’s operations and giving analysis of significant risks and opportunities. The paper covers progress against strategic objectives and shareholder related issues. The Group Finance Director also submits a separate financial report to the Board each month evaluating progress against internal targets and external expectations. Quarterly re-forecast papers, an annual budget paper and an annual strategic plan paper are also submitted to the Board. The Group Chief Executive Officer and Group Finance Director report to the Audit Committee on all aspects of internal control. The internal audit function prepares quarterly reports on specific topics which are reviewed by the Audit Committee. The Board receives regular reports from the Audit Committee, and the papers and minutes of the Audit Committee are used as a basis for the Board’s annual review of internal controls. A comprehensive financial reporting package is received from all operating units monthly with comparisons against budget, forecast and prior year performance. Each operating unit is required to submit a quarterly self-certification on compliance and controls. A thorough re-forecast is prepared quarterly and a budget is prepared annually. 2 3 The Group updates its three year strategic plan annually. Dialight plc Annual Report and Accounts 2017Strategic reportBrexit – deep dive The decision by the UK to leave the EU, so called “Brexit” results in uncertainties surrounding potential tariffs on goods imported to the EU. We currently manufacture most of our lighting products in Mexico which has a trade agreement with the EU and therefore sales to the EU (excluding the UK) are unaffected by Brexit. We saw a currency impact of the Brexit decision on the Group’s reported results in 2017 due to translational gains on results from the US. Sales to the UK may be impacted by tariffs in the future but at this stage there is no certainty on this. We continue to make contingency plans to mitigate this risk. RISK MANAGEMENT FRAMEWORK The diagram below summarises our complementary approach based on utilising a top down plus a bottom up process: Top down Group risk policy and strategy Group risk appetite Principal risk oversight Group compliance oversight Bottom up Business risk appetite policy Assessment and mitigation of specific risks Upward reporting of key residual risks SEE PAGE 58 FOR OUR AUDIT COMMITTEE REPORT DIALIGHT PLC BOARD OPERATIONAL COMPLIANCE CHIEF EXECUTIVE AUDIT COMMITTEE RISK COMMITTEE EXECUTIVE COMMITTEE COMPANY SECRETARY SENIOR MANAGERS INTERNAL AUDIT SENIOR FINANCE STAFF 3 3 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 PRINCIPAL RISKS AND UNCERTAINTIES RISK CATEGORY DESCRIPTION GROSS RISK IMPACT ON STRATEGY IMPACT ON VIABILITY, REPUTATION AND H&S MITIGATION PRODUCTION CAPACITY Production capacity needs to be sufficient to ensure current orders can be fulfilled in a timely manner H and be scalable to support growth Risks to production capacity by using a single-site location, for the manufacture of all Lighting products The Group needs to maintain a robust supply chain SUPPLY CHAIN MANAGEMENT The procurement planning process is dependent on the accuracy of sales forecasts to ensure adequacy of component supply IT SYSTEMS The Group uses IT systems to operate and control its business; any disruption to this would have an adverse impact on the business. The Group also needs to ensure the protection and integrity of its data POLITICAL CONDITIONS The Group’s main manufacturing plants are in Mexico and its main market is North America. Proposed import tariffs could impact the Group’s business model. “Brexit” has introduced uncertainty to the level of tariffs on goods imported from Europe H M M 4 3 KPI _ Revenue _ Underlying operating profit _ On-time delivery _ Order growth KPI _ Revenue _ Underlying gross profit _ On-time delivery _ Order growth KPI _ Revenue _ Underlying operating profit _ On-time delivery _ Order growth KPI _ Revenue _ Underlying operating profit _ inability to fulfil _ the Group moved Lighting production to its manufacturing partner during the year in order to provide demand due to lack of scalable operations product availability _ loss of revenue and operating profit and lower revenue _ the complexity of our products was not fully appreciated by our manufacturing partner. This resulted in a slower than expected ramp-up causing capacity constraints which led to delays in order fulfilment _ we have placed full-time staff at our manufacturing partner’s facility to hasten the knowledge transfer on production and procurement management _ production capacity is being re-balanced between our manufacturing partner and our in-house facility to mitigate part of this risk by moving production of certain complex products back to our own Mexican facility _ the material shortages at our manufacturing partner resulted in significant production capacity constraints. The dual sourcing programme has been delayed while these immediate issues were addressed but this is a high priority issue for the coming year _ inability to fulfil demand _ we continue to refine our forecasting process and review the accuracy level monthly in order to provide due to lack of product a continuous cycle of ownership and improvement availability _ higher inventory obsolescence with an adverse impact on gross margin customers _ loss of revenue and significant business disruption _ loss of commercially sensitive information performance _ loss of market share _ unforeseen liabilities _ inability to supply _ the Group continually reviews its IT systems to ensure that they are robust and scalable in line with _ there are back-ups built into all Group systems and the spread of systems offers good protection the expansion of the business from individual events _ third-party suppliers are used to provide data protection software _ reduced financial _ based on current information potential tariffs on imports from Mexico to North America are not a major risk _ the Group is considering production locations within the EU Dialight plc Annual Report and Accounts 2017Strategic report Gross risk Link to strategy L Low H High M Medium Reinforce our foundations Strengthen our capabilities Create and capture value RISK CATEGORY DESCRIPTION GROSS RISK IMPACT ON STRATEGY IMPACT ON VIABILITY, REPUTATION AND H&S MITIGATION PRODUCTION CAPACITY Production capacity needs to be sufficient to ensure current orders can be fulfilled in a timely manner H and be scalable to support growth Risks to production capacity by using a single-site location, for the manufacture of all Lighting products The Group needs to maintain a robust supply chain SUPPLY CHAIN MANAGEMENT The procurement planning process is dependent on the accuracy of sales forecasts to ensure adequacy of component supply IT SYSTEMS The Group uses IT systems to operate and control its business; any disruption to this would have an adverse impact on the business. The Group also needs to ensure the protection and integrity of its data POLITICAL CONDITIONS The Group’s main manufacturing plants are in Mexico and its main market is North America. Proposed import tariffs could impact the Group’s business model. “Brexit” has introduced uncertainty to the level of tariffs on goods imported from Europe H M M KPI _ Revenue _ Underlying operating profit _ On-time delivery _ Order growth KPI _ Revenue _ Underlying gross profit _ On-time delivery _ Order growth KPI _ Revenue _ Underlying operating profit _ On-time delivery _ Order growth KPI _ Revenue _ Underlying operating profit _ inability to fulfil _ the Group moved Lighting production to its manufacturing partner during the year in order to provide demand due to lack of scalable operations _ the complexity of our products was not fully appreciated by our manufacturing partner. This resulted in a slower than expected ramp-up causing capacity constraints which led to delays in order fulfilment and lower revenue _ we have placed full-time staff at our manufacturing partner’s facility to hasten the knowledge transfer on production and procurement management _ production capacity is being re-balanced between our manufacturing partner and our in-house facility to mitigate part of this risk by moving production of certain complex products back to our own Mexican facility _ the material shortages at our manufacturing partner resulted in significant production capacity constraints. The dual sourcing programme has been delayed while these immediate issues were addressed but this is a high priority issue for the coming year _ we continue to refine our forecasting process and review the accuracy level monthly in order to provide a continuous cycle of ownership and improvement product availability _ loss of revenue and operating profit _ inability to fulfil demand due to lack of product availability _ higher inventory obsolescence with an adverse impact on gross margin _ inability to supply _ the Group continually reviews its IT systems to ensure that they are robust and scalable in line with customers _ loss of revenue and significant business disruption _ loss of commercially sensitive information _ reduced financial performance _ loss of market share _ unforeseen liabilities the expansion of the business _ there are back-ups built into all Group systems and the spread of systems offers good protection from individual events _ third-party suppliers are used to provide data protection software _ based on current information potential tariffs on imports from Mexico to US and Canada are not a major risk _ the Group is considering production locations within the EU 3 5 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED RISK CATEGORY DESCRIPTION GROSS RISK IMPACT ON STRATEGY IMPACT ON VIABILITY, REPUTATION AND H&S MITIGATION SUCCESSION PLANNING AND STAFF CALIBRE INTELLECTUAL PROPERTY MARKET TRENDS & COMPETITION PRODUCT DEVELOPMENT STRATEGY Group performance is dependent on attracting and retaining high-quality staff across all functions Theft or violation of intellectual property (“IP”) by third parties or third parties taking legal action for IP infringement To continue to lead the market, the Group must be able to identify where customer demand is trending and ensure that we have the products to match. Failure to deliver technologically advanced products or to execute sales strategy could result in loss of market share Ability to deliver new products to the market on a timely basis PRODUCT RECALL The Group gives a ten year warranty on Lighting products FOREIGN EXCHANGE Foreign currency risk is the most significant treasury related risk for the Group. In times of significant volatility, this can have a material impact on performance M M M H M M 6 3 KPI _ Revenue _ Retention KPI _ Revenue _ Underlying operating profit KPI _ Revenue _ Order growth KPI _ Revenue _ Underlying gross profit _ Order growth KPI _ Underlying operating profit KPI _ Revenue _ Underlying operating profit _ without good calibre _ the Group’s development programmes enhance the skills of executives and middle managers staff, the Group will find it _ a comprehensive recruitment process and ongoing evaluation assist high-quality hiring and difficult to expand and development considerable time is spent assessing middle and senior management in order achieve its strategic goals to identify succession plans _ proprietary technology _ all intellectual property is protected by patents and potential violations are pursued through used by competitors legal process patent office screening used to avoid infringing existing patents leading to loss of market share and revenue _ unforeseen liabilities _ loss of market share _ the Group has a robust business case process which incorporates feedback from customers and is evaluated through market intelligence _ internal and external marketing resources are used to review market trends and ensure that the Group’s products remain at the forefront of the market _ significant upgrades to our two largest product lines (High Bay and Area Light, see page 13) were launched during the year _ loss of market share _ lack of order growth is being placed on manufacturability _ new product development process is being reviewed due to delays in 2017 and greater emphasis _ unforeseen liabilities _ we maintain a reserve against potential claims _ product quality is a key focus in the design stage and during the manufacturing process _ volatile financial _ the Group uses natural hedging to cover operational exposure as the majority of revenue and costs performance arising from are in US Dollars. As the business expands geographically, the use of forward contracts will be translation of profit from reviewed to limit operational exposure on a selected currency basis _ translational exposure is not currently hedged but the Group reports key financial indicators on an actual and a constant currency basis overseas operations _ most of the Group’s profit earned is not in the reporting currency Dialight plc Annual Report and Accounts 2017Strategic report Gross risk Link to strategy L Low H High M Medium Reinforce our foundations Strengthen our capabilities Create and capture value RISK CATEGORY DESCRIPTION GROSS RISK IMPACT ON STRATEGY IMPACT ON VIABILITY, REPUTATION AND H&S MITIGATION SUCCESSION PLANNING AND STAFF CALIBRE INTELLECTUAL PROPERTY MARKET TRENDS & COMPETITION PRODUCT DEVELOPMENT STRATEGY Group performance is dependent on attracting and retaining high-quality staff across all functions Theft or violation of intellectual property (“IP”) by third parties or third parties taking legal action for IP infringement To continue to lead the market, the Group must be able to identify where customer demand is trending and ensure that we have the products to match. Failure to deliver technologically advanced products or to execute sales strategy could result in loss of market share Ability to deliver new products to the market on a timely basis PRODUCT RECALL The Group gives a ten year warranty on Lighting products FOREIGN EXCHANGE Foreign currency risk is the most significant treasury related risk for the Group. In times of significant volatility, this can have a material impact on performance M M M H M M KPI _ Revenue _ Retention KPI _ Revenue _ Underlying operating profit KPI _ Revenue _ Order growth KPI _ Revenue _ Underlying gross profit _ Order growth KPI _ Underlying operating profit KPI _ Revenue _ Underlying operating profit _ without good calibre staff, the Group will find it difficult to expand and achieve its strategic goals _ proprietary technology used by competitors leading to loss of market share and revenue _ unforeseen liabilities _ the Group’s development programmes enhance the skills of executives and middle managers _ a comprehensive recruitment process and ongoing evaluation assist high-quality hiring and development _ considerable time is spent assessing middle and senior management in order to identify succession plans _ all intellectual property is protected by patents and potential violations are pursued through legal _ process patent office screening used to avoid infringing existing patents _ loss of market share _ the Group has a robust business case process which incorporates feedback from customers and is evaluated through market intelligence _ internal and external marketing resources are used to review market trends and ensure that the Group’s products remain at the forefront of the market _ significant upgrades to our two largest product lines (High Bay and Area Light, see page 13) were launched during the year _ loss of market share _ lack of order growth _ new product development process is being reviewed due to delays in 2017 and greater emphasis is being placed on manufacturability _ unforeseen liabilities _ we maintain a reserve against potential claims _ product quality is a key focus in the design stage and during the manufacturing process _ volatile financial performance arising from _ the Group uses natural hedging to cover operational exposure as the majority of revenue and costs are in US Dollars. As the business expands geographically, the use of forward contracts will be translation of profit from reviewed to limit operational exposure on a selected currency basis overseas operations _ most of the Group’s profit earned is not in the reporting currency _ translational exposure is not currently hedged but the Group reports key financial indicators on an actual and a constant currency basis 3 7 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 FINANCIAL REVIEW Income statement We have had a challenging year in the execution of our three-year strategy to build a robust and scalable operational platform for future growth. In 2017, we expected to complete the move to our manufacturing partner by mid year. However, the platform engineering of our products was not completed on time. This delayed the launch of our two largest product families by six months. Fariyal Khanbabi, Group Finance Director The ability of our manufacturing partner to ramp up production was slower than anticipated. At the same time, we also experienced extended lead times on critical components that were in our manufacturing partner’s forecast, leading to severe production delays which had a major impact on our results. Despite the challenges that we faced, Group revenue was broadly flat compared to 2016 at £181.0m (2016: £182.2m) and on a constant currency basis was 4% lower than 2016. The resilience in revenue was counteracted by additional costs of production due to the delays, resulting in a 130 basis point reduction in underlying gross margin. Operating costs were flat year on year, resulting in an underlying operating profit of £9.7m, a reduction of £3.4m compared to 2016. The bridge for underlying operating profit year on year is shown in the table below. The key drivers are below: _ (£0.4m) gross margin impact of the revenue reduction _ (£2.4m) due to additional freight charges due to expediting late orders _ (£1.6m) due to ongoing investment in sales _ £1m due to operational savings 13.1 (0.4) (2.4) (1.6) 1.0 9.7 15 12 9 6 3 0 £’m 2016 Revenue decrease Freight costs Investment in sales Operating costs 2017 8 3 Dialight plc Annual Report and Accounts 2017Strategic reportManagement of currency volatility Dialight reports its results in Sterling. The performance of each business segment Revenues were 1% higher (4% lower at is reviewed individually below. Allocation of constant currency) compared with the Our major trading currency is the US Dollar, overheads in each segment was based on prior year. The production delays adversely which comprises 81% of the Group’s revenue. directly attributed costs plus an allocation impacted the level of on time delivery and The Group has both translational and based on segmental revenue. this resulted in lower revenues across all transactional currency exposure. Translational exposures arise on the consolidation of Lighting overseas Company results into Sterling; this is the major currency exposure. Transactional exposure occurs where the currency of sales or purchases differs from the local functional currency. We use natural hedging on revenue and purchases to mitigate the majority of the currency risk. 2017 £’m 2016 £’m Increase % Revenue 137.5 136.6 Gross profit 54.3 57.4 1% (5%) Gross margin % 40% 42% -200bps territories except Australia. Our order intake, i.e. the value of orders received in the year, was also adversely impacted with a year-on-year decline of 4% at constant currency. This was caused by customers deferring orders due to delayed product launches and poor on time delivery. Overheads (43.1) (43.9) (2%) On a vertical sector basis the revenue profile The US Dollar strengthened by 5% compared to the prior year and was the main driver for Underlying operating was as follows: the currency impact. The average rate for the profit 11.2 13.5 (17%) Vertical sectors US Dollar against Sterling has moved from 1.36 in 2016 to 1.29 in 2017. Based on the current mix of currencies, a 1% movement The Lighting segment represented 76% of of the US Dollar relative to Sterling changes the Group’s revenue and 74% of the Group’s revenue by £1.5m and EBIT by £0.2m. underlying segmental operating profit. Cash control The Group has retained strong control over cash during a turbulent year. Closing cash has increased by 60% to £12.8m after funding non-underlying costs. £12.8M Closing cash 143% Cash conversion 2017 2016 2015 Industrial processing & manufacturing 39% 41% 40% Energy, utilities & mining 38% 35% 42% Public & infrastructure 9% 12% 8% Structural 14% 12% 10% 100% 100% 100% We have maintained our diversity of market penetration within key vertical markets and the top three market verticals now account for 39% of revenue in 2017 compared with 41% in the prior year. Gross margin contracted by 200 basis points to 40% and gross profit reduced £3.1 million year on year. The major elements for the decrease are: _ increased freight costs due to air freighting late deliveries in order to meet customer demand; _ our manufacturing partner was not able to make the more bespoke and higher margin products; and _ we had to operate our in-house facility below capacity resulting in inefficiencies. Operating costs increased by 2% with the cost of incremental headcount not funded by increased revenue. The result of lower gross margin and higher costs is that the overall underlying operating profit in the Lighting segment reduced by 17% to £11.2m. 3 9 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 FINANCIAL REVIEW CONTINUED Employee severance and restructuring costs Intangibles write-down Tangible asset impairment and disposals Inventory costs Production transfer costs Other Non-underlying costs recorded in cost of sales and administrative expenses Total cash impact 2017 £’m 0.3 (1.2) (0.9) – (4.6) – (6.4) (5.2) 2016 £’m (5.3) (5.1) 0.2 (3.7) (2.4) (0.1) (16.4) (4.9) Central overheads Central overheads comprise of costs not In the prior year, non-underlying costs related to the closure of the UK directly attributable to the segment and manufacturing facility, expected redundancy therefore not allocated to these segments. costs at the Mexican production facility, In 2017 they amounted to £5.4m, a marginal goodwill impairment of the European Traffic increase of £0.1m from 2016. business and the costs of initial production transfer to our manufacturing partner. Non-underlying costs The Group incurs costs and earns income that is non-recurring in nature or that is Tax The underlying business had a tax rate of Signals and Components otherwise considered to not be reflective of 33.0% (2016: 31.0%), before one-off items. 2017 £’m 43.5 12.4 2016 £’m 45.6 12.1 Increase % (5%) 2% the underlying performance of the business. The recent US tax reforms have resulted in In the assessment of performance of the a reduction of £0.4m in the value of deferred Group, management examines underlying tax assets. Non underlying costs receive performance, which removes the impact tax relief at 34.4% (2016: 30.0%). The net of non-underlying costs and income. impact of these changes result in a reported effective tax rate of 43.3% (2016: 24.9% Revenue Gross profit Gross margin % 29% 27% +200bps The table above presents the components of credit) for the Group. Overheads (8.5) (7.2) (18%) non-underlying profit or loss recorded within Underlying operating cost of sales and administrative expenses. The majority of the Group’s profits arise in the US where the corporation tax rate was profit 3.9 4.9 (20%) Over the past two years the Group has been 35% in 2017 and this is the main driver for implementing its strategic plan to transform the tax rate on the underlying business being to a robust and scalable manufacturing 33%. The recently announced tax reforms Signals and Components are high- platform. We have incurred costs in relation in the US reduce the corporation tax rate to volume businesses operating within highly to this transition. competitive markets. Reported revenue reduced by 5% but the prior year includes revenue from the discontinued European We incurred costs of £4.6m relating to the transfer of lighting assembly to our 21%, effective 01 January 2018. As a result, we anticipate an effective tax rate for 2018 in the low twenties before discrete tax items. business of £5.5m. Excluding this business, manufacturing partner. This figure relates revenue grew by 8% year on year. to set-up costs, project management and Earnings per share (“EPS”) The basic EPS for the underlying business There is significant competition from low- we reviewed and impaired fixed assets of decrease was due to the poor performance cost producers but margins improved by £0.9m as part of scaling down our in-house discussed above. The statutory EPS was 4.8 2% as a continuous cost improvement Mexican facility and intangible assets of pence (2016: negative 8.4 pence). dedicated engineering time. In addition, was 17.9 pence (2016: 26.9 pence). The programme mitigated the price erosion. £1.2m related to product prototypes that Overall there was a reduction in underlying have subsequently been superseded as operating profit of £1.0m (20%). a result of platform engineering. Pension asset The Group has two defined benefit schemes which are closed to new entrants. The scheme valuation has increased by £2.3m 0 4 Dialight plc Annual Report and Accounts 2017Strategic reportUnderlying operating profit (EBIT) Depreciation Amortisation Adjusted underlying EBITDA Working capital movements (excluding impact of non-underlying items) Adjusted operating cash flow Cash conversion % 2017 £’m 9.7 2.4 1.5 13.6 5.9 19.5 2016 £’m 13.1 3.1 4.0 20.2 0.8 21.0 143% 104% from a deficit of £1.3m at 31 December 2016 There was a net reduction in working capital of to a surplus of £1.0m at 31 December 2017. £5.9m mainly driven by inventory. The major The increase is due to favourable movements outflows relate to capital expenditure of £4.9m in the asset portfolio. The triennial funding (2016: £6.0m) and a net cash outflow of £5.2m valuation of the schemes was concluded for non-underlying items. This Strategic report was approved and signed on behalf of the Board by the Group Chief Executive Officer and Group Finance Director. Martin L. Rapp Group Chief Executive Officer Fariyal Khanbabi Group Finance Director 26 February 2018 in the year and resulted in company contributions being unchanged. Strong cash generation Cash generation is an important measure Banking and covenant compliance The Group has its banking relationships with HSBC Bank plc and Wells Fargo. The Group has a revolving credit facility with HSBC of the business model underpinning for £25m, with a further £25m “accordion” further investment in the business. feature, and has a five-year term. The Group Cash generation in 2017 was strong has no borrowings against the facility at the with adjusted operating cash flow (in balance sheet date and is fully compliant the table above) of £19.5m (2016: £21.0m) with its covenant requirements which and represented a cash conversion rate ensures significant financial flexibility. of 143% (2016: 104%). The conversion rate was high due to the reduction in inventory as production was partially transferred Capital management and dividend The Board’s policy is to maintain a strong to our manufacturing partner. capital base in order to maintain investor, creditor and market confidence and to Cash flow As a result of the high cash conversion, the sustain future development of the business. The Board considers consolidated total Group’s net cash position improved by £4.8m equity as capital. At 31 December 2017 in the year from a net cash position of £8.0m this equated to £76.1m (2016: £77.1m). at 31 December 2016 to a net cash position of £12.8m at 31 December 2017. The Board is not proposing any final dividend The roll forward of net cash was as follows: Net cash at 31 December 2016 Adjusted underlying EBITDA Net working capital movement Capital expenditure Taxes and other Non-underlying costs Foreign exchange impact on cash £’m 8.0 13.6 5.9 (4.9) (3.7) (5.2) (0.9) Net cash at 31 December 2017 12.8 payment for 2017 (2016: nil). Going concern As disclosed in the viability statement, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. The Directors believe that it continues to be appropriate to apply the going concern concept in preparing the Annual Report and Accounts. 4 1 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 CHAIRMAN’S INTRODUCTION TO GOVERNANCE Wayne Edmunds, Chairman 2 4 Leadership Our focus on improving the quality and performance of Dialight’s management team continued throughout 2017. Senior management appointments have been made in a number of key areas to support Dialight’s growth strategy, including the appointments of a new Group Chief Executive Officer and Chief Operating Officer. I am mindful of the importance of ethnic and gender diversity at Board level and at a senior manager level. Biographies for each of the Directors and for the Executive Board are set out on pages 44 to 45. The progress in talent development and diversity can be found in the Our People section on pages 24 to 27. We strive to have the right balance of skills, experience and knowledge on our Board to deliver strong leadership, to make clear and effective decisions and to harness our culture to encourage our business to be innovative. Compliance statements Throughout the year ended 31 December 2017, the Company has complied with the provisions as set out in the Code (a copy of which is available on the Financial Reporting Council’s website at www.frc.org.uk). The Group’s approach to risk management and internal control is set out on pages 32 to 37. The Directors confirm that they consider the Annual Report and Accounts, taken as a whole, to be fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance. Board priorities Our priorities for 2018 are to focus on resolving our manufacturing delivery issues in order to build a robust operational platform. We will continue to build on the foundations we have established with talent and innovation to encourage our businesses to innovate, collaborate and seek out opportunities that keep pace with market developments. Wayne Edmunds Chairman 26 February 2018 This corporate governance report provides shareholders and other stakeholders with an appreciation of how our Group is managed and the governance and control framework within which Dialight operates. Good governance is essential in enabling our Board to operate effectively in the leadership of the Group and in promoting the success of the Company in the long term. People and culture As Board members, we have a significant role in setting the Group’s culture, which is in turn supported by the Group’s core values. Our culture of accountability, collaboration and respect, enables management to embed our governance and control procedures throughout the business. The Board is committed to maintaining the highest standards of corporate governance and this report sets out how we have applied the main principles and relevant provisions of the UK Corporate Governance Code 2016 (the ”Code”). As the Company is below the FTSE 350 some of the provisions do not apply but, to maintain good governance and in line with best practice, we endeavour to comply with the Code wherever possible. Dialight plc Annual Report and Accounts 2017GovernanceHOW THE BOARD SUPPORTED STRATEGY Governance at Dialight is ingrained in the organisation’s operating culture and within the Board of Directors. The Board has been actively engaged in the large-scale changes the Group has undergone. It has continued to improve the discipline around its procedures to ensure that they are appropriate for the Group. STRATEGY THE BOARD’S GOVERNANCE ROLE WHAT WE HAVE ACHIEVED The Board is monitoring the short-term The Board has appointed a very operational recovery plan very closely to experienced Group Chief Executive ensure that progress is being made on the Officer with a background in operational key issues of: management to ensure that the recovery REINFORCE OUR FOUNDATIONS a) increasing production capacity b) improving on time delivery c) robustness of the supply chain plan is successful. The Board approved the transfer of the production of certain products from our manufacturing partner back to our in-house and that it is being delivered in a timely manner. facility. This reduces the complexity at our manufacturing partner. The Board reviews the operational plans for Priorities have been re-aligned to ensure the Group regularly to evaluate progress on: that resources are being used in the most effective manner based on current a) the medium term supply chain strategy operational constraints. STRENGTHEN OUR CAPABILITIES b) the new product roadmap c) the new technology roadmap and that the deliverable timescale aligns with the business strategy. CREATE AND CAPTURE VALUE The Board monitors the major levers that will The appointment of a new Head of Strategic accelerate market adoption: Accounts was fully supported by the Board to give new impetus to the strategic a) portion of revenue from strategic accounts account initiative. b) payback period on fixtures c) influencing of regulatory/statutory Review of new product/technology bodies to place restrictions on the use roadmaps to ensure that they will support of older, less environmentally friendly the growth targets over the medium term. lighting technology to ensure that the Group is meeting milestones. 4 3 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 BOARD OF DIRECTORS 5 6 7 1 2 3 4 4 4 Board committee key A Audit Committee N Nominations Committee R Remuneration Committee Chairman of the Committee Dialight plc Annual Report and Accounts 2017Governance3. Fariyal Khanbabi 6. David Thomas A N R Group Finance Director Term of office: Joined Dialight on 8 September 2014 as Group Finance Director. Non-Executive Director Term of office: Joined Dialight on 26 April 2016 as a Non-Executive Director and Chair Background and career: From 2009 until joining Dialight in September 2014 Fariyal was Chief Financial Officer at Blue Ocean of the Audit Committee. Background and career: David was Chief Financial Officer at Invensys plc from 2011 Group, an independent privately owned fuel until his retirement in 2014, having held trading and distribution business. She has senior roles across the business since 2002. over ten years’ experience in senior financial Prior to joining Invensys, he was a Senior positions, including roles at NYSE and Partner in Ernst & Young LLP, specialising in Nasdaq-listed companies. long-term industrial contracting businesses, Current external appointments: None. and is a former member of the Auditing 4. Stephen Bird Senior Independent Practices Board. A N R Current external appointments: None. Director Term of office: Senior Independent Director since February 2013. Joined Dialight as 7. Gaelle Hotellier Non-Executive Director Appointed: 3 October 2016. A N R Non-Executive Director on 10 January 2013 and was appointed Chairman of the Background and career: Gaelle has worked for the Siemens group since 2002 Remuneration Committee on 8 January 2017. during which time she has held various Background and career: Stephen is currently Group Chief Executive of The senior management roles. Between 2013 and 2015 Gaelle was an Executive Board Vitec Group plc and has previous Board member of the European Union’s Fuel Cell experience as a Non-Executive Director of Hydrogen Joint Undertaking, a public-private Umeco plc. Prior to joining Vitec, Stephen partnership with the European Commission. was Divisional Managing Director of Weir She is also a former Chairwoman of Oil & Gas, part of Weir Group plc, and has the Supervisory Board of Siemens held senior roles at Danaher Corporation, Industriegetriebe GmbH in Penig. 