INNOVATIVE ELECTRONICS DRIVING GLOBAL GROWTH d i s c o v e r I E G r o u p 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 f o r t h e y e a r e n d e d 3 1 M a r c h 2 0 1 9 INNOVATIVE ELECTRONICS discoverIE Group plc Annual Report and Accounts for the year ended 31 March 2019 discoverIE AR2019.indd 3 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:35 WELCOME TO OUR 2019 ANNUAL REPORT discoverIE is an international leader in customised electronics, focusing on markets with sustained growth prospects and increasing electronic content, where there is an essential need for our products Introduction to discoverIE ■ We design, manufacture and supply customised electronic components which are highly differentiated ■ Customers are Original Equipment Manufacturers who depend on our products ■ Supplying growth markets with increasing electronic content ■ Highly acquisitive in a fragmented market Our investor website Visit: www.discoverIEplc.com It contains a wide range of information of interest to institutional and private investors including: ■ Latest news and press releases ■ Reports and presentations Navigating the report This icon signposts to further content within the report This icon signposts to further information that can be found online discoverIE AR2019.indd 4 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:37 READ MORE Strong investment case discoverIE designs, manufactures and supplies application-specific electronic products that help our customers solve their technical challenges. Read more on our investment case on page 5 Profit growth across both divisions Underlying operating profit increased by 25% (+26% CER) with the Group well positioned for further growth. Read more in our finance review on page 34 Target markets leading growth Two-thirds of Group revenue is derived from our target markets of renewable energy, transportation, medical and industrial & connectivity. Read more on our target markets on page 15 Consistency and proven strategy The Group pursues a clear strategy, investing in initiatives that enhance design opportunities for customised products in targeted growth markets. Read more on our strategy on page 16 CONTENTS Strategic report Highlights Investment case Group at a glance Chairman’s statement Our business model Market review Our key markets Our strategy Strategy in action Key Strategic Indicators Key Performance Indicators Operating review Finance review Risk management Principal risks and uncertainties Corporate social responsibility Corporate governance The Board The Group Executive Committee Directors’ report 4 5 6 8 12 14 15 16 18 23 24 26 34 40 42 46 54 56 58 Board report on corporate governance 62 Audit and Risk Committee report Nomination Committee report Directors’ remuneration report 74 80 82 Directors’ responsibilities statement 103 Financials statements Independent auditor’s report to the members of discoverIE Group plc Consolidated income statement Supplementary income statement information Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity 106 118 118 119 120 121 Consolidated statement of cash flows 122 Notes to the Group financial statements Company balance sheet Company statement of changes in equity Notes to the Company financial statements Other information Five year record Principal locations Financial calendar 2019/20 Corporate information 123 169 170 171 175 176 IBC IBC Innovative Electronics www.discoverieplc.com Stock Code: DSCV 01 discoverIE AR2019.indd 1 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:41 Strategic Report Differentiated products Targeting growth markets driven by innovation Innovations in technology are driving dramatic changes in every aspects of our lives. Electronic component specialist discoverIE is at the centre of this revolution Medical This market is driven by the increasing use of technology in diagnosing, monitoring and controlling medical conditions Read more on our target markets on page 14 02 discoverIE Group plc Annual Report and Accounts for the year ended 31 March 2019 discoverIE AR2019.indd 2 26542 Job Number 13 June 2019 6:00 pm 13 June 2019 6:00 pm Proof Two Proof Number 13/06/2019 18:02:42 HEADING STRATEGIC REPORT discoverIE AR2019.indd 3 26542 Job Number 13 June 2019 6:00 pm 13 June 2019 6:00 pm Proof Two Proof Number 13/06/2019 18:02:43 HIGHLIGHTS ■ Strong financial and operating performance y Group sales and orders increased by 13% (+14% CER3) y Group organic sales and orders grew by 8% y D&M organic4 sales up 10%: now 61% of Group sales (FY 2017/18: 57%) Revenue FY19 FY18 £438.9m £387.9m +13% y Underlying operating profit increased by 25% (+26% CER) y Underlying earnings per share increased by 22% Underlying operating profit1 y Excellent cash generation with £28.6m operating cash flow5, 93% of underlying operating profit FY19 FY18 £30.6m £24.5m +25% ■ Further good progress on key strategic and performance targets y Underlying operating margin increased to 7.0% (FY 2017/18: 6.3%) y Sales beyond Europe increased to 21% of total sales (FY 2017/18: 19%) y Cross-selling revenue of £10.6m, up 20% on last year (FY 2017/18: £8.8m) y ROCE6 of 15.4% (FY 2017/18: 13.7%2) y Full year dividend increased by 6% ■ Three higher margin, international D&M acquisitions completed, two since the year end y Cursor Controls acquired in October 2018 for £19m y Hobart and Positek acquired in April 2019 for £16m ■ Group well positioned for further growth y Strong growth in new project design wins y Record year-end order book of £139m (+15% CER) y Over-subscribed equity placing in April 2019, raising a net £28m y Debt facility extended by £60m to £180m with gearing7 reduced to 1.4x (post equity fundraising) y Further acquisition opportunities developing y New year trading has started well Read more in our finance review on page 34 Underlying profit before tax1 FY19 FY18 £27.2m £21.9m +24% Underlying EPS1 FY19 FY18 27.2p 22.3p +22% Reported profit before tax2 FY19 FY18 £19.3m £14.6m2 +32% Reported fully diluted EPS2 FY19 FY18 19.4p 14.2p2 +37% Full year dividend per share FY19 FY18 9.55p 9.0p +6% Notes: 1 Underlying operating profit’, ‘Underlying EBITDA’, ‘Underlying operating costs’, ‘Underlying profit before tax’ and ‘Underlying EPS’ are non-IFRS financial measures used by the Directors to assess the underlying performance of the Group. These measures exclude acquisition-related costs (amortisation of acquired intangible assets of £5.9m, acquisition costs of £1.8m, the IAS19 pension charge relating to a legacy defined benefit scheme of £0.4m) and exceptional income of £0.2m for FY 2018/19. Equivalent underlying adjustments within the FY 2017/18 underlying results totalled £7.3m. For further information, see note 2 of the Group financial statements. 04 2 Last year’s financial statements have been 5 Operating cash flow is defined as underlying restated as set out in note 2 of the Group EBITDA adjusted for the investment in, or release financial statements which has impacted of, working capital and less the cash cost of reported profit before tax and reported fully capital expenditure. diluted EPS. 3 Growth rates at constant exchange rates (“CER”). 6 Return on capital employed (“ROCE”) is defined as underlying operating profit as a percentage of The average sterling rate of exchange against net assets (including goodwill) plus net debt. the euro was in line with last year, weakened 1% against the US dollar and was up 3% on average against the three Nordic currencies. 4 Organic growth for the Group is calculated at CER and is shown excluding the first 12 months of acquisitions (Santon was acquired last financial year on 1 February 2018), and Cursor Controls was acquired on 17 October 2018. 7 Group gearing is defined as net debt divided by underlying EBITDA (annualised for acquisitions). discoverIE AR2019.indd 4 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:43 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Strategic report Strong financials ■ Solid balance sheet ■ Progressive dividend policy ■ Sustainable, profitable growth Read more on page 34 INVESTMENT CASE 1 Drivers of future performance ■ High level of project wins and new opportunities driving future organic 2 growth ■ Record order book ■ Cross-selling opportunities between the businesses ■ International expansion ■ Good track record of value-accretive acquisitions, with a robust acquisition pipeline Record Order Book 2010-2019 Increase in dividend 2010-2019 +15% m 5 8 £ m 3 7 £ m 5 6 £ m 2 5 £ m 0 5 £ m 9 3 1 £ m 2 2 1 £ m 9 0 1 £ 2 1 r a M 2 1 p e S 3 1 r a M 3 1 p e S 4 1 r a M 4 1 p e S 5 1 r a M 5 1 p e S 6 1 r a M 6 1 p e S 7 1 r a M 7 1 p e S 8 1 r a M 8 1 p e S 9 1 r a M +6% FY19 FY18 FY17 FY16 FY15 FY14 FY13 FY12 9.55p 9.00p 8.50p 8.05p 7.60p 6.80p 6.18p 5.81p 3 Focus on customised electronics ■ Highly differentiated electronic products meeting customer demand for application-specific solutions 4 Attractive growth markets ■ Technology revolution driving new product development ■ Global trends underpinning structural growth ■ Applications necessitating increased electronic content Read more about our business model on pages 12 and 13 Read more in our market review on pages 14 and 15 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 05 discoverIE AR2019.indd 5 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:43 Strategic report GROUP AT A GLANCE Global reach We have a unique competitive position – no other company on a global scale has the ability to offer customers complex solutions, matching our product diversity with quality, flexibility and technical engineering. As a global supplier, we are able to follow the opportunities of our global customers. Internationalising the business 23 COUNTRIES 25,000 CUSTOMERS Our global operation with a highly differentiated approach The Design & Manufacturing division (“D&M”) has gone from The Custom Supply division also has a strong international a UK business in 2011 to a global business in 2019 operating presence. Acal BFi operates across 11 countries in Europe, with in 23 countries. Twenty-one per cent of Group sales for the logistic centres in Germany, UK and Hong Kong. Each country year were beyond Europe. During the year, production ramp- up began in the Group’s new, larger production facilities has its own dedicated sales force and technical support teams, supported by central business development directors. in Bangalore, India, Bratislava, Slovakia and Seoul, Korea. Additionally, the expansion of the magnetics components production facility in China, which will complete during FY 2019/20, will expand Myrra’s Asian capacity by around 70%. Developing sales in North America and Asia Emerging markets Sales and manufacturing Manufacturing Sales Read more about the North America +11% 06 Internationalisation of our business on page 22 Europe +4% Asia +13% discoverIE AR2019.indd 6 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:44 HEADINGdiscoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019 25,000 CUSTOMERS Europe +4% Our divisions discoverIE operates across two divisions Design & Manufacturing and Custom Supply. The Group’s increasing focus on design and manufacturing is reflected in both revenue and underlying profit. Read more on our products on pages 18 to 19 DESIGN AND MANUFACTURING Revenue FY19 FY18 £266.2m £172.7m £222.6m £165.3m FY17 £175.6m £162.6m FY16 £137.6m £150.1m Underlying operating profit FY19 FY18 FY17 £29.8m £8.6m £24.2m £7.5m £20.2m £5.2m FY16 £16.5m £4.7m Design and Manufacturing Custom Supply Read more on our performance on page 34 Watch our Corporate film at: www.discoverIEplc.com The Design & Manufacturing division supplies custom electronic products which are designed uniquely, or specifically modified from an existing product to customer specifications. Design & Manufacturing has over 5,000 customers. It distributes some of its products via discoverIE’s Custom Supply division and this cross-selling is growing. Underlying operating margin Number of employees: 3,840 11.2% CUSTOM SUPPLY The Custom Supply division provides technically demanding, customised electronic, photonic and medical products to over 20,000 industrial manufacturers. The products come from a range of high-quality third party international suppliers, as well as from discoverIE’s own Design & Manufacturing division. A high degree of technical knowledge is required in the sales process. Approximately half of the division’s employees are technically qualified. Underlying operating margin Number of employees: 5.0% 425 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 07 discoverIE AR2019.indd 7 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:47 Strategic report CHAIRMAN’S STATEMENT “ The Group has made significant progress again this year with an excellent set of results.” Malcolm Diamond MBE Chairman 2019 HEADLINES Group sales +13% Underlying operating profit +25% Read more in our finance review on page 34 08 I am pleased to report that the Group has made significant progress again this year with an excellent set of results reflecting strong levels of organic growth and operating efficiency. Progress has been made on all the Group’s strategic and operational objectives towards our mid-term targets with one of these objectives being upwardly revised for the coming year. Acquisitions continue to play an important role in building discoverIE. The most recent acquisitions of the UK-based Cursor Controls and Positek, and Hobart in the US, are all high quality, higher margin D&M businesses, designing, manufacturing and supplying custom solutions. Each provides good scope for developing further, both in our target markets and internationally, with c.70% of sales from the three businesses being beyond Europe. Strategy The Group is an international leader in customised electronics, focusing on structurally growing markets driven by increasing electronic content, where there is an essential need for our products. The Group’s product range is highly differentiated, with the majority being either partly or fully customised for specific customer applications. With our key markets being worldwide, management sees the opportunity to continue expanding beyond Europe (currently 21% of Group sales), as well as within Europe, as we continue our strategy of building a global electronics group. A priority for the year ahead is to deliver further good growth through a combination of organic performance and value- enhancing acquisitions. Group results Group sales for the year increased by 13% to £438.9m and by 14% at constant exchange rates (“CER”). Underlying operating profit, which excludes acquisition- related costs and exceptional items, increased by £6.1m to £30.6m (up by 25% and up by 26% CER) with underlying profit before tax increasing by £5.3m to £27.2m (up 24%). The strong growth in D&M helped to deliver a 70bps increase in underlying operating margins to 7.0% (FY 2017/18: 6.3%), despite additional investment to support future growth and an adverse impact of the weak solar market at Santon during the year. Underlying earnings per share for the year increased by 22% to 27.2p (up 4.9p from 22.3p last year). The difference between the growth of underlying profit before tax and underlying earnings per share results from a slightly higher underlying tax rate (up c.1ppt). discoverIE AR2019.indd 8 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:49 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Strategic report After underlying adjustments for acquisition-related costs of £8.1m, offset by exceptional income of £0.2m, profit before tax Acquisitions On 17 October 2018, the Group acquired the Cursor Controls for the year on a reported basis was £19.3m, a 32% increase from last year (FY 2017/18: £14.6m), with fully diluted earnings per share increasing by 37% to 19.4p (FY 2017/18: 14.2p). Cash generation was strong, with operating cash flow of £28.6m up 29% on last year (FY 2017/18: £22.1m), and representing 93% of underlying operating profit. Net debt at the year end was £63.3m, resulting in a Group gearing ratio of 1.7 times. We are mindful of retaining a strong financial position, in order to retain the flexibility to take advantage of further acquisition opportunities and are comfortable operating with gearing in the range of 1.5 to 2.0 times. Alongside the acquisitions of Hobart and Positek, in April 2019, we took the opportunity to strengthen the balance sheet by way of a well-supported placing which raised net proceeds of £28.2m, reducing pro-forma year-end gearing to 1.4 times. Together with strong organic cash flows, this provides the Group with an excellent platform from which to continue to execute its growth strategy. On behalf of the Board, I would like to thank Shareholders for their support. As reported in our first half results, we uncovered a fraud at one of our subsidiary companies through our divisional control processes. Management’s response was swift, decisive and appropriate. A review of our internal controls and procedures was undertaken and a number of recommendations were made and implemented which will further strengthen our controls. The Group is insured against fraud and management was able to recover the majority of the loss. Group (“Cursor Controls”), a designer and manufacturer of human to machine interface products for an initial consideration of £19.0m on a debt free, cash free basis, and a contingent payment of up to £4.0m, subject to the business achieving certain profit growth targets during the three-year period ended 31 December 2021. Cursor Controls is based in the UK and Belgium. Since the year end, on 16 April 2019, the Group acquired Hobart Electronics (“Hobart”), a designer and manufacturer of custom transformers, inductors and magnetic components, for an initial cash consideration of $15.2m (£11.7m) on a debt free, cash free basis and a contingent payment of up to $4.0m (£3.1m), subject to the achievement of certain growth targets over the three-year period ended 31 December 2021. Hobart is based in the US with manufacturing in Mexico. Also on 16 April 2019, the Group acquired Positek, a designer and manufacturer of customised rugged, high accuracy sensors for an initial consideration of £4.2m on a debt free, cash free basis and a further contingent payment of up to £0.4m, payable subject to the achievement of certain integration and profit targets in the next 18 months. Positek is based in the UK and supplies international markets. We are delighted to welcome the employees from all the new businesses into the Group. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 09 discoverIE AR2019.indd 9 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:50 CHAIRMAN’S STATEMENT Board changes After six years, Henrietta Marsh and Richard Brooman will Employees Including the recent acquisitions of Cursor Controls, Hobart retire at the Company’s Annual General Meeting on 25 July and Positek, the Group now comprises approximately 2019. Henrietta has served as a Non-Executive Director since 4,400 employees in 23 countries around the world. The May 2013 and as Chair of the Remuneration Committee since Board believes that by adopting an entrepreneurial and October 2014. Richard has served as a Non-Executive Director decentralised operating environment, together with rigorous since January 2013, Chair of the Audit and Risk Committee planning, review, support, investment and controls, the Group since July 2013 and as Senior Independent Director since is able to continue to foster an ambitious and successful December 2014. We thank them for their significant culture. contributions to the Company’s development and wish them well. On behalf of the Board, I would like to thank everybody at discoverIE for their commitment and hard work. Their Tracey Graham, who has been on the Board since November dedication remains essential in helping us to achieve our 2015, has succeeded Henrietta as Chair of the Remuneration goals. Committee. Tracey is also Non-Executive Director and Chair of the Remuneration Committee at Royal London Mutual Insurance Society and Ibstock plc. Bruce Thompson, who joined the Board as a Non-Executive Director in February 2018, will succeed Richard as Senior Independent Director. Since the period end, it has been announced that Clive Watson will join the Board in September 2019 as a Non-Executive Director and Chair of the Audit and Risk Committee. Clive has recently retired from Spectris plc after 13 years as Group Finance Director and also from Spirax Sarco Engineering plc where he was Senior Independent Non-Executive Director and Chair of the Audit and Risk Committee, having joined in 2009. Dividend The Board is recommending a 6% (0.4 pence) increase in the final dividend per share to 6.75 pence per share, giving a full-year dividend per share of 9.55 pence, and representing Summary By focusing on structural growth markets and responding effectively to complex customer requirements, the Group has evolved into a higher quality business that is making excellent progress and delivering strong results. The market in which we operate remains highly fragmented, offering scope to build the Group’s technology capability and extend its geographical coverage through disciplined acquisitions. Combined with continued organic growth, the Board and management continue to be excited by the opportunities ahead to build a global business, that attracts and retains high quality employees, delivers value to our customers, and grows returns for our Shareholders. Malcolm Diamond MBE Chairman a cover against underlying earnings of 2.8 times (FY 2017/18: 4 June 2019 2.5 times). The final dividend is payable on 30 July 2019 to shareholders registered on 14 June 2019. Since 2010, the annual dividend per share has risen by 88% and the total dividend payment by nearly 350%. In light of the Group’s active and successful acquisition strategy, the Board believes that maintaining a progressive dividend policy with a long-term dividend cover (over three times underlying earnings) is appropriate to enable both dividend growth and a higher level of investment from internally generated resources. 10 discoverIE AR2019.indd 10 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:50 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Innovative Electronics www.discoverieplc.com Stock Code: DSCV 11 discoverIE AR2019.indd 11 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:51 Strategic report OUR BUSINESS MODEL discoverIE is an international leader in customised electronics focusing on markets with sustained growth prospects and increasing electronic content. We design, manufacture and supply electronic products that are central to our customers’ requirements. OUR RESOURCES OUR MODEL People and culture Our achievements are a result of the commitment, skills and ingenuity of our employees who have a high degree of technical knowledge. We have a decentralised ambitious and entrepreneurial culture which allows our 4,400 employees across the globe to contribute to the Group’s success. Technology and engineering capability Our technology expertise enables us to meet emerging customer needs driven and enabled by the technology revolution. Our engineering expertise allows us to respond to both the need for increased electronic content and for application-specific solutions, supporting our customers throughout the entire product lifecycle. Design & Manufacturing facilities Over 80% of the products made by the Design & Manufacturing division are manufactured in-house. Our manufacturing processes enable us to respond efficiently to our customers’ demands. The division’s principal manufacturing facilities are in China, India, the Netherlands, Poland, Slovakia, Sri Lanka and Thailand. Two new manufacturing facilities in Mexico were acquired as a result of the acquisition of Hobart Electronics. Read about Design & Manufacturing on page 30 Long-term customer relationships discoverIE’s highly skilled engineers work closely with customers to develop a deep understanding of their industry and requirements. Our engineers use this knowledge to create innovation-led, bespoke solutions which are then designed into the customers’ products. Financial Our financial strength enables us to invest heavily in our existing businesses and to broaden our reach through further acquisitions, both geographically and technologically. Watch our Corporate film at: www.discoverIEplc.com 12 O u r Customers ply p u S s m a a t revenue stre e p e R P r o d u c t i o n Id e n ti f c a t i o n o f o p p o r t u n i t y n otatio u e sig n and q D Sample and appr o v a l s Repeat revenue streams Once approved, our products typically enjoy repeat revenue for the lifetime of the customer’s production, typically five to seven years, depending on the product end market. Cross-selling opportunities A key strategic focus for the Group is cross-selling between the businesses. We aim to sell as many product groups to our customers as possible. Cross-selling initiatives are changing the nature of the discoverIE business by broadening the range of products sold to customers, in turn developing stronger customer relationships and achieving more efficient use of sales resources. Our Custom Supply division provides excellent cross-selling opportunities by providing the Design & Manufacturing businesses access to 20,000 customers. discoverIE AR2019.indd 12 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:51 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report OUR COMPETITIVE ADVANTAGES 1 2 Global reach No other company offers our range of capabilities on our scale. Our global footprint means that we can meet the location demands of our Expertise We have been active in the electronics market for over 20 years and our expertise and knowledge has grown over this time. This allows us to develop new products in response to changing technologies. customers. Our customers Strategic report 3 Differentiated products The products which we design and manufacture are application specific. We have specialist knowledge in many niche markets, enabling us to differentiate our products to match our customers’ requirements. Large customer base, spread geographically and across multiple industries. Our customers are Original Equipment Manufacturers that require solutions for their product-specific applications. With rising electronic content, customers are increasingly dependent on technology to develop their next generation products. Identification of opportunity By working closely with our customers, we are able to understand their needs and jointly develop approriate solutions. We understand our customers, how they operate and how our components and solutions fit into their products. The solutions we provide result in an enhanced performance of our customers’ products, which benefits both customers and their end users. Design and quotation We design solutions for our customers. While some solutions are designed completely from scratch, we have “platform product ranges” that can be modified to meet our customers’ needs. Speed is important – the ability to provide customers with a quote quickly enables them to produce the final product faster. This approach saves customers time and cost. Customers will work with a dedicated team of engineers to create a design that matches their requirements. VALUE CREATION FOR OUR STAKEHOLDERS Customers ■ Improved usability and effectiveness of the products we design, manufacture and supply results in enhanced performance of our customers’ applications, which also benefits their own customers. ■ We enable customers to differentiate their own products from their competitors. ■ Cost-efficient ■ Quick lead times ■ Quality: high standards and reliable components. We are able to achieve this as we have complete control over the end-to-end process of the production of an electronic solution. Employees Employees benefit from the ability to improve their skills and work in a challenging and ambitious environment. They get the opportunity to make a contribution to world-leading products. We have created an environment where each employee is able to be their best. Shareholders We generate attractive returns for Shareholders over Sample and approvals the long term. Once the quote and design are accepted, samples are provided to the customer for approval. This is a critical step in the process. Production With internal know-how and in-house manufacturing, we can maintain complete control of the product manufacturing process, ensuring both high standards and reliability. Quality is assured through our advanced testing procedures. Supply discoverIE is able to supply the customer consistently over the lifetime of the project. We do this through ongoing production and maintaining inventory, be it in-house or on consignment at the customer. Communities and the environment We aim to contribute positively to the communities and environment in which we operate. Suppliers Our geographical footprint allows us to engage with suppliers at their locations. We enable smaller suppliers to expand their global network via our international supply chain. Governing bodies and regulators We aim to create trusted relationships with governing bodies and regulators, meeting all legal and regulatory commitments and requirements. Read about stakeholder engagement on page 47 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 13 discoverIE AR2019.indd 13 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:51 MARKET REVIEW TARGETING GROWTH MARKETS DRIVEN BY INNOVATION Long-term technology trends Target markets The Group focuses on four target markets, which account for 71% of D&M turnover and 66% of Group turnover: transportation, medical, renewable energy and industrial & connectivity. These are expected to drive the Group’s organic revenue growth well ahead of GDP over the economic cycle Growth in these markets is driven by increasing electronic content, connectivity and communication in products, and by global macro trends such as an ageing affluent population, an expanding transport infrastructure and the increasing need for renewable sources of energy. This year, organic revenue growth in these target markets was 12%, compared and create acquisition opportunities. with 8% for the Group as a whole. RENEWABLE ENERGY TRANSPORTATION MEDICAL INDUSTRIAL & CONNECTIVITY OUR SALES BY INDUSTRY SECTOR Organic growth by market REVENUE FROM TARGET MARKETS (% of total) Group revenue Target markets 12% Other markets 1% Total 8% Target markets £290m 66% Other markets £149m 34% 14 discoverIE AR2019.indd 14 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:55 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report OUR KEY MARKETS Since 2009, our strategy has been to grow our business in customised electronics focusing on markets with sustained growth prospects, driven by an increasing electronic content and where there is an essential need for our products. Renewable energy Transportation Medical Industrial & connectivity Key facts 2/3 global investment in power generation to 2040 will be into renewable energy1 Automotive circuits Medical electronics to Overall market size for expected to rise CAGR grow CAGR global machine-to- 13.4% (2016-2021)2 6.8% (2017-2022)3 machine connections to rise CAGR 13.2% (2016-2022)4 Connectivity and industrial internet of things ■ Remote monitoring and control ■ Quality control ■ Precision and automation Mega trends Decarbonisation and diversification Electrification and autonomous vehicles Artificial intelligence, sensing and analytics Market drivers ■ Geopolitical consensus ■ Decarbonisation ■ “Safety-centric” ■ Growing public agenda awareness ■ Legislative and regulatory regimes ■ Cost of energy ■ Mass transit and route vehicles ■ Proactive and preventative medicine ■ Technological and biological fusion ■ Predictive analytics Technology integration ■ Increasing scale of ■ Electric vehicles ■ Monitoring and ■ Automation and wind turbines ■ Diversification of solar systems ■ Mass transit and route vehicles ■ Autonomous vehicles ■ High-speed rail control robotics ■ Automation and ■ “Smart factories” robotics ■ Artificial intelligence ■ Advanced surgery ■ Increasing electronic content discoverIE solutions ■ Power inductors ■ Charging ■ Turbine blade pitch ■ Sensors control ■ Airflow measurement ■ Power control ■ Cabin monitoring and control ■ Embedded diagnostics ■ Interface device and cabling ■ Power systems ■ Wireless telematics ■ Fibre optic connectivity ■ AI communication ■ Wireless robotics control ■ Power control ■ Shielding 1 Source: World Energy Outlook 2017 2 Source: IC Insights 3 Source: Research+ Markets 4 Source: Markets-and-Markets Read more about our strategy on page 16 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 15 discoverIE AR2019.indd 15 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:55 Strategic report OUR STRATEGY “ We have pursued a clear strategy and the benefits of this approach are evident in the Group’s results.” Nick Jefferies Group Chief Executive Our strategic priorities Our strategic aim To grow our business in customised electronics by focusing on markets with sustained growth prospects, driven by an increasing electronic content and where there is an essential need for our products. Our strategic priorities Over recent years, the Group has pursued a clear strategy, investing in initiatives that enhance design opportunities for customised products in targeted growth markets, namely: renewable energy; transportation; medical; and industrial & connectivity. The benefits of this approach are evident in these results with strong levels of organic revenue growth throughout the established business units in the D&M division, driving a 23% increase in its divisional underlying operating profits. Likewise, in the Custom Supply division, good organic growth and greater efficiency has resulted in a 15% increase in its underlying operating profit. Core to our value proposition is the understanding of our customers’ design challenges and the design and manufacture of engineered products to meet their needs, that are then supplied over the life of the customer’s production, typically five to seven years. In a fragmented market, there exist opportunities to consolidate certain manufacturers of customised products for the Group’s common customer base, which ranges from mid-sized original equipment manufacturers to multinational companies operating in multiple locations. Our four target markets (renewable energy, transportation, medical, and industrial & connectivity), are long-term, international growth markets driven by excellent fundamentals where our customers depend upon the Group’s products. Growing sales well ahead of GDP Continue building revenues in the D&M division Acquire high quality businesses Internationalising the business 16 discoverIE Group plc Annual Report and Accounts for the year ended 31 March 2019 discoverIE AR2019.indd 16 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:56 Strategic report Strategic priorities Progress made Link to key strategic indicators and risks Group organic sales in the year grew by 8% driven by 10% organic growth in the D&M division and 5% 2 1 in Custom Supply The D&M division accounts for 61% of Group sales (FY2017/18: 57%) and 78% of the Group’s underlying 1 1 profit contribution Growing sales well ahead of GDP Grow sales well ahead of GDP over the economic cycle by focusing on structural growth markets Continue building revenues in the higher margin D&M division Continue building revenues in the Design & Manufacturing (“D&M”) division where operating margins for our businesses are higher (>10%) Optimise performance in the Custom Supply division to achieve an operating margin of 5% and to develop cross-selling of D&M division products Acquire high quality businesses Acquire businesses with attractive growth markets and strong operating margins In October 2018, the Group acquired the Cursor Controls Group, a UK-based designer of human to machine interface products. Since acquisition, Cursor Controls has performed strongly with excellent growth in orders and sales. Two further acquisitions, Positek and Hobart Electronics were made in April 2019 and are settling in well 1 2 1 2 3 3 1 Internationalising the business Further internationalise the business by developing sales in North America and Asia Sales beyond Europe represented 21% of Group revenue (FY2017/18: 19%) improving as a result of Santon and Cursor Controls (50% of sales in the period were outside Europe) Strategic indicators Risks 1 2 3 Increase share of Group revenue from Design & Manufacturing Increase underlying operating margin Build sales beyond Europe 1 2 Instability in the economic environment Business acquisitions underperformance Read more in our governance report on page 62 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 17 discoverIE AR2019.indd 17 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:56 Strategic report STRATEGY IN ACTION Differentiated products Acquire high quality businesses CURSOR CONTROLS – OPTICAL TRACKBALLS Cursor Controls specialises in providing solutions to real problems being faced by customers in their markets and has developed a number of world- leading, differentiated products, such as optical trackballs. The requirements of the customer The ability to clean, sterilise and decontaminate user interfaces in medical applications plays a crucial role with infection control and as the trackball is one of the most frequently utilised input devices on a system, being able to clean it thoroughly and easily is critical for end users. Traditional trackballs make use of mechanical shafts, roller bearings and opto- encoders, with the multiple non-sealed moving parts making it impossible to fully sterilise the module, while also significantly increasing the risk of damage to the exposed printed circuit board assembly as servicing is carried out. The solution we developed To overcome these challenges, Cursor Controls developed a patented IP68 sealed, contactless tracking solution, the Optical Range. With no moving parts other than the ball itself and offering a unique, fully sealed barrier to protect the electronics, the Optical Range allows for straightforward and seamless cleaning and sterilisation without the risk of damage to any other components – making it the de facto choice for the world’s leading ultrasound system developers. Benefits to the customer The fully sealed platform also offers significant benefits for other markets, including marine, food processing and defence and aerospace, where the IP68 construction ensures improved reliability and increased sealing protection even when exposed to the most aggressive of contaminants. The Optical Range is available in a variety of configurations and has been extensively certified, making it well suited to a host of demanding markets and applications. 18 18 discoverIE Group plc Annual Report and Accounts for the year ended 31 March 2019 discoverIE AR2019.indd 18 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:57 HEADINGdiscoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Cross-selling Growing sales well ahead of GDP Strategic report PROVIDING CHARGING INFRASTRUCTURE FOR ELECTRIC VEHICLES Electric vehicles provide a cleaner, reliable and efficient form of transportation. The requirements of the customer In order for electric vehicles to become a practical alternative to the combustion engine and hybrid vehicles, it is necessary to create a comprehensive network of charging stations, both in residential and commercial properties. Acal BFi has built a relationship with a provider of solutions for charging electric vehicles, including: retrofitting underground car parks; installing chargers in residential properties and large commercial use parking. The solution we developed Due to its knowledge of the products and capabilities of the D&M division, Acal BFi was able to partner with Myrra, a discoverIE D&M company, to provide a range of custom products to support the requirements of the customer. These include: ■ Bespoke power supplies – AC wall box chargers ■ Customised power supplies – DC wall box chargers for up to 1,000V DC (supporting the next generation of electric vehicles) ■ High power (1,000kW) charger for charging stations in commercial parking facilities ■ Wireless solutions for pay-to-use electric charging stations Benefits to the customer By partnering with Myrra, Acal BFi was able to combine their optical wireless connectivity with Myrra’s charging units, together with design support from the Group’s in- house wireless technology design centre, thus increasing the range of solutions and options available to the customer. The customer also benefited from the Group’s high degree of flexibility to create bespoke solutions, with a short time to market, enabling the customer to respond quickly to evolving market requirements and differentiate themselves from their competitors. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 19 discoverIE AR2019.indd 19 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:58 HEADING STRATEGY IN ACTION Acquisitions HOBART ELECTRONICS Continue building revenues Hobart Electronics, headquartered in the USA Hobart Electronics, headquartered in the USA and acquired in April 2019, designs, manufactures and acquired in April 2019, designs, manufactures and supplies customised transformers, inductors and supplies customized transformers, inductors and magnetic components for niche applications. and magnetic components for niche applications. Hobart is a good example of discoverIE’s Hobart is a good example of discoverIE’s acquisition strategy in action: acquisition strategy in action: ■ A profitable business sharing the essential DNA ■ Sales beyond Europe: 94% of revenues are in of our D&M division North America ■ Sales beyond Europe: 94% of revenues are in ■ Target markets: the markets served by Hobart North America include energy infrastructure and industrial, ■ Target markets: the markets served by Hobart approximately 74% of its sales include energy infrastructure and industrial, ■ Expansion of global footprint: manufacturing approximately 74% of its sales facilities in Arizona, Indiana and two larger sites ■ Expansion of global footprint: manufacturing in Mexico facilities in Arizona, Indiana and two larger sites ■ Focused on customised, low volume products in Mexico for niche applications ■ Focused on customised, low volume products ■ Experienced CEO and management team for niche applications remain with the business ■ Experienced CEO and management team Following acquisition, Hobart now operates as part remain with the business of Noratel’s US business within the D&M division In addition, Hobart Electronics is a bolt-on whilst retaining its distinct brand identity. acquisition which strengthens Noratel’s position in The strong local management, working the important North American market and brings together with the Noratel management team, attractive opportunities for operational and cross- are embracing the market opportunity and selling synergies. Following acquisition, Hobart investment capability that comes from being part now operates as part of Noratel’s US business of the discoverIE Group. within the D&M division while retaining its distinct brand identity. The strong local management, working together with the Noratel management team, is embracing the market opportunity and investment capability that comes from being part of the discoverIE Group. 20 20 discoverIE Group plc Annual Report and Accounts for the year ended 31 March 2019 discoverIE AR2019.indd 20 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:00 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Acquisitions Strategic report VARIOHM Variohm, headquartered in the UK and acquired in January 2017, a designer and manufacturer of electronic sensors, switches and motion- measurement systems for industrial, medical, transportation and renewable energy applications, is a good example of how discoverIE develop and invest in businesses following acquisition. Since acquisition, the following have been achieved: ■ Designed and launched several product offerings ■ Investment in and expansion of management team ■ Developed high value added sales focus ■ Increased efficiency and productivity ■ Strengthened finance function ■ Focus on key markets with strong success in medical and transportation ■ Established cross-selling with Acal BFi ■ Begun implementation of new ERP software More recently, discoverIE has acquired Positek Limited, a UK-based designer of rugged, high accuracy, linear, rotary tilt and submersible sensors, supplying international markets, with 60% of sales in the industrial sector. Positek now operates as part of the Variohm business within the D&M division, while retaining its distinct brand identity. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 21 discoverIE AR2019.indd 21 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:02 STRATEGY IN ACTION Investment Internationalising the business EXPANDING MAGNETICS PRODUCTION IN INDIA AND CHINA During the year, production ramp-up began in our new larger production facility in Bangalore, India. While the Group has an existing facility in Trivandrum, additional space was required for production of a new product range as well as increased production of existing product ranges. Bangalore was identified as the location for the new facility in order to be close to target customers. The Group has the ability to increase production capacity which allows for further growth, as customer demand requires. Additionally, the Group commenced the expansion of our magnetics component facility in China which, when complete later this year, will increase Myrra’s production capacity in Asia by around 70%. 22 discoverIE Group plc Annual Report and Accounts for the year ended 31 March 2019 discoverIE AR2019.indd 22 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:03 Strategic report Strategic report KEY STRATEGIC INDICATORS KEY STRATEGIC INDICATORS 1 INCREASE SHARE OF GROUP REVENUE FROM D&M1 2 INCREASE UNDERLYING OPERATING MARGIN 3 BUILD SALES BEYOND EUROPE1 MID-TERM TARGET2 75% MID-TERM TARGET2 8.5% MID-TERM TARGET2 30% FY19 FY18 FY17 FY16 FY15 FY14 61% 57% 52% 48% 37% 18% FY19 FY18 FY17 FY16 FY15 FY14 7.0% 6.3% 5.9% 5.7% 4.9% 3.4% FY19 FY18 FY17 FY16 FY15 FY14 21% 19% 19% 17% 12% 5% Definition The proportion of total Group revenue that is derived from business in the Design & Manufacturing (‘‘D&M’’) division. Why we measure this This is a measure of the implementation of our strategy; moving up the value chain into higher margin products that are generated in the D&M division. Commentary on performance The D&M division delivered 61% of Group sales, up from 57% last year. This is further progress towards our mid- term target of 75%. Definition Underlying operating profits as a percentage of sales. Why we measure this This is a measure of the operating efficiency of the Group. Commentary on performance Increased to 7.0% from 6.3% last year. The tenth consecutive year of increasing margin. This is further progress toward our mid-term target of 8.5%. Definition Sales in the Americas, Asia and Africa. Excludes the UK and Europe. Why we measure this Increasingly, we sell to companies with operations on more than one continent. It is important that we are able to support and supply those customers where they operate. Commentary on performance Twenty-one per cent of sales were generated beyond Europe, up from 19% last year, improving as a result of the acquisition of Santon and Cursor Controls (for which over 50% of sales in the period were outside Europe). 1 As a proportion of Group revenue 2 Mid-term is a three to five-year period starting in November 2016 Link to strategic priorities Link to strategic priorities Link to strategic priorities Innovative Electronics www.discoverieplc.com Stock Code: DSCV 23 discoverIE AR2019.indd 23 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:04 KEY PERFORMANCE INDICATORS 2 INCREASE CROSS-SELLING 3 UNDERLYING EPS GROWTH1 £10.6m Mid-term target £12m p.a. (was £10m p.a.) 22% Mid-term target >10% £10.6m £8.8m FY19 FY18 FY17 FY16 FY15 FY14 £4.6m £3.0m £0.9m £0.3m FY19 FY18 FY17 FY16 FY15 FY14 22% 16% 13% 10% 31% 20% 1 SALES GROWTH 14% CER Mid-term target well ahead of GDP FY19 FY18 FY17 FY16 FY15 FY14 FY19 FY18 FY17 FY16 FY15 FY14 14% 11% 14% 6% 36% 17% 8% ORGANIC1 Mid-term target well ahead of GDP 8% 6% (1)% 3% 2% 3% 3% 2% 1 Defined in note 2 of the Group financial statements 1 Defined in note 2 of the Group financial statements Definition Sales between Group operating companies. Why we measure this Cross-selling expands the sales opportunity by widening the range of products that can be sold. For acquired businesses, cross-selling provides new customer and geographical opportunities to enhance organic growth. In both cases, cross- selling creates stronger customer relationships. Commentary on performance Cross-selling generated £10.6m of Group sales, an increase of 20% over the prior year, reaching our three-year target of £10m p.a. early. Consequently, we have increased our target to £12m p.a. for the coming year. Definition Growth in underlying earnings per share (being underlying operating profit after tax divided by the weighted average fully diluted number of ordinary shares during the period). Why we measure this This measures the growth of the underlying earnings for each share and illustrates the level of profit growth being generated by the Group for each share in issue. Commentary on performance Underlying EPS growth for the year was very strong at 22% (FY 2017/18: 16%), with two-year growth of 42%. This is well ahead of our annual target of exceeding 10% and reflects widespread organic growth, acquisitions and improved operating efficiency. Definition Two measures are used to calculate sales growth: 1. Organic sales growth is calculated at constant exchange rates, excluding the first 12 months of acquisitions. 2. Constant Exchange Rate (CER) growth measures the total increase in sales, both organic growth and the additive effect of acquisitions. Why we measure this 1. Organic sales growth measures the success of the Group in generating new business and growth. 2. CER growth measures the total growth of the Group and drives overall levels of profitability and earnings. Commentary on performance Organic sales growth for the year of 8% was well ahead of GDP, with good growth in both divisions (D&M increasing by 10% and Custom Supply by 5%) reflecting the sustained focus on higher growth target markets. 24 discoverIE AR2019.indd 24 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:05 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report UNDERLYING EPS GROWTH1 4 DIVIDEND GROWTH 6% 5 RETURN ON CAPITAL EMPLOYED (ROCE)1 15.4% Mid-term target Progressive Mid-term target >15% 6 OPERATING CASH FLOW 1 93% Mid-term target >85% of underlying operating profit FY19 FY18 FY17 FY16 FY15 FY14 6% 6% 6% 6% FY19 FY18 FY17 FY16 FY15 FY14 11% 10% 15.4% 2 13.7% 13.0% 11.6% 12.0% 15.2% FY19 FY18 FY17 FY16 FY15 FY14 93% 2 90% 136% 100% 104% 100% 1 Defined in note 2 of the Group financial 1 Defined in note 2 of the Group financial statements statements 2 Last year’s financial statements have been 2 Last year’s financial statements have been restated as set out in note 2 of the Group restated as set out in note 2 of the Group financial statements which has impacted ROCE financial statements which has impacted ROCE and operating cash flow. and operating cash flow. Definition Growth in the amount derived from the Group’s earnings, that is paid to Shareholders annually, expressed in pence per share. Why we measure this The Group has a progressive dividend policy. Dividend growth is an important parameter as investors are often attracted by dividend growth prospects. The Group depends on supportive Shareholders for the future development of the Group, for example, when raising new equity for acquisitions. Commentary on performance The full-year dividend has increased by 6%, reflecting the strong performance of the year and confidence in future prospects. This is the ninth consecutive year of increase. Definition Underlying operating profits for the year as a percentage of capital employed (net assets including goodwill, plus net debt as at the end of the year). Why we measure this This is a measure of profitability and the efficiency with which capital is utilised. By including goodwill incurred in acquisitions, it measures the effectiveness of acquisitions. Commentary on performance Strong growth in underlying operating profit has driven a 1.7 ppt increase in return on capital employed to 15.4% (including the acquisitions of Santon and Cursor Controls), compared with the return for FY2017/18 of 13.7%, ahead of our three-year target of exceeding 15%. Definition Underlying EBITDA less working capital and capital expenditure as a percentage of underlying operating profits. Why we measure this This measures the conversion rate of underlying operating profits into cash. Commentary on performance Over the last year, operating cash flow was 93% of underlying operating profit, being ahead of our 85% target, despite the working capital required to support the strong organic sales growth. Over the last six years, operating cash flow has been consistently strong. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 25 discoverIE AR2019.indd 25 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:05 Strategic report OPERATING REVIEW “ This year has seen another strong Group performance, driven by widespread organic growth.” Nick Jefferies Group Chief Executive Overview Over recent years the Group has pursued a clear strategy, investing in initiatives that enhance design opportunities for customised products in targeted growth markets, namely: renewable energy; transportation; medical; and industrial & connectivity. The benefits of this approach are evident in these results with strong levels of organic revenue growth throughout the established business units in the D&M division, driving a 23% increase in its divisional underlying operating profits. Likewise, in the Custom Supply division, good organic growth and greater efficiency has resulted in a 15% increase in its underlying operating profit. Group organic sales in the year grew by 8% to £439m, driven by 10% organic growth in the D&M division and 5% in Custom Supply. Together with a 6% contribution from the acquisitions of Santon in February 2018 and Cursor Controls in October 2018, Group sales increased by 14% CER. Including the translation impact of a slightly stronger sterling on average since last year, reported Group revenues increased by 13%. Orders also performed well, growing by 8% organically to £454m and by 14% CER, when including acquisitions, leading to another record year-end order book at 31 March 2019 of £139m (up 12% organically year-on-year and 15% CER). Project design wins, a proxy measurement for new business creation, grew strongly during the year. The estimated lifetime sales value of design wins during the year was £266m, an increase of 40% compared with last year, with 75% of these wins in our target markets. Strong revenue growth has driven a 25% increase in underlying operating profit, rising by £6.1m to £30.6m, (26% CER), with underlying EPS increasing by 22% to 27.2p. Group Strategy The Group designs, manufactures and supplies highly differentiated, innovative components for electronic applications. Core to our value proposition is the understanding of our customers’ design challenges and the design and manufacture of engineered products to meet their needs, that are then supplied over the life of the customer’s production, typically five to seven years. In a fragmented market, there exists opportunities to consolidate certain manufacturers of customised products for the Group’s common customer base, which ranges from mid-sized OEMs (original equipment manufacturers) to multinational companies operating in multiple locations. Our four target markets (renewable energy, transportation, medical, and industrial & connectivity) are long-term, international growth markets driven by excellent fundamentals where our customers depend upon the Group’s products. 