A n n u a l R e p o r t 2 0 2 1 – F i n a n c i a l S t a t e m e n t s – B u i l d i n g f o r t h e f u t u r e Building for the future Laying the foundations of a pure play Components business Annual Report 2021 – Financial Statements ANNUAL REPORT 2021 – FINANCIAL STATEMENTS FINANCIAL STATEMENTS Financial Statements Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Accounting Policies Critical Accounting Judgements and Estimates Notes Essentra plc Company Balance Sheet Essentra plc Company Statement of Changes in Equity Essentra plc Company Accounting Policies Essentra plc Company Notes Independent auditors’ report to the members of Essentra plc Strategic & Directors’ Reports 143 144 145 146 147 148 158 160 193 194 195 198 205 This is part two of our Annual Report for the year ended 31 December. Part one consists of our Strategic and Directors’ Reports and can be found on our corporate website. When reviewing the performance and activities of Essentra plc in 2021, both parts should be read together. A n n u a l R e p o r t 2 0 2 1 – S t r a t e g i c a n d D i r e c t o r s ’ R e p o r t s Building for the future Laying the foundations of a pure play Components business Annual Report 2021 – Strategic and Directors’ Reports 2021 saw the start of a new and transformational chapter in Essentra’s journey.” Paul Forman Chief Executive CONSOLIDATED INCOME STATEMENT CONSOLIDATED INCOME STATEMENT Consolidated Income Statement For the year ended 31 December 2021 Revenue Operating profit Finance income Finance expense Profit/(loss) before tax Income tax (charge)/credit Profit/(loss) for the year Attributable to: Equity holders of Essentra plc Non-controlling interests Profit/(loss) for the year * See the note on accounting policies for further details of the prior year restatement. Earnings per share attributable to equity holders of Essentra plc: Basic Diluted Earnings per share from continuing operations attributable to equity holders of Essentra plc: Basic Diluted Adjusted profit measure: Operating profit Amortisation of acquired intangible assets Adjusting items Adjusted operating profit See note 27 for further details of the adjusted profit measure. Note 1 3 3 4 6 6 6 6 2 2021 £m (restated)* 2020 £m 959.7 896.5 49.7 2.8 (19.3) 33.2 (4.9) 28.3 26.9 1.4 28.3 8.9p 8.9p 8.9p 8.9p £m 49.7 22.4 11.8 83.9 11.6 1.9 (17.6) (4.1) 2.6 (1.5) (3.3) 1.8 (1.5) (1.2)p (1.2)p (1.2)p (1.2)p £m 11.6 22.6 28.1 62.3 143 ESSENTRA PLC ANNUAL REPORT 2021 143 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Consolidated Statement of Comprehensive Income For the year ended 31 December 2021 Profit/(loss) for the year Other comprehensive income: Items that will not be reclassified to profit or loss: Remeasurement of defined benefit pension schemes Deferred tax (expense)/income on remeasurement of defined benefit pension schemes Items that may be reclassified subsequently to profit or loss: Effective portion of changes in fair value of cash flow hedges: Net change in fair value of cash flow hedges transferred to the income statement Ineffective portion of changes in fair value of cash flow hedges transferred to the income statement Effective portion of changes in fair value of cash flow hedges Foreign exchange translation differences: Attributable to equity holders of Essentra plc: Arising on translation of foreign operations Arising on effective net investment hedges Income tax income/(expense) Attributable to non-controlling interests Other comprehensive expense for the year, net of tax Total comprehensive income for the year Attributable to: Equity holders of Essentra plc Non-controlling interests Total comprehensive income for the year * See the note on accounting policies for further details of the prior year restatement. Note 18 4,16 15 15 4 2021 £m 28.3 28.5 (7.9) 20.6 (1.8) (0.5) 0.9 (23.4) (0.4) 0.4 (0.1) (24.9) (restated)* 2020 £m (1.5) (6.7) 2.1 (4.6) (0.5) --- 0.1 (9.3) (3.3) (0.5) (0.5) (14.0) (4.3) (18.6) 24.0 (20.1) 22.7 1.3 24.0 (21.4) 1.3 (20.1) 144 144 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 CONSOLIDATED BALANCE SHEET CONSOLIDATED BALANCE SHEET Consolidated Balance Sheet At 31 December 2021 Assets Property, plant and equipment Lease right-of-use asset Intangible assets Long-term receivables Derivative assets Deferred tax assets Retirement benefit assets Total non-current assets Inventories Income tax receivable Trade and other receivables Derivative assets Other financial assets Cash and cash equivalents Total current assets Total assets Equity Issued share capital Merger relief reserve Capital redemption reserve Other reserve Cash flow hedging reserve Translation reserve Retained earnings Attributable to equity holders of Essentra plc Non-controlling interests Total equity Liabilities Interest bearing loans and borrowings Lease liabilities Retirement benefit obligations Provisions Other financial liabilities Other payables Deferred tax liabilities Total non-current liabilities Interest bearing loans and borrowings Lease liabilities Derivative liabilities Income tax payable Trade and other payables Provisions Total current liabilities Total liabilities Total equity and liabilities 31 December 2021 £m Note (restated)* 31 December 2020 £m (restated)* 1 January 2020 £m 7 9 8 15, 19 16 18 10 11, 19 15, 19 12, 22, 19 20 21 21 21 14, 19, 22 22 18 17 19 13, 19 16 14, 19, 22 22 15, 19 13, 19 17 254.3 50.4 483.5 5.2 0.7 11.6 34.1 839.8 128.7 1.5 175.2 0.5 --- 136.3 442.2 262.5 52.7 502.4 4.7 --- 20.6 12.6 855.5 102.6 3.7 154.2 0.3 --- 135.8 396.6 273.5 43.4 481.9 5.6 --- 15.2 16.9 836.5 113.1 7.0 166.9 0.8 6.2 70.4 364.4 1,282.0 1,252.1 1,200.9 75.6 385.2 0.1 (132.8) (1.5) (47.5) 333.6 612.7 16.2 628.9 313.3 46.1 25.1 2.5 5.6 --- 45.3 437.9 --- 11.6 0.1 21.5 180.9 1.1 215.2 75.6 385.2 0.1 (132.8) (0.1) (24.1) 300.8 604.7 13.3 618.0 285.2 49.1 36.5 8.0 1.2 2.2 45.5 427.7 --- 11.9 0.5 33.1 155.4 5.5 206.4 66.0 298.1 0.1 (132.8) 0.3 (11.0) 307.1 527.8 7.7 535.5 249.0 39.3 34.3 6.0 3.4 --- 45.3 377.3 60.7 11.4 0.3 37.9 174.5 3.3 288.1 653.1 1,282.0 634.1 1,252.1 665.4 1,200.9 * See the note on accounting policies for further details of the prior year restatement. The consolidated financial statements on pages 143 to 192 were approved by the Board of Directors on 18 March 2022 and were signed on its behalf by: Paul Forman Chief Executive Company registration no: 05444653 Lily Liu Chief Financial Officer 145 ESSENTRA PLC ANNUAL REPORT 2021 145 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Consolidated Statement in of Changes Equity For the year ended 31 December 2021 At 1 January 2021 (restated)1 Profit for the year Other comprehensive expense Total comprehensive income for the year Equity issue to non- controlling interest Share option expense Tax relating to share- based incentives Issued capital £m Merger relief reserve £m Note Capital redemption reserve £m Cash flow hedging and cost of hedging reserves2 £m Other reserve £m Translation reserve £m Retained earnings £m Non- controlling interests £m 75.6 385.2 0.1 (132.8) (0.1) (24.1) 300.8 26.9 13.3 1.4 2021 Total equity £m 618.0 28.3 (1.4) (23.4) 20.6 (0.1) (4.3) --- --- --- --- (1.4) (23.4) 47.5 0.8 0.5 (16.0) 333.6 1.3 3.1 --- --- 24.0 3.1 0.8 0.5 (1.5) 16.2 (17.5) 628.9 2020 (restated)1 Dividends paid 24 At 31 December 2021 75.6 385.2 0.1 (132.8) (1.5) (47.5) Issued capital £m Merger relief reserve £m Note Capital redemption reserve £m Other reserve £m Cash flow hedging and cost of hedging reserves £m Translation reserve £m Retained earnings £m Non- controlling interests £m Total equity £m At 1 January 2020 (as previously reported) Prior period restatement Restated total equity at the beginning of the financial year Loss for the year (restated)1 Other comprehensive expense Total comprehensive loss for the year Issue of share capital Equity issue to non- controlling interest Share options exercised Share option expense Tax relating to share- based incentives Dividends paid At 31 December 2020 (restated)1 24 66.0 298.1 0.1 (132.8) 0.3 (11.0) 312.4 7.7 540.8 (5.3) --- (5.3) 66.0 298.1 0.1 (132.8) 0.3 (11.0) 307.1 7.7 535.5 (3.3) 1.8 (1.5) (0.4) (13.1) (4.6) (0.5) (18.6) --- 9.6 --- 87.1 --- --- (0.4) (13.1) (7.9) --- --- 0.1 1.2 0.3 --- 1.3 --- 5.0 --- --- --- (0.7) (20.1) 96.7 5.0 0.1 1.2 0.3 (0.7) 75.6 385.2 0.1 (132.8) (0.1) (24.1) 300.8 13.3 618.0 1 See the note on accounting policies for further details of the prior year restatement. 2 See note 15 for details of hedging reserve movements in relation to derivatives. 