1. Martin L. Rapp Group Chief Executive Officer Term of office: Appointed as Group Chief Executive Officer on 8 January 2018. Background and career: Martin was Chief Executive Officer of Laird Technologies, Inc. from 2001 until 2011, having held various management roles at Laird plc since joining in 1996. Previously, Martin held engineering, marketing and management positions with Black & Decker, Unipart Group, Hepworth Monsanto, a chemical company, from plc and Technicolor Group. 1981 to 1996. Current external appointments: None. Current external appointments: Group Chief Executive of The Vitec Group plc. Current external appointments: Within Siemens AG Power & Gas Division, Gaelle is in charge of the project management for the European, Middle East and Africa Region. Gaelle is also a Member of the Advisory 2. Wayne Edmunds Chairman Term of office: Appointed as Chairman on 25 January 2016 and is Chair of the Nominations Committee. N Background and career: Wayne was Chief Executive Officer of Invensys plc from 2011 until 2014, having worked at the business 5. David Blood Board of Berthold Vollers GmbH. N Non-Executive Director Term of office: Joined Dialight on 1 July 2015 as a Non-Executive Director. Background and career: David is co- founder and Senior Partner of Generation Investment Management LLP. Previously, David spent 18 years at Goldman Sachs, ** Michael Sutsko served as a Director from 1 June 2015 until he stepped down on 8 January 2018. since 2008 in various roles including Chief including serving as co-Chief Executive Financial Officer from 2009 to 2011. He Officer and Chief Executive Officer of joined Invensys from Reuters America Inc., Goldman Sachs Asset Management from where he was Chief Financial Officer, and has held several other senior finance roles 1999 to 2003. David received a BA from Hamilton College and an MBA from the in the technology sector including 17 years Harvard Graduate School of Business. at Lucent Technologies. Current external appointments: Non- Executive Director and Chairman of the Audit Committee of Ashstead Group plc, Interim Chief Executive of BBA Aviation plc until 1 April 2018 (after which he will continue on the Board as a Non-Executive Director). Wayne is also a Non-Executive Director of MSCI Inc. Current external appointments: David is on the Boards of New Forests Bike Shareholdings, SHINE, Social Finance UK, World Resources Institute, as well as being a Life Trustee of Hamilton College. 4 5 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 LEADERSHIP The role of the Board The ultimate role of the Board is to promote The Board’s powers are derived from the Company’s Articles of Association but certain decisions and oversight roles have the long-term success of the Company by been delegated to its committees. The delivering sustainable shareholder value. In Board has established a formal schedule order to fulfil its duty, the Board must ensure of matters reserved for its decision and has that the Group operates within a clearly approved terms of reference where it has defined operating structure which fits within delegated responsibilities to its committees. a robust governance and control framework. The chairman of each committee reports to the Board on the activities of the committee. The Board has ultimate responsibility for the Committee minutes are approved by the management, direction and performance committee and then reviewed by the Board. of the Group, and sets the strategic goals which the Company implements through its business plans. The Board is Corporate governance framework The operation of the Board and the committees also responsible for ensuring appropriate is described in this report and further resources are in place to achieve its strategy information on each committee is detailed and deliver sustainable performance. within the separate committee reports. OUR GOVERNANCE STRUCTURE Dialight benefits from a robust corporate governance framework which is essential in order to maintain good oversight and control over: financial and management reporting; compliance and regulatory matters; risk management; and the approval of significant decisions (such as material agreements). The diagram below sets out the top level corporate governance framework for how the Board and its committees interact. Provides strategic leadership to the Group within a framework of robust corporate governance and internal control, setting the culture, values and standards that are embedded throughout the business to deliver long-term sustainable growth for the benefit of our shareholders. BOARD NOMINATIONS COMMITTEE AUDIT COMMITTEE REMUNERATION COMMITTEE EXECUTIVE BOARD _ reviews the composition of the Board; _ monitors the integrity of financial statements; _ keeps under review the _ management committee framework and policy on chaired by the Group Chief _ oversees the Board’s _ oversees risk management Executive Director and senior Executive Officer, which succession planning; and and control; management remuneration reviews operational matters _ keeps under review the _ monitors the effectiveness (including pension leadership needs of, and of the internal audit function; arrangements); and and business performance; _ reinforces the operational succession planning for, and _ approves the design and and governance structures in the Company. _ reviews external auditor targets framework for share place across the Group; and independence and leads the plan awards. audit tender process. _ acts as a forum for management decisions. READ MORE PAGE 54 6 4 READ MORE PAGE 58 READ MORE PAGE 62 Dialight plc Annual Report and Accounts 2017GovernanceDIVISION OF RESPONSIBILITIES OF THE BOARD CHAIRMAN GOVERNANCE STRATEGY PEOPLE GROUP CHIEF EXECUTIVE OFFICER EXECUTIVE DIRECTORS SENIOR INDEPENDENT DIRECTOR INDEPENDENT NON-EXECUTIVE DIRECTORS _ promoting high standards of corporate governance; _ leading, chairing and managing the Board; _ ensuring all Board committees are properly structured and operate with appropriate terms of reference; _ regularly considering the composition and succession planning of the Board and its committees; _ ensuring that the Board and its committees’ performance are evaluated on a regular basis; _ ensuring adequate time is available for all agenda items and that the Board receives accurate, clear and timely information; and _ ensuring that there is effective communication with shareholders. _ leading the Board in developing the strategy of the business and setting its objectives; _ promoting open and constructive debate in Board meetings; _ ensuring effective implementation of Board decisions with the support of the Group Chief Executive Officer; _ ensuring that the Board manages risk effectively; and _ consulting, where appropriate, with the Senior Independent Director on Board matters. _ chairing the Nominations Committee; _ identifying and meeting the induction and development needs of the Board and its committees; _ developing a strong working relationship with the Group Chief Executive Officer; _ ensuring a strong working relationship between Executive and Non-Executive Directors; _ setting clear expectations concerning the Company’s culture, values and behaviours; and _ ensuring effective relationships are maintained with all major stakeholders in the business. A summary of the business carried out by the Board during the year, the standing Board agenda items and a summary of the matters that are formally reserved for the Board (as set out in writing) are summarised on page 49. _ with the Chairman, providing coherent leadership and management of the Company; _ developing objectives, strategy and performance standards to be agreed by the Board; _ providing input to the Board’s agenda; _ providing effective leadership of the Executive Board to achieve the agreed strategies and objectives; _ securing an Executive Board of the right calibre, with specific responsibility for its composition, and ensuring that its succession plan is reviewed annually with the Chairman and the Non-Executive Directors; _ monitoring, reviewing and managing key risks and strategies with the Board; _ ensuring that the assets of the Group are adequately safeguarded and maintained; _ building and maintaining the Company’s communications and standing with shareholders, financial institutions and the public, and effectively communicating the Dialight investment proposition to all stakeholders; and _ ensuring the Board is aware of the view of employees on issues of relevance to Dialight. _ implementing and delivering the strategy and operational decisions agreed by the Board; _ making operational and financial decisions required in the day-to-day management of the Company; _ providing executive leadership to senior management across the business; _ championing the Group’s values and reinforcing the governance and control procedures; and _ promoting talent management, encouraging diversity and inclusion. _ acting as a sounding board for the Chairman; _ serving as a trusted intermediary for the other Directors; and _ providing an alternative channel for shareholders to raise concerns, independent of executive management and the Chairman. _ contributing independent thinking and judgement, and providing external experience and knowledge, to the Board agenda; _ scrutinising the performance of management in delivering the Company’s strategy and objectives; _ providing constructive challenge to the Executive Directors; and _ monitoring the reporting of performance and ensuring that the Company is operating within the governance and risk framework approved by the Board. COMPANY SECRETARY _ acting as a sounding board for the Chairman and other Directors; _ ensuring clear and timely information flow to the Board and its committees; and _ providing advice and support to the Board on matters of corporate governance and risk. 4 7 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 LEADERSHIP CONTINUED Principal committees of the Board The Board has established three principal committees: the Nominations Committee, the Audit Committee and the Remuneration Committee. Details of their constitution, their roles and responsibilities, and the activities of each committee during the year are set out in their respective reports, which follow this Governance report. Each committee operates under its own terms of reference, which have been approved by the Board and which are reviewed annually. In addition, the Board has established an informal management committee, the Executive Board, which is chaired by the Group Chief Executive Officer. The Executive Board provides a forum in which the executives, representing their sector or functional area, can review and take decisions on operational and financial matters that arise in day-to-day business operations. The Executive Board is also an effective means for implementing actions from the Dialight Board and providing oversight of operational matters. Reporting requirement Description of the business model and strategy. Location Strategic Review See pages 8 to 9 and 14 to 16 Description of the significant issues that the Audit Committee considered in relation to the Audit Committee report financial statements and how these issues were addressed, having regard to the matters See page 58 communicated to it by the external audit team. Explanation of how the Audit Committee has assessed the effectiveness of the external Audit Committee report audit process. See page 58 Identification of search consultancies used and any connections with the Company. Nominations Committee report See page 54 Statement that the Directors consider that the Annual Report and Accounts, taken as a whole, Directors’ Responsibilities is fair, balanced and understandable and provides information necessary for shareholders See page 85 to assess the Company’s position and performance. Future policy table and notes, performance scenario charts, remuneration obligations Remuneration Committee report in service contracts. See page 64 Policy implementation, remuneration paid to service advisers, single total figure tables, Remuneration Committee report GCEO  pay comparison to Company performance and relative importance of spend on pay. See page 69 Directors’ shareholdings and variable pay awarded in the year. Remuneration Committee report See page 75 BOARD ACTIVITIES FOR THE YEAR FEBRUARY 2017 APRIL 2017 JULY 2017 SEPTEMBER 2017 DECEMBER 2017 PRELIMINARY RESULTS AGM HALF YEAR RESULTS _ dividend planning _ evaluation of prior year objectives _ annual objectives for the Group _ annual assessment of internal control processes _ AGM notice of meeting 8 4 _ sector review _ group performance and priorities _ talent assessment and development _ modern slavery statement _ talent assessment and development _ cyber security update GROUP STRATEGIC PERFORMANCE AND PRIORITIES BUDGET _ talent assessment and _ Chairman and Non- development _ cyber security update _ strategic planning review Executive Director fees _ sector review _ review of risk appetite _ review of actions from Board evaluation _ approval of terms of reference for Board and committees Dialight plc Annual Report and Accounts 2017GovernanceSTANDING BOARD AGENDA ITEMS MATTERS RESERVED FOR DECISION BY THE BOARD In addition to the above Board matters _ setting the Group’s long-term objectives _ approving significant changes to considered over the past year, at each and commercial strategy; meeting there are standing items, _ approving annual operating and capital which include: _ review and approval of the previous minutes; expenditure budgets; _ ceasing all or a material part of the Group’s business; bribery and corruption; _ significantly extending the Group’s _ status update on any matters activities into new business or outstanding from previous meetings; _ updates from each Board committee geographic areas; _ changing the share capital or corporate on the activities since the last structure of the Company; Board meeting; _ changing the Group’s management _ report from the Group Chief and control structure; Executive Officer; _ approving half year and full year results accounting policies; _ approving key policies; _ approving risk management procedures and policies, including those on anti- _ approving major investments, disposals, capital projects or contracts (including bank borrowings and debt facilities); _ approving resolutions to be put to the AGM and documents or circulars to be sent to shareholders; and _ approving changes to the Board structure, size or composition (following a recommendation of and reports; and _ approving dividend policy and the the Nominations Committee). declaration of dividends. _ report from the Group Finance Director; _ investor relations report; _ health and safety report; _ risk review; _ corporate governance update; and _ updates from the Company Secretary on legal and administrative matters. Board meetings The Board has five regular face-to-face meetings scheduled each year and three scheduled Board calls, but will also meet, as required, to consider urgent or non-routine matters. Additionally, the Board also meets once a year to review the overall strategy of the Group. Board meeting attendance During the year, attendance by Directors at Board and committee meetings was as follows: Wayne Edmunds Martin L. Rapp Fariyal Khanbabi Stephen Bird1 David Blood David Thomas Gaelle Hotellier Michael Sutsko Board 8 / 8 8 / 8 8 / 8 8 / 8 8 / 8 8 / 8 8 / 8 8 / 8 Audit Remuneration Nominations n/a 3 / 3 n/a 3 / 3 n/a 3 / 3 3 / 3 n/a n/a 6 / 6 n/a 6 / 6 n/a 6 / 6 n/a n/a 2 / 2 2 / 2 n/a 1/ 2 2 / 2 2 / 2 2 / 2 n/a 1 Stephen Bird was unable to attend the 12 December Nominations Committee meeting due to a prior business commitment. 4 9 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 LEADERSHIP CONTINUED BOARD ACTIVITIES CONTINUED Ensuring Group objectives are aligned with shareholders _ review of feedback from shareholders _ reviewing Group strategy annually _ reviewing capital allocation decisions _ reviewing Board evaluation Ensuring health and safety of employees _ reviewing accident frequency rates _ reviewing any reports of near misses _ ensuring safe and comfortable working environments STRATEGIC PEOPLE AND CULTURE LEADERSHIP FINANCIAL BOARD ACTIVITY GOVERNANCE AND RISK Ensuring succession planning _ succession plans have been introduced for all senior managers _ board succession plans have also been put in place _ ensuring the Board interacts with senior managers as much as possible to judge the depth of the Management Team Ensuring adequacy of risk management framework Ensuring robustness and integrity of financial statements _ overseeing the results of the Risk Committee _ reviewing the output of internal audit _ review areas of judgement within the financial statements _ review external auditor independence _ reviewing any whistleblowing _ review of investor relations instances materials 0 5 Dialight plc Annual Report and Accounts 2017GovernanceEFFECTIVENESS Director holds is an important consideration Independence The Board has reviewed the independence when recruiting and when performing the annual evaluation of Non-Executive of the Chairman and each Non-Executive Director effectiveness. Director and considers the Chairman and all of the Non-Executive Directors apart As announced on 5 June 2017, Wayne from David Blood to be independent of Edmunds was appointed interim CEO at BBA management and free from business or other Aviation. Prior to the appointment, the Board relationships that could interfere with the considered the potential impact of this on exercise of independent judgement. David Wayne’s ability to fulfil his duties at Dialight. Blood is not considered to be independent Based on a number of factors, the Board as a consequence of his connection with concluded that this appointment would not Generation Management LLP, which is impact his effectiveness. This has proven currently the Company’s largest shareholder. to be the case as confirmed at the recent David’s letter of appointment contains external Board evaluation. Wayne Edmunds additional clauses covering confidentiality, will be stepping down as interim CEO of insider dealings and conflicts of interest. BBA Aviation on 1 April. The Board considers David to be independent in character and judgement Executive Directors are permitted to accept when joining Board debates or discussion one external appointment, subject to the in which he is not conflicted. The Board prior approval of the Chairman. Approval believes that any shares in the Company will only be given where the appointment held by the Chairman and Non-Executive does not create a conflict of interest with Directors serve to align their interests the Group’s activities and where the role with those of the shareholders. Time allocation The Board benefits from the wide variety of is considered to be beneficial to the development of the individual, which will also benefit the Company. skills, experience and knowledge that each In addition to the scheduled Board meetings Director has. However, being available and (eight per year), Non-Executive Directors committing sufficient time to the Company are expected to attend the AGM, the annual is essential and therefore the number of strategy meeting and certain other Company external directorships that a Non-Executive events and site visits throughout the year. A time commitment of around 20 days per annum is the anticipated requirement for each Non-Executive Director. Confirmation is obtained on appointment from each Non- Executive Director that they can allocate sufficient time to the role. The Chairman and Non-Executive Directors also meet twice a year without Executive Directors present to ensure there is an opportunity to discuss potentially sensitive matters. The Senior Independent Director meets with the Non-Executive Directors, without the Chairman present, at least once per year, to evaluate the Chairman’s performance. Re-election of Directors All of the current Directors will stand for re-election at the forthcoming AGM. Following the annual evaluation of the Board and its committees, all Directors standing for election or re-election at the AGM continue to be effective, hold recent and relevant experience and continue to demonstrate commitment to the role. Biographical details of each Director standing for election or re-election are set out on page 45. Liability insurance Each Director is covered by appropriate directors’ and officers’ liability insurance, at the Company’s expense. In addition, the Directors are entitled to be indemnified by the Company to the extent permitted by law and the Company’s Articles of Association in respect of all losses arising out or in connection with the execution of their powers, duties and responsibilities. Induction of new Directors Newly appointed Non-Executive Directors follow a tailored induction programme, which includes dedicated time with Group executives and visits to regional offices. There are tailored induction materials, which provide a comprehensive overview of: the Group and the legal and organisational structure; the governance framework; the role of the Non-Executive Director; key business contacts at the Company level; and details of the external advisers. In addition to the latest Annual Report and Company announcements, further materials such as recent broker coverage and the last Board evaluation are also provided. 5 1 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 EFFECTIVENESS CONTINUED Performance evaluation The Board undertakes a formal evaluation of The executive members of the Board have leaders. This regular interaction between frequent contact with all executives and the Board and the businesses provides a its performance, and that of each Director, make regular visits to our sites. The Non- vital channel of communication and forum on an annual basis. The principal committees Executive members of the Board carry out for open dialogue, which encourages the of the Board undertake an annual evaluation Company visits as part of their induction and sharing of knowledge and experience. of their effectiveness, in accordance with routinely thereafter. The Board members also their terms of reference. engage with our current and future business BOARD, COMMITTEE AND DIRECTORS’ PERFORMANCE EVALUATION CYCLE QUESTIONNAIRE A comprehensive EVALUATION The Company questionnaire is sent to all Secretary compiles Board members the results ACTION PLAN The collated results are discussed by the Board and the action plan is approved FEEDBACK Individual feedback plans are provided to Directors Board evaluation The Board evaluation is performed annually a) the Board and executive management c) improved reporting on the operational need to continually strive to maintain performance of the Group. and externally moderated every three years. a culture within Dialight and individual In 2017, the evaluation was carried out by relationships between the Board and Lintstock, an independent third party. executive management that encourage Based on feedback received, the Board b) the Board needs to ensure that any concluded that the Board and its committees sub-committees or individuals to continue to operate effectively. However, whom specific ad hoc responsibilities the following items were noted as areas that are delegated from time to time are openness and collaboration; required improvement: sufficiently formalised in terms of scope and protocols; and 2 5 Dialight plc Annual Report and Accounts 2017GovernanceRELATIONS WITH SHAREHOLDERS AND STAKEHOLDERS Shareholder engagement The Company is committed to maintaining invited to presentations by the Company The Group Chief Executive Officer gives a immediately after the announcement of the presentation on operational matters before good communications with investors. Although Company’s interim and full year results. the Chairman deals with the formal business of overall responsibility for ensuring that there is The contents of these presentations and the meeting. Each substantially separate issue an effective communication with shareholders conference calls are available on the website is proposed as a separate resolution. Details of lies with the Chairman, on a day-to-day basis and shareholders can register on the resolutions to be proposed, and shareholders’ the Board’s primary contact with shareholders website to receive email alerts. options for voting, at the forthcoming AGM is through the Executive Directors. The Chairman is generally available to shareholders and meets with institutional and other large The Annual General Meeting The Company’s AGM presents an additional can be found in the separate circular to shareholders. All shareholders present can question the Board during the meeting investors; the Senior Independent Director opportunity to communicate with private and as well as informally afterwards. is also available as required. institutional investors. The AGM is attended The Company regularly meets with its large shareholders to attend. take place at 11.30am on Tuesday, 17 April by the Board and is open to all Dialight The Company’s forthcoming AGM will investors and institutional shareholders who, along with sell-side research analysts, are 2018 at the offices of Investec Bank plc, 2 Gresham Street, London EC2V 7QP. HOW WE ENGAGE WITH STAKEHOLDERS STAKEHOLDER WHY WE ENGAGE METHODS OF ENGAGEMENT EMPLOYEES Employees are critical to the Group and it is essential that we engage with them. Good communication with employees is a key requirement to support an agile approach to the business and encourage innovation. _ group meetings _ conference calls _ site visits CUSTOMERS Customers are an essential part of Understanding our customers’ requirements and behaviours allows us to deliver the products that our customers want. _ feedback on existing products _ requests for new product designs _ requests for specific solutions the business. COMMUNITIES What we do impacts communities around the world. We employ people in 17 countries around the world thereby impacting many communities. _ community outreach programmes _ local media GOVERNMENT AND REGULATORS The products that we produce must meet stringent regulatory requirements. Policy and regulatory changes can provide _ attending Government climate change opportunities for business expansion as conferences older forms of technology are phased out. _ providing feedback to regulators on future product developments SHAREHOLDERS As a publicly listed company, we need to provide fair, balanced and understandable information to instil confidence. To ensure compliance with regulatory requirements and to gauge shareholder _ regulatory news announcements _ updates to the investor relations section feedback on the business and management performance. of our website _ press releases _ annual and half year reports and presentations _ AGM 5 3 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 EFFECTIVENESS CONTINUED NOMINATIONS COMMITTEE REPORT As I outlined in last year’s report, changes to the executive membership by the Group Chief Executive Officer for the Board as a whole, through the of the Board. leadership of the Nominations Committee, recognises its role in ensuring that a strong pipeline of future senior Composition of the Committee The committee currently comprises management has been identified from Wayne Edmunds (who chairs the committee) which future Board appointments can and four Non-Executive Directors. Wayne be made. Equally important, talent Edmunds would not chair a meeting which needs to be recognised and nurtured was dealing with the appointment of at executive and management levels. a successor to the chairmanship. Role of the Committee The Committee is appointed by the The following members served on the committee during the year: Board and operates under written terms of reference, which are available on the Group’s Committee member Member from website. The primary role and responsibilities Wayne Edmunds 25 Jan 2016 of the committee are to: _ review the size, balance and composition (evaluating the skills, knowledge and experience) of the Board and its committees, ensuring that they remain Stephen Bird 10 Jan 2013 Martin L. Rapp 26 April 2016 to 8 January 2018 David Thomas 26 April 2016 David Blood 23 July 2015 appropriate and making recommendations Gaelle Hotellier 3 October 2016 to the Board with regard to any changes; _ lead the process for Board appointments; _ oversee the succession planning requirements for the Board and other senior executives, including the identification and assessment of potential candidates, and making recommendations to the Board for its approval; and _ keep under review the leadership needs of the Group in relation to both its Executive Directors and other senior executives, including any recommendations made Activities during the year During the year, the committee has undertaken the following activities: _ appointment of a new Group Chief Executive Officer on 8 January 2018; _ Non-Executive Director succession planning; _ review of executive succession plans and talent; Wayne Edmunds, Chair of the Nominations Committee 4 5 Dialight plc Annual Report and Accounts 2017GovernanceNon-Executive Director tenure (number of years) Composition of the Board1 10 8 6 4 2 0 5 2 1.75 1.75 2.5 5 2 Non-executive Executive 1.2 Board gender diversity1 Wayne Edmunds Stephen Bird Martin L. Rapp David Thomas David Blood Gaelle Hotellier 5 2 Male Female _ annual evaluation and review of Director independence in accordance with the Diversity The Board recognises the benefits of greater Board nationalities1 terms of reference; and diversity on the Board and in management _ proposing the election and re-election positions throughout the Group. At the date of Directors at the AGM. of this report, the Board comprised of seven 3 1 Directors, of whom two are women (29%). The spread of nationalities is: three British, three American and one French. Dialight has the ambition of increasing the number of Company executives based outside the USA to better reflect the revenue generated outside those markets and to embrace diversity and inclusion across the Group. 3 UK US French Further details on diversity are set out in the 1 At the date of this report. Our people section on page 26. Priorities for the coming year The committee’s priority for 2018 will be to focus on succession planning and talent development at executive and Board level. On behalf of the Nominations Committee Wayne Edmunds Chair of the Nominations Committee 26 February 2018 Allocation of time 5%70% 10% 15% Governance and reporting Succession planning and recruitment Re-election of Directors Composition of the Board Board appointments and process Prior to making a recommendation to the Board for the appointment of Marty Rapp as Group Chief Executive Officer, the committee considered all options, internal candidates – on a permanent and interim basis – and an external recruitment process. The committee considered Marty’s relevant experience, his knowledge of the business and his willingness to act, compared to the disruption of an external search process, and was unanimous in its recommendation to appoint him as a permanent successor. 