26 discoverIE AR2019.indd 26 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:05 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Our strategy comprises four elements: The Group’s progress with its strategic objectives is measured through key strategic indicators (“KSIs”), while progress with its financial performance is measured through key performance indicators (“KPIs”). Our KSIs and KPIs are mid-term targets over a three to five-year period from November 2016. 1. Grow sales well ahead of GDP over the economic cycle by focusing on structural growth markets; 2. Move up the value chain by continuing to build revenues in the higher margin D&M division; 3. Acquire businesses with attractive growth prospects and strong operating margins; 4. Further internationalise the business by developing sales in North America and Asia. Key strategic indicators 1 INCREASE SHARE OF GROUP REVENUE FROM D&M1 2 INCREASE UNDERLYING OPERATING MARGIN 3 BUILD SALES BEYOND EUROPE 1 MID-TERM TARGET2 75% MID-TERM TARGET2 8.5% MID-TERM TARGET2 30% FY19 FY18 FY17 FY16 FY15 FY14 61% 57% 52% 48% FY19 FY18 FY17 FY16 FY15 FY14 37% 18% 1 As a proportion of Group revenue 2 Mid-term is a three to five-year period starting in November 2016 7.0% 6.3% 5.9% 5.7% 4.9% 3.4% FY19 FY18 FY17 FY16 FY15 FY14 21% 19% 19% 17% 12% 5% The Group made good progress towards its strategic objectives during the year: ■ The D&M division accounts for 61% of Group sales (FY 2017/18: 57%), and 78% of the Group’s underlying profit contribution. Annualised for the acquisitions of Cursor Controls in October 2018, and Hobart and Positek in April 2019, D&M sales now represent 62.5% of Group sales. Importantly, customer concentration remains low with no one customer accounting for more than 4% of Group sales; ■ The growing proportion of the D&M division and the Group’s improving operating efficiencies have increased the Group operating margin by 0.7ppts over last year to 7.0% (FY 2017/18: 6.3%) despite additional investment to support future growth and an adverse impact of the weak solar market at Santon during the year; ■ Sales beyond Europe represented 21% of Group revenue (from 19% in FY 2017/18) improving as a result of the acquisitions of Santon and Cursor Controls (for which over 50% of sales in the period were outside Europe). On an annualised basis, including acquisitions, this would rise to 23%. We continue to seek acquisitions with international revenues. Our long-term ambition is to increase the share of Group revenue from D&M to 85% with an overall operating margin of 10% and sales beyond Europe of 40%. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 27 discoverIE AR2019.indd 27 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:06 Strategic report OPERATING REVIEW Key performance indicators 1 SALES GROWTH 2 INCREASE CROSS-SELLING 3 UNDERLYING EPS GROWTH 14% CER Mid-term target Well ahead of GDP £10.6m Mid-term target £12m p.a. (was £10m p.a.) 22% Mid-term target >10% 14% 11% 14% 6% 36% 17% FY19 FY18 FY17 FY16 FY15 FY14 £10.6m FY19 £10.6m 22% £8.8m £4.6m £3.0m £0.9m £0.3m FY18 FY17 FY16 FY15 FY14 16% 13% 10% 31% 20% 8% ORGANIC1 Mid-term target Well ahead of GDP 8% 6% (1)% 3% 2% 3% 3% 2% FY19 FY18 FY17 FY16 FY15 FY14 FY19 FY18 FY17 FY16 FY15 FY14 4 DIVIDEND GROWTH 5 ROCE1 6 OPERATING CASH FLOW 1 6% Mid-term target Progressive 15.4% Mid-term target >15% 93% Mid-term target >85% of underlying operating profit FY19 FY18 FY17 FY16 FY15 FY14 6% 6% 6% 6% FY19 FY18 FY17 FY16 FY15 FY14 11% 10% 15.4% 2 13.7% 13.0% 11.6% 12.0% 15.2% FY19 FY18 FY17 FY16 FY15 FY14 93% 2 90% 136% 100% 104% 100% 1 Defined in note 2 of the Group financial statements. 2 Last year’s financial statements have been restated as set out in note 2 of the Group financial statements which has impacted ROCE and operating cash flow. 28 discoverIE AR2019.indd 28 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:06 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report 22% 93% The Group has also made good progress with its KPIs this year: ■ Organic sales growth for the year of 8% was well ahead of GDP, with good growth in both divisions (D&M increasing by 10% and Custom Supply by 5%) reflecting the sustained focus on higher growth target markets; ■ Cross-selling generated £10.6m of Group sales, an increase of 20% over the prior year, reaching our three-year target of £10m p.a. early. Consequently, we have increased our target to £12m p.a. for the coming year; ■ Underlying EPS growth for the year was very strong at 22% (FY 2017/18: 16%), with two-year growth of 42%. This is well ahead of our annual target of exceeding 10% and reflects widespread organic growth, acquisitions and improved operating efficiency; ■ Strong growth in underlying operating profit has driven a 1.7ppt increase in return on capital employed to 15.4% (including the acquisitions of Santon and Cursor Controls) compared with the return for FY 2017/18 of 13.7%, ahead of our three-year target of exceeding 15%; ■ Over the last year, operating cash flow was 93% of underlying operating profit, being ahead of our 85% target, despite the working capital required to support the strong organic sales growth. Over the last six years, operating cash flow has been consistently strong. Divisional results Divisional and Group performances for the year ended 31 March 2019 are set out and reviewed below. FY 2018/19 Underlying operating profit1 £m Margin Revenue £m 11.2% 5.0% 222.6 165.3 29.8 8.6 (7.8) Revenue £m 266.2 172.7 FY 2017/18 Underlying operating profit1 £m Margin 24.2 10.9% 4.5% 7.5 (7.2) Revenue growth 20% 4% CER revenue growth Organic revenue growth 21% 5% 10% 5% 438.9 30.6 7.0% 387.9 24.5 6.3% 13% 14% 8% Design & Manufacturing Custom Supply Unallocated costs Total 1 Underlying operating profit excludes acquisition-related costs and exceptional costs. With approximately 85% of Group sales in non-sterling By working with high quality customers in our focus markets, currencies, the translation of Group results into sterling has we aim to build an order book that leads to long-term, been slightly impacted by stronger sterling year-on-year, with repeating revenues. Group revenue growth reducing from 14% CER to 13% on a reported basis. Design wins Project design wins are a proxy measurement for new Order book Orders have continued to grow well with the year-end order business creation and are a key driver of organic sales growth. By working with customers at an early stage in their project book reaching a record year-end high of £139m, an increase design cycle, we identify opportunities for custom products. of 15% CER over last year. On an organic basis, the Group order book increased by 12%, with the D&M order book growing by 17% organically and the Custom Supply order book by 4% organically. The order book growth is driven by repeating revenues from existing customer projects and the conversion of customer design wins from new projects into orders. Design opportunities take on average 18 months to develop to conclusion, at which point they become a design win. Once in production, the design win is expected to create a recurring revenue stream over a number of years. Design wins again grew very strongly this year. The estimated lifetime sales value of design wins during the period was £266m, an increase of 40% over the prior year (FY 2017/18: Over 80% of the order book is for delivery within 12 months £190m), and on an estimated annual revenue basis represents from the time of order, and it is this conversion into sales 16% of reported revenue, up from 12% last year. A portion of which is driving the continued momentum in sales into design wins are to replace existing projects as they become FY2019/20. end of life. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 29 discoverIE AR2019.indd 29 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:06 Strategic report OPERATING REVIEW Design & Manufacturing (“D&M”) Division The D&M division designs, manufactures and supplies highly differentiated, innovative components for electronic applications. Over 80% of the products are manufactured in-house, the balance being manufactured by approved (+25%). The underlying operating margin of 11.2% was 0.3ppts higher than last year (FY 2017/18: 10.9%), with higher gross margins partly offset by operational investment to support infrastructure, for example, local IT systems, required for future growth, and was also partly impacted by solar market third-party contractors. The division’s principal manufacturing slow-down during the year. facilities are in China, India, Mexico, the Netherlands, Poland, Slovakia, Sri Lanka and Thailand. During the year, production ramp-up began in our new, larger production facilities in Bangalore, India for magnetic components; Bratislava, Slovakia for fibre optic components; and Seoul, Korea for electromagnetic shielding products. Additionally, we commenced the expansion of our magnetic components production facility in China which, when complete later this year, will increase Myrra’s production capacity in Asia by around 70%. The benefit of design wins from previous years generating new revenue and strong demand from our key target markets helped to deliver strong organic growth in the division with sales growth of 10% and order growth of 11%. This continued the momentum seen last year when organic sales and orders grew by 11% and 10% respectively. Sales growth has been consistently strong across each of the last nine quarters, with growth between 9% and 11%, with one quarter at 14%. Geographically, sales grew by 12% in Asia, Germany and the Nordic region; by 9% in the Rest of Europe and North America and 6% in the UK. Revenues beyond Europe were 27% of D&M revenues (up from 26% last year). The effect of China / US tariffs is limited. Of £32m sales into Santon In February 2018, the Group acquired the Santon Group, a Dutch-based designer and manufacturer of highly differentiated, patented, direct current (“DC”) switches for use in solar, industrial and transportation markets. The acquisition was consistent with the Group’s strategy of targeting structural growth markets, in this case renewable energy, transportation and industrial markets, building on its established position in niche components for solar power. Following anticipated changes to Chinese solar tariffs, sales and orders in Santon’s solar business slowed in the first half of the year as the market adapted. In the second half, orders recovered strongly such that full-year orders were at a similar level to the prior year, lifting second half sales by 12% over the first half. The lower solar sales for the year as a whole also had an adverse impact on divisional margins. The growing order book bodes well for future organic growth. The potential for the Chinese tariff reduction and the subsequent temporary drop in sales was anticipated in the deal structure at the time of acquisition. As a result, a repayment was made to the Group by the vendor of the €2.5m (£2.2m) capital expenditure contribution made by the Group at the time of acquisition and the initial contingent the US, £4.0m were manufactured in China and subject to a payment of up to €10m was not payable. tariff (mostly at 25%), with our pass-through policy applying. With our production operations located internationally in India, Sri Lanka, Thailand and now Mexico, production for the US is being reduced in China and transferred to other countries where appropriate. We expect this to continue in the year ahead, minimising the effects of such tariffs on our customers. Organic sales growth of 10%, combined with an 11% sales increase from acquisitions, resulted in overall sales increasing by 21% CER. Including a 1% reduction in revenue due to the impact of currency translation, reported divisional revenue increased by 20% to £266.2m (FY 2017/18: £222.6m). D&M revenue accounted for 61% of Group revenue (FY 2017/18: 57%) representing further progress towards our mid-term target for D&M to reach 75% of Group revenue, and generated 78% of the Group’s underlying profit contribution, up 2ppts on last year (FY 2017/18: 76%). Underlying operating profit of £29.8m was £5.6m (+23%) higher than last year (FY 2017/18: £24.2m) and up £5.9m CER Sales in Santon’s transportation and industrial businesses grew by 8% during the year and are expected to continue to grow, having recently won a number of new projects. The growth prospects for Santon remain excellent. Its high performance switches are suitable for a number of growth markets, in particular transportation such as rail, energy storage, solar energy and industrial markets, where it can benefit from access to the Group’s wide customer base and geographical presence. A number of initiatives are underway, developing these opportunities. Cursor Controls In October 2018, the Group acquired the Cursor Controls Group, a UK-based designer and manufacturer of human to machine interface (“HMI”) products for medical, industrial and transportation applications. Its products include trackballs, touchpads and rugged keyboards, which are custom designed for specific applications, and are highly complementary to the Group’s existing business. The acquisition is consistent with discoverIE’s focus on structural 30 discoverIE AR2019.indd 30 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:06 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report growth markets with over 60% of its revenues derived from Approximately 50% of revenues are generated from the medical and industrial sectors. Over 90% of its sales are customers in Europe, 20% from customers in North America, to international markets outside the UK, with 40% being into around 15% from customers in Asia Pacific and 15% in the North America, Asia and other non-EU markets. The business, UK. Following acquisition, Positek now operates as part of the which is based in Newark, UK, with manufacturing facilities Variohm business within the D&M division while retaining its in the UK and Belgium, continues to retain its distinct brand distinct brand identity. identity. The business was acquired for an initial cash consideration of Cursor Controls was acquired for an initial cash consideration £4.2m on a debt free, cash free basis, with further contingent of £19.0m on a debt free, cash free basis, before expenses, and cash consideration of up to £0.4m, payable subject to the generated revenue of £7.9m for its year ended 31 December achievement of certain integration and profit targets in the 2017, with an underlying operating profit of £2.1m. In addition, 18 months following acquisition. Revenues for the year ended a contingent payment of up to £4.0m will be payable subject 31 August 2018 were £1.5m, generating an underlying EBITDA to Cursor Controls achieving certain profit growth targets of £0.6m. during the three-year period ended 31 December 2021. Since acquisition, Cursor Controls has performed strongly, Custom Supply division The Custom Supply division provides customised electronic, with excellent growth in orders and sales including a large photonic and medical products for technically demanding new order from a major international customer. As with applications in industrial, medical and healthcare markets. other acquisitions, we expect the business to benefit from The business operates similarly to the D&M division, but access to discoverIE’s broader, international customer base, mostly with products sourced from third-party suppliers to create new revenue opportunities from cross-selling within rather than manufactured in-house. As such, operating the Group. Hobart Electronics In April 2019, the Group acquired Hobart Electronics, a US headquartered business founded in 1969 which designs, manufactures and supplies customised transformers, inductors and magnetic components for niche applications. As well as manufacturing sites in Indiana and Arizona, it margins are lower than in D&M. A key element of the division’s strategy is to grow the proportion of cross-sales from products manufactured by the D&M division in a manner that complements, but does not compete with or limit growth of, our highly valued third-party suppliers, thereby enhancing the Group’s overall value proposition to customers and suppliers. has two larger manufacturing sites in Mexico and employs Given the bespoke nature of the product offering, a high around 260 people. Over 90% of revenues are generated degree of technical knowledge is required during the sales from customers in North America. The markets served by process with the division’s in-house engineers helping Hobart include energy infrastructure and industrial, which customers to solve their design challenges. The Group is collectively account for approximately 74% of sales. Following the only industrial electronics business which provides acquisition, Hobart now operates as part of Noratel’s US such a comprehensive range of customer-specific products business within the D&M division while retaining its distinct and solutions across Europe. The division comprises two brand identity. businesses, Acal BFi and Vertec. The business was acquired for an initial cash consideration of Acal BFi supplies industrial markets and accounts for most $15.2m (£11.7m) on a debt free, cash free basis, with a further of Custom Supply divisional revenue. It supplies products contingent cash consideration of up to $4.0m (£3.1m) payable from a selected group of manufacturers (including the subject to the achievement of certain growth targets over the Group’s D&M businesses) to customers in five technology next three years. Revenues for the year ended 31 December 2018 were $13.0m (£10.0m), generating a pre-tax profit of $2.0m (£1.5m). Positek In April 2019, the Group also acquired Positek, a UK-based areas: Communications & Sensors, Power & Magnetics, Electromechanical & Cabling, Microsystems, and Imaging & Photonics. The business operates across Europe, with centralised warehousing, purchasing, finance, customer contact management and IT systems. Vertec supplies exclusively-sourced medical imaging and radiotherapy designer and manufacturer of rugged, high accuracy linear, products into medical and healthcare markets in the UK and rotary, tilt and submersible sensors, supplying international South Africa. markets with 60% of sales into the Industrial sector. Positek, which was founded in 1992, sells products worldwide that are renowned for their quality, precision and robustness. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 31 discoverIE AR2019.indd 31 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:06 Strategic report OPERATING REVIEW The division’s trading performance this year was good, particularly in Germany, Italy and the Netherlands, driving 5% overall organic sales growth in the year, with organic growth of 2% in the first half and 8% in the second half; first half iv) Industrial & connectivity Technology is creating opportunities for connectivity everywhere, which is becoming increasingly important in industry. A report by the research firm Markets-and-Markets growth excluding one large order shipment in the prior year expects the overall market size for global machine-to- was 6%. Including a 1% reduction due to translation movements, reported divisional revenue increased by 4% to £172.7m (FY 2017/18: £165.3m). Underlying operating profit of £8.6m was £1.1m (+15%) higher than last year (FY 2017/18: £7.5m) while the underlying operating margin was 5.0%, 0.5ppts higher than last year, achieving our mid-term target margin for this division. Target markets The Group focuses on four target markets, which account for around 71% of D&M turnover and 66% of Group turnover: transportation, medical, renewable energy and industrial & connectivity. These target markets are expected to drive the Group’s organic revenue growth well ahead of GDP over the economic cycle and create acquisition opportunities. Growth in these markets is driven by the increasing electronic content, connectivity and communication in products, and by global macro trends such as an ageing affluent population, an expanding transport infrastructure, and the increasing need for renewable sources of energy. This year, organic machine connections to rise by 13.2% CAGR between 2016 and 2021. With the growing adoption of electronics and connectivity of industrial devices, the definition of this target market is being broadened to include key, growth industrial applications, reflecting the increasing contribution of the D&M division. Cross-selling For acquired businesses, cross-selling through our Custom Supply division or between other D&M businesses provides new customer and geographical growth opportunities. It takes typically three years for cross-selling to become established within a business unit, due to project lead-in cycles, and then develop into a significant additional source of revenue, as evidenced by the Group’s longer standing acquisitions of MTC and Myrra, which both now count intra- Group cross-selling as one of their largest customers. This year, cross-selling revenues, which now account for 2.4% of Group sales, were up 20% to £10.6m from the previous year (FY 2017/18: £8.8m), exceeding our three-year target set at 31 March 2017 of £10m and achieved earlier than anticipated. revenue growth in these target markets was 12%, compared We have increased this target for the year ahead to £12m. with 8% for the Group as a whole. i) Transportation Transport markets continue to grow internationally. The electronics content is rising, driven by electrification, safety, automation and convenience. IC Insights, an electronics market research company, expects integrated circuit sales, a proxy for electronic content, into the automotive market to rise by a CAGR of 13.4% between 2016 and 2021. ii) Medical This market is driven by the increasing use of technology in Acquisitions There are numerous opportunities to acquire businesses that will enhance, strengthen and build the Group. Good acquisitions, at the right price, which build complementary product and/or geographical capability and supply common markets and customers, create future organic growth opportunities and build value for Shareholders. We acquire businesses that are successful, profitable and growing in our existing and adjacent technology areas, with good growth prospects and long-term growth drivers similar diagnosing, monitoring and controlling medical conditions, as to the Group’s target markets. Typically, the businesses we acquire are led by entrepreneurial managers who wish to remain following acquisition. We encourage this as it helps to retain a decentralised, entrepreneurial culture. well as an increasingly affluent and ageing global population which now accounts for the majority of healthcare spending in developed economies. A report by Research+Markets forecasts the global sales of medical electronics to grow by a CAGR of 6.8% between 2017 and 2022. iii) Renewable energy The increasing global requirement for clean electricity is leading to the rapid adoption of sustainable energy generation. So much so that, according to the World Energy Outlook 2017, two-thirds of global investment in power generation up to 2040 will be into renewable energy, primarily wind and solar. 32 discoverIE AR2019.indd 32 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:07 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Our primary acquisition focus is to invest for growth, with operational efficiency improvement. As such, the D&M division operates a decentralised structure with business units operating to pre-agreed business plans. We support growth investment requirements and develop operational performance according to the requirements of each business Group priorities for the year ahead Our priority for the year ahead is to deliver further good growth in earnings and operating margins, through: 1. Organic sales growth, including: ■ High quality design wins in target markets unit. Depending upon the circumstances, we add value in ■ Continued emphasis on cross-selling. some or all of the following areas: ■ Internationalising sales channels and expanding the customer base, including via Group cross-selling initiatives (see above); ■ Developing and expanding the product range; ■ Investing in management capability (“scaling up”) and succession planning; ■ Capital investment in manufacturing and infrastructure; ■ Improving manufacturing efficiency; ■ Enabling growth with larger customers as a consequence of the stronger Group balance sheet; ■ Infrastructure efficiencies, such as warehousing and freight; ■ Finance and administrative support, such as treasury, banking, legal, pension, tax and insurance, risk and control; and ■ Expanding the business through further acquisitions. Acquisition performance Over the last eight years, 14 businesses have been acquired in the D&M division at a cost of £187m, including two since the year end, and a further two acquired in the last two years. We measure acquisition return on investment (“ROI”) using the current year operating profit attributable to each business over the acquisition costs (including earn-outs, expenses of acquisition and integration costs). The Group, which has a weighted average cost of capital (“WACC”) of c.9%, targets an acquisition EBIT ROI of 15% within two years. Overall, the weighted average ROI of the ten acquired businesses owned for at least two years was 20%, up from 17% in the prior year. During the year, of these ten businesses, seven significantly exceeded our target ROI with a range of 24% to 115%, mostly the result of several years’ 2. Developing new and expanded production facilities. 3. Integrating the Hobart and Positek acquisitions through: ■ Organic growth; ■ Integration into Noratel and Variohm respectively; ■ Establishment of cross-selling. 4. Improving underlying operating margins through: ■ Further growth in the D&M contribution to Group performance; ■ Ongoing efficiency initiatives; ■ Operational gearing benefits; ■ Continued investment in our commercial and manufacturing infrastructure. 5. Further value-enhancing acquisitions. Summary and outlook This year has seen an excellent Group performance with strong organic growth complemented by the contribution from acquisitions, resulting in 22% growth in underlying earnings per share. As a business we are focused on four key structurally growing markets with 66% of Group revenue and 75% of design wins derived from our target markets of renewable energy, transportation, medical and industrial & connectivity. discoverIE is a natural consolidator in a highly fragmented market, acquiring high quality Design and Manufacturing businesses to build the Group’s technology capability and extend our geographical coverage. We have made three acquisitions in the last eight months (Cursor Controls, Hobart and Positek), all of which are high quality, higher margin custom design businesses, selling into international markets, and further building our business in line with our strategic profitable post-acquisition growth from those businesses. objectives. Two were slightly below target, while the smallest business performed below our WACC; changes to this business are being made which are expected to improve its profitability in the year ahead. With a record year-end order book and a high level of design wins, we are well positioned for continued progress and excited by the opportunities that lie ahead as we continue to build a high-quality, global business. Nick Jefferies Group Chief Executive 4 June 2019 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 33 discoverIE AR2019.indd 33 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:07 Strategic report FINANCE REVIEW “ The Group’s gross margin has increased by 7ppts in the last ten years, a reflection of the differentiated nature of our products and the acquisitions of higher margin businesses.” Simon Gibbins Group Finance Director Orders, revenue and gross profit Group revenue for the year increased by 13% over last year to £438.9m, and by 14% CER, the difference reflecting the translation impact of sterling strength on average since last year. Organic revenue increased by 8%, while the acquisitions of Santon last year and Cursor Controls this year contributed an additional 6% growth in revenues. £m Reported revenue FX translation impact Underlying revenue (CER) Acquisitions Organic revenue FY 2018/19 438.9 438.9 (24.7) 414.2 FY 2017/18 387.9 (3.9) 384.0 – 384.0 % 13 14 8 Group orders also increased by 14% CER with a book-to-bill ratio of 1.03 (H1: 1.03, H2: 1.04). Organically, orders were also up 8% for the year. With approximately 80% of Group sales in non-sterling currencies, the translation of Group results into sterling was impacted by its strength on average since last year. While sterling was in line with the euro during the year, it appreciated 3% against Nordic currencies on average and weakened 1% against the US dollar. Gross profit for the year of £145.0m increased by 14% over last year (FY2017/18: £126.7m) with gross margin for the year of 33.0% being 0.3ppts ahead of last year (FY 2017/18: 32.7%). The Group’s gross margin has increased by around 7ppts in the last ten years, a reflection of the differentiated nature of our products and the acquisitions of higher margin businesses. Underlying operating costs Reported costs were up 12% as detailed below. Excluding underlying adjustments, Group underlying operating costs increased by 13% CER. Adjusting for the pre-acquisition costs of Santon and Cursor Controls, underlying operating costs increased by 5% organically, reflecting investment in D&M businesses to support strong revenue growth. As a percentage of sales, underlying operating costs for the year reduced by 0.4ppts to 26.0% (FY 2017/18: 26.4%), a reflection of strong sales growth and tight cost control. 34 discoverIE AR2019.indd 34 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:08 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Strategic report £m Organic operating costs Acquisition operating costs Underlying operating costs (CER) FX translation Underlying adjustments Acquisition-related costs Amortisation of acquired intangibles Exceptional items1 IAS 19 pension administration cost Reported operating costs FY 2018/19 FY 2017/18 106.9 7.5 114.4 1.8 5.9 (0.2) 101.4 – 101.4 0.8 0.8 4.9 1.2 0.4 122.3 0.3 109.4 % 5 13 12 1 Last year’s exceptional charge within administrative expenses restated as set out in note 2 of the Group Financial Statements £m Selling and distribution costs Administrative expenses Reported operating costs FY 2018/19 FY 2017/18 57.7 64.6 122.3 54.5 54.9 109.4 Selling and distribution costs, and administrative expenses, both include the additional operating costs of the recently acquired businesses. Underlying adjustments, which are included in the financial statements within administrative expenses, are discussed below. Group operating profit and margin Group underlying operating profit for the year was £30.6m, up £6.1m (+25%) on last year, and up 26% CER, delivering a Group underlying operating margin of 7.0%, up 0.7ppts on last year. Reported Group operating profit for the year (after accounting for the underlying adjustments discussed below) was £22.7m, an increase of £5.4m (+31%) compared with last year (FY 2017/18: £17.3m). £m Underlying Underlying adjustments Acquisition-related costs Amortisation of acquired intangibles Exceptional items (restated) IAS 19 pension cost Reported FY 2018/19 FY 2017/18 Operating profit Finance cost Profit before tax Operating profit Finance cost Profit before tax 30.6 (3.4) 27.2 24.5 (2.6) 21.9 (1.8) (5.9) 0.2 (0.4) 22.7 – – – – (3.4) (1.8) (5.9) 0.2 (0.4) 19.3 (0.8) (4.9) (1.2) (0.3) 17.3 – – – (0.1) (2.7) (0.8) (4.9) (1.2) (0.4) 14.6 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 35 discoverIE AR2019.indd 35 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:11 FINANCE REVIEW Underlying adjustments Underlying adjustments for the year comprise: acquisition- Financing costs Group finance costs of £3.4m (FY 2017/18: £2.7m), comprised related costs of £1.8m (FY 2017/18: £0.8m); the amortisation underlying finance costs (being interest and facility fees of acquired intangibles of £5.9m (FY 2017/18: £4.9m); and arising from the Group’s banking and pooling facilities), the IAS19 legacy pension cost of £0.4m (FY 2017/18: £0.3m). together with an IAS 19 pension finance charge. In addition, there was net exceptional income this year of £0.2m, being exceptional income of £1.1m related to income from an insurance policy in respect of a fraud uncovered during the year (as detailed below), offset by an exceptional charge of £0.9m related to a pension equalisation provision for Guaranteed Minimum Pensions (GMP) which is covered in more detail in the pension section below. Underlying finance costs for the year were £3.4m, an increase of £0.8m from last year (FY 2017/18: £2.6m), due to higher average debt balances during the year following the acquisitions of Santon for £24.0m in February 2018 and Cursor Controls for £19.0m in October 2018. Included within finance costs is the amortisation of the upfront arrangement fees associated with the Group’s syndicated banking facility of During the year, divisional internal control processes approximately £0.3m per annum, rising to £0.4m next year. identified a fraud, perpetrated against the Group in a small US subsidiary. Decisive action was taken to resolve the matter with new management put in place and tightened Group and local controls. Of the total fraud cost of £4.0m, £2.6m has been recovered this year from insurance after the excess deductible. The fraud was conducted over a period of four The IAS 19 pension finance cost for the year was nil, compared with £0.1m last year. Underlying tax rate The underlying effective tax rate for the year was 25%. This was approximately 1ppt higher than last year due mainly to years of which £1.5m of the fraud cost was incurred this year, increased profitability in higher tax territories. £1.2m last year and a further £1.3m in the previous two years. The exceptional income of £1.1m for this year comprises the insurance receipt of £2.6m offset by the fraud cost incurred this year of £1.5m. Acquisition-related costs of £1.8m comprised expenses related to the acquisition of Cursor Controls in October 2018 of £0.9m, contingent consideration of £0.5m paid in relation to earlier acquisitions and £0.4m incurred in relation to the post year-end acquisitions of Hobart and Positek. The £1.0m The overall effective tax rate of 24% was slightly lower than the underlying effective tax rate mainly due to higher tax credit available on the amortisation of acquired intangibles. Profit before tax and EPS Underlying profit before tax for the year was £27.2m, an increase of £5.3m (24%) compared with last year. This increase resulted in underlying diluted earnings per share for the year of 27.2p, up 22% on last year. increase in the amortisation charge since last year relates After the underlying adjustments discussed above, reported to the amortisation of intangibles identified as part of the acquisitions of Santon last year and Cursor Controls this year. The total annualised amortisation cost for next year is expected to be around £7.0m, excluding the impact of the two businesses (Hobart and Positek) which were acquired profit before tax of £19.3m was 32% higher than last year (FY2017/18: £14.6m), with reported fully diluted earnings per share of 19.4p, an increase of 37% on last year (FY2017/18: 14.2p). after the year end. £m Underlying Underlying adjustments Acquisition-related costs Amortisation of acquired intangibles Exceptional items (restated) IAS 19 pension cost Reported 36 FY 2018/19 FY 2017/18 PBT 27.2 (1.8) (5.9) 0.2 (0.4) 19.3 EPS 27.2p 19.4p PBT 21.9 (0.8) (4.9) (1.2) (0.4) 14.6 EPS 22.3p 14.2p discoverIE AR2019.indd 36 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:11 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Strategic report Working capital Working capital at 31 March 2019 was £67.2m, equivalent to Cash flow Net debt at 31 March 2019 was £63.3m, compared with £52.4m 14% of annualised final quarter sales at CER. This compares at 31 March 2018. The increase of £10.9m results mainly from with working capital of £60.9m at 31 March 2018, also at 14% of last year’s annualised final quarter sales at CER. Continued the Cursor Controls acquisition in October 2018. Excluding the upfront costs and expenses related to acquisitions, net debt tight management of working capital has kept this ratio in would have reduced by £13.3m to £39.1m. line with last year, despite increased sales in the D&M division, which, as a manufacturer, holds raw material and more finished goods than in Custom Supply, and hence has lower stock turns (3.8 times in D&M compared with 10.9 times in Custom Supply). This, in turn, results in higher working capital as a percentage of sales in the D&M division (19% in D&M compared with 10% in Custom Supply). Group stock turns were 5.1, 0.2 turns better than last year despite the increasing percentage of D&M sales. Group trade debtor days and trade creditor days outstanding at 31 March 2019 were at 54 days (down 1 day) and 63 days (consistent with last year) respectively. ROCE for the year (return on capital employed, as defined in note 2 to the Group financial statements) on our organic business was 15.4%, up 1.7ppts on last year driven by increased profitability and operating efficiency. This is ahead of our target to achieve a ROCE of at least 15%. Net debt at 1 April Free cash flow (see table below) Acquisition-related cash flow Executive share option exercises Equity issuance Net exceptional receipt/(cost) (restated) Legacy pension Dividends Foreign exchange impact Net debt at 31 March FY 2018/19 FY 2017/18 (52.4) 21.4 (24.2) (1.6) 0.1 1.1 (1.7) (6.7) 0.7 (30.0) 15.8 (25.4) (1.5) – (3.0) (1.7) (6.2) (0.4) (63.3) (52.4) Net acquisition cash flows of £24.2m comprise a £19.0m upfront cash payment for the acquisition of Cursor Controls in October 2018, £1.5m of acquisition adjustments for acquired cash and working capital, acquisition costs of £1.6m and the cash cost of earn-out payments made in the period of £2.1m. The net cash receipt in respect of the fraud uncovered during the year (see Underlying adjustments above) totalled £1.1m (being insurance proceeds of £2.6m offset by the cash loss incurred in the year of £1.5m). Additionally, £1.5m of tax was paid in respect of executive share options which were exercised during the year. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 37 discoverIE AR2019.indd 37 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:13 FINANCE REVIEW Dividend payments increased by £0.5m to £6.7m following the 6% dividend increase last year. The Group will continue to review the level of future dividend growth in relation to its policy of long-term dividend cover of over three times underlying earnings per share. Operating cash flow and free cash flow (see definitions in note 2 to the Group financial statements) for the year compared with last year are shown below. £m Underlying profit before tax Finance costs Non-cash items1 Underlying EBITDA Working capital (restated)2 Capital expenditure Operating cash flow Finance costs Taxation Free cash flow FY 2018/19 FY 2017/18 27.2 3.4 6.4 37.0 (3.2) (5.2) 28.6 (3.4) (3.8) 21.4 21.9 2.6 4.8 29.3 (2.9) (4.3) 22.1 (2.6) (3.7) 15.8 1 Non-cash items comprise depreciation (£4.6m), amortisation (£0.6m) and share-based payments (£1.2m) Banking facilities During February 2019, the Group increased its syndicated banking facility from £120m to £180m and extended the remaining term of the facility by two years out to four years ending in June 2023, with an option exercisable by the Group to extend the facility by a further year to June 2024. In addition, the Group has a £60m accordion facility which it can use to extend the total facility up to £240m. The syndicated facility is available both for acquisitions and for working capital purposes, and now comprises six lending banks. With net debt at 31 March 2019 of £63.3m, the Group’s gearing ratio was 1.7 times (FY 2017/18: 1.5 times), being defined as net debt divided by underlying EBITDA (annualised for acquisitions). Following the placing on 18 April 2019, year-end gearing would have reduced on a pro forma basis to 1.4 times, with our target gearing range being between 1.5 and 2.0 times. Balance sheet Net assets of £134.7m at 31 March 2019 were £7.9m higher than at the end of the last financial year (31 March 2018: £126.8m). The increase primarily relates to the net profit for the year partly offset by the payment of last year’s final 2 Last year’s inventory restated as set out in note 2 of the Group Financial dividend. The movement in net assets is summarised below: Statements Underlying EBITDA of £37.0m was 26% higher than last year. £m £3.2m was invested into working capital, to support strong organic D&M sales growth of 10% (being additional organic D&M sales of £22.3m). This additional working capital equates to 14% of D&M sales, 5ppts below the 19% average for the D&M division. Capital expenditure at £5.2m was £0.9m higher than last year with increased investment in the D&M division. Operating cash flow of £28.6m, which was up 29% on last year, represents 93% of underlying operating profit, ahead of our 85% conversion target. Free cash flow (after finance costs and taxation) was £21.4m; at 104% of underlying profit after tax, again ahead of our target of 90%. Net assets at 31 March 2018 (restated) Net profit after tax Dividend paid Currency net assets – translation impact Gain on defined benefit scheme Equity issuance Share-based payments (inc tax) Net assets at 31 March 2019 FY 2018/19 126.8 14.6 (6.7) (1.1) 0.1 0.1 0.9 134.7 38 discoverIE AR2019.indd 38 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:13 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Defined benefit pension scheme The Group’s IAS19 pension liability, associated with its legacy Risks and uncertainties The principal risks faced by the Group are detailed on defined benefit pension scheme, reduced during the period pages 42 to 45. These risks include, but are not limited to: by £0.5m, from £3.0m at 31 March 2018 to £2.5m at 31 March the economic environment, particularly within Europe; the 2019. This mainly results from contributions of £1.7m made impact arising from the UK’s decision to leave the European by the Group partially offset by increased gilt and corporate Union; the performance of acquired companies; loss of bond rates during the year. Annual payments of £1.7m major customers or suppliers; technological change; major remain payable (growing by 3% each year in accordance business disruption; cyber security; inventory obsolescence; with the plan agreed with the pension trustees in 2009) until product liability; liquidity and debt covenants; exposure to March 2022. The triennial valuation of the scheme is being adverse foreign currency movements; obligations in respect undertaken based on valuations as at 31 March 2018. of a legacy defined benefit pension scheme; and loss of key In October 2018, it was ruled that the trustees of Lloyds personnel. Banking Group had a duty to remove inequalities in scheme The Group’s risk management processes cover identification, benefits that arose under Guaranteed Minimum Pensions impact assessment, likely occurrence and mitigation actions. (GMPs) being unequal between men and women. This has Some level of risk, however, will always be present. The Group affected many UK companies with defined benefit schemes. is well positioned to manage such risks and uncertainties, As a result of this ruling, the liabilities of the pension scheme if they arise, given its strong balance sheet and committed increased by £0.9m with a corresponding exceptional charge being incurred. banking facility of £180m. Brexit discoverIE does not anticipate a material direct tariff impact Simon Gibbins Group Finance Director from Brexit. As an international Group, only 15% of sales are in the UK. Over 90% of these sales are either manufactured 4 June 2019 in the UK, or sourced from the US and Asia. Likewise, most of our UK businesses sell to UK customers. Where there are sales to Europe, products are already low or zero rated for WTO purposes, and were rates to apply, we would seek to apply our customer pass-through policy. Indirect risk remains in terms of customer demand and the impact from a depreciation of sterling which would increase import costs. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 39 discoverIE AR2019.indd 39 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:13 Strategic report RISK MANAGEMENT RISK MANAGEMENT FRAMEWORK In delivering value to our Shareholders, our employees and The risk management framework, including a risk register detailing the Group’s key risks, is regularly reviewed by the Group Executive Committee. The risk register details the potential impact and likelihood of the respective risks on the other stakeholders, we need to evaluate and manage the risks Group, linking each risk to the Group’s corporate strategy. The faced across our entire organisation. These may be affected register also evaluates the potential mitigants and controls, by a variety of factors, some of which we cannot control. and the residual risks remaining as a result of the Group’s Many of the risks are similar to those faced by comparable internal control processes. The Group Executive Committee companies in terms of scale and operations. The Board of Directors has overall responsibility for the Group’s risk appetite and risk management strategy. Oversight of risk management is undertaken by the Audit and Risk Committee which ensures that there is an effective risk management strategy and framework. The Audit and Risk monitors the key risks and reports to the Board via the Audit and Risk Committee on the key risks facing the Group. The Group Executive Committee also monitors the internal control processes put in place to address the identified risks. Further information on the Group’s principal risks and uncertainties is detailed on pages 42 to 45. Committee supports the Board by monitoring the Company’s The Company’s risk management framework follows a three risk management framework, identifying areas of risk, lines of defence model. The first line of defence is operational challenging control weaknesses and providing independent management in our businesses. Day-to-day risk management assessment on the effectiveness of the Group’s internal controls and risk management systems. Further information controls, policies and procedures are implemented and monitored by the local management teams with oversight on the Audit and Risk Committee and its activities can be and review by divisional management. Relevant internal found on pages 74 to 80. control systems are in place to identify, evaluate and manage discoverIE applies the Enterprise Risk Management the Group’s business risks. framework to identify potential events that may affect The second line of defence comprises Group functions such the Group and manage the associated risks. The risk as legal, IT, treasury, tax, quality and risk. This focuses on management framework is made up of five steps to identify, monitoring and compliance with risk control systems and assess and mitigate risks. processes implemented by the Group. I d e n t i fy and assess i n t e r n a l a nd external risks Objective: foster a culture of risk management to effectively execute discoverIE’s corporate strategy ctiveness n efforts r effe tio a ig t i m f o o t i n o M C a o n m d m m u i ti g n ic tio a ate risks n plans m s, and b ilit y, c o ntrols, d p r o c e d ures h s y st e E s t a b l i s a a c c o u n t s a i c i e p o l n D e t e r r i m s i k n r e e a p p s p o n s e r o p r i a t e The internal audit function was enhanced during the year, including the recruitment of a Senior Internal Auditor. This function serves to provide independent assurance of the operation of risk management processes, internal controls and governance, and serves as the third line of defence. Risk appetite The Board has approved the acceptance of certain operational risks which are considered appropriate to achieve the Group’s strategic priorities. discoverIE is averse to exposing itself to reputational risk, regulatory and compliance risks, and risks relating to the security of systems and data, while being more open to risks relating to the pursuit of innovating our products, building our customer base and increasing our competitive strength in the market. The degree of risk to be accepted is managed on a day-to-day basis through the Board delegated authority levels. 40 discoverIE AR2019.indd 40 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:13 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Board ■ Overall responsibility for corporate strategy and risk management ■ Defines the Group’s appetite for risk Strategic report Audit and Risk Committee ■ Reviews effectiveness of Group’s risk management framework and internal controls ■ Ensures compliance with relevant laws ■ Oversees effectiveness of Group’s Internal Audit function Group Executive Committee ■ Management of the Group and delivery of the strategy ■ Monitoring of the key risks ■ Regular reviews of the risk management framework e n i l g n i t r o p e r t n e d n e p e d n I Operating companies ■ Identify internal and external risks ■ Responsible for the implementation of risk mitigation actions and compliance with internal controls and policies ■ Responsible for compliance with relevant laws Group Internal Controls and Risk Management ■ Responsible for the integration of the risk management framework Group Internal Audit ■ Monitors compliance with the Group’s internal controls and policies ■ Conducts or commissions internal audits Viability statement The Directors have assessed the prospects of the Group over a period significantly longer than 12 months from the approval of the financial statements. The Board has concluded that the most appropriate time period for this review should be the three-year period ending 31 March 2022. The selection of this period is consistent with the Group’s strategic planning process, including budgeting and forecasting; its review of external credit facilities; and its assessment of the Group’s principal risks. The financial projections for the three-year period are based upon the Group’s budget for the year ending 31 March 2020 and forecast growth thereon. The budget is built up by each operating company, applying assumed growth rates and it considers the Group’s cash flows, cash and financial covenant headroom under existing borrowing facilities, and other key financial ratios over the period. The financial projections are subject to sensitivity analysis, which involves flexing a number of the underlying main assumptions, both individually and in conjunction, together with mitigating actions that the Directors would consider undertaking. The sensitivities take into account the principal risks and uncertainties set out on pages 42 to 45, notably an economic downturn, Brexit, loss of key customers and suppliers, underperformance of acquired businesses, major business disruption, liquidity and debt covenants and foreign currency. The Group is monitoring the risk related to uncertainty surrounding Brexit and currently does not expect that the direct impact of Brexit should have a material impact on the Group’s operations or financial results. The other risks which have not been modelled are more qualitative in nature and thus highly subjective to model, but their relevance and potential impact has been considered by the Board as part of the risk management process. The Group has a syndicated banking facility of £180m which is committed up to the end of June 2023 with an option exercisable by the Group to extend the facility by a further year to June 2024. In addition, the Group has a £60m accordion facility which it can use to extend the total facility up to £240m. The syndicated facility is available both for acquisitions and for working capital purposes. The Strategic Report on pages 4 to 51 sets out the key details of the Group’s financial performance, capital management, business environment and principal risks and uncertainties. Based on the Director’s assessment, the Board believes that, taking into account the Group’s current position, having regard to the available committed borrowing facilities available to the Company, and subject to the principal risks and uncertainties faced by the business as documented on pages 42 to 45 of the Strategic Report, the Group will be able to continue in operation and to meet its liabilities as they fall due for the three-year period of their assessment. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 41 discoverIE AR2019.indd 41 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:13 PRINCIPAL RISKS AND UNCERTAINTIES Focus on principal risks This section of the Strategic Report provides an overview of the Group’s approach to managing risk, focusing on the major risk factors to implementing the Group’s strategy and business model. It is not an exhaustive list of all possible risks. Additional uncertainties exist, some of which may not be known to the Group and could have a negative effect on the Group’s financial position and performance. The principal risks and uncertainties detailed below were considered in assessing the long-term viability of the Group. The viability statement can be found on page 41. Strategic risk Potential impact Mitigating actions Change in the year Instability in the economic environment ■ Reduction in sales; ■ Market position as a differentiated ■ Lower margins; ■ Difficulty raising equity and debt, impacting growth ability. specialist supplier; ■ Diversification into different markets, locations and product offerings; ■ Vigilance entering markets that are politically or financially unstable; ■ Value-adding and earnings-enhancing acquisitions; ■ A long-term credit facility is in place. ■ Limited impact of China/US tariffs; ■ Direct impact of Brexit is expected to be limited. Link to KSIs: 2 3 Link to KPIs: 3 5 Business acquisitions underperformance ■ Financial impact due to underperformance of ■ Operational, financial and legal due diligence on target businesses; acquisitions; ■ Appropriate warranties and indemnities ■ Loss of key employees and from vendors; ■ Cursor Controls, acquired in October 2018, has performed strongly since their expertise; ■ Use of earn-out structures to incentivise acquisition; ■ Expected synergies and key management; cross-selling opportunities ■ Monitoring of the acquired business are not realised. performance against budget; ■ Santon, acquired in February 2018, has been impacted by the reduction in Chinese solar panel subsidies. However, ■ Hiring of experienced finance personnel; performance strengthened in H2, with ■ Specific risk management programme for first 12 months post-acquisition. strong order growth Link to KSIs: 1 2 3 Link to KPIs: 1 2 3 5 6 KSIs Increase share of Group revenue from D&M Increase underlying operating margin Build sales beyond Europe 1 2 3 42 KPIs 1 2 3 Sales growth Increase cross-selling Underlying EPS growth 4 5 6 Dividend growth Return on capital employed Operating cash flow discoverIE AR2019.indd 42 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:13 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Operational risk Potential impact Mitigating actions Change in the year Brexit ■ Analysis by the Brexit Committee, concluded ■ Continued assessment of the likely impact on commercial, operational, that the direct impact on financial and other compliance areas; the Group should not be ■ Flexible production and warehouse material. facilities enable movement of production and supply to other countries if required; ■ Focus on foreign exchange volatility and hedging policy to mitigate FX risks. ■ Preparations for a potential no-deal Brexit included the following: y increasing stock levels; y redeploying stock throughout locations; y improving UK Customs controls and processes, with our main warehouse facility achieving Authorised Economic Operator (AEO) certification. Link to KSIs: 2 Link to KPIs: 1 2 3 5 6 Loss of major customers ■ Reduced profitability; ■ Less available cash flow; ■ Loss of market share. ■ Low dependence on any single customer (the largest customer is less than 4% of Group revenues); ■ Culture of high-quality service and long-term customer relationships; ■ Focus on developing business with SMEs; ■ Robust customer quality management systems. Link to KSIs: 1 2 Link to KPIs: 1 2 3 Loss of major suppliers ■ Negative impact on ■ Low dependency on any single supplier; production; ■ Damaged relationships with key customers; ■ Reduced sales. ■ Increasing proportion of own- manufactured product; ■ Long-term supplier relationships, enhanced by strong customer relationships. Monitoring of market and technological developments, including input from customers. Link to KSIs: 2 Link to KPIs: 1 3 5 Technological changes ■ Reduced sales; ■ The Group is diversified into a number of ■ Loss of market share. differentiated technology units; ■ Focus on established technologies with low capital requirements. Link to KSIs: 1 2 Link to KPIs: 1 3 5 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 43 discoverIE AR2019.indd 43 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:14 Strategic report PRINCIPAL RISKS AND UNCERTAINTIES Potential impact Mitigating actions Change in the year Major business disruption ■ Insufficient production to deliver goods on order; ■ Disaster recovery and business continuity plans are monitored regularly; ■ Damaged relationships ■ Multiple manufacturing sites and with key customers; warehousing enabling movement from ■ Reduced sales. one facility to another; ■ Insurance cover. Cyber security ■ Business disruption ■ Reduced service to customers; ■ Financial loss; ■ Central IT security guidance policy; ■ Robust anti-virus and anti-spam software and specialised target threat protection services; ■ Theft of and/or access to ■ Robust backup policies in place; confidential data. ■ Secure private networking; ■ Third-party cyber security assessments across the Group in progress. Loss of key personnel ■ Loss of expertise; ■ Potential business disruption; ■ Staff development, training programmes and succession planning; ■ Remuneration based on personal and ■ Insufficient resources. business success; ■ Regular remuneration benchmarking; ■ Use of earn-out structures, to incentivise key management of acquired companies. ■ Investment in new manufacturing facilities in India, Slovakia and Korea; ■ Expansion of Chinese facilities in progress; ■ Acquisition of Hobart with facilities in Mexico. Link to KSIs: 1 2 Link to KPIs: 1 3 5 6 ■ External Cyber assessments to be completed by December 2019; ■ Proposed improvements being reviewed and implemented. Link to KSIs: 2 Link to KPIs: 1 3 4 5 6 Link to KSIs: 2 Link to KPIs: 1 2 3 5 Product liability ■ Non-compliance with quality standards; ■ Quality inspection controls before products are shipped to customers; ■ Financial loss; ■ Standard Terms and Conditions limit Link to KPIs: ■ Reputational damage. companies’ maximum liabilities; 1 3 5 6 ■ Customised products reduce risk to individual customers. 44 discoverIE AR2019.indd 44 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:14 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Potential impact Mitigating actions Change in the year Inventory obsolescence ■ Financial loss. ■ Provisioning and write-off policies to cover potential obsolescence; ■ Non-cancellable, non-returnable orders for customised stock builds; Link to KPIs: 3 4 6 ■ Certain supplier stock return rights (Custom Supply Division); ■ Purchasing to reliable sales forecasts. Financial risk Potential impact Mitigating actions Change in the year Liquidity and debt covenants ■ Insufficient cash resources to support the Group’s ■ Central treasury function oversees the Group’s cash resources and financing activities. requirements; ■ Ongoing review of headroom against committed facilities and financial covenants; ■ Working capital controls and monitoring of key working capital metrics; ■ Issuance of equity to fund the cost of certain acquisitions. Foreign currency ■ Reduction of the Group’s ■ Use of forward currency contracts to reported results; hedge committed and forecast sales and ■ Lower gross and operating purchases in foreign currency; margins. ■ Currency borrowings as a natural hedge against same currency assets; ■ Central review of foreign currency exposures. Retirement benefit obligations ■ Increased charge to the ■ The scheme is closed to new members income statement; and future service benefits do not accrue ■ In February 2019 the Group extended its revolving credit facility from £120m to £180m and extended the remaining term to the end of June 2023; ■ Gearing at 31 March 2019 of 1.4x compared with 1.5x at 31 March 2018. Link to KPIs: 1 4 Link to KPIs: 3 6 ■ Increased level of cash contributions required. for existing members; ■ A deficit recovery plan has been agreed, based on actuarial advice; ■ Monitoring of the fund assets and liabilities; ■ Investment strategy reviews at least every three years. Link to KPIs: 4 5 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 45 discoverIE AR2019.indd 45 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:14 Strategic report CORPORATE SOCIAL RESPONSIBILITY The long-term success of the Group is enhanced by positive relationships with all stakeholders The Board recognises that the long-term success of the The Group also has due diligence processes in place to Group is enhanced by positive relationships with all support the ongoing assessment and management of risks stakeholders, including: Shareholders; employees; customers; associated with both existing and newly acquired companies and suppliers; as well as the local communities and the and the development of relationships with new suppliers. environment in which it operates. The Group endeavours to These include site visits by both executive and non-executive identify and manage any risks to the value of its business management; meetings with customers and suppliers; and, from social, environmental and ethical matters, and to take where relevant, asking our suppliers to confirm compliance any opportunities presented by a sensible and considerate with Group policies. approach to such matters to enhance Shareholder value. Management, at all levels, is committed to giving The Group promotes policies and procedures across consideration to corporate social responsibility in its actions, the Group which take into account: the interest of the endeavours to show due respect for human rights and Group’s employees; the need to foster reasonable business works to high standards of integrity and ethical propriety. relationships with suppliers, customers and others; the As an international organisation, discoverIE takes account of impact of the Group’s operations on its workforce, the cultural differences between the various territories in which it community and the environment; and the maintenance operates. discoverIE’s values are essential to how it operates of high standards of business conduct. Our policies and and to the long-term success and growth of the Group. discoverIE believes that who we are and how we behave matters not only to our employees but the many stakeholders who have an interest in our business. Stakeholder engagement remains vital to building a sustainable business and we interact with many stakeholders at different levels of the Group. Engagement is carried out by those most relevant to the stakeholder group or issue. The table on the opposite page identifies some of our stakeholders and how discoverIE engages with them. procedures include the following: ■ Anti-bribery and corruption; ■ Whistleblowing; and ■ Health and safety. Day-to-day responsibility for implementation of corporate and social policies is delegated to the management of discoverIE’s operating companies. Where appropriate, the Group policies and procedures are supported by the local operating companies’ policies and codes of conduct. During the year, the Group policies and procedures were reviewed to ensure that they remained fit for purpose. The health and safety policy was updated and the Board decided to expand the policy to include a new policy on personal protection equipment. In addition, the annual health and safety questionnaire was divided into manufacturing and non-manufacturing specific questionnaires to aid completion. 46 discoverIE AR2019.indd 46 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:16 HEADINGdiscoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Stakeholder engagement Strategic report Strategic Report Our people Why it is important to engage Employee engagement is critical to our success. We work to create a diverse and inclusive workplace where employees can reach their full potential. Engaging with our employees ensures we can retain and develop the best talent. Stakeholders key interests ■ Reputation ■ Reward ■ Career opportunities ■ Employee engagement ■ Training and development ■ Wellbeing ■ Health and safety Ways we engage ■ Listening groups ■ Employee surveys ■ Townhall meetings ■ Newsletters ■ Employee events ■ Apprenticeship programme ■ Recognition and reward Customers Why it is important to engage Understanding the needs of our customers allows us to provide application-specific products which both add value and differentiate our customers from their competitors. We engage with our customers to build trusting relationships from which we can mutually benefit. Stakeholders key interests ■ Safety, quality and reliability ■ Product performance and efficiency ■ Competitiveness ■ Our availability and responsiveness ■ Relationship ■ Compliance ■ Convenience ■ Range of products Suppliers Why it is important to engage Our external supply chain and our suppliers are critical to our performance. We engage with our suppliers to build trusting relationships from which we can mutually benefit and to ensure that they are performing to our standards and conducting business to our expectations. Stakeholders key interests ■ Quality management ■ Cost-efficiency ■ Long-term relationships ■ Responsible procurement, trust and ethics ■ Technological advances, including digital solutions Shareholders Why it is important to engage Access to capital is vital to the long-term performance of our business. We ensure that we provide fair, balanced and understandable information to Shareholders and investment analysts and work to ensure that they have a strong understanding of our strategy, performance, culture and ambition. Stakeholders key interests ■ Financial performance and economic impact ■ Governance and transparency ■ Operating and financial information ■ Confidence in the Group’s leadership ■ Dividend growth Ways we engage ■ Participation in industry forums and events ■ Social media and commercial websites ■ Contract negotiation, implementation and management of ongoing relationships ■ Customer audits of our manufacturing facilities ■ Customer-specific events ■ Geographical footprint allows us to meet the customer in their locations ■ Satisfaction surveys Ways we engage ■ Joint customer visits ■ Employee training ■ Quarterly business reviews ■ Geographical footprint allows smaller suppliers to operate globally ■ Logistical efficiencies via holding of consignment stock ■ Supplier conferences Ways we engage ■ Regular market updates ■ Investor presentations ■ One-on-one meetings ■ Investor roadshows ■ Corporate website, including dedicated investor section ■ Shareholder consultations ■ Annual reports ■ Annual General Meetings ■ Capital Market Days Global communities Why it is important to engage We are committed to building positive relationships with the communities in which we operate. We support communities and groups local and relevant to our operations and consider the environmental and social impacts of our operations. Stakeholders key interests Ways we engage ■ Local operational impact ■ Health and safety and ■ Charitable donations and volunteering environmental performance ■ Corporate and operating company websites ■ Local environmental initiatives Innovative Electronics www.discoverieplc.com Stock Code: DSCV 47 discoverIE AR2019.indd 47 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:17 HEADING CORPORATE SOCIAL RESPONSIBILITY Our people The Group is committed to the principle of equal opportunity in employment. Employment policies are fair, equitable and consistent with the skills and abilities of employees and the needs of the Group’s business. These policies ensure that everyone is accorded equal opportunity for recruitment, training and promotion. Diversity discoverIE’s employment policy is based on equal opportunities for all employees and prospective employees, and on there being no discrimination on grounds of colour, ethnic origin, gender, age, religion, political or other opinion, disability or sexual orientation. The Group endeavours to protect employees from, and does not tolerate any form of harassment. Set out below is an analysis of the number of employees by gender during the year. Male Female Some of the Group’s operating companies have structured apprenticeship schemes for technical staff. Employees are actively encouraged to undertake further learning, such as National Vocational Qualifications or similar level courses, as well as continual professional development to maintain any relevant professional accreditations. Recruitment and retention Clear and fair terms of employment, as well as a fair and competitive remuneration policy, are in place. It is Group policy to communicate with employees on major matters to encourage them to take an interest in the affairs of their employing company and the Group. Each of the Group’s operating companies is responsible for developing effective arrangements in this regard, including the creation of a common awareness by employees of the financial and economic factors affecting their employing company’s performance. The Group remains supportive of the employment and advancement of disabled persons. Full consideration is given to applications for employment from disabled persons, where the candidate’s particular aptitudes and abilities are consistent with meeting adequately the requirements of the job. Opportunities are available to disabled employees for training, career development and promotion. Gender split Senior managers & executives Directors Where existing employees become disabled, it is the Group’s policy to provide continuing employment, wherever practicable, in the same or an alternative position and to provide appropriate training and support to achieve this aim. % 5 4 : 9 1 0 2 % 5 4 : 8 1 0 2 % 5 5 : 9 1 0 2 % 5 5 : 8 1 0 2 % 6 2 : 9 1 0 2 % 7 2 : 8 1 0 2 % 4 7 : 9 1 0 2 % 3 7 : 8 1 0 2 % 9 2 : 9 1 0 2 % 9 2 : 8 1 0 2 % 1 7 : 9 1 0 2 % 1 7 : 8 1 0 2 Development and training Employees are encouraged to develop their knowledge and skills and to progress their careers to the mutual benefit of themselves and the Group companies they work for. It is the responsibility of management to ensure that they comply with all local laws and regulations, including those relating to the employment of underage staff. Employees benefit from the ability to improve their skills and work in a challenging and ambitious work environment and they get the opportunity to make a contribution to world-leading products. Health and safety A great deal of importance is attached to the provision of clean, healthy and safe working conditions. In addition to compliance with all local regulations, discoverIE promotes working practices which protect the health and safety of its employees and other persons who enter its premises. The Board has overall responsibility for health and safety matters but, in line with the Group’s decentralised management approach, health and safety matters are kept under regular review by local management to ensure compliance with local regulatory requirements. The operating companies report to the Board on a monthly basis in respect of health and safety issues, including the number of on-site accidents (if any), near misses and mitigation. All accidents are investigated and corrective actions and preventive measures are put in place to ensure that the accident does not reoccur and future risks are mitigated. 48 discoverIE AR2019.indd 48 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:18 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Strategic report APPRENTICES: Jacob Upton has been working at discoverIE for two years. In August 2018 he won the AMI Manufacturing Apprentice award. Over the past few years, discoverIE Jacob is positive about his decision has begun offering Engineering to become an apprentice at Variohm, Apprenticeships. Nathan and Jordan he says; “ I am extremely happy that I got the chance to join Variohm-Eurosensor as an apprentice. It has been great fun working with such a supportive team, and I have enjoyed every minute of it. As well as experience, you are also able to gain qualifications that open more doors for you to progress.” were our first two Engineering Apprentices; they completed their studies earlier this year. Jacob is due to complete his qualification within the next few months. The AMI Manufacturing Apprentice Awards has been launched to identify and recognise the very best apprentices within the UK. Jacob started working in Variohm- Eurosensor’s production department before moving into the engineering department. This has enabled him to gain the product knowledge first-hand along with the methods used to manufacture and modify Variohm’s products. discoverIE believes that training is the best way for our employees to get the most from their job roles and it helps to keep us, as a Group, up to date with the industry. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 49 discoverIE AR2019.indd 49 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:20 HEADING CORPORATE SOCIAL RESPONSIBILITY Business ethics All discoverIE Group companies seek to be honest, fair and competitive in their relationships with customers and suppliers. Every attempt is made to ensure that products and services are provided to the agreed standards and all Community The Group believes that good community relations are important to the long-term development and sustainability reasonable steps are taken to ensure the safety and quality of the operating business. The Group considers the of the goods and services provided. Payment is made to suppliers in accordance with the agreed terms, the relevant environmental and social impacts on the community of conducting business and this forms part of the business goods or services having been satisfactorily delivered. decision-making process. So far as it is able to, and taking into account local cultural The Group has been a Foundation Champion of the and regulatory differences, discoverIE encourages the organisations and people with whom it does business to abide by principles of good practice in relation to their corporate social responsibility. Community Foundation for Surrey since 2015. More recently, discoverIE has committed to supporting a new fund created by the Foundation, the Step Change Panel. Read more about discoverIE’s work with the Foundation discoverIE is committed to ensuring that no form of modern on our website slavery, servitude, forced or compulsory labour and human trafficking exists in its business operations or its supply chains. The Group does not tolerate modern slavery or human trafficking in any part of the Group’s business and expects the same high standards from our suppliers and contractors. www.discoverIEplc.com Environment The Group whistleblowing policy was also reviewed and Environmental matters are taken seriously by discoverIE, updated during the year. An external whistleblowing helpline which seeks to ensure that its activities do not harm the has been put in place to aid reporting. In accordance with the Market Abuse Regulations of the Financial Conduct Authority, employees are required to seek Board-level approval before dealing in any of the Company’s shares. communities as places in which to work and live. The Group endeavours to ensure that its operations do not have a negative impact on the environment. Apart from compliance with all local environmental laws and regulations, Group companies are encouraged to manage effectively natural resources and energy, to minimise waste and to recycle, Anti-bribery and corruption discoverIE is committed to applying the highest standards where economically viable means of doing so are available. Although the majority of products discoverIE deals with of integrity, honesty and fairness in its business activities are non-hazardous, where such products are involved, it everywhere. A zero-tolerance approach is taken towards minimises the environmental risks by use of appropriate bribery and corruption in all its forms by, or of, its employees labelling and technical information, in conjunction with or any persons or companies acting on its behalf. It is proper training and procedures for the handling, storage discoverIE’s policy that no-one in the Group should offer or and disposal of such products. The Group has implemented accept any bribes or other corrupt payments, engage in any procedures to ensure compliance with the Restriction of the anti-competitive practices or knowingly be involved in any Use of Hazardous Substances in Electrical and Electronic fraud or money laundering. The Board and senior management have implemented a worldwide anti-bribery and corruption programme to enforce and monitor effective anti-bribery procedures in accordance with the UK Bribery Act 2010. The programme was reviewed during 2018 and the updated programme was provided to all employees and, where relevant, customers and suppliers. Equipment Regulations 2004 (RoHS), the Waste Electrical and Electronic Equipment Regulations 2006 (WEEE), the Producer Responsibility Obligations (Packaging Waste) Regulations 2005 and the Waste Batteries and Accumulators Regulations 2009. 50 discoverIE AR2019.indd 50 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:20 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Strategic report Environmental initiatives During the year under review, several of the Group’s operating companies have implemented initiatives in order to minimise the Group’s impact on the environment. These initiatives include: ■ Campaigns to recycle plastic ■ Installation of filters to reduce air emissions ■ Careful planning of journeys to reduce mileage ■ Planting of trees near our facilities ■ Introduction of light sensors and LED lighting, reducing ■ Recycling of packaging materials – cardboard boxes are electricity consumption shredded and used as packing materials ■ Member of return and recycling system for all waste ■ Use of electric forklifts instead of diesel products ■ Use of more efficient packing materials to minimise waste ■ Use of wind and hydroelectric renewable energy at production our facilities in Norway and Denmark ■ Changed from petrol and diesel company cars to hybrid vehicles Greenhouse gas emissions Scope 1 and Scope 2 market-based greenhouse gas (GHG) Methodology discoverIE has reported greenhouse gas emissions pursuant emission per £m of sales increased 3% compared with the to the Companies Act 2006 (Strategic Report and Directors’ prior year, as a result of higher use of electricity for production Report Regulations 2013 (the “Regulations”)). The reporting in our factories in Asia that use fossil energy, partly offset by followed the 2013 UK Government environmental reporting the increased use of renewable energy. discoverIE’s most guidance (Chapter 2) and used the GHG Protocol Corporate significant emissions arise from the use of electricity (78% Accounting and Reporting Standard (revised edition). of the total emissions (2017: 77%)), which comprises all of the Scope 2 emissions. Sixty-one per cent (2017 63%) of the The reporting period is 1 January 2018 to 31 December 2018. Scope 1 emissions arise from transport fuel, the remainder As per the GHG protocol, discoverIE reports both its location arising mainly from the use of gas and oil for heating. and market-based Scope 2 footprint. For the location-based As well as enabling the reporting of emissions and understanding our GHG footprint, this information will help discoverIE to develop a strategy to further reduce emissions and identify potential cost savings going forward. In recent years, there have been various initiatives to reduce emissions. GHG emissions for the period from 1 January 2018 to 31 December 2018 (tonnes of CO2 equivalent): Total Scope 1 emissions1 Total Scope 2 emissions – Location-based Total Scope 2 emissions – Market-based Total gross Scope 1 and 2 emissions – Location-based Total gross Scope 1 and 2 emissions – Market-based Intensity measurement (tonnes CO2e per £m sales): Location-based Market-based YE 31/12/18 YE 31/12/17 2.258 7.225 1.995 7.077 7.863 6.693 9.483 9.073 21.6 23.1 23.4 22.4 1 Excludes refrigerants, air conditioning and heat pumps footprint, emissions are calculated using either Defra or IEA emission factors. For the market-based footprint, discoverIE has applied supplier-specific factors, or the Reliable Disclosure II residual factors where supplier-specific factors are not available. In the absence of both supplier-specific and residual factors, discoverIE has applied the location- based factor. discoverIE reports its emissions data using an operational control approach to define the organisational boundary which meets the definitional requirements of the Regulations in respect of those emissions for which it is responsible. This includes all subsidiaries 100% owned by discoverIE. discoverIE has reported on all emission sources for which we deem ourselves responsible. Emissions of the recently acquired company Cursor Controls are not included, as the acquisition completed in October 2018. Leased vehicles and properties under operational control have been included in approved by the Board. On behalf of the Board Nick Jefferies Group Chief Executive Simon Gibbins Group Finance Director 4 June 2019 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 51 10.122 8.689 Scope 1 and 2 emissions. The Strategic Report, as set out on pages 4 to 51, has been discoverIE AR2019.indd 51 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:20 Strategic report Differentiated products Global operations with a highly differentiated response discoverIE’s highly skilled engineers work closely with customers to develop a deep understanding of their industry and requirements Industrial & connectivity Technology is creating opportunities for widespread adoption of electronics and connectivity everywhere, which is becoming increasingly important in industry Read more on our target markets on page 14 discoverIE AR2019.indd 52 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:23 HEADINGCorporate governance CORPORATE GOVERNANCE discoverIE AR2019.indd 53 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:26 HEADINGCorporate governance THE BOARD Malcolm Diamond MBE Non-Executive Chairman Nick Jefferies Group Chief Executive N R G N Appointment to the Board Chairman since April 2017, Non-Executive Director since November 2015 Independent Yes Previous experience Malcolm brings considerable commercial and international business experience to the Board, as well as City investor knowledge and expertise. Prior to joining the Board, Malcolm was Executive Chairman and Chief Executive of Trifast plc and, among other previous appointments, was the Senior Non-Executive Director of Dechra Pharmaceuticals Plc and a Non-Executive Director of Unicorn AIM VCT plc. External appointments Non-Executive Chairman of Trifast plc and Flowtech Fluidpower PLC. Appointment to the Board January 2009 Independent No Previous experience Nick joined discoverIE as Group Chief Executive in 2009. He started his career as an electronics engineer for Racal Defence (now part of Thales plc), before joining Toshiba and then Hitachi’s European electronic component businesses. Prior to discoverIE, he was General Manager for electronics globally at Electrocomponents plc. External appointments None Simon Gibbins Group Finance Director Richard Brooman Non-Executive Director G A and at ICI plc for six years in various senior finance roles, both in the UK and overseas. His earlier career was spent with Coopers & Lybrand where he qualified as a chartered accountant. External appointments None Appointment to the Board January 2013 Independent Yes Previous experience Richard is a Chartered Accountant and brings a wealth of financial and risk management experience to the Board. During his executive career, he was CFO of Sherwood International plc, VCI plc and the global consumer healthcare business of Smithkline Beecham plc. External appointments Non-Executive Director and Audit and Risk Committee Chair of Hg Capital Trust plc and Invesco Perpetual UK Smaller Companies Investment Trust plc. He is also a director or trustee of several businesses in the third sector. Appointment to the Board July 2010 Independent No Previous experience Simon brings significant financial expertise and experience gained at an international level. Prior to joining the Group, he was at Shire plc for nine years, latterly as Global Head of Finance and Deputy CFO, 54 discoverIE AR2019.indd 54 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:28 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Committee membership A G Audit and Risk Committee Group Executive Committee N R Nomination Committee Chairman of the Committee Remuneration Committee Tracey Graham Non-Executive Director A N R Henrietta Marsh Non-Executive Director Appointment to the Board November 2015 Independent Yes Previous experience Tracey brings significant operational expertise to the Board. During her executive career, Tracey was Chief Executive of Talaris Limited and Managing Director of De La Rue Cash Systems. Prior to that she was President of Sequoia Voting Systems, Customer Services Director at AXA Insurance and held senior positions at HSBC. External appointments Non-Executive Director of Link Scheme Limited, Senior Independent Director of Ibstock plc, and Non- Executive Director of Royal London Mutual Insurance Society. Tracey is also a Member of the City of London Court of Common Council. Appointment to the Board May 2013 Independent Yes Previous experience Henrietta has 30 years’ experience in the financial services industry at Living Bridge, 3i and Morgan Stanley. She was the founder Chairman of the AIM VCT Managers Group. Henrietta was responsible for AIM investment at Living Bridge EP LLP and was a Director of 3i plc, where she worked as a fund manager. She is an experienced Non-Executive Director at both listed and AIM traded companies. External appointments Non-Executive Director of Gamma Communications plc. Member-nominated trustee of the 3i plc Pension Fund and a member of the London Stock Exchange’s AIM Advisory Group. Bruce Thompson Senior Independent Director A N R During his executive career, Bruce was Chief Executive Officer of Diploma PLC. Prior to joining Diploma, Bruce was a director with the technology and management consulting firm Arthur D. Little Inc., both in the UK and the USA. External appointments None Joanna Harkus Madge Group Company Secretary G Appointment to the Board April 2017 Previous experience Joanna joined discoverIE as Group Company Secretary Designate in January 2017 and became Group Company Secretary in April joining discoverIE, Joanna project managed the rebranding of the Group as well as organising the Group’s first Capital Markets Day. External appointments Non-Executive Director of 2017. A qualified Chartered the Step Change Panel Secretary, she previously held that position at Arle Capital Partners Limited (formerly part of Candover Investments plc). Since Innovative Electronics www.discoverieplc.com Stock Code: DSCV 55 Appointment to the Board Senior Independent Director since March 2019, Non- Executive Director since February 2018 Independent Yes Previous experience Bruce brings a wide range of strategic and leadership expertise to the Board with proven experience of growing international industrial businesses. discoverIE AR2019.indd 55 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:30 Corporate governance THE GROUP EXECUTIVE COMMITTEE Nick Jefferies Group Chief Executive Simon Gibbins Group Finance Director Joanna Harkus Madge Group Company Secretary Read the biographies on pages 54 and 55 Jeremy Morcom Group Head of Corporate Development Paul Neville Group Commercial Director Jeremy joined discoverIE in going into industry, Jeremy Paul joined discoverIE the Design & Manufacturing March 2017 and is responsible was an investment banker in March 2009 and is division. He has many years’ for M&A and acquisition specialising in the industrial responsible for running the experience in both financial strategy across the Group. He manufacturing sector. A Design & Manufacturing and operational senior brings extensive experience in physicist by background, he division. Formerly responsible management positions for strategic growth programmes has a strong understanding for discoverIE’s M&A listed public companies. having led the M&A of the Group’s products and programme, Paul led the functions at Spectris plc for technology. nine years and at Invensys plc for four years. Prior to acquisition of 13 businesses, ten of which are now within Martin Pangels Group Development Director Paul Webster Group Director – Acal BFi and Cross-Selling Martin joined discoverIE in term priorities across the Paul joined discoverIE Director in April 2012. He July 2010. He initially led the Group. Prior to joining in June 2010 and is has many years’ experience integration of BFi Optilas discoverIE, he spent nine responsible for Acal BFi and in senior management into the Group and was years at Electrocomponents cross-selling between the roles, including Head of responsible for the operating plc, where he was Regional Design & Manufacturing Product Management companies of the combined General Manager for Europe, businesses and Acal BFi. for electronics globally at Acal BFi for the last six and six years with Bain Paul was formerly Managing Electrocomponents plc. He years. He recently assumed & Company as a strategy Director of Acal BFi UK began his career as a design a new role focusing on the consultant. before moving to Group engineer for Plessey Avionics delivery of the medium- Product Management (now part of BAE Systems). 56 discoverIE AR2019.indd 56 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:34 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Corporate governance Innovative Electronics www.discoverieplc.com Stock Code: DSCV 57 discoverIE AR2019.indd 57 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:35 DIRECTORS’ REPORT The Directors present their Annual Report with the audited financial statements for the year ended 31 March 2019 discoverIE Group plc (“discoverIE”, or the “Group”) is an The Group’s policies and processes for managing its international group of businesses that designs, manufactures capital, its financial risk management objectives, details and supplies innovative components for electronic of its financial instruments and hedging activities and its applications. The Group provides application-specific exposure to credit and liquidity risk are disclosed in note 26 components to original equipment manufacturers (“OEMs”) to the Group financial statements on pages 154 and 155. internationally. With in-house engineering capability, the Group is able to design components to meet customer requirements, which are then manufactured and supplied, usually on a repeating basis, for their ongoing production needs. This generates a high level of recurring revenue and long-term customer relationships. By focusing on key The Group recognises the importance of its responsibilities in relation to the environment, to social and community issues and to business ethics, as well as to its employees. Further information is included in the Corporate Social Responsibility statement on pages 46 to 51. markets which are driven by structural growth and increasing Other information to be disclosed in the Directors’ Report is electronic content, namely renewable energy, transportation, given in this section. medical and industrial & connectivity, the Group aims to achieve organic growth that is well ahead of GDP and to supplement that with targeted complementary acquisitions. The Business Model is explained in further detail on pages 12 and 13 of the Strategic Report. The Directors’ Report of the Group for the financial year ended 31 March 2019 is set out on pages 58 to 61 inclusive. As permitted by legislation, some of the matters required to be included in the Directors’ Report have instead been included in the Strategic Report, which includes the Operating Review, the Finance Review and the Viability Statement, on Both the Directors’ Report and the Strategic Report have been drawn up in accordance with, and in reliance upon, applicable English company law. The liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law. Financial results and dividends The financial statements set out the results of the Group for the financial year to 31 March 2019 and are shown on pages 118 to 168. The key strategic and performance indicators of the business are set out in the Strategic Report on pages 4 to 51. pages 4 to 51, as the Board considers them to be of strategic As reported in our Annual Report for the year ended importance. Specifically, these are: Disclosure ■ Future business developments ■ Risk management ■ Employee involvement ■ Greenhouse gas emissions Location ■ Throughout the Strategic Report (pages 4 to 51) ■ Risk management and principal risks and uncertainties (pages 40 to 45) ■ Corporate Social Responsibility Report (pages 46 to 51) ■ Corporate Social Responsibility Report (pages 46 to 51) 31 March 2018, a technical non-compliance issue was identified with respect to last year’s final dividend payable out of distributable reserves. While the Board was confident that there were adequate distributable reserves in subsidiary companies to meet this dividend at the time, the position was remedied by means of appropriate resolutions at a general meeting of Shareholders in July 2018. The Board has assessed and implemented improved controls and processes to identify distributable reserves to prevent reoccurrence of this issue. Distributable reserves as at 31 March 2019 were £15.2m. The Directors recommend a final dividend of 6.75p per share (2017/18: 6.35p) which, together with the interim dividend of 2.8p per share (2017/18: 2.65p), makes a total dividend for the year of 9.55p per ordinary share (2017/18: 9.00p). Subject to approval by Shareholders of the recommended final dividend, the dividend award to Shareholders for 2018/19 will total £7.5m (2017/18: £6.5m). If approved, the Company will pay the final dividend on 30 July 2019 to Shareholders on the register of members at 14 June 2019. 58 discoverIE AR2019.indd 58 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:35 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Directors The membership of the Board and biographical details of the Directors’ indemnity The Articles of the Company contain an indemnity in favour Directors are given on pages 54 and 55 and are incorporated of the Directors, which is a Qualifying Third Party Indemnity into this report by reference. All Directors served throughout within the meaning of s.236 of the Companies Act 2006 and the financial year ended 31 March 2019. is in force at the time of the approval of this Annual Report. Copies of Executive Directors’ service contracts are available to Shareholders for inspection at the Company’s registered Directors of subsidiary undertakings are also subject to this Qualifying Third Party Indemnity. office and at the Annual General Meeting (“AGM”). Details of In addition, each Director of the Company has entered into a the Directors’ remuneration and service contracts and their Deed of Indemnity with the Company, which operates only interests in the shares of the Company are included in the in excess of any right to indemnity that a Director may enjoy Directors’ Remuneration Report which is set out on pages 82 under any such other indemnity or contract of insurance. to 102. Powers of the Directors The Board of Directors is responsible for the management of the business of the Company and may exercise all the powers of the Company, subject to the Company’s Articles of Association (the “Articles”), the Companies Act 2006 and any directions given by the Shareholders by special resolution. The Company has also arranged appropriate insurance cover in respect of legal action against its Directors and officers. Share capital As at 31 March 2019, the Company’s issued share capital consisted of 73,358,847 ordinary shares of 5p each (no shares are held in treasury). The Articles may be amended by a special resolution of the During the year, 1,940,991 new ordinary shares were issued Company’s Shareholders. under the Group’s long-term incentive schemes. Appointment and replacement of Directors The Board can appoint a Director but anyone so appointed On 18 April 2019, 7,309,867 new ordinary shares were issued as part of a placing, raising gross proceeds of approximately must be elected by an ordinary resolution at the next general £29.2. Following admission of the placing shares, the meeting. In accordance with the Articles, any Director who Company’s issued share capital consisted of 80,668,714 has held office for more than three years since their last ordinary shares of 5p each. appointment must offer themselves for re-election at the next Annual General Meeting. Details of movements in the Company’s issued share capital can be found on page 157 in note 29 to the Group financial Following the publication of the revised Corporate statements. Governance Code in 2018, the Board has decided to adopt the requirement for annual elections of the Directors during the current financial year. Directors’ conflicts of interest The Company has procedures in place for managing conflicts of interest. Should a Director become aware that they, or Restrictions on transfer of securities in the Company There are no restrictions on the transfer of securities in the Company, except: ■ that certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws); any of their connected parties, have interest in an existing and or proposed transaction with discoverIE, they should notify the Board in writing or at the next Board meeting. Internal controls are in place to ensure that any related party transactions involving Directors, or their connected parties, are conducted on an arm’s length basis. Directors have a ■ pursuant to the Listing Rules of the Financial Conduct Authority, whereby certain employees of the Company require the approval of the Company to deal in the Company’s ordinary shares. continuing duty to update any changes to these conflicts. The Company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 59 discoverIE AR2019.indd 59 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:35 Corporate governance DIRECTORS’ REPORT Rights and obligations attaching to shares Subject to the Articles, the Companies Act 2006 and other Shareholders’ rights, shares in the Company may be issued with such rights and restrictions as the Shareholders may by ordinary resolution decide, or if there is no such resolution, as the Board may decide provided it does not conflict with any resolution passed by Shareholders. As at 4 June 2019, the Company has been notified of the following changes to the major shareholdings shown below: Holdings of ordinary shares (5p) % holding Aberdeen Standard Investments 7,732,513 Canaccord Genuity Group Inc. 7,050,478 The rights attached to any class of shares can be amended if approved, either by 75% of Shareholders holding the issued Legal & General Investment Management Ltd (UK) shares in the class by amount, or by special resolution passed Charles Stanley Group plc at a separate meeting of the holders of the relevant class of BlackRock Inc. 4,729,511 4,177,030 3,242,721 shares. Unicorn Asset Management (UK) 3,225,264 Every member and every duly appointed proxy present at a Chelverton Asset Management 3,093,614 general meeting or class meeting has, upon a show of hands, one vote and every member present in person or by proxy Montanaro Asset Management Limited has, upon a poll, one vote for every share held. AXA SA 3,000,000 2,936,499 2,639,779 Franklin Resources No person holds securities in the Company carrying special rights with regard to control of the Company. Substantial shareholdings As at 31 March 2019, the Company had been notified of the Authority to purchase own shares At the AGM held on 26 July 2018, Shareholders authorised the Company to purchase in the market up to 10% of its 9.59 8.74 5.86 5.18 4.02 4.00 3.83 3.72 3.64 3.27 following major shareholdings equal to, or in excess of, 3% of issued share capital (7,333,519) ordinary shares and, as at the issued share capital: Holdings of ordinary shares (5p) % holding Canaccord Genuity Group Inc. 7,050,478 Aberdeen Standard Investments 5,249,464 Legal & General Investment Management Ltd (UK) BlackRock Inc. 4,729,511 3,242,721 Unicorn Asset Management (UK) 3,225,264 Chelverton Asset Management 3,093,614 Montanaro Asset Management Limited AXA SA Franklin Resources 3,000,000 2,936,499 2,639,779 9.61 7.16 6.45 4.42 4.39 4.22 4.09 4.00 3.60 31 March 2019, the full extent of this authority remained in force and unused. This authority is renewable annually, and a special resolution will be proposed at the 2019 AGM to renew it. The Directors will only purchase the Company’s shares in the market if they believe it is in the best interest of Shareholders generally. Change of control Details of the Group’s borrowing facilities are provided in the Finance Review section of the Strategic Report on page 38. These agreements contain a change of control provision, which may result in the facility being withdrawn or amended upon a change of control of the Group. The Group is party to a number of commercial agreements which, in line with normal practice in the industry, may be affected by a change of control following a takeover bid. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment which occurs because of a takeover bid. 60 discoverIE AR2019.indd 60 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:36 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Corporate governance Political donations There were no political donations during the year (2017/18: nil). Auditor and disclosure of information to auditor PricewaterhouseCoopers LLP have indicated their willingness to continue in office and a resolution to appoint them will be proposed at the AGM. In the case of each Director in office, as at the date of this Report: ■ so far as the Director is aware, there is no relevant audit information of which the Group and Company’s auditors are unaware; and ■ they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group and Company’s auditors are aware of that information. Annual General Meeting The Notice of the AGM to be held at 11.00 am on Thursday 25 July 2019 is being sent separately to Shareholders with this report. The venue for the meeting is 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford, Surrey, GU2 7AH. Going concern The Group’s business activities, together with factors which may adversely impact its future development, performance and position, and its viability statement are included in the Strategic Report on pages 4 to 51. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Finance Review section of the Strategic Report on pages 34 to 39. The Group has significant financial resources, well established contracts with a number of suppliers and a broad and stable customer base. As a consequence, the Directors believe that the Group is well placed to manage its principal risks and uncertainties that are disclosed on pages 42 to 45 of the Strategic Report. The Group’s forecasts and projections, taking account of a sensitivity analysis of changes in trading performance, show that the Group is well placed to operate within the level of its current committed facilities for the foreseeable future. After making due enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continued to adopt the going concern basis in preparing this Annual Report and Accounts. By order of the Board Joanna Harkus Madge Group Company Secretary 4 June 2019 2 Chancellor Court Occam Road Surrey Research Park Guildford Surrey GU2 7AH Registered number: 02008246 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 61 discoverIE AR2019.indd 61 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:36 BOARD REPORT ON CORPORATE GOVERNANCE “ discoverIE aims to build an environment of trust, transparency and accountability which is necessary for fostering long-term investment, financial stability and business integrity.” Malcolm Diamond MBE Chairman Chairman’s governance overview discoverIE aims to build an environment of trust, transparency and accountability which is necessary for fostering long-term investment, financial stability and business integrity. I am pleased to confirm that we have complied throughout the year with the 2016 Corporate Governance Code (the “Code”). In addition, the Board has taken steps to begin compliance with the 2018 Corporate Governance Code, including moving to the annual election of all Directors. The revised 2018 Code has reinforced and expanded on the long-standing requirement of the Companies Act 2006 for Directors to remain mindful of their duties to consider the interests of key stakeholders. Further information on the Company’s stakeholders and how we engage with them can be found on page 47. The Board is accountable for setting and leading our culture. It ensures that the correct tone is established from the top and is embedded in our values, including a culture of transparency and integrity by all employees. During the year, the risk management framework of the Group was reviewed and the internal audit function was strengthened. Further information is contained in the Audit and Risk Committee Report on pages 74 to 78. The composition of the Board has been an area of focus this year for the Nomination Committee. In line with the Group’s long-term succession plans, it was announced in March that Richard Brooman and Henrietta Marsh would resign at the Annual General Meeting in July 2019. Following the announcement in March, Tracey Graham was appointed as Chair of the Remuneration Committee and Bruce Thompson was appointed as Senior Independent Director. The Nomination Committee also led the recruitment of an additional Non-Executive Director to the Board, Clive Watson, who will join the Board in September 2019. Further information on succession planning and the recruitment and induction process is included in the Nomination Committee Report on pages 80 and 81. Our remuneration policy was approved by the Company’s Shareholders at the Company’s Annual General Meeting in 2018. Your Remuneration Committee Chair has been working closely with the Group and its advisers to ensure that the remuneration policy continues to promote the long-term success of the Company. Further information can be found in the Directors’ Remuneration Report on pages 82 to 102. 