146 146 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED STATEMENT OF CASH FLOWS Consolidated Statement of Cash Flows For the year ended 31 December 2021 Operating activities Profit/(loss) for the year Adjustments for: Income tax expense/(credit) Net finance expense Intangible amortisation Adjusting items Depreciation of property, plant and equipment Lease right-of-use asset depreciation Profit on lease termination Impairment of fixed assets Share option expense Hedging activities and other movements (Increase)/decrease in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Cash outflow in respect of adjusting items Adjustment for pension contributions Movement in provisions Cash inflow from operating activities Income tax paid Net cash inflow from operating activities Investing activities Interest received Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Payments for intangible assets Acquisition of businesses net of cash acquired Proceeds from sale of businesses net of cash disposed Short-term investments Net cash outflow from investing activities Financing activities Interest paid Dividends paid to equity holders Dividends paid to non-controlling interests Arrangement fee paid for financing facilities Repayments of long-term loans Proceeds from long-term loans Lease liability principal repayments Proceeds from equity issue Costs incurred in equity issue Proceeds from equity issue to non-controlling interests Proceeds from sale of employee trust shares Net cash (outflow)/inflow from financing activities Note 4 3 2,8 2 7 9 5,18 23 22 2021 £m (restated)* 2020 £m 28.3 (1.5) 4.9 16.5 25.0 11.8 36.6 12.0 --- 0.5 0.8 (0.5) (28.3) (27.9) 26.3 (25.6) (4.8) (0.2) 75.4 (12.2) 63.2 0.4 (38.5) 8.9 (3.2) (14.6) --- --- (47.0) (11.0) (16.0) (1.5) (4.4) (182.5) 211.4 (12.8) --- --- 3.1 --- (13.7) (2.6) 15.7 25.1 28.1 37.3 12.0 (2.0) 0.1 1.2 1.3 9.6 14.9 (18.3) (21.3) 0.9 --- 100.5 (7.7) 92.8 1.9 (30.9) 0.4 (3.7) (41.2) 5.0 0.6 (67.9) (14.7) --- (0.7) --- (352.9) 318.8 (11.9) 100.0 (3.3) 5.0 0.1 40.4 Net increase in cash and cash equivalents 22 2.5 65.3 Net cash and cash equivalents at the beginning of the year Net increase in cash and cash equivalents Net effect of currency translation on cash and cash equivalents Net cash and cash equivalents at the end of the year * See the note on accounting policies for further details of the prior year restatement. 147 ESSENTRA PLC ANNUAL REPORT 2021 135.8 2.5 (2.0) 136.3 12,22 70.4 65.3 0.1 135.8 147 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES Accounting Policies a. Basis of preparation The consolidated financial statements of the Essentra plc Group has been prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards. On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted International Accounting Standards, with future changes being subject to endorsement by the UK Endorsement Board. Essentra transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 January 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework. The Company has elected to prepare its individual company financial statements in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (‘‘FRS 101’’); these are presented on pages 193 to 204. The financial statements are prepared under the historical cost convention except for derivatives which are stated at fair value and retirement benefit obligations which are valued in accordance with IAS 19 Employee Benefits. The preparation of financial statements that conform with adopted IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates. For the purposes of these financial statements ‘‘Essentra’’ or ‘‘the Group’’ means Essentra plc (‘‘the Company’’) and its subsidiaries. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and future periods if relevant. The accounting policies used in the preparation of these financial statements are detailed below. These policies have been consistently applied to all periods presented. Going Concern Information regarding the financial position of the Group, its cash flows, liquidity position, and borrowing facilities are described in the Financial Review on pages 40 to 42. In addition, note 19 to the financial statements includes the Group’s objectives, policies and processes exposures for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and to credit, market and liquidity risk. Cash balances and borrowings are detailed in note 22. At 31 December 2021, the Group’s external financing arrangements amounted to £534.3m, comprising United States Private Placement Loan Notes (‘‘USPP’’) of $350.0m (with a range of expiry dates from November 2024 to July 2033) and a multi-currency revolving credit facility (‘‘RCF’’) of £275.0m (expiring in October 2026). Of the total facility of £534.3m, only £14.8m is expiring before 2026. The amount drawn under the RCF as at 31 December 2021 was £59.2m, with the available undrawn amount at £215.8m. The facility is subject to two covenants, which are tested semi-annually: net debt to EBITDA (leverage) and EBITA to net finance charges. The financial covenants require the net debt to EBITDA ratio to be less than 3.0x and interest cover to be greater than 3.5x. Despite the significant economic and operational challenges in the recent years, the Group has not sought to change either of the two covenants. The believe that the Group is well placed to manage its business risks and, after making enquiries including a review of forecasts and predictions, taking account of reasonably possible changes in trading performances and considering the existing borrowing facilities, including the available liquidity, have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least the next 18 months following the date of approval of the financial statements, and no breaches of covenants are expected. Directors the The uncertainty as to the future impact on the Group of the COVID-19 pandemic has been considered as part of the Group’s adoption going concern basis, taking into account the experience during the recent years and the most recent circumstances. The Group of demonstrated resilient operational capability and ability to continue supporting the customers, as well as ability to raise additional financing and renew borrowing facilities. As at 31 December 2021 and as at the date of approval of these financial statements, all of the Group’s manufacturing and distribution facilities are operational and have resumed to pre-pandemic levels of operating capacity. Across the Group, supply chain is being proactively managed, as are operating costs and the timing of capital expenditure and significant cash spends. As part of the going concern assessment, the Board has also considered a downside scenario that reflects a continuing level of operational and commercial challenges experienced in recent years, which we consider to be severe but plausible. Included within the severe yet plausible downside scenario are the potential significant costs of strategic reviews which are ongoing and possible impact of foreign exchange fluctuations. The Directors have also considered scenarios which incorporate the potential outcomes of the strategic reviews the potential impact of the Group’s previously announced intentions to move to be a pure play components business over time. and The results of these scenarios show that there is sufficient liquidity in the business for a period of at least 18 months from the date of approval of these financial statements, and do not indicate any covenant breach during the test period. The severe downside scenario includes assumptions for the similar extent of operational disruptions as seen in 2021. Set against this were mitigating actions including tight management of capital expenditure, sales and general overhead, and working capital. Overall level of liquidity (defined as available undrawn borrowing facility plus cash and cash equivalent) at the end of December 2021 was £352.1m, which was significantly higher than the £287.0m as at 31 December 2020. Further information on the Group’s borrowing facilities, cash resources and other financial instruments can be found in notes 14 and 19 to the financial statements. 148 148 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES a. Basis of preparation continued These downside scenarios indicate that the Group is more sensitive to a decline in profit than a contraction in cash flows given the importance of this metric to the Group’s covenant compliance. However, management has carried out reverse stress tests which indicated that an overall reduction in adjusted operating profit of approximately 60% from the 2021 result would be required to result in a breach in covenants over the testing period. This level of reduction is outside the range of outcomes that the Directors would consider plausible. The severe but plausible scenario does not indicate a material uncertainty which may cast significant doubt over the Company’s and Group’s ability to continue as a going concern. Based on these, and taking into consideration the risks detailed in note 19, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, and accordingly have adopted the going concern basis in preparing the consolidated financial statements. This disclosure has been prepared in accordance with the Financial Reporting Council’s UK Corporate Governance Code. Changes in accounting policies Software as a service (‘‘SaaS’’) arrangements During 2021, the Company has changed its accounting policy relating to the capitalisation of certain software costs; this change follows the IFRS