5 5 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 ACCOUNTABILITY INTERNAL CONTROL FRAMEWORK t h i c a l E n it o o M Functi o a n d c ultural environment A s s u r a n ce activities r i n g a n d oversight controls a l a n d front line c n o n t r o l s RISKS the Annual Report and Accounts. This Internal control statement process is in accordance with the Financial The Board’s responsibilities The Board has overall responsibility to Reporting Council’s (FRC) ‘Guidance on Risk Management, Internal Control and the shareholders for the Group’s system of Related Financial and Business Reporting’. internal control and risk management, and The Board has continued to improve and the review of the system’s effectiveness is embed controls throughout the Group and carried out with the assistance of the Audit will continue to keep the systems under Committee. Whilst not providing absolute review to ensure that the internal control assurance against material misstatements and risk management framework remains or loss, this system is designed to identify fit for purpose. and manage those risks that could adversely impact the achievement of the Group’s objectives. The Group’s risk management Review of internal control effectiveness The Board regularly reviews the effectiveness structure and process is detailed on of the Group’s risk management and pages 32 and 33. The Group’s principal risks and uncertainties are detailed on pages 34 to 37. internal control systems, including financial, operational and compliance controls. This is principally based on reviewing reports from management to consider whether significant risks have been identified, evaluated, The Board confirms that there is an ongoing managed and controlled. The Group’s process for identifying, evaluating and external auditor, KPMG LLP, has audited managing the significant risks faced by the financial statements and has reviewed the Group and for determining the nature the financial control systems to the extent and extent of the significant risks it is considered necessary to support the willing to take in achieving its strategic audit report. objectives. The Board, advised by the Audit Committee, regularly reviews the process, which has been in place for the year under review and up to the date of approval of 6 5 Dialight plc Annual Report and Accounts 2017GovernanceVIABILITY STATEMENT During the year, the Board carried out a robust assessment of the principal risks affecting the Group, including those that would threaten its business model, future performance, solvency or liquidity. The principal risks and uncertainties, including an analysis of the potential impact and mitigating actions, are set out on pages 34 to 37 of the Strategic report. The Board has assessed the viability of the Group over a three year period, taking into account the Group’s current position and the potential impact of the principal risks and uncertainties. Whilst the Board has no reason to believe that the Group will not be viable over a longer period, it has determined that three years is an appropriate period. In drawing its conclusion, the Board has aligned the period of viability assessment with the Group’s strategic planning process (a three year period). The Board believes that this approach provides greater alignment with the share-based incentive plan. In assessing the viability of the Group, sensitivities have been performed on the key assumptions below: _ revenue growth; _ operational issues; and _ fluctuations in foreign exchange. In reviewing the Company’s viability, the Board has identified the following factors which they believe support their assessment: _ the Group operates in diverse end markets with no strong customer concentration; _ there is considerable financial capacity under current facilities that are in place until December 2021 and there is the ability to raise further funds; _ there is a strong culture of accountability within a robust governance and control framework; and _ an ethical approach to business throughout the business. The Board carried out a comprehensive exercise of financial modelling and stress-tested the model with various scenarios. In each scenario, the effect on the Group’s borrowing covenants was considered. Based on this assessment, the Board confirms that it has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to 31 December 2020. The Audit Committee had a separate report prepared to review the issues surrounding the outsourcing programme in 2017 and whether effective controls were in place. The report concluded that effective controls existed but the review and escalation process failed to flag issues in a timely manner. Going concern The Group’s business activities, together with the main trends and factors likely to affect its future development, performance and position, and the financial position of the Group, its cash flows, liquidity position and borrowing facilities, are set out in the Strategic report. In addition, note 22 to the Financial statements includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to currency and liquidity risks. Having renegotiated its £25m three-year revolving credit facility in December 2016, of which the whole amount remains undrawn at the date of this report, the Group has considerable financial resources. The Group contracts with a diverse range of customers and suppliers across different geographic areas and industries and no one customer accounts for more than 5% of Group turnover. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. After conducting a formal review of the Group’s financial resources, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis of accounting in preparing the Annual Report and Accounts. Longer-term viability In accordance with the UK Corporate Governance Code, the Board has considered the Company’s longer-term viability and sets out its Viability Statement in the panel on the right. 5 7 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 ACCOUNTABILITY CONTINUED AUDIT COMMITTEE REPORT During the year, the Audit Committee has continued to focus on the effectiveness of the controls across the Group. The evolution of our risk management process is an area which the Committee will continue to focus on over the coming year. The difficulties experienced in the business during the year were operational in nature rather than financial. The monitoring of the operational performance of the Group is an area of on going review. The focus is on a number of key areas, the quality and KPIs pertaining to our manufacturing, production mix forecasting and reviewing our production capacity. Role and responsibilities The Committee is appointed by the Board and operates under written terms of reference, which were updated in December 2016 and reviewed again in December 2017. These are available to view at www.ir.dialight.com. The Committee’s primary duties are listed beneath the six subheadings below: 1. Financial reporting _ review significant financial reporting judgements and the application of accounting policies, including compliance with the accounting standards; _ ensure the integrity of the financial statements and their compliance with UK company law and accounting regulations; David Thomas, Chair of the Audit Committee 8 5 _ ensure the Annual Report and Accounts are fair, balanced and understandable and recommend their approval to the Board; _ monitor the integrity of announcements containing financial information; 2. Internal controls _ monitor the adequacy and effectiveness of the internal financial controls and processes; _ monitor compliance with the UK Corporate Governance Code; 3. Risk management _ review and provide oversight, on behalf of the Board, of the processes by which risks are managed; _ review the process undertaken and stress testing required to approve the Group’s viability statement and going concern statement; 4. Fraud and whistleblowing _ monitoring the processes in place throughout the Group to prevent and detect fraud and to enable employees to raise concerns in confidence; _ receive reports on fraud attempts or incidents of concern; 5. Internal audit _ review and approve the internal audit work plan and charter; _ regularly review reports arising from internal audits, monitor the status of actions and consider remedial action for overdue items; _ monitor the structure, composition and resourcing of the internal audit function; _ review the role and effectiveness of the internal audit function; _ consider whether an independent third- party review of internal audit effectiveness and processes is appropriate; 6. External audit _ manage the relationship with the Group’s external auditor; _ monitor and review the independence and performance of the external auditor and formally evaluate their effectiveness; _ review the policy on non-audit services carried out by the external auditor, taking account of relevant ethical guidance; _ negotiate and approve the external auditor’s fee, the scope of the audit and the terms of their engagement; and _ make recommendations to the Board for the appointment or reappointment of the external auditor. Dialight plc Annual Report and Accounts 2017GovernanceComposition of the Committee The committee currently comprises the three independent Non-Executive Directors. The following members served on the committee during the year: _ David Thomas _ Stephen Bird _ Martin L. Rapp (resigned 8 January 2018) _ Gaelle Hotellier The Chairman, Group Chief Executive Officer and Group Finance Director are also in attendance at committee meetings, along with the Group Financial Controller. Representatives from the external auditor also attend key committee meetings. Activities during the year The main areas of review by the committee throughout the year are set out below. Activities during the year 50% 10% 20% 8% 12% Financial statements and business reports Internal audit External audit Risk management Other The Committee’s activities during the year Financial statements and reports _ Reviewed the 2016 Annual Report and Accounts, the 2017 Half Year Report and the trading updates issued in July 2017, October 2017 and December 2017. As part of these reviews, the committee received a report from the external auditor on the audit of the Annual Report and Accounts and a report on the ISRE 2410 interim review performed on the half-year results; _ Reviewed the effectiveness of the Group’s risk management and internal controls and disclosures made in the Annual Report and Accounts; _ Reviewed the process and stress testing undertaken to support the Group’s viability and going concern statements; _ Reviewed currency exposure and the Group’s treasury policies following the UK’s decision to leave the EU; and _ Reviewed taxation provisions. Risk management _ Considered the output from the Group- wide risk review process to identify, evaluate and mitigate risks, the Group’s changing risk profile and future risk reports; _ Reviewed the resource and requirements for risk management and internal control in the Group; and _ Considered export controls and other compliance-related matters. External auditor and non-audit work _ Agreed the scope and methodology of the audit and non-audit work to be undertaken by the external auditor; _ Evaluated the independence and objectivity of the external auditor; _ Agreed changes to the policy on non- audit services and independence; and _ Agreed the terms of engagement and fees to be paid to the external auditor for the audit of the 31 December 2017 financial statements. Internal audit _ Evaluated the effectiveness and the scope of work to be undertaken by the internal audit function; _ Reviewed management responses to audit reports issued during the year; _ Reviewed the Group’s whistleblowing policy and procedures; and _ Reviewed and strengthened the resource in internal audit. Governance The committee meets at least three times per year and routinely meets with the external auditor without the Executive Directors present. It is chaired by David Thomas, independent Non-Executive Director, who is a chartered accountant with recent and relevant financial experience. The Group Finance Director and Group Financial Controller work closely with the committee Chairman to facilitate open communication and regular information flow. Each committee member brings a wealth of professional and practical knowledge and experience which is relevant to the Company’s industry. Such abilities ensure that the committee as a whole functions with competence and credibility. The committee receives regular updates on changes to financial accounting standards and reporting requirements, regulatory and governance changes and developments around risk management, fraud prevention and detection, and cyber security. In its advisory capacity, the committee confirmed to the Board, that based on its review of the Annual Report and Accounts and internal controls that support the disclosures, the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable, and provide the necessary information for shareholders to assess the Company’s position and performance, its business model and strategy. Whistleblowing The committee has responsibility for ensuring that arrangements are in place for employees to raise concerns or suspicions they may have about possible wrongdoing in financial reporting or other matters. An external organisation, Safecall, operates a 24-hour confidential reporting service for the Group, which provides employees with the choice of making a report via a multilingual telephone line or via the internet. The service allows employees to remain anonymous (subject to local legislation) and also provides a case reporting number which ensures that there is a mechanism for two- way communication between the reporter and the Company, even if they have chosen to remain anonymous. Confidential reports from this service are provided to the Company Secretary, as well as the Committee Chairman, for investigation and to report any significant cases to the committee. During the year, the committee carried out a review of the effectiveness of the Group’s whistleblowing arrangements. Engagement of the external auditor and tenure KPMG was first appointed as external auditor in 2001. KPMG is required to rotate the audit partner responsible for the Group every five years and the current audit partner’s term will end after the 2018 audit. The Audit Committee recommends that KPMG be re-appointed as the Company’s auditor at the next AGM. 5 9 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 ACCOUNTABILITY CONTINUED AUDIT COMMITTEE REPORT CONTINUED During 2017, the committee continued to monitor legislative and best practice changes in this area. Under EU Directive provisions, the Company is required to retender its external auditor by 31 December 2023. At that point, KPMG would not be able to be re-appointed. Auditor independence At each meeting, the committee receives a summary of all fees, audit and non-audit, payable to the external auditor. A summary of fees paid to the external auditor is set out in note 9 to the Accounts. The external auditor confirmed its independence as auditor of the Company, in a letter addressed to the Directors. External audit effectiveness The effectiveness of the external audit process is assessed by the committee, which meets regularly throughout the year with the audit partner and senior audit managers. Key to the overall effectiveness of the process is a “no surprises” approach adopted by both the Group and the external auditor under which each party makes the other aware of accounting and financial reporting issues as and when they arise, rather than limiting this exchange to the period in which formal audit and review engagements take place. This general approach is supported by a formal annual survey process involving subsidiary and Group management as well as Audit Committee members and attendees. Surveys are tailored and issued to three distinct groups of respondents: _ subsidiary financial controllers; _ Group finance team; and _ Audit Committee members and attendees. Fair, balanced and understandable One of the key governance requirements is for the report and accounts to be fair, balanced and understandable. Ensuring that this standard is met requires continuous assessment of the financial reporting issues affecting the Group on a year-round basis in The survey completed by the first group is addition to a number of focused exercises divided between questions focusing on audit that take place during the Annual Report quality and client service. As this group is and Accounts production process. involved primarily in the execution phase of the audit, the responses cover practical audit These focused exercises can be summarised management issues as well as observations as follows: made of the integrity and quality of audit field teams. The second, and particularly _ qualitative review of disclosures and a the third group, interact mainly with senior review of internal consistency throughout audit management and the audit partner the Annual Report and Accounts. This so that the survey covers more general review assesses the Annual Report and audit planning and wider issues around Accounts against objective criteria drawn the audit relationship. up for each component of the requirement (individual criteria that indicate “fairness”, In addition to assessing the effectiveness “balance” and “understandability” of the external auditor, the committee as well as criteria that overlap two or recognises that Group management has more components); an important role to play in the overall _ risk comparison review, which assesses effectiveness of the external audit process the consistency of the presentation of risks and the external auditor is therefore asked and significant judgements throughout the to conduct its own survey of both subsidiary main areas of risk disclosure in the Annual and head office companies with which Report and Accounts; KPMG interacts. This survey addresses items _ formal review of all Board and committee such as the timeliness, quality and reliability meeting minutes by the Company of data provided to the external auditor. Secretary to ensure that all significant issues are appropriately reflected and Taken together, the committee believes given due prominence in narrative that sufficient and appropriate information is reporting; and obtained to form an overall judgement of the _ preparation and issue to the Audit effectiveness of the external audit process. committee of the key working papers and The external audit effectiveness process and judgements considered by the Audit findings from last year’s review were also Committee in the period. results for each of the significant issues The Directors’ statement on a fair, balanced and understandable Annual Report and Accounts is set out on page 85. incorporated into our audit processes this year. Risk management and internal controls Further details of risk management and internal controls are set out on pages 32 and 33. Through monitoring of the effectiveness of its internal controls and risk management, the committee is able to maintain a good understanding of business performance, key areas of judgement and decision making processes within the Group. 0 6 Dialight plc Annual Report and Accounts 2017GovernanceConflicts of interest The Company has arrangements in place to consider and deal with Directors’ conflicts of interest. An annual review is undertaken, facilitated by the Company Secretary, with all identified conflicts recorded on a register that is adopted by the Board. Conflicted Directors are not able to attend meetings where the conflicted matter is discussed and decisions are made. David Blood is a partner at Generation Investment Partners LLP, the Group’s largest shareholder. As a result, specific terms regarding dealing with conflicts of interest were incorporated in his letter of appointment. None of the Directors had or have an interest in any material contract relating to the business of the Company or any of its subsidiary undertakings. Significant issues Significant issues and accounting judgements are identified by the finance team, or through the external audit process and are reviewed by the Audit Committee. The significant issues considered by the committee in respect of the year ended 31 December 2017 are set out in the following table: Risk area Significant issues and judgements How the issues were addressed Revenue recognition Revenue is a key performance indicator for the Group. Controls relevant to the production sites are formally Whilst the Group’s revenue recognition policies documented within the production sites. The accounting are not complex, the Group’s customers can have policies for revenue recognition are set out in note 3 different contractual terms for transfer of ownership. to the Financial statements and are unchanged from The maintenance of an effective control environment within the production sites is fundamental to ensuring previous periods. The Audit Committee considered existing controls over revenue recognition and noted no appropriate revenue recognition. significant issues with respect to the operation of the controls. The Audit Committee also considered a report from the external auditor, which commented, inter alia, on revenue recognition. Inventory The Group operates in an industry whereby technology The Audit Committee has reviewed the detailed analysis is rapidly changing and the risk of obsolescence is provided by management. The Audit Committee is high. The Group has also been undergoing a significant of the view that the provisions held by the Group are transformation programme which may result in inventory appropriate. The Audit Committee also considered the becoming slow moving or obsolete. Certain of these separate disclosure of exceptional costs relating to provisions may be classified as non-underlying. inventory and think this will aid investors in evaluating Further details of these costs are provided in note 14 the performance of the business in the year. to the Financial statements. Use of judgements The use of judgement and estimates is required in The Audit Committee has reviewed and challenged key a number of areas, primarily in assessing the amount assumptions used in these areas. _ Development costs _ Deferred tax of development costs capitalised and the value of the deferred tax asset. The Audit Committee requested that management prepare an in-depth analysis of capitalised development costs and deferred tax assets. Following review, the Audit Committee concluded that the judgements applied were appropriate in preparing the financial statements for the year. When considering the financial statements, the committee also considered the issues included in the Group’s critical accounting policies, which are set out in note 2 to the Financial statements. Having discussed these matters with management and the external auditor, the committee has satisfied itself that such risks are being appropriately managed, that the judgements made are reasonable and that they are being accounted for in accordance with the relevant accounting standards and principles. David Thomas Chair of the Audit Committee 26 February 2018 6 1 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 DIRECTORS’ REMUNERATION REPORT As in previous years, the Remuneration Committee’s report for 2017 (the “Report”) is split into three sections: the annual statement, the Directors’ remuneration policy and the annual report on remuneration. As announced on 8 January 2018, Michael Sutsko stepped down as Group Chief Executive Officer with effect from the date of the announcement and was replaced by Marty Rapp on a permanent basis. Following his appointment as Group Chief Executive Officer, Marty Rapp stepped down as a member and Chair of the Committee and was replaced by myself. Gaelle Hotellier has joined the Remuneration Committee with effect from 8 January 2018. During 2016 and early 2017, the committee undertook a comprehensive review of our remuneration policy to ensure that it reflected recommended market practice and continued to both motivate and retain our international executive team. Following consultation with our major shareholders, the new remuneration policy (the “Policy”) was tabled at the 2017 Annual General Meeting (‘‘AGM’’) and received the support of 99% of the votes cast. Below is a reminder of the key changes that were made to the Policy: Stephen Bird, Chair of the Remuneration Committee 2 6 _ the introduction of a mandatory two- year post-vesting holding period on all Performance Share Plan (‘‘PSP’’) awards granted to Executive Directors from 2017 onwards, which brought the total time horizon for holding long-term incentives to five years; _ language changes to ensure that the committee has sufficient flexibility in areas such as incentive measures, targets and weightings to respond to business circumstances over the life of the Policy; and _ a greater flexibility for below Board participants to receive some or all of future long-term incentive awards in the form of restricted share units, with vesting conditional only on continued employment over a number of years. This change in approach is driven by the need to be able to incentivise and retain key personnel in different jurisdictions, in particular those colleagues based in the US where this practice is prevalent. No structural changes are considered necessary to the Policy or its implementation for the forthcoming year. Remuneration outcomes for 2017 Long-term incentives Michael Sutsko and Fariyal Khanbabi were each granted an award under the PSP during the year, the vesting outcome of which will be based on performance over the three financial years to 31 December 2019. These awards will vest to the extent that the earnings per share (“EPS”) and relative total shareholder return (“TSR”) targets are achieved over the three-year period. Further details of awards made to Michael Sutsko and Fariyal Khanbabi, including details of the performance targets applying, are included on page 78. In respect of the long-term incentive plan awards made in 2015, both the EPS and TSR performance of Dialight over the three-year performance period have been below the performance targets set by the committee at the time of grant. As a result, all 2015 PSP awards will lapse in full in 2018. Annual bonus outcomes for the financial year Following a review of Dialight’s performance against the EBIT targets set for the annual Performance Bonus Plan (“APBP”), the committee determined that no bonuses Dialight plc Annual Report and Accounts 2017Governancewould be payable to the former Group applying to these awards will be finalised Chief Executive Officer and the Group over the coming weeks and disclosed both Finance Director. at the time of award and in next year’s report. In accordance with the Policy, PSP awards Compensation arrangements for will also be subject to a two-year post- Michael Sutsko The remuneration payments payable to vesting holding period. Michael Sutsko on leaving are in line with his contract and the Policy. See page 78 Review of Non-Executive Director fees In accordance with the Policy, Non-Executive for further details. Director fees are typically reviewed every year, such fees having last been increased Compensation arrangements for in January 2015. Marty Rapp As a Non-Executive Director of Dialight The committee approved a 3% increase with and Chair of the Committee, Marty Rapp effect from 1 January 2018 to the Chairman’s received an annual fee of $69,800 following fee and the Board approved an equivalent the recent 3% increase to the Non-Executive increase to the base fee for Non-Executive Directors’ fees described in more detail Directors and the uplift for both the Senior below. On his appointment as Group Chief Independent Director and committee chairs. Executive Officer, the committee agreed that Marty Rapp’s annual fee be replaced This 3% increase is broadly in line with inflation and salary adjustments applied with a remuneration package equivalent in to the wider Dialight employee population all material respects to Michael Sutsko’s, and is considered appropriate given the including the same salary adjusted as increased duration of Board calls during described below. Implementation of the Policy for 2018 As mentioned, there are no structural changes proposed to the implementation 2018 and beyond. Details of the adjusted fees can be found on page 79. Shareholder voting at the 2018 AGM As there are no proposed changes to the of the Policy for 2018. As it does every Policy as approved by shareholders at the year, the committee undertook a review of 2017 AGM, there will be no vote to approve Executive Directors’ base salaries, taking the Policy at the 2018 AGM. There will into account a range of factors including however be the usual advisory resolution to individual experience, responsibilities and approve the annual report on remuneration, performance, as well as pay and conditions which focuses on the remuneration for employees more broadly across the outcomes for the year under review and Group. Following this review, the committee how the Remuneration Committee intends agreed and recommended to the Board to implement the Policy next year. salary increases of 3% for the Executive Directors, to take effect from 1 January 2018. The committee is aware of the latest These increases are in line with planned developments in the executive pay arena, increases across the organisation and are broadly in line with inflation. particularly those recommended by institutional shareholders and we monitor these closely. We believe that Dialight’s The 2018 APBP awards for Executive approach to remuneration is appropriate Directors will be on a similar basis to and represents a fair balance between 2017, with EBIT performance being the shareholder and management interests. primary measure with 15% of the Executive Directors’ bonuses being subject to the On behalf of all of my colleagues on the achievement of certain individual goals Remuneration Committee, I hope that you linked to the Company’s strategic objectives, will support the resolution approving the with a particular focus on production and annual report on remuneration. a return to sustainable growth. For the PSP awards to be made to Executive Directors in 2018, the committee has determined that these will again be subject to EPS and relative TSR performance measured over three years. The targets Stephen Bird Chair of the Remuneration Committee 26 February 2018 6 3 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 DIRECTORS’ REMUNERATION REPORT CONTINUED DIRECTORS’ REMUNERATION POLICY investor expectations, and the level of remuneration and pay awards made generally to employees of the Group. Directors’ remuneration policy This section of the report details the Policy for Executive and Non- Executive Directors which shareholders approved at the 2017 AGM and is effective for up to three years. The Policy remains unchanged from that presented last year, save for the removal of the reference to the Roxboro UK Pension Scheme, which is a legacy defined benefit scheme in which neither Executive Director participates and which is closed to new members. The committee continues to have a clear policy on remuneration; namely that base salary and benefits for Executive Directors should represent a fair return for employment but that the majority of remuneration should be variable, dependent on the continued success of the Company, and aligned with the creation of shareholder value and delivery of Dialight’s strategic plan. The committee believes that the Policy continues to reinforce these principles, while also taking account of prevailing best practice, Compliance statement This Report has been prepared in accordance with the provisions of the Companies Act 2006 and Schedule 8 of the Large and Medium- sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the “Regulations”). It also meets the requirements of the UK Listing Authority’s Listing Rules and the Disclosure and Transparency Rules. In accordance with the Regulations, the following sections of the Report are subject to audit: the single total figure of remuneration for Directors and accompanying notes (page 74), scheme interests awarded during the financial year and payments to past Directors (pages 77 and 80), payments for loss of office and the statement of Directors’ shareholdings and share interests (page 81). The remaining sections of the Report are not subject to audit. A breakdown of all elements of executive remuneration and their place in the Company’s policy can be found below: Remuneration Policy table Element/link to strategy Operation Opportunity Performance metrics Base salary To ensure that fixed pay The committee sets base salary Any base salary increases are None. with reference to relevant market applied in line with the outcome represents a fair return data and an individual’s experience, of the review. for employment. responsibilities and performance. In respect of existing Executive Base salary is considered by Directors, it is anticipated that the committee on an individual’s salary increases will generally be appointment and then reviewed in line with the broader employee once a year or when an individual population. In exceptional changes position or responsibilities. circumstances (including, but not When making a determination limited to, a material increase in role size or complexity), the committee as to the appropriate level of has discretion to make appropriate remuneration, the committee adjustments to salary levels to firstly considers pay and conditions ensure that they remain market for employees across the Group, competitive. It is not envisaged that the general performance of the this will be a frequent occurrence. Company and the wider economic environment and, where considered Detail of current salaries for the relevant, the committee benchmarks Executive Directors can be found remuneration against a bespoke on page 74. group of comparator companies incorporated in both the US and the UK (size adjusted on the basis of market capitalisation and revenue). Benchmarking is not the only driver in salary reviews. 4 6 Dialight plc Annual Report and Accounts 2017GovernanceElement/link to strategy Operation Opportunity Performance metrics Benefits The approach of the Executive Directors receive benefits Benefits vary by role and individual None. which consist primarily of the circumstances; eligibility and cost committee is that other provision of a car allowance, life are reviewed periodically. benefits payable remain in insurance and medical insurance, line with market practice to although they may include The committee retains the ensure that Dialight retains such benefits as the committee discretion to approve a higher its ability to be competitive deems appropriate. and remain attractive to prospective candidates. total benefit cost in exceptional circumstances (e.g. relocation) or in circumstances where factors outside the Company’s control have changed materially (e.g. increases in life insurance premiums). The value of benefits awarded to the Executive Directors can be found in the table on page 74. Pension The Company provides The Company operates a 401(k) The new Group Chief Executive None. and Supplemental Executive Officer does not currently this benefits package in Retirement Plan (“SERP”) in participate in the SERP and instead order to be competitive in the US, with both employee and receives a cash payment in lieu of the relevant market and to employer contributions made employer contribution. The Group ensure its ability to recruit to the relevant schemes. Chief Executive Officer does and retain executives. participate in the 401(k) scheme and Executive Directors in the UK are receives an employer contribution entitled to join the existing defined of up to 3% of base salary in contribution scheme offering accordance with the plan rules. employer contributions of up to 15% or to receive an equivalent It is not anticipated that pension cash payment in lieu. contributions (as a percentage of salary) will exceed the levels Executive Directors in the US are currently provided. entitled to participate in the 401(k) and the SERP. In relation to the Further details of what has been SERP, a participant is entitled to receive a cash equivalent payment paid during 2017 can be found on page 74. in lieu of employer contribution. Salary is the only element of remuneration that is pensionable. 