62 discoverIE AR2019.indd 62 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:37 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Compliance with the UK Corporate Governance Code discoverIE’s governance framework, which is shaped by the Code, the Companies Act 2006 and secondary legislation and guidance, sets out standards of good practice in relation to Board leadership and effectiveness, remuneration, accountability and relations with Shareholders. Each Director has access to all information relating to the Group and to the advice and services of the Company Secretary and, as required, external advice at the Group’s expense. Leadership: The Non-Executive Directors constructively challenge and help develop strategy. Learn more about the Directors’ skills and experience on pages 54 and 55 Effectiveness: The Board regularly evaluates the balance of skills, experience, independence and knowledge of the Directors. All new Directors receive a tailored induction programme. A rigorous evaluation of the Board, the Committees and the individual Directors is undertaken annually. Learn more about the Board’s effectiveness on pages 70 and 71 Accountability: The Board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. Effective risk management is critical to achieving our strategy. Learn more about Risk management on pages 40 and 41 £ Remuneration: Having a formal and transparent policy for developing policy on executive remuneration and for fixing the remuneration packages of individual Directors is crucial. The remuneration policy aims to attract, retain and motivate by linking reward to performance. Learn more about the Remuneration policy on pages 87 to 89 Relations with Shareholders: The Board regularly meets with Shareholders, both private and institutional, and an active dialogue is encouraged. Learn more about Shareholder and stakeholder engagement on pages 47 and 73 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 63 discoverIE AR2019.indd 63 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:37 Corporate governance BOARD REPORT ON CORPORATE GOVERNANCE Leadership Role of the Group Chief Executive ■ Leading the development and implementation of the discoverIE is led by a strong and experienced Board with a Group’s strategy; broad range of skills, experience and knowledge. Throughout ■ Communicating with Shareholders and other stakeholders; the year under review, the Board consisted of Malcolm Diamond as Non-Executive Chairman; Richard Brooman, Tracey Graham, Henrietta Marsh and Bruce Thompson as Non-Executive Directors; Nick Jefferies as Group Chief Executive; and Simon Gibbins as Group Finance Director. The composition of the Board is kept under review by the Nomination Committee on an annual basis. In accordance with the Group’s long-term succession plans, Richard ■ Responsible for the day-to-day management of the Group’s businesses and reporting their progress to the Board; ■ Leading the Group Executive Committee. The Group Chief Executive is assisted in meeting his responsibilities by the Group Executive Committee. Role of the Board ■ Setting the long-term objectives and commercial strategy; Brooman and Henrietta Marsh will step down from the ■ Oversight of the management of discoverIE; Board in July 2019. Clive Watson will join the Board as a Non-Executive Director and Chair of the Audit and Risk Committee in September 2019. The Nomination Committee considers the size and composition of the Board to be appropriate to the Group’s business and strategy. The Non-Executive Directors constructively challenge management proposals where appropriate and carefully monitor management performance and reporting ■ Review of the Key Strategic Indicators and Key Performance Indicators; ■ Review of acquisitions and corporate transactions; ■ Recommending or declaring dividends; ■ Approval of financial statements, business plans, financing and treasury matters; ■ Major capital expenditure and commitments; throughout the year. Constructive challenge is viewed by the ■ Maintaining sound internal controls and risk management Board as an essential aspect of good governance. systems; The Company has both a Chairman and a Group Chief ■ Review of the Group’s overall corporate governance; and Executive. There is a clear division of responsibilities, which ■ Any litigation of a material nature. As set out on the opposite page, certain matters are delegated to the Group Executive Committee and to the Audit and Risk, Remuneration and Nomination Committees. The Board also has a General Purposes Committee, consisting of any two Directors of the Company, which has delegated authority to approve certain defined and routine matters between Board meetings. has been agreed by the Board, and details of their respective roles are available from the Company on request. Role of the Chairman ■ Responsible for leading the Board, which includes the operation of the Board’s overall procedures; ■ Providing a forum for constructive discussion and ensuring receipt of clear and timely information; ■ Overseeing Corporate Governance matters; ■ Leading the performance evaluations of the Group Chief Executive, the Non-Executive Directors and the Board. The Chairman, in conjunction with the Group Company Secretary, ensures that Directors receive a full, formal and tailored induction to the Group and ongoing training as relevant. 64 discoverIE AR2019.indd 64 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:37 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Governance framework The Board Chaired by Malcolm Diamond Meets a minimum of six times a year. Accountable to Shareholders for the long-term success of the Group. This is achieved via a clear division of responsibilities between the Chairman and Group Chief Executive, the setting of strategic aims and ensuring that the necessary financial and human resources are in place to achieve that strategy. Nomination Committee Chaired by Malcolm Diamond The Nomination Committee Audit and Risk Committee Chaired by Richard Brooman The Audit and Risk Committee has Remuneration Committee Chaired by Tracey Graham The Remuneration Committee reviews and recommends to the regularly reviews the structure, size responsibility for overseeing and Board the framework and policy for and composition of the Board and monitoring the Group’s financial the remuneration of the Chairman, its Committees. It identifies and statements, accounting processes, the Executive Directors and the nominates suitable candidates to audit processes (internal and Group Executive Committee. be appointed to the Board (subject external), controls and matters The Committee ensures that the to Board approval) and considers relating to fraud and other reports remuneration policy of the Group diversity, culture, talent and received under the whistleblowing reflects the Group’s strategy. succession generally. policy. Further information on the Nomination Committee is on pages 80 to 81 Further information on the Audit and Risk Committee is on pages 74 to 78 Further information on the Remuneration Committee is on pages 82 to 102 Group Executive Committee The Group Executive Committee comprises: Nick Jefferies, who is the Chairman of the Committee, together with Simon Gibbins, Joanna Harkus Madge, who is also the Secretary, Jeremy Morcom, Paul Neville, Martin Pangels and Paul Webster. For their biographies see page 56. During the year to 31 March 2019, there were nine meetings of the Committee. Other senior managers attend the Committee meetings, by invitation, for specific topics. The Committee is responsible for the Group’s day-to-day operations, for delivering results and for driving growth for Shareholders. The powers delegated to the Committee are contained in its written terms of reference, which are available on request and are on the Company’s website: www.discoverIEplc.com Innovative Electronics www.discoverieplc.com Stock Code: DSCV 65 discoverIE AR2019.indd 65 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:37 Corporate governance BOARD REPORT ON CORPORATE GOVERNANCE Board activities Topic Key activities and discussions in 2018/19 Key priorities in 2019/20 Strategy ■ Reviewed and approved the acquisition of ■ Consider acquisitions as identified and Cursor Controls, Hobart Electronics and Positek determine the appropriate course of action ■ Reviewed key strategic indicators (“KSIs”) and ■ Keep KSIs and KPIs under review key performance indicators (“KPIs”) ■ Keep the Group’s dividend policy under ■ Considered and approved the Group’s review dividend policy ■ Continue to review potential impact of Brexit ■ Reviewed the potential impact of Brexit on the on the Group Group ■ Reviewed further operational investment in ■ Continue to focus on international growth in key markets, including expansion into North India and China America Risk and risk management ■ Carried our robust assessment of principal risks (see pages 42 to 45) ■ Review key risks and ensure that the Group’s internal control process remains appropriate ■ Improved and expanded internal controls in ■ Strengthen internal audit function response to the identification of fraud at one of the Group’s US facilities ■ Review results of cyber risk review and implement appropriate procedures ■ Monitored compliance with the anti-bribery and corruption policy ■ Reviewed initial results of cyber risk review and approved further testing throughout the Group ■ Review and update the Group’s whistleblowing policy and procedures Governance ■ Continued focus on the composition, balance ■ Continue monitoring of distributable reserves and effectiveness of the Board ■ Carried out succession planning for Board, Group Executive Committee and senior management ■ Continue to strengthen internal controls and reporting ■ Review level of institutional holding and consider actions to broaden the Group’s ■ Signed off and published the Group’s third Shareholder base further modern slavery statement ■ Continue work to ensure compliance with the ■ Engaged with institutional Shareholders, revised Corporate Governance Code 2018 investors and other stakeholders throughout the year ■ Build further understanding and plan actions in relation to new regulations over the period ■ Implemented a revised Non-Audit Services policy ■ Rectified technical non-compliance with regards to distributable reserves and the payment of recent dividends ■ Implemented the revised remuneration policy, approved by Shareholders at the AGM in 2018 ■ Reviewed and approved the FY 2017/18 Annual Report. The Board agreed that, taken as a whole, the FY 2017/18 Annual Report was fair, balanced and understandable 66 discoverIE AR2019.indd 66 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:37 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Topic Key activities and discussions in 2018/19 Key priorities in 2019/20 Organisational capacity ■ Monitored health and safety performance across the Group. Regular Board updates received on actions improving health and ■ Continue to monitor health and safety performance across the Group safety ■ Reviewed health and safety policy and the implementation of an updated Personal Protective Equipment Policy ■ Received presentations by senior management on operating companies, tax, treasury and M&A strategy ■ Review of major customers and suppliers Board development ■ Continued focus on the composition, balance and effectiveness of the Board. Reviewed ■ Provide training to the Board to assist with their continued professional development Board and Committee composition and discussed and acted on the recommendations of the Nomination Committee ■ Undertook an internal evaluation of the Board, its Committees and individual Directors Board and Board Committee meetings attendance Board attendance Richard Brooman1 Malcolm Diamond Simon Gibbins Tracey Graham Nicholas Jefferies Henrietta Marsh2,3 Bruce Thompson4 Committees Board Audit and Risk Remuneration Nomination Overall attendance % 9/9 9/9 9/9 9/9 9/9 8/9 9/9 3/3 — — 3/3 — 3/3 — 5/5 6/6 — 6/6 — 5/5 3/3 3/3 5/5 — 5/5 5/5 3/3 1/1 100 100 100 100 100 95 100 During the year, attendance by Directors at Board and Committee meetings was as follows: 1 Richard Brooman resigned from the Remuneration and Nomination Committees in March 2019 2 Henrietta Marsh was unable to attend the Board meeting on 26 March 2019 3 Henrietta Marsh resigned from the Audit and Risk, Remuneration and Nomination Committees in March 2019 4 Bruce Thompson was appointed as a member of the Remuneration Committee in November 2018 and as a member of the Audit and Risk and Remuneration Committees in March 2019 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 67 discoverIE AR2019.indd 67 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:37 Corporate governance THE BOARD IN ACTION China manufacturing visit In October 2018, the Board visited Noratel and Myrra’s facilities in Foshan and Zhongshan, China. “ The Board’s site visits enable direct engagement with employees and a good understanding of operations and working practices.” Nick Jefferies Group Chief Executive During its visit to Noratel Foshan, the Board received a presentation from the local Managing Director which included an overview of the business and its strategy. The Board was led on a tour of the facility, which highlighted the operating company’s approach to health and safety. The Board was able to meet with several members of the local management team. The Board then travelled to Zhongshan to visit the Myrra facility. In addition to management presentations, the Board toured the recent changes to the facility, including the expansion of the site as well as the introduction of automation. The Board was also able to review the health and safety practices of the facility, including the application of the protective equipment policy. The visit enabled the Board to see first-hand product design and testing as well as the different manufacturing techniques used by the two companies. During both visits, the Board was able to meet with the management team and key employees outside of the formal meetings. discoverIE AR2019.indd 68 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:38 HEADINGCorporate governance Pictured: Opposite page: Board visits the Noratel factory in Foshan, China. Above, clockwise from top: copper winding onto a toroidal transformer used in medical applications; semi-finished goods testing, prior to the next stage of manufacturing; and connecting cable sensors onto an integrated transformer and reactor assembly used in transportation applications. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 69 discoverIE AR2019.indd 69 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:38 Corporate governance BOARD REPORT ON CORPORATE GOVERNANCE Effectiveness Independence The independence of the Non-Executive Directors is reviewed annually. The Board considers that the Non-Executive Induction of new Directors While appointments to the Board are the responsibility of the full Board, the Nomination Committee has a duty to ensure that, when making recommendations to the Board on suitable candidates, it takes into account the Board’s existing Directors bring strong independent oversight and continue to balance of skills and experience and has due regard for demonstrate independence. However, the Board recognises the recommended term within the Code. It is mindful of the diversity. The process for making Board appointments is fully described in the Nomination Committee Report set out on need for suitable succession, and therefore maintains a clear page 80 and 81 of this Annual Report and Accounts. record of the time each Non-Executive Director has served the Company and the skill set that each provides. Richard Brooman and Henrietta Marsh, having served six full years on the Board, will retire as Directors of the Company at the Company’s Annual General Meeting in July 2019. All new Directors receive induction training on joining the Board and are expected regularly to update and refresh their skills and knowledge, with the Company providing the necessary resources, as required. The induction programme includes meeting with the Group’s senior management and Bruce Thompson was appointed as the Senior Independent visits to key locations, as well as a comprehensive briefing pack. Director in March 2019 and is available to Shareholders should they have concerns that cannot be resolved through Induction process: other channels. Time allocation The Board held six scheduled meetings and three ad hoc meetings during the year. Individual attendance is set out on page 67. Sufficient time is provided at the start and the end of each meeting for the Chairman to meet privately with Step 1: Understand the discoverIE business Company structure and strategy, including Group structure, history, strategy, key people, succession plans, Board procedures including governance framework, Board Committees, calendars, minutes, and the risk the Senior Independent Director and the Non-Executive register. Directors. All Directors are aware of the need to allocate sufficient time to the Company in order to discharge their responsibilities effectively. The letters of appointment for Non-Executive Directors set out the time commitment expected to allow them to perform their duties effectively. Step 2: Meet the management teams One-on-one meetings with the Group Executive Committee and senior management. Step 3: Visit the discoverIE businesses Visits to a number of discoverIE businesses, both in the UK and overseas. 70 discoverIE AR2019.indd 70 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:38 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Information and professional development Papers are circulated in advance of Board and Committee meetings, and Directors are invited to request such further information as they may require, thereby ensuring that proper consideration can be given to all matters. Between scheduled meetings, Directors are kept abreast of progress through ad hoc meetings and briefings, as and when required. A procedure is in place whereby Directors may have access to independent professional advice at the Company’s expense and Directors have access to the advice and services of the Company Secretary, who is responsible for advising the Board, through the Chairman, on all governance matters. Her responsibilities also include ensuring good information flows within the Board and its Committees, and between senior management and the Non-Executive Directors. The Summary of the 2018 Board Evaluation: Board The composition of the Board was composition positively rated although there was Board’s expertise Board dynamics an acknowledgement that additional commercial experience would be useful The Board’s understanding of the views and requirements of major investors and other stakeholders was rated positively Board dynamics was rated positively, particularly the relationship between the Chairman and Group Chief Executive appointment or removal of the Company Secretary is a Management The management of meetings and the matter for the Board as a whole. of meetings structure of the Committees, together Board evaluation Step 1: Directors consider their individual performance, the performance of the Chairman and the overall performance of the Board and Board Committees by using questionnaires. The completed questionnaires are submitted to the Company Secretary who collates the results and provides an overall summary to the Board. Step 2: The results of the evaluation are discussed by the Board with Board support, was considered appropriate Risk The effectiveness with which the Board management takes risk into account when making decisions was positively rated Re-election The Company’s Articles of Association require that, at every Annual General Meeting, each Director who (a) was appointed since the previous Annual General Meeting or (b) was appointed or last reappointed at or before the Annual General Meeting held at least three years before the current year or (c) being a Non-Executive Director, as at the date of the Meeting, has held office with the Company for a continuous period of nine years or more, must retire from and actions for improvement are decided upon. office and, if appropriate, seek re-election. A summary of the 2018 Board evaluation is detailed in the After six years as Non-Executive Directors, Henrietta Marsh box opposite. and Richard Brooman have decided to retire from the Board at the conclusion of the Annual General Meeting and therefore will not be offering themselves for re-election. Following the publication of the revised Corporate Step 3: Individual questionnaires are provided to the Chairman Governance Code in 2018, the Board has decided to adopt the requirement for annual elections of all Board members and Senior Independent Director, as appropriate. during the current financial year. One-on-one discussions are then held between the Therefore, at the next Annual General Meeting of the Chairman and the Senior Independent Director on the Company, a resolution will be proposed for the re-election evaluation of the Chairman, and between the Chairman of Nick Jefferies, Simon Gibbins, Malcolm Diamond, Tracey and the Non-Executive Directors on their respective Graham and Bruce Thompson. evaluations. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 71 discoverIE AR2019.indd 71 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:38 Corporate governance BOARD REPORT ON CORPORATE GOVERNANCE Having considered the skills and experience and the performance of, and contribution made by, each Director, and the independence of each Non-Executive Director, the Board is satisfied that all Directors continue to be effective and continue to demonstrate a great deal of commitment to their roles and that their respective skills complement each other to enhance the overall operation of the Board of Directors. Through their ongoing consideration of strategic, operation, financial and risk matters, and by providing appropriate challenge to management, the Board considers that all Directors continue to make an important contribution to the long-term sustainable success of the Company. As such, the Board unanimously recommends their re-election. Conflicts of interest Directors are subject to a statutory duty under the Companies Act 2006 (the “Act”) to avoid a situation where they have, or could have, direct or indirect interest that conflicts, or possibly could conflict, with the Company’s interests. The Act allows directors of public companies to authorise conflicts and potential conflicts where appropriate, where the Articles of Association (the “Articles”) contain a provision to this effect. Accountability Financial reporting The Directors have acknowledged in the Directors’ Responsibilities Statement on page 103 their responsibility for preparing the financial statements of the Company and the Group. The auditor has included in the audit report a statement of responsibilities. The Directors are also responsible for the publication of the Interim Report of the Group, covering the first six months of the Company’s financial year, which, in their opinion, provides a fair, balanced and understandable assessment of the Group’s financial performance and position. The Directors also issue regular trading updates during each financial year (four trading updates were issued during this financial year). £ Remuneration The level and make-up of Directors’ remuneration The level and make-up of the Directors’ remuneration is set The Act also allows the Articles to contain other provisions for out in the Directors’ Remuneration Report on pages 82 to dealing with Directors’ conflicts of interests to avoid a breach 102. As this shows, a proportion of an Executive Director’s of duty. The Group has adopted policies and procedures to deal with conflicts of interests and the Board is satisfied that these continue to operate effectively. overall remuneration is designed to promote the long-term success of the Company by being performance-related through annual bonus and long-term share incentive schemes. Procedure on Board remuneration The remuneration of Executive Directors and the Non- Executive Chairman is the responsibility of the Executive Directors’ Remuneration Committee, as more fully described in the Directors’ Remuneration Report. The remuneration of the Non-Executive Directors is determined by the Non- Executive Directors’ Remuneration Committee, which consists of the Chairman and the Executive Directors. No Director is involved in deciding their own remuneration. 72 discoverIE AR2019.indd 72 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:38 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Shareholder and stakeholder engagement The Board believes that it is an important part of its responsibilities to maintain an effective and timely dialogue with the Company’s Shareholders and institutional investors. To this end, the Board keeps in touch with Shareholder opinion in whatever ways it deems to be most practical and efficient. For example, through direct face-to-face contact, or analysts’ or brokers’ briefings. As mentioned above, four trading updates were issued during the financial year. Throughout the year, meetings are held with institutional Annual General Meeting The level of proxy voting, together with the number of votes cast for and against each resolution and abstentions, will be made available at the AGM after voting on a show of hands has been completed and will be published on the Company’s website: www.discoverIEplc.com A separate resolution will be presented on each substantially separate issue. The proxy form relating to the AGM includes an option for votes to be withheld. Notice of the Meeting will be sent to Shareholders at least 20 working days before the Shareholders, as well as investment analysts. These meetings Meeting. include discussions on governance and strategy matters. It is a responsibility of the Chairman to ensure that Shareholder views are communicated to the Board as a whole. Frequent communication occurs between the Company, via the Executive Directors, and Shareholders and analysts, particularly following results announcements and trading updates. Members of the Board and the Chair of each Board Committee will normally attend the Annual General Meeting to answer any questions. In addition, the Chair of the Remuneration Committee maintains contact, as When, in the opinion of the Board, a significant proportion of votes have been cast against any resolution at any general meeting, the Company will explain, when announcing the voting results, what actions it intends to take to understand the reasons behind the voting result. Board composition Gender diversity Board tenure 1 year 2 required, with the Company’s principal Shareholders about remuneration. The Company responds to any questions from 5 Shareholders, generally as they arise. In order to ensure that members of the Board develop an understanding of the views of major Shareholders about the Company, any feedback received by the Company from meetings with institutional Shareholders and stockbroking Female 29% Male 71% <1 Year 0% >1 Year 100% analysts is discussed internally and raised with the Board, Independence as appropriate. Periodically, the Company’s stockbrokers and public relations advisers follow up meetings held with institutional investors and stockbroking analysts in order to try to obtain feedback on these meetings which may not have been provided directly to the Company. The results of such 5 follow-up discussions are circulated to the Board. 2 In addition, investor roadshows are held twice a year and formal investor presentations are made to groups of private client fund managers. The Company also periodically engages with existing and potential new investors through a formal Capital Markets Day at which attendees have an opportunity to meet with senior management in the Group to gain a better understanding of the businesses’ product portfolios. The last Capital Markets Day was held in March 2018. Further information on how the Company engages with its shareholders and other stakeholders is detailed on page 47. Executive 29% Non-executive 71% Approval This Board Report on Corporate Governance has been approved by the Board and signed on its behalf by Joanna Harkus Madge Group Company Secretary 4 June 2019 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 73 discoverIE AR2019.indd 73 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:38 Corporate governance AUDIT AND RISK COMMITTEE REPORT “ The Committee’s role is central in bringing together the Group’s risk management activities and control environment.” Richard Brooman Chairman of the Audit and Risk Committee Member Richard Brooman Tracey Graham Henrietta Marsh Bruce Thompson Since 2013 2017 2014-19 2019 The Group Company Secretary acts as Secretary to the Committee. 2018/19 key achievements ■ Agreed and implemented a risk management and an internal audit programme for FY19 Key areas of focus in 2019/20 ■ Agree and implement risk management and internal audit programmes for FY20 and the rolling three-year ■ Reviewed and updated the internal control framework, using lessons learnt from the fraud in North America ■ Continued external cyber risk assessment across the Group ■ Reviewed risk management framework and plan ■ Assess the results of the external cyber risk review. Implement and monitor the required actions ■ Build internal audit capability and delivery ■ Review and update the global whistleblowing policies, including adoption of external assessment programme recommendations ■ Review the implementation of IFRS 16 (Accounting for ■ Recruited a new Senior Internal Auditor and revised the Leases) internal audit framework ■ Continue evaluation of the potential impact of Brexit on ■ Continued assessment of the potential impact of Brexit the Group on the Group ■ Implement recommendations from external risk ■ Reviewed and approved enhanced controls and management review processes to identify and monitor distributable reserves ■ Reviewed and updated the policy on non-audit services ■ Finalised the impact assessment of IFRS 9 (Financial ■ Review the accounting for new acquisitions, including Hobart and Positek ■ Review and update terms of reference and audit work Instruments), IFRS 15 (Revenue Recognition), and IFRS 16 plans to ensure compliance with the 2018 UK Corporate (Accounting for Leases) Governance Code ■ Recruitment of new Chair of the Audit and Risk Committee 74 discoverIE AR2019.indd 74 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:39 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Dear Shareholder, I am pleased to report on the activities of the Audit and Risk Committee (“the Committee”) during the year under review. Following six years as a Non-Executive Director of The Board is satisfied that the members of the Committee have both recent and relevant experience (as set out on pages 54 and 55) and that, therefore, the Committee as a whole has competence in the sector in which the Group discoverIE Group plc, most of it as Chair of the Audit and Risk operates. The Committee is satisfied that the Group’s Committee, I plan to retire from the Board at the conclusion executive compensation arrangements do not prejudice of the AGM in July 2019. Post 31 March 2019, discoverIE announced the appointment of Clive Watson as Non- Executive Director and Chair of the Committee with effect from 2 September 2019. The Committee and external auditor During the year, the Committee met three times and also met privately with the external auditor. In addition to the Committee members, the Group Chief Executive, the Group Finance Director, representatives from the external auditor, the Group Risk Manager and the Group Financial Controller attended parts of these meetings by invitation. As Chair of the Committee, I maintain direct communication with the external auditor and the Group Risk Manager, independently of the management of the Company. Meetings of the Committee are scheduled so as to ensure the Committee is informed fully, and on a timely basis, on areas of significant risks and judgement. The Committee also received sufficient, reliable and timely information from management on significant changes to financial accounting standards and reporting requirements, regulatory and governance changes and developments around risk management, fraud prevention and detection, and cybersecurity. As Chair of the Committee, I report to the robust controls and good stewardship. Role of the Committee The Committee’s role is central in bringing together the Group’s risk management activities and control environment to ensure adherence to policies, the integrity of financial reporting and the maintenance of a strong risk-focused culture. As Chair of the Audit and Risk Committee, I attend the Group’s Annual General Meeting and make myself available for any Shareholder questions on the Committee’s remit. The Committee oversees and reviews the management of risk, financial results, and the Group’s internal audit function. Key responsibilities of the Committee: ■ Consideration of the appropriateness of the accounting principles, policies and practices adopted in the Group’s accounts; ■ Review of external financial reporting and associated announcements to ensure they are fair, balanced and understandable; ■ Managing the appointment, and remuneration of the Group’s external auditor, together with an assessment of the effectiveness and independence of the audit, including the policy on the award of non-audit services; Board on any significant matters arising from the activities of ■ Initiating and supervising a competitive tender process for the Committee. The Committee believes that the issue of non-audit services the external audit, as and when required; ■ Oversight of the internal audit function; to the Company is closely related to external auditor ■ Ensuring the effectiveness of the Group’s risk management independence and objectivity. The Committee recognises processes and internal controls; ■ Oversight and update of the Group Risk Register; ■ Oversight of the Group’s whistleblowing procedures; ■ Monitoring compliance with the UK Corporate Governance Code. that the independence of the external auditor may risk becoming compromised if they also act as the Company’s consultants and advisers to any material extent. Having said that, the Committee accepts that certain work of a non- audit nature is best undertaken by the external auditor. To keep a check on this, the Committee reviewed its policy on the provision of non-audit services during the year to ensure that there is no likelihood of any impairment of auditor independence or objectivity. The non-audit services that were provided by the external auditor during the financial year were in line with the policy, were permissible under Ethical Standards and were not material. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 75 discoverIE AR2019.indd 75 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:39 Corporate governance AUDIT AND RISK COMMITTEE REPORT Fair, balanced and understandable The Committee has, at the request of the Board, reviewed this year’s Annual Report and Accounts to assess whether it presents a fair, balanced and understandable view of the Company’s position and prospects. The Committee’s review took account of the process by which the Annual Report and Accounts is prepared, which includes analysis of changes to applicable reporting requirements and standards, and a robust schedule of review and verification by senior management and external advisers to ensure disclosures are accurate. The Committee is satisfied that, taken as a whole, the Annual Report and Accounts is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Group’s position and performance, business model and strategy and has advised the Board accordingly. Significant matters considered and decisions taken As part of the monitoring of the integrity of the financial statements, the Committee assesses whether suitable accounting policies have been adopted and whether management has made appropriate estimates and judgements. Support from the external auditor is sought when undertaking these assessments. During the year, the Committee’s review of other significant accounting and financial reporting issues included a focus on the key areas outlined as follows: Impairment of goodwill A consideration of the carrying value of goodwill and the assumptions underlying the impairment review. The judgements in relation to goodwill impairment largely relate to the assumptions underlying the calculations of the recoverable amount of the business unit being tested for impairment, primarily the achievability of long-term business plans and macroeconomic assumptions underlying the valuation process. The assumptions are sensitised to ensure that there is adequate headroom between the recoverable amount and the carrying value of the business being tested for impairment. A review of the reassessment of the basis of allocation to the Acal BFi businesses and conclusion that the Acal BFi Group represents one cash generating unit (CGU) due to the interdependence of cash flows across the business. Accounting for acquisitions A review of the initial accounting for the acquisition of Cursor Controls during the year, including the appropriateness of the assumptions used in assessing the fair value of assets and liabilities acquired. Valuation of the legacy defined benefit pension scheme A review of the final assessment of the fair value accounting for Santon (acquired in the prior year). A review of the appropriateness of the assumptions used in the valuation of the legacy defined benefit pension scheme under IAS 19 – Employee Benefits. Additionally, the review of the appropriateness of the provision established for guaranteed minimum pensions (GMPs) following the High Court Judgement in October 2018 confirming that pension schemes are required to equalise GMPs accrued between 1990 and 1997 for men and women. The recognition and valuation of judgemental provisions A determination of the appropriateness of the assumptions used in the recognition and valuation of judgemental provisions which relate mainly to onerous contracts, inventory, severance indemnities, acquisition earn-out arrangements, long-term bonus plans, restructuring and integration. Presentation of underlying profit adjustments A review of the appropriateness of items disclosed as exceptional items and acquisition- related costs (including asset amortisation of acquired intangibles, acquisition expenses and legacy IAS 19 costs) in the Supplementary income statement information and notes to the Group financial statements, in line with the Group’s stated policy. 76 discoverIE AR2019.indd 76 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:39 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Impact of IFRS A review of the impact of IFRS 9 and IFRS 15 in the current financial year and the application of relevant policies following the adoption of the standards. A review of the impact of IFRS 16 from FY20 onwards. Accounting for fraud A review of the accounting for a fraud perpetrated against the Group in a US subsidiary. This included a prior year restatement of inventory and an exceptional item in the income statement. The Committee was satisfied that each of the matters set out above had been fully and adequately addressed by the Internal Controls The Group’s finance department includes a separate Internal Executive Directors, appropriately tested and reviewed by the Audit function. This is led by the Group Risk Manager who external auditor and that the disclosures made in this Annual is part of the Group management team and reports both to Report and Accounts were appropriate. Risk management and internal controls The Board has overall responsibility for the Group’s risk appetite, risk management and ensuring that there is an effective risk management strategy and framework. This includes determining the nature and extent of the risks the Group Financial Controller and, independently, to me, as Chair of the Audit and Risk Committee. The scale of internal audit work was increased during the year, and, towards the end of FY19, the internal audit function was expanded to include the recruitment of a Senior Internal Auditor, reporting to the Group Risk Manager. which it is willing to take in achieving the Group’s strategy A programme of internal audit activities has been completed and objectives. The Board is ultimately responsible for during the year. The scope of work carried out by internal the effectiveness of the risk management and internal audit generally focuses on the internal financial controls controls systems. Further information on the Group’s risk operating within each business, particularly in recently management and principal risks can be found on pages 40 acquired businesses. Further internal audit work is outsourced to 45. to external providers, where appropriate. Oversight of risk management is undertaken by the While no system of controls can provide absolute assurance Committee, in accordance with its terms of reference. In against material misstatement or loss, the Group’s systems order to ensure the effectiveness of the risk management are designed to manage, rather than eliminate, the risk of and internal control systems, the Committee undertakes a failure to achieve business objectives and provide reasonable, number of key activities during the year, including: and not absolute, assurance against material misstatement or loss. As part of the annual review of the effectiveness of the Group’s internal controls, the Committee, on behalf of the Board, has regard to the significance of the risks involved, the likelihood and severity of an event occurring and the costs associated with any relevant controls. ■ Consideration of the risk management activities during the year (including particular focus on specific areas of cyber security and financial controls); ■ Review of risk reporting to ensure effectiveness and that the balance between risk and opportunity was in keeping with the Group’s risk appetite; ■ Regular meetings with members of senior management and internal audit; ■ Review of reports on control matters and challenge of management’s response to any matters raised; ■ Evaluation and challenge of the results and recommendations of audits undertaken by the internal audit function and the external auditor; and ■ Review of the annual Audit and Risk Committee agenda. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 77 discoverIE AR2019.indd 77 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:39 Corporate governance AUDIT AND RISK COMMITTEE REPORT The principal components of the Group’s systems of The Finance team is responsible for producing financial control are: ■ a clearly defined organisational structure with short and clear reporting lines; ■ recruitment of high quality staff; ■ an ongoing process for the identification, regular review and management of the principal risks and issues affecting the business, both at Group and operating levels; ■ in-house and outsourced internal audit activities; ■ an ongoing review of regulatory compliance; ■ a regular review of the principal suppliers and customers of the Group, and how each impacts upon the Group’s information that is timely, accurate and in accordance with applicable laws and regulations. In addition, it is responsible for the distribution of financial information, both internally and externally. Key financial and operational performance is reported on a timely basis and measured against both the Board-approved budget, management’s rolling forecasts and comparable information from prior periods. A review of the financial statements is completed by management to ensure that the financial position and results of the Group are appropriately reflected. All financial information published externally by the Group is approved by the Board. The above procedures apply to discoverIE Group plc and all of business; its subsidiary companies. ■ a comprehensive planning process, which starts with a strategic plan and culminates in an annual budget and a long-term plan; ■ regular rolling forecasting throughout the year of orders, sales, profitability, cash flow, working capital and balance sheets; During the year, the Group’s internal control processes identified a fraud, perpetrated against the Group in one of its US subsidiaries. Strong and decisive management action was taken and a review of the Group’s expenses policies and procedures was undertaken. The Committee also decided to expand the internal audit programme which was aided ■ a regular review of actual performance against budget and by the expansion of the internal audit team. The external forecasts; ■ clearly defined procedures for the authorisation of major new investments and commitments; and ■ a requirement for each operating company to maintain a system of internal controls appropriate to its own local business environment. auditors were also engaged to carry out full scope audits on certain trading entities not subject to a statutory audit. The Group was able to recover most of the loss under its global insurance programme. The financial impact of the loss and insurance recovery are reported in notes 2 and 6 to the Group financial statements. Terms of reference The Committee’s terms of reference are available upon request and are on the Company’s website: www.discoverIEplc.com Richard Brooman Chairman of the Audit and Risk Committee 4 June 2019 78 discoverIE AR2019.indd 78 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:40 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Corporate governance Innovative Electronics www.discoverieplc.com Stock Code: DSCV 79 discoverIE AR2019.indd 79 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:40 NOMINATION COMMITTEE REPORT Member Malcolm Diamond Tracey Graham Nick Jefferies Bruce Thompson Since 2017 2018 2009 2019 The Group Company Secretary acts as Secretary to the Committee. Key areas of focus in 2019/20 ■ Recruitment and induction of a Non-Executive Director and Chair of the Audit and Risk Committee ■ Review and update the Group’s diversity policy ■ Update the Committee’s terms of reference to ensure compliance with the 2018 Corporate Governance Code Dear Shareholder, The discoverIE Board has a collective responsibility for promoting the long-term success of the Company for the benefit of its Shareholders and employees. In leading the search for new Directors, the Nomination Committee (“the Committee”) plays an important part in helping to secure that long-term success. At the same time, discoverIE’s commitment to good governance and compliance with the requirements of the UK 2016 Corporate Governance Code means that there is in place a formal, rigorous and transparent procedure for the appointment of new Directors to the Board. During the year, the Committee met formally on five occasions with all Committee members attending all meetings. The Committee made several recommendations to the Board on the composition and structure of both the Board and its Committees. “ The Board is committed to a culture which attracts and retains talented people to deliver outstanding performance and further enhance the success of the Group.” Malcolm Diamond MBE Chairman of the Nomination Committee 2018/19 key achievements ■ Reviewed the structure, size and composition of the Board and its Committees ■ Recommended to the Board the appointment, which was duly approved, of Bruce Thompson as a member of the Audit and Risk, Nomination and Remuneration Committees In each case, the Committee’s recommendation was made after careful consideration of the individual’s independence, ■ Updated succession plans for the Board and the senior performance and ability to continue to contribute to the management team Board in the light of the knowledge, skills, commitment and ■ Reviewed and updated the Committee’s terms of experience required. reference ■ Recommended to the Board the reappointments, which were duly approved, of the Non-Executive Directors upon the conclusion of their specified terms of office ■ Recommended to the Board the appointment, which was duly approved, of Bruce Thompson as Senior Independent Director Composition The majority of the Committee members are independent Non-Executive Directors. During the year under review, the Committee was chaired by me, with Richard Brooman, Henrietta Marsh, Tracey Graham and Nick Jefferies as Committee members. In March 2019, Richard Brooman and Henrietta Marsh resigned as members of the Committee and Bruce Thompson was appointed as a member of the Committee. 80 discoverIE AR2019.indd 80 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:41 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Key responsibilities The Committee’s key duties are: Succession planning The Committee is concerned to ensure that a proper ■ To review the structure, size and composition (including the skills, knowledge and experience) of the Board and to process for succession planning for the Board and senior management is in place, so that a pipeline of executive talent recommend changes; is developed. ■ To consider succession planning for the Directors and the right balance of skills, knowledge, experience and diversity During the year, the Board reviewed succession planning for (i) the Executive and Non-Executive Directors, (ii) the on the Board; ■ To identify and nominate candidates to fill Board vacancies, having previously prepared a description of the role and capabilities required for a particular appointment; members of the Group Executive Committee and (iii) other senior managers. The review covered senior managers, including members of the Group Executive Committee, across the Group’s businesses and addressed, in particular: ■ To review the leadership needs of the organisation, both ■ Both emergency and longer-term succession planning; executive and non-executive; ■ The evolution of the Group and the identification of future ■ To make recommendations to the Board on the leaders; reappointment of any Non-Executive Director at the conclusion of their specified term of office and on appointments to the Audit and Risk and Remuneration Committees; and ■ To review, as part of the annual assessment exercise, the time commitment of the Non-Executive Directors to the role and to their external appointments. Appointment of Directors The Committee’s principal role is to make recommendations to the Board on suitable candidates to fill Board vacancies, as and when they arise. In managing this process, the Committee takes into account the Board’s existing balance of skills, knowledge and experience and has due regard for diversity (including gender). A job specification is prepared and agreed by the Committee. Unless the appointment is as an Executive Director, for which a suitable candidate is available from within the Group, the Committee will consult appropriate executive search or other organisations with databases of candidates before a short-list of suitable candidates is produced for agreement by the Committee. References from appropriate third parties will then be taken on the prospective director. Candidates meet all members of the Committee, which then makes recommendations to the Board. Adopted practice is for all members of the Board to meet with the relevant candidate before an appointment is finally made. ■ The development of “rising stars” within the Group; and ■ The impact of acquisitions on the organisational structure. In line with the Group’s long-term succession plans, it was announced in March 2019 that Richard Brooman and Henrietta Marsh would retire at the Annual General Meeting in July 2019. Following the announcement in March, Tracey Graham was appointed as Chair of the Remuneration Committee and Bruce Thompson was appointed as Senior Independent Director. Post 31 March 2019, the Nomination Committee also led the recruitment of an additional Director to the Board, Clive Watson, who will join the Board in September 2019 as a Non-Executive Director and Chair of the Audit and Risk Committee. A Chartered Accountant, Clive Watson recently retired from Spectris plc after 13 years as Group Finance Director and also from Spirax-Sarco Engineering plc where he was the Senior Independent Non-Executive Director and Chair of the Audit and Risk Committee, having joined in 2009. We are delighted to welcome Clive to the Board and look forward to working with him and benefitting from his extensive business experience as we take the Group into the next phase of its development. Following the appointment of Clive Watson to the Board, the Committee is satisfied that the size, composition and structure of the Board and its Committees is appropriate for the size of the Group. Diversity The Board is committed to a culture which attracts and retains talented people to deliver outstanding performance Terms of reference The Committee’s terms of reference are available upon request and are on the Company’s website: and further enhance the success of the Group. While the www.discoverIEplc.com Board has no set objectives in relation to diversity, it is mindful of its responsibilities in this regard when making new appointments to the Board, and for the Group as a whole, and in relation to Board succession and management and development. The Committee plans to review the Group’s policy on diversity during the next financial year. Malcolm Diamond MBE Chairman of the Nomination Committee 4 June 2019 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 81 discoverIE AR2019.indd 81 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:41 Corporate governance DIRECTORS’ REMUNERATION REPORT “ It has been an excellent year for the Company and an excellent year for Shareholders.” Tracey Graham Chair of the Remuneration Committee Member Tracey Graham (Chair) Malcolm Diamond Bruce Thompson Since 2016 2017 2018 The Committee consults with the Group Chief Executive who may attend meetings by invitation of the Committee Chair, although he is not involved in deciding his own remuneration. The Group Company Secretary acts as Secretary to the Committee. 