Interpretation Committee’s agenda decision published in April 2021 and relates to the capitalisation of costs of configuring or customising application software under ‘‘Software as a Service’’ (‘‘SaaS’’) arrangements. The Group’s accounting policy has historically been to capitalise costs attributable to the configuration and customisation of SaaS arrangements as intangible assets on the balance sheet, irrespective of whether the services were performed by the SaaS supplier or third party. Following the adoption of the above IFRIC agenda guidance, current SaaS arrangements were identified and assessed to determine if the Group has control of the software. For those arrangements where we do not have control of the developed software, to the extent that the services were performed by third parties and those services are distinct from the SaaS arrangement, the Group derecognised the intangible asset previously capitalised. Amounts paid to the supplier in advance of the commencement of the service period, for configuration or customisation, services which are not distinct from the SaaS arrangement, are treated as a prepayment. Any costs incurred which resulted in a software asset from which the Company has control, i.e. the power to obtain the future economic benefits and to restrict others’ access to those benefits, continue to be capitalised as an intangible asset. change, in presenting the Group’s adjusted operating profit, configuration and customisation costs of significant SaaS arrangements The costs written off are presented within operating profit in the consolidated income statement. Given the significant impact of this policy are presented as part of adjusting items (see note 2) in order to present an alternative performance measure that excludes the impact of associated with current implementation of a cloud-based enterprise resource planning (‘‘ERP’’) system within the Group. Configuration and costs which, in the view of management, represent investments in upgrading the Group’s technological capability including costs customisation costs of non-significant SaaS arrangements are included within adjusted operating profit. such In addition, cash flows relating to the customisation and configuration costs of SaaS arrangements are presented as part of operating activities in the consolidated cash flow statement. In relation to the Group’s adjusted performance measures for cash flows, the cash outlay relating to customisation and configuration cost of major SaaS arrangements is presented as a cash outflow for adjusting items, corresponding to the treatment of such costs with regards to adjusted operating profit. This change impacts the Group’s adjusted operating cash flow and free cash flow. December 2020 and 1 January 2020 balance sheets respectively, as well as £0.5m and £2.5m reduction in property, plant and equipment. This change in accounting policy led to adjustments amounting to £16.4m and £4.4m reduction in the intangible assets recognised in the 31 Customisation and configuration costs for SaaS arrangements of £11.8m and £10.4m were charged to operating expenses for 2021 and 2020 respectively that relate to major SaaS arrangements and therefore are presented within adjusting items with regards to the Group’s adjusted operating profit. Customisation and configuration costs for non-significant SaaS arrangements were included within adjusted operating profit and amounted to £nil and £0.1m for 2021 and 2020 respectively. Accordingly, the prior period balance sheet and consolidated income statement have been restated in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The tables below show the impact of the change in accounting policy on previously reported financial results and position. 149 ESSENTRA PLC ANNUAL REPORT 2021 149 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES Accounting Policies continued a. Basis of preparation continued (i) Impact on the consolidated balance sheet Property, plant and equipment Intangible assets Deferred tax assets Other assets and liabilities Net assets Retained earnings Other equity balances Total equity Property, plant and equipment Intangible assets Deferred tax Other assets and liabilities Net assets Retained earnings Other equity balances Total equity (ii) Impact on consolidated income statement and statement of comprehensive income Operating profit Profit before tax Tax credit Profit/(loss) for the year Attributable to owners of the Company Non-controlling interest Total comprehensive income/(expense) for the year Alternative performance measures --- Profit Operating profit Adjusting items Amortisation of acquired intangible assets Adjusted operating profit (iii) Impact on earnings per share Basic earnings per share Diluted earnings per share Adjusted basic earnings per share Adjusted diluted earnings per share 150 150 ESSENTRA PLC ANNUAL REPORT 2021 As previously reported 31 December 2020 £m Impact of restatement £m Restated 31 December 2020 £m 263.0 518.8 16.8 (167.5) 631.1 313.9 317.2 631.1 (0.5) (16.4) 3.8 --- (13.1) (13.1) --- (13.1) 262.5 502.4 20.6 (167.5) 618.0 300.8 317.2 618.0 As previously reported 1 January 2020 £m Impact of restatement £m Restated 1 January 2020 £m 276.0 486.3 13.6 (235.1) 540.8 312.4 228.4 540.8 (2.5) (4.4) 1.6 --- (5.3) (5.3) --- (5.3) 273.5 481.9 15.2 (235.1) 535.5 307.1 228.4 535.5 As previously reported 2020 £m Impact of restatement £m Restated 2020 £m 21.7 6.0 0.3 6.3 4.5 1.8 6.3 21.7 17.7 22.6 62.0 (10.1) (10.1) 2.3 (7.8) (7.8) --- (7.8) (10.1) 10.4 --- 0.3 11.6 (4.1) 2.6 (1.5) (3.3) 1.8 (1.5) 11.6 28.1 22.6 62.3 As previously reported 2020 Impact of restatement Restated 2020 1.7p 1.6p 13.1p 13.0p (2.9)p (2.8)p 0.1p 0.1p (1.2)p (1.2)p 13.2p 13.1p FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES a. Basis of preparation continued (iv) Impact on consolidated statement of cash flows Net cash inflow from operating activities Net cash outflow from investing activities Net cash inflow from financing activities Net increase in cash and cash equivalents Alternative performance measures --- Cash flows Cash outflow in respect of adjusting items Adjusted operating cash flow Free cash flow As previously reported 2020 £m Impact of restatement £m Restated 2020 £m 103.3 (78.4) 40.4 65.3 (10.9) 76.3 56.9 (10.5) 10.5 --- --- (10.4) 10.4 10.4 92.8 (67.9) 40.4 65.3 (21.3) 86.7 67.3 There was no impact on the overall level of cash and cash equivalent. Other pronouncements The Group adopted the following new pronouncements during 2021, which did not have a material impact on the Group’s financial statement: • Interest Rate Benchmark Reform --- Phase 2 (Amendments to IFRS 7, IFRS 4 and IFRS 16), which address the effects of the reform on a company’s financial statements that arise when an interest rate benchmark used to calculate interest on a financial asset is replaced with an alternative benchmark • Amendments to UK and Republic of Ireland accounting standards as a result of the UK’s exit from the European Union • Amendment to IFRS 16, which clarifies the extension of the practical expedient where the lessee is not required to assess whether eligible COVID-19 related rent concessions are lease modifications • Amendments to IAS 1, which address the presentation of financial statements on classification of liabilities • Revised Conceptual Framework for Financial Reporting (Amendments to IFRS 9, IAS 39 and IFRS 7) The following standards and amendments issued before 31 December 2021 with an effective date on or after 1 January 2022 have not been early adopted by the Group, they do not have a material impact on the Group’s financial statement: • Amendment to IAS 12 --- deferred tax related to assets and liabilities arising from a single transaction • A number of narrow-scope amendments to IFRS 3, IAS 16, IAS 37 and some annual improvements on IFRS 1, IFRS 9, IAS 41 and IFRS 16 b. Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by Essentra. Control exists when Essentra is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements subsidiaries are included in the financial statements from the date that control commences until the date that control ceases. All of entities are wholly owned subsidiaries of the Group except for ITC Essentra Limited (India) (50% owned) and China Tobacco Essentra (Xiamen) Filters Co., Ltd (49% owned). The ownership held by the Group in these companies are through holding of ordinary shares in companies and they are accounted for as subsidiaries of the Group in the consolidated financial statements due to a control achieved via board membership. these (ii) Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expense arising from intragroup transactions are eliminated in preparing the consolidated financial statements. 