6 5 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements DIRECTORS’ REMUNERATION REPORT CONTINUED DIRECTORS’ REMUNERATION POLICY CONTINUED Element/link to strategy Operation Opportunity Performance metrics Sharesave Plan To provide a mechanism by The Sharesave Plan currently Employees will be able to save up to None. operates in the UK, the US and the maximum of the limits approved which employees can save Mexico but may be introduced by HM Revenue & Customs from up to purchase shares at a to other parts of the world at time to time (or local currency discount to the prevailing a future date. equivalent) for a total period of market price on an annual three years. basis, encouraging The Sharesave Plan has typically employee retention and been operated on an annual At the beginning of each savings engagement with the basis and is open to all eligible period, employees will be granted Company. employees, including Executive options over shares in Dialight plc Directors. up to a maximum discount of 20% to the prevailing market price. The employees’ savings are then used to purchase and exercise these options at the end of three years. Annual Performance APBP measures, weightings and The maximum bonus opportunity Performance is assessed on an Bonus Plan The APBP rewards targets are set by the Committee is 175% of salary. at the beginning of each financial annual basis, as measured against specific objectives set at the start performance against our year following the finalisation of Threshold performance will of each year. annual goals, and directly the budget for that year. deliver payouts of up to 20% of supports the achievement maximum, while payouts for target The primary measure is Company of EBIT, one of the key Bonuses up to target are paid in performance will be up to 60% EBIT, although other financial financial KPIs of the cash, with payouts above target of maximum. Company. delivered in Dialight shares. Where the executive receives Dialight shares, half of these vest after two years with the balance vesting after three years, subject to continued employment with the Group. Dividends are accrued on these deferred shares and are paid to the participant on release of shares that are subject to the award. The rules of the APBP allow for the clawback of deferred share awards prior to their vesting should the committee take the decision that to allow such awards to vest would be contrary to the best interests of the Company’s shareholders. measures may be rewarded, as may additional specific objectives, that can be triggered following satisfactory achievement of the primary EBIT targets. Further details of the measures, weightings and targets applicable for 2018 can be found on page 79. 6 6 Dialight plc Annual Report and Accounts 2017GovernanceElement/link to strategy Operation Opportunity Performance metrics Performance Share Plan The PSP provides direct PSP awards may be structured The maximum PSP award is 150% Vesting of PSP awards is subject as conditional shares or nil-cost of salary per annum, although the to continued employment and alignment between the options with a two-year exercise committee has historically made performance measures. The interests of shareholders window from the date of vesting. awards of between 25% and 125% performance measures relating to and those of the Executive of salary. grants are weighted as follows: Directors by linking The release of awards may, at vesting of awards to the the discretion of the committee, Threshold vesting delivers up to Company’s long-term be deferred in whole or in part 25% of maximum. financial and share price following the end of a three-year performance. vesting period. All vested awards will be subject to a two-year post- vesting holding period. The committee has the power to authorise the payment of dividends or dividend equivalents under the rules of the PSP. The PSP rules contain provisions that allow for clawback and malus in respect of both vested and unvested awards in exceptional circumstances. _ Between 25% and 75% on three- year earnings per share (“EPS”) growth. _ Between 25% and 75% on TSR relative to a relevant peer group or index. The committee will review the performance measures, weightings and targets prior to each grant to ensure that they continue to be well aligned with the delivery of Company strategy. Further details of the measures, weightings and targets applicable for 2018 can be found on page 79. 6 7 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements DIRECTORS’ REMUNERATION REPORT CONTINUED DIRECTORS’ REMUNERATION POLICY CONTINUED Element/link to strategy Operation Opportunity Performance metrics Non-Executive Fee levels are typically considered The Company’s policy in relation None. Director fees The Company sets fee every year, taking into account to fees is to reflect the time fees paid for equivalent roles at commitment and responsibilities levels to attract and companies of similar size, time of the roles, normally by paying retain Non-Executive commitment and complexity. up to median level fees, compared Directors with the to market, depending on the necessary experience and The fees paid to the Chairman experience and background of expertise to advise and are determined by the Committee, the Non-Executive Directors. The assist with establishing while fees for Non-Executive Company also reimburses the Non- and monitoring the Directors are determined by Executive Directors for expenses strategic objectives the Board. of the Company. reasonably and properly incurred in the performance of their duties. Additional fees are payable for acting as Senior Independent In normal circumstances, increases Director and as Chair of any to fees will be broadly in line of the Board’s committees. with price inflation, subject to cases of material misalignment Non-Executive Directors do with the market or a change in not receive any bonus, do not the complexity, responsibility or participate in awards under the time commitment required to fulfil Company’s share plans and are a Non-Executive Director role. not eligible to join the Company’s pension scheme. It remains important for the Board to have the necessary flexibility to step outside this general policy should the requirement be clear that a certain type of individual is required to conform with new governance requirements or legislation. Aggregate fees for all Non- Executive Directors will be within the limits set by the Articles of Association. Details of current Non-Executive Director fees can be found on page 79. 8 6 Dialight plc Annual Report and Accounts 2017GovernanceNotes to the remuneration policy table Explanatory detail for future remuneration policy table Executive Directors are eligible to receive payment from any award made prior to the approval and implementation of the Policy detailed in this Report. Performance measures and targets For the APBP, EBIT has been selected as the primary measure to provide a direct link to one of our KPIs and ensure that the bonus is self- financing. Any other measures will be agreed on an annual basis to ensure alignment with the Company’s strategy for the coming year. Targets are set on an annual basis taking into account the Company’s budget as well as external expectations for Dialight and the sector. For the PSP, the committee considers that TSR provides clear alignment between Executive Directors’ interests and those of shareholders and provides an objective measure of the Company’s success over time, while EPS provides good line of sight and helps to focus participants on the Company’s financial performance. EPS targets will be reviewed and confirmed prior to each grant, taking account of the Company’s strategic plan, analyst estimates, historical performance and EPS performance ranges used at other FTSE companies. Other performance measures may be adopted for future awards, should the Committee consider that these would be beneficial in aligning remuneration with Company strategy. If an event occurs which causes the committee to consider that an outstanding PSP award or bonus would not achieve its original purpose without alteration, the committee has discretion to amend the targets, provided the new conditions are materially no less challenging than was intended when originally imposed. Such discretion could be used to appropriately adjust for the impact of material acquisitions or disposals, or for exceptional and unforeseen events outside the control of the management team. Difference between the Directors’ remuneration policy and that for other employees All employees receive salaries and benefits which are consistent with local market practice, with any review of fixed pay taking into account experience, responsibility, individual performance and salary levels at comparable companies. Senior management is typically eligible to participate in the APBP, with opportunities and performance measures reflecting organisational level and business area, as appropriate. PSP awards at senior management level and to other key employees now take the form of restricted share units with vesting subject only to continued employment over a number of years. This change provides participants below Executive Director level greater flexibility and helps Dialight remain competitive in the main talent markets in which it operates, while also continuing to align plan participants with the interests of shareholders in growing the value of the Company over the longer term. Share awards (whether subject to performance conditions or not) to participants below Executive Director level are not subject to a holding period. Shareholding guidelines Executive Directors are required to accumulate and maintain a holding of Dialight shares equivalent in value to their last annual PSP award. Executives have five years from their date of joining to build their shareholdings to the required level. Current shareholding levels are included on page 81. Remuneration scenarios Group Chief Executive – Martin L. Rapp Minimum 100% On-target 49.58% 38.41% 12.01% $1,591k $789k Maximum 30.08% 40.79% 29.13% $2,622k Fixed Short-term incentive Long-term incentive Minimum performance Fixed elements of remuneration only. For Marty Rapp, given his recent start date, the fixed elements of his remuneration include an estimation for 2018 of $14k in respect of his travel expenses between his home and the Farmingdale office in New Jersey. This is in addition to the value of employer pension contributions, life insurance, healthcare and car allowance. 6 9 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements DIRECTORS’ REMUNERATION REPORT CONTINUED DIRECTORS’ REMUNERATION POLICY CONTINUED On-target performance Fixed elements of remuneration plus: _ 100% of salary paid in bonus (57% of maximum opportunity); and _ 25% of PSP award (31% of salary). Maximum performance Fixed elements of remuneration plus the full payout of both short- and long-term incentives. Group Finance Director – Fariyal Khanbabi Minimum 100% On-target 54.49% Maximum 34.73% 34.13% 11.38% £605k £329k 36.26% 29.01% £948k Fixed Short-term incentive Long-term incentive Minimum performance Fixed elements of remuneration only. On-target performance Fixed elements of remuneration plus: _ 75% of salary paid in bonus (60% of maximum opportunity); and _ 25% of PSP award (25% of salary). Maximum performance Fixed elements of remuneration plus the full payout of both short- and long-term incentives. The composition and value of the Executive Directors’ remuneration packages at “minimum”, “on-target” and “maximum” scenarios are set out above. The policy of the committee is to align Executive Directors’ interests with those of shareholders and to give the Executive Directors an incentive to perform at the highest levels. To achieve this, it seeks to ensure that a significant proportion of the remuneration package varies with the financial performance of the Group and that targets are aligned with the Group’s stated business objectives. Recruitment policy In cases of appointing a new Executive Director from outside the Company, the committee may make use of all the existing components of remuneration. Executive Directors will receive a base salary, pension contributions and other benefits, and will be eligible to participate in the APBP and PSP in line with the normal policy. The maximum level of variable pay (excluding any buy-outs) offered to any new Executive Director on appointment would be 325% of salary (comprising 175% of salary in the APBP and 150% in the PSP). Base salaries of new appointees will be determined by reference to relevant market data, experience and skills of the individual, internal relativities and their current basic salary. Where new appointees have initial basic salaries set below market, any shortfall may be managed with phased increases over a period of two to three years subject to the individual’s development in the role. The committee may elect to make an award in respect of a new appointment to ‘buy out’ incentive arrangements forfeited on leaving a previous employer on a like-for-like basis, which may be awarded in addition to the remuneration structure outlined above. If the committee determines that it is appropriate to do so, it will apply the following approach: 0 7 Dialight plc Annual Report and Accounts 2017GovernanceThe fair value of these incentives will be calculated taking into account: _ the proportion of the performance period completed on the date of the Executive’s cessation of employment; _ the performance conditions attached to the vesting of these incentives and the likelihood of them being satisfied; and _ any other terms and conditions having a material effect on their value (“lapsed fair value”). The committee may then grant up to the same fair value as the lapsed fair value where possible under the Company’s incentive plans (subject to the annual limits under these plans). The committee, however, retains the discretion to provide the lapsed fair value under specific arrangements in relation to the recruitment of the particular individual. Listing Rule 9.4.2 may be utilised in order to provide the flexibility to the committee to offer a remuneration structure outside of the Group’s existing plans, as appropriate. The approach to the recruitment of internal candidates would be similar but the committee would continue to honour existing contractual commitments prior to any promotion. For Non-Executive Directors, the committee and the Company would seek to pay fees in line with the Company’s existing Policy. A base fee in line with the prevailing fee schedule would be payable for Board membership, with additional fees payable for acting as Senior Independent Director and/or as Chair of a Board Committee. Service contracts Executive Directors’ service contracts, including arrangements for early termination, are carefully considered by the committee. Executive Directors’ service contracts contain provisions that require up to 12 months’ notice of termination on either side. Such contracts do not contain any provisions for payments outside the scope of those contained in the contract. Executive Director service contracts are available to view at the Company’s Registered Office. Non-Executive Directors have specific terms of engagement provided in formal letters of appointment, which contain three-month notice periods that are mutual. The Non-Executive Directors are appointed for a three-year term, subject to annual re-election by the shareholders at the Company’s AGM. Executive Directors’ service contracts require up to 12 months’ notice to be given by Dialight in the event of termination. Both can be terminated with and without cause and require up to 12 months’ notice from either party. Subject to his compliance with those restrictive covenants in the contract, the Group Chief Executive Officer is entitled to a severance payment equivalent to a full year’s salary and continuing benefits. This does not apply should he resign or be terminated with cause. Details of the remuneration package payable to the former Group Chief Executive Officer Michael Sutsko on leaving are available on page 78. The Group Finance Director’s contract provides for pay in lieu of notice but does not contain any additional compensation provisions. None of the current Executive Directors’ contracts contain liquidated damages clauses. If a contract is to be terminated, the committee will determine such mitigation as it considers fair and reasonable in each case. In determining any compensation, it will take into account the best practice provisions of the Code and published guidance from recognised institutional investor bodies, and will take legal advice on the Company’s liability to pay compensation and the appropriate amount. The committee periodically considers what compensation commitments the Executive Directors’ contracts would entail in the event of early termination. There are no contractual arrangements that would guarantee a pension with limited or no abatement on severance or early retirement. The committee will exercise discretion in making appropriate payments in the context of outplacement, settling legal claims or potential legal claims by a departing Executive Director, including any other amounts reasonably due to the Executive Director, for example, to meet the legal fees incurred in connection with the termination of employment, where the Company wishes to enter into a settlement agreement and the individual must seek independent legal advice. 7 1 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements DIRECTORS’ REMUNERATION REPORT CONTINUED DIRECTORS’ REMUNERATION POLICY CONTINUED Treatment of outstanding variable incentives will be as follows: APBP In the event of an Executive Director leaving Dialight before the end of a bonus year or prior to the payment of a bonus, the committee has discretion to allow them to be paid a portion of bonus relative to their point of leaving. This will be highly contingent on the manner of the Executive Director’s departure and whether they are classified as a “good leaver” pursuant to the rules of the APBP. PSP The PSP would operate in a similar way to the APBP. Assuming the Executive Director is classed as a “good leaver”, outstanding PSP shares would typically be pro-rated for the proportion of the performance period served and released, subject to applicable performance conditions, at the normal vesting date. The committee has flexibility to allow awards to vest earlier than above when an individual leaves; however, the default position will be for awards not to be released early. The treatment of shares subject to deferral or holding periods will be subject to the committee’s discretion and will take into account the circumstances at the time. For the purpose of the above, “good leaver” is defined as a participant ceasing to be employed by the Group by reason of death, disability, ill health, redundancy, retirement with agreement of the Company or any other reason that the committee determines in its absolute discretion. Should the Executive Director leave the Company in any other circumstances, outstanding awards would typically lapse. The committee also retains discretion in the event of a change of control to release awards under the PSP. It is usual in this situation that awards would be pro-rated for time and performance subject to the discretion of the committee. In relation to the APBP, the scheme rules allow the committee to determine that all deferred share elements of the bonus awards will vest on a change of control and may be exercised within such period as the committee shall specify. External appointments It is the Company’s policy that, except in extraordinary circumstances, Executive Directors should only accept one appointment with a third party as a Non-Executive Director. Any such appointment is subject to prior Board approval and consideration will be given to potential conflicts of interest with Dialight and the time demands of the external appointment. The Executive Director concerned is entitled to retain any fees from such a non-executive directorship. Employment conditions elsewhere in the Company The committee takes into account what the general rise in employee salaries was across the Company at the review date when considering changes to the remuneration of the Executive Directors. The Company did not expressly seek the views of employees when drawing up the Policy but does carry out an annual review of salaries across the Group. Shareholder views The committee maintains a regular dialogue with its major shareholders and will continue to monitor trends and developments in corporate governance and market practice to ensure that the structure of executive remuneration remains appropriate. 2 7 Dialight plc Annual Report and Accounts 2017GovernanceANNUAL REPORT ON REMUNERATION The following section provides details of how the Policy was implemented during the financial year ending 31 December 2017, and how it will be implemented in 2018. Roles and responsibilities The primary responsibilities of the committee are to: _ set the remuneration policy for all Executive Directors, the Company’s Chairman and the Company Secretary including, where appropriate, bonuses, incentive payments, share based incentive schemes and post-retirement benefits; _ determine the remuneration packages for the Executive Directors, the Company’s Chairman and the Company Secretary, within the terms of the Policy; _ recommend and monitor the structure of the remuneration of the senior management group as defined by the Board; _ approve the design of, and determine targets for, any performance related incentive schemes operated by the Company and approve the total annual payments made under such schemes (in accordance with the provisions of Schedule A of the UK Corporate Governance Code); and _ review the design of all share incentive plans requiring approval by the Board and shareholders. For any such plans, the Committee shall determine each year, taking into account the recommendations of the Group Chief Executive Officer, whether awards will be made and, if so, the amount of such awards to the Executive Directors, Company Secretary, members of the Executive Committee and other senior Group employees from time to time nominated by the Group Chief Executive Officer, and any performance targets to be used. A copy of the terms of reference for the committee is available on the Company’s website or on request from the Company Secretary at the Registered Office. Other decisions The committee’s other principal activities and key decisions during the year included: _ setting the 2017 salary increases for Executive Directors; _ reviewing of cash bonuses in respect of the 2016 financial year; _ approving the 2017 PSP awards and setting the associated PSP performance targets; _ reviewing the performance targets outcome in relation to the 2014 PSP award; _ setting APBP objectives for 2017; _ reviewing and approving the committee’s terms of reference; and _ reviewing the committee’s performance as part of the 2017 external Board performance evaluation. Committee members The names of those who served on the committee during the year can be found in the below table: Committee member Martin L. Rapp (Committee Chair) Stephen Bird David Thomas Member since 26 April 2016 10 January 2013 26 April 2016 Following the end of the 2017 financial year, Marty Rapp stepped down as member and Chair of the Committee, and was replaced by Stephen Bird. Gaelle Hotellier joined the Committee as a member. These changes took effect from 8 January 2018. All members of the committee are considered independent within the definition set out in the Code. None of the committee has any personal financial interest in Dialight (other than as shareholders), conflicts of interests arising from cross directorships or day-to-day involvement in running the business. 7 3 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements DIRECTORS’ REMUNERATION REPORT CONTINUED ANNUAL REPORT ON REMUNERATION CONTINUED During the year, the committee met face-to-face three times and held additional meetings by conference call to deal with the review and approval of specific matters falling outside of the scheduled meetings. Attendance by individual members of the committee is disclosed in the Corporate governance report on page 49. Only members of the committee have the right to attend Committee meetings. The Group Chief Executive Officer, the Group Finance Director, the Company Secretary and the Group HR Director attend the committee’s meetings by invitation, but are not present when their own remuneration is discussed. The committee also takes independent professional advice as required. External advice The committee has access to the advice of the Group Chief Executive Officer and the Company Secretary as well as external advisers as required. During the year ended 31 December 2017, the committee consulted: _ Kepler Associates, a brand of Mercer, which provided independent advice on long-term incentive measures and targets; updates on the external remuneration environment; performance testing for long-term incentive plan; and Directors’ remuneration report drafting support for a fee of £19,273; and _ Clifford Chance, which advised on the operation of the Company’s share and other incentive plans during the year, including the launch of the 2017 Sharesave Plan and gave ad hoc advice on other remuneration issues for a fee of £21,466. In addition, Slaughter and May was engaged at the start of 2018 to provide advice on Michael Sutsko’s compensation arrangements on leaving. The committee retains the responsibility for the appointment of remuneration advisers and their associated fees and undertakes due diligence periodically to ensure that its advisers remain independent and that the advice provided is impartial and objective. Statement of shareholder voting At the AGM held on 20 April 2017, the Directors’ remuneration report and the Policy received the following proportions of votes from shareholders: Remuneration report Remuneration policy 2017 outcomes % of votes for % of votes against Votes withheld 99.24 99.42 0.76 0.58 4,288 3,911 Single figure of total remuneration The following tables provide details of the Directors’ remuneration for the 2017 financial year, together with their remuneration for the 2016 financial year, in each case before deductions for income tax and national insurance contributions (where relevant): 2017 (all figures in 000s) Executive Directors Michael Sutsko Fariyal Khanbabi Non-Executive Directors Wayne Edmunds Stephen Bird David Blood Gaelle Hotellier Martin L. Rapp David Thomas Salary/Fee 2017 Benefits 2017 Pension 2017 Sub-total fixed 2017 Bonus 2017 PSP 2017 Sub-total variable 2017 Total remuneration 2017 $593 £267 $1921 £46 £41 €551 $671 £46 $53 £13 $100 £40 – – – – – – – – – – – – $746 £320 $192 £46 £41 €55 $67 £46 – – – – – – – – – – – – – – – – – – – – – – – – $746 £320 $192 £46 £41 €55 $67 £46 1 Wayne Edmunds, Gaelle Hotellier and Martin L. Rapp received “local” currency fees with effect from 1 January 2017. 4 7 Dialight plc Annual Report and Accounts 2017Governance2016 (all figures in 000s) Executive Directors Michael Sutsko Fariyal Khanbabi Non-Executive Directors Wayne Edmunds1 Stephen Bird David Blood Gaelle Hotellier2 Martin L. Rapp3 David Thomas4 Past Directors Bill Ronald5 Tracey Graham6 Robert Lambourne7 Salary/Fee 2016 Benefits 2016 Pension 2016 Sub-total fixed 2016 $576 £259 £121 £46 £41 £10 £31 £31 £9 £20 £20 $52 £13 $97 £39 – – – – – – – – – – – – – – – – – – $725 £311 £121 £46 £41 £10 £31 £31 £9 £20 £20 Bonus 2016 $741 £219 – – – – – – – – – PSP 2016 $0 £0 – – – – – – – – – Sub-total variable 2016 Total remuneration 2016 $741 £219 $1,466 £530 – – – – – – – – – £121 £46 £41 £10 £31 £31 £9 £20 £20 1 Wayne Edmunds was appointed as Chairman on 25 January 2016. 2 Gaelle Hotellier was appointed as a Non-Executive Director on 3 October 2016. 3 Martin L. Rapp was appointed as a Non-Executive Director on 26 April 2016. 4 David Thomas was appointed as a Non-Executive Director on 26 April 2016. 5 Bill Ronald stepped down as Chairman on 25 January 2016. 6 Tracey Graham stepped down as a Non-Executive Director on 26 April 2016. 7 Robert Lambourne stepped down as a Non-Executive Director on 26 April 2016. Additional disclosures Executive Directors’ benefits Executive Directors receive benefits comprising life insurance, healthcare and car allowances. In addition, Marty Rapp will be entitled to reimbursement of his costs of travel and accommodation in travelling from his home to the Farmingdale office in New Jersey. Pensions The figure includes the amount of Company contributions to Fariyal Khanbabi’s and Michael Sutsko’s pensions during the year. Fariyal Khanbabi received Company contributions of 15% of base salary and mid-year elected to receive a cash payment in lieu. Michael Sutsko received employer contributions under a US 401(k) plan. Michael Sutsko did not participate in the SERP and instead received a cash payment in lieu of employer contribution. APBP The APBP operates on the basis that is set out in the Policy report on page 66. Maximum bonus potential, paid in a mixture of cash and, in respect of performance above target, deferred shares, is 175% of salary for the Group Chief Executive Officer and 125% for the Group Finance Director. 2016 APBP As discussed in the 2016 Remuneration Committee report, actual EBIT performance for 2016 was £13.1m. In addition, having considered performance against individual targets and financial imperatives including the refinancing, the committee determined that both Michael Sutsko and Fariyal Khanbabi had fully met their executive goals. As a result, total bonuses of 128.6% of salary and 84.5% of salary became payable to Michael and Fariyal respectively, of which 28.6% and 9.5% of salary were paid in the form of deferred shares. 7 5 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements DIRECTORS’ REMUNERATION REPORT CONTINUED ANNUAL REPORT ON REMUNERATION CONTINUED 2017 APBP The 2017 APBP was based primarily on EBIT performance with up to 15% of the Executive Directors’ target bonus being subject to the achievement of certain individual goals linked to Dialight’s key strategic goals. The performance range in respect of 2017 EBIT was as follows: EBIT (after provision for bonus) Threshold Target Maximum Actual £14.5m £17.5m £20.5m £9.7m No bonus is payable under either element for below threshold EBIT. Actual EBIT performance for 2017 was £9.7m and as a result no bonuses were payable in respect of the 2017 financial year. PSP Awards made in 2014 Awards made under the PSP in 2014 lapsed in 2018 due to the fact that the related performance conditions were not achieved. Awards made in 2015 Awards made under the PSP in 2015 will lapse on 7 April 2018 as the related performance conditions were not achieved during the three-year performance period to 31 December 2017. Percentage change in the remuneration of the Group Chief Executive Officer The following table sets out the change in remuneration paid to the then Group Chief Executive Officer, Michael Sutsko, from 2016 to 2017 compared with the average percentage change for employees as a whole: Salary Bonus Benefits % change 2016–2017 Group Chief Executive Officer Group employees 3% 3% -100% -100% 0% 0% Due to operational performance no bonus was payable in relation to 2017 but a bonus was paid in 2016. The main benefits provided include healthcare, life insurance and car allowance. There has been no change in the level of benefits provided to Group employees. Relative importance of spend on pay The table below shows the total amount paid by the Company to its employees (excluding severance costs) for 2017 and 2016. Details of the total amount of distributions for the same two years can also be seen. Spend on pay 2017 2016 £34.4m £36.6m Distributions 2017 2016 £0m £0m 6 7 Dialight plc Annual Report and Accounts 2017GovernancePerformance graph and table The graph below demonstrates the Company’s total shareholder return (‘‘TSR’’) performance over the past nine years relative to the FTSE 250 Mid Index (excluding investment trusts), the FTSE SmallCap Index (excluding investment trusts) and the FTSE All-Share Electronic and Electrical Equipment Index, indices of which Dialight has been a constituent over the period. 1,200 1,000 800 600 400 200 0 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dialight FTSE250 Index (excluding investment trusts) FTSE SmallCap Index (excluding investment trusts) FTSE All-Share Electronic and Electrical Equipment Index Source: Datastream The table below sets out the “single figure” of total remuneration of the Group Chief Executive Officer over the same nine-year period: 2009 2010 2011 2012 2013 2014 2015 2016 2017 R Burton R Burton R Burton R Burton R Burton R Burton R Burton M Sutsko M Sutsko Total remuneration ($’000) $745 $2,845 $4,170 $3,843 $1,564 $1,153 Bonus outcome (% of max) 70 100 100 66.6 0 29 PSP vesting outcome (% of max) 58 100 100 100 100 0 (to Feb) R Stuckes (Mar to Jun) M Sutsko (from Jul) $112 £185 $523 0 n/a 0 0 n/a n/a $1,466 £746 74 0 n/a n/a PSP awards made in 2017 Awards granted in 2017 are measured against EPS and TSR on the following basis: EPS EPS is used in respect of 75% of awards. For awards made in 2017, no part of the award that is subject to the EPS condition will vest if the Company’s 2019 EPS over the three-year vesting period is below 62p, 25% of the award that is subject to the EPS condition will vest if the Company’s 2019 EPS exceeds 62p, rising on a straight-line basis to 100% vesting if the Company’s 2019 EPS exceeds 78p. The committee will review the performance targets prior to the grant of any future awards to ensure that they are appropriately stretching, but achievable. 