2018/19 key achievements ■ Implementation of remuneration policy following approval by the Company’s Shareholders ■ Renewal of long-term incentive plan and update of plan rules ■ Implementation of a deferred bonus scheme, in line with the remuneration policy ■ Setting of appropriate incentive targets for Executive Directors and Senior Management ■ Review and update of the Committee’s terms of reference ■ Assessment of the competitiveness of the Company’s remuneration, including a review of external benchmarking data Key areas of focus in 2019/20 ■ Review of remuneration policy to ensure that it remains appropriate ■ Carry out a tender for the Company’s remuneration consultations, including the Company’s current consultants ■ Review the competitiveness of remuneration for Executive Directors and Senior Management ■ Set incentive targets and determine award levels for Executive Directors and Senior Management ■ Update the terms of reference of the Committee to ensure compliance with the 2018 Corporate Governance Code 82 discoverIE AR2019.indd 82 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:42 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Corporate governance ANNUAL STATEMENT Information not subject to audit Dear Shareholder, On behalf of the Board, it is my pleasure to present our Directors’ Remuneration Report (the “Report”) for the year ended 31 March 2019. I succeeded Henrietta Marsh as Chair of the Remuneration Committee in March 2019, as Henrietta will be retiring from the Board at the upcoming AGM after six years. I would like to thank Henrietta for her support and wish her well for the future. The Company’s remuneration philosophy for Executive Directors and Senior Management is to motivate, retain and, when necessary, attract senior management of the right calibre. To do this, we provide packages which reflect individual experience and performance and take into account the remuneration paid by companies of a similar size and complexity to discoverIE. During the year, the Committee implemented the Company’s remuneration policy, which had been approved at the 2018 Annual General Meeting. The revised policy incorporated a number of changes from the previous policy, in order to The Committee’s conclusion was that the current structure works well and remains fit for purpose. It is simple and consistent, with pay outcomes dependent upon performance linked to our business strategy. All decisions made by the Committee have been made under the Group’s Remuneration Policy. The salary increase for the Group Chief Executive was 3%, in line with the increase awarded to the UK workforce. Further details can be found on page 101. The Committee used its discretion to award a salary increase to the Group Finance Director of 11.8% (new salary £310,000). Additional context in relation to this increase is provided below. The Committee informed the Company’s major shareholders, comprising over 75% of the Shareholder base at the time, as well as key representative bodies of its decision. Business performance and resulting remuneration outcomes for the year ending 31 March 2019 It has been an excellent year for the Company and for Shareholders. discoverIE has continued to deliver strong results for Shareholders: trading for the year ended 31 March 2019 was strong across all four quarters and the Group has delivered full-year earnings in line with the Board’s incorporate best practice, to improve the competitiveness of remuneration packages and to further improve alignment. expectations. In determining the remuneration packages for the Executive Directors for the forthcoming financial year, the Committee took into account the following factors: ■ The Group’s overall performance and strategy - in particular, the Committee noted the strong organic growth, value- enhancing acquisitions, and strong trading of discoverIE for the year ended 31 March 2019; ■ Current and emerging market practice; ■ Best practice expectations of institutional investors; and ■ The competitiveness of the Company’s remuneration – the Committee looked both at other companies in the Small Cap index as well as a set of comparators that have similar complexities to discoverIE. There were a number of achievements which we expect to build value over the longer term. You can read more detail in the Strategic Report on pages 4 to 51 but some of the highlights are summarised below: ■ Strong growth in sales, orders, profits and earnings ■ Organic growth driven by strong performance from the Design & Manufacturing division ■ Further good progress on key strategic and performance targets ■ Three higher margin D&M acquisitions, two since the year-end ■ Successful equity placing on 16 April 2019, raising c.£28m ■ Record year-end order book of £139m (+15% CER) Innovative Electronics www.discoverieplc.com Stock Code: DSCV 83 discoverIE AR2019.indd 83 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:42 DIRECTORS’ REMUNERATION REPORT In light of this performance, the Committee decided to award annual bonus payments of 86.4% and 68.2% of maximum to the Group Chief Executive and Group Finance Director respectively. Further details can be found on page 95 of this report. In addition, the Committee approved LTIP awards of 150% and 125% to the Group Chief Executive and Group Finance Director. These awards, made on 30 April 2019, are to reward an excellent year and to continue to motivate the Executive Directors to deliver Shareholder value over the longer term. It has been particularly pleasing to see continued recognition of the long-term strategic progress being made by the Company. This resulted in full vesting of the LTIP awards granted in March 2016. These shares will be subject to a two- year holding period before they become exercisable. Details of salary change for Group Finance Director The Company’s remuneration policy provides that salary increases awarded may be higher than the workforce in exceptional circumstances, such as the need to retain a Other key activities in the year ending 31 March 2019 During the year under review, the Committee held five formal meetings. As well as the implementation of the remuneration policy, the Committee also carried out the following activities: ■ Reviewed and approved the Executive Directors’ performance against financial and non-financial objectives for the year ended 31 March 2018 and the 2015 LTIP targets and determined the bonuses payable; ■ Reviewed the Executive Directors’ expected performance against financial and non-financial objectives for the year ended 31 March 2019 and the 2016 LTIP Awards; ■ Determined salary increases for Executive Directors as well as other GEC members for the year ending 31 March 2020; ■ Approved the LTIP Awards to be made in the year ending 31 March 2020 and their performance conditions; ■ Reviewed and approved the annual bonus structure for Executive Directors and Senior Management for the year ending 31 March 2020; critical executive; which the Committee believes is the case ■ Renewed the LTIP plan which was due to expire in in respect of the Group Finance Director. The Committee July 2018; determined the salary of the Group Finance Director after ■ Implemented a deferred bonus scheme, in line with the careful consideration of a number of important factors: Company’ remuneration policy; and ■ The increased size, scope and complexity of the business, which now has a wider international footprint due to ■ Updated the terms of reference of the Committee. Further detail on the above can be found in the Annual strong organic growth and the increased number of value- Report on Remuneration. During 2019, the Committee will enhancing acquisitions; ■ Performance: the Group Finance Director, together with the Group Chief Executive, is instrumental in formulating continue to review the reward arrangements appropriate to Executive Directors, and will also continue to consider the remuneration implications for the UK Corporate Governance and implementing the Group’s strategy, which is delivering Code 2018. strong results and growth; and The Annual Report on Remuneration explains how our policy ■ For market value purposes it is now around the mid-level of the FTSE Small Cap index, while for revenue purposes, the has been implemented during the year and, along with this letter, will be subject to an advisory vote at our AGM Company has the size, complexity and international spread (resolution 3). We hope that you will support this resolution. of a number of FTSE 250 organisations. The Committee determined the salary level of the Group Finance Director after careful consideration of these factors. To ensure this level was consistent with market rates, the Committee also reviewed external benchmarking data of the Tracey Graham Chair of the Remuneration Committee Company’s peers. 4 June 2019 The Committee therefore decided to increase the Group Finance Director’s salary to £310,000 p.a. (11.8%). All other benefits received, including pension (5.71%) and maximum bonus and LTIP potential (as percentages of salary) remain the same. 84 discoverIE AR2019.indd 84 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:42 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Corporate governance DIRECTORS’ REMUNERATION REPORT REMUNERATION AT A GLANCE CORPORATE PERFORMANCE FOR THE YEAR Underlying profit before tax +24% FY19 FY18 £27.2m £21.9m Underlying diluted earnings per share +22% FY19 FY18 27.2 p 22.3p Full year dividend per share +6% FY19 FY18 9.55p 9.0p Audited information Executive Directors In this section, we show the link between corporate performance for the year under review and the remuneration outcomes for the Executive Directors. The key features of the Executive Directors’ remuneration for the year ended 31 March 2019 are also shown. Remuneration philosophy The key principles of our approach to executive remuneration are: Align to discoverIE’s purpose, strategy, risk policies and risk-taking capacity Incentivise achievement of discoverIE’s business plan and longer-term sustainable growth of the business Recognise the leadership team by differentiating total remuneration based on the relative performance of the business and the individuals Ensure risk-based decision-making and good governance Executive Director total remuneration Nick Jefferies FY19 Simon Gibbins FY19 £1.796m £881k Total fixed pay 29% Bonus1 LTIP 22% 49% FY18 Total fixed pay 35% Bonus LTIP 21% 44% FY18 £1.80m £937k Total fixed pay 28% Bonus LTIP 15% 56% 1 20% of the bonus award was in the form of deferred shares Total fixed pay 31% Bonus LTIP 15% 53% Innovative Electronics www.discoverieplc.com Stock Code: DSCV 85 discoverIE AR2019.indd 85 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 HEADING DIRECTORS’ REMUNERATION REPORT Remuneration outcomes for the Executive Directors for the year ended 31 March 2019 Salary FY19 Bonus (£k and as % of salary) Taxable benefits Pension benefits/allowance Value of LTIP vesting Single figure of total remuneration Nick Jefferies £000 453 392 11 60 881 1,796 86.4% Simon Gibbins £000 277 189 11 16 388 881 68.2% LTIP awards of 150% and 125% of salary were made to the Group Chief Executive and the Group Finance Director on 30 April 2019 respectively. These awards reflect the strong financial results in the year. In accordance with the Remuneration Policy, 20% of Nick Jefferies’ bonus will be in the form of deferred shares. Remuneration for the year ended 31 March 2020 The table below sets out a summary of how the proposed remuneration policy will apply during 2019/20. Possible remuneration outcomes for the Executive Directors for the year ended 31 March 2020 are shown on page 93. Remuneration element Base salary Remuneration for year ending 31 March 2020 ■ Effective 1 April 2019, salary increase of 3% for the Group Chief Executive, in line with the workforce. An exceptional salary increase of 11.8% was awarded to the Group Finance Director. Salaries are now £466,754 for the Group Chief Executive and £310,000 for the Group Finance Director Pension ■ Cash equivalent of 15% of salary for Group Chief Executive and 6.5% of salary for Group Finance Director (minus the employer’s National Insurance contribution) Annual bonus ■ Maximum bonus opportunity of 125% of salary for Group Chief Executive (75% of salary for target performance) and 100% of salary for Group Finance Director (60% of salary for target performance) ■ While historic remuneration to Executive Directors has not been excessive; in light of the latest remuneration guidance on target pay-outs for Executive Directors’ annual bonuses, the Committee plans to review the relationship between target and maximum bonuses during FY20 ■ Performance metrics are based 80% on financial measures, including underlying EBIT and Simplified Working Capital. The remaining 20% will be based on strategic measures ■ Mandatory deferral of 20% of any bonus earned into discoverIE shares for a period of three years if bonus opportunity is above 100% of salary. This means that currently 20% of any bonus paid to the Group Chief Executive will be deferred into discoverIE shares LTIP ■ LTIP awards for FY20 will be made in line with policy, with grant sizes of up to a maximum of 135% of salary for Group Chief Executive and 100% of salary for Group Finance Director1 ■ Performance metrics and targets will be the same as FY20 grant – one-third on underlying EPS Growth, one-third on Relative TSR and one-third Absolute TSR ■ Shareholding target of 250% of salary for the Group Chief Executive and Group Finance Director within seven years Shareholding guidelines 1 Additional awards may be granted to the Group Chief Executive and Group Finance Director in return for their bearing the Company’s liability to Employer’s National Insurance arising on the exercise of such grants made to them above. The additional award ensures that the Group Chief Executive and Group Finance Director are in a neutral position on an after-tax basis, assuming no change in the tax rate. 86 discoverIE AR2019.indd 86 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance REMUNERATION POLICY Information not subject to audit This part of the Directors’ Remuneration Report sets out the remuneration policy that Shareholders approved at the Annual General Meeting in July 2018, which was implemented from that date. It has been prepared in When implementing the policy, the Committee: ■ Takes account of pay and employment conditions elsewhere in the Group; ■ Ensures that incentive arrangements encourage responsible behaviour in all aspects of the Company’s business, including financial, social, environmental and governance aspects; do not encourage excessive risk-taking; and are compatible with the Company’s risk policies and accordance with the Companies Act 2006 (the “Act”) and the procedures. The Committee has the discretion to take Large and Medium-sized Companies and Groups (Accounts these factors into account when adjudicating bonuses and and Reports) (Amendment) Regulations 2013. LTIP outcomes; The below policy has been updated with data for the year ending 31 March 2020, where relevant. The Committee has reviewed the Executive Directors’ remuneration packages to ensure that they reflect the Company’s own particular ■ Enters into open dialogue and consults with key Shareholders, when looking to make material changes to the remuneration policy; and ■ Considers market practice in terms of the structure and circumstances and are aligned with the Company’s key levels of executive remuneration. strategic objectives, as set out in the Strategic Report on pages 4 to 51, and with the long-term interests of its Key objectives of our reward policy The policy aims to deliver a remuneration package that: Shareholders. ■ Attracts and retains high calibre Executive Directors and Senior Managers in a challenging and competitive business environment; ■ Reduces complexity, delivering an appropriate balance between fixed and variable pay for each Executive Director; ■ Encourages long-term performance by setting challenging targets linked to sustainable growth; ■ Is aligned to the Group’s objectives and Shareholder interests and to the delivery of sustainable value to Shareholders. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 87 discoverIE AR2019.indd 87 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 Corporate governance DIRECTORS’ REMUNERATION REPORT Operation and performance metrics Opportunity Salaries are reviewed annually and normally fixed for 12 Any percentage increases will months, effective from 1 April. The Committee takes into account: ■ Role, competence and performance; ■ Average change in broader workforce pay; and ■ Total organisational salary budgets. Salaries are also benchmarked against companies of a comparable size and complexity which operate internationally, in similar sectors. ordinarily be in line with those across the wider workforce. However, salary increases may be higher in exceptional circumstances, such as the need to retain a critical executive, or an increase in the scope of the executive’s role (including promotion to a more senior role) and/or in the size of the Group. Directors, along with other senior UK executives, receive a Insurance cover based on market car allowance, life assurance and critical illness cover, and rates. family medical insurance. The Company operates a defined contribution pension Up to 15% of base salary. scheme. Contributions are benchmarked periodically against companies of a comparable size and complexity which operate internationally, in similar sectors. Executive Directors may take a cash allowance in lieu of pension contributions. Targets (financial and non-financial) are determined and Up to 125% of salary payable for reviewed by the Committee annually and are selected to significant over-achievement be relevant for the year in question. of financial and non-financial bonus objectives. Up to 60% of the maximum bonus opportunity will be payable for targeted and budgeted financial and non- financial objectives. Actual bonus payable is determined by the Committee after the financial year-end, based on performance against these targets. Financial objectives are updated to reflect acquisitions, disposals and currency movements during the year. Mandatory deferral of 20% of any bonus earned into discoverIE shares for a period of three years (if bonus opportunity is above 100% of salary). Malus and clawback provisions apply to cash and deferred elements of the bonus, applying in the event of material misstatement of information or misconduct. Performance metrics are based at least 70% on financial performance. Financial measures may include (but are not limited to) EBIT and Simplified Working Capital. Non-financial measures may include strategic measures directly linked to the Company’s priorities. Remuneration policy Element, purpose and link to strategy Base salary To attract and retain quality staff. Benefits To help retain employees and remain competitive in the marketplace. Pension To facilitate long-term savings provisions. Annual bonus The principal long-term measure of Shareholder interests is Total Shareholder Return. The Committee considers that this will be enhanced through the setting and attainment of various short-term targets, which are within the control of the Executive Directors. These are incentivised through the bonus plan which rewards the achievement of annual financial and strategic business targets. 88 discoverIE AR2019.indd 88 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Element, purpose and link to strategy Long Term Incentive Plan To motivate Executives to deliver Shareholder value over the longer term. Operation and performance metrics Opportunity Awards of conditional shares through nil-cost options Up to 150% of salary. are typically granted annually, with vesting dependent on the achievement of performance conditions over the following three years. Threshold performance will result in 25% of the award vesting. Vested awards are subject to a two-year holding period, in aggregate a five-year period from award to exercise. Dividend equivalents will be paid on vested awards. Part of an LTIP award may be satisfied using an HMRC- approved company share option scheme (CSOP). Other than this, the Company no longer makes awards of approved share options to Executive Directors except, potentially, in the case of new recruits (see recruitment policy). Malus and clawback applies to vested and unvested LTIP awards in the event of material misstatement of information or misconduct. Performance metrics reflect strategic goals and milestones. The exercise of the award is dependent upon the individual’s continued employment for a three-year period from the date of grant, subject to the good and bad leaver provisions within the Plan rules and the satisfaction by the Company of certain performance conditions over the three-year vesting period. The performance conditions are based at least 50% on the Group’s TSR performance, on a relative and/or absolute basis. The remainder will be on Group financial performance, which may include (but not be limited to) Group earnings or returns over the performance period. The Company’s share schemes are funded through a combination of shares purchased in the market and newly issued shares, as appropriate. The Company monitors the number of shares issued under the schemes and their impact on dilution limits. The Company is committed to remaining within the Investment Association’s 10% dilution limit. Shareholding guidelines To further align the interests of Executives with those of Shareholders. Executive Directors will be required to accumulate the Executives will be required to required shareholding requirement within a certain time hold 200% of salary after five period from appointment. years and 250% after seven years. Shares held which are no longer subject to performance conditions count towards the requirement. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 89 discoverIE AR2019.indd 89 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 Corporate governance DIRECTORS’ REMUNERATION REPORT Notes to the remuneration policy table Performance conditions and target setting Each year, the Committee will determine the weightings, measures and targets as well as timing of grants and payments for the annual bonus and LTIP plans within the approved remuneration policy and relevant plan rules (or documents). The Committee considers a number of factors which assist in forming a view. These include, but are not In exceptional circumstances, the Committee has the discretion to adjust and/or set different targets and performance conditions for annual bonus and long- term incentive plans, provided the new conditions are no tougher or easier than the original conditions. This includes events where conditions are unable to fulfil their original intended purpose. Awards may also be adjusted in certain circumstances (e.g. for a rights issue, a corporate restructuring limited to, the strategic priorities for the Company over the or for special dividends). short to long term, Shareholder feedback, the risk profile of the business and the macroeconomic climate. Any discretion exercised by the Committee in the adjustment of performance conditions will be fully explained The Annual Bonus Scheme is measured against a balance of profitability, cash management and the delivery of key strategic areas of importance for the business. The profitability to Shareholders in the relevant report. If the discretion is material and upwards, the Committee will consult with major Shareholders in advance. No such discretion was metric used is EBIT and the cash management metric is exercised during FY19. Simplified Working Capital. The LTIP is assessed against a balance of measures identified as those most relevant to driving sustainable bottom- line business performance, as well as providing value for Shareholders. These measures include EPS Growth, Absolute TSR and Relative TSR. Targets are set against the annual and long-term plans, taking into account analysts’ forecasts, the Company’s strategic plans, prior year performance, estimated vesting levels and the affordability of pay arrangements. Targets are set to provide an appropriate balance of risk and reward to ensure that, while being motivational for participants, maximum payments are only made for exceptional performance. The Committee also has the ability to grant additional LTIP awards to participants in return for their bearing the Company’s liability to employer’s National Insurance arising on the exercise of such grants made to them above. The additional award ensures that the participants are in a neutral position on an after-tax basis, assuming no change in tax rates. All historical awards that have been granted before the date this policy came into effect and still remain outstanding (including those detailed on page 98 of the Annual Report on Remuneration) remain eligible to vest based on their original award terms, other than for the adjustment made for the rights issue in 2014. Recruitment (and appointment) policy The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s approved remuneration policy in force at the time of appointment. Similar considerations may also apply where a Director is promoted to the Board from within the Group. 90 discoverIE AR2019.indd 90 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Element Recruitment policy Base salary Benefits Pension Annual bonus Long Term Incentive Plan The Committee will take into account a number of factors, including the current pay for other Executive Directors, external market forces, skills and current level of pay. Benefits provision would be in line with normal policy. The Committee may agree that the Company will meet appropriate relocation costs. In line with normal policy, i.e. a maximum contribution (or a cash allowance in lieu of contribution) of no more than 15% of salary. Eligible to take part in the annual bonus, with a maximum bonus of up to 125% in line with policy. A normal award of up to 150% of salary, in line with policy. In addition, a new recruit may be awarded up to 300% of salary in performance shares, which would be subject to the same performance measures and rules in force for the LTIPs at the time of appointment. Compensation for forfeited remuneration The approach in respect of compensation for forfeited remuneration in respect of a previous employer will be considered on a case-by-case basis taking into account all relevant factors, such as performance achieved or likely to be achieved, the proportion of the performance period remaining and the form of the award. The Committee retains the ability to make use of the relevant Listing Rule to facilitate the “buy- out”. Any “buy-out” awards would have a fair value no higher than the remuneration forfeited. Notice period and payment for loss of office It is the Company’s policy that Executive Directors should have service contracts incorporating a maximum notice period of one year. However, it may be necessary occasionally to offer longer initial notice periods to new Directors. Under the terms of their service contracts, any termination payments are not predetermined but are determined in accordance with the Director’s contractual rights, taking account of the circumstances and the Director’s duty to mitigate loss. The Company’s objective is to manage its exposure to the risk of a potential termination payment. Non-Executive Directors have letters of appointment for a term of one year whereupon they are normally renewed, but generally for no more than nine years in aggregate. Non-Executive Directors are not eligible for payment on termination, other than payment to the end of their contracts. Malcolm Diamond Chairman Date of contract/ letter of appointment Expiry of current term 28 November 2016 31 March 2020 Nick Jefferies Group Chief Executive 26 November 2008 12 months by either the Simon Gibbins Group Finance Director 10 June 2010 Director or the Company 12 months by either the Director or the Company Richard Brooman Senior Non-Executive Director 7 December 2012 31 December 20191 Henrietta Marsh Non-Executive Director Tracey Graham Non-Executive Director Bruce Thompson Non-Executive Director 22 April 2013 23 October 2015 15 January 2018 25 July 20191 31 October 2019 25 February 2020 2 On 15 March 2019, the Company announced that Richard Brooman and Henrietta Marsh planned to retire at the end of the Annual General Meeting on 25 July 2019. Other than their service contracts, no contract of significance, to which any member of the discoverIE Group is a party and in which a Director is or was materially interested, subsisted at the end of, or during, the year. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 91 discoverIE AR2019.indd 91 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 Corporate governance DIRECTORS’ REMUNERATION REPORT Termination payments for Executive Directors On termination, the Company will normally make a payment Change of control or restructuring On a change of control, all LTIP awards will be released, in lieu of notice (“PILON”) which is equal to the aggregate of: subject to performance requirements and prorated the basic salary at the date of termination for the applicable according to completion of the vesting period. In line with notice period; the pension allowance over the relevant period market practice and the Plan rules, the final treatment of any and the cost to the Company of providing all other benefits awards is subject to the discretion of the Committee. (excluding pension allowance) or a sum equal to the amount of benefits as specified in the Company’s most recent Annual Report; and a bonus payment calculated in accordance with the bonus plan agreed by the Committee. The Company may pay the PILON either as a lump sum or in equal monthly instalments, from the date on which the employment terminates until the end of the relevant period. If alternative employment (paid above a pre-agreed rate) is commenced, for each month that instalments of the There are no enhanced bonus provisions on a change of control. Comparison with remuneration policy for other employees The Company’s approach to salary reviews is consistent throughout the Company with consideration given to responsibility, experience, performance, salary levels in comparable organisations and the Company’s ability to pay. PILON remain payable, the monthly amount, in aggregate Differing bonus arrangements (which are normally (excluding the pension payment), may be reduced by half of discretionary) operate elsewhere in the organisation and, one month’s basic salary in excess of the pre-agreed rate. The treatment of LTIP awards on termination will be in accordance with the plan rules and, where appropriate, at the discretion of the Committee. If identified as a “good leaver” for the purposes of the bonus plan, the bonus payout will be subject to time prorating to reflect the time period in employment as well as the achievement of targets to that date. If identified as a “good leaver” under the LTIPs and share option schemes’ rules, (including those good leavers identified as being at the discretion of the Committee), outstanding awards may be exercised, normally pro rata for service up until the date of leaving and subject to the subject to role, employees are entitled to benefits such as healthcare, car allowance (or Company-funded vehicle), life assurance and critical illness cover. Fees for Non-Executive Directors Fees for the Non-Executive Directors are determined on behalf of the Board by the Non-Executive Directors’ Remuneration Committee, while fees for the Chairman are determined by the Remuneration Committee. When determining fees, due regard is given to fees paid to Non- Executive Directors in other similarly-sized UK quoted companies, the time commitment and the responsibilities of the roles. Non-Executive Directors cannot participate in any of the Company’s share incentive schemes. As disclosed on page 94 of this Annual Report and Accounts, additional outcome of the performance conditions, either on the fees, over and above the base fee payable to the Non- normal release or on such earlier date as the Committee Executive Directors, are payable for chairing the Audit and may determine. If, in the judgement of the Committee, Risk and Remuneration Committees and for acting as Senior greater progress towards achievement of targets has been Independent Director. made as a result of the performance of the Executive Director, it may, at its absolute discretion, decide to vest up to 100% of the outstanding award. This is under exceptional circumstances only. The Committee may also agree to make payments in respect of statutory employment claims, reasonable legal fees, outplacement and accrued holiday or sick leave. Fees are normally reviewed annually to ensure that they reflect an individual’s time commitment and responsibilities. 92 discoverIE AR2019.indd 92 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance External appointments The Executive Directors are entitled to accept one appointment outside the Group, provided that the Consideration of employment conditions elsewhere in the Group The remuneration policy, which has been implemented Chairman’s permission is obtained in advance of accepting for the current Executive Directors, is more weighted an appointment and specific approval is given by the Board. towards performance-related pay than for other employees. Neither of the Executive Directors who served during the year The reason for this is to establish a clear link between held any non-executive appointments outside the Group. remuneration received by the Executive Directors and the Illustrations of the application of the Executive Directors’ remuneration policy The bar charts below illustrate some possible outcomes of the creation of Shareholder value. As mentioned on page 92 of this Annual Report and Accounts, when setting the policy the Committee takes application of the policy for the year ending 31 March 2020. account of pay and employment conditions elsewhere in Group Chief Executive (£’000) the Group, but has not used any remuneration comparison measures between the Executive Directors and other Maximum1 539 583 700 employees. Consideration of Shareholder views The Committee’s policy is to receive updates on the views of Shareholders and their representative bodies on best practice, and take these into account. It seeks the views of key Shareholders on matters of remuneration in which it believes they may be interested. Target2 539 350 175 Minimum3 539 Group Finance Director (£’000) Maximum1 339 388 388 Target2 339 233 97 Minimum3 339 Fixed Remuneration Bonus Long term incentive Plan 1 Maximum assumes that the maximum Long Term Incentive Plan (“LTIP”) award vests (150% and 125% of salary for the Group Chief Executive and Group Finance Director) and the maximum bonus (125% and 100% of salary for the Group Chief Executive and Group Finance Director) have been earned as stated in the policy table on pages 88 to 90. In line with the Remuneration Policy, 20% of the bonus awarded to the Group Chief Executive will be in the form of deferred shares 2 Target assumes that 25% of the LTIP award granted on 30 April 2019 vests (150% of salary for the Group Chief Executive and 125% for the Group Finance Director) and bonuses have been earned at the target levels (75% of salary for the Group Chief Executive and 60% of salary for the Group Finance Director) as stated in the policy table on pages 88 to 90. In line with the remuneration policy, 20% of the bonus awarded to the Group Chief Executive will be in the form of deferred shares 3 Minimum in the bar charts above is fixed remuneration only (i.e. salary, pension and benefits as disclosed in the single figure table) An additional award of 15,379 shares was made on 30 April 2019 such that Simon Gibbins is in a net neutral position after tax, assuming no change in tax rates, as a result of his agreement to take on the Company’s liability to employer’s National Insurance. The figures for maximum and target outcomes above exclude the additional award of 15,379 shares. Projected values also exclude the impact of share price movements and dividend accrual. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 93 discoverIE AR2019.indd 93 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 Corporate governance DIRECTORS’ REMUNERATION REPORT ANNUAL REPORT ON REMUNERATION Information subject to audit The Committee is responsible for considering and making recommendations to the Board on the remuneration of the Executive Directors. In doing so, it reports to the Board on how it has discharged its responsibilities and operates within agreed terms of reference. The Committee also considers the recommendations of the Group Chief Executive with regard to the members of the Group Executive Committee (“GEC”) who are not Executive Directors, in determining their remuneration packages, including bonuses, incentive payments, share options and other share-based awards. The Group Company Secretary provides administrative support. The table below shows how we have applied the current remuneration policy during FY19. It discloses all the elements of remuneration received by the Directors during the year. Single total figure of remuneration for each Director (audited) Nick Jefferies Simon Gibbins Salary £000 Benefits1 £000 Bonus2 £000 LTIP3 £000 Pension4 £000 FY19 FY18 FY19 FY18 453 438 277 268 11 11 11 11 392 279 189 144 881 1,018 388 499 60 58 16 15 Total £000 1,796 1,803 881 937 The table below sets out the single total figure of remuneration received by each Executive Director for the year ended 31 March 2019 and the prior year: 1 Taxable benefits comprise car allowance (£9,000 each) and family medical insurance. The benefits cost the Company £10,975 and £10,899 in total for Nick Jefferies and Simon Gibbins respectively 2 For performance in the year under review, a bonus of 86.4% and 68.2% of salary is payable to Nick Jefferies and Simon Gibbins, respectively. Further details can be found on page 95. In accordance with the Remuneration Policy, 20% of the Nick Jefferies’ bonus will be in the form of deferred shares 3 4 The performance conditions attached to the 2016 LTIP award granted to Nick Jefferies and Simon Gibbins on 31 March 2015 were met and therefore the options vested in full on 31 March 2019. Further details can be found on page 96 Pension in the year under review for Nick Jefferies and Simon Gibbins was paid as cash in lieu of pension and was equal to 15% and 6.5% of salary (minus employer’s NI contributions) respectively Single total figure of remuneration for Non-Executive Directors (audited) Basic fee Committee chair fees SID fee Malcolm Diamond Richard Brooman Henrietta Marsh Tracey Graham Bruce Thompson1 FY19 £ 135,000 45,000 45,000 45,000 45,000 FY18 £ 118,00 41,000 41,000 41,000 4,269 FY19 £ – 5,000 5,000 – – FY18 £ – 5,000 5,000 – – 1 Appointed as a Director with effect from 26 February 2018 FY19 £ – FY18 £ Total FY19 £ FY18 £ – 135,000 118,000 6,000 6,000 56,000 – – – – – – 50,000 45,000 45,000 52,000 46,000 41,000 4,269 94 discoverIE AR2019.indd 94 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:43 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Incentive outcomes for Executive Directors for the year ended 31 March 2019 Annual bonus in respect of performance for the year The maximum bonus opportunity for the year under review was 125% and 100% of salary for the Group Chief Executive and the Group Finance Director respectively. Annual bonuses for the year under review were based on a combination of financial and non-financial performance, with targets set against the annual budget at the start of the year. Financial performance for the year under review was measured against a combination of Group EBIT performance and Simplified Working Capital (SWC), weighted 65% and 15% respectively, with the remaining 20% based on specific individual objectives and Committee discretion as to the overall contribution. Further details, including the targets set and performance against each of the metrics, are provided in the tables below: Nick Jefferies (audited) Group underlying EBIT (£m) Vesting1 (% of max) SWC Vesting1 (% of max) Individual objectives Overall 1 Vesting between the points is on a straight-line basis Simon Gibbins (audited) Group underlying EBIT (£m) Vesting1 (% of max) SWC Vesting1 (% of max) Individual objectives Overall 1 Vesting between the points is on a straight-line basis 87.5% Budget £26.3m 10% 23.6% 0% 87.5% Budget £26.3m 10% 23.6% 0% Budget £30.0m 37.5% 22.5% 12.5% Budget £30.0m 30% 22.5% 10% 112.5% Budget £33.8m 81.25% 21.4% 18.75% 112.5% Budget £33.8m 65% 21.4% 15% Weighting 65% 15% 20% Weighting 65% 15% 20% Actual £30.6m 44.5% 21.7% 16.94% 25% 86.4% Actual £30.6m 35.6% 21.7% 13.56% 19% 68.2% Each Executive Director was given a number of individual non-financial objectives, tailored to their role and to business requirement in the year under review. Nick Jefferies and Simon Gibbins received 100% and 95% respectively for their performance against their non-financial objectives achieved during the year. Nick Jefferies Simon Gibbins ■ Developed organic growth capabilities ■ Ensured adequacy of Group debt and equity funding and ■ Improvement of margin ■ Achieved successful integration of Santon ■ Successful induction of Bruce Thompson ■ Increased proportion of revenue from Design & Manufacturing ■ Developed and implemented Brexit contingency plan successful extension of the existing debt facility ■ Achieved smooth transition to new auditor ■ Achieved successful integration of Santon ■ Developed FY19 operating efficiencies ■ Further developed internal audit and risk management function, including cyber security and recent acquisitions ■ Increased analyst coverage and increased time spent on investor activities outside half-year points ■ Developed and implemented Brexit contingency plan Innovative Electronics www.discoverieplc.com Stock Code: DSCV 95 discoverIE AR2019.indd 95 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:44 Corporate governance DIRECTORS’ REMUNERATION REPORT The Committee assessed these achievements against the pre-set personal objectives and in the context of overall business performance and decided to award Nick Jefferies 25% out of the available 25% and Simon Gibbins 19% out of the available 20% for this element of their bonus. This means that, in total for the year under review, Nick Jefferies received a bonus of 86.4% of his salary and Simon Gibbins received a bonus of 68.2% of his salary. 2016 LTIP vesting (audited) LTIP Awards were granted on 31 March 2016 to Nick Jefferies and Simon Gibbins with vesting dependent on relative TSR performance against a comparator group made up of constituents of the FTSE Small Cap Index (50%) and absolute TSR in excess of CPI (50%) from 31 March 2016 to 31 March 2019. The specific targets are as follows: Relative TSR ranking against the FTSE Small Cap (50% weighting) Relative TSR ranking against peers % of award vesting Upper quartile (or above) 100% Between median and upper quartile Straight-line vesting between 25% and 100% Below median performance 0% Absolute TSR performance (50% weighting) Absolute TSR performance % of award vesting Equal to or above CPI +20ppts 100% Between CPI +10ppts and CPI +20ppts Straight-line vesting between 25% and 100% Below CPI +10ppts 0% The TSR is measured by Orient Capital Limited and makes a standard TERP adjustment for the discounted rights issue in June 2014. discoverIE’s TSR performance was +69% from 31 March 2016 to 31 March 2019. discoverIE’s TSR rank was therefore at the 84th percentile against the FTSE Small Cap and 68ppts above CPI growth. This meant that the performance conditions were met and the award vested in full. The vested awards are subject to a two-year holding period. Share awards made during the year (audited) The Company did not award any shares to the Executive Directors during the financial year. Post the year-end, 166,236 and 92,006 shares were granted on 30 April 2019 to Nick Jefferies and Simon Gibbins respectively. The following table contains details of these awards. Director Nick Jefferies Simon Gibbins Face value as % of salary Face value1 Number of shares 150% £700,131 166,236 125% £387,500 92,006 Threshold vesting (% of face value) Maximum vesting (% of face value) 25% 100% End of performance period 31 March 2022 31 March 2022 1 Due to the timing of grant of these options at the year end, the face value of options granted has not been audited in the current year. This will be audited in the year ended 31 March 2020, being the first year a charge is recognised in respect of these options The number of shares for these awards was calculated using the three-day average closing share price for the three days immediately prior to the award date of 30 April 2019 of 421p. In addition to the grants set out above, 15,379 shares with a face value of £64,745 were awarded to Simon Gibbins in return for him bearing the Company’s liability to employer’s National Insurance arising on the exercise of such grants made to him above. The additional award ensures he is in a neutral position on an after-tax basis, assuming unchanged tax rates. 96 discoverIE AR2019.indd 96 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:44 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Vesting of these awards is subject to the following performance conditions: Relative TSR ranking against the FTSE Small Cap (one-third weighting) Relative TSR ranking against peers % of award vesting Upper quartile (or above) 100% Between median and upper quartile Straight-line vesting between 25% and 100% Below median performance 0% Absolute TSR performance (one-third weighting) Absolute TSR performance Equal to or above CPI +30ppts % of award vesting 100% Between CPI +10ppts and CPI +30ppts Straight-line vesting between 25% and 100% Below CPI +10ppts 0% EPS Growth (one-third weighting) EPS Growth Equal to or above 12ppts per annum Between 5ppts and 12ppts per annum % of award vesting 100% Straight-line vesting between 25% and 100% Below 5ppts per annum 0% Performance will be measured over three years from 31 March 2019 to 31 March 2022 using share prices averaged over the previous month, for both the start and end of the performance period. In the case of EPS Growth, performance will be measured from FY19 to FY22. Vested shares will be subject to an additional two-year holding period. Pension arrangements (audited) The Company does not operate a defined benefit pension scheme. Pension contributions/cash allowances for the Executive Directors are set out in the policy table on page 88 of this Report. The Group operates a legacy defined benefit pension scheme, the Sedgemoor Group Pension Fund. The Executive Directors are not members of this scheme. Executive share option schemes (“the Option Schemes”) (audited) Movements in the Executive Directors’ holdings of options under the Option Schemes during the year under review are shown below. Nick Jefferies held vested share options under an approved executive share option scheme, known as the discoverIE Group plc 2010 Company Share Option Plan. Nick Jefferies exercised his share option in full on 7 February 2019. Movements during the year Number held at 31.03.19 Granted Vested Exercised Lapsed Number held at 31.03.181 Gain on vesting date £0002 Nick Jefferies Simon Gibbins – – – – – – 18,819 – – – 18,819 – 7 n/a When exercisable Sep 2013 to Sep 2020 n/a 1 2 The number of shares granted under the plan was adjusted in 2014 for the Company’s rights issue. Adjustments were calculated using the recommended HMRC formula These shares, which are in the form of executive share options, vested on 1 September 2013 at a share price of 182.98p and became exercisable from that date. The share price on grant was 148.00p, producing a gain of £6,583 on the vesting date (the exercise price was £nil) Innovative Electronics www.discoverieplc.com Stock Code: DSCV 97 discoverIE AR2019.indd 97 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:44 Corporate governance DIRECTORS’ REMUNERATION REPORT Movements of shares under the 2008 long term incentive plan and the 2008 renewed long term incentive plan (“the LTIPs”) Movements in the Executive Directors’ holdings of nil-cost options under the LTIPs during the year are shown below. The performance criteria for the LTIPs are set out in the policy table on page 96. The figures below include adjustments made to holdings during the year ended 31 March 2015 for the Company’s rights issue in June 2014. Movements during the year Number held at 31.03.19 Granted Vested Exercised Lapsed Number held at 31.03.18 Vested but not exercised Share value at 31.03.19 £ When exercisable Nick Jefferies Simon Gibbins – – – 245,192(v)2 223,567(v)3 242,788(nv) 163,371(nv) – – – 120,192(v)5 98,437(v)6 106,900 (nv) 83,255 (nv)7 (v)= vested; (nv) = non-vested – – – – – – – – – – – – – – – – – – 223,567 – – – – – – 98,437 – – 340,1051 264,5931 233,6391 – – 340,105 264,593 – 233,696 – – – – – – – – – – – – – 192,4314 122,6384 108,3184 – – – – – – – – – – – – – – – 245,192 245,192 966,056 Mar 2020 to Mar 2025 223,567 242,788 163,371 192,431 122,638 108,318 120,192 98,437 106,900 83,255 – – – – – – 880,853 Mar 2021 to Mar 2026 956,584 Mar 2022 to Mar 2027 643,682 Mar 2023 to Mar 2028 – – – – – – 120,192 473,556 Mar 2020 to Mar 2025 98,437 387,841 Mar 2021 to Mar 2026 – – 421,186 Mar 2022 to Mar 2027 328,025 Mar 2023 to Mar 2028 1 2 3 4 5 6 7 On 6 June 2018, Nick Jefferies exercised in full his options over 838,394 shares granted on 31 March 2010, 28 March 2012 and 28 March 2013. After settlement of the PAYE liability which arose as a result of the exercise, Nick Jefferies acquired 444,349 shares in the Company The award, in the form of a nil-cost option over 245,192 shares in the Company was made to Nick Jefferies on 31 March 2015. The performance conditions attached to the award, when measured on the basis of an analysis provided by Orient Capital Limited, resulted in 100% vesting on 31 March 2018 The award, in the form of a nil-cost option over 223,567 shares in the Company was made to Nick Jefferies on 31 March 2016. The performance conditions attached to the award, when measured on the basis of an analysis provided by Orient Capital Limited, resulted in 100% vesting on 31 March 2019 On 6 June 2018, Simon Gibbins exercised in full his options over 423,387 shares granted on 20 July 2010, 28 March 2012 and 28 March 2013. After settlement of the PAYE liability which arose as a result of the exercise, Simon Gibbins acquired 224,395 shares in the Company The award, in the form of a nil-cost option over 120,192 shares in the Company was made to Simon Gibbins on 31 March 2015. The performance conditions attached to the award, when measured on the basis of an analysis produced by Orient Capital Limited, resulted in 100% vesting on 31 March 2018 The award, in the form of a nil-cost option over 98,437 shares in the Company was made to Simon Gibbins on 31 March 2016. The performance conditions attached to the award, when measured on the basis of an analysis produced by Orient Capital Limited, resulted in 100% vesting on 31 March 2019 An additional award of 13,916 shares was made on 29 March 2018 such that Simon Gibbins is in a net neutral position after tax, assuming unchanged tax rates, as a result of his agreement to take on the Company’s liability to employer’s National Insurance. This is in addition to the 83,255 shares set out above and is subject to the same vesting and exercise conditions 98 discoverIE AR2019.indd 98 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:44 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Directors’ interests (audited) The interests of the Directors, who held office as at 31 March 2019 (including family interests) in ordinary shares (fully paid, 5p) of the Company, were as follows: Shares held at 31 March 2019 Unencumbered shares 960,931 257,670 10,272 12,272 6,949 19,907 8,000 Nil cost options vested but not exercised 468,759 218,629 – – – – – Shares/nil cost options vested but subject to additional holding period – – – – – – – Shares/nil cost options subject to performance conditions 406,159 190,155 – – – – – Unencumbered shares held at 31 March 2018 Value of current shareholding (% of salary) 1,243% 677% 504,446 33,275 10,272 12,272 6,949 14,545 8,000 Nick Jefferies Simon Gibbins Richard Brooman Henrietta Marsh Tracey Graham Malcolm Diamond Bruce Thompson Pursuant to the placing announced on 16 April 2019, Simon Gibbins and Malcolm Diamond each acquired 5,000 shares and Bruce Thompson acquired 8,000 shares in the Company on 18 April 2019. The interests of Nick Jefferies, Richard Brooman, Henrietta Marsh and Tracey Graham at 4 June 2019 are unchanged from those at 31 March 2019. The values of current shareholdings for Nick Jefferies and Simon Gibbins have been valued using the share price as at 31 March 2019 of 394p. Executive Directors are required to build up/maintain a shareholding of at least 200% of salary, including LTIP shares where performance conditions no longer apply, within five years. Both of the Executive Directors have met the current shareholding requirements. In accordance with the proposed remuneration policy, Executive Directors will be required to build up/maintain a shareholding of at least 250% of salary within seven years. Both of the Executive Directors meet the proposed shareholding requirements. The figures for shares/nil cost options subject to performance conditions exclude the additional award to Simon Gibbins in respect of employer’s National Insurance. Dilution The Company’s share schemes are funded through a combination of shares purchased in the market and newly issued shares, as appropriate. The Company monitors the number of shares issued under the schemes and their impact on dilution limits. As at 31 March 2019, approximately 4.7m shares (6.6% in the last ten years) have been, or may be, issued to settle awards made in the last ten years in connection with all share schemes and executive share schemes, respectively. The Company is committed to remaining within The Investment Association’s 10% dilution limit. Payments for loss of office (audited) There were no payments for loss of office during the year. Payments to past Executive Directors (audited) There were no payments to past Executive Directors during the year. This represents the end of the audited section of the Report. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 99 discoverIE AR2019.indd 99 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:44 Corporate governance DIRECTORS’ REMUNERATION REPORT Pay for performance The graph below shows Total Shareholder Return (TSR) in terms of change in value (with dividends deemed to be reinvested gross on the ex-dividend date) of an initial investment of £100 on 1 April 2009 between that date and 31 March 2019 in a holding of the Company’s shares, compared with the corresponding TSR in a hypothetical holding of £100 invested in the FTSE Small Cap Index. This index has been chosen because it is considered to be a reasonable comparator in terms of the Company’s size and its share liquidity. The accompanying table details the Group Chief Executive’s single figure of remuneration and actual variable pay outcomes over the same period. 