151 ESSENTRA PLC ANNUAL REPORT 2021 151 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES Accounting Policies continued c. Foreign currency Items included in the financial statements of the Group’s subsidiaries are measured using the currency of the primary economic environment in which the subsidiary operates (‘‘functional currency’’). The consolidated financial statements are prepared in sterling (functional currency of the parent company). (i) Foreign currency transactions Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into sterling at the exchange rate ruling at that date and recognised in the income statement unless hedge accounting criteria apply (see policy for financial instruments). (ii) Financial statements of foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into sterling at the exchange rate ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at average exchange rates. (iii) Net investment in foreign operations Exchange differences on retranslation at the closing rate of the opening balances of overseas entities are taken to other comprehensive income, as are exchange differences arising on related foreign currency borrowings and derivatives designated as net investment hedges, to the extent that they are effective. Other exchange differences are taken to the income statement. Differences arising prior to 1 January 2004 are included in retained earnings. d. Financial instruments Interest bearing loans and borrowings and other financial liabilities (excluding derivatives) are held at amortised cost, unless they are included in a hedge accounting relationship. See note 15 for separate disclosure of hedge types. Derivatives are measured initially at fair value. Subsequent measurement in the financial statements depends on the classification of the derivative as follows: (i) Fair value hedges Where a derivative is used to hedge the foreign exchange exposure of a monetary asset or liability, any gain or loss on the derivative is recognised in the income statement. (ii) Cash flow hedges Where a derivative is designated as a hedging instrument in a cash flow hedge, the change in fair value is recognised in other comprehensive income to the extent that it is effective and any ineffective portion is recognised in the income statement. Where the underlying transaction results in a financial asset, accumulated gains and losses are recognised in the income statement in the same period previously recognised in other comprehensive income are included in the initial carrying value of the asset. as the hedged item affects profit or loss. Where the hedged item results in a non-financial asset the accumulated gains and losses (iii) Hedges of net investment in foreign operations The gain or loss on an instrument used to hedge a net investment in a foreign operation that is deemed effective is recognised in other comprehensive income. Any ineffective portion is recognised in the income statement. (iv) Unhedged derivatives The movements in the fair value of derivatives which are not designated as an effective hedge relationship are charged/credited to the profit or loss. e. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Previously revalued properties were treated as being held at deemed cost upon transition to adopted IFRS. Where parts of an item of property, plant and equipment or other assets have different useful lives, they are accounted for as separate items. The carrying values of property, plant and equipment and other assets are periodically reviewed for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. Property, plant and equipment are depreciated over their estimated remaining useful lives on a straight-line basis at the following annual rates: Land and buildings --- Freehold land Land and buildings --- Buildings Plant and machinery Fixtures, fittings and equipment Not depreciated 2% or life of lease if shorter 7---20% 10---33% The assets’ useful lives and residual values are reviewed, and adjusted if appropriate, at each balance sheet date. 152 152 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES f. Lease liabilities and lease right-of-use assets Leases greater than 12 months in length, and those not of low-value, are recognised as a lease right-of-use asset with the associated future lease payment terms recognised as a lease liability. The right-of-use assets and the associated lease liabilities are recognised by discounting the future lease payments at the rate implicit to the lease or, if the rate implicit to the lease cannot be readily determined, at the relevant incremental borrowing rate. Determining the incremental borrowing rate incorporates three key elements: risk-free rate (reflecting specific country and currency), spread (reflecting the specific risk for each subsidiary within the Group) and an asset class adjustment (reflecting the variation credit between asset categories). risk in The Group has leases of certain equipment (e.g. printing and photocopying machines) that are considered of low value. Rentals associated with leases that are of low-value or less than 12 months in length are expensed to the income statement on a straight-line basis. associated lease incentives are amortised in the income statement over the life of the lease. The (i) The Group’s leasing activities The Group leases various properties, equipment and cars. Rental contracts are typically made for fixed periods of 1 to 20 years, but might have extension options as described below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets cannot be used as security for borrowing purposes. Approximately 85% of the Group’s future lease obligations under IFRS 16 relate to property leases. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the right-of-use asset’s useful life and the lease term on a straight-line basis. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable • variable lease payments that are based on an index or a rate • amounts expected to be payable by the lessee under residual value guarantees and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability • any lease payments made at or before the commencement date less any lease incentives received • any initial direct costs and • restoration costs. (ii) Variable lease payments The Group has certain assets which may include variable lease payments based on usage, although this is a small proportion of the Group’s assets. These include vehicles, with variable lease payments based on mileage or equipment such as printers, of which the lease payments vary based on their usage. The variable lease payments are not material for the Group. Any future variable payment increase that requires either speculation or an estimate is not included. Future lease payments should then be applied only when they are known, with no change to the discount rate. (iii) Extension and termination options Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. g. Intangible assets (i) Goodwill Goodwill is stated at cost less any impairment losses. Acquisitions are accounted for using the purchase method. For acquisitions that have occurred since 1 January 2004, goodwill represents the difference between the fair value of the assets given in consideration and the fair value of identifiable assets, liabilities and contingent liabilities of the acquiree. For acquisitions made before 1 January 2004, goodwill is included on the basis of its deemed cost, which represents the amount previously recorded under UK GAAP. Since 1 January 2010, the Group has expensed costs attributable to acquisitions in the income statement. Given their one-off nature, these costs are generally presented within adjusting items. 153 ESSENTRA PLC ANNUAL REPORT 2021 153 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES Accounting Policies continued g. Intangible assets continued (ii) Research and development Research costs are expensed to the income statement in the year in which they are incurred. Development costs relating to new products are capitalised when the Group is able to demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the asset and the ability to measure reliably the expenditure during development. (iii) Acquired intangible assets An intangible asset acquired in a business combination is recognised at fair value to the extent it is probable that the expected future economic benefits attributable to the asset will flow to the Group and that its cost can be measured reliably. Intangible assets principally relate to customer relationships, which are valued using discounted cash flows based on historical customer attrition rates, and developed technology, which is valued using an income approach. The cost of intangible assets is amortised through the income statement on a straight-line basis over their estimated useful economic life. (iv) Other intangible assets Other intangible assets which are not acquired through a business combination (‘‘non-acquired intangible assets’’) are recognised at cost to the extent it is probable that the expected future economic benefits attributable to the asset will flow to the Group and that its cost can be measured reliably, and amortised on a straight-line basis over their estimated useful economic life. SaaS arrangements are service contracts providing the Company with the