7 7 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements DIRECTORS’ REMUNERATION REPORT CONTINUED ANNUAL REPORT ON REMUNERATION CONTINUED TSR TSR is used in respect of the remaining 25% of awards in order to maintain strong shareholder alignment. No part of the awards made in 2017 that are subject to the TSR condition will vest if the percentage increase in the Company’s TSR over the three-year vesting period is below the percentage increase in the TSR of the comparator index: 25% of the awards that are subject to the TSR condition will vest if the percentage increase in the Company’s TSR is equal to the percentage increase in the TSR of the comparator index, rising on a straight-line basis to 100% vesting if the percentage increase in the Company’s TSR is equal to the increase in the TSR of the comparator index plus 10% per annum. The comparator index for these purposes is the FTSE SmallCap Index, excluding investment trusts. Holding period A mandatory two-year post-vesting holding period will apply to any shares received by Executive Directors on the vesting or exercise of the 2017 PSP awards. The 2017 awards made to the Executive Directors are set out below: Director Plan awarded Nature of interest % of salary Fariyal Khanbabi PSP 100% Nil-cost option Exercise price per share Number of shares subject to an award Face value of an award1 Performance conditions Date of grant of award Date of end of performance period n/a 26,588 £267,130 TSR/EPS 24.03.17 31.12.19 Michael Sutsko PSP 125% Conditional n/a 58,930 £592,069 TSR/EPS 24.03.17 31.12.19 share award 1 Based on five-day average share price on date of award of £10.0470. Payments to past Directors or for loss of office Exit payments Following the end of the 2017 financial year, Michael Sutsko stepped down as Group Chief Executive Officer of Dialight. The key elements of the remuneration package payable on leaving are set out below and are consistent with the Policy and his service contract: _ the salary and benefits payable to Michael Sutsko prior to leaving, will continue to be paid during his 12-month garden leave; _ no bonus will be payable in respect of 2017 performance as the 2017 EBIT targets have not been met; _ Michael Sutsko will not be entitled to a bonus in respect of the 2018 financial year; _ for a period of 12 months following the end of his garden leave, Michael Sutsko will be entitled to a payment equivalent to (i) the cost to the Company of continuing healthcare benefits under the Consolidated Omnibus Budget Reconciliation Act 1985 for Michael Sutsko and his qualified beneficiaries and (ii) the cost to the Company of Michael Sutsko’s benefits under the Company’s group life insurance plan; _ in relation to his PSP awards which will remain outstanding at the end of the garden leave period (8 January 2019), the committee has exercised its discretion under the rules of the PSP to determine that these will vest on their normal vesting dates, subject to the satisfaction of the applicable performance conditions and time pro-rating to reflect the proportion of the vesting period that has elapsed at that point. Michael Sutsko’s 2017 PSP award was subject to a two-year holding period. The committee has exercised its discretion to waive this holding period, should the pro-rated 2017 PSP awards vest; _ in relation to his outstanding deferred shares awarded as conditional shares as part of his 2017 bonus under the APBP, the committee has exercised its discretion under the rules of the APBP to determine that these will vest in full at the end of his garden leave; and _ the Company will pay Michael Sutsko’s outplacement support costs of up to $30,000. He will continue to be covered by his current tax equalisation programme, and the Company will continue to pay the reasonable cost of foreign tax advice, in relation to any year in which tax advice continues to be required on earnings related to his employment by the Company. The costs of Michael Sutsko’s compensation on leaving will fall into the 2018 accounting period. 8 7 Dialight plc Annual Report and Accounts 2017GovernanceImplementation of the remuneration policy for 2018 New Group Chief Executive Officer As previously mentioned, Marty Rapp succeeded Michael Sutsko and was appointed as Group Chief Executive Officer with effect from 8 January 2018. The committee agreed that Marty Rapp receive a remuneration package equivalent in all material respects to Michael Sutsko’s entitlement. Executive salaries and Non-Executive Director fees In line with the increase across the broader employee population, the committee agreed a 3% increase in salary for Executive Directors with effect from 1 January 2018. This brings the Group Finance Director’s salary to £275,145. Marty Rapp, as the new Group Chief Executive Officer will receive a salary of $611,078, being the salary paid to Michael Sutsko during 2017, adjusted to reflect the agreed 3% uplift. The Chairman’s and the Non-Executive Directors’ fees were also reviewed at the end of 2017 and a decision was made to increase these by 3% with effect from 1 January 2018. The enhancements for chairing a Board committee and acting as Senior Independent Director (‘‘SID’’) were also increased by 3% with effect from 1 January 2018. The table below sets out the adjusted fees: Name Wayne Edmunds Stephen Bird David Blood Gaelle Hotellier David Thomas Base fee following 3% increase $198,100 SID uplift Committee chair Current fee $198,100 £42,000 £5,100 £5,100 £52,200 £42,000 €57,100 £42,000 £42,000 €57,100 £5,100 £47,100 Pensions The Group Chief Executive Officer does not currently participate in the SERP and will receive a cash payment in lieu of employer contribution of 15% of base salary. The Group Chief Executive Officer does, however, participate in the 401(k) scheme and will receive an employer contribution of 3% of base salary in accordance with the plan rules. The Group Finance Director will receive either a contribution of 15% of base salary into a defined contribution pension scheme or a cash payment in lieu. APBP The 2018 APBP will be based on targets linked primarily to EBIT performance with a small element based on personal objectives, as in 2017. The maximum annual bonus achievable will remain as 175% of salary in respect of Marty Rapp and 125% of salary in respect of Fariyal Khanbabi. Target bonuses will remain 100% of salary and 75% of salary respectively with any bonus earned above target being payable in the form of deferred shares, 50% of which vest after two years and 50% of which vest after three years. It is the committee’s view that detailed disclosure of the performance targets in advance for the future financial year is commercially sensitive. The targets are based on profit projections for the year ahead which would provide the Company’s competitors with a potential commercial advantage and would also be price sensitive. The committee will, however, provide full retrospective disclosure of the performance conditions and targets at the end of the relevant financial year. PSP PSP awards to Executive Directors for 2018 will be made in March or April this year subject to EPS and TSR performance targets. As communicated in last year’s Annual Report and Accounts we have increased the weighting on EPS from 50% to 75%, with a commensurate reduction in the weighting on relative TSR from 50% to 25%. The committee believes that this rebalancing will continue to focus participants on Dialight’s financial performance over the next three years, whilst also recognising the strong shareholder alignment and objectivity offered by TSR. Awards made to the Executive Directors are now subject to a two-year post-vesting holding period. At the time of the production of this Report, the targets applying to the 2018 awards had not formally been approved by the committee. We will be finalising targets over the coming weeks, taking into account a range of internal and external reference points, and will provide full disclosure both at the time of award, and in next year’s Annual Report and Accounts. 7 9 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements DIRECTORS’ REMUNERATION REPORT CONTINUED ANNUAL REPORT ON REMUNERATION CONTINUED Outstanding awards under the PSP and APBP Type of award Award date Number at 1 January 2017 Awarded in year Vested in year Exercised in year Lapsed in year Number at 31 December 2017 Exercise price Earliest vesting/ exercise date Expiry date Fariyal Khanbabi PSP PSP APBP1 PSP APBP PSP Total NCO 16.09.14 27,674 NCO 07.04.15 32,325 NCO 13.03.15 10,445 NCO 16.03.16 49,240 – – – – NCO 10.03.17 NCO 24.03.17 – – 2,384 26,588 – – – – 5,222 (10,445) – – – – – – (27,674) – – – – – – 32,325 – 49,240 2,384 26,588 114,461 28,972 5,222 (10,445) (27,674) 110,537 – – – – – – – 16.09.17 16.09.24 07.04.18 07.04.20 31.01.17 13.03.20 16.03.19 16.03.21 31.01.19 10.03.22 24.03.20 24.03.22 – – 1 Of the 10,445 deferred share options originally awarded to Fariyal Khanbabi, 5,223 had vested prior to 2017. The remaining 5,222 vested during 2017 and the full award of 10,445 options was subsequently exercised on 6 March 2017. Type of award Award date Number at 1 January 2017 Awarded in year Vested in year Exercised in year Lapsed in year Number at 31 December 2017 Exercise price Earliest vesting/ exercise date Michael Sutsko PSP1 PSP APBP1 PSP Total CSA 03.08.15 71,644 CSA 16.03.16 96,485 – – CSA 10.03.17 CSA 24.03.17 – – 13,058 58,930 168,129 71,988 – – – – – – – – – – – – – – – 71,644 96,485 13,058 58,930 240,117 – – – – – 03.08.18 16.03.19 31.01.19 24.03.20 – Expiry date n/a n/a n/a n/a – 1 Michael Sutsko’s 2017 APBP award will vest in full at the end of his garden leave (8 January 2019). His PSP awards which remain outstanding at that date will vest on their normal vesting dates, subject to the satisfaction of applicable performance conditions and time pro-rating. Notes: CSA denotes conditional share awards. These are subject to performance conditions set out on page 77. NCO denotes nil-cost options. These are subject to performance conditions set out on page 77. The average closing market price of a share over the five trading days of 17–23 March 2017, which was used for the purpose of calculating award values on 23 March 2017, the date of the awards recorded in the tables above made during the year, was 1004.7 pence. Options under the PSP granted prior to and during 2014 are exercisable for seven years from the date of vesting. From 2015 the exercise period reduced to two years from the date of vesting. Awards granted since 2017 are subject to a mandatory two-year post-vesting holding period. Options under the APBP are exercisable for five years from the date of grant. Under the APBP scheme, awards vest 50% on or after 31 January in the second year after grant with the remaining 50% vesting on or after 31 January in the third year after grant. During the year, the range of share prices was 550 pence to 1,115 pence, with the price on 31 December 2017 being 550 pence. Executive Directors’ shareholding guidelines Executive Directors are currently required to accumulate and maintain a holding of Dialight shares equivalent in value to their last annual PSP award (i.e. currently 125% of salary for the Group Chief Executive Officer and 100% for the Group Finance Director). In accordance with the guidelines, Executive Directors have five years from joining Dialight to acquire the requisite holding. All Dialight shares, whether purchased on the open market or received through vestings and/or exercises under the various Dialight share plans, shall be included to satisfy the requirements. The Dialight share price used to value a holding for the purposes of the guidelines will be the higher of: (i) the prevailing price on the date that the holding is valued; and (ii) the acquisition price (i.e. the price on the date on which the awards were acquired). 0 8 Dialight plc Annual Report and Accounts 2017GovernanceThe table below shows the holdings of ordinary shares in the Company as at 31 December 2017 by Executive Directors and their compliance with the guidelines: Executive Director Fariyal Khanbabi Michael Sutsko Shares held at 1 January 2017 – 4,669 Shares held at 31 December 2017 5,483 11,489 Following year-end, Marty Rapp purchased 12,500 Dialight plc ordinary shares, bringing the total number of Dialight plc ordinary shares he holds as at 8 January 2018 to 26,000 shares. Fariyal Khanbabi and Marty Rapp, who were appointed Executive Directors on 8 September 2014 and 8 January 2018 respectively, have until 8 September 2019 and 1 January 2023 to build their respective shareholding up to the required levels. Total shareholding of Directors Michael Sutsko Fariyal Khanbabi Wayne Edmunds Stephen Bird David Blood David Thomas Martin L. Rapp Gaelle Hotellier Beneficially held shares1 Shares under incentive plans Ordinary shares at 1 January 2017 4,669 – – Ordinary shares at 31 December 20172,3 11,489 5,483 – 28,000 28,000 – 1,294 13,500 882 – 1,294 13,500 882 Unvested and/or subject to performance conditions5 227,059 108,153 Subject to deferral4 13,058 2,384 – – – – – – – – – – – – Shareholding guidelines met No No – – – – – – 1 Some of these shares are held through nominees. 2 Michael Sutsko purchased ordinary shares during the year. Fariyal Khanbabi exercised 10,445 nil-cost options under the APBP scheme during the year and sold 4,962 shares to cover tax and commission. 3 Martin L. Rapp, Stephen Bird and Wayne Edmunds all purchased ordinary shares after 31 December 2017. 4 Relates to deferred shares held under the APBP scheme. 5 Relates to outstanding awards under the PSP. Directors’ service agreements and letters of appointment The dates on which Directors’ initial service agreements/letters of appointment commenced and the expiry dates as at 31 December 2017 are as follows: Chairman and Executive Directors Commencement date Expiry date of current employment/service agreement or letter of appointment Wayne Edmunds Michael Sutsko Fariyal Khanbabi Non-Executive Directors 25 January 2016 Letter of appointment was for an initial term of three years. 1 June 2015 The agreement is terminable by the Company or by the Director on 12 months’ notice. 8 September 2014 The agreement is terminable by the Company or by the Director on six months’ notice. Stephen Bird 10 January 2013 Letter of appointment was for an initial term of three years. During 2016, this was extended for a further three-year period. David Blood Martin L. Rapp David Thomas Gaelle Hotellier 1 July 2015 Letter of appointment was for an initial term of three years. 26 April 2016 Letter of appointment was for an initial term of three years. 26 April 2016 Letter of appointment was for an initial term of three years. 3 October 2016 Letter of appointment was for an initial term of three years. 8 1 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements OTHER STATUTORY INFORMATION concerning interests held in those shares. Except as set out above and as permitted under applicable statutes, there are no limitations on voting rights of holders of a given percentage, number of votes or deadlines for exercising voting rights. Restrictions on transfer of shares There are no specific restrictions on the transfer of the Company’s shares, although the Articles contain provisions whereby Directors may refuse to register a transfer of a certificated share which is not fully paid. There are no other restrictions on the transfer of ordinary shares in the Company except certain restrictions which may from time to time be imposed by laws and regulations (for example insider trading laws). The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. Activities Dialight plc is a holding company. A list of its subsidiary companies, including its overseas paid. No purchases by the Company of its own shares were made in 2017 under the authority granted at the 2017 AGM. Employee share plans Details of employee share plans are set out in note 18 to the accounts. branches, is set out on pages 125 and 126. Our businesses by sector and their activities Rights and obligations of ordinary shares Holders of ordinary shares are entitled are set out on page 2. Ordinary dividends The Board is not proposing any final dividend to attend and speak at general meetings of the Company and to appoint one or more proxies or, if the holder of shares is a corporation, one or more corporate payment for 2017 (2016: nil). The Group has representatives. On a show of hands, each a clear capital allocation discipline and is holder of ordinary shares who (being an committed to returning excess funds via individual) is present in person or (being a future dividend or share repurchase. corporation) is present by a duly appointed corporate representative, not themselves Share capital and capital structure Details of the share capital, together with being a member, shall have one vote, as shall proxies (unless they are appointed by more details of the movements in the share capital during the year, are shown in note 16 to the than one holder, in which case they may vote both for and against the resolution in accounts. The Company has one class of accordance with the holders’ instructions). ordinary share which carries no right to fixed On a poll, every holder of ordinary shares income. Each share carries the right to one present in person or by proxy shall have vote at general meetings of the Company. one vote for every share of which they are There are no other classes of share capital. the holder. Electronic and paper proxy There are no specific restrictions on the size appointments and voting instructions must of a holding nor on the transfer of shares, be received not later than 48 hours before with both governed by the general provisions the meeting. A holder of ordinary shares of the Articles of Association (the “Articles”) can lose the entitlement to vote at general and prevailing legislation. No person has any meetings where that holder has been served special rights of control over the Company’s with a disclosure notice and has failed to share capital and all issued shares are fully provide the Company with information The Company currently operates three share plans: the PSP, the APBP and an all- employee Sharesave Plan. Further details of these share plans are provided in the report of the Remuneration Committee on pages 64 to 68. The rules of the PSP provide that, in the event of a change of control through a general offer or scheme of arrangement, shares subject to awards under the PSP could be released within one month of the date of notification of the likely change of control. The rules of the Sharesave Plan have special provisions which also allow for early exercise in the event of a change of control, reconstruction or winding up of the Company. Internal reorganisations do not automatically trigger the early exercise of options. The Company has established the Dialight Employees’ Share Ownership Plan Trust (“ESOT”) in which all employees of the Group, including Executive Directors, are potential beneficiaries. The ESOT held no shares as at 31 December 2017 (2016: Nil). The Trustees of the ESOT retain the voting rights over the shares held in the ESOT and may exercise these rights independent of the interests of the Company. 2 8 Dialight plc Annual Report and Accounts 2017GovernanceAppointment and replacement of Directors With regard to the appointment and Allotment authority Under the Companies Act 2006, the Directors may only allot shares if authorised replacement of Directors, the Company by shareholders to do so. At the Annual is governed by its Articles of Association, General Meeting, an ordinary resolution the UK Corporate Governance Code, the will be proposed which, if passed, will Companies Act and related legislation. authorise the Directors to allot and issue Directors can be appointed by the Company new shares up to an aggregate nominal value by ordinary resolution at a general meeting that is in line with Investment Association or by the Board. If a Director is appointed by guidelines In accordance with the Directors’ the Board, such Director will hold office until stated intention to seek annual renewal, the the next annual general meeting and shall authority will expire at the conclusion of the then be eligible for election at that meeting. annual general meeting of the Company in In accordance with the UK Corporate 2019. Passing this resolution will give the Governance Code, each of the Directors, Directors flexibility to act in the best interests being eligible, will offer themselves for of shareholders, when opportunities arise, election or re-election at this year’s Annual by issuing new shares. General Meeting. The Company can remove a Director from office, either by passing a The Companies Act 2006 also requires that, special resolution or by notice being given by all the other Directors. The Articles if the Company issues new shares for cash or sells any treasury shares, it must first offer themselves may be amended by special them to existing shareholders in proportion resolution of the shareholders. to their current holdings. At the Annual General Meeting, a special resolution will be Powers of Directors The powers of Directors are described in proposed which, if passed, will authorise the Directors to issue a limited number of shares the Matters Reserved for the Board, copies for cash and/or sell treasury shares without of which are available on request from the offering them to shareholders first. The Company Secretary, and are summarised authority is for an aggregate nominal amount in the Corporate Governance Report on of up to 10% of the issued share capital of page 42. Essential contracts and change of control The Directors are not aware of there being the Company as at Annual General Meeting, of which 5% of the issued share capital can only be issued for the purposes of financing an acquisition or other capital investment. any significant agreements that contain The Company’s Annual General Meeting any material change of control provisions will be held on 17 April 2018. The Notice to which the Company is a party, other of Meeting, together with an explanation than in respect of the five-year unsecured of the proposed resolutions, is enclosed £25m multi-currency revolving credit facility with this Annual Report and Accounts and with HSBC Bank plc (“HSBC”) which was is also available on the Company’s website originally entered into in 2014 and which was at www.ir.dialight.com. extended in December 2016 on substantially the same terms for a duration of five years expiring on December 2021, approved for renewal at the December 2016 Board meeting. Under the terms of that facility, and in the event of a change of control of the Company, HSBC can withdraw funding and all outstanding loans, accrued interests and other amounts due and owing becomes payable within 30 days of the change. 8 3 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 OTHER STATUTORY INFORMATION CONTINUED Substantial interests in shares As at 6 February 2018, the Company had been notified, in accordance with chapter 5 of the Disclosure and Transparency Rules, of the following voting rights as a shareholder of the Company. Shareholder Generation Investment Mgt Schroder Investment Mgt Impax Asset Mgt Sterling Strategic Value Fund S.A. River & Mercantile Asset Mgt Financiere de l’Echiquier AXA Investment Mgrs Aberdeen Standard Investments (Standard Life) Holding 6,532,248 3,691,158 2,952,315 2,286,175 1,373,119 1,262,870 1,188,808 1,037,555 % Voting rights 20.09 11.35 9.08 7.03 4.22 3.88 3.66 3.19 Auditor Each of the persons who is a Director at the There have been no significant events since the balance sheet date. An indication of the date of approval of this Annual Report and likely future developments in the business Accounts confirms that: of the Company and details of research and development activities are included _ so far as the Director is aware, there in the Strategic Report on pages 12 to 16. is no relevant audit information of which Details related to employee matters are in the Company’s Auditor is unaware; and _ the Director has taken all the steps that the Our people section on pages 24 to 27. Environmental matters, including greenhouse he/she ought to have taken as a Director in gas emissions reporting, are included within order to make himself/herself aware of any the Sustainability Report on pages 28 to 31. relevant audit information and to establish that the Company’s Auditor is aware of Information about the use of financial that information. instruments by the Company and its subsidiaries is given in note 12 to the This confirmation is given and should be Financial statements. interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Information on the Company’s political and charitable contributions during the The Board is recommending to shareholders year is set out on page 31. the re-appointment of KPMG as auditor of the Company and a resolution authorising For the purposes of compliance with DTR the Directors to set its remuneration will 4.1.5 R(2) and DTR 4.1.8 R, the required be proposed at the forthcoming Annual content of the management report can General Meeting. be found in the Strategic report and these regulatory disclosures, including Scope of the reporting in this Annual the sections of the Annual Report and Report and Accounts The Directors present their Annual Report Accounts incorporated by reference. on the affairs of the Group, together with By order of the Board the financial statements and Auditor’s Report, for the year ended 31 December 2017. The Corporate governance report set out on pages 42 to 85, which includes details of the Directors who served during the year, forms part of this report. 4 8 Chris Fussell General Counsel and Company Secretary 26 February 2018 Dialight plc Annual Report and Accounts 2017GovernanceDIRECTORS’ RESPONSIBILITY STATEMENT The Directors are responsible for preparing _ for the parent company financial the Annual Report and the Group and parent statements, state whether applicable company financial statements in accordance UK Accounting Standards have been with applicable law and regulations. followed, subject to any material departures Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under disclosed and explained in the parent company financial statements; and _ prepare the financial statements on the going concern basis unless it is that law they are required to prepare the inappropriate to presume that the Group Group financial statements in accordance and the parent company will continue with the International Financial Reporting in business. Standards (“IFRS”) as adopted by the European Union (“EU”) and applicable law The Directors are responsible for keeping and have elected to prepare the parent adequate accounting records that are company financial statements in accordance sufficient to show and explain the parent with UK Accounting Standards. company’s transactions and disclose with reasonable accuracy at any time the financial The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement of the Directors in respect of the annual financial report We confirm that to the best of our 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 consolidation taken as a whole; and _ the Directors’ and Corporate governance reports 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. As far as each Director is aware, there is no relevant audit information of which the Company’s auditors are unaware. Each Director has taken steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. For and on the behalf of the Board of Dialight plc. Under company law, the Directors must not approve the financial statements unless they position of the parent company and enable them to ensure that its financial statements are satisfied that they give a true and fair comply with the Companies Act 2006. Martin L. Rapp Group Chief Fariyal Khanbabi Group Finance view of the state of affairs of the Group and They have general responsibility for taking Executive Director parent company and of their profit or loss for such steps as are reasonably open to them 26 February 2018 26 February 2018 that period. In preparing each of the Group to safeguard the assets of the Group and and parent company financial statements, to prevent and detect fraud and the Directors are required to: other irregularities. _ select suitable accounting policies and Under applicable law and regulation, then apply them consistently; the Directors are also responsible for _ make judgements and estimates that are preparing a Strategic report, Directors’ reasonable and prudent; report, Directors’ remuneration report _ for the Group financial statements, state whether they have been prepared in and Corporate governance statement that comply with that law and those regulations. accordance with IFRS as adopted by the EU; 8 5 Strategic report GovernanceFinancial statements Dialight plc Annual Report and Accounts 2017 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DIALIGHT PLC ONLY 1. Our opinion is unmodified We have audited the financial statements of Dialight plc (‘the Company’) for the year ended 31 December 2017 which comprise the Consolidated income statement, Consolidated statement of comprehensive income, Consolidated statement of changes in equity, Consolidated statement of total financial position, Consolidated statement of cash flows, Company balance sheet, and the related notes, including the account policies in notes 3 and 30. In our opinion: _ the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2017 and of the Group’s profit for the year then ended; _ the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; _ the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; 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. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the Audit Committee. We were appointed as auditor by the Directors in 2001. The period of total uninterrupted engagement is for the 17 financial years ended 31 December 2017. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided. Overview Materiality: Group financial statements as a whole Coverage Risks of material misstatement vs 2016 Recurring risks  Inventory valuation  Revenue recognition  Valuation of capitalised development costs  Valuation of investments (Company only) 2017 – £0.45m (4.75% of normalised profit before tax) 2016 – £0.9m (0.5% of revenue) 97% (2016: 96%) of revenue 95% of normalised profit before tax 2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, 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. We summarise below the key audit matters in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters: 6 8 Dialight plc Annual Report and Accounts 2017Financial statementsInventory (£24.6m; 2016: £31.4m) The risk Subjective estimate The Group operates in an industry whereby developments in product technology may Refer to page 58 (Audit result in inventory becoming slow moving Our response Our procedures included: _ Our experience: Making enquiries of management and challenging the assumptions used for any provisions Committee report), page 100 or obsolete. The Group has also undergone additional to the group policy based on our knowledge (accounting policy) and page 113 a programme of product platform of the group; (financial disclosures). re-engineering which resulted in changes _ Enquiry of management: Making enquiries of to stock lines. These factors, in turn, management about discontinued product lines and low may mean that inventory cannot be sold usage products and then assess if appropriate provision or sales prices are discounted to less than the inventory carrying value. has been recognised in relation to these products; _ Test of detail: Testing the carrying value of inventory by comparing the carrying value to average sales margin for each product recorded in the post year end period to assess whether those items were held at the lower of cost or net realisable value; _ Assessing transparency: We also assessed the adequacy of the Group’s disclosures in respect of the judgements used in determining the estimates related to the carrying value of inventory. Our results: _ We found the resulting estimate of the recoverable amount of inventory to be acceptable (2016: acceptable). Revenue (£181.0m; 2016: £182.2m) Existence of revenue There is a risk that transactions completed Our procedures included: just before or after the year end could be _ Our experience: Challenging the recognition of Refer to page 58 (Audit incorrectly recorded in the wrong period revenue for a sample of items recognised either side Committee report), page 102 due to the high volume of transactions of the financial year end by reference to the customer (accounting policy) and page 104 close to the year-end reporting deadline. agreement and the identified trigger event for revenue, (financial disclosures). The Group has a number of customers such as when contractually the customer takes on who have non-standard contractual terms the risks and rewards of ownership and tracing back meaning that the risks and rewards transfer to third party carrier documentation to confirm sales at different timings (such as on dispatch, on were recognised in the appropriate period. receipt at port of destination and on receipt by customer) with the result that there is Our results: an increased risk that revenue may not be recognised in the correct period for such _ We found the resulting recognition of revenue to sales occurring near to year end. be acceptable. (2016: acceptable). Development costs (£4.1m; 2016: £4.8m) Refer to page 58 (Audit Recoverability of capitalised development costs Judgement is required around the ongoing Our procedures included: _ Re-performance: Re-performing management’s Committee report), page 100 viability of capitalised projects and impairment review for a sample of completed projects. (accounting policy) and page 111 a resulting risk of impairment. This included challenging forecast sales data with (financial disclosures). reference to actual sales achieved during the year, and _ Our experience: Challenging the assessment of the viability of projects through discussion with finance and engineering management. Our results: _ We found the valuation of capitalised development costs to be acceptable (2016: acceptable). 8 7 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements INDEPENDENT AUDITOR’S REPORT CONTINUED Parent Company Risk: Investment in subsidiaries (£17.9m; 2016: £18.0m) The risk Low risk, high value The carrying amount of the parent Our response Our procedures included: company’s investments in subsidiaries _ Tests of detail: Comparing the carrying amount of Refer to page 100 (accounting represents 30.5% (2016: 27.5%) of 100% of investments of the total investment balance policy) and page 111 (financial the company’s total assets. Their with the relevant subsidiaries’ balance sheets to identify disclosures). recoverability is not at a high risk of whether their net assets, were in excess of their carrying significant misstatement, or subject amount and assessing whether those subsidiaries have to significant judgement. However, due historically been profit-making. to their materiality in the context of the parent company financial statements, _ Assessing subsidiary audits: Considering the results of our audit work on the profits and net assets of those this is considered to be the area that subsidiaries. had the greatest effect on our overall parent company audit. Our results: We found the group’s assessment of the recoverability of the investment in subsidiaries to be acceptable. (2016: acceptable). 