900 800 700 600 500 400 300 200 100 31 March 2009 31 March 2010 31 March 2011 31 March 2012 31 March 2013 31 March 2014 31 March 2015 31 March 2016 31 March 2017 31 March 2018 31 March 2019 discoverIE Return Index FTSE Small Cap Return Index Total Shareholder Return: discoverIE vs. FTSE Small Cap Index Note: The Company’s share price was adjusted following the rights issue in June 2014. Single figure of total remuneration (£’000) Salary (£’000) Bonus outcome (% of maximum) LTIP outcome (% of maximum) Turnover (£m) EBIT (£m)2 20091 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 132 70 – – 165 0 289 259 590 280 1,613 297 999 320 572 320 1,246 330 1,321 425 665 429 1,803 1,796 438 453 – – 120 (2) 100 10 20 55 59 60 43.5 63.7 86.4 – 210 6 94 207 7 88 177 5 9 212 7 100 271 13 100 288 16 – 100 100 338 387.9 438.9 20 24.5 30.6 1 Nick Jefferies joined the Company in January 2009 2 Continuing operations 100 discoverIE AR2019.indd 100 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:44 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Corporate governance Group Chief Executive remuneration Percentage increase in the remuneration of the Group Chief Executive The table below shows the movement in the cash remuneration for the Group Chief Executive between the year under review and the prior financial year, compared with the movement in the average remuneration (per head) for UK employees of the Group, on a like-for-like basis, excluding Cursor Controls which was acquired during the year. Group Chief Executive Salary Benefits Bonus1 Single figure total Average per UK employee Salary Benefits Bonus 2019 £’000 453 11.0 391.5 1,796.2 32.7 4.2 2.9 2018 £’000 % change 438 11.0 278.9 1,803.0 30.4 4.1 2.9 3.5% -0.5% 40.4% (0.4)% 7.6% 2.4% – 1 In accordance with the Remuneration Policy, 20% of the Group Chief Executive’s bonus was in the form of deferred shares Importance of the spend on pay The table below shows the importance of the spend on pay for all employees across the globe compared with the returns distributed to Shareholders, during the year under review and the prior financial year. The information is based on like-for-like constant currency, and includes annualised prior year acquisitions. Remuneration paid to or receivable by all employees Distributions to Shareholders by way of dividends (net of share issues) 2019 £m 86.1 6.7 2018 £m 82.4 6.2 % change 4.5% 8.1% Innovative Electronics www.discoverieplc.com Stock Code: DSCV 101 discoverIE AR2019.indd 101 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:44 Corporate governance DIRECTORS’ REMUNERATION REPORT Statement of implementation of the remuneration policy in the financial year ending 31 March 2020 The Company intends to implement the policy in the financial year ended 31 March 2020 in the way described in the “Remuneration at a Glance” section and policy table for the Executive Directors on pages 85 and 88 to 90. The Remuneration Committee has approved salary increases for the Group Chief Executive and Group Finance Director for the year ending 31 March 2020 of 3.5% and 11.8% respectively. These salary increases are in line with the remuneration policy. The salary increase for the Group Chief Executive is lower than the average increase across the Group. The Committee has approved performance measures for the annual bonus for the Executive Directors for the year ending 31 March 2020, 80% of which are financial measures with the remainder being individual objectives. Due to the close link between targets and the long-term strategy, the bonus targets for the year ending 31 March 2020 have not been disclosed in this report due to commercial sensitivity. However, further information on these bonus targets will be disclosed in next year’s annual report and accounts. The Committee has granted LTIP awards on 30 April 2019 which are in line with the policy, performance measures and targets set in prior years. With effect from 1 April 2019, the fees of the Non-Executive Directors, including the additional fees payable, are as follows: As at 1 April 2019 Malcolm Diamond1 Richard Brooman Tracey Graham Henrietta Marsh Bruce Thompson Basic fee £ 140,000 46,000 46,000 46,000 46,000 Committee Chair fee £ SID fee £ – 8,000 8,000 – – – – – – 8,000 Total £ 140,000 54,000 54,000 46,000 54,000 Advisers During the year, the Committee received independent advice on executive remuneration from Mercer Kepler. Mercer Kepler is a signatory to the Remuneration Consultants’ Code of Conduct. Other than in relation to advice on remuneration, neither Kepler (nor its parent, Mercer) provide other services to the Company. The fees paid to Kepler for advice during the year ended 31 March 2019 were £22,000. Shareholder voting 2018 AGM resolutions For1 Against Binding vote on the remuneration policy 47,004,246 95.56% 2,186,425 Approval of the Annual Report on Remuneration 47,808,809 97.19% 1,382,528 Withheld2 9,067 8,397 4.44% 2.81% 1 Includes votes at the Chairman’s discretion 2 A vote “withheld” is not a vote in law, and is not counted in the calculation of the proportion of votes for and against the resolution 102 discoverIE AR2019.indd 102 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:44 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements DIRECTORS’ RESPONSIBILITIES STATEMENT The Directors are responsible for preparing the Annual Report The Directors consider that the Annual Report and Accounts, and financial statements in accordance with applicable law taken as a whole, is fair, balanced and understandable and and regulation. Company law requires the Directors to prepare financial statements for each financial year. Under that law the provides the information necessary for Shareholders to assess the Group’s and the Company’s performance, business model and strategy. Directors have prepared the Group financial statements in Each of the Directors, whose names and functions are accordance with International Financial Reporting Standards listed on pages 54 to 55, confirm that, to the best of their (IFRSs), as adopted by the European Union, and the Company knowledge: ■ The Company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law), give a true and fair view of the assets, liabilities, financial position and loss of the Company; ■ The Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and ■ The Strategic Report includes a fair review of the development and performance of the business and the position of the Group and the Company, together with a description of the principal risks and uncertainties that it faces. In the case of each Director in office at the date the Directors’ Report is approved: ■ So far as the Director is aware, there is no relevant audit information of which the Group’s and the Company’s auditors are unaware; and ■ They have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group’s and the Company’s auditors are aware of that information. financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of the affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period. In preparing the financial statements, the Directors are required to: ■ Select suitable accounting policies and then apply them consistently; ■ State whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements; ■ Make judgements and accounting estimates that are reasonable and prudent; and ■ Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose, with reasonable accuracy at any time, the financial position of the Group and the Company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group’s financial statements, Article 4 of the IAS Regulation. The Directors are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 103 discoverIE AR2019.indd 103 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:44 Financial statements Strategic Report Differentiated Products Designing and manufacturing application-specific products to original equipment manufacturers internationally discoverIE has specialist knowledge in many niche markets, enabling us to differentiate our products to match our customers’ requirements Transportation Transport markets continue to grow around the world, driven by increasing demand and falling costs, whether it be rail, air or automotive Read more on our products on page 14 discoverIE AR2019.indd 104 26542 26542 13 June 2019 6:00 pm 13 June 2019 6:00 pm Proof One Proof One 13/06/2019 18:03:47 Financial statements Financial statements FINANCIAL STATEMENTS discoverIE AR2019.indd 105 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:03:49 INDEPENDENT AUDITOR’S REPORT to the members of discoverIE Group plc REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Opinion In our opinion: ■ discoverIE Group plc’s Group financial statements and Company financial statements (the “financial statements”) give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 March 2019 and of the Group’s profit and cash flows for the year then ended; ■ the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; ■ the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and ■ the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise: the Consolidated statement of financial position and the Company balance sheet as at 31 March 2019; the Consolidated income statement and Consolidated statement of comprehensive income, the Consolidated and Company statements of changes in equity, and the Consolidated statement of cash flows for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Our opinion is consistent with our reporting to the Audit and Risk Committee. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Company. 106 discoverIE AR2019 financials.indd 106 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements Our audit approach Overview Overall Group materiality: £1,365,000 (2018: £1,095,000), based on 5% of underlying profit before tax. Materiality by component materiality allocation. Overall Company materiality: £1,170,000 (2018: £900,000), based on 1% of total assets, limited 82% of Group revenue (2018: 79%) and 81% of Group underlying profit before tax (2018: 71%) covered through full scope audit procedures. Audit Scope Four country operations visited by the Group audit team during the year. ■ Overstatement of inventory and associated Prior Year Adjustment (PYA) (Group). Key Audit Matters ■ Goodwill impairment assessment (Group). ■ Inventory valuation (Group). ■ Accounting for acquisition of Cursor Controls (Group). ■ Presentation of adjustments included in underlying profit before tax (Group). ■ Carrying value of investments (Company). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. Capability of the audit in detecting irregularities, including fraud Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and regulations related to the Listing Rules, pensions legislation, tax legislation and local laws and regulations applicable in the territories that the Group operates in, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting of inappropriate journal entries to improve the results, application of bias in accounting estimates, and, as demonstrated by the issues identified in the US during the year, override of controls in relation to purchases of inventory. The Group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group engagement team and/or component auditors included: ■ Discussions with management, including consideration of known or suspected instances of non-compliance with laws and regulation and fraud. This included evaluating and testing the misstatement of inventory identified by the Group during the year, for which further details are set out in a key audit matter; ■ Consideration of the Group’s controls designed to prevent and detect irregularities; ■ Challenging assumptions and judgements made by the Directors in their significant accounting estimates; and ■ Identifying and testing journal entries based on a risk-based sample selection. There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 107 discoverIE AR2019 financials.indd 107 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 Financial statements INDEPENDENT AUDITOR’S REPORT to the members of discoverIE Group plc Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Key audit matter How our audit addressed the key audit matter Overstatement of inventory and associated Prior Year Adjustment (PYA) (Group) Refer to page 9 (Chairman’s statement) and note 2 to the Group financial statements). The Directors identified a significant overstatement of inventory at one of its subsidiaries in the US during the year. At the time the issue was discovered, inventory in this subsidiary was overstated by approximately £4.0m. Inappropriate capitalisation of inventory over a period of approximately four years largely reflected an override of internal controls, in which cash was misappropriated from the business. Management carried out a detailed internal review of the factors which gave rise to this issue, as well as investigating its extent. Our audit considered the scope and results of the investigation, including the quantification by management of the amount of the overstatement and the timing of when it occurred. As the overstatement of inventory was material at both 31 March 2018 (£2.5m), and 31 March 2017 (£1.3m), the corresponding comparative amounts have been restated. The analysis of the timing of the transactions that led to these overstatements involved a number of assumptions in respect of approximately £1.1m of the £4.0m overstatement. We assessed the scope of management’s internal review, and performed our own independent testing as explained below. We performed a full scope audit of the US subsidiary for the year ended 31 March 2019, to address the risk that there was further overstatement of inventory or other assets in the financial statements that was not identified by the Directors. This included attending a year-end inventory count. We did not identify any further issues as a result of performing these procedures. In respect of the overstatement of inventory and the nature of the transactions associated with it, we performed the following audit procedures: ■ We tested a sample of payroll transactions of key individuals to check the basis on which payments had been made; ■ We read email correspondence between individuals in the business and checked bank statements of the US subsidiary’s principal bank account over the period in question; ■ Where possible we obtained confirmations directly from suppliers in respect of certain inventory purchases purported to have taken place, obtaining evidence that such purchases did not take place; and ■ We tested a further sample of transactions with suppliers during the year to evaluate whether these were appropriate. Our findings from these procedures supported the analysis prepared by the Directors. We extended our audit procedures across all in-scope components to address the risk of whether this issue extended beyond this one subsidiary. This included attending year end stock counts in components that were not otherwise in scope for our Group audit, and procedures over the approval of employee expenses. We did not identify any other matters that suggested the matter extended beyond this subsidiary. We evaluated the Directors’ allocation of the inventory overstatement to each financial year and are satisfied that, as the estimation of timing relates to only £1.1m of the total overstatement of inventory, the allocation of these costs to each accounting period is not materially misstated. We inspected the correspondence with respect to the insurance claim and verified that the insurance proceeds were received by the Group before the end of the 2019 financial year. As a result of the work we performed, we are satisfied that the amounts recorded in the 2017, 2018 and 2019 financial years in relation to this fraud are not materially misstated and that the disclosure included in the financial statements is appropriate. 108 discoverIE AR2019 financials.indd 108 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements Key audit matter How our audit addressed the key audit matter Goodwill impairment assessment (Group) Refer to page 76 (Audit and Risk Committee Report), note 2 (Significant accounting estimates) and note 16 for the related disclosures on goodwill. We evaluated the judgement that the Acal BFi business is one CGU. On the basis that the cash flows are not independent at country level, the business performance reviews take place at a divisional level rather than by country, and a number of key distribution agreements are now pan-European, we were satisfied that this judgement was reasonable. We were also satisfied that there was no impairment of the goodwill immediately prior to this reassessment The Group carried £85.3m of goodwill at 31 March 2019 (2018: £77.0m). The recoverability of the carrying value of goodwill is contingent on future cash flows of the underlying cash-generating units (“CGUs”) and there is a risk that if these cash flows do not meet the Directors’ expectations, the goodwill may be impaired. becoming effective. Focusing on the Santon CGU, we evaluated and challenged the Directors’ future cash flow forecasts and the process by which they were drawn up, and tested the underlying value in use calculations. We compared management’s forecasts with the latest Board-approved budget and found them to be reasonable. We challenged: ■ the key assumptions for short and long-term growth rates in the forecasts by comparing them with historical results, as well as the actual results for the period after the year end; and During the year, the Directors ■ the discount rate used in the calculations by assessing the cost of capital concluded that the Acal BFi business for the Group and comparable organisations, and assessed the specific risk represents one CGU, having previously premium applied to each CGU. assessed the recoverability of goodwill at country level. No impairment was recorded at a country level immediately prior to this reassessment. We focused our assessment on the estimates and judgements used by management in the impairment We performed sensitivity analysis on the key assumptions within the cash flow forecasts. This included sensitising the discount rate applied to the future cash flows, and the short and longer term growth rates and profit margins forecast. We compared the total value in use calculated in management’s goodwill models to the Group’s market capitalisation of £289m at 31 March 2019 to further support the assumptions within the models. model. We focused in particular on the We ascertained the extent to which a change in these assumptions, both Santon CGU, which has a goodwill individually or in aggregate, would result in a goodwill impairment, and carrying value of £5.1m in light of considered the likelihood of such events occurring. challenging trading conditions during the first half of the financial year. In respect of Santon, we have evaluated the changes in the forecast from prior year and assessed the reasons driving the change in the expected performance No impairment charge was recognised on the CGU. in the year ended 31 March 2019. Based on the procedures described above, we were satisfied that the recoverability of the carrying value of goodwill in respect of all the CGUs identified had been appropriately assessed. We were satisfied that no specific disclosures were required in relation to the likelihood of changes to key assumptions resulting in an impairment to any CGU. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 109 discoverIE AR2019 financials.indd 109 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 Financial statements INDEPENDENT AUDITOR’S REPORT to the members of discoverIE Group plc Key audit matter How our audit addressed the key audit matter Inventory valuation (Group) Refer to page 76 (Audit and Risk Committee Report), note 2 (Significant We obtained an understanding of management’s inventory provisioning methodology and how it is applied across the Group. We recalculated the inventory provision to ensure mathematical accuracy, and noted no material accounting estimates) and note 19 exceptions. We assessed the reasonableness of management’s judgement regarding the obsolescence percentage applied and expected future sales levels by comparing these assumptions to historic write-offs and historic sales. We found the assumptions to be reasonable. (Inventories). The balance of gross inventories at 31 March 2019 was £73.4m, against which a provision of £7.2m was held (2018: a provision of £ 6.6m was recorded against gross inventories of £64.7million). The valuation of the inventory provision was a focus of our audit for the following reasons: The Group holds large quantities of inventory comprising many different types of product, often held for long periods of time, which raises the risk of inventory obsolescence. There is uncertainty about the impact of product life cycles, the value recoverable from any excess stock, and future sales levels which require management to make assumptions based on information available at period end. The inventory provision is calculated within the Group’s accounting systems based on a manual process that considers the age of the individual items held. 110 discoverIE AR2019 financials.indd 110 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements Key audit matter How our audit addressed the key audit matter Accounting for acquisition of Cursor Controls (Group) Refer to page 76 (Audit and Risk Committee Report), note 2 (Accounting policies) and page 142 (note 11 Business combinations). In order to test the components of the acquisition, we performed the following procedures: ■ Read technical papers prepared by Directors in respect of the acquisition and inspected relevant contracts and information; ■ Assessed the provisional fair value calculation of the assets acquired, including assessing the completeness and quantum of adjustments made by The Group completed the acquisition management; ■ Challenged the key assumptions used in the valuation model, including the discount rate and assumptions used for forecasts; ■ Assessed whether the Directors’ identification and valuation of other known and contingent liabilities associated with Cursor Controls was complete. Based upon the above, we are satisfied that the Directors have applied reasonable judgements in the provisional accounting for the acquisition of Cursor Controls. of Cursor Controls, a UK designer and manufacturer of human to machine interface (“HMI”) products for medical, industrial and transportation applications, on 16 October 2018. Accounting for the acquisition required a provisional fair value exercise, including valuing separately identifiable intangible assets. This can be a particularly judgemental process, given the range of assumptions that are adopted to determine the valuations, including the applicable discount rate used in the fair value calculations. Based on an exercise performed by management, the Directors recorded £9.0m of goodwill and £9.7m of intangibles relating to Cursor Controls’ customer relationships and patents. The total consideration paid for the acquisition was £20.8m. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 111 discoverIE AR2019 financials.indd 111 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 Financial statements INDEPENDENT AUDITOR’S REPORT to the members of discoverIE Group plc Key audit matter How our audit addressed the key audit matter Presentation of adjustments included in underlying profit before tax (Group) Refer to Audit and Risk Committee Report (page 76); Accounting policies We considered the appropriateness of the adjustments made to the statutory profit before tax to derive underlying performance. In order to do this we considered: ■ The Group’s accounting policy on exceptional and non-underlying items; (note 2); and note 6 (Underlying profit ■ The application of IFRS, in particular IAS 1; and before tax). £7.9m (2018: £7.3m) of net costs incurred in the year are presented as adjustments to the Group’s underlying profit before tax. These include: ■ £1.8m of acquisition costs; ■ £5.9m of amortisation of acquired intangibles; ■ £0.4m in respect of the Group’s IAS 19 pension charge for the year; and ■ £0.2m of exceptional items, being the net income of £1.1m reflecting ■ European Securities and Markets Authority (“ESMA”) guidelines on alternative performance measures issued on 3 July 2016. We challenged management on the appropriateness of the classification of each item, being mindful that classification should be balanced between gains and losses, the basis for the classification clearly disclosed and applied consistently from one year to the next. We also considered the risk that the Group’s accounting policy could be manipulated to help achieve profit targets. We also considered the risk of one-off gains during the year not being properly identified and therefore presented inappropriately within underlying profit Having considered the nature and quantum of these items, overall we were the insurance proceeds of £2.6m less satisfied that the presentation of adjustments to the Group’s underlying profit the £1.5m of losses relating to the in the financial statements for the year ended 31 March 2019 is materially overstatement of inventory in the appropriate. current financial year, offset by the GMP equalisation charge of £0.9m. The Group presented underlying performance measures on the face of its consolidated income statement. Management believes that the presentation of underlying performance measures provides investors with a means of evaluating performance of the Group on a consistent basis, similar to the way in which management evaluates performance. The determination of which items are classified as adjustments to underlying profit is subject to judgement and therefore users of the consolidated financial statements could be misled if amounts are not classified appropriately or presented consistently. 112 discoverIE AR2019 financials.indd 112 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements Key audit matter How our audit addressed the key audit matter Carrying value of investments (Company) Refer to note 2 (page 171) and note 4 (page 172) of the Company financial statements. We obtained management’s assessment of the carrying value of the investments and we challenged: ■ the key assumptions for short and long-term growth rates in the forecast cash flows for DMS by comparing them with historical results, as well as challenging the expected growth in DMS’s income arising from its recharge The Company holds investments in its of costs around the Group; and subsidiaries of £168.9m (2018: £167.8m). ■ the discount rate used in the calculations by assessing the cost of capital for We focused on this area due to the size of the investment balances and the risk of impairment arising in the Company’s investment of £31.3m in the Group and comparable organisations. We performed sensitivity analysis on the key assumptions within the cash flow forecasts. This included sensitising the discount rate applied to the future cash flows, and the short and longer term growth rates and operating income discoverIE Management Services forecast. Following the conclusion of our procedures above, we are satisfied that no impairment is required to the carrying value of the investment in DMS. Limited (‘DMS’), the Group’s service Company that derives revenue from intercompany recharges. There was a £10m impairment recorded against the DMS investment in the prior year. Management has performed an assessment of the recoverable amount of the investment and compared this to the carrying value using the same cash flow methodology applied in the impairment test for goodwill described above. The results showed that no impairment is required. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate The business is structured across two reported segments, Design and Manufacturing (‘D&M’) and Custom Supply (‘CS’), operating in 22 countries. Across the 22 countries, the Group has 58 component business operations. We performed an audit of the complete financial information of 25 (2018: 21) of these components (“full scope components”), which were selected based on their size or risk characteristics. This covered 82% (2018: 79%) of the Group’s revenue and 81% (2018: 71%) of the Group’s underlying profit before tax. For 11 (2018: 13) further components (“specified procedures components”), we performed tailored audit procedures to address any significant risk or balances and transactions involving judgement and estimates. The remaining 22 components in aggregate represent 14% (2018: 11%) of the Group’s underlying profit before tax. For these components, the Group audit team performed central risk assessment analytical procedures. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 113 discoverIE AR2019 financials.indd 113 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 Financial statements INDEPENDENT AUDITOR’S REPORT to the members of discoverIE Group plc In establishing our overall approach to the Group audit, we determined the nature of work that needed to be undertaken at each of the components by us, as the Group audit engagement team, or by component auditors from PwC network firms operating under our instruction. Of the 25 full scope components, audit procedures were performed on ten components directly by the Group audit team, with component auditors performing audit procedures over the remaining 15 components. For the 11 specified procedures components, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole. The Group audit team, over the course of the year, visited those operations in the UK, US, Netherlands and Norway determined to be full scope components. In the previous financial year the Group audit team visited those entities considered to be full scope components in UK, Germany, France, Italy, Denmark, Norway and Sweden, as well as operations in Poland and China. The Group team held regular meetings with the full scope component audit teams, and also reviewed selected audit workpapers of each of those teams. This helped to ensure that the Group audit team was sufficiently involved in both the planning and the execution of the audit procedures in these countries. The Group audit team also joined the audit clearance meetings for each of the full scope components. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate, on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Company financial statements Overall materiality £1,365,000 (2018: £1,095,000) £1,170,000 (2018: £900,000) How we determined it 5% of profit before tax. 1% of total assets, limited by component materiality. Rationale for We believe that underlying profit before We believe that total assets is the most benchmark applied tax provides a consistent year-on-year basis appropriate measure to assess a holding for determining materiality and is the most Company, and is a generally accepted auditing relevant performance measure to the key benchmark. stakeholders of the Group. For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £50,000 and £1,170,000. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality. We agreed with the Audit and Risk Committee that we would report to them misstatements identified during our audit above £68,000 (Group audit) (2018: £50,000) and £68,000 (Company audit) (2018: £50,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. 114 discoverIE AR2019 financials.indd 114 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements Going concern In accordance with ISAs (UK) we report as follows: Reporting obligation Outcome We are required to report if we have anything material We have nothing material to add or to draw attention to. to add or draw attention to in respect of the Directors’ statement in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the Directors’ identification of any material uncertainties to the Group’s and the Company’s ability to continue as a going concern over a period of at least 12 months from the date of approval of the financial statements. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and Company’s ability to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group’s trade, customers, suppliers and the wider economy. We are required to report if the Directors’ statement We have nothing to report. relating to Going Concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic Report, Directors’ Report and Corporate Governance Statement, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated). Strategic Report and Directors’ Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the year ended 31 March 2019 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06) In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06) Innovative Electronics www.discoverieplc.com Stock Code: DSCV 115 discoverIE AR2019 financials.indd 115 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 Financial statements INDEPENDENT AUDITOR’S REPORT to the members of discoverIE Group plc Corporate Governance Statement In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on pages 77 to 78) about internal controls and risk management systems in relation to financial reporting processes and about share capital structures in compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance and Transparency Rules sourcebook of the FCA (“DTR”) is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06) In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in this information. (CA06) In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on pages 62 to 73) with respect to the Company’s corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06) We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Company. (CA06) The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group We have nothing material to add or draw attention to regarding: The Directors’ confirmation on page 66 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. The Directors’ explanation on page 41 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the “Code”); and considering whether the statements are consistent with the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit. (Listing Rules) Other Code provisions We have nothing to report in respect of our responsibility to report when: The statement given by the Directors, on page 103, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and Company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company obtained in the course of performing our audit. The section of the Annual Report on page 76 describing the work of the Audit and Risk Committee does not appropriately address matters communicated by us to the Audit and Risk Committee. The Directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors. Directors’ remuneration In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. (CA06) 116 discoverIE AR2019 financials.indd 116 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements Responsibilities for the financial statements and the audit Responsibilities of the Directors for the financial statements As explained more fully in the Directors’ Responsibilities Statement set out on page 103, the Directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: ■ we have not received all the information and explanations we require for our audit; or ■ adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or ■ certain disclosures of Directors’ remuneration specified by law are not made; or ■ the Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Appointment Following the recommendation of the Audit and Risk Committee, we were appointed by the Directors on 13 September 2017 to audit the financial statements for the year ended 31 March 2018 and subsequent financial periods. The period of total uninterrupted engagement is two years, covering the years ended 31 March 2018 to 31 March 2019. Richard Porter (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 4 June 2019 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 117 discoverIE AR2019 financials.indd 117 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:10 Financial statements CONSOLIDATED INCOME STATEMENT for the year ended 31 March 2019 Revenue Cost of sales Gross profit Selling and distribution costs Administrative expenses (including underlying adjustments) Operating profit Finance income Finance costs Profit before tax Tax expense Profit for the year Earnings per share Basic Diluted SUPPLEMENTARY INCOME STATEMENT INFORMATION Underlying Performance Measures Operating profit Add back: Exceptional items Acquisition costs Amortisation of acquired intangible assets IAS 19 pension administrative charge Underlying operating profit Profit before tax Add back: Exceptional items Acquisition costs Amortisation of acquired intangible assets Total IAS 19 pension charge Underlying profit before tax Underlying earnings per share Basic Diluted 1 Refer to note 2 for details on restatement 118 Notes 4 7 9 9 10 13 Notes 7 6 6 17 32 6 6 17 32 13 2019 £m 438.9 (293.9) 145.0 (57.7) (64.6) 22.7 0.5 (3.9) 19.3 (4.7) 14.6 20.0p 19.4p 2018 £m Restated1 387.9 (261.2) 126.7 (54.5) (54.9) 17.3 0.4 (3.1) 14.6 (4.0) 10.6 15.0p 14.2p 2019 £m 22.7 (0.2) 1.8 5.9 0.4 30.6 19.3 (0.2) 1.8 5.9 0.4 27.2 2018 £m Restated1 17.3 1.2 0.8 4.9 0.3 24.5 14.6 1.2 0.8 4.9 0.4 21.9 28.1p 27.2p 23.4p 22.3p discoverIE AR2019 financials.indd 118 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 March 2019 Profit for the year Other comprehensive income: Items that will not be subsequently reclassified to profit or loss: Actuarial gain on defined benefit pension scheme Deferred tax charge relating to defined benefit pension scheme Items that may be subsequently reclassified to profit or loss: Exchange differences on translation of foreign subsidiaries Other comprehensive loss for the year, net of tax Total comprehensive income for the year, net of tax 1 Refer to note 2 for details on restatement Notes 32 10 2019 £m 14.6 2018 £m Restated1 10.6 0.1 – 0.1 (1.1) (1.1) (1.0) 13.6 2.1 (0.3) 1.8 (3.5) (3.5) (1.7) 8.9 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 119 discoverIE AR2019 financials.indd 119 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 Financial statements CONSOLIDATED STATEMENT OF FINANCIAL POSITION for the year ended 31 March 2019 Non-current assets Property, plant and equipment Intangible assets – goodwill Intangible assets – other Deferred tax assets Current assets Inventories Trade and other receivables Current tax assets Cash and cash equivalents Total assets Current liabilities Trade and other payables Other financial liabilities Current tax liabilities Provisions Non-current liabilities Trade and other payables Other financial liabilities Pension liability Provisions Deferred tax liabilities Total liabilities Net assets Equity Share capital Share premium Merger reserve Currency translation reserve Retained earnings Total equity 1 Refer to note 2 for details of restatement Notes 14 15 17 10 19 20 21 28 22 25 28 22 32 25 10 29 2019 £m 24.4 85.3 34.4 5.1 149.2 66.2 88.7 1.3 22.9 179.1 328.3 (87.7) (1.7) (5.5) (1.1) (96.0) (0.2) (84.5) (2.5) (2.7) (7.7) (97.6) (193.6) 134.7 3.7 106.9 2.9 2.4 18.8 134.7 2018 £m Restated1 2017 £m Restated1 23.4 77.0 30.2 5.8 136.4 58.1 84.6 1.3 21.9 165.9 302.3 (82.1) (6.4) (4.6) (0.9) (94.0) (0.7) (67.9) (3.0) (2.8) (7.1) (81.5) (175.5) 126.8 3.6 106.9 2.9 3.5 9.9 16.0 72.6 28.1 5.5 122.2 48.8 77.3 – 21.0 147.1 269.3 (72.3) (1.0) (2.6) (2.2) (78.1) (3.3) (50.0) (6.4) (2.5) (6.5) (68.7) (146.8) 122.5 3.5 106.0 2.9 7.0 3.1 126.8 122.5 These financial statements were approved by the Board of Directors on 4 June 2019 and signed on its behalf by: Nick Jefferies Group Chief Executive Simon Gibbins Group Finance Director 120 discoverIE AR2019 financials.indd 120 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 March 2019 Attributable to equity holders of the Company Share capital £m Share premium £m Merger reserve £m Currency translation reserve £m Retained earnings £m At 1 April 2017 (Restated1) Profit for the year (Restated1) Other comprehensive loss Total comprehensive income Shares issued (note 29) Notional repurchase of share options (note 31) Share-based payments including tax Dividends (note 12) At 31 March 2018 (Restated1) Profit for the year Other comprehensive loss Total comprehensive income Shares issued (note 29) Share-based payments including tax Dividends (note 12) At 31 March 2019 Refer to note 2 for details on restatement 3.5 106.0 2.9 – – – 0.1 – – – – – – 0.9 – – – – – – – – – – 3.6 106.9 2.9 – – – 0.1 – – 3.7 – – – – – – – – – – – – 7.0 – (3.5) (3.5) – – – – 3.5 – (1.1) (1.1) – – – 106.9 2.9 2.4 Total equity £m 122.5 10.6 (1.7) 8.9 1.0 (1.5) 2.1 (6.2) 126.8 14.6 (1.0) 13.6 0.1 0.9 (6.7) 134.7 3.1 10.6 1.8 12.4 – (1.5) 2.1 (6.2) 9.9 14.6 0.1 14.7 – 0.9 (6.7) 18.8 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 121 discoverIE AR2019 financials.indd 121 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 Financial statements CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 March 2019 Net cash flow from operating activities Investing activities Acquisition of shares in subsidiaries (net of cash/(debt) acquired) Acquisition related contingent consideration Purchase of property, plant and equipment Purchase of intangible assets – software Proceeds from disposal of property, plant and equipment Interest received Net cash used in investing activities Financing activities Net proceeds from the issue of shares Proceeds from borrowings Repayment of borrowings Dividends paid Notional repurchase of share options Net cash generated from financing activities Net increase/(decrease) in cash and cash equivalents1 Cash and cash equivalents at 1 April Effect of exchange rate fluctuations Cash and cash equivalents at 31 March Reconciliation to cash and cash equivalents in the consolidated statement of financial position Net cash and cash equivalents shown above Add back: bank overdrafts Cash and cash equivalents presented in current assets in the consolidated statement of financial position 1 Further information on the consolidated statement of cash flows is provided in notes 23 and 24. Notes 24 23 23 12 31 22 21 2019 £m 22.4 (21.3) (1.3) (4.2) (1.2) 0.2 0.4 (27.4) 0.1 17.2 (1.2) (6.7) – 9.4 4.4 16.2 0.2 20.8 20.8 2.1 22.9 2018 £m 15.0 (24.6) (0.8) (3.7) (0.6) – 0.4 (29.3) – 20.4 (1.5) (6.2) (1.5) 11.2 (3.1) 19.8 (0.5) 16.2 16.2 5.7 21.9 122 discoverIE AR2019 financials.indd 122 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 1. Authorisation of financial statements and statement of compliance with IFRS The financial statements, which comprise the results of discoverIE Group plc (‘the Company’) and its subsidiaries (collectively referred to as “the Group”), for the year ended 31 March 2019 were authorised for issue by the Board of Directors on 4 June 2019. discoverIE Group plc is a public limited company incorporated and domiciled in England and Wales. The Company’s ordinary shares are traded on the London Stock Exchange. The significant accounting policies adopted by the Group are set out in note 2. 2. Accounting policies Basis of preparation The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted for use in the European Union and as applied in accordance with the provisions of the Companies Act 2006. The consolidated financial statements are presented in pounds Sterling and all values are rounded to the nearest hundred thousand except as otherwise indicated. Prior year restatement Fraud During the year, internal control processes identified a fraud, perpetrated against the Group in a small US subsidiary. Decisive action was taken to resolve the matter with new management put in place and tightened Group and local controls. Of the total fraud cost of £4m, £2.6m has been recovered this year from insurance after the excess deductible. The fraud was concealed in inventories and conducted over a period of four years of which £1.5m of the fraud cost was incurred this year, £1.2m last year and a further £1.3m in the previous two years. The exceptional income of £1.1m for this year comprises the insurance receipt of £2.6m offset by the fraud cost incurred this year of £1.5m. In accordance with IAS 8, 2018 and 2017 balance sheets have been restated. Santon business combination In accordance with IFRS3, a measurement period adjustment has been made to the prior year accounting for the acquisition of Santon. The Santon acquisition completed on 1 February 2018 and the provisional accounting for the acquisition was reflected in the 2018 financial statements. During the year, the acquisition date fair values have been reassessed in light of information and circumstances that existed at the acquisition date. The impact of the reassessment has been to reduce the fair value of the acquired assets and the fair value of consideration transferred to the seller by £6.8m. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 123 discoverIE AR2019 financials.indd 123 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 2. Accounting policies continued The restatement impact on the consolidated income statement and consolidated statement of financial position is shown below. Consolidated income statement Profit before tax Profit after tax Consolidated statement of financial position Intangible assets – other Intangible assets – goodwill Inventories Trade and other receivables Trade and other payables – current Trade and other payables – non current Current tax liabilities Deferred tax liabilities Retained earnings 2018 reported £m Fraud restatement £m Santon restatement £m 2018 restated £m 15.8 11.8 33.1 81.9 60.6 82.4 (81.2) (6.2) (4.9) (7.8) 12.4 (1.2) (1.2) – – (2.5) – – – – – (2.5) – – (2.9) (4.9) – 2.2 (0.9) 5.5 0.3 0.7 – 14.6 10.6 30.2 77.0 58.1 84.6 (82.1) (0.7) (4.6) (7.1) 9.9 Basis of consolidation The Group’s financial statements consolidate the results of discoverIE Group plc, entities controlled by the Company (its subsidiaries) and include the Group’s share of the results of its associates. Subsidiaries The consolidated financial statements comprise the financial statements of the Group and its subsidiaries at 31 March 2019. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its control over the investee. Specifically, the Group controls an investee if, and only if, the Group has: ■ Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); ■ Exposure, or rights, to variable returns from its involvement with the investee; and ■ The ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: ■ The contractual arrangement with the other vote holders of the investee; ■ Rights arising from other contractual arrangements; and ■ The Group’s voting rights and potential voting rights. The Group re-assesses whether or not it controls an investee, if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated income statement from the date the Group gains control until the date the Group ceases to control the subsidiary. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. 124 discoverIE AR2019 financials.indd 124 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 2. Accounting policies continued Associates An associate is an undertaking in which the Group has significant influence and which is neither a subsidiary nor a joint venture. Significant influence is the power and the ability to participate in financial and operating policy decisions, but not to execute control or joint control of those decisions. discoverIE’s investments in its associates are accounted for under the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the associate, less distributions received and less any impairment in value. Going concern The Group’s business activities, together with factors which may adversely impact its future development, performance and position, are set out in the Strategic Report on pages 4 to 51. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Finance Review section of the Strategic Report on pages 34 to 39. The Group has significant financial resources, well established distribution contracts with a number of suppliers and a broad and stable customer base. As a consequence, the Directors believe that the Group is well placed to manage its principal risks and uncertainties as disclosed on pages 42 to 45 of the Strategic Report. The Group’s forecasts and projections, taking account of the sensitivity analysis of changes in trading performance, show that the Group is well placed to operate within the level of its current committed facilities for the foreseeable future. After making due enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least 12 months from the date of approval of the financial statements. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Underlying profits and earnings These financial statements include alternative performance measures that are not prepared in accordance with IFRS. These alternative performance measures have been selected by management to assist them in making operating decisions because they represent the underlying operating performance of the Group and facilitate internal comparisons of performance over time. Alternative performance measures are presented in these financial statements as management believe they provide investors with a means of evaluating performance of the Group on a consistent basis, similar to the way in which management evaluates performance, that is not otherwise apparent on an IFRS basis, given that certain strategic non-recurring, infrequent or non-cash items that management does not believe are indicative of the underlying operating performance of the Group are included when preparing financial measures under IFRS. The Directors consider there to be the following alternative performance measures: Underlying operating profit “Underlying operating profit” is defined as operating profit excluding acquisition related expenditure (namely amortisation of acquired intangible assets, acquisition costs and the IAS19 pension administration charge relating to the Group’s legacy defined benefit pension scheme) and exceptional items. Acquisition costs comprise all attributable costs in connection with business acquisitions and related integration into the Group. They include contingent consideration where it is treated as an expense and movement in contingent consideration where it is treated as purchase price outside of the 12 month measurement period. Underlying EBITDA “Underlying EBITDA” is defined as underlying operating profit with depreciation, amortisation and equity settled share-based payment expense added back. Underlying profit before tax “Underlying profit before tax” is defined as profit before tax excluding acquisition related expenditure (namely amortisation of acquired intangible assets, acquisition costs and the total IAS19 pension charge relating to the Group’s legacy defined benefit pension scheme) and exceptional items. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 125 discoverIE AR2019 financials.indd 125 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 2. Accounting policies continued Underlying effective tax rate “Underlying effective tax rate” is defined as the effective tax rate on underlying profit before tax. Underlying earnings per share “Underlying earnings per share” is calculated as underlying profit before tax reduced by the underlying effective tax rate, divided by the weighted average number of ordinary shares (for diluted earnings per share purposes) in issue during the period. Operational cash flow “Operational cash flow” is defined as Underlying EBITDA adjusted for the investment in, or release of, working capital and less the cash cost of capital expenditure. Free cash flow “Free cash flow” is defined as net cash flow before exceptional items, payments to the legacy defined benefit pension scheme, dividend payments, net proceeds from equity fund raising, the cost of acquisitions and proceeds from business disposals. Return On Capital Employed (“ROCE”) “ROCE” is defined as underlying operating profit as a percentage of net assets (including goodwill) plus net debt. Organic basis Reference to “organic” basis included in the Chairman’s statement, Operating Review and Finance Review of the Strategic Report means at constant exchange rates (“CER”) and excluding the first 12 months of acquisitions (Santon was acquired last financial year on 1 February 2018 and Cursor Controls was acquired on 17 October 2018). Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. The choice of measurement of non-controlling interest, either at fair value or at the proportionate share of the acquiree’s identifiable net assets is determined on a transaction by transaction basis. Acquisition costs incurred are expensed and included in administrative expenses. When the Group acquires a business, it assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration, which is deemed to be an asset or liability, will be recognised in accordance with IFRS 9 “Financial Instruments: Classification and Measurement” either in profit or loss or in other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost, being the excess of the aggregate of the acquisition-date fair value of the consideration transferred and the amount recognised for the non-controlling interest (and where the business combination is achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree) over the net identifiable amounts of the assets acquired and the liabilities assumed in exchange for the business combination. Assets acquired and liabilities assumed in transactions separate to the business combinations, such as the settlement of pre- existing relationships or post-acquisition remuneration arrangements, are accounted for separately from the business combination in accordance with their nature and applicable IFRS. Identifiable intangible assets, meeting either the contractual-legal or separability criterion, are recognised separately from goodwill. Contingent liabilities representing a present obligation are recognised if the acquisition-date fair value can be measured reliably. 126 discoverIE AR2019 financials.indd 126 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 2. Accounting policies continued If the aggregate of the acquisition-date fair value of the consideration transferred and the amount recognised for the non- controlling interest (and where the business combination is achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree) is lower than the fair value of the assets, liabilities and contingent liabilities and the fair value of any pre-existing interest held in the business acquired, the difference is recognised in the consolidated income statement. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash- generating units (or groups of cash-generating units) that are expected to benefit from the business combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Each unit or group of units to which goodwill is allocated shall represent the lowest level within the entity at which the goodwill is monitored for internal management purposes and shall not be larger than an operating segment before aggregation. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed of operation is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Intangible assets – other All intangible assets, excluding goodwill arising on a business combination, are stated at their amortised cost or fair value less any provision for impairment. (a) Software Implementation costs of IT systems, and computer software, are amortised on a straight-line basis over their estimated useful lives which vary from three to ten years depending on the type of software and associated licensing and maintenance arrangements. (b) Acquired intangible assets – business combinations Intangible assets that are acquired as a result of a business combination include customer and supplier relationships, patents and brands that can be separately identified and measured at fair value on a reliable basis, together with the associated deferred tax liability. Amortisation is charged to the consolidated income statement on a straight line basis over the expected useful economic lives as follows. Customer and supplier relationships Patents Brands 5–10 years Patent term 5 years (c) Intangible assets – research and development Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally generated intangible asset arising from the Group’s development activities is capitalised only if all of the following conditions are met: (a) an asset is created that can be identified (such as software, new processes and product development costs); (b) it is probable that the asset created will generate future economic benefits; and (c) the development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basis over their useful lives between five and ten years. Where no internally generated intangible asset can be capitalised, development expenditure is recognised as an expense in the period in which it is incurred. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 127 discoverIE AR2019 financials.indd 127 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 2. Accounting policies continued Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is provided on a straight-line basis to write off the cost, less residual value, over the estimated useful life at the following rates: Land and buildings: Freehold property 2–4% per annum Leasehold buildings Shorter of lease term or useful life Land is not depreciated Leasehold improvements Plant and equipment 10–20% per annum or over the life of the lease 5-33% per annum Property, plant and equipment is reviewed for impairment in accordance with IAS 36 “Impairment”, when there are events or changes in circumstances that indicate that the carrying value may not be recoverable. Impairment of non-financial assets At each reporting date, the Group reviews the carrying value of its assets to determine whether there is any indication that the assets are impaired. If any such indication exists, or when annual impairment testing for an asset is required, such as in the case of goodwill, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset (or cash- generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount and an impairment loss is immediately recognised as an expense. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, an impairment loss is reversed to the extent that the asset’s carrying value does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Such reversals are recognised in the consolidated income statement. Any impairment charge on goodwill is not reversed. Financial assets Beginning 1 April 2018, the Group classifies its financial assets in the following measurement categories: 1. those to be measured at amortised cost; and 2. those to be measured subsequently at fair value through profit or loss (“FVTPL”) or through other comprehensive income (“FVOCI”). The classification depends on the Group’s business model for managing the financial assets as well as the contractual terms of the cash flows of the financial assets. For assets measured at fair value, gains or losses will either be recorded in profit or loss or other comprehensive income. At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. At subsequent measurement Financial assets mainly comprise “trade receivables”, “other current assets (excluding prepayments and VAT receivables)”, and “cash and cash equivalents” in the statement of financial position. Financial assets are subsequently measured based on the classification as follows: Amortised cost: Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A gain or loss on a financial asset that is subsequently measured at amortised cost and is not part of a hedging relationship is recognised in profit or loss when the asset is derecognised or impaired. Interest income from these financial assets is included in finance income using the effective interest rate method. 128 discoverIE AR2019 financials.indd 128 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 2. Accounting policies continued FVTPL: Derivative financial instruments that are held for trading as well as those that do not meet the criteria for classification as amortised cost or FVOCI are classified as FVTPL. Movement in fair values and interest income that is not part of a hedging relationship is recognised in profit or loss in the period in which it arises. The Group applies the IFRS 9 simplified approach and uses a provision matrix to measure expected credit loss which uses a lifetime expected loss allowance for all trade receivables. Expected credit loss is assessed separately for each of the Group’s key regions and is based on each region’s three-year historical credit loss experience. Prior to 1 April 2018, the Group classified non-derivative financial assets with fixed or determinable payments as loans and receivables. They were included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables were presented in trade and other receivables in the consolidated statement of financial position. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offest and there is an intention to settle on a net basis or realise the asset and the liability simultaneously. Inventories Inventories comprise goods held for resale and work in progress and are stated at the lower of cost and net realisable value after making allowance for any obsolete or slow moving items. Cost comprises direct materials, inward carriage and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Trade and other receivables Trade receivables are assessed for impairment in accordance with IFRS 9 “Financial instruments”. This requires consideration of both historical and forward looking information when considering potential impairment of trade receivables. The Group has opted to use the simplified approach allowed under IFRS 9, which requires the calculation of a lifetime expected credit loss. A provision matrix has been created to calculate an expected credit loss. This matrix is based upon historical observed default rates adjusted for forward looking information to create an adjusted default rate. This adjusted default rate is used to calculate an expected credit loss and is compared with the bad debts written off during the previous 36 months. The following criteria are used to calculate the default rate: Historical ■ The level of sales written off during the prior 36 month period compared to the credit sales over the same 36 month period and the aging of receivables. Forward looking ■ Forecast sales growth ■ Growth in geographical markets ■ Macroeconomic factors such as growth rates or interest rates ■ Other material factors such as customer concentration In addition to the expected credit loss, provision is made where there is objective evidence that a receivable balance may be impaired. Such evidence may include a significant change in the credit risk profile of a customer, debt that has become significantly overdue or contract default. Trade receivables are written off where there is no reasonable expectation of recovery, such as bankruptcy proceedings. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 129 discoverIE AR2019 financials.indd 129 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:11 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 2. Accounting policies continued Cash and cash equivalents Cash and cash equivalents in the consolidated statement of financial position comprise cash at bank and in hand and short- term deposits with an original maturity of three months or less. For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash and cash equivalents as defined above, net of outstanding bank overdrafts to the extent that offsetting agreements are in place. Borrowings Borrowings are initially recognised at fair value net of any associated issue costs. Borrowings are subsequently recorded at amortised cost, with any difference between the amount initially recorded and the redemption value recognised in the consolidated income statement using the effective interest rate method. Provisions Provisions for warranties, onerous contracts, retirement benefits and restructuring costs are recognised when the Group has a present legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. In relation to the provision for onerous contracts, an assessment is made for impairment of any related assets. Provisions are discounted to present value when the effect is material using a discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. The amortisation of the discount is recognised as a finance cost. Exceptional items The Group discloses exceptional items by virtue of their nature, size or incidence so as to allow a better understanding of the underlying trading performance of the Group. The Group includes, where material, the profit or loss on disposal of property, investments or businesses and other financial assets, asset impairments and significant restructuring costs in exceptional items. Foreign currency translation Transactions in foreign currencies are initially recorded in the functional currency at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the reporting date and gains or losses on translation are included in the consolidated income statement. Currency gains and losses arising from the retranslation of the opening net assets of foreign operations are recorded as a movement on reserves, net of tax. The differences that arise from translating the results of overseas businesses at average rates of exchange, and their assets and liabilities at closing rates, are dealt with in a separate currency translation reserve. All other currency gains and losses are dealt within in the consolidated income statement. 130 discoverIE AR2019 financials.indd 130 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 2. Accounting policies continued Revenue recognition Revenue represents the fair value of the consideration received or receivable for goods, commission and other services provided to third parties, after deducting discounts, VAT and similar taxes levied overseas. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. In particular: a. Revenue from the sale of products is recognised upon transfer of control to the customer upon completion of specified performance obligations. This is generally when goods are dispatched to customers; b. Revenue from rendering of services, which primarily comprise maintenance and outsourcing contracts, is recognised over the life of the contract reflecting performance of the contractual obligations to the customer; c. Interest income is recognised as the interest accrues using the effective interest method; d. Dividend income is recognised when the shareholders’ right to receive the payment is established. Segment reporting Operating segments are reported in a manner consistent with internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board. Dividends Dividends are recognised when they meet the criteria for recognition as a liability. In relation to final dividends, this is when the dividend is approved by the shareholders in the general meeting, and in relation to interim dividends, when paid. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Rentals payable under operating leases are charged to the consolidated income statement on a straight-line basis over the term of the relevant lease. The Group has not entered into any material finance leases. Borrowing costs Borrowing costs are recognised as an expense in the period in which they are incurred, in accordance with the effective interest rate method. Pensions Payments to defined contribution pension schemes are charged as an expense as they fall due. In respect of defined benefit pension schemes, the obligation recognised in the consolidated statement of financial position represents the present value of the defined benefit obligation, reduced by the fair value of the scheme assets. The cost of providing benefits is determined using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised in full in the period in which they occur in the consolidated statement of comprehensive income. Net interest costs are included in finance costs and pension administration costs are included in administration expenses. Share-based payments The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted, calculated using an option pricing model, and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. In valuing equity-settled transactions, no account is taken of non-market vesting conditions. At each reporting date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non-market conditions and hence the number of equity instruments that will ultimately vest. The movement in cumulative expense since the previous reporting date is recognised in the consolidated income statement, with a corresponding entry in equity. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 131 discoverIE AR2019 financials.indd 131 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 2. Accounting policies continued Taxation Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the reporting date. Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: ■ where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; ■ in respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and ■ deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the reporting date. Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise income tax is recognised in the consolidated income statement. Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange risks arising from operational activities. It principally employs forward foreign exchange contracts to hedge the risks associated with foreign currency fluctuations relating to certain firm commitments and highly probable forecast transactions. Certain derivative financial instruments are designated as hedging instruments in line with the Group’s risk management policies. Hedges of foreign currency exposure on firm commitments and highly probable forecast transactions are accounted for as a cash flow hedge. The Group does not enter into speculative derivative contracts. Where the fair value of the hedging investment or hedging item is material, the Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. All derivative financial instruments are initially recognised in the statement of financial position at fair value and are subsequently re-measured to their fair value at each reporting date. The fair value of forward exchange contracts is calculated by reference to current forward exchange contracts with similar maturity profiles. 132 discoverIE AR2019 financials.indd 132 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 2. Accounting policies continued Significant accounting judgements and estimates Estimation uncertainty Key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The most significant areas in which assumptions are made and estimates used are in determining: Goodwill impairment The Group tests annually whether goodwill is impaired in accordance with its accounting policy. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates of future cash flows and the selection of suitable discount rates (note 16). During the year a reassessment of the basis of allocation to the Acal BFi businesses concluded that Acal BFi Group represents one CGU (see note 15). Contingent consideration The amounts recognised for contingent consideration in relation to business combinations are the Directors’ best estimates of the actual amounts which will be payable based on the forecast performance of the acquired businesses. note 11 provides details of contingent considerations arising from business combinations. Fair value of assets acquired in a business combination Judgements and estimates are required in assessment of fair value of the consideration and net assets acquired, including the identification and valuation of intangible assets. note 11 provides details on business combinations. Retirement benefits The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net expense for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of retirement benefit obligations. The actuarial assumptions used in determining the carrying amount at 31 March 2019 are set out in note 32. Current assets In the course of normal trading activities, judgement is used to establish the carrying value of various elements of working capital, principally inventory and trade receivables. Provisions are made against obsolete or slow-moving inventories and doubtful debts. The provisions are based on the facts available at the time the financial statements are approved and are also determined by using profiles, based on past practice, applied to certain aged inventory and trade receivables categories. Exceptional items The amounts recognised as exceptional items are consistent with the accounting policy on page 130. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 133 discoverIE AR2019 financials.indd 133 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 3. New accounting standards and financial reporting requirements New standards applied The following standards and interpretations, which have been issued by the IASB, became effective during the current year end and have been adopted by the Group: International Accounting Standards (IAS/IFRS/IFRIC) IFRS 9 IFRS 15 Financial Instruments: Classification and Measurement Revenue from Contracts with Customers 1 Period beginning on or after Effective date1 1 January 2018 1 January 2018 IFRS 9, “Financial Instruments” replaces the provisions of IAS 39 relating to the classification and measurement of financial assets and liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. The Group has assessed the impact of IFRS 9 with the main area of consideration being the impairment of trade receivables. The Group’s trade receivables are subject to IFRS 9’s new impairment model for financial assets, which requires the recognition of impairment provisions based upon expected credit losses rather than incurred credit losses, as in the case of IAS 39. The Group has applied the simplified approach and records lifetime expected losses on all trade receivables. The adoption of this model has had no material impact on the Group’s financial statements. Details of the change in the Group’s accounting policy are set out in note 2. IFRS 15, “Revenue from contracts” deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard replaces IAS 18 “Revenue” and IAS 11 “Construction contracts” and related interpretations. The impact of adopting IFRS 15 on the Group financial statements was not material. This reflects the relatively non-complex and largely standardised terms and conditions applicable to the Group’s revenue contracts. Details of the change in the Group’s accounting policy in respect of revenue recognition are set out in note 2. New standards not yet applied IFRS 16, “Leases” is effective for annual periods beginning on or after 1 January 2019 and will impact the Group for the first time for the financial year ending 31 March 2020. The standard requires lessees to recognise a lease liability reflecting the net present value of future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. The Group has not made use of the exemptions for leases of low-value assets and short term leases (leases shorter than 12 months). The Group will not restate prior year comparators when the new standard is adopted, with lease asset values being set equal to lease liabilities at the date of transition in line with the “simplified approach” under IFRS 16. The lease liability will be recognised as the present value of remaining lease payments discounted using the interest rate implicit in the lease, if this rate is readily available. If not, the lessee’s incremental borrowing rate will be used. The lease liability will be adjusted for prepaid or accrued lease payments. The income statement will be impacted by the replacement of operating lease rentals with depreciation of the right of use asset and interest expense from the unwinding of the discount on the lease liability. 134 discoverIE AR2019 financials.indd 134 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 3. New accounting standards and financial reporting requirements continued The Group will apply the standard from 1 April 2019 and expects to recognise right-of-use assets of approximately £19m and lease liabilities of £19m. For the year ending 31 March 2020, the Group expects the impact on net profit after tax, earnings per share and total cashflow to be immaterial. Changes resulting from the adoption of IFRS 16, including recognition of lease liabilities as financial liabilities, will not impact the Group’s gearing for the purpose of the gearing covenant and interest covenant within our £180m syndicated banking facility. 4. Revenue Group revenue is analysed below: Sale of goods Rendering of services Total revenue 2019 £m 428.7 10.2 438.9 2018 £m 381.4 6.5 387.9 5. Operating segment information The Group organises its business into two divisions, Design & Manufacturing and Custom Supply. ■ The Design & Manufacturing division manufactures custom electronic products that are uniquely designed or modified from a standard product for a specific customer requirement. The products are manufactured at one of our in-house manufacturing facilities or, in some cases, by third-party contractors. ■ The Custom Supply division provides technically demanding, customised electronic, photonic and medical products to the industrial, medical and healthcare markets, both from a range of high-quality, international suppliers (often on an exclusive basis) and from discoverIE’s Design & Manufacturing division. These two divisions have been assessed as the reportable operating segments of the Group. Within each reportable operating segment are aggregated business units with similar characteristics such as the method of acquiring products for sale (manufacturing versus distribution), the nature of customers and products, risk profile and economic characteristics. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is reported and evaluated based on operating profit or loss earned by each segment without allocation of central administration costs including Directors’ salaries, investment revenue and finance costs, and income tax expense. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 135 discoverIE AR2019 financials.indd 135 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 5. Operating segment information continued Segment revenue and results Design & Manufacturing £m 266.2 Custom Supply £m 172.7 29.8 1.1 (1.8) (5.9) – 23.2 8.6 – – – – 8.6 Unallocated £m – (7.8) (0.9) – – (0.4) (9.1) Total £m 438.9 30.6 0.2 (1.8) (5.9) (0.4) 22.7 Design & Manufacturing £m Restated Custom Supply £m Unallocated £m Total £m Restated 222.6 165.3 – 387.9 24.2 (1.2) (0.8) (4.9) – 17.3 7.5 (7.2) – – – – 7.5 – – – (0.3) (7.5) Design & Manufacturing £m Custom Supply £m 127.1 109.9 237.0 51.0 9.0 60.0 (54.3) (32.1) 24.5 (1.2) (0.8) (4.9) (0.3) 17.3 Total £m 178.1 118.9 297.0 2.0 22.9 6.4 328.3 (86.4) (5.3) (86.2) (2.5) (13.2) (193.6) 134.7 2019 Revenue Result Underlying operating profit/(loss) Exceptional items Acquisition costs Amortisation of acquired intangible assets IAS 19 pension charge Operating profit/(loss) 2018 Revenue Result Underlying operating profit/(loss) Exceptional items Acquisition costs Amortisation of acquired intangible assets IAS 19 pension charge Operating profit/(loss) Segment assets and liabilities 2019 Assets and liabilities Segment assets (excluding goodwill and other intangible assets) Goodwill and other intangible assets Central assets Cash and cash equivalents Current and deferred tax assets Total assets Segment liabilities Central liabilities Other financial liabilities Pension liability Current and deferred tax liabilities Total liabilities Net assets 136 discoverIE AR2019 financials.indd 136 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 5. Operating segment information continued 2018 Assets and liabilities Segment assets (excluding goodwill and other intangible assets) Goodwill and other intangible assets Central assets Cash and cash equivalents Deferred tax assets Total assets Segment liabilities Central liabilities Other financial liabilities Pension liability Current and deferred tax liabilities Total liabilities Net assets Design & Manufacturing £m Restated 116.8 97.6 214.4 Custom Supply £m 48.1 9.2 57.3 (48.4) (30.5) Total £m Restated 164.9 106.8 271.7 1.6 21.9 7.1 302.3 (78.9) (7.6) (74.3) (3.0) (11.7) (175.5) 126.8 For the purposes of monitoring segment performance and allocating resources between segments, the Directors monitor the net assets attributable to each segment. Assets and liabilities are allocated to reportable segments, with the exception of the pension liability, tax assets and liabilities, cash and all borrowings, central assets (ERP and other Head Office assets) and central liabilities (Head Office liabilities). Other segment information Design & Manufacturing Custom Supply Central Depreciation and amortisation1 Additions to non-current assets1 2019 £m 10.3 0.5 0.3 11.1 2018 £m 8.2 0.5 0.3 9.0 2019 £m 24.8 0.4 0.5 25.7 2018 £m Restated 24.4 0.5 – 24.9 1 Includes goodwill, acquired intangibles and related amortisation. Geographical information The Group’s revenue from external customers based on customer locations and information about its segment assets by geographical location are detailed below: UK Europe Rest of the World Revenue from external customers Non-current assets 2019 £m 74.0 273.0 91.9 438.9 2018 £m 61.5 252.0 74.4 387.9 2019 £m 45.5 96.2 7.5 149.2 2018 £m Restated 29.1 99.9 7.4 136.4 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 137 discoverIE AR2019 financials.indd 137 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 6. Underlying profit before tax Profit before tax Add back Exceptional Items Acquisition costs Amortisation of acquired intangible assets Total IAS 19 pension charge Underlying profit before tax 2019 £m 19.3 (0.2) 1.8 5.9 0.4 27.2 2018 £m Restated 14.6 1.2 0.8 4.9 0.4 21.9 (a) (b) (c) (d) The tax impact of the underlying profit adjustments above is a credit of £2.0m (2018: £1.3m). (a) An exceptional charge of £0.9m was incurred in relation to equalisation of Guaranteed Minimum Pensions (GMPs) in the Sedgemoor Group Pension Fund. See note 32 for further details During the year, internal control processes identified a fraud, perpetrated against the Group in a small US subsidiary. Decisive action was taken to resolve the matter with new management put in place and tightened local and Group controls. Of the total fraud cost of £4.0m, £2.6m has been recovered this year from insurance after the excess deductible. The fraud was conducted over a period of four years of which £1.5m of the fraud cost was incurred this year, £1.2m last year and a further £1.3m in the previous two years. The exceptional income of £1.1m for this year comprises the insurance receipt of £2.6m offset by the fraud cost incurred this year of £1.5m. (b) In the year there were £1.8m of acquisition costs. Costs of £0.9m were incurred in relation to the acquisition of Cursor Controls. Contingent consideration of £0.5m was charged in relation to past acquisitions. £0.4m was incurred in relation to the post year-end acquisitions of Hobart and Positek. In the prior year there were £1.2m of acquisition costs relating primarily to the acquisition of Santon, and £0.3m of acquisition integration cost relating to the manufacturing integration between the Plitron and Noratel business. These costs are partially offset by a £0.7m net credit adjustment to contingent consideration for acquired businesses. (c) Amortisation charge for intangible assets recognised on acquisition (see note 17). (d) Pension costs related to the Group’s legacy defined benefit pension scheme (see note 32). 7. Operating profit Amounts charged to the consolidated income statement are as follows: Employee costs (note 8) Depreciation of property, plant and equipment (note 14) Amortisation of other intangible assets (note 17) Net foreign exchange differences Inventories (amounts included in cost of sales): Cost of inventories Write-down of inventories to net realisable value Operating lease rentals: Minimum lease payments recognised as an operating lease expense Auditors’ remuneration: Audit of the Group financial statements (including parent company) Audit of local subsidiary financial statements 138 2019 £m 88.4 4.6 6.5 0.1 294.0 1.8 6.2 0.2 0.6 2018 £m 78.9 3.5 5.5 0.9 260.8 1.1 6.0 0.2 0.5 discoverIE AR2019 financials.indd 138 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 8. Employee costs and Directors’ emoluments Wages and salaries Social security costs Other pension costs Share-based payments (note 31) 2019 £m 71.6 12.3 3.4 1.1 88.4 The average monthly number of employees (including Executive Directors) during the year was as follows: Sales and marketing Manufacturing and service Administration At 31 March 2019 the Group had 4,283 employees (2018: 4,061). Directors’ emoluments Aggregate emoluments in respect of qualifying services Aggregate contribution to money purchase pension schemes Highest paid director Emoluments in respect of qualifying services Pension contributions to the defined contribution scheme 2019 570 3,236 475 4,281 2019 1,332,680 75,560 1,408,240 855,664 59,731 915,395 2018 £m 64.4 10.9 2.9 0.7 78.9 2018 591 2,941 454 3,986 2018 1,150,519 73,005 1,223,524 727,771 57,711 785,482 Retirement benefits are accruing to two Directors under a defined contribution pension scheme (2018: two). Further details of Directors’ emoluments are provided in the remuneration report on pages 82 to 102. 9. Finance income/(costs) Interest receivable and similar income Finance income Finance costs on bank loans and overdrafts Net pension finance charge (note 32) Finance costs 2019 £m 0.5 0.5 (3.9) – (3.9) 2018 £m 0.4 0.4 (3.0) (0.1) (3.1) Innovative Electronics www.discoverieplc.com Stock Code: DSCV 139 discoverIE AR2019 financials.indd 139 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 10. Tax expense The major components of the corporation tax expense are summarised below: Current taxation: UK corporation tax UK adjustments in respect of prior years Overseas tax Overseas adjustments in respect of prior years Total current taxation expense Deferred taxation Origination and reversal of temporary differences within the UK Origination and reversal of temporary differences overseas Adjustment in respect of prior years Increased recognition of historic losses Impact of tax rate changes Total deferred taxation credit Tax expense reported in the consolidated income statement Tax recognised in other comprehensive income Decrease/(increase) in deferred tax asset on pension deficit Tax reported in other comprehensive income Tax recognised in equity Increase in deferred tax asset on share-based payments Tax reported in equity 2019 £m 2018 £m – – – 5.5 (0.3) 5.2 5.2 0.4 (0.4) (0.1) (0.4) – (0.5) 4.7 2019 £m – – 2019 £m 0.3 0.3 – (0.1) (0.1) 4.3 – 4.3 4.2 0.2 0.2 – (0.8) 0.2 (0.2) 4.0 2018 £m 0.3 0.3 2018 £m 1.4 1.4 The effective rate of taxation for the year is higher (2018: higher) than the standard rate of taxation in the UK of 19% (2018: 19%). A reconciliation of the tax expense applicable to the profit before tax, at the statutory tax rate, to the actual tax expense at the Group’s effective tax rate for the years ended 31 March 2019 and 31 March 2018 respectively is presented below: Profit before tax Profit before taxation multiplied by standard rate of corporation tax in the UK of 19% (2018: 19%) Effect of: Different tax rates in overseas companies Tax losses not recognised Non-deductible expenses Adjustments to deferred taxation in respect of prior years Increased recognition of historic losses Impact of tax rate changes on deferred tax Adjustments to current taxation expense in respect of prior years Total tax reported in the consolidated income statement 140 2019 £m 19.3 3.7 1.0 0.3 0.5 (0.1) (0.4) – (0.3) 4.7 2018 £m Restated 14.6 2.8 1.0 0.8 0.1 – (0.8) 0.2 (0.1) 4.0 discoverIE AR2019 financials.indd 140 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 10. Tax expense continued Deferred tax Deferred tax liabilities Accelerated capital allowances Intangibles Other temporary differences Gross deferred tax liabilities Deferred tax assets Decelerated capital allowances Pensions Tax losses Share-based payment plans Other temporary differences Gross deferred tax assets Deferred tax credit in the consolidated income statement Consolidated income statement Decelerated capital allowances Other temporary differences 2019 £m (0.5) (6.6) (0.6) (7.7) 0.7 0.6 1.7 1.2 0.9 5.1 2019 £m (0.3) (0.2) (0.5) 2018 £m Restated (0.5) (6.1) (0.5) (7.1) 0.9 0.9 1.2 2.3 0.5 5.8 2018 £m 0.1 (0.3) (0.2) At 31 March 2019, the Group had not recognised any deferred tax asset in respect of tax losses of approximately £28.0m (2018: £26.0m). Deferred tax assets are not recognised where there is insufficient evidence that losses will be utilised. At 31 March 2019, there was a £0.1m recognised deferred tax liability (2018: nil) for taxes that would be payable on the remittance of certain of the Group’s overseas subsidiaries’ unremitted earnings. The Group has determined that, other than this £0.1m deferred tax liability, undistributed profits of its overseas subsidiaries will not be distributed in the near future where an additional tax charge would arise. A reduction in the UK corporation tax rate to 17% had been substantively enacted with effect from 1 April 2020. A rate of 19% is applicable until the 17% rate becomes effective. Rates of 17% and 19% have been applied in the measurement of the Group’s UK based deferred tax assets and liabilities at 31 March 2019, based on an estimate of when the UK deferred tax is expected to crystallise. 11. Business combinations Acquisitions in the year ended 31 March 2019 Acquisition of Cursor Controls On 16 October 2018, the Group completed the acquisition of Cursor Controls via the purchase of 100% of the share capital and voting equity interests of its holding company Cursor Controls Holdings (“Cursor Controls”): Cursor Controls was acquired for a consideration of £19m on a debt free, cash free basis, before expenses, funded from the Group’s existing debt facilities. The initial cash consideration of £20.8m was adjusted for cash acquired and other net purchase price adjustments of £1.8m. In addition, a contingent payment of up to £4.0m will be payable subject to Cursor Controls achieving certain profit growth targets during the three-year period ended 31 December 2021. Cursor Controls is a designer and manufacturer of human to machine interface (“HMI”) products for medical, industrial and transportation applications, its products comprise trackballs, touchpads and ruggedised keyboards. They are custom designed for specific applications, and are highly complementary to discoverIE’s existing business. The business, which is based in Newark, UK, with manufacturing facilities in the UK and Belgium, operates within the Group’s Design & Manufacturing division while retaining its distinct brand identity. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 141 discoverIE AR2019 financials.indd 141 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 11. Business combinations continued The fair value of the identifiable assets and liabilities of Cursor Controls at the date of acquisition were as follows. Property, plant and equipment Intangible assets – customer relationships and patents Inventories Trade and other receivables Net cash Trade and other payables Current tax liabilities Deferred tax liabilities (non-current) Total identifiable net assets Provisional goodwill arising on acquisition Total Discharged by: Cash Provisional fair value recognised at acquisition £m 0.9 9.7 1.4 2.0 1.4 (1.5) (0.2) (1.9) 11.8 9.0 20.8 20.8 20.8 The fair value of the trade receivables is equal to their gross amounts. It is expected that the full contractual amounts of the trade receivables can be collected. The goodwill of £9.0m arising from the acquisition is attributable to the cross-selling synergies and international expansion expected to arise from operating as part of the Group. None of the goodwill recognised is expected to be deductible for corporate tax purposes. Net cash outflows in respect of the acquisition comprise: Cash consideration Acquisition costs (included in cash flows from operating activities)1 Net cash acquired Total £m 20.8 0.9 (1.4) 20.3 1 Acquisition costs of £0.9m were expensed as incurred in the year ended 31 March 2019 and were included within administrative expenses (note 6). Included in cash flow from investing activities is the cash consideration of £20.8m, the net cash acquired of £1.4m and debt like items of £0.1m. From the date of acquisition to 31 March 2019, Cursor Controls contributed £6.6m to revenue and £1.0m to profit after tax of the Group. If the business combination had taken place at the beginning of the year, the consolidated profit after tax for the Group would have been £15.2m and the consolidated revenue for the Group would have been £443.8m. 142 discoverIE AR2019 financials.indd 142 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 11. Business combinations continued Acquisitions in the year ended 31 March 2018 Acquisition of Santon On 1 February 2018, the Group announced the acquisition of Santon Group (“Santon”) via the purchase of 100% of the share capital and voting equity interests of its holding company EWAC Holdings BV. The initial consideration comprises a payment of £19.4m in cash, funded from the Group’s existing debt facilities, and the issue to the vendor of new ordinary shares of 5p each in discoverIE (the “New Ordinary Shares”) to the value of £0.9m. The Group received a purchase price adjustment of £1.3m during the year ended 31 March 2019. In accordance with IFRS 3, a measurement period was made in the prior year to reflect the changes to the provisional fair values identified at acquisition. See note 2 for further details. In addition, contingent consideration of up to £19.7m will be payable over the next three years, subject to Santon achieving certain growth targets. The fair value of the contingent consideration at the acquisition date was estimated to be £nil. Santon is a Dutch based designer and manufacturer of highly differentiated, patented direct current (“DC”) switches for use in solar, industrial and transportation markets. Santon operates from Rotterdam in the Netherlands, with sales offices in the UK and Germany. Santon operates within the Group’s Design & Manufacturing division. The fair value of the identifiable assets and liabilities of Santon at the date of acquisition were as follows. Property, plant and equipment Intangible assets – customer relationships and patents Inventories Trade and other receivables Net debt Trade and other payables Current tax liabilities Deferred tax liabilities (non-current) Total identifiable net assets Goodwill arising on acquisition Total Discharged by: Cash Shares issued Purchase price adjustments Fair value recognised at acquisition £m 7.3 7.6 4.5 5.2 (4.4) (3.7) (0.7) (1.8) 14.0 5.0 19.0 19.4 0.9 (1.3) 19.0 The fair value of the trade receivables is equal to their gross amounts. It is expected that the full contractual amounts of the trade receivables can be collected. The goodwill of £5.0m arising from the acquisition is attributable to the cross-selling synergies and international expansion expected to arise from operating as part of the Group. None of the goodwill recognised is expected to be deductible for corporate tax purposes. . Innovative Electronics www.discoverieplc.com Stock Code: DSCV 143 discoverIE AR2019 financials.indd 143 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 11. Business combinations continued Net cash outflows in respect of the acquisition comprise: Cash consideration Acquisition costs (included in cash flows from operating activities)1 Net debt acquired Total £m 19.4 1.2 4.4 25.0 1 Acquisition costs of £1.2m were expensed as incurred in the year ended 31 March 2018 and were included within administrative expenses (note 6). Included in cash flow from investing activities is the cash consideration of £19.4m, the net debt acquired of £4.4m and debt like items of £0.8m. From the date of acquisition to 31 March 2018, Santon contributed £3.7m to revenue and £nil to profit after tax of the Group. If the business combination had taken place at the beginning of the year, the consolidated profit after tax for the Group would have been £12.9m and the consolidated revenue for the Group would have been £416.5m. 12. Dividends Dividends recognised in equity as distributions to equity holders in the year: Equity dividends on ordinary shares: Final dividend for the year ended 31 March 2018 of 6.35p (2017: 6.05p) Interim dividend for the year ended 31 March 2019 of 2.80p (2018: 2.65p) Total amounts recognised as equity distributions during the year Proposed for approval at AGM: Equity dividends on ordinary shares: 2019 £m 4.6 2.1 6.7 2019 £m 2018 £m 4.3 1.9 6.2 2018 £m Final dividend for the year ended 31 March 2019 of 6.75p (2018: 6.35p) 5.4 4.5 Summary Dividends per share declared in respect of the year Dividends per share paid in the year Dividends paid in the year 9.55p 9.15p £6.7m 9.0p 8.7p £6.2m As reported in our Annual Report for the year ended 31 March 2018, a technical non-compliance issue was identified with respect to last year’s final dividend payable out of distributable reserves. While the Board was confident that there was adequate distributable reserves in subsidiary companies to meet this dividend at the time, the position was remedied by means of appropriate resolutions at a general meeting of Shareholders in July 2018. 144 discoverIE AR2019 financials.indd 144 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:12 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 13. Earnings per share Basic earnings per share is calculated by dividing the net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is the basic earnings per share after allowing for the dilutive effect of the conversion into ordinary shares of the weighted average number of options outstanding during the year. The following reflects the income and share data used in the basic and diluted earnings per share computations: Profit for the year attributable to equity holders of the parent: Weighted average number of shares for basic earnings per share Effect of dilution – share options Adjusted weighted average number of shares for diluted earnings per share Basic earnings per share Diluted earnings per share Underlying earnings per share is calculated as follows: Net profit for the year Exceptional items Acquisition costs Amortisation of acquired intangible assets IAS 19 pension charge Tax effect of the above Underlying earnings Weighted average number of shares for basic earnings per share Effect of dilution – share options Adjusted weighted average number of shares for diluted earnings per share Underlying basic earnings per share Underlying diluted earnings per share 2019 £m 14.6 2018 £m Restated 10.6 Number Number 72,979,791 70,797,217 2,419,122 3,666,253 75,398,913 74,463,470 20.0p 19.4p 15.0p 14.2p 2019 £m 14.6 (0.2) 1.8 5.9 0.4 (2.0) 20.5 2018 £m Restated 10.6 1.2 0.8 4.9 0.4 (1.3) 16.6 Number Number 72,979,791 70,797,217 2,419,122 3,666,253 75,398,913 74,463,470 28.1p 27.2p 23.4p 22.3p At the year end, there were 2,629,935 ordinary share options in issue that could potentially dilute underlying earnings per share in the future, of which 2,419,122 are currently dilutive (2018: 4,580,130 in issue and 3,666,253 dilutive). Innovative Electronics www.discoverieplc.com Stock Code: DSCV 145 discoverIE AR2019 financials.indd 145 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 14. Property, plant and equipment Cost At 1 April 2017 Additions Disposals Arising from business combinations Exchange adjustments At 31 March 2018 Additions Disposals Arising from business combinations Exchange adjustments At 31 March 2019 Accumulated depreciation At 1 April 2017 Charge for the year Disposals Exchange adjustments At 31 March 2018 Charge for the year Exchange adjustments At 31 March 2019 Net book value at 31 March 2019 Net book value at 31 March 2018 Land and buildings £m Leasehold improvements £m Plant and equipment £m 7.7 0.5 – 3.2 (0.1) 11.3 0.2 – 0.2 (0.1) 11.6 2.2 0.4 – – 2.6 0.5 – 3.1 8.5 8.7 2.7 0.4 (0.7) – (0.1) 2.3 0.4 – 0.1 – 2.8 1.7 0.2 (0.7) (0.1) 1.1 0.3 – 1.4 1.4 1.2 17.1 3.1 (0.3) 4.1 (0.5) 23.5 4.6 (0.3) 0.6 (0.2) 28.2 7.6 2.9 (0.3) (0.2) 10.0 3.8 (0.1) 13.7 14.5 13.5 Total £m 27.5 4.0 (1.0) 7.3 (0.7) 37.1 5.2 (0.3) 0.9 (0.3) 42.6 11.5 3.5 (1.0) (0.3) 13.7 4.6 (0.1) 18.2 24.4 23.4 Land and buildings includes land with a cost of £0.8m (2018: £0.8m) that is not subject to depreciation. At 31 March 2019 the Group had capital expenditure commitments for plant and equipment of £0.4m (2018: £1.4m) for which no provision has been made. 146 discoverIE AR2019 financials.indd 146 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 15. Intangible assets – goodwill Cost At 1 April 2017 Arising from business combinations Exchange adjustments At 31 March 2018 Arising from business combinations Exchange adjustments At 31 March 2019 Impairment At 31 March 2018 and 31 March 2019 Net book value at 31 March 2019 Net book value at 31 March 2018 16. Impairment testing of goodwill The carrying value of goodwill is analysed as follows: Custom Supply Acal BFi Medical Design & Manufacturing Stortech Hectronic MTC Myrra RSG Noratel Foss Flux Contour Plitron Variohm Santon Cursor Controls £m Restated 109.4 5.3 (0.9) 113.8 9.0 (0.7) 122.1 £m (36.8) 85.3 77.0 2019 £m 2018 £m Restated 8.4 0.6 3.6 0.6 2.0 5.1 1.2 8.5 0.6 3.6 0.6 2.0 5.2 1.3 28.7 29.2 5.6 0.6 7.7 1.1 6.0 5.1 9.0 5.6 0.6 7.7 1.1 6.0 5.0 – 85.3 77.0 Goodwill acquired through business combinations is allocated to cash-generating units (CGUs). The management has reassessed the continuing interdependence of cashflows across the Acal BFi businesses and, as a result, has concluded that Acal BFi is now one CGU. Consequently, Compotron and Acal BFi UK goodwill have been aggregated into this CGU. The movement in goodwill compared to prior year relates to the movement in foreign exchange with the exception of Cursor Controls which was acquired in the year (refer to note 11 for details). Innovative Electronics www.discoverieplc.com Stock Code: DSCV 147 discoverIE AR2019 financials.indd 147 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 16. Impairment testing of goodwill continued The recoverable amount of each remaining CGU is based on value in use calculations and management’s view of the recoverable amount. The key assumptions in these calculations relate to future revenue and margins. Cash flow forecasts for the five-year period from the reporting date are based on 2020 budget and management projections thereon. Revenue growth rates in the post-budget management projections between 2.5% and 10% (2018: between 5% and 10%) have been used depending on size and sector in which the CGU operates. Annual cash flow growth rates beyond the five-year period are assumed at 2% (2018: 2%) for all CGUs in line with the average long-term growth rate for the relevant markets. Discount rates reflect the current market assessment of the risks specific to each CGU. The discount rate was estimated based on the average percentage of a weighted average cost of capital for the industry and then further adjusted to reflect management’s assessment of any risk specific to the Group. The pre-tax discount rate applied to the cash flow projections of CGUs varies from 10% to 15% (2018: 10% to 16%). Sensitivity to changes in assumptions The Group has conducted sensitivity analysis on the impairment test of each CGUs carrying value. With regard to all the CGUs above, the Directors believe that no reasonably possible changes in any of the key assumptions would cause the carrying value of the CGU to materially exceed its recoverable amount. 17. Intangible assets – other Acquired intangibles Customer/ supplier relationships £m Restated Patents and brands £m Restated Total £m Restated Software and development £m 10.8 – 0.6 0.1 11.5 – 1.2 (0.1) 12.6 8.3 0.6 0.2 9.1 0.6 (0.1) 9.6 3.0 2.4 36.7 5.4 – (0.7) 41.4 7.1 – (0.4) 48.1 11.1 4.9 (0.2) 15.8 5.6 (0.3) 21.1 27.0 25.6 0.8 2.2 – – 3.0 2.6 – (0.1) 5.5 0.8 – – 0.8 0.3 – 1.1 4.4 2.2 48.3 7.6 0.6 (0.6) 55.9 9.7 1.2 (0.6) 66.2 20.2 5.5 – 25.7 6.5 (0.4) 31.8 34.4 30.2 Cost At 1 April 2017 Arising from business combinations Additions Exchange adjustment At 31 March 2018 Arising from business combinations Additions Exchange adjustment At 31 March 2019 Accumulated amortisation At 1 April 2017 Charge for the year Exchange adjustment At 31 March 2018 Charge for the year Exchange adjustment At 31 March 2019 Net book value at 31 March 2019 Net book value at 31 March 2018 148 discoverIE AR2019 financials.indd 148 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 18. Investments in associates Cost At 31 March 2018 and 31 March 2019 Impairment At 31 March 2018 and 31 March 2019 Net book amount 31 March 2018 and 31 March 2019 Associates Scientific Digital Business (Pte) Ltd £m 5.4 (5.4) – Country of incorporation % equity interest 2019 and 2018 Singapore 40 Impairment of associate investments In 2009, the Directors took the view that its associate investment should be fully impaired, due to continuing losses in this business. There have been no changes in 2019 that would lead to this impairment being reversed. 19. Inventories Finished goods and goods for resale Raw materials and work in progress Total inventories As at 31 March 2019, the provision for realisable value against total inventories was £7.2m (2018: £6.6m). 20. Trade and other receivables Trade receivables Other receivables Prepayments and contract assets 2019 £m 39.6 26.6 66.2 2019 £m 78.5 7.1 3.1 88.7 2018 £m Restated 35.7 22.4 58.1 2018 £m Restated 74.4 7.4 2.8 84.6 Trade receivables are non-interest bearing; are generally on 30 to 60 days’ terms and are shown net of a provision for impairment. As at 31 March 2019, trade receivables of £0.8m (2018: £0.8m) were impaired and fully provided for. Movements in the provision for impairment of receivables were as follows: At 1 April Charge for the year Amounts written off At 31 March 2019 £m 0.8 0.1 (0.1) 0.8 2018 £m 0.9 0.1 (0.2) 0.8 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 149 discoverIE AR2019 financials.indd 149 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 20. Trade and other receivables continued As at 31 March, the analysis of trade receivables that were past due but not impaired is as follows: Past due but not impaired Neither past due nor impaired £m 63.7 62.5 Total £m 78.5 74.4 <30 days £m 11.8 9.7 30–60 days £m 1.2 1.1 60–90 days £m 1.3 0.5 2019 2018 21. Cash and cash equivalents Cash at bank and in hand 90–120 days £m 0.1 0.2 2019 £m 22.9 >120 days £m 0.4 0.4 2018 £m 21.9 Cash at bank earns interest at floating rates, based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates. The Group only deposits cash surpluses with major banks of high credit standing (£16.0m with HSBC; credit rating of AA-, £0.6m with Danske Bank; credit rating of A+, and the remaining balance of £6.3m with various financial institutions; credit rating of BBB- or higher) in line with its treasury policy. The fair value of cash and cash equivalents is £22.9m (2018: £21.9m). 22. Other financial liabilities Bank overdrafts Unsecured bank loans Revolving Credit Facility (RCF) Capitalised debt costs Total other financial liabilities Trade and other payables Total Effective interest rate % Maturity Variable On demand Variable Variable Current Non-current 2019 £m 2.1 – – (0.4) 1.7 78.0 79.7 2018 £m Restated 5.7 1.0 – (0.3) 6.4 71.9 78.3 2019 £m – 2.8 83.1 (1.4) 84.5 0.2 84.7 2018 £m Restated – 0.2 68.3 (0.6) 67.9 0.7 68.6 Interest on overdrafts is based on floating rates linked to LIBOR. Included in unsecured bank loans are euro-denominated loans of £0.2m carrying fixed interest rates of 8%. At 31 March 2019, the revolving credit facility drawdowns of £83.1m were denominated primarily in Sterling and Euros which bear interest based on LIBOR and EURIBOR, plus a facility margin. The revolving credit facility is unsecured. Trade and other payables above include only contractual obligations. 150 discoverIE AR2019 financials.indd 150 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 22. Other financial liabilities continued The maturity of the carrying value of the gross contractual financial liabilities is as follows: The carrying amount of the Group’s borrowings is denominated in the following currencies: At 31 March 2019 Fixed and floating rate Trade and other payables At 31 March 2018 Floating rate Trade and other payables Sterling Euro US dollar Other currencies 23. Movements in cash and net debt Year to 31 March 2019 Cash and cash equivalents Bank overdrafts Net cash Bank loans under one year Bank loans over one year Capitalised debt costs Total loan capital Net debt Within 1 year £m 1.7 78.0 79.7 2–5 years £m 84.5 0.2 84.7 Total £m 86.2 78.2 164.4 Within 1 year £m Restated 2–5 years £m Restated Total £m Restated 6.4 71.9 78.3 67.9 0.7 68.6 2019 £m 42.2 39.2 4.1 0.7 86.2 74.3 72.6 146.9 2018 £m 14.1 50.8 3.6 5.8 74.3 1 April 2018 £m 21.9 (5.7) 16.2 (1.0) (68.5) 0.9 (68.6) (52.4) Cash flow £m Non cash changes £m 31 March 2019 £m 1.0 3.4 4.4 1.2 (17.2) – (16.0) (11.6) – 0.2 0.2 (0.2) (0.2) 0.9 0.5 0.7 22.9 (2.1) 20.8 – (85.9) 1.8 (84.1) (63.3) Bank loans over one year above include £83.1m (2018: £68.3m) drawn down against the Group’s revolving credit facility. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 151 discoverIE AR2019 financials.indd 151 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 23. Movements in cash and net debt continued Year to 31 March 2018 Cash and cash equivalents Bank overdrafts Net cash Bank loans under one year Bank loans over one year Capitalised debt costs Total loan capital Net debt Supplementary information to the statement of cash flows 1 April 2017 £m 21.0 (1.2) 19.8 (0.1) (50.9) 1.2 (49.8) (30.0) Cash flow £m 1.9 (5.0) (3.1) (0.9) (18.0) – (18.9) (22.0) Underlying Performance Measure Decrease in net cash Add: Business combinations Exceptional cash flow Executive options issuance Legacy pension scheme funding Dividends paid Notional repurchase of share options Less: Net proceeds from share issue Free cash flow Net finance costs Taxation Operating cash flow Non cash changes £m 31 March 2018 £m (1.0) 0.5 (0.5) – 0.4 (0.3) 0.1 (0.4) 2019 £m (11.6) 24.2 (1.1) 1.6 1.7 6.7 – (0.1) 21.4 3.4 3.8 28.6 21.9 (5.7) 16.2 (1.0) (68.5) 0.9 (68.6) (52.4) 2018 £m Restated (22.0) 25.4 3.0 – 1.7 6.2 1.5 – 15.8 2.6 3.7 22.1 152 discoverIE AR2019 financials.indd 152 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 24. Reconciliation of cash flows from operating activities Profit for the year Tax expense Net finance costs Depreciation of property, plant and equipment Amortisation of intangible assets – other Loss on disposal of property, plant and equipment Change in provisions Pension scheme funding IAS 19 pension administration charge Impact of equity-settled share-based payment expense and associated taxes Operating cash flows before changes in working capital Increase in inventories Increase in trade and other receivables Increase in trade and other payables Increase in working capital Cash generated from operations Interest paid Income taxes paid Net cash flow from operating activities 25. Provisions At 1 April 2018 Arising during the year Utilised Exchange difference At 31 March 2019 Analysis of total provisions: Current Non-Current 2019 £m 14.6 4.7 3.4 4.6 6.5 0.1 0.2 (1.7) 1.3 (0.5) 33.2 (6.6) (4.9) 8.3 (3.2) 30.0 (3.8) (3.8) 22.4 Other £m 0.8 0.3 (0.2) – 0.9 2019 £m 1.1 2.7 3.8 2018 £m Restated 10.6 4.0 2.7 3.5 5.5 – (3.5) (1.7) 0.3 0.7 22.1 (6.5) (0.6) 6.7 (0.4) 21.7 (3.0) (3.7) 15.0 Total £m 3.7 0.6 (0.5) – 3.8 2018 £m 0.9 2.8 3.7 Severance and retirement indemnity £m 2.9 0.3 (0.3) – 2.9 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 153 discoverIE AR2019 financials.indd 153 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 25. Provisions continued Severance and retirement indemnity The severance provision relates to severance costs payable to employees. Retirement indemnity provision of £2.5m (2018: £2.3m), relates to retirement and leaving indemnity schemes in Sri Lanka, India, France and Italy. The schemes are unfunded. The service cost, representing deferred salaries accruing to employees, is included as an operating expense and determined by reference to local laws and actuarial assumptions where applicable. Other Other provisions relate to warranty provisions, onerous contracts, dilapidations and restructuring. The provisions greater than one year are expected to be utilised within one to three years. 