right to access the cloud provider’s application software over the contract period. Costs incurred to configure or customise, and the ongoing fees to obtain access to the cloud provider’s application software, are recognised as operating expenses when the services are received. Where costs incurred for the development of software code enhances, modifies, or creates additional capability to, existing on-premise systems and meets the definition of and recognition criteria for an intangible asset. These costs are recognised as intangible software assets and amortised over the useful life of the software on a straight-line basis. Intangibles are amortised over their estimated remaining useful lives on a straight-line basis at the following annual rates: Goodwill Customer relationships Other intangibles --- research and development Other intangibles --- development of e-commerce Other intangibles --- software and software development Not amortised 6---12% 7---20% 10---20% 10---20% h. Impairment All assets are reviewed regularly to determine whether there is any indication of impairment. Goodwill is tested for impairment annually. An impairment loss is recognised whenever the carrying amount of a non-financial asset or the cash generating unit to which it belongs exceeds its recoverable amount, being the greater of value in use and fair value less costs to sell, and is recognised in the income statement. Value in use is estimated based on future cash flows discounted using a pre-tax discount rate based upon the Group’s weighted average cost of capital. Financial assets were assessed for impairment using the expected credit loss model which requires expected credit losses and changes to expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. Changes to the expected credit loss are recognised in the income statement. i. Inventories Inventories are valued at the lower of standard cost and net realisable value. For work-in-progress and finished goods, cost includes an appropriate proportion of labour cost and overheads. j. Cash and cash equivalents Cash and cash equivalents comprise cash balances and fixed term investments whose maturities are three months or less from the date acquisition. Bank overdrafts repayable on demand form an integral part of Essentra’s cash management and are included as part of cash and cash equivalents in the statement of cash flows. of k. Loans and borrowings Loans and borrowings are initially measured at cost (which is equal to fair value at inception plus issuance cost) and are subsequently measured at amortised cost using the effective interest method. 154 154 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES l. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost, which is generally equivalent to recognition at nominal value less impairment loss calculated using the expected loss model. Trade receivables subject to factoring are financial assets at fair value through other comprehensive income. The Group applies the simplified model to recognise lifetime expected credit losses for its trade receivables and other receivables, including those due in greater than 12 months, by making an accounting policy election. The expected loss rate estimated for each ageing period is follows: Current: 0.2%, Overdue 1-30 days: 0.5%, Overdue 31-60 days: 1%, Overdue 61-90 days: 5%, Overdue 91-180 days: 10%, Overdue 181-360 days: 50% and Overdue over 360 days: 100%. as m. Trade and other payables Trade payables are non-interest bearing and are recognised initially at fair value and subsequently at amortised cost. n. Deferred consideration Deferred consideration is recognised and held at fair value. Changes in its fair value are recognised in profit or loss, within adjusting items. o. Income tax Income tax in the income statement comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in equity or other comprehensive income. Current tax is the expected tax payable on the taxable income for the year using the applicable tax rates enacted or substantively enacted at the balance sheet date and any adjustment to tax payable in prior years. Deferred tax is provided, using the balance sheet liability method, on temporary differences arising between the tax bases and the carrying amounts of assets and liabilities in the financial statements. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition assets or liabilities that affect neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries of the to extent that they will not reverse in the foreseeable future. Deferred tax is determined using tax rates that are expected to apply when the related deferred tax asset or liability is settled, using the applicable tax rates enacted or substantively enacted at the balance sheet dates. A deferred tax asset is recognised only to the extent that it is probable that future taxable profit will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefits will be realised. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against liabilities and they relate to income taxes levied by the same tax authority and the Group intends to settle its current tax assets and liabilities when net basis. a on p. Revenue Revenue from the sale of goods is recognised in the income statement net of expected discounts, rebates, refunds, credits, price concessions or other similar items, when the associated performance obligation has been satisfied, and control of the goods has been transferred to the customer. A significant part of the Group’s businesses sell goods on an ex-works basis, where the Group as seller makes its goods ready for collection at its premises on an agreed upon sales date and the buyer incurs all transportation and handling costs and bears the risks for bringing the goods to their chosen destination. Where the Group operates non ex-works terms with customers, revenue is recognised when the control of the goods has been transferred to the customer. These terms include consignment stock agreements, where revenue is recognised upon the customer removing goods from consignment stock provided the relevant conditions for revenue recognition are met. Each customer arrangement/contract is assessed to identify the performance obligations being provided to the customer. Where distinct performance obligations are deemed to exist, an element of revenue is apportioned to that obligation. q. Finance income and expense Finance income and expense is recognised in the income statement as it accrues. r. Segment reporting A segment is identified on the basis of internal reports that are regularly reviewed by the Group Management Committee in order to allocate resources to the segment and assess its performance. 155 ESSENTRA PLC ANNUAL REPORT 2021 155 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES Accounting Policies continued s. Pensions (i) Defined contribution schemes Obligations for contributions to defined contribution pension schemes are expensed to the income statement as incurred. (ii) Defined benefit schemes The net obligations in respect of defined benefit pension schemes are calculated separately for each scheme by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any scheme assets is deducted. The discount rate is the yield at the balance sheet date AA credit-rated bonds that have maturity dates approximating to the terms of Essentra’s obligations. The calculation is performed by on qualified independent actuary using the projected unit credit method. Net interest on defined benefit assets is presented within finance a income, and net interest on defined benefit liabilities is presented within finance expense. Actuarial gains and losses that have arisen are recognised in full in the consolidated statement of comprehensive income. The amounts charged to operating profit are the current service cost, past service cost (including curtailments) and gains and losses on settlement. The value of a net pension asset is the amount that may be recovered either through reduced contributions or agreed refunds from the scheme. t. Share-based payments Essentra operates equity-settled, share-based incentive plans. A charge is made in the income statement based on the fair value of option awards using the Monte Carlo or binomial valuation models and relevant quoted share price information with a corresponding increase in equity. The fair value is measured at grant date and spread over the period between grant date and vesting date of the options. The amount recognised as an expense will be adjusted to reflect the actual number of share options that vest with the exception of options that fail to vest because market conditions are not met. u. Adjusting items Adjusting items are separately presented from other items by virtue of their nature, size and/or incidence (considered for each operating segment). They are identified separately in order for the reader to obtain a clearer understanding of the underlying results of the ongoing Group’s operations, by excluding the impact of items which, in management’s view, do