3. Key audit matters: our assessment of risks of material misstatement Materiality for the Group financial statements as a whole was set at £0.45 million, determined with reference to a benchmark of group profit before tax, normalised to exclude this year’s non-underlying items as disclosed in note five of £6.4 million, and normalised to exclude volatility by averaging over the last five years ending 31 December 2013 to 31 December 2017, of which it represents 4.75% (2016: 0.5% Revenue). We consider a benchmark of profit before tax to be more appropriate in the current year due to that measure having become more stable than in prior years. Materiality for the parent company financial statements as a whole was set at £0.3m (2016: £0.6m), determined with reference to a benchmark of gross assets, of which it represents 0.5% (2016: 1%). We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £23,000, in addition to other identified misstatements that warranted reporting on qualitative grounds. Of the Group’s eight (2016: eight) reporting components, we subjected four (2016: four) to full scope audits for group purposes and two (2016: two) to specified risk-focused audit procedures. The latter were not individually financially significant enough to require a full scope audit for group purposes, and did present specific individual risks that needed to be addressed. We conducted reviews of financial information (including enquiry) at a further two (2016: two) non-significant components. The components within the scope of our work accounted for the percentages illustrated opposite. The remaining 3% of total Group revenue and 11% of Group profit before tax is represented by three reporting components, none of which individually represented more than 5% of any of total Group revenue or Group profit before tax. For these residual components, we performed analysis at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these. The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from £0.19 million to £0.35 million, having regard to the mix of size and risk profile of the Group across components. The work on three of the eight components (2016: three of the eight components) was performed by component auditors and the rest, including the audit of the parent company, was performed by the Group team. The Group team visited three (2016: three) component locations in the UK and USA (2016: UK and USA) to assess the audit risk and strategy. Telephone conference meetings were also held with one component auditor and the other component sites were not physically visited. At these meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor. 8 8 Dialight plc Annual Report and Accounts 2017Financial statementsNormalised profit before tax £9.4m (2016: Revenue of £182.2m) Group materiality £0.45m (2016: £0.9m) £0.45m Whole financial statements materiality (2016: £0.9m) £0.35m Range of materiality at six components (£0.19m to £0.35m) (2016: £0.5m to £0.7m) £0.023m Misstatements reported to the audit committee (2016: £0.045m) Normalised profit… Group materiality Group revenue Group profit before tax 88% 9% 11% 85% 97% (2016: 96%) 65% 9% 86% 26% 91% (2016: 95%) Group total assets Group profit before exceptional items and taxation 88% 9% 10% 87% 77% 80% 18% 10% 97% (2016: 97%) 95% (2016: 90%) Full scope for Group audit purposes 2017 Specified risk-focused audit procedures 2017 Full scope for Group audit purposes 2016 Specified risk-focused audit procedures 2016 Residual components 4. We have nothing to report on going concern We are required to report to you if: _ we have anything material to add or draw attention to in relation to the Directors’ statement in note 2 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or _ the related statement under the Listing Rules set out on page 57 is materially inconsistent with our audit knowledge. We have nothing to report in these respects. 5. We have nothing to report on the other information in the Annual Report The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. 8 9 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements INDEPENDENT AUDITOR’S REPORT CONTINUED Strategic report and Directors’ report Based solely on our work on the other information: _ we have not identified material misstatements in the Strategic report and the Directors’ report; _ in our opinion the information given in those reports for the financial year is consistent with the financial statements; and _ in our opinion those reports have been prepared in accordance with the Companies Act 2006. Directors’ remuneration report In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. Disclosures of principal risks and longer-term viability Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to: _ the Directors’ confirmation within the Viability Statement on page 57 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 and liquidity; _ the Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and _ the Directors’ explanation in the Viability Statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered 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. Under the Listing Rules we are required to review the Viability Statement. We have nothing to report in this respect. Corporate governance disclosures We are required to report to you if: _ we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or _ the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects. 6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: _ adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or _ the parent company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or _ certain disclosures of Directors’ remuneration specified by law are not made; or _ we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 0 9 Dialight plc Annual Report and Accounts 2017Financial statements7. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 85, the Directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; 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; assessing the Group and 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 they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud, other irregularities, or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. Irregularities – ability to detect Our audit aimed to detect non-compliance with relevant laws and regulations (irregularities) that could have a material effect on the financial statements. In planning and performing our audit, we considered the impact of laws and regulations in the specific areas of financial reporting, company and taxation legislation. We identified these areas through discussion with the directors and other management (as required by auditing standards), from our sector experience, and from inspection of the group’s regulatory correspondence. We considered the extent of compliance with those laws and regulations that directly affect the financial statements as part of our procedures on the related financial statement items. We communicated identified laws and regulations throughout our team, which included individuals with experience relevant to those laws and regulations and remained alert to any indications of non-compliance throughout the audit. As with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. 8. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Graham Neale (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants One Snowhill Snow Hill Queensway Birmingham B4 6GH 26 February 2018 9 1 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2017 Twelve months ended 31 December 2017 Twelve months ended 31 December 2016 Underlying underlying Non- Total £’m 181.0 £’m 182.2 (114.3) (112.7) 69.5 (32.7) (23.7) 13.1 – (0.5) (0.5) 12.6 (3.9) 8.7 66.7 (34.0) (29.4) 3.3 – (0.3) (0.3) 3.0 (1.3) 1.7 1.3 0.4 1.7 4.8p 4.8p £’m – (3.7) (3.7) – (12.7) (16.4) – – – (16.4) 4.9 (11.5) Total £’m 182.2 (116.4) 65.8 (32.7) (36.4) (3.3) – (0.5) (0.5) (3.8) 1.0 (2.8) (2.8) – (2.8) (8.4p) (8.4p) Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit/(loss) from operating activities Financial income Financial expense Net financing expense Profit/(loss) before income tax Income tax (expense)/credit Profit/(loss) for the year Profit for the year attributable to: Equity owners of the Company Non-controlling interests Profit/(loss) for the year Earnings per share Basic Diluted Underlying £’m Non- underlying £’m 181.0 (114.3) 66.7 (34.0) (23.0) 9.7 – (0.3) (0.3) 9.4 (3.5) 5.9 – – – – (6.4) (6.4) – – – (6.4) 2.2 (4.2) Note 4 4 7 4 8 9 17 17 The accompanying notes form an integral part of these financial statements. 2 9 Dialight plc Annual Report and Accounts 2017Financial statementsCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2017 Other comprehensive income Items that may be reclassified subsequently to profit and loss Exchange difference on translation of foreign operations Income tax on exchange difference on translation of foreign operations Items that will not be reclassified subsequently to profit and loss Remeasurement of defined benefit pension liability Income tax on remeasurement of defined benefit pension liability Other comprehensive income for the year, net of tax Profit/(loss) for the year Total comprehensive (expense)/income for the year Attributable to: Owners of the parent Non-controlling interests Total comprehensive (expense)/income for the year Note 2017 £’m 2016 £’m 18 18 (5.6) 0.6 (5.0) 1.9 (0.4) 1.5 (3.5) 1.7 (1.8) (2.2) 0.4 (1.8) 11.3 (0.9) 10.4 (1.5) 0.3 (1.2) 9.2 (2.8) 6.4 6.4 – 6.4 9 3 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017 Balance at 1 January 2017 Profit for the year Other comprehensive (expense)/income Foreign exchange translation differences, net of tax Remeasurement of defined benefit pension liability, net of tax 18 Total other comprehensive (expense)/income Total comprehensive (expense)/income for the year Transactions with owners, recorded directly in equity Share-based payments, net of tax 6, 8 Dividends Total contributions by and distributions to owners Balance at 1 January 2016 Loss for the year Other comprehensive income Foreign exchange translation differences, net of tax Remeasurement of defined benefit pension liability, net of tax 18 Total other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Share-based payments, net of tax 6, 8 Dividends Total contributions by and distributions to owners Note Share capital £’m 0.6 – Merger reserve £’m 1.4 – Translation reserve £’m 15.4 – Capital redemption reserve £’m 2.2 – Retained earnings £’m 57.6 1.3 Non- controlling interests £’m (0.1) 0.4 Total £’m 77.2 1.3 (2.2) 0.4 (1.8) Total equity £’m 77.1 1.7 (5.0) 1.5 (3.5) – – – – – – 0.3 Non- controlling interests £’m (0.1) – – – – – – – – (0.1) 0.8 – 0.8 76.1 Total equity £’m 70.1 (2.8) 10.4 (1.2) 9.2 6.4 0.6 – 0.6 77.1 – – – – – – – – – – – – – – (5.0) – (5.0) (5.0) – – – – – – – – – – Merger reserve Translation reserve Capital redemption reserve £’m 1.4 – – – – – – – – £’m 5.0 – 10.4 – 10.4 10.4 – – – £’m 2.2 – – – – – – – – – – – – – – – – (5.0) 1.5 1.5 2.8 0.8 – 0.8 61.2 Retained earnings £’m 61.0 (2.8) 1.5 (3.5) 0.8 – 0.8 75.8 Total £’m 70.2 (2.8) – 10.4 (1.2) (1.2) (1.2) 9.2 (4.0) 6.4 0.6 – 0.6 57.6 0.6 – 0.6 77.2 Note Share capital £’m 0.6 – Balance at 31 December 2017 0.6 1.4 10.4 2.2 Balance at 31 December 2016 0.6 1.4 15.4 2.2 At 31 December 2017, the number of shares held by the Group through the Dialight Employees’ Share Ownership Plan Trust (“ESOT”) was nil (2016: nil). The market value of these shares at 31 December 2017 was £nil (2016: £nil). 4 9 Dialight plc Annual Report and Accounts 2017Financial statementsCONSOLIDATED STATEMENT OF TOTAL FINANCIAL POSITION AT 31 DECEMBER 2017 Assets Property, plant and equipment Intangible assets Deferred tax assets Employee benefits Other receivables Total non-current assets Inventories Trade and other receivables Asset held for sale Cash and cash equivalents Total current assets Total assets Liabilities Trade and other payables Provisions Tax liabilities Borrowings Total current liabilities Employee benefits Provisions Total non-current liabilities Total liabilities Net assets Equity Issued share capital Merger reserve Other reserves Retained earnings Non-controlling interests Total equity Note 2017 £’m 2016 £’m 10 11 13 18 28 14 15 10 21 20 19 12 18 19 16 16 13.9 13.9 5.3 1.0 0.2 34.3 24.6 34.3 – 12.8 71.7 106.0 15.9 15.4 3.5 – – 34.8 31.4 40.0 2.0 8.0 81.4 116.2 (26.9) (31.3) (1.4) (0.7) – (3.8) (1.9) – (29.0) (37.0) – (0.9) (0.9) (29.9) 76.1 0.6 1.4 12.6 61.2 75.8 0.3 76.1 (1.3) (0.8) (2.1) (39.1) 77.1 0.6 1.4 17.6 57.6 77.2 (0.1) 77.1 The accompanying notes form part of the financial statements. These financial statements were approved by the Board of Directors on 26 February 2018 and were signed on its behalf by: Martin L. Rapp Group Chief Executive Fariyal Khanbabi Group Finance Director Company number: 2486024 9 5 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 Operating activities Profit/(loss) for the year Adjustments for: Financial income Financial expense Income tax charge/(credit) Share-based payments Depreciation of property, plant and equipment Amortisation of intangible assets Impairment losses on intangible assets and goodwill Impairment losses on tangible assets Gain on disposal of tangible assets Legal settlement Operating cash flow before movements in working capital Decrease/(increase) in inventories Decrease/(increase) in trade and other receivables (Decrease)/increase in trade and other payables (Decrease)/increase in provisions Pension contributions in excess of the income statement Cash generated from operations Income taxes (paid)/received Interest paid Net cash generated from operating activities Investing activities Capital expenditure Sale of fixed assets Capitalised expenditure on development Net cash used in investing activities Financing activities Proceeds from issue of shares Repayment of bank facility Net cash (used in)/generated from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of exchange rates on cash held Cash and cash equivalents at end of year 6 9 Note 2017 £’m 2016 £’m 1.7 – 0.3 1.3 0.8 2.4 1.5 1.2 0.9 – – 10.1 5.1 3.4 (2.6) (2.4) (0.5) 13.1 (4.3) (0.3) 8.5 (2.6) 2.0 (2.3) (2.9) 0.1 – 0.1 5.7 8.0 (0.9) 12.8 (2.8) – 0.5 (1.0) 0.6 3.1 4.0 5.1 – (0.2) 1.3 10.6 (0.2) (1.5) 5.0 2.9 (0.5) 16.3 0.3 (0.5) 16.1 (3.9) 0.9 (2.1) (5.1) – (9.5) (9.5) 1.5 5.5 1.0 8.0 7 7 8 10 11 11 10 5 19 18 7 10 10 11 21 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 1. Reporting entity Dialight plc is a company domiciled in England. The address of the Company’s Registered Office is Leaf C, Level 36, Tower 42, 25 Old Broad Street, London EC2N 1HQ. The consolidated financial statements of the Company for the year ended 31 December 2017 comprise the Company and its subsidiaries (together referred to as the “Group”). 2. Basis of preparation (a) Statement of compliance The consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (“IFRSs”). The Company has elected to present its parent company financial statements in accordance with FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”. (b) Consolidated basis of preparation The financial statements have been prepared on the historical cost basis except for certain financial instruments which are carried at fair value. The Directors have a reasonable expectation that the Company has sufficient resources to continue in existence for a period no shorter than 12 months from the date of this report. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. (c) Use of estimates, judgements and assumptions In the process of applying the Group’s accounting policies, management has made a number of judgements. The process of preparing the Group’s financial statements inevitably requires the Group to make estimates and assumptions concerning the future and the resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and judgements that have the most significant effect on the amounts included in these consolidated financial statements are as follows: Significant judgements Development and patent costs (see note 11) The Group capitalises development costs and patents provided they meet all criteria set out in the respective accounting policy. Costs are only capitalised where management is satisfied as to the ultimate commercial viability of the projects concerned based on available information. The capitalised costs are amortised over the useful economic life, which is determined based on the reasonable commercial prospects for the resultant product. Deferred Tax (see note 13) Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered. 9 7 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 2. Basis of preparation continued Significant estimates Inventory provision (see note 14) The Group operates in an environment of technological change, presenting the risk of obsolete inventory. Inventory is reviewed by operational and financial management on a regular basis, product by product, and the level of provision required is assessed against historical and forecast use for that product. Inventory at our outsource manufacturer is only included on the balance sheet of the Group where ownership reverts to the Group under the terms of the outsourcing agreement. Warranty (see note 19) The Group offers performance warranties on many of its products. A provision is made for the expected costs of future warranty claims relating to past product sales. This provision is estimated based on historical trends for returns, internal knowledge of product performance characteristics and the expected costs of remedying warranty-returned products. Actual returns may be materially higher or lower than these estimates, which may have a material impact on the adequacy of the provision for warranty claims. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by Group entities. (a) Basis of consolidation Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. Acquisitions on or after 1 January 2010 For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as: _ the fair value of the consideration transferred; plus _ the recognised amount of any non-controlling interests in the acquiree; less _ the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Acquisitions between 1 January 2004 and 1 January 2010 For acquisitions between 1 January 2004 and 1 January 2010, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the acquisition. Acquisitions prior to 1 January 2004 (date of transition to IFRSs) As part of its transition to IFRSs, the Group elected to restate only those business combinations that occurred on or after 1 January 2003. In respect of acquisitions prior to 1 January 2003, goodwill represents the amount recognised under the Group’s previous accounting framework, UK GAAP. Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. 8 9 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 20173. Significant accounting policies continued (b) Foreign currency translation For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s overseas operations, including goodwill and fair value adjustments arising on consolidation, are translated using exchange rates prevailing on the balance sheet date. Income and expense items of overseas operations are translated at average exchange rates for the period. Since the transition date, resulting exchange differences are recognised as a separate component of equity within the Group’s translation reserve. Such translation differences are recognised in the income statement in the period in which the foreign operation is disposed of. Foreign currency transactions are accounted for at the exchange rate prevailing at the date of the transaction. Gains and losses resulting from the settlement of such transactions and from the translation of monetary and non-monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. (c) Derivative financial instruments Derivative financial instruments are recorded initially at cost and are remeasured to fair value at subsequent reporting dates. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. (d) Property, plant and equipment Items of property, plant and equipment are stated at cost less accumulated depreciation. (e) Other intangible assets Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and accumulated impairment losses. (f) Depreciation and amortisation Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: Buildings 16–50 years Plant, equipment and vehicles 3–10 years Amortisation Amortisation is recognised in profit and loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives are as follows: Patents and trademarks Development costs 4 years 3–5 years (g) Goodwill Goodwill that arises upon acquisition of subsidiaries is included in intangible assets. For the measurement of goodwill at initial recognition, see note 3(a). Subsequent measurement After initial recognition, goodwill is measured at cost less any accumulated impairment losses until disposal or termination of the previously acquired business when the profit or loss on disposal or termination will be calculated after charging the gross amount at current exchange rates of any such goodwill through the income statement. Goodwill is allocated to the CGUs and is tested at least annually for impairment. An impairment loss recognised for goodwill is not reversed in a subsequent period. 9 9 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 3. Significant accounting policies continued (h) Research and development costs Expenditure on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding is recognised in the income statement as an expense as incurred. Development expenditure is capitalised only if the expenditure can be measured reliably, the product and process is technically and commercially viable, future economic benefits are probable and the Group intends and has sufficient resources to complete the development and to use or sell the asset. The expenditure capitalised includes direct cost of material, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. (i) Impairment The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its recoverable amount. A CGU is the smallest identifiable asset group that generates cash flows that are largely independent from other assets and groups. Impairment losses are recognised in profit and loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro-rata basis. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Any impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. A financial asset, in particular the carrying value of trade receivables, is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. Any impairment losses are recognised through the income statement. (j) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their location and condition at the balance sheet date. Items are valued using the first in, first out method. When inventories are used, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. Provision for write-down to net realisable value and losses of inventories is recognised as an expense in the period in which the write-down or loss occurs. (k) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of borrowings. (l) Share capital (i) Dividends are recognised in the period in which they are approved by the Company’s shareholders, or in the case of an interim dividend, when the dividend is paid. (ii) When share capital recognised as equity is repurchased by the ESOT, the amount of the consideration paid is recognised as a deduction from equity. (iii) Under the terms of the PSP and deferred bonus scheme, dividends accrue on shares not yet vested; however, in the event that the shares 0 0 1 lapse or are forfeited then the dividends will not be paid and the accrual is reversed. Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 20173. Significant accounting policies continued (m) Employee benefits (i) Defined contribution pension plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due. (ii) Defined benefit pension plans The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned for their service in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation is performed by an independent qualified actuary using the projected unit credit method. When the calculation results in a potential asset to the Group, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest) are recognised immediately in other comprehensive income. The Group determines the net interest expense/(income) on the net defined benefit liability/(asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability/(asset), taking into account any changes in the net defined benefit liability/(asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss. When the benefits of a plan are changed, or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs. (iii) Share-based payments and deferred bonus transactions The PSP allows Group employees to acquire shares of the Company. The fair value of the award granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at the grant date and spread over the performance period during which the employees become unconditionally entitled to the award. The fair value of the grants is measured using the Monte Carlo or Black-Scholes models, taking into account the terms and conditions upon which the grants were made. The amount recognised as an expense is only adjusted to reflect forfeitures resulting from failures to meet non-market conditions. The share-based payments are equity-settled. Key Group employees are awarded shares in the Company under the Annual Performance Bonus Plan. The fair value of the award granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at the grant date and spread over the performance period during which the employees become unconditionally entitled to the award. (n) Other provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. (o) Trade and other receivables Trade and other receivables are initially recorded at fair value and then subsequently stated at their amortised cost less any impairment losses. The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists the assets’ recoverable amounts are estimated, being the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of the money and risks specific to the asset. Receivables with a short duration are not discounted. An impairment loss in respect of trade and other receivables is reversed if there has been a change in the estimates used to determine the recoverable amount. 1 0 1 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 3. Significant accounting policies continued (p) Trade and other payables Trade and other payables are initially recorded at fair value and then subsequently stated at amortised cost. (q) Revenue recognition Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts, volume rebates and product returns. Revenue represents the invoiced value of goods supplied and is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the external customers in line with contractual arrangements and agreed shipping terms and the amount of revenue can be measured reliably and it is probable that the economic benefit associated with the transaction will flow to the Group. (r) Expenses (i) Operating lease payments Payments under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. (ii) Net financing costs Net financing costs comprise interest receivable, interest payable, borrowings, interest on pension assets and liabilities, foreign exchange gains and losses, gains and losses on hedging instruments that are recognised in the income statement and unwinding of discount. (s) Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered. Deferred tax is calculated using tax rates that are enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited to profit and loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. 2 0 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 20173. Significant accounting policies continued (t) Changes in accounting policies The Group has consistently applied the accounting policies set out in this note to all periods presented in these consolidated financial statements. The Group has adopted a number of standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2017. There was no material impact on the financial performance of the Group. Adoption of new and revised standards A number of new standards, amendments to standards and interpretations, including IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers (effective for annual periods beginning after 1 January 2018) and IFRS 16 Leases (effective for annual periods beginning after 1 January 2019), have not been applied in preparing these consolidated financial statements. The Group has undertaken analysis and is currently assessing the impact of IFRS 9, IFRS 15 and IFRS 16 but believes that none of these will have a material impact on the financial statements, but may require some further disclosure. IFRS 15 Revenue from Contracts with Customers (effective for the year beginning 1 January 2018), provides a single, principles-based five-step model to be applied to all sales contracts, based on the transfer of control of goods and services to customers. Based on the initial analysis, we expect that adoption of IFRS 15 will have no significant impact on the timing of recognition of revenue. The only changes for the Group are how revenue is disaggregated for the purpose of disclosure. The revenue will be primary disaggregated by geographical market and vertical segments within reportable segments. (u) Measurement of fair values A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. The Group has an established control framework, appropriate for the size and complexity of the Group, with respect to the measurement of fair values. When measuring the fair value of an asset or liability, the Group uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. 1 0 3 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 4. Operating segments The Group has two reportable operating segments. These segments have been identified based on the internal information that is supplied regularly to the Group’s chief operating decision maker for the purposes of assessing performance and allocating resources. The chief operating decision maker is considered to be the Group Chief Executive Officer. The two reportable operating segments are: _ Lighting, which develops, manufactures and supplies highly efficient LED lighting solutions for hazardous and industrial applications in which lighting performance is critical and includes anti-collision obstruction lighting; and _ Signals and Components, which develops, manufactures and supplies status indication components for electronics OEMs, together with niche industrial and automotive electronic components and highly efficient LED signalling solutions for the traffic and signals markets. There is no inter-segment revenue and no individual customers that represent more than 10% of revenue. All revenue relates to the sale of goods. Segment gross profit is revenue less the costs of materials, labour, production and freight that are directly attributable to a segment. Overheads comprise operations management, selling costs plus corporate costs, which include share-based payments. Segmental assets and liabilities are not reported internally and therefore are not presented below. Reportable segments 2017 Revenue Underlying gross profit Overheads Segment results Unallocated expenses Underlying operating profit Non-underlying expense Operating profit Net financing expense Profit before tax Income tax expense Profit after tax 2016 Revenue Underlying gross profit Overheads Segment results Unallocated expenses Underlying operating profit Non-underlying expense Operating loss Net financing expense Loss before tax Income tax expense 4 0 1 Loss after tax Lighting £’m Signals and Components £’m 137.5 54.3 (43.1) 11.2 43.5 12.4 (8.5) 3.9 Lighting £’m 136.6 57.4 (43.9) 13.5 Signals and Components £’m 45.6 12.1 (7.2) 4.9 Total £’m 181.0 66.7 (51.6) 15.1 (5.4) 9.7 (6.4) 3.3 (0.3) 3.0 (1.3) 1.7 Total £’m 182.2 69.5 (51.1) 18.4 (5.3) 13.1 (16.4) (3.3) (0.5) (3.8) 1.0 (2.8) Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 20174. Operating segments continued Other segmental data Underlying Depreciation Amortisation Non-underlying Gain on disposal of tangible assets Impairment losses on tangible asset write-down Impairment losses on intangible asset write-down 2017 Lighting £’m Signals and Components £’m 1.8 1.1 – 0.9 1.1 0.6 0.4 – – 0.1 2016 Lighting £’m Signals and Components £’m 2.3 3.3 (0.2) – 1.1 0.8 0.7 – – 4.0 Total £’m 2.4 1.5 – 0.9 1.2 Total £’m 3.1 4.0 (0.2) – 5.1 Geographical segments The Lighting and Signals and Components segments are managed on a worldwide basis but operate in four principal geographical areas: North America, the UK, Europe and Rest of World. The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods. All revenue relates to the sale of goods. Sales revenue by geographical market North America UK Rest of Europe Rest of World Reconciliations of reportable segment profit or loss Total profit for reportable segments Unallocated amounts: Overheads Non-underlying expense Net financing expense Profit/(loss) before tax 2017 £’m 2016 £’m 136.0 129.7 5.5 15.7 23.8 11.3 17.4 23.8 181.0 182.2 2017 £’m 15.1 (5.4) (6.4) (0.3) 3.0 2016 £’m 18.4 (5.3) (16.4) (0.5) (3.8) 1 0 5 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 5. Non-underlying income/(expense) The Group incurs costs and earns income that is non-recurring in nature or that is otherwise considered to not be reflective of the underlying performance of the business. In the assessment of performance of the business units of the Group, management examines underlying performance, which removes the impact of non-underlying costs and income. The table below presents the elements of non-underlying profit or loss recorded within cost of sales: Inventory costs Non-underlying costs recorded in cost of sales The table below presents the elements of non-underlying profit or loss recorded within administrative expenses: Employee severance and restructuring costs Intangible asset impairment Tangible asset impairment and disposals Production transfer costs Other 2017 £’m – – 2017 £’m 0.3 (1.2) (0.9) (4.6) – 2016 £’m (3.7) (3.7) 2016 £’m (5.3) (5.1) 0.2 (2.4) (0.1) Non-underlying costs recorded in administrative expenses (6.4) (12.7) The Group incurs costs and earns income that is non-recurring in nature or that is otherwise considered to not be reflective of the underlying performance of the business. In the assessment of performance of the Group, management examines underlying performance, which removes the impact of non-underlying costs and income. Over the past two years, the Group has been implementing our strategic plan to transform to a robust and scalable manufacturing platform. We have incurred costs in relation to this transition. We incurred costs of £4.6m relating to the transfer of lighting assembly to our manufacturing partner. These related to set-up costs, project management and dedicated engineering time. In addition, we reviewed and impaired fixed assets of £0.9m as part of scaling down our in-house Mexican facility and intangible assets of £1.2m related to product prototypes that have subsequently been superseded due to platform engineering. In the prior year, non-underlying costs related to the closure of the UK manufacturing facility, expected redundancy costs at the Mexican production facility, goodwill impairment on the European Traffic business and initial production transfer costs to our manufacturing partner. 