26. Financial risk controls Management of financial risk The main financial risks faced by the Group are credit risk, liquidity risk and market risk, which include interest rate risk and currency risk. The Board regularly reviews these risks and has approved written policies covering the use of financial instruments to manage these risks. The Group Finance Director retains the overall responsibility and management of financial risk for the Group. Most of the Group’s financing and interest rate and foreign currency risk management is carried out centrally at Group head office. The Board approves policies and procedures setting out permissible funding and hedging instruments, exposure limits and a system of authorities for the approval of transactions. Management of interest rate risk The Group has exposure to interest rate risk arising principally from changes in Euro, Sterling and US Dollar interest rates. The Group does not hedge against exposure to interest rate risk. Based on the Group’s debt position at the year end, a 1% increase in interest rates would decrease the Group’s profit before tax by approximately £0.6m (2018: £0.5m). Management of foreign exchange risk The Group’s shareholders’ equity, earnings and cash flows are exposed to foreign exchange risks, due to the mismatch between the currencies in which it purchases stock and the final currency of sale to its customers. It is Group policy to hedge identified significant foreign exchange exposure on its committed operating cash flows. This is carried out centrally based on forecast orders and sales. The following table demonstrates the sensitivity to a 10% change in the rates of Sterling against all other currencies, US Dollar against all other currencies and Euro against all other currencies, with all other variables remaining constant, of the Group’s profit before tax, due to changes in the fair value of monetary assets and liabilities. Profit before tax – (loss)/gain 10% appreciation 10% depreciation £ currency impact US$ currency impact Euro currency impact 2019 £m (0.2) 0.3 2018 £m (0.3) 0.3 2019 £m 1.8 (1.8) 2018 £m 1.5 (1.6) 2019 £m (1.0) 1.2 2018 £m (0.6) 0.7 154 discoverIE AR2019 financials.indd 154 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 26. Financial risk controls continued Management of credit risk Credit risk exists in relation to customers, banks and insurers. Exposure to credit risk is mitigated by maintaining credit control procedures across a wide customer base. The Group is exposed to credit risk that is primarily attributable to its trade and other receivables. This is minimised by dealing with recognised creditworthy third parties who have been through a credit verification process. The maximum exposure to credit risk is limited to the carrying value of trade and other receivables. As well as credit risk exposures inherent within the Group’s outstanding receivables, the Group is exposed to counterparty credit risk arising from the placing of deposits and entering into derivative financial instrument contracts with banks and financial institutions. The Group manages exposure to credit risk by entering into financial instrument contracts only with highly credit-rated authorised counterparties which are reviewed and approved annually by the Board. Counterparties’ positions are monitored on a regular basis to ensure that they are within the approved limits and that there are no significant concentrations of credit risks. The Group’s largest customer is less than 4% of Group sales. Management of liquidity risk The Group manages its exposure to liquidity risk and maximises its flexibility in meeting changing business needs by managing the cash generation of its operations, combined with bank borrowings and access to long-term debt. In its funding strategy, the Group’s objective is to maintain a balance between the continuity of funding and flexibility through the use of overdrafts, bank loans and facilities. At 31 March 2019, the Group had net cash of £20.8m (2018: £16.2m), excluding borrowings of £84.1m (2018: £68.6m). The Group had total working capital facilities available of £190.2m (2018: £130.3m) with a number of major UK and overseas banks, of which £190.2m (2018: £128.3m) were committed facilities. The Group had drawn £88.0m against total facilities at 31 March 2019. During February 2019, the Group increased its syndicated banking facility from £120m to £180m and extended the remaining term of the facility by two years out to four years ending in June 2023, with an option exercisable by the Company to extend the facility by a further year to June 2024. In addition, the Group has a £60m accordion facility which it can use to extend the total facility up to £240m. The syndicated facility is available both for acquisitions and for working capital purposes, and now comprises six lending banks. The facilities are subject to certain financial covenants, which, following review, had significant headroom at 31 March 2019. Management of capital The Group’s objective when managing capital is to safeguard its ability to continue as a going concern and to maintain robust capital ratios to support the development of the business with a view to providing strong returns to Shareholders. In order to maintain or adjust the capital structure, the Group may change the amount of dividends paid to Shareholders, issue new shares or increase bank borrowings. In respect to this objective, the Group has a target gearing range of between 1.5 and 2.0 times. Gearing at 31 March 2019 was within this range at 1.7 times. In order to maintain such a gearing range and provide the flexibility for future acquisitions, the Group issued new shares on 16 April 2019 which reduced the pro-forma year-end gearing of the Group to 1.4 times. Additionally, during the year, the Group increased its syndicated bank facility from £120m to £180m and extended the remaining term of the facility by two years out to four years ending in June 2023, with an option exercisable by the Group to extend the facility by a further year to June 2024. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 155 discoverIE AR2019 financials.indd 155 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 27. Financial assets and liabilities Fair values Set out below is a comparison by category of carrying amounts and fair values of the Group’s financial instruments that are carried in the financial statements. Financial assets Cash at bank and in hand Financial liabilities at amortised cost Bank overdrafts and short-term borrowings Non-current interest-bearing loans and borrowings: Fixed and floating rate borrowings Contingent consideration Forward contracts Carrying amount 2019 £m Fair value 2019 £m Carrying amount 2018 £m Restated Fair value 2018 £m Restated 22.9 22.9 21.9 21.9 (2.1) (2.1) (6.7) (6.7) (84.5) (0.2) – (84.5) (0.2) – (67.9) (0.7) (0.1) (67.9) (0.7) (0.1) The fair value of loans and borrowings has been calculated by discounting future cash flows, where material, at prevailing market interest rates. Short-term trade and other receivables and payables have been excluded from the above table as their book values approximate fair values. 28. Trade and other payables Current Trade payables Other payables Accrued expenses and contract liabilities 2019 £m 58.9 17.6 11.2 87.7 2018 £m Restated 51.8 20.1 10.2 82.1 Trade payables are non-interest bearing and are settled taking into account local best practice. Other payables are non- interest bearing and are settled throughout the year. Accrued expenses are non-interest bearing and are settled throughout the year. Contract liabilities are recognised over the term of the underlying contract. Included in other payables is contingent consideration of £1.0m which relates to the acquisition of Contour. The Group participates in a supply chain finance arrangement whereby vendors may elect to receive early payment of their invoices from a bank by factoring their receivable from discoverIE entities. Included within trade payables is £0.6m (2018: £nil) subject to such an arrangement. Non-current Other payables 2019 £m 0.2 2018 £m Restated 0.7 Included in non-current trade and other payable is a £0.2m contingent payment relating to the acquisition of Cursor. For 2018, £0.7m related to the acquisition of Contour. 156 discoverIE AR2019 financials.indd 156 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:13 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 29. Share capital Allotted, called up and fully paid Ordinary shares of 5p each 2019 Number 73,358,847 2019 £m 3.7 2018 Number 71,417,857 2018 £m 3.6 During the year to 31 March 2019, employees exercised 1,940,991 share options under the terms of the various share option schemes (2018: 513,235). 30. Commitments and contingencies Operating lease commitments The Group leases various buildings under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The Group also leases certain motor vehicles and items of machinery. These leases have an average life of between three and five years with no renewal option included in the contracts. There are no restrictions placed upon the lessee by entering into these leases. Future minimum rentals payable under non-cancellable operating leases are as follows: Due within one year Due after one year but not more than five years Due after more than five years 2019 £m 5.7 9.6 1.1 16.4 2018 £m 5.4 9.8 0.6 15.8 Future minimum sublease rentals expected to be received over the term of non-cancellable operating leases are £0.1m (2018: £0.1m). 31. Share-based payment plans The Group operates various share-based payment plans. The various schemes are explained below and have been separated into two separate disclosures. The charge to the income statement in respect of each of these schemes is: a) Approved and unapproved executive share option schemes b) discoverIE Group plc long-term incentive plan (“the LTIP”) 2019 £m – 1.1 1.1 2018 £m – 0.7 0.7 a) Approved and Unapproved Executive Share Option Schemes The Group operates an approved and an unapproved executive share option scheme, the rules of which are similar in all material respects. The grant of options to Executive Directors and senior management is recommended by the Remuneration Committee on the basis of their contribution to the Group’s success. The options vest after three years. The exercise price of the options is equal to the closing mid-market price of the shares on the trading day prior to the date of the grant. Exercise of all options is subject to continued employment. The life of each option granted is seven years. There are no cash settlement alternatives. Options are valued using the binomial option-pricing model. No non-market performance conditions were included in the fair value calculations. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 157 discoverIE AR2019 financials.indd 157 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:14 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 31. Share-based payment plans continued The fair value per option granted and the assumptions used in the calculation are as follows: Grant date Share price at grant date Exercise price Number of employees Shares under option Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate of return Expected dividends expressed as a dividend yield Fair value 29 March 2018 £4.15 £4.02 3 14,278 3 32.87% 10 7 1.11% 2.4% £0.86 The expected volatility is based on historical volatility over the previous five years. The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the assumed option life. The total charge for the year relating to the approved and unapproved share option schemes was £nil (2018: £nil). Outstanding share options A summary of the options over ordinary shares that have been granted under various Group share option schemes and remain outstanding is given below: 31 March 2019 Outstanding at 1 April 2018 Forfeited during the year Exercised during the year Granted during the year Outstanding at 31 March 2019 Exercise price (pence) Exercise dates 37,638 18,196 14,331 23,791 35,098 14,278 143,332 At 31 March 2018 – – – – – – – (37,638) (18,196) (11,383) – – – (67,217) – – – – – – – – – 2,948 23,791 35,098 14,278 76,115 148.00 201.00 302.00 226.25 219.50 2013–2020 2016–2024 2018–2025 2019–2026 2020–2027 402.00 2021–2028 2021–2028 Outstanding at 1 April 2017 Forfeited during the year Exercised during the year Granted during the year Outstanding at 31 March 2018 Exercise price (pence) Exercise dates – – – – – – – – (18,819) – (15,320) – – – – (34,139) – – – – – – 14,278 14,278 37,638 18,196 – 14,331 23,791 35,098 14,278 143,332 148.00 201.00 218.00 302.00 226.25 219.50 402.00 2013–2020 2016–2024 2017–2024 2018–2025 2019–2026 2020–2027 2021–2028 56,457 18,196 15,320 14,331 23,791 35,098 – 163,193 158 discoverIE AR2019 financials.indd 158 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:14 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 31. Share-based payment plans continued Changes in share options A reconciliation of option movements over the year to 31 March 2019 is shown below: Outstanding at 1 April Granted Exercised Forfeited Outstanding at 31 March Exercisable at 31 March 2019 2018 Weighted average exercise price £2.26 – £2.40 – £2.59 £3.02 Number 143,332 – (67,217) – 76,115 2,948 Weighted average exercise price £2.01 £4.02 £1.79 – £2.26 £1.65 Number 163,193 14,278 (34,139) – 143,332 55,834 The weighted average remaining contractual life for the share options outstanding at 31 March 2019 is 7.9 years (2018: 6.7 years). The range of exercise prices for options outstanding at the end of the year was £2.20 to £4.02 (2018: £1.48 to £4.02). b) The LTIP Since 2008, the Group has operated the LTIP as a replacement for the approved and unapproved executive share option scheme detailed above. The LTIP involves a conditional award of shares on a grant of a nil-cost option. The award of shares to Executive Directors and senior management is recommended by the Remuneration Committee on the basis of such factors as their contribution to the Group’s success. The LTIPs are equity settled and there are no cash settled alternatives. The release of an award is dependent on the individual’s continued employment for a three-year holding period from the date of grant and the satisfaction by the Company of certain performance conditions. There were no awards made in 2019. For awards made in 2018, the performance conditions are as follows: ■ 33.3% of the award is based on the Company’s comparative total shareholder return (“TSR”) against a comparator group made up of the constituents of the FTSE Small Cap Index; ■ 33.3% of the award is based on the Company’s absolute total shareholder return as measured against the Consumer Price Index (“CPI”); and ■ 33.3% of the award is based on the Company’s absolute earnings per share (“EPS”) performance. Awards are valued using the Monte Carlo Simulation and Discounted Share Price models. No non-market performance conditions were included in the fair value calculations. The fair value per award granted and the assumptions used in the calculation are as follows: Awards granted in the year ended 31 March 2018: Grant date Share price at grant date Exercise price Number of employees Shares under option Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate of return Expected dividend yield Fair value 29 March 2018 EPS 29 March 2018 TSR 29 March 2018 CPI £4.15 nil 17 £4.15 nil 17 £4.15 nil 17 210,814 210,813 210,813 3 3 3 31.24% 31.24% 31.24% 10 5 n/a 2.4% £3.86 10 5 0.87% 2.4% £2.54 10 5 0.87% 2.4% £1.01 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 159 discoverIE AR2019 financials.indd 159 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:14 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 31. Share-based payment plans continued The expected volatility is based on historical volatility over a term commensurate with the expected life of each award. The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the assumed option life. The total charge for the year relating to the LTIP schemes was £1.1m (2018: £0.7m). Outstanding LTIP A summary of the awards that have been granted under the LTIP and remain outstanding is given below: 31 March 2019 Outstanding at 1 April 2018 447,381 271,948 601,551 578,041 641,588 618,421 788,765 632,440 4,580,135 31 March 2018 Granted during the year Forfeited during the year Exercised during the year Outstanding at 31 March 2019 – – – – – – – – – – – – – – (9,208) – – (447,381) (271,948) (601,551) (578,041) (23,653) (18,417) – – – – – – 617,935 590,796 788,765 632,440 (9,208) 1,940,991 2,629,936 Outstanding at 1 April 2017 Granted during the year Forfeited during the year Exercised during the year Outstanding at 31 March 2018 804,587 447,381 271,948 654,469 611,927 649,690 618,421 788,765 – 4,847,188 – – – – – – – – 632,440 632,440 (378,156) (426,431) – – – – (8,102) – – – – – (52,918) (33,886) – – – – – 447,381 271,948 601,551 578,041 641,588 618,421 788,765 632,440 (386,258) (513,235) 4,580,135 Exercise dates 2013–2020 2014–2021 2015–2022 2016–2023 2020–2025 2021–2026 2022–2027 2023–2028 Exercise dates 2012–2019 2013–2020 2014–2021 2015–2022 2016–2023 2020–2025 2021–2026 2022–2027 2023–2028 The 378,156 shares forfeited during 2018 was a notional repurchase of share options relating to a reduction in the number of shares issued on the exercise of options awarded under the LTIP as a consequence of the Group agreeing to settle the PAYE liability arising on exercise. The weighted average remaining contractual life for the share options outstanding at 31 March 2019 is 7.5 years (2018: 6.5 years). The range of exercise prices for options outstanding at the end of the year was nil (2018: nil). 32. Pension liability Defined contribution schemes The Group makes payments to various defined contribution pension schemes, the assets of which are held in separately administered funds. In the United Kingdom, the relevant scheme is the discoverIE Group plc Employee Pension Scheme (‘the discoverIE scheme’). Contributions by both employees and Group companies are held in externally invested trustee- administered funds. 160 discoverIE AR2019 financials.indd 160 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:14 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 32. Pension liability continued The Group contributes a specified percentage of earnings for members of the discoverIE scheme, and thereafter has no further obligations in relation to the discoverIE scheme. At the year end, 223 employees were active members of the discoverIE scheme (2018: 222). The total cost charged to the consolidated income statement in relation to the UK-based discoverIE scheme was £638,000 (2018: £534,000). Employer contributions in respect of other UK-based schemes and overseas pension schemes were £368,000 (2018: £262,000) and £2,425,000 (2018: £2,141,000) respectively. Total contributions payable in the next financial year are expected to be at rates broadly similar to those in 2018/19 but based on actual salary levels in 2019/20. Defined benefit schemes The acquisition of the Sedgemoor Group in June 1999 brought with it certain defined benefit pension schemes, together “the Sedgemoor Scheme”. The Sedgemoor Scheme is funded by the Company, provides retirement benefits based on final pensionable salary and its assets are held in a separate trustee-administered fund. Following the acquisition of the Sedgemoor Group, the Sedgemoor Scheme was closed to new members. Shortly thereafter, employees were given the opportunity to join the discoverIE scheme and future service benefits ceased to accrue to members under the Sedgemoor Scheme. Contributions to the Sedgemoor Scheme are determined in accordance with the advice of independent, professionally qualified actuaries and are set based upon funding valuations carried out every three years. Based upon the results of the triennial funding valuation at 31 March 2015, the Sedgemoor Scheme’s Trustees agreed with Sedgemoor Limited on behalf of the participating employers to continue the participating employers’ contributions under the deficit recovery plan agreed at the previous valuation at 31 March 2012. This required contributions of £1.6m p.a. increasing by 3% each April payable over the period to 31 March 2022. These contributions are being reviewed as part of the triennial funding valuation as at 31 March 2018 which is being carried out. The estimated amount of employer contributions expected to be paid to the Sedgemoor Scheme during 2019/20 is £1.8m (2018/19: £1.7m), subject to any changes which may arise from the triennial valuation process. The results of the triennial funding valuation as at 31 March 2015 were updated to the accounting date by an independent qualified actuary in accordance with IAS 19. The main actuarial assumptions used are set out as follows: Rate of increase of salaries Rate of increase of pensions in payment Discount rate Inflation assumption – RPI Inflation assumption – CPI 2019 n/a 2.4% 2.4% 3.3% 2.2% 2018 n/a 2.4% 2.6% 3.2% 2.1% The discount rate is based on the yields on AA grade Sterling corporate bonds at the reporting date. Pensioner mortality assumptions are based on 110% of the ‘S2NA’ table, projected from 2007 and with long-term improvement rates in line with CMI 2017 core projections based on each member’s actual date of birth with a long-term annual rate of improvement of 1.25% for males and for females. The weighted average duration of the defined benefit obligation at 31 March 2019 was 13 years (2018: 13 years). The investment strategy is set by the Trustee of the Sedgemoor Scheme in consultation with the Company. The current strategy is to invest 50% of the assets in equities, property and other return seeking investments and 50% in liability driven investments, corporate bonds, cash and other bond-related instruments. As at 31 March 2019 the investment strategy hedged 60% of interest rate risk and 60% of inflation risk relative to the Sedgemoor Scheme’s liability value for cash funding purposes. The Sedgemoor Scheme assets are held exclusively within instruments with quoted prices in an active market, other than the property fund. Re-measurements are recognised immediately through other comprehensive income. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 161 discoverIE AR2019 financials.indd 161 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:14 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 32. Pension liability continued The charges recognised in the consolidated income statement in respect of defined benefit schemes are as follows: Pension administration costs (recognised in administrative expenses) Net interest cost on pension scheme deficit (recognised in finance cost) Past service cost Total 2019 £m 0.4 – 0.9 1.3 2018 £m 0.3 0.1 – 0.4 Past service cost In October 2018, it was ruled that the trustees of Lloyds Banking Group had a duty to remove inequalities in scheme benefits that arose under Guaranteed Minimum Pensions (GMPs) being unequal between men and women. As a result of this, the liabilities of the pension scheme increased by £0.9m with a corresponding past service cost being recognised as an exceptional charge (see note 6). The charges recognised in the consolidated statement of comprehensive income are as follows: Re-measurement gains/(losses): Return on plan assets (excluding amounts included in net interest expense) Actuarial changes arising from changes in financial assumptions Reversal of deferred tax movement on funding surplus under IAS 19 valuation Actuarial gains recorded in the consolidated statement of comprehensive income 2019 £m – 0.1 – 0.1 2018 £m (0.2) 1.9 0.4 2.1 The fair value of assets and expected rates of return used to determine the amounts recognised in the consolidated statement of financial position are as follows: Equities Bonds Property Absolute Return Fund Diversified Growth Fund Cash Liability driven investments Infrastructure Fair value of scheme assets Present value of funded defined benefit obligations Liability recognised in the consolidated statement of financial position 2019 £m 3.5 11.5 3.9 5.7 – 1.7 5.4 5.0 36.7 (39.2) (2.5) 2018 £m 3.4 10.0 3.9 5.7 5.1 2.3 6.2 – 36.6 (39.6) (3.0) 162 discoverIE AR2019 financials.indd 162 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:14 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 32. Pension liability continued Changes in the present value of the defined benefit obligation are as follows: Opening defined benefit obligation Net interest cost Actuarial losses due to: Changes in financial assumptions Reversal of deferred tax movement on funding surplus under IAS 19 valuation Benefits paid Past service costs Closing defined benefit obligations Changes in the fair value of the scheme assets are as follows: Opening fair value of scheme assets Interest on scheme assets Actual return on plan assets less interest on plan assets Pension administration costs Contributions Benefits paid Closing fair value of scheme assets Sensitivities The sensitivity of the 2019 pension liabilities to changes in assumptions are as follows: 2019 £m 39.6 1.0 (0.1) – (2.2) 0.9 39.2 2019 £m 36.6 1.0 – (0.4) 1.7 (2.2) 36.7 2018 £m 42.9 1.0 (1.9) (0.4) (2.0) – 39.6 2018 £m 36.5 0.9 (0.2) (0.3) 1.7 (2.0) 36.6 Assumption Discount rate Inflation Life expectancy Change in assumption Increase in scheme deficit £m Decrease by 0.5% Increase by 0.5% Increase by 1 year 2.7 1.1 2.2 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 163 discoverIE AR2019 financials.indd 163 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:14 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 33. Related party disclosures As at 31 March 2019 the Group’s subsidiaries are set out below. The Group holds (directly or indirectly) 100% of the total voting rights of all subsidiaries. Name and nature of business Registered office Country of incorporation and registration Type of share Custom Supply Acal BFi UK Limited 3 The Business Centre, Molly Millars Lane, Wokingham RG41 2EY England Ordinary Shares Acal Central Procurement UK Ltd 3 The Business Centre, Molly Millars Lane, Wokingham RG41 2EY England Ordinary Shares Vertec Scientific Limited Vertec Scientific SA (pty) Ltd 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 8 Charmaine Avenue, President Ridge, Randburg 2194 England Ordinary Shares South Africa Ordinary Shares Acal BFi France SAS 4 allée du Cantal – ZI Petite Montagne Sud – 91090 Lisses France Acal BFi Belgium NV/SA Lozenberg 4, 1932 Zaventem Belgium Acal BFi Germany GmbH Assar-Gabrielsson-Straße 1, 63128 Dietzenbach Germany Acal BFi Nordic AB P.O. Box 3002, 750 03 Uppsala, Sweden Sweden Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Acal BFi Netherlands BV Luchthavenweg 53, 5657EA Eindhoven Netherlands Ordinary Shares Acal BFi Italy Srl Via Cascina Venina n.20/A, 20090 Assago, Milan Italy Ordinary Shares Design & Manufacturing Myrra SAS 2 boulevard de La Haye, 77600 Bussy, Saint Georges Myrra Power Sp Zoo Ul Warszawska 1, 05-310 Kaluszyn Zhongshan Myrra Electronic Co Ltd 39-2 Industrial Road, Xiaolan Industrial Park, Xiaolan Town 528400, Guandong France Poland China Myrra Hispania Srl c/Mataro 43 Pol. Ind. les Grases, 08980 Saint Feliu De Llobregat, Barcelona Spain Myrra Germany GmbH Lebacher Strabe 4, 66113 Saarbrucken Myrra Hong Kong Ltd Noratel AS Noratel UK Ltd 42/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong Postboks 133, Hokksund, 3301 7 George House, Princes Court, Beam Heath Way, Nantwich, Cheshire CW5 6GD Noratel Denmark A/S Kirkebjerg Parkvej 45, Brøndby 2605 Noratel Finland OY Kiertokatu 5, PB 11, Salo 24280 Foshan Noratel Electric Co Ltd NO 22-2 Xingye Road, Zone C Shishan Science & Technology Industrial Park, Nanhai Distric, Foshan City, Guangdong Providence 528225 Noratel Germany AG Elsenthal 53, Grafenau DE-94481 Noratel India Power Components Pvt Ltd Nila Techopark, Trivandrum 695581 Germany Hong Kong Norway England Denmark Finland China Germany India Noratel SP Z.o.o ul. Szczecinska 1K, Dobra Szczecinska PL-72-003 Poland Danselbud Noratel Transformator Sp Zoo ul. Szczecinska 1K, Dobra Szczecinska PL-72-003 Poland Ordinary Shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares 164 discoverIE AR2019 financials.indd 164 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:15 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements Lars Lindahlsväg 2, Bo Lars Lindahlsväg 2, Box 108, Laxå 69522 x 108, Laxå 69522 33. Related party disclosures continued Name and nature of business Registered office Noratel International Pvt Ltd P.O Box 15, phase II, Katunayanke KEPZ Noratel Sweden AB Lars Lindahlsväg 2, Box 108, Laxå 69522 Noratel North America Inc # 300. 7731 Little Avenue, Charlotte NC 28226 Noratel Power Engineering Inc # 1117 East Janis Street, Carson, CA 90746 Foss Fiberoptisk Systemsalg AS Dansrudveien 45, N-3036 Drammen Foss Fibre Optics s.r.o Strojnicka 29, SK-821 05 Bratislava Flux A/S Industrivangen 5, 4550 Asnaes Flux International Ltd BLK C 5, 41/27 Bangna-Trad KM. 16.5, Bangchalong, Bangplee Hectronic AB P.O. Box 3002, 750 03 Uppsala RSG Electronic Components GmbH Sprendlinger Landstr. 115, 63069 Offenbach, Germany Country of incorporation and registration Sri Lanka Sweden USA USA Norway Slovakia Denmark Thailand Sweden Germany Type of share Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary Shares Ordinary Shares MTC Micro Tech Components GmbH EMC Innovation Limited Stortech Electronics Limited Contour Electronics Limited Hausener Straße 9, 89407 Dillingen a.d, Donau Germany Ordinary Shares Woolim Lions Valley C-409, 283 Bupyeong-daero, Bupyeong-gu, Incheon 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH South Korea Ordinary Shares England Ordinary Shares England Ordinary Shares Contour Electronics Asia Limited Room 601, 6/F Shing Yip Industrial Building, 19-21 Hong Kong Ordinary shares Plitron Manufacturing Incorporated Shing Yip Street, Kwun Teng, Kowloon 8-601 Magnetic Drive, Toronto, Ontario, M3J 3J2 Canada Ordinary shares Ixthus Instrumentation Limited 2 Chancellor Court, Occam Road, Surrey Research England Ordinary Shares Heason Technology Limited Herga Technology Limited Variohm-Eurosensor Limited Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH EWAC Holding B.V. Hekendorpstraat 69, 3079 DX Rotterdam Santon Holland B.V. Hekendorpstraat 69, 3079 DX Rotterdam Santon Group B.V. Hekendorpstraat 69, 3079 DX Rotterdam Santon Switchgear Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Shares England Ordinary Shares England Ordinary Shares Netherlands Netherlands Netherlands England Ordinary shares Ordinary Shares Ordinary Shares Ordinary Shares Santon Circuit Breaker Services B.V. Hekendorpstraat 69, 3079 DX Rotterdam Netherlands Ordinary Shares Santon Hekendorpstraat B.V. Hekendorpstraat 69, 3079 DX Rotterdam Santon International B.V. Hekendorpstraat 69, 3079 DX Rotterdam Santon GmbH Cursor Controls Limited Oberstrasse 1, Altes Rathaus Hinsbeck, Postfach 5217, 41334 Nettetal 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH Netherlands Netherlands Germany Ordinary Shares Ordinary Shares Ordinary Shares England Ordinary Shares NSI bvba Haakstraat 1A, 3740 Bilzen, Belgium Belgium Ordinary Shares Innovative Electronics www.discoverieplc.com Stock Code: DSCV 165 discoverIE AR2019 financials.indd 165 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:15 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 33. Related party disclosures continued Name and nature of business Registered office Country of incorporation and registration Type of share Management services discoverIE Management Services Limited Holding companies 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Share Acal Electronic Holdings Limited 2 Chancellor Court, Occam Road, Surrey Research England Ordinary Shares Park, Guildford GU2 7AH Trafo Holding AS Postboks 133, Hokksund, 3301 discoverIE Nordic Holdings Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH discoverIE BV Luchthavenweg 53, 5657 EA Eindhoven discoverIE Europe Holding BV Luchthavenweg 53, 5657 EA Eindhoven discoverIE GmbH Oppelner Straße 5, 82194 Gröbenzell discoverIE France Holdings SAS 4 Allée du Cantal – ZI Petite Montagne Sud – 91090 Lisses Norway England Netherlands Netherlands Germany France Ordinary Shares Ordinary Shares Ordinary shares Ordinary shares Ordinary Shares Ordinary Shares Sedgemoor Limited Contour Holdings Limited discoverIE Electronics Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Shares England Ordinary Shares England Ordinary Shares Aramys SAS 2 Boulevard de La Haye, 77600 Busy Saint Georges France Variohm Holdings Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary shares Ordinary Shares Cursor Controls Holdings Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Shares Dormant companies Cabcon Ltd Eurosensor Limited Acal Supply Chain Limited Acal BFi Iberia SL Acal Electronics Limited BFi Optilas Ltd Sedgemoor Holdings Limited Sedgemoor Group Supplementary Pension Trustees Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH C/Anabel Segura, 7, Planta Acceso, 28108 Alcobendas, Madrid 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Shares England Ordinary Shares England Ordinary Shares Spain Ordinary Shares England Ordinary Shares England Ordinary Shares England Ordinary Shares England Ordinary Shares Sedgemoor Group Pension Trustees Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Shares Townsend-Coates Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Shares 166 discoverIE AR2019 financials.indd 166 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:16 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 33. Related party disclosures continued Name and nature of business Registered office Country of incorporation and registration Actech Holdings Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Type of share Ordinary Shares Advanced Crystal Technology Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Shares Bosunmark Limited Gothic Crellon Limited Radiatron Holdings Limited 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Shares England Ordinary Shares England Ordinary Shares Radiatron Components Limited 2 Chancellor Court, Occam Road, Surrey Research England Ordinary Shares Amega Group Limited Amega Electronics Limited Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH 2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH England Ordinary Shares England Ordinary Shares All subsidiaries operate in their country of incorporation. All material subsidiaries have a 31 March year end and the shares carry the same voting rights as their effective interest. Related parties Remuneration of key management personnel The Group considers key management personnel as defined in IAS 24 “Related Party Disclosures” to be the members of the Group Executive Committee as set out on page 56. Remuneration is set out below in aggregate. The charge for share-based payments of £0.9m (2018: £0.5m) relates to the Group’s LTIP as detailed in note 31. Short-term employee benefits Share-based payments 2019 £m 3.2 0.9 4.1 2018 £m 2.7 0.5 3.2 Associate undertakings Details of the Group’s investments in associates are provided in note 18. Terms and conditions of transactions with related parties All transactions with related parties were on an arm’s length basis. Outstanding balances at year end are unsecured and settlement occurs in cash. Transactions with other related parties Details of transactions with Directors are detailed in the Remuneration report on pages 82 to 102 Innovative Electronics www.discoverieplc.com Stock Code: DSCV 167 discoverIE AR2019 financials.indd 167 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:16 Financial statements NOTES TO THE GROUP FINANCIAL STATEMENTS for the year ended 31 March 2019 34. Events after the reporting date Dividend A final dividend of 6.75p per share (2018: 6.35p), amounting to a dividend of £5.4m (2018: £4.5m) and bringing the total dividend for the year to 9.55p (2018: 9.0p), was declared by the Board on 29 May 2019. The discoverIE Group plc financial statements do not reflect this dividend. Business combinations On 16 April 2019, subsequent to the period end, the Group completed the acquisitions of Coil-Tran Corporation (trading as Hobart Electronics) and Positek Limited. Coil-Tran Corporation was acquired for an initial cash consideration of $15.2m (£11.7m) and Positek Limited for an initial cash consideration of £4.2m, both on a debt free, cash free basis. A contingent payment of up to $4.0m (£3.1m) will be payable to the vendors of Coil-Tran Corporation subject to the achievement of certain growth targets over the next three years. A contingent payment of up to £0.4m will be payable to the vendors of Positek Limited subject to the company achieving certain integration and profit targets over the next 18 months. The acquisitions were funded from existing debt facilities. Share placing On 18 April 2019, 7,309,867 shares were issued at a premium of £28.9m for an aggregate consideration of £29.2m. 35. Exchange rates The profit and loss accounts of overseas subsidiaries are translated into Sterling at average rates of exchange for the year and consolidated statement of financial positions are translated at year end rates. The main currencies are the US Dollar and the Euro. Details of the exchange rates used are as follows: Year to 31 March 2019 Year to 31 March 2018 Closing rate 1.3090 1.1651 Average rate 1.3139 1.1340 Closing rate 1.4083 1.1430 Average rate 1.3261 1.1345 US Dollar Euro 168 discoverIE AR2019 financials.indd 168 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:16 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements COMPANY BALANCE SHEET as at 31 March 2019 Fixed assets Investments Current assets Debtors Cash at bank and in hand Total current assets Creditors: amounts falling due within one year Net current liabilities Non-current liabilities Other financial liabilities Other payables Net assets Capital and reserves Called up share capital Share premium accounts Merger reserve Profit and loss account Total shareholders’ funds Note 2019 £m 2018 £m 4 5 6 7 8 9 168.9 167.8 3.1 4.2 7.3 (13.0) (5.7) (10.2) – (10.2) 153.0 3.7 106.9 2.9 39.5 153.0 2.9 14.2 17.1 (32.6) (15.5) (11.1) (0.7) (11.8) 140.5 3.6 106.9 2.9 27.1 140.5 The profit of the parent company for the financial year was £18.5m (2018: £1.0m loss). These financial statements were approved by the Board of Directors on 4 June 2019 and signed on its behalf by: Nick Jefferies Group Chief Executive Simon Gibbins Group Finance Director Innovative Electronics www.discoverieplc.com Stock Code: DSCV 169 discoverIE AR2019 financials.indd 169 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:16 Financial statements COMPANY STATEMENT OF CHANGES IN EQUITY for the year ended 31 March 2019 At 1 April 2017 Loss for the year Notional repurchase of share options Share-based payments Shares issued (note 9) Dividends At 31 March 2018 Profit for the year Share-based payments Shares issued (note 9) Dividends At 31 March 2019 Share capital £m Share premium £m Merger reserve £m Profit and loss account £m 3.5 106.0 2.9 – – – 0.1 – 3.6 – – 0.1 – 3.7 – – – 0.9 – 106.9 – – – – – – – – – 2.9 – – – – 106.9 2.9 35.1 (1.0) (1.5) 0.7 – (6.2) 27.1 18.5 0.6 – (6.7) 39.5 Total £m 147.5 (1.0) (1.5) 0.7 1.0 (6.2) 140.5 18.5 0.6 0.1 (6.7) 153.0 Out of £39.5m retained earnings above, £15.2m are available for distribution to the Shareholders. 170 discoverIE AR2019 financials.indd 170 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:17 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements NOTES TO THE COMPANY FINANCIAL STATEMENTS for the year ended 31 March 2019 1. Basis of accounting The separate financial statements of the Company have been prepared for all periods presented, in accordance with Financial Reporting Standard 101 “Reduced Disclosure Framework” (“FRS 101”), on the going concern basis and under the historical convention modified for fair values, and in accordance with the Companies Act 2006 and with applicable accounting standards. A separate profit and loss account dealing with the results of the Company has not been presented as permitted by section 408(3) of the Companies Act 2006. The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in accordance with FRS 101: ■ The following paragraphs of IAS 1 “Presentation of financial statements” 10(d) (statement of cash flows) 16 (statement of compliance with all IFRS) 111 (cash flow statement information) 134-136 (capital management disclosures) ■ IFRS 7 “Financial Instruments: Disclosures” ■ IAS 7 “Statement of Cash Flows” ■ IAS 24 (paragraph 17) “Related Party Disclosures” (key management compensation) ■ IAS 24 “Related Party Disclosures” (the requirement to disclose related party transactions between two or more members of a group) For the following disclosures, as the Group financial statements include the equivalent disclosures, the company has taken the exemptions available under FRS 101: ■ IFRS 2 “Share-based Payments” in respect of Group settled equity share-based payments ■ Certain disclosures required by IFRS 13 “Fair Value Measurement” 2. Summary of significant accounting policies Going concern The Group’s business activities, together with factors which may adversely impact its future development, performance and position, are set out in the Strategic Report on pages 4 to 51. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Finance Review section of the Strategic Report on pages 34 to 39. The Group has significant financial resources, well established distribution contracts with a number of suppliers and a broad and stable customer base. As a consequence, the Directors believe that the Group is well placed to manage its principal risks and uncertainties as disclosed on pages 42 to 45 of the Strategic Report. The Group’s forecasts and projections, taking account of the sensitivity analysis of changes in trading performance, show that the Group is well placed to operate within the level of its current committed facilities for the foreseeable future. After making due enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Income recognition Dividend income is recognised when the Company’s right to receive payment is established. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 171 discoverIE AR2019 financials.indd 171 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:17 Financial statements NOTES TO THE COMPANY FINANCIAL STATEMENTS for the year ended 31 March 2019 2. Summary of significant accounting policies continued Investments Investments in subsidiary and associate undertakings are stated initially at cost, being the fair value of the consideration given and including directly attributable transaction costs. The carrying values are reviewed for impairment if events or changes in circumstances indicate the carrying values may not be recoverable. Dividends Dividends are recognised when they meet the criteria for recognition as a liability. In relation to final dividends, this is when approved by the Shareholders in general meeting, and in relation to interim dividends, when paid. Borrowing costs Borrowing costs are recognised as an expense in the period in which they are incurred, in accordance with the effective interest rate method. Share-based payments In preparing the financial statements, the Company has applied IFRS 2 “Share-based Payments”. Although the Company does not incur a charge under this standard, the issuance by the Company to its subsidiaries of a grant over the Company’s options represents additional capital contributions by the Company in its subsidiaries. The additional capital contribution is based on the fair value of the grant issued, allocated over the underlying grant’s vesting period. Further information on share-based payments is provided in note 31 of the Group Financial Statements. Taxation Corporation tax payable is provided on taxable profits at the current rate. Deferred taxation 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. Deferred tax assets are regarded as recoverable and recognised in the financial statements when, on the basis of available evidence, it is more likely than not that there will be suitable taxable profits from which the future reversal of the timing differences can be deducted. Deferred tax assets and liabilities are not discounted. 3. Profit of the parent company The profit of the parent company for the financial year was £18.5m (2018: £1.0m loss). By virtue of section 408(3) of the Companies Act 2006, the Company is exempt from presenting a separate profit and loss account. 4. Investments At 1 April 2017 Impairment to investment Share-based payments At 31 March 2018 Share-based payments At 31 March 2019 Subsidiary undertakings £m 177.1 (10.0) 0.7 167.8 1.1 168.9 Details of all direct and indirect holdings in subsidiaries are provided in note 33 of the Group Financial Statements. In the prior year the investment in discoverIE Management Services Ltd was impaired by £10.0m following the annual impairment test. 172 discoverIE AR2019 financials.indd 172 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:17 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements 5. Debtors Amounts falling due within one year: Amounts owed by subsidiary undertakings Corporation tax Deferred tax Prepayments The deferred tax asset in the prior year comprises temporary timing differences. 6. Creditors Amounts falling due within one year: Amounts owed to subsidiary undertakings Other payables Accruals 2019 £m 2018 £m – 3.0 – 0.1 3.1 2019 £m 10.6 1.2 1.2 13.0 1.3 1.4 0.1 0.1 2.9 2018 £m 31.3 0.3 1.0 32.6 7. Other financial liabilities Other financial liabilities of £10.2m at 31 March 2019 (2018: £11.1m) comprise drawdowns on the Group’s revolving credit facility (see note 22 to the Group financial statements). The amount is denominated in sterling and bears interest based on LIBOR. The facility is secured against the shares of certain Group subsidiaries. 8. Other payables (non current) Other payables 2019 £m – – 2018 £m 0.7 0.7 The balance at 31 March 2018 of £0.7m relates to contingent consideration in respect of the acquisition of Contour. This is payable during the year to 31 March 2020 and has therefore been shown in Other creditors in Amounts falling due within one year. Innovative Electronics www.discoverieplc.com Stock Code: DSCV 173 discoverIE AR2019 financials.indd 173 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:17 Financial statements NOTES TO THE COMPANY FINANCIAL STATEMENTS for the year ended 31 March 2019 9. Called up share capital Allotted, called up and fully paid Ordinary shares of 5p each 2019 Number 73,358,847 2019 £m 3.7 2018 Number 71,417,857 2018 £m 3.6 At 31 March 2019, there were outstanding nil-priced LTIPs for employees of subsidiaries to purchase up to 2,629,935 (2018: 4,580,130) ordinary shares of 5p each between 2019 and 2028. These are subject to certain performance conditions as disclosed in note 31 of the Group financial statements. During the year to 31 March 2019, employees exercised 1,940,991 share options under the terms of the LTIP scheme (2018: 513,235). 10. Related parties The Company is exempt under the terms of IAS 24 from disclosing related party transactions with wholly-owned entities that are part of the Group as these transactions are fully eliminated on consolidation. The Company has given guarantees and offset arrangements to support bank facilities made available to subsidiary undertakings. 11. Share-based payments For detailed disclosures of share-based payments granted to the employees of subsidiaries refer to note 31 of the Group financial statements. 12. Post balance sheet event On 18 April 2019, the Company issued 7,309,867 new ordinary shares through an equity placing. The shares were issued at a price of 400 pence per share representing a discount of 3.85% to the closing price of 416 pence per share on 15 April 2019. Net proceeds were £28.2m, being gross proceeds on issue of £29.2m, less directly attributable expenses of £1.0m. The placing structure attracted merger relief under section 612 of the Companies Act 2006, and therefore did not require an increase in share premium. This resulted in an increase in distributable reserves of £27.8m, being the excess of the net proceeds of £28.2m over the nominal value of the shares issued of £0.4m. . 174 discoverIE AR2019 financials.indd 174 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:17 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Financial statements FIVE YEAR RECORD Group income statement Revenue Gross profit Underlying operating profit Underlying profit before tax Profit before tax Profit for the year Earnings per share Underlying diluted earnings per share Fully diluted earnings per share Dividend per share Group statement of financial position Net debt Non-current assets Net assets 2019 £m 2018 £m Restated 2017 £m Restated 2016 £m Restated 438.9 145.0 30.6 27.2 19.3 14.6 27.2p 19.4p 9.55p (63.3) 148.7 134.7 387.9 126.7 24.5 21.9 14.6 10.6 22.3p 14.2p 9.0p (52.4) 136.4 126.8 338.2 111.0 20.0 17.2 4.1 3.5 19.2p 4.1p 8.5p (30.0) 122.2 122.5 287.7 92.6 16.3 14.5 8.8 6.6 17.0p 10.0p 8.05p (38.1) 108.4 101.3 2015 £m 271.1 84.4 13.4 11.8 4.3 2.9 15.4p 4.8p 7.6p (19.0) 88.6 92.7 Refer to note 2 of the Group financial statements for details of restatement Innovative Electronics www.discoverieplc.com Stock Code: DSCV 175 discoverIE AR2019 financials.indd 175 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:17 Other information PRINCIPAL LOCATIONS Group head office Country United Kingdom Company discoverIE Group plc Location Guildford Custom Supply division Country United Kingdom Belgium Denmark Finland France Germany Italy Netherlands Norway South Africa Spain Sweden Company Acal BFi UK Limited Acal BFi Central Procurement UK Limited Vertec Scientific Limited Acal BFi Belgium NV/SA Acal BFi Nordic AB Acal BFi Nordic AB Acal BFi France SAS Acal BFi Germany GmbH Acal BFi Italia Srl Acal BFi Netherlands BV Acal BFi Nordic AB Vertec Scientific SA (pty) Ltd Acal BFi Iberia SL Location Wokingham, Bracknell, Milton Keynes Wokingham Silchester Brussels Copenhagen Helsinki Evry Dietzenbach, Munich Milan Eindhoven Honefoss Johannesburg Madrid Acal BFi Nordic AB Stockholm, Uppsala Design & Manufacturing division Company Country Contour Electronics Limited United Kingdom Cursor Controls Ltd Heason Technology Limited Herga Technology Limited Ixthus Instrumentation Limited Noratel UK Limited Positek Limited Santon Switchgear Ltd Stortech Electronics Limited Variohm-Eurosensor Limited NSI bvba Plitron Manufacturing Inc Foshan Noratel Electric Co Ltd Zhongshan Myrra Electronic Co Ltd Noratel Denmark A/S Flux A/S Noratel Finland OY Myrra SAS MTC Micro Tech Components GmbH Noratel Germany AG RSG Electronic Components GmbH Santon GmbH Contour Asia Ltd Myrra Hong Kong Limited Noratel India Power Components Pvt Ltd Santon Holland BV Foss AS Noratel AS Myrra Power Sp Zoo Noratel Sp Zoo Foss Fibre Optics, sro EMC Innovation Ltd Noratel International Pvt Ltd Hectronic AB Noratel Sweden AB Flux International Ltd Hobart Electronics Imag Noratel North America Inc. Noratel Power Engineering Inc. Belgium Canada China Denmark Finland France Germany Hong Kong India Netherlands Norway Poland Slovakia South Korea Sri Lanka Sweden Thailand USA 176 Location Hook Newark Horsham Bury St. Edmunds Towcester Nantwich Cheltenham Newport Harlow Towcester Bilzen Toronto Foshan City Zhongshan Brondby Asnaes Salo Bussy-Saint-Georges Dillingen Grafenau, Bremen Offenbach Nettetal Kowloon Wanchai Kerala and Bangalore Rotterdam Drammen Hamar Kaluszyn Szczecinska Bratislava Cheongcheon-Dong Katunayake Uppsala Laxa, Vaxjo Bangkok Hobart, IN Tempe, AZ Charlotte, NC Carson, CA discoverIE AR2019 financials.indd 176 26542 13 June 2019 5:54 pm Proof Nine 13/06/2019 18:02:17 discoverIE Group plcAnnual Report and Accountsfor the year ended 31 March 2019Other information FINANCIAL CALENDAR 2019/20 Annual General Meeting 25 July 2019 Results Interim Report for the six months to 30 September 2019 Late November 2019 Preliminary announcement for the year to 31 March 2020 Early June 2020 Annual Report 2020 Late June 2020 Dividend payments Final dividend for the year to 31 March 2019 30 July 2019 Interim dividend for the six months to 30 September 2019 Late January 2020 Final dividend for the year to 31 March 2020 Late July 2020 CORPORATE INFORMATION Registered office discoverIE Group plc 2 Chancellor Court Occam Road Surrey Research Park Guildford Surrey GU2 7AH Telephone: 01483 544500 Incorporated in England and Wales with registered number: 2008246 Auditor PricewaterhouseCoopers LLP Corporate solicitors White & Case LLP Principal bankers Bank of Ireland Clydesdale Bank plc Citibank NA Inc Danske Bank A/S HSBC Bank UK plc KBC Bank NV Stockbrokers Peel Hunt LLP Registrars Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: 0371 384 2001 Innovative Electronics www.discoverieplc.com Stock Code: DSCV IBC discoverIE AR2019.indd 6 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:02:38 Other information d i s c o v e r I E G r o u p 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 f o r t h e y e a r e n d e d 3 1 M a r c h 2 0 1 9 discoverIE Group plc 2 Chancellor Court Occam Road Surrey Research Park Guildford Surrey GU2 7AH Telephone +44 (0)1483 544500 Fax +44 (0)1483 544550 www.discoverIEplc.com discoverIE AR2019.indd 1 26542 13 June 2019 6:00 pm Proof Nine 13/06/2019 18:01:55