not form part of the Group’s underlying operating results, such as gains, losses or costs arising from business acquisition and disposal activities, significant restructuring and closure costs and items which are non-recurring or one-off in nature (such as the costs of fundamental strategic review and reorganisation). Operating profit before adjusting items and acquired intangible amortisation is called adjusted operating profit, which forms the primary basis of management’s review and assessment of operational performance of the Group’s businesses. (i) Gains/losses and transaction costs relating to acquisitions and disposals of businesses In 2021, Essentra acquired Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd (‘‘Hengzhu’’), incurring one-off acquisition related costs (refer note 23). to In 2020, Essentra acquired 3C! Packaging, Inc. (‘‘3C!’’), incurring one-off acquisition related costs (refer to note 23). Further one-off costs were incurred as a result of acquisition of Nekicesa, Innovative Components, alongside professional fees associated with certain corporate development activities. A one-off credit was received in respect of a VAT refund on the costs of a previous business disposal. (ii) Acquisition integration and restructuring costs These relate to costs incurred on the integration of acquired businesses and restructuring associated with acquisitions. (iii) Customisation and configuration costs of significant Software as a Service (‘‘SaaS’’) arrangements These relate to costs incurred on implementation (customisation and configuration) of significant ‘‘software as a service’’ (‘‘SaaS’’) arrangements. In the view of management, these are investments to upgrade the Group’s technical capabilities and therefore their costs are excluded from the adjusted operating profit. (iv) Other adjusting items In 2021 this represented advisory and professional fees in relation to strategic reviews of the Group’s Packaging and Filters businesses as well as the costs of previously announced restructuring activities within the Group’s three divisions. Included within these previously announced restructuring activities, Packaging generated a profit on disposal of tangible assets within the Moorestown site and credits relating to Components and Packaging restructuring consisted of reversal of provisions as well as writebacks on the carrying value of lease right-of-use assets and other tangible fixed assets. Within the Filters division, additional restructuring was incurred relating to the rationalisation of the division’s innovation and development centres in the US and the UK and restructuring activities to rationalise the Tear Tapes operations. In 2020, this represented restructuring activities within the Packaging division, comprising the closure of Portsmouth, UK and Moorestown, USA; Components Europe, comprising the closure of the manufacturing facility in Åstorp, Sweden, and transfer to Barcelona, Spain, and closure of warehousing capabilities in Northern Europe and transfer to Nettetal, Germany; and Components Americas, comprising the closure of manufacturing sites in Schaumburg, Illinois, and Melbourne, Arkansas, with transfer of those activities to Flippin, Arkansas, and the closure of warehousing facilities in Edison, in New Jersey, in Elgin, in Illinois, and in Los Angeles, California. In addition professional fees have been incurred as part of a strategic review of the Group’s operational structure and cost profile. This is offset by a credit arising on the release of excess provision held for potential penalties in relation to the review of the compliance of certain Group companies’ export activities with US laws as the Company does not anticipate any significant enforcement action. 156 156 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ACCOUNTING POLICIES ACCOUNTING POLICIES v. Investment in own shares The shares held in the Essentra Employee Benefit Trust for the purpose of fulfilling obligations in respect of share option plans are treated as belonging to the Company and are deducted from its retained earnings. The cost of shares held directly (treasury shares) are also deducted from retained earnings. w. Provisions A provision is recognised when there is a probable legal or constructive obligation as a result of a past event and a reliable estimate can be made of the outflow of resources that will be required to settle the obligation. The outflow is the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. x. Government grants Government grants are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met, usually on submission of a valid claim for payment. Government grants in respect of capital expenditure are included within the carrying amount of the related property, plant and equipment, and are released to profit or loss on a straight line basis over the expected useful lives of the relevant assets. Grants of a revenue nature are credited to profit or loss so as to match them with the expenditure to which they relate. y. Net debt Net debt is defined as cash and cash equivalents and short-term liquid investments, net of lease liabilities and interest bearing loans and borrowings. z. Dividends Dividends are recognised as a liability in the period in which they are approved by the shareholders of the Company (final dividend) or paid (interim dividend). aa. Assets and disposal groups held for sale and discontinued operations Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on remeasurement are recognised in profit or loss. A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and: • represents a separate major line of business or geographical area of operations or • is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or • is a subsidiary acquired exclusively with a view to resale. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the income statement. 157 ESSENTRA PLC ANNUAL REPORT 2021 157 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES Critical Accounting Judgements and Estimates The following provides information on those policies that management considers critical because of the level of judgement and estimation required which often involves assumptions regarding future events which can vary from what is anticipated. The Directors believe that the financial statements reflect appropriate judgements and estimates and provide a true and fair view of Essentra’s performance and financial position. Accounting Estimates (i) Business combinations and intangible assets IFRS 3 requires the identification of acquired intangible assets as part of a business combination. The methods used to value such intangible assets require the use of estimates and judgements such as customer attrition, cash flow generation from the existing relationships with customers and returns on other assets. Future results are impacted by the amortisation periods adopted and changes to the estimated useful lives would result in different effects on the income statement and balance sheet. Goodwill is not amortised but is tested annually for impairment, along with the finite-lived intangible assets and other assets of the Group’s cash generating units. Tests for impairment are based on discounted cash flows and assumptions (including discount rates, timing and growth prospects) which are inherently subjective. An estimate is also required in identifying the events which indicate potential impairment, and in assessing fair value of individual assets when allocating an impairment loss in a cash-generating unit or groups of cash- generating units. The Group performs various sensitivity analyses in respect of the tests for impairment, as detailed in note 8. The useful lives of the Group’s finite-lived intangible assets are reviewed following the tests for impairment annually. Judgement may also be required in determining the fair value of other assets acquired and liabilities (including contingent liabilities) assumed. In preparing the consolidated financial statements the Group has considered the impact that climate change may have on key accounting judgements and estimates including asset useful economic lives and asset valuations and impairments. As set out on page 31 of the Strategic Report, the Group continues to introduce initiatives designed to reduce the carbon emissions from its operations. As a result, the Group considers the environmental assumptions embedded within the Group’s strategic business plan to support the key forward looking accounting judgements and estimates. (ii) Taxation Liabilities for tax contingencies require management judgements and estimates in respect of tax audit issues and exposures in each of the jurisdictions in which it operates. Management is also required to make an estimate of the current tax liability together with an assessment of the temporary differences which arise as a consequence of different accounting and tax treatments. Where management concludes a tax position is uncertain, a current tax liability is held for anticipated taxes that are considered