6 0 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 20176. Personnel expenses Wages and salaries Social security contributions Management incentives Employee severance costs Equity-settled share-based payment transactions Contributions to defined contribution plans Total charge for defined benefit plans 2017 £’m 34.4 3.6 – – 0.8 1.3 0.2 2016 £’m 34.2 4.1 2.4 1.7 0.6 1.2 0.2 40.3 44.4 Wages and salary costs in base currency reduced by 8% in 2017 compared to 2016. The reported wages and salary numbers reflect the strengthening of the USD compared to GBP as our largest salary base is in the US. The majority of the headcount reductions were direct labour at our Mexican facility who are in the lower salary quartile and therefore do not proportionately reduce the wages and salary costs. There were no management incentives or severance charges in 2017. The average number of employees by geographical location was: UK US and Mexico Rest of World 2017 Number 2016 Number 32 1,304 200 1,536 172 1,808 193 2,173 In 2017, the Group employed an average of 836 direct staff (2016: 1,408) and 700 indirect staff (2016: 765). The average annual staff numbers for 2016 include a part-year element relating to staff at the UK production facility that closed on 30 September 2016. 7. Net financing (expense)/income Recognised in profit and loss Net interest on defined benefit liability Interest expense on financial liabilities Net financing expense recognised in the consolidated income statement Year ending 31 December 2017 Year ending 31 December 2016 Underlying £’m Non- underlying £’m Total £’m Underlying £’m Non- underlying £’m (0.2) (0.1) (0.3) – – – (0.2) (0.1) (0.3) (0.2) (0.3) (0.5) – – – Total £’m (0.2) (0.3) (0.5) 1 0 7 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 8. Income tax (income)/expense Current tax expense Recognised in the income statement Current tax (income)/expense Current year Adjustment for prior years Deferred tax (income)/expense Origination and reversal of temporary differences Adjustment for prior years Reduction in tax rate Recognition of previously unrecognised losses Income tax expense/(income) Reconciliation of effective tax rate Profit/(loss) for the year Total income tax income Profit/(loss) excluding income tax Income tax using the UK corporation tax rate Effect of tax rates in foreign jurisdictions Increase/(reduction) in tax rate Non-deductible expenses Recognition of tax effect of previously unrecognised losses Adjustment for prior years Non-taxable income Research and development credits Other 2017 £’m 2016 £’m 2.5 (0.2) 2.3 (0.5) (0.8) 0.4 (0.1) 1.3 2017 % 2017 £’m 2016 % 1.7 1.3 3.0 0.6 0.5 0.4 1.0 (0.1) (1.0) – (0.2) 0.1 1.3 (20.0) 23.7 (5.3) 36.8 (7.9) (52.6) 5.6 (2.6) (2.6) (24.9) 19.3 16.9 13.6 33.9 (3.4) (33.6) – (6.8) 3.4 43.3 3.3 (0.3) 3.0 (2.1) (1.7) (0.2) – (1.0) 2016 £’m (2.8) (1.0) (3.8) (0.8) 0.9 (0.2) 1.4 (0.3) (2.0) 0.2 (0.1) (0.1) (1.0) The underlying business had a tax rate of 33.0% (2016: 31.0%), before one-off items. The recent US tax reforms have resulted in a reduction of £0.4m in the value of deferred tax assets. Non underlying costs receive tax relief at 34.4% (2016: 30.0%). The net impact of these changes result in a reported effective tax rate of 43.3% (2016: 24.9% credit) for the Group. The majority of the Group’s profits arise in the US where the corporation tax rate was 35% in 2017 and this is the main driver for the tax rate on the underlying business being 33%. The recently announced tax reforms in the US reduce the corporation tax rate to 21%, effective 01 January 2018. As a result, we anticipate an effective tax rate for 2018 in the low twenties before discrete tax items. Tax recognised directly in equity Employee benefits Other 8 0 1 2017 £’m 0.4 (0.6) 2016 £’m (0.3) 0.9 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 20178. Income tax (income)/expense continued Current tax Current tax is calculated with reference to the profit of the Company and its subsidiaries in their respective countries of operation. Set out below are details in respect of the significant jurisdictions where the Group operates and the factors that influenced the current and deferred taxation in those jurisdictions. UK The UK companies are subject to a corporate tax rate of 19.25% (2016: 20%). The UK entities have a tax credit due to losses arising in the period. The UK tax authorities have reduced the UK rate of corporation tax from 1 April 2017 to 19% and by a further 2% to 17% from 1 April 2020. No further UK corporation tax rate reductions have been announced. As such, the UK timing differences have been recognised at the rate at which the timing differences are expected to unwind. US On December 22, 2017, the US government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The new law makes broad and complex changes to the US tax code and it will take time to interpret the changes. Based on our current understanding of the law, we estimate the impact to our US full year 2017 earnings to be minimal for current taxes but have a £0.4m impact on the value of deferred tax assets. The new territorial tax system will cause us to incur a deemed repatriation tax of £0.1m on undistributed earnings of certain non-U.S. subsidiaries. Beginning in 2018, we anticipate an effective tax rate in the low twenties before discrete tax items. 9. Profit/(loss) for the year Profit/(loss) for the year has been arrived at after charging: Research and development costs Expensed as incurred Amortisation charge Total research and development costs Depreciation of fixed assets Amortisation of customer relationships Impairment of goodwill and intangible assets Impairment of tangible assets Operating leases – property Operating leases – other Auditor’s remuneration Audit of these financial statements Amounts receivable by auditor in respect of: Audit of financial statements of subsidiaries pursuant to legislation 2017 £’m 2016 £’m 6.2 1.7 7.9 2.4 – 1.2 0.9 2.0 0.2 2017 £’m 0.1 0.1 0.2 4.5 2.2 6.7 3.1 0.3 5.1 – 2.0 0.1 2016 £’m 0.1 0.1 0.2 1 0 9 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 10. Property, plant and equipment Cost At 1 January 2016 Exchange adjustments Additions Reclassified as current asset Disposals At 31 December 2016 Balance at 1 January 2017 Exchange adjustments Additions Disposals Balance at 31 December 2017 Accumulated depreciation At 1 January 2016 Exchange adjustments Charge for year Disposals At 31 December 2016 Balance at 1 January 2017 Exchange adjustments Charge for the period Impairment Disposals Land and buildings £’m Plant, equipment and vehicles £’m Total £’m 51.1 8.7 3.9 (1.0) (8.1) 54.6 54.6 (4.4) 2.7 (2.3) 50.6 45.1 8.1 3.8 – (6.5) 50.5 50.5 (4.1) 2.7 (1.5) 47.6 (31.4) (35.0) (5.5) (2.9) 4.7 (35.1) (35.1) 2.9 (2.2) (0.9) 1.5 (6.0) (3.1) 5.4 (38.7) (38.7) 3.0 (2.4) (0.9) 2.3 6.0 0.6 0.1 (1.0) (1.6) 4.1 4.1 (0.3) – (0.8) 3.0 (3.6) (0.5) (0.2) 0.7 (3.6) (3.6) 0.1 (0.2) – 0.8 Balance at 31 December 2017 Carrying amount at 31 December 2017 At 31 December 2016 (2.9) (33.8) (36.7) 0.1 0.5 13.8 15.4 13.9 15.9 The profit on sale of tangible assets in the prior year comprised of cash received on the sale of assets of £0.9m plus the expected proceeds of the asset held for sale of £2.0m less the net book value of disposals of £2.7m. The asset held for sale was sold for £2.0m in the current year and the proceeds are shown in the consolidated statement of cash flows. 0 1 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 201711. Intangible assets Cost Balance at 1 January 2016 Additions arising from internal developments Effects of foreign exchange movement Balance at 31 December 2016 Additions arising from internal developments Effects of foreign exchange movement Balance at 31 December 2017 Amortisation and impairment losses Balance at 1 January 2016 Amortisation for the period Impairment Effects of foreign exchange movement Balance at 31 December 2016 Balance at 1 January 2017 Amortisation for the period Impairment Effects of foreign exchange movement Balance at 31 December 2017 Carrying amount at 31 December 2017 At 31 December 2016 Concessions, patents, licences and trademarks £’m 5.2 0.6 1.3 7.1 0.6 (0.6) 7.1 (3.2) (1.5) – (0.8) (5.5) (5.5) (0.4) (0.4) 0.5 (5.8) 1.3 1.6 Order book and customer relationships Technology £’m £’m Goodwill £’m Development costs £’m 11.9 – 1.3 13.2 – (0.5) 12.7 (0.2) – (4.0) – (4.2) (4.2) – – – 2.1 – – 2.1 – – 2.1 (1.8) (0.3) – – (2.1) (2.1) – – – 0.6 – – 0.6 – – 0.6 (0.6) – – – (0.6) (0.6) – – – 15.5 1.5 2.8 19.8 1.7 (1.3) 20.2 (9.5) (2.2) (1.1) (2.2) (15.0) (15.0) (1.1) (0.8) 0.8 Total £’m 35.3 2.1 5.4 42.8 2.3 (2.4) 42.7 (15.3) (4.0) (5.1) (3.0) (27.4) (27.4) (1.5) (1.2) 1.3 (4.2) (2.1) (0.6) (16.1) (28.8) 8.5 9.0 – – – – 4.1 4.8 13.9 15.4 The amortisation charge for the development costs, concessions, patents, licences and trademarks is shown within administrative expenses in the income statement. Lighting segment Goodwill acquired in a business combination is allocated at acquisition to the CGUs that are expected to benefit from the business combination. All goodwill relates to the Lighting segment. CGUs are identified either geographically or at a product segment level. In prior years, the CGU relating to goodwill on UK Lighting was considered to be the geographic revenue in Europe. Following the transfer of production and know-how from the UK to Mexico during 2017, the applicable CGU was re-assessed and is now considered to be a larger US & European segment. Goodwill of £2.3m related to this has been combined with goodwill of £4.9m that was previously solely related to US Lighting and the carrying amount of the goodwill is as follows: Lighting – US & Europe Obstruction Lighting – Europe Lighting – Australia 2017 £’m 2016 £’m 7.2 1.2 0.1 8.5 7.6 1.3 0.1 9.0 1 1 1 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 11. Intangible assets continued Lighting segment continued The Group tests goodwill (at the CGU level) annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates and growth rates. Management estimates discount rates using pre-tax rates that reflect current market assessments of a number of factors that impact on the time value of money and any risk specific to the CGU. The rate includes management’s assessment of a normal level of debt to equity ratio within similar companies in its sector. The Group prepares cash flow forecasts derived from the most recent strategic forecasts approved by management covering a three-year period. Management has arrived at the three-year plan based upon certain assumptions derived from a combination of internal assessment and research carried out by external consultants who specialise in areas of the Group’s business and their knowledge of the business. The key assumptions within the three-year forecasts are revenue growth (which varies depending on the CGU’s product groups and the markets addressed) and gross profit, which is based on management’s best estimate of material, labour and production cost trends and manufacturing efficiencies. Cash flows in years four and five are extrapolated using similar growth rates to the first three years. Cash flows beyond the five-year period are extrapolated using estimated growth rates of between 0% and 1%. Sensitivity to changes in key assumptions Impairment testing is dependent on management’s estimates and judgements, particularly as they relate to the forecasting of future cash flows, the discount rates selected and expected long-term growth rates. The rate used to discount the forecast cash flow for the CGUs in the Lighting segment was 15.0% (2016: 10.5%). Due to production issues on Lighting in the year, the discount rate was increased in order to be prudent. The growth rates management has applied in the value in use calculations for each of the CGUs over the five-year period vary due to the nature of the products, industries and countries in which the CGU operates. Changes in these assumptions could reduce the recoverable amount below the carrying amount. No such risks were identified in the current year. 12. Interest-bearing loans and borrowings On 12 December 2016, the Company signed a five-year unsecured £25m multi-currency revolving credit facility with HSBC Bank plc. Under the terms of the facility, the Group also has a £25m “accordion” facility, by which further facilities may be made available by HSBC under the current terms to support significant investment opportunities that may arise. At 31 December 2017 there were no drawings on the facility. 2 1 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 201713. Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Intangible assets Employee benefits Provisions Losses and other items Tax assets/(liabilities) Set-off of tax Net tax assets Assets Liabilities Net 2017 £’m 2016 £’m – – 0.2 2.2 4.6 7.0 – 7.0 – 0.3 0.5 0.2 2.6 3.6 (0.1) 3.5 2017 £’m (0.8) (0.9) – – – (1.7) – (1.7) 2016 £’m (0.1) – – – – (0.1) (0.1) – 2017 £’m (0.8) (0.9) 0.2 2.2 4.6 5.3 – 5.3 2016 £’m (0.1) 0.3 0.5 0.2 2.6 3.5 – 3.5 Deferred tax assets have been recognised in respect of all tax losses in entities expected to generate future taxable profits. The Group expects to generate sufficient taxable profits to recover the deferred tax assets within 3 to 5 years. There are no unrecognised deferred tax assets (2016: £nil). The increase in the deferred tax asset in the year is mainly due to losses recognised in Europe partly offset by a write-down of £0.4m related to the change in corporation tax rate in the US. The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred taxation liabilities have not been recognised is £nil (2016: £nil). Movement in temporary differences during the year Balance at 1 January 2016 Recognised in income Recognised in equity Balance at 31 December 2016 Balance at 1 January 2017 Recognised in income Recognised in equity Balance at 31 December 2017 14. Inventories Raw materials and consumables Work in progress Finished goods Property, plant and equipment £’m 0.3 (0.4) – (0.1) (0.1) (0.7) – (0.8) Intangible assets £’m (2.8) 3.1 – 0.3 0.3 (1.2) – (0.9) Employee benefits Provisions £’m 0.6 (0.4) 0.3 0.5 0.5 0.1 (0.4) 0.2 £’m – 0.2 – 0.2 0.2 2.0 – 2.2 Other short- term timing differences £’m 2.0 1.5 Total £’m 0.1 4.0 (0.9) (0.6) 2.6 2.6 1.4 0.6 4.6 2017 £’m 13.8 4.0 6.8 24.6 3.5 3.5 1.6 0.2 5.3 2016 £’m 16.9 3.8 10.7 31.4 Inventories to the value of £82.7m (2016: £78.0m) were recognised as expenses in the year. During the year, inventory write-downs totalled £1.4m (2016: £7.3m). The write-downs are included in the income statement. Raw materials have reduced by £3.1m to reflect the partial transfer of Lighting production to our manufacturing partner. We continue to hold raw materials for Signals and Components, Obstruction and residual Lighting manufacturing. 1 1 3 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 15. Trade and other receivables Trade receivables Other non-trade receivables Income tax recoverable Prepayments and accrued income 2017 £’m 28.4 4.1 0.7 1.1 34.3 2016 £’m 37.2 1.7 – 1.1 40.0 The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables is disclosed in note 22. 16. Capital and reserves Share capital Allotted and fully paid Ordinary shares of 1.89 pence each 2017 Number 2017 £’m 2016 Number 2016 £’m 32,521,179 0.6 32,504,335 0.6 During the year, 16,844 shares were issued (2016: 1,077) in order to satisfy the requirement for shares that vested as part of the Sharesave scheme, the proceeds of issue were £0.1m (2016: less than £0.1m). The ordinary shares issued in the year have the same rights as the other shares in issue. Issued share capital In issue at 1 January Shares issued Issued and fully paid at 31 December Ordinary shares 2017 Number 2016 Number 32,504,335 32,503,258 16,844 1,077 32,521,179 32,504,335 Merger reserve On acquiring Lumidrives Limited in 2006, the Company issued ordinary shares as part of the consideration. Merger relief was taken in accordance with Section 131 of the Companies Act 1985 and hence £546,000 was credited to the merger reserve. On acquiring Dialight A/S in 2010, the Company issued ordinary shares as part of the consideration. Merger relief was taken in accordance with Section 612 of the Companies Act 2006 and hence £903,000 was credited to the merger reserve. Translation reserve The translation reserve comprises all foreign exchange differences from 1 January 2004 arising from the translation of the financial statements of foreign operations for the Company. Capital redemption reserve The capital redemption reserve comprises the nominal value of “B” preference shares redeemed since the capital reorganisation in 2005. 4 1 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 201716. Capital and reserves continued Dividends After the balance sheet date no dividends were proposed by the Directors and there are no income tax consequences for the Company. Final proposed dividend Nil pence per ordinary share (2016: nil pence) 17. Earnings per share 2017 £’m – 2016 £’m – Basic earnings per share The calculation of basic earnings per share (“EPS”) at 31 December 2017 was based on a profit for the year of £1.7m (2016: loss of £2.8m) and the weighted average number of ordinary shares outstanding during the year of 32,510,106 (2016: 32,503,348). Diluted earnings per share The calculation of diluted EPS at 31 December 2017 was based on a profit for the year of £1.7m (2016: loss of £2.8m) and the weighted average number of ordinary shares outstanding during the year of 33,014,680 (2016: 32,777,907) was calculated as follows: Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares Effect of share options in issue Weighted average number of ordinary shares (diluted) 2017 ’000 2016 ’000 32,510 32,503 505 275 33,015 32,778 Underlying EPS is highlighted below as the Directors consider that this measurement of earnings gives valuable information on the performance of the Group. Basic earnings Underlying basic earnings1 Diluted earnings Underlying diluted earnings1 2017 2016 Per share Per share 4.8p 17.9p 4.8p 17.6p (8.4p) 26.9p (8.4p) 26.7p 1 Underlying earnings excludes non-underlying items as explained in note 29 and allocates tax at the appropriate rate (see note 8). 1 1 5 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 18. Employee benefits Defined benefit pension obligations The Group makes contributions to two defined benefit plans (referred to below as Plan A and Plan B) to provide benefits for employees upon retirement. Both plans are closed to new members and future accrual. The plans expose the Group to actuarial risks, such as longevity risk, interest rate risk and investment risk. Both plans are final salary defined benefit schemes and are administered by discrete funds (the “Funds”) that are legally separate from the Group. Trustees include independent and Company-appointed individuals. The Trustees of the plans are required by law to act in the best interests of the plan participants and are responsible for setting certain policies (e.g. investment) of the Funds. The Company is required to agree a Schedule of Contributions with the Trustees of the Funds following a valuation which must be carried out at least once every three years with the latest valuation in 2017. The outcome of the valuation was that Company contributions remain unchanged. The Company expects to pay contributions of £0.5m in respect of the Funds in the year to 31 December 2018. The weighted average duration of the defined benefit obligation is 16 years. There is no effect on recognition of the net defined benefit surplus as a result of the asset ceiling. The following table shows a reconciliation from the opening balances to the closing balances for net defined benefit liability/(asset) and its components. Defined benefit obligation Fair value of plan assets Net defined benefit liability/(asset) 2017 £’m 27.3 – 0.7 0.7 (0.3) (0.1) – – (0.4) – (1.8) (1.8) 25.8 2016 £’m 23.7 – 0.9 0.9 (0.1) 4.7 – (0.5) 4.1 – (1.4) (1.4) 27.3 2017 £’m 2016 £’m (26.0) (23.6) 0.1 (0.7) (0.6) – – – (1.5) (1.5) 0.2 (0.9) (0.7) – – – (2.6) (2.6) (0.5) (0.5) 1.8 1.3 1.4 0.9 (26.8) (26.0) 2017 £’m 1.3 0.1 – 0.1 (0.3) (0.1) – (1.5) (1.9) (0.5) – (0.5) (1.0) 2017 £’m (0.2) (0.8) (1.0) 2016 £’m 0.1 0.2 – 0.2 (0.1) 4.7 – (3.1) 1.5 (0.5) – (0.5) 1.3 2016 £’m (0.1) 1.4 1.3 Balance at 1 January Included in profit or loss Administration costs Interest cost/(income) Included in other comprehensive income Remeasurements (gain)/loss: Actuarial (gain)/loss arising from: – demographic assumptions – financial assumptions – experience adjustment – return on plan assets excluding interest income Other Contributions paid by the employer Benefits paid Balance at 31 December Represented by: Net defined benefit asset (Plan A) Net defined benefit liability (Plan B) 6 1 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 201718. Employee benefits continued Plan assets consist of the following: Equities Bonds and gilts Cash All equity securities and government bonds have quoted prices in active markets. Actuarial assumptions The principal assumptions at the balance sheet date (expressed as weighted averages) are: Discount rate at 31 December Future salary increases Future pension increases Inflation – RPI Inflation – CPI 2017 £’m Total 11.9 14.8 0.1 26.8 % per annum 2017 2.50 n/a 3.25 3.30 2.40 2016 £’m Total 13.7 12.2 0.1 26.0 2016 2.70 n/a 3.50 3.60 2.70 Assumptions regarding future mortality have been based on published statistics and mortality tables. The current longevities underlying the values of the defined benefit obligation at the reporting date were as follows: Longevity at age 65 for current pensioners Males Females Longevity at age 65 for current members aged 45 Males Females 2017 2016 Plan A Plan B Plan A Plan B 22.3 24.2 23.7 25.7 22.3 24.2 23.7 25.7 22.1 24.6 23.9 26.5 22.1 24.6 23.9 26.5 Sensitivity analysis Potential changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below: Defined benefit obligation Discount rate (0.5% movement) Inflation (0.5% movement) Life expectancy (+/–1 year) Increase Decrease £’m (2.4) 0.4 0.3 £’m 0.9 (2.0) (0.3) Although the analysis does not take account of the full distribution of cash flows expected under the plans, it does provide an approximation of the sensitivity of the assumptions shown. 1 1 7 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 18. Employee benefits continued Share-based payments PSP In September 2005, the shareholders approved the PSP. During the year, an award under the PSP was made to the Executive Directors and senior managers, details of which are set out below. The award was split into two components, one of which was based on the EPS performance of the Group, and the other on the Group’s total shareholder return (“TSR”) performance. Number of awards at the year end Fair value pence per share Date of award April 2014 (EPS) April 2014 (TSR) September 2014 (EPS) September 2014 (TSR) April 2015 (EPS) April 2015 (TSR) August 2015 (EPS) August 2015 (TSR) March 2016 (EPS) March 2016 (TSR) August 2016 (EPS) August 2016 (TSR) January 2017 (service condition) January 2017 (service condition) March 2017 (EPS) March 2017 (TSR) March 2017 (service condition) August 2017 (service condition) Number of awards at the beginning of the year Number of awards granted during the year Number of awards vested during the year 22,422 22,422 13,837 13,837 34,935 34,935 35,822 35,822 101,752 101,752 2,159 2,159 – – – – – – – – – – – – – – – – – – 7,721 7,721 64,139 21,380 36,884 3,608 421,854 141,453 – – – – – – – – – – – – – – – – – – – Number of awards forfeited during the year (22,422) (22,422) (13,837) (13,837) – – – – (9,856) 25,079 (9,856) 25,079 – – 35,822 35,822 (5,829) 95,923 (5,829) 95,923 – – – – – – 2,159 2,159 7,721 7,721 64,139 21,380 (4,354) 32,530 – 3,608 (108,242) 455,065 Vesting period Maturity date 3 years Apr 2017 3 years Apr 2017 3 years Sep 2017 3 years Sep 2017 3 years Apr 2018 3 years Apr 2018 3 years Aug 2018 3 years Aug 2018 3 years Mar 2019 3 years Mar 2019 3 years Aug 2019 3 years Aug 2019 2 years Jan 2018 3 years Jan 2019 3 years Mar 2020 3 years Mar 2020 3 years Mar 2020 3 years Aug 2020 886 377 904 395 802 349 545 147 570 356 710 493 1037 1037 701 990 990 832 Further details of the PSP are included in the Directors’ remuneration report on pages 58 to 73. The 2017 awards linked to EPS have been valued using the Black-Scholes model and those linked to TSR have been valued using the Monte Carlo model. The following key assumptions and inputs have been used in the calculation of the fair values: Share price Exercise price Expected volatility Award life Correlation Dialight and the FTSE 250 Index (excluding investment trusts) 8 1 1 The employee expense in 2017 was £0.8m (2016: £0.6m) (see note 6). March 2017 EPS and TSR award £10.05 £nil 48% 3 years 33% Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 201718. Employee benefits continued Save As You Earn (“SAYE”) In 2014, the Group initiated an all-employee UK Sharesave Plan and established equivalent arrangements in the UK, the US and Mexico. Under the terms of the SAYE scheme employees can save up to a limit of £250 per month or local currency equivalent per scheme and not exceeding £500 per month for all schemes. Awards under the scheme were made at a 20% discount to the closing mid market price on the date of invitation, vesting over a three-year period. There are no performance conditions attached to the SAYE scheme. The latest scheme was rolled out in April 2017. Outstanding at 1 January 2016 Granted during the year Vested in the year Forfeited during the year Outstanding at 31 December 2017 2017 scheme number 2015 scheme number 2014 scheme number – 59,674 24,102 48,354 – – – (5,772) (627) (3,422) (7,738) (16,768) 44,932 46,164 6,707 The options outstanding at the period end have a weighted average remaining contractual life of three years. Options were valued using the Black-Scholes option pricing model. The fair value per option granted and the assumptions used in the calculation were as follows: Grant date Share price at grant date Exercise price Expected volatility Number of employees Shares under option Vesting period Option life Expected life Expected dividends expressed as a dividend yield Fair value per option 19. Provisions Balance at 1 January 2017 Effects of foreign exchange movement Provisions made during the year Provisions used during the year Provision not required Balance at 31 December 2017 26 April 2017 £10.10 £8.08 37% 63 48,354 3 years 3 years 3 years 2% £3.55 Total £’m 4.6 (0.2) 1.0 (2.8) (0.3) 2.3 Warranty £’m 1.8 (0.1) 1.0 (1.2) – 1.5 Restructuring £’m 2.8 (0.1) – (1.6) (0.3) 0.8 The warranty provision relates to sales made over the past five years. The provision has been estimated based on historical warranty data with similar products adjusted for the potential warranty received on products from our manufacturing partner. The Group expects to settle the majority of the liability over the next two to three years. Movements related to discounting the warranty provision are less than £0.1m in both years and therefore not disclosed. The restructuring provision relates to redundancy costs (see note 5) and will all be utilised within one year. Due within one year Due between one and five years Total 2017 £’m 1.4 0.9 2.3 Total 2016 £’m 3.8 0.8 4.6 1 1 9 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 20. Trade and other payables Trade payables Other taxes and social security Non-trade payables and accrued expenses The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 22. 21. Cash and cash equivalents Cash and cash equivalents in the statement of total financial position Cash and cash equivalents in the statement of cash flows 2017 £’m 14.6 1.0 11.3 26.9 2017 £’m 12.8 12.8 2016 £’m 15.3 1.0 15.0 31.3 2016 £’m 8.0 8.0 22. Financial risk management The Group has exposure to credit risk, market risk and liquidity risk from its use of financial instruments. This note presents information about the Group’s exposure to each of the above risks and the Group’s objectives, policies and processes for measuring and managing risk. Further quantitative disclosures are included throughout these consolidated financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Group’s risk policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Credit risk Trade and other receivables Credit risk is the risk of financial loss if a customer fails to meet its contractual obligations by not paying the receivables due. The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. Operationally, the Group has no significant concentration of credit risk. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings when available and, in some cases, bank references. Purchase limits are set for customers. Customers who do not meet the benchmark creditworthiness may transact with the Group only on a prepayment basis. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. Impairment losses are determined having taken into account special customer circumstances and financial position, together with Group information about general payment trends. 0 2 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 201722. Financial risk management continued Exposure to credit risk The ageing of trade receivables at the reporting date was: Not past due Past due 0–30 days Past due 31–120 days Past due 121–365 days More than one year Total Gross 2017 £’m Impairment 2017 £’m 21.2 5.5 1.6 0.3 0.1 28.7 – – – (0.2) (0.1) (0.3) Gross 2016 £’m 28.6 6.6 2.0 0.1 0.1 37.4 The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 January 2017 Effects of foreign exchange Utilisation of provision Provision created Balance at 31 December 2017 Impairment 2016 £’m – – – (0.1) (0.1) (0.2) £’m 0.2 – (0.2) 0.3 0.3 The allowance in respect of trade receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount considered irrecoverable is written off against the financial asset directly. Other non-trade receivables of £4.1m (2016: £1.7m) are not past due and have no impairment. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Group’s income. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Interest rate risk The Group’s policy is to manage exposure to interest rate risk by utilising short-term fixed rate borrowings. At 31 December 2017, the Group had no drawings against its revolving credit facility. Foreign currency risk Exposure to currency risk arises in the normal course of the Group’s business. The Group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than each subsidiary’s functional currency. The currencies giving rise to risk are primarily the Euro, CAD Dollar and the US Dollar. Where possible the Group uses natural hedging within the Group to hedge the majority of its foreign currency risk. Natural hedging is the mechanism whereby the cash inflows in a particular currency are matched to the cash outflows in that currency at the same business or a different Group company. The Group has borrowing facilities in US Dollars in order to match the currency of the Group’s major market. Foreign exchange contracts may be taken out to manage exposures that are not mitigated through natural hedging but the Group had no foreign exchange contracts at the balance sheet date. In respect of other monetary assets and liabilities held in currencies other than UK 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. 1 2 1 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 22. Financial risk management continued Market risk continued The Group’s exposure to foreign currency risk was as follows, based on notional amounts: Trade receivables Currency cash Trade payables Gross balance sheet exposure The following significant exchange rates applied during the year: US Dollar Euro Canadian Dollar Mexican Peso 2017 $’m 2017 CAD’m 0.5 0.5 – 1.0 2.8 0.4 (0.1) 3.1 2017 €’m 3.4 0.3 (0.1) 3.6 2016 $’m 0.3 0.5 (0.1) 0.7 2016 CAD’m 2.0 0.4 – 2.4 2016 €’m 2.5 – (0.1) 2.4 2017 Average rate 2017 At balance sheet date 1.29 1.14 1.67 1.35 1.13 1.69 2016 Average rate 1.36 1.22 1.80 2016 At balance sheet date 1.23 1.17 1.66 24.33 26.55 25.25 25.56 Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. 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. Exposure to liquidity risk For non-derivative financial liabilities, the Group’s exposure relates principally to trade and other payables and borrowings. Trade and other payables arise in the normal course of business and there are no unusual or onerous terms and conditions. The following are contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: 31 December 2017 Non-derivative financial liabilities Trade and other payables Borrowings 31 December 2016 Non-derivative financial liabilities Trade and other payables Borrowings Carrying amount Contractual cash flow £’m £’m 2 months or less £’m 2–12 months £’m 1–2 years £’m 26.9 – 26.9 (26.9) (26.9) – – (26.9) (26.9) – – – – – – Carrying amount Contractual cash flow £’m £’m 2 months or less £’m 2–12 months £’m 1–2 years £’m 31.3 – 31.3 (31.3) (31.3) – – (31.3) (31.3) – – – – – – The Group has a five-year unsecured £25m multi-currency revolving credit facility which is undrawn at the balance sheet date see note 12. 2 2 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 201722. Financial risk management continued Capital management The Board’s policy is to maintain a strong capital base in order to maintain investor, creditor and market confidence and to sustain future development of the business. The Board considers consolidated total equity as capital. As at 31 December 2017, this totalled £76.1m (2016: £77.1m). The Board is not proposing a final dividend for 2017. The Group has a clear capital allocation discipline and is committed to returning any excess funds to our shareholders via either a future dividend or a share repurchase. Sensitivity analysis In managing interest rate and currency risks the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer term, however, permanent changes, in particular in foreign exchange rates, would have an impact on equity value and consolidation earnings. At 31 December 2017, it is estimated that a general increase of 1% in the value of the Euro and the US Dollar against UK Sterling would have increased the Group’s profit before tax by approximately £0.3m for the year ended 31 December 2017 (2016: reduced the loss before tax by £0.3m), and would have had increased the Group’s equity for the year ended 31 December 2017 by £0.1m (2016: £0.1m). Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet are as follows: Financial assets Cash and cash equivalents Loans and receivables Trade and other receivables Total financial assets Financial liabilities Trade and other payables Borrowings Total financial liabilities Net financial assets Carrying amount 2017 £’m Fair value 2017 £’m Carrying amount 2016 £’m Fair value 2016 £’m 12.8 12.8 8.0 8.0 34.3 47.1 34.3 47.1 40.0 48.0 40.0 48.0 (26.9) (26.9) (31.3) (31.3) – – – – (26.9) (26.9) (31.3) (31.3) 20.2 20.2 16.7 16.7 Details of the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table are set out in note 3(u). 23. Operating leases Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years 2017 £’m 1.6 2.1 3.7 2016 £’m 2.0 3.2 5.2 Of the £3.7m (2016: £5.2m), £3.4m (2016: £4.9m) relates to property and the balance to plant and equipment. The Group has no off balance sheet arrangements that need to be disclosed as within the context of Section 410A of the Companies Act 2006. 1 2 3 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements 24. Capital commitments Capital commitments at 31 December for which no provision has been made in the accounts were: Contracted 2017 £’m 0.8 2016 £’m 0.8 25. Contingencies During 2011 the Roxboro UK Pension Fund (the “Scheme”) was closed to future accrual. This Scheme is included within the pension asset detailed in note 18. As part of the negotiations regarding closure, the Company agreed to grant a parent company guarantee in respect of all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally and in any capacity whatsoever) of Dialight Europe Limited, the principal employer, to make payments in the Scheme up to a maximum amount equal to the entire aggregate liability, on the date on which any liability under the guarantee arises, of every employer (within the meaning set out in Section 318 of the Pensions Act 2004 and regulations made thereunder) in relation to the Scheme, were a debt under Section 75(2) of the Pensions Act 1995 to have become due on that date. No provision has been made in relation to this contingency. 26. Related parties The ultimate controlling party of the Group is Dialight plc. Transactions between the Company and its subsidiaries have been eliminated on consolidation. Intra-group transactions are priced on an arm’s length basis. Transactions with key management personnel Directors of the Company and their immediate relatives control less than 1% of the Company. The main Board Directors are considered to be the Group’s key management personnel. Key management personnel compensation comprised the following: Short-term employee benefits Post-retirement benefits Share-based payments 2017 £’m 2016 £’m 1.3 0.1 0.8 2.2 1.1 0.1 0.2 1.4 The aggregate of remuneration and amounts receivable under long-term incentive schemes of the highest paid Director was £0.6m (2016: £0.5m), and pension contributions of £0.1m (2016: £0.1m) were made to a money purchase scheme on his behalf. During the year, the highest paid Director received 58,930 shares under a long-term incentive scheme. Number of Directors accruing benefits under money purchase schemes Number of Directors who exercised share options Number of Directors in respect of whose qualifying services shares were received or receivable under long term incentive schemes 2017 2016 2 – 2 2 – 2 4 2 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 201727. Subsidiaries In accordance with Section 409 of the Companies Act 2006, a full list of subsidiaries as at 31 December 2017 is disclosed below. Those companies stated in table (a) below are those, in the opinion of Directors, which principally affect the revenue, profit or assets of the Dialight Group. The remaining companies that comprise the Dialight Group are set out in table (b) below. The investment is held directly by Dialight plc except for those companies indicated by *. (a) Trading companies Name Percentage owned Registered office Principal activity Dialight Corporation* 100% 1501 Route, 34 South Design, assembly and sale of Lighting Farmingdale, NJ 07727 and Signals and Components products Dialight Europe Limited 100% United States Leaf C Level 36, Tower 42 25 Old Broad Street London EC2N 1HQ United Kingdom Sale of Lighting products Dialight GmbH* 100% Maximilianstrabe 54 Sale of Lighting products 80538 Munchen Germany Dialight A/S 100% Ejby Industrivej 91 B Assembly and sale of Lighting products Dialight ILS Australia Pty Limited* 75% 2600 Glostrup Copenhagen Level 2 Spectrum 100 Railway Road Subiaco WA 6008 Australia Sale of Lighting products Dialight Asia Pte. Ltd* 75% 33 Ubi Avenue 3 Sale of Lighting products Dialight Penang Sdn. Bhd.* 100% 07–72 Vertex (Tower A) Singapore, 408868 Room B, 3rd Floor 309-K Perak Road 10150, Penang Malaysia Assembly and sale of Signals and Components products Dialight Do Brasil Tecnologia Led Ltda* 75% American Park Empresarial NR Assembly and sale of Lighting products Dialight de Mexico, S. de R.L. de C.V.* 100% Indaiatuba Sao Paulo/SP 13347-662, Brazil Calle Lirios S/N Colona Pacheco Ensenda Baja California Mexico Assembly of Lighting, Signals and Components products Dialight ILS Australia Pty Limited, Dialight Asia Pte. Ltd and Dialight Do Brasil Tecnologia Led Ltda are all owned 75% by the Group and there are non-controlling interests of 25%. The total loss for the period attributable to non-controlling interests is less than £0.1m (2016: less than £0.1m) and their share of equity is £0.1m (2016: £0.1m). The Group also has branches in France and the United Arab Emirates. 1 2 5 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements Intermediary holding company Non-trading/intermediary holding company Dormant Corporate pension fund trustee Non-trading 27. Subsidiaries continued (b) Other companies Unless otherwise stated, the registered office for the subsidiaries listed below is Leaf C, Level 36, Tower 42, 25 Old Broad Street, London EN2N 1HQ. Name Belling Lee Limited Roxboro Overseas Limited 100% 100% Percentage owned Registered office Principal activity The Roxboro Trust Company Limited 100% The Roxboro UK Pension Trustee Limited* 50% Dialight Latin America, S. de R.L. de C.V.* 100% Calle Lirios S/N Colona Pacheco Ensenda Baja California Mexico CRL Components, Inc.* 100% The Corporation Trust Co. Dormant Corporation Trust Centre 1209 Orange Street City of Wilmington County of New Castle DE United States Roxboro Analytical Inc.* 100% 1501 Route 34 South Non-trading Farmingdale NJ 07727 United States Roxboro Holdings Inc.* 100% The Corporation Trust Co. Non-trading/intermediary Corporation Trust Centre holding company 1209 Orange Street City of Wilmington County of New Castle DE, United States Roxboro Metrology Inc.* 100% 1501 Route 34 South Non-trading Farmingdale NJ 07727 United States 6 2 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 DECEMBER 201728. Other receivables Other receivables These relate to deposits on leasehold properties. 2017 £’m 0.2 2016 £’m – 29. Reconciliation to non-GAAP performance measures The Group has been involved in a major transformation of its operational footprint over the past two years. This has resulted in costs being incurred and revenues being earned that relate solely to the transformation and which are not representative of the on-going performance of the business. The Board consider that users of the financial statements find it useful to view the on-going costs and revenues of the business in isolation from costs related to the transformation. Gross profit Non-underlying items (see note 5) Underlying gross profit Profit/(loss) from operating activities Non-underlying items (see note 5) Underlying operating profit/underlying EBIT Profit/(loss) from operating activities Non-underlying items (see note 5) Depreciation of property, plant and equipment (see note 10) Amortisation of intangible assets (see note 11) Adjusted underlying EBITDA Profit/(loss) from operating activities Non-underlying items Depreciation of property, plant and equipment (see note 10) Amortisation of intangible assets (see note 11) Net movement on working capital (Inventories, trade and other receivables, trade and other payables) as per Consolidated statement of cash flows Movements in working capital related to non-underlying Adjusted operating cashflow 2017 £’m 66.7 – 66.7 3.3 6.4 9.7 3.3 6.4 2.4 1.5 13.6 3.3 6.4 2.4 1.5 5.9 – 19.5 2016 £’m 65.8 3.7 69.5 (3.3) 16.4 13.1 (3.3) 16.4 3.1 4.0 20.2 (3.3) 16.4 3.1 4.0 3.3 (2.5) 21.0 Constant currency The Group’s revenues are mainly earned in the US and it presents certain key metrics on a constant currency basis to remove any impact of currency fluctuations. The constant currency impact is calculated by re-translating the prior year numbers at the exchange rate prevailing in the current year. 1 2 7 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements COMPANY BALANCE SHEET (PREPARED UNDER FRS 102) AT 31 DECEMBER 2017 Fixed assets Tangible assets Investments Debtors Current assets Debtors Cash Creditors Amounts falling due within one year Other creditors Borrowings Current liabilities Net current assets Total assets less current liabilities Net assets excluding pension fund asset Pension fund asset Net assets including pension fund asset Capital and reserves Called up share capital Capital redemption reserve Other reserve Profit and loss account Equity shareholder funds Note 2017 £’m 2016 £’m 32 33 37 37 38 39 43 41, 42 42 42 42 0.1 17.9 27.5 45.5 12.9 0.3 13.2 – 18.0 30.7 48.7 16.4 0.3 16.7 (2.9) (16.8) – (2.9) 10.3 55.8 55.8 0.2 56.0 0.6 2.2 3.4 49.8 56.0 – (16.8) (0.1) 48.6 48.6 0.1 48.7 0.6 2.2 2.6 43.3 48.7 As permitted by Section 408 of the Companies Act 2006, a separate profit and loss account of the parent company has not been presented. The parent company’s profit for the year was £6.6m (2016: £5.1m). The accompanying notes form part of the financial statements. These financial statements were approved by the Board of Directors on 26 February 2018 and were signed on its behalf by: Martin L. Rapp Group Chief Executive Fariyal Khanbabi Group Finance Director 8 2 1 Dialight plc Annual Report and Accounts 2017Financial statementsNOTES TO THE COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 30. Accounting policies The principal accounting policies are summarised below. They have all been applied consistently throughout the year and to the preceding year. (a) General information and basis of accounting Dialight plc is a company incorporated in the United Kingdom under the Companies Act. The address of the Registered Office is given on page 140 of this Annual Report and Accounts. The Company is a holding company that manages the other trading subsidiaries of the Dialight Group. The financial statements have been prepared under the historical cost convention, modified to include certain items at fair value, and in accordance with Financial Reporting Standard 102 (“FRS 102”) issued by the Financial Reporting Council. The functional currency of Dialight plc is considered to be UK Sterling because that is the currency of the primary economic environment in which the Company operates. (b) Going concern The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for a period no shorter than 12 months from the date of this report. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. (c) Tangible fixed assets Tangible fixed assets are stated at cost, net of depreciation and any provision for impairment. Depreciation is provided on all tangible fixed assets at rates calculated to write off the cost, less estimated residual value, of each asset on a straight-line basis over its expected useful life, which is between three and ten years. (d) Financial instruments Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. (i) Financial assets and liabilities All financial assets and liabilities are initially measured at transaction price (including transaction costs), except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value (which is normally the transaction price excluding transaction costs), unless the arrangement constitutes a financing transaction. If an arrangement constitutes a financing transaction, the financial asset or financial liability is measured at the present value of the future payments discounted at a market rate of interest for a similar debt instrument. The Company’s debt instruments are subsequently measured at amortised cost using the effective interest method. Debt instruments that are classified as payable or receivable within one year on initial recognition and which meet the above conditions are measured at the undiscounted amount of the cash or other consideration expected to be paid or received, net of impairment. 1 2 9 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2017 30. Accounting policies continued (ii) Investments Investments in subsidiaries and associates are measured at cost less impairment. For investments in subsidiaries acquired for consideration, including the issue of shares qualifying for merger relief, cost is measured by reference to the nominal value of the shares issued plus fair value of other consideration. Any premium is ignored. (iii) Equity instruments Equity instruments issued by the Company are recorded at the fair value of cash or other resources received or receivable, net of direct issue costs. (e) Impairment of assets Assets, other than those measured at fair value, are assessed for indicators of impairment at each balance sheet date. If there is objective evidence of impairment, an impairment loss is recognised in profit or loss. (f) Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. Unrelieved tax losses and other deferred tax assets are recognised only to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. (g) Employee benefits The Company operates both defined benefit and defined contribution plans. The assets of all arrangements are held separately from the assets of the Company in independently administered funds. The amount charged against profits in respect of defined contribution arrangements is the contributions payable to those arrangements in the accounting period. For the defined benefit arrangements, the assets are measured at market values. The liabilities are measured using the projected unit credit method, discounting at the current rate of return of a high-quality corporate bond of the appropriate term and currency to the liability. The defined benefit scheme surplus or deficit is recognised in full and presented on the face of the balance sheet. Other long-term employee benefits are measured at the present value of the benefit obligation at the reporting date. 0 3 1 Dialight plc Annual Report and Accounts 2017Financial statements30. Accounting policies continued (h) Foreign currency Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Exchange differences are recognised in profit or loss in the period in which they arise. (i) Leases Rentals under operating leases are charged on a straight-line basis over the lease term, even if the payments are not made on such a basis. Benefits received and receivable as an incentive to sign an operating lease are similarly spread on a straight-line basis over the lease term. (j) Share-based payment The Company grants to its employees rights to its equity instruments of Dialight plc. The fair value of awards granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to receive the awards. The fair value of the awards granted is measured using a pricing model, taking into account the terms and conditions upon which the awards were granted. The amount recognised as an expense is adjusted to reflect the actual value of share awards that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. Where the Company grants awards over its own shares to the employees of its subsidiaries, it recognises an increase in the cost of investment in its subsidiaries equivalent to the equity-settled share-based payment charge recognised in its subsidiaries’ financial statements with the corresponding credit being recognised directly in equity. (k) Dividends Dividends are recognised in the period in which they are approved by the Company’s shareholders, or in the case of an interim dividend, when the dividend is paid. Dividends receivable from subsidiaries are recognised when either received in cash or applied to reduce a creditor balance with a subsidiary. 31. Critical accounting judgements and key sources of estimation uncertainty In the application of the Company’s accounting policies, which are described in note 30, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The Directors consider that there are no critical accounting judgements or key sources of estimation uncertainty within the Company’s individual financial statements. 1 3 1 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2017 32. Fixed assets Cost At 1 January 2017 Additions At 31 December 2017 Depreciation At 1 January 2016 Charge for the year At 31 December 2017 Net book value at 31 December 2017 Net book value at 31 December 2016 No assets of the Company are held under finance leases. 33. Fixed asset investments Investments in subsidiary undertakings Cost At 1 January 2017 Share-based payment At 31 December 2017 Provisions At 1 January 2017 Profit and loss account At 31 December 2017 Net book value at 31 December 2017 Net book value at 31 December 2016 Fixtures, fittings and equipment £’m 0.2 0.1 0.3 (0.2) – (0.2) 0.1 – £’m 22.8 0.8 23.6 (4.8) (0.9) (5.7) 17.9 18.0 In accordance with Section 26 of FRS 102, the cost of investment is increased to reflect the cost of share options awarded to employees of the Company’s subsidiaries. A full list of subsidiaries of the Company is provided in note 27 on pages 125 and 126. 34. Financial risk management The Company has exposure to market risk and liquidity risk from its use of financial instruments. The overall framework for managing risk and the interest rate risk that affects the Company is discussed in note 22. All carrying values are considered to be fair values. A sensitivity analysis has been carried out in note 22 and is considered to not be materially different from the results for the Company only. 2 3 1 Dialight plc Annual Report and Accounts 2017Financial statements34. Financial risk management continued Foreign currency risk The Company holds monetary assets and liabilities in currencies other than UK Sterling. The majority of these relate to intercompany balances which provide a natural hedge elsewhere in the Group. The Company’s exposure to foreign currency risk to third parties was as follows based on notional amounts: Currency cash Other creditors Gross balance sheet exposure 2017 $’m 0.2 – 0.2 2017 €’m – – – 2016 $’m 0.2 – 0.2 2016 €’m – – – The exchange rates applied during the year are disclosed in note 22. Liquidity risk The Company’s exposure to liquidity risk relates to its borrowings. This is discussed in note 22. 35. Share-based payments Share-based payments are described in full in note 18. PSP The PSP relating to employees of the Company is disclosed on page 63 in the Directors’ remuneration report. Save As You Earn (“SAYE”) The options under the SAYE relating to employees of the Company are as follows: Outstanding at 1 January Granted during the year Forfeited during the year Outstanding at 31 December 2017 scheme number – 6,416 (445) 2015 scheme number 3,736 – – 5,971 3,736 Details on assumptions and inputs used in the calculation of share-based payment amounts are disclosed in note 18. 36. Key management personnel The main Board Directors are considered to be the Company’s key management personnel. Details of their compensation are disclosed in note 26. 37. Debtors Amounts owed by subsidiary undertakings Other debtors Deferred tax asset (note 40) Less non-current portion: amounts owed by subsidiary undertakings Current portion 2017 £’m 39.7 0.4 0.3 40.4 (27.5) 12.9 2016 £’m 46.6 0.5 – 47.1 (30.7) 16.4 1 3 3 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2017 38. Creditors Amounts falling due within one year: Deferred tax liability (note 40) Amounts owed to subsidiary undertakings Accruals and deferred income 2017 £’m 2016 £’m – 1.2 1.7 2.9 0.9 14.0 1.9 16.8 39. Borrowings On 12 December 2016, the Company signed a five-year unsecured £25m multi-currency revolving credit facility with HSBC Bank plc. Under the terms of the facility, the Group also has a £25m “accordion” facility, by which further facilities may be made available by HSBC under the current terms to support significant investment opportunities that may arise. Amongst the covenants attached to the facility are requirements related to the net debt to EBITDA ratio of the Group and interest cover. During the year and subsequently, the Group has operated well within those covenants. At 31 December 2017 there were no drawings on the facility (2016: £nil). 40. Deferred tax assets/(liabilities) At 1 January Prior year adjustment Profit and loss account Group relief Recognised in equity At 31 December An analysis of deferred tax is as follows: Capital allowances Short-term timing differences Debtors (see note 37) Creditors (see note 38) 41. Called up share capital Allotted and fully paid Ordinary shares of 1.89 pence each Shares classified as liabilities Shares classified in shareholder funds 2017 £’m (0.9) – 0.3 0.9 – 0.3 – 0.3 0.3 – 2016 £’m 0.1 (0.1) (0.9) – (0.9) – (0.9) – (0.9) 2017 Number 2017 £’m 2016 Number 2016 £’m 32,521,179 32,504,335 0.6 – 0.6 0.6 0.6 – 0.6 0.6 During the year, 16,844 shares were issued (2016: 1,077) in order to satisfy the requirement for shares that vested as part of the Sharesave scheme, the proceeds of issue were £0.1m (2016: less than £0.1m). The ordinary shares issued in the year have the same rights as the other shares in issue. 4 3 1 Dialight plc Annual Report and Accounts 2017Financial statements42. Capital and reserves a) Statement of changes in equity Balance at 1 January 2017 Profit Other comprehensive income Remeasurement of defined benefit pension liability, net of tax Total other comprehensive income Total comprehensive income for year Transactions with owners, recorded directly in equity Share based payments, net of tax Total contribution by and distribution to owners Balance at 31 December 2017 Balance at 1 January 2016 Profit Other comprehensive income Remeasurement of defined benefit pension liability, net of tax Total other comprehensive income Total comprehensive income for year Transactions with owners, recorded directly in equity Share based payments, net of tax Total contribution by and distribution to owners Balance at 31 December 2016 Other reserve capital contribution £’m 2.6 Share capital £’m 0.6 – – – – – 0.6 – – – 0.8 0.8 3.4 – – – – – 0.6 – – – 0.6 0.6 2.6 Capital redemption Retained earning 2.2 49.8 56.0 Total equity £’m 48.7 6.6 (0.1) (0.1) £’m 43.3 6.6 (0.1) (0.1) 6.5 6.5 – – 0.8 0.8 Retained earning £’m 38.4 5.1 (0.2) (0.2) Total equity £’m 43.2 5.1 (0.2) (0.2) 4.9 4.9 – – 0.6 0.6 £’m 2.2 – – – – – – – – – – 2.2 43.3 48.7 Other reserve capital contribution £’m Capital redemption £’m 2.0 2.2 Share capital £’m 0.6 At 31 December 2017 the number of shares held by the Group through the ESOT was nil ordinary shares (2016: nil). The market value of these shares at 31 December 2017 was £nil (2016: £nil). 1 3 5 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2017 42. Capital and reserves continued b) Dividends After the balance sheet date no dividends were proposed by the Directors and there are no income tax consequences for the Company. Final proposed dividend Nil pence per ordinary share (2016: nil pence) 2017 £’m – 2016 £’m – 43. Pensions The Company operates a defined contribution plan and a defined benefit pension arrangement called the Roxboro UK Executive Pension Fund (the “Executive Fund”). The Executive Fund provides benefits based on final salary and length of service on leaving. The Executive Fund is closed to new members. The following disclosures exclude any allowance for defined contribution funds operated by the Company. The Executive Fund is subject to the “Statutory Funding Objective” under the Pensions Act 2004. An actuarial valuation of the Executive Fund is carried out at least once every three years to determine whether the Statutory Funding Objective is met. As part of the process the Company must agree with the Trustees of the Executive Fund the contributions to be paid to address any shortfall against the Statutory Funding Objective. The most recent actuarial valuation was carried out in 2017. The results of that valuation were projected by an independent qualified actuary to 31 December 2017 allowing for Executive Fund cash flows and changes in the assumptions for FRS 102 purposes. Recognised assets for defined benefit obligations Present value of funded obligations Fair value of plan assets Recognised asset for defined benefit obligations Plan assets consist of the following: Bonds Cash The assets do not include any investments in shares of the Company. Movements in the present value of defined benefit obligations Liabilities at 1 January Interest cost Benefits paid Experience loss on defined benefit obligation Changes to financial assumptions Liabilities at 31 December 6 3 1 2017 £’m (2.3) 2.5 0.2 2017 £’m 2.5 – 2.5 2017 £’m 2.3 0.1 2016 £’m (2.3) 2.4 0.1 2016 £’m 2.4 – 2.4 2016 £’m 2.0 0.1 (0.1) (0.1) – – 2.3 – 0.3 2.3 Dialight plc Annual Report and Accounts 2017Financial statements43. Pensions continued Movements in fair value of plan assets Assets at 1 January Interest on assets Employer contributions Benefit paid Return on plan assets less interest Assets at 31 December Expense recognised in the profit and loss account Interest on obligation Interest on plan assets Liability for defined benefit obligations The principal assumptions at the balance sheet date (expressed as weighted averages) are: Discount rate at 31 December Future pension increases Inflation – RPI Inflation – CPI 2017 £’m 2.4 0.1 0.1 2016 £’m 2.2 0.1 0.1 (0.1) (0.1) – 2.5 2017 £’m 0.1 (0.1) – 0.1 2.4 2016 £’m 0.1 (0.1) – UK scheme (% per annum) 2017 2.50 3.25 3.30 2.40 2016 2.70 3.60 3.60 2.70 For its UK pension arrangements the Group has, for the purpose of calculating its liabilities as at 31 December 2017, used SAPS S2NA mortality tables based on year of birth (as is published by the Institute and Faculty of Actuaries). The UK mortality tables are based on the latest mortality investigations and reflect an industry-wide recognition that life expectations have improved. The average life expectancy of an individual currently aged 45 years and retiring at age 65 years is 23.7 years for males and 24.2 years for females. For individuals currently aged 65 years the average life expectancy is 22.3 years for males and 24.2 years for females. 44. Related party transactions During the period, the Company received no management fees or interest on inter-company loans (2016: £nil) from subsidiaries that are not wholly owned. At 31 December 2017 a total of £2.2m was owed to the Company by those subsidiaries (2016: £2.3m). 1 3 7 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2017 45. Statement of cash flows Operating activities Profit for the year Adjustments for: Depreciation of property, plant and equipment Impairment of investment Share-based payments Inter-company debt forgiveness Finance income Financial expense Operating cash flow before movements in working capital Increase/(decrease) in debtors (Decrease)/Increase in other creditors Cash generated from operations Interest received Interest paid Net cash generated from operating activities Investing activities Capital expenditure Net cash used in investing activities Financing activities Dividends paid (Repayment)/drawdown of bank facility Payment of upfront loan facility costs Net cash (used in)/generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Finance income and interest is received from wholly owned subsidiaries. 31 December 2017 £’m 31 December 2016 £’m 6.6 – 0.9 0.8 – 5.1 – – 0.6 2.5 (2.4) (4.4) 0.1 6.0 6.7 (13.9) (1.2) 1.4 (0.1) 1.3 – (0.1) (0.1) – – – – – 0.3 0.3 0.3 4.1 (4.7) 8.8 8.2 1.4 (0.3) 1.1 – – – – (9.5) – (9.5) (0.2) 0.5 0.3 8 3 1 Dialight plc Annual Report and Accounts 2017Financial statementsFIVE-YEAR SUMMARY Revenue Research and development cash expenditure Underlying operating profit Non-underlying operating loss Finance (charges)/income Profit/(loss) before gain on disposal of discontinued operations and taxation Cash generated from operating activities Net cash/(debt) Shareholders’ funds Statistical information Basic earnings per ordinary share from continuing operations Dividends per share Dividend cover (times) Underlying operating margin Prepared under IFRSs 2017 £’m 2016 £’m 2015 £’m 2014 £’m 2013 £’m 181.0 182.2 161.4 159.8 131.2 6.9 9.7 (6.4) (0.3) 3.0 13.1 12.8 76.1 6.0 13.1 (16.4) (0.5) (3.8) 16.3 8.0 77.1 5.5 6.1 (9.5) (0.5) (3.9) 8.7 (3.8) 70.1 6.2 18.1 (2.3) (0.3) 15.5 8.6 0.6 72.8 5.9 14.5 (2.9) (0.4) 11.2 6.9 7.1 66.7 Pence Pence Pence Pence Pence 4.8 n/a n/a (8.4) n/a n/a (6.4) 9.8 n/a 29.4 15.0 2.0 23.9 14.4 1.7 5.4% 7.2% 3.7% 11.2% 11.1% 1 3 9 Dialight plc Annual Report and Accounts 2017Strategic report GovernanceFinancial statements DIRECTORY AND SHAREHOLDER INFORMATION Company Secretary and Registered Office Chris Fussell Leaf C Level 36 Tower 42 25 Old Broad Street London EC2N 1HQ Registrars Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA Equiniti’s Shareholder Contact Centre can Legal advisers Slaughter and May One Bunhill Row London EC1Y 8YY Principal bankers HSBC Bank PLC Level 6 Metropolitan House Telephone: +44 (0)20 3058 3541 be contacted by telephone on 0371 384 321 Avebury Boulevard Registered in England and Wales 2495 (international callers: +44 121 415 7047) Milton Keynes MK9 2GA Company number: 2486024 Email: info@dialight.com www.dialight.com between 8.30am and 5.30pm Monday to Friday, excluding bank holidays. Financial PR Website Shareholders are encouraged to visit You can also access details of your shareholding and a range of other shareholder services by registering our website, www.dialight.com, which at www.shareview.co.uk. contains information about Dialight. Any information on or linked from the website is not incorporated by reference into the Dealing service Equiniti offers Shareview Dealing, a service Annual Report and Accounts. which allows you to sell your Dialight plc shares or add to your holding if you are a UK MHP Communications 6 Agar Street London WC2N 4HN Financial calendar 2018 Annual General Meeting 17 April 2018 Half Yearly Financial Report 30 July 2018 There is a section designed specifically resident. You can deal in your shares on the Both the paper manufacturer and printer are for investors at www.IR.dialight.com, which internet or by telephone. For more information registered to the Environmental Management includes detailed coverage of Dialight’s about this service and for details of their System ISO 14001 and are Forest Stewardship share price and our financial results. You can rates, log on to www.shareview.co.uk/dealing Council (FSC) chain-of-custody certified. also review this year’s Annual Report and or telephone 0345 603 7037 between 8.30am Accounts. Our share price is also available and 4.30pm, Monday to Friday. on the London Stock Exchange’s website, Forward-looking statements Certain sections of this Annual Report www.londonstockexchange.com. If you wish to deal, you will need your contain forward-looking statements that account/shareholder reference number are subject to risk factors associated with, Dialight plc shareholders can elect to receive which appears on your share certificate. amongst other things, the economic and their shareholder communications such business circumstances occurring from as the Annual Report and Accounts and Alternatively, if you hold a share certificate, time to time in the countries and sectors in other shareholder documents electronically you can also use any bank, building society which the Company and its subsidiaries and by registering at www.dialight.com/ SiteServices/AlertServices. or stockbroker offering share dealing facilities to buy or sell shares. If you are in any doubt associates operate. It is believed that the expectations reflected in the Annual Report about buying or selling shares, you should are reasonable but they may be affected by Financial advisers and stockbrokers seek professional financial advice. a wide range of variables which could cause Auditors KPMG LLP One Snowhill Snow Hill Queensway Birmingham B4 6GH actual results to differ materially from those currently anticipated. Trademarks The following trademarks appear in this document: Dialight and Vigilant, and they are registered trademarks of the Dialight Group. Investec Bank PLC 2 Gresham Street London EC2V 7QP Rothschild & Co New Court St. Swithin’s Lane London EC4N 8AL 0 4 1 Dialight plc Annual Report and Accounts 2017Financial statementsDialight is the world leader in LED industrial technology with over 1 million led fixtures installed worldwide. Our sustainable, energy efficient and intelligent LED lighting technologies are market leaders. We enable industrial customers operating in demanding environments to reduce their energy costs, maintenance costs and carbon footprint while maximising their safety and productivity. 2017 HIGHLIGHTS Revenue (£’m) Underlying gross profit (£’m) 2017 2016 2015 181.0 2017 182.2 2016 66.7 69.5 161.4 2015 56.2 Underlying basic EPS (p) Net cash debt (£’m) 2017 2016 17.9 2017 12.8 26.9 2016 8.0 2015 13.3 2015 (3.8) Underlying operating profit (£’m) 2017 2016 2015 6.1 9.7 13.1 Statutory measures Profit/(Loss) from operating activities (£’m) Profit/(Loss) for the year (£’m) Earnings per share (p) 2017 £’m 3.3 1.7 4.8 2016 £’m (3.3) (2.8) (8.4) 2015 £’m (3.4) (2.0) (6.4) Financial highlights _ revenue broadly flat (4% Operational highlights _ operational difficulties due to: below at constant currency) _ reduced production output _ lighting division order intake from our manufacturing 4% down at constant partner; currency _ procurement planning _ underlying profit decline due issues at our to the operational difficulties manufacturing partner; and _ net cash of £12.8m _ strong balance sheet _ delays in new product launches of High Bay and supported by good working Area Light capital management and _ actions underway to resolve five-year credit facility production issues maturing in December 2021 Both the paper manufacturer and printer are registered to the Environmental Management System ISO 14001 and are Forest Stewardship Council® (FSC)® chain-of-custody certified. 21617_Dialight_AR17_1.Cover.indd 5-7 20/02/2018 19:14 D I A L I G H T P L C A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 7 Dialight plc Leaf C Level 36 Tower 42 25 Old Broad Street London, EC2N 1HQ www.dialight.com 

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