probable based on the information available. Key judgement areas for the Group include the pricing of intercompany goods and services as well as the tax consequences arising from restructuring operations. Included in the tax payable is a liability of £7.4m (2020: £12.0m) for transfer pricing matters and £12.3m (2020: £20.2m) for other uncertain tax positions. The reduction in each provision is primarily due to the expiry of statute of limitations following the passage of time and favourable agreements reached with tax authorities on previous matters. Adjustments for current year transactions and foreign exchange movements complete the movement in the year. Management may engage with professional advisers in making their assessment and, if appropriate, will liaise with the relevant taxation authorities to resolve the matter. The tax liability is reassessed in each period to reflect management’s best estimate in light of information available. If the final outcome of these matters differs to the liability held in the financial statements, the difference may impact the income tax charge/(credit) in the year the matter is concluded. (iii) Pensions Essentra accounts for its defined benefit pension schemes in accordance with IAS 19. The application of IAS 19 requires the exercise of judgement in relation to the assumptions used, particularly in determining the discount rate, inflation rate assumption and mortality assumptions. For each assumption there is a range of possible outcomes (see note 18). In consultation with Essentra’s actuaries, management decides the point within those ranges that most appropriately reflects Essentra’s circumstances. Small changes to these assumptions can have a significant impact on valuations. The Group performs a sensitivity analysis for the significant assumptions used in determining post-employment costs and liabilities, as detailed in note 18. Accounting Judgements (i) Adjusting items Judgement is required to determine whether items should be included within adjusting items by virtue of their size or incidence. Details of the items categorised as adjusting items are disclosed in note 2. As restructuring and reorganisation costs are recognised (for instance with respect to site rationalisation initiatives), estimates are often involved in relation to property-related costs (such as restoration and dilapidation costs, recoverable amount of lease right-of-use assets and potential sublet income) and asset impairment charges (in assessing recoverable amount such as fair value from potential sale of assets). Where appropriate, management may engage with professional advisers in making these assessments. 158 158 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (ii) Consolidation of a subsidiary Judgement is required to establish whether control exists over an entity in which Essentra holds part of the share capital. Essentra has a 49% shareholding in China Tobacco Essentra (Xiamen) Filters Co., Ltd which has been consolidated as a subsidiary within the consolidated financial statements because management has assessed that Essentra has control over the entity to direct the relevant activities (including approval of budgets and capital investments, and appointment of key management personnel) that significantly affect the entity’s returns and the ability to use its power to affect those returns, through a majority of membership in the entity’s governing body (primarily the board of directors). Subsidiaries are fully consolidated during the period which the Group holds control. (iii) Leases and lease right-of-use assets A key judgement in determining the right-of-use asset and lease liability is establishing whether it is reasonably certain that an option to extend the lease will be exercised. Distinguishing whether a lease will be extended or otherwise could have a material impact on the value of the right-of-use assets and lease liabilities recognised on the balance sheet, but may not have a material impact on the income statement. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee. (iv) ‘‘Software as a service’’ (‘‘SaaS’’) arrangements The accounting treatment of customisation and configuration costs relating to SaaS arrangements involved a number of judgements: • whether a software arrangement is a SaaS arrangement: management considers the fact pattern of the software arrangement carefully to identify SaaS arrangements, distinguishing from other arrangements such as ‘‘platform as a service’’ or ‘‘infrastructure as a service’’ • whether any cost incurred in customisation and configuration result in an additional code from which the customer has the power to obtain the future economic benefits and restrict others’ access to those benefits: management considered whether the code can be used in or transferred to another computing arrangement • whether the customisation and configuration service provided by the SaaS provider is distinct from the regular SaaS arrangement: management considers factors such as whether the Company can benefit from the service separately from the other elements of deliverables from the SaaS provider • whether a third party providing customisation and configuration service is in effect a subcontractor of the SaaS provider: management considers factors such as the nature of contractual and working relationship between the SaaS provider and the third party, the obligations of the third party, who has the primary responsibility for the services that the third party provides etc. See changes in accounting policies section for impact of SaaS arrangements on these financial statements. (v) Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, are classified as held for sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on remeasurement are recognised in profit or loss. We assessed the status of the currently ongoing strategic reviews for the Packaging and Filters divisions, and considered the applicability of the requirements in relation to assets held for sale. As previously announced, the strategic reviews are likely to conclude in the second quarter of 2022 at the earliest, and at present no decision or commitment has been entered into by the management. Management therefore concluded that the businesses under strategic review do not meet the requirements under IFRS 5 to be classified as ‘held for sale’ as at 31 December 2021. 159 ESSENTRA PLC ANNUAL REPORT 2021 159 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes 1. Segment analysis In accordance with IFRS 8, Essentra has determined its operating segments based upon the information reported to the Group Management Committee. The operating segments are as follows: Components --- A leading global manufacturer and distributor of a comprehensive range of components, used in diverse industrial applications and end-markets. Packaging --- One of very few multicontinental suppliers of a full range of secondary packaging to the pharmaceutical, personal care and beauty sectors. Filters --- The only global independent provider of filters and related solutions to the tobacco industry. The adjusted operating profit/loss presented for each operating segment includes the effect of allocation of certain functional costs such as finance, human resources, legal and IT, as well as costs relating to management of the divisions on an internal management methodology. External revenue Total revenue adjusting items Operating profit/(loss) before intangible amortisation and Amortisation of acquired intangible assets Adjusting items Operating profit/(loss) Segment assets Intangible assets Unallocated items3 Total assets Segment liabilities Unallocated items3 Total liabilities Other segment items Capital expenditure (cash spend) Depreciation of property, plant and equipment Average number of employees Components £m Packaging £m 301.7 301.7 362.4 362.4 56.9 (8.6) (0.4) 47.9 172.4 158.9 --- 331.3 74.2 --- 74.2 9.1 7.2 2,708 15.4 (13.8) 1.6 3.2 219.9 297.1 --- 517.0 77.7 --- 77.7 14.8 13.8 3,476 Filters £m 295.6 295.6 28.2 --- (3.3) 24.9 199.7 23.0 --- 222.7 66.7 --- 66.7 13.9 10.5 1,715 Eliminations £m --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- 2021 Total £m 959.7 959.7 83.9 (22.4) (11.8) 49.7 613.8 483.5 184.7 1,282.0 247.8 405.3 653.1 Central Services2 £m --- --- (16.6) --- (9.7) (26.3) 21.8 4.5 184.7 211.0 29.2 405.3 434.5 3.9 5.1 287 41.7 36.6 8,186 160 160 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 1. Segment analysis continued External revenue Total revenue Operating profit/(loss) before intangible amortisation and adjusting items Amortisation of acquired intangible assets Adjusting items Operating profit/(loss) Segment assets Intangible assets Unallocated items3 Total assets Segment liabilities Unallocated items3 Total liabilities Other segment items Capital expenditure (cash spend) Depreciation of property, plant and equipment Average number of employees Components £m Packaging £m 255.0 255.0 363.2 363.2 45.5 (8.9) (9.3) 27.3 149.1 158.2 --- 307.3 60.4 --- 60.4 10.6 7.3 2,355 13.8 (13.6) (9.1) (8.9) 218.5 316.0 --- 534.5 85.8 --- 85.8 11.0 13.4 3,498 Filters £m 278.3 278.3 25.2 (0.1) 0.9 26.0 186.6 22.6 --- 209.2 56.7 --- 56.7 8.5 10.7 1,674 Eliminations £m --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- (restated)1 2020 Total £m 896.5 896.5 62.3 (22.6) (28.1) 11.6 576.7 502.4 173.0 1,252.1 233.3 400.8 634.1 Central Services2 £m --- --- (22.2) --- (10.6) (32.8) 22.5 5.6 173.0 201.1 30.4 400.8 431.2 4.4 5.9 276 34.5 37.3 7,803 1 See the note on accounting policies for further details of the prior year restatement. 2 Central Services includes executive and non-executive management, Group Finance, Tax, Treasury, Legal, Group Assurance, Human Resources, Information Technology, Corporate Development, Investor Relations and other services provided centrally to support the operating segments. 3 The unallocated assets relate to income and deferred tax assets, retirement benefit assets, derivatives, short-term investments, loan receivables and cash and cash equivalents. unallocated liabilities relate to interest bearing loans and borrowings, retirement benefit obligations, derivatives, deferred tax liabilities and income tax payable. Intersegment The transactions are carried out on an arm’s length basis. Net finance expense of £16.5m (2020: £15.7m) and income tax charge of £4.9m (2020: credit of £2.6m) cannot be meaningfully allocated by segment. No customer accounted for more than 10% of revenue in either 2021 or 2020. Analysed by destination, revenue to Europe & Africa is £453.1m (2020: £443.2m), revenue to Americas is £296.3m (2020: £277.2m) and revenue to Asia and Middle East is £210.3m (2020: £176.1m). Revenue to the UK is £70.8m (2020: £81.5m), with other significant countries being the USA with revenue of £231.0m (2020: £210.4m), Ireland £51.2m (2020: £49.5m) and Germany £47.8m (2020: £48.9m). Non-current assets in the UK total £145.6m (2020: £167.9m), with the other significant location being the USA with £309.8m (2020: £321.6m). 161 ESSENTRA PLC ANNUAL REPORT 2021 161 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 2. Net operating expense Changes in inventories of finished goods and work-in-progress Raw materials and consumables Personnel expense1 (note 5) Depreciation of property, plant and equipment Profit/(loss) on sale of property, plant and equipment Depreciation of lease right-of-use assets Amortisation of intangible assets Impairment of property, plant and equipment and intangibles Impairment/(impairment writeback) of right-of-use assets Adjusting items1 Exchange differences recognised in profit or loss Other operating expenses Net operating expenses 2021 £m (10.6) 412.7 286.5 36.6 (0.2) 12.0 25.0 1.0 (1.1) 11.8 (0.5) 136.8 910.0 (restated)* 2020 £m 9.1 368.5 271.8 37.3 0.2 12.0 25.1 1.7 2.0 28.1 --- 129.1 884.9 * See the note on accounting policies for further details of the prior year restatement. 1 In addition to the above, the following items were included within adjusting items: personnel expenses totalling £9.6m (2020: £4.9m); and a pension curtailment credit of £nil (2020: £0.4m). No income or expense (2020: £nil) was recognised in operating expense during the year in respect of ineffective cash flow hedges. Essentra’s hedges of net investments were also entirely effective in 2021 and 2020, and therefore no hedge ineffectiveness has been recognised in net operating expense in 2021 (2020: £nil). Research and development expenses (including relevant staff costs) charged to general and profit or loss during the year amounted to £2.1m (2020: £3.2m). Other operating expenses include manufacturing, selling, administrative overheads. Adjusting items (Gains)/losses and transaction costs relating to acquisitions and disposals of businesses1 Acquisition integration and restructuring costs2 Customisation and configuration costs of significant software as a service (‘‘SaaS’’) arrangements3 Other4 Adjusting items * See the note on accounting policies for further details of the prior year restatement. 2021 £m (3.4) 0.6 11.8 2.8 11.8 (restated)* 2020 £m 5.7 0.5 10.4 11.5 28.1 Adjusting items are separately presented from other items by virtue of their nature, size and/or incidence (considered for each operating segment). They are identified separately in order for the reader to obtain a clearer understanding of the underlying results of the ongoing Group’s operations, by excluding the impact of items which, in management’s view, do not form part of the Group’s underlying operating results, such as gains, losses or costs arising from business acquisition and disposal activities, significant restructuring and closure costs and other items which are non-recurring or one-off in nature (such as the costs of fundamental strategic reviews and reorganisation). Operating profit before adjusting items and acquired intangible amortisation is called adjusted operating profit, which forms the primary basis of management’s review and assessment of operational performance of the Group’s businesses. 1 (Gains)/losses and transaction costs relating to acquisitions and disposals of businesses are made up of a credit of £4.4m in relation the reversal of certain claim provisions in relation to prior disposals, following the conclusion of negotiation with the purchasers; a of to gain in China joint venture, and £0.2m related to costs incurred in pursuit of acquisition targets. £0.4m in relation to a prior acquisition for claims made against the vendor. These are offset by acquisition-related costs of £1.0m relation to the acquisition of Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd (‘‘Hengzhu’’); £0.2m of costs in setting up the Filters In 2020, there was a £0.3m gain relating to a VAT refund on the costs of a previous business disposal, £0.1m consisting of acquisition costs in relation to Innovative Components, £0.1m costs incurred in establishing the China JV and £1.2m costs incurred in acquiring 3C! Packaging, Inc. (‘‘3C!’’). The remaining £4.6m cost related to external professional costs associated with certain development activities during the year. 162 162 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 2. Net operating expense continued 2 Acquisition integration and restructuring costs are made up of £0.3m for the integration of the 3C! business, acquired in 2020, and £0.3m for the integration of Hengzhu into the existing business. In 2020, £0.3m of costs were incurred in the integration of Nekicesa, acquired in 2019, and 3C!, acquired in 2020, into the existing business. The remaining £0.2m was incurred as a result of restructuring activities within the Filters division as a result of the integration of the newly established Filters China joint venture in the existing business. 3 In accordance with the revised accounting policy in relation to the customisation and configuration costs of software as a service (‘‘SaaS’’) arrangements (see the note on accounting policies), costs of significant SaaS arrangements which, in the view of management, represents investment in upgrading the Group’s technological capability, were expensed as adjusting items. In the current year, costs of £11.8m (2020: £10.4m) were attributable to major SaaS projects and relate primarily to the costs of implementing a new cloud-based enterprise resource planning (‘‘ERP’’) system within the Group. 4 Other adjusting items in 2021 of £2.8m relate to: • £3.2m of professional and advisory fees in relation to strategic reviews of the Group’s Filters and Packaging businesses as announced October and November 2021, in which the Group sets out the strategic goal of becoming a pure play global Components business in future. The Board of Directors has decided to review the full range of strategic options for the Filters and Packaging businesses. in the It is anticipated that the strategic reviews are likely to conclude in the second quarter of 2022 at the earliest • £0.9m of advisory costs in relation to a strategic review of the Group’s operational structure and cost profile, and certain redundancies in enabling functions as part of the review • £4.3m profit on disposal of Moorestown property following the restructuring activities in the Packaging division initiated in 2020 • £1.8m restructuring costs in the Packaging Division, involving management restructuring and redundancies at various European sites, offset by a credit from the release of a property provision in relation to prior year restructuring following a favourable outcome of negotiation • £2.5m cost in relation to Filters restructuring, including rationalisation of the division’s innovation and development centres in the US and the UK and restructuring activities to rationalise the Tear Tapes operations • £1.3m net credit relating to Components restructuring, comprising £0.6m costs in relation to restructuring activities within the Components Europe and Americas businesses, offset by a £0.6m credit relating to the reversal of certain prior provisions, and a £1.3m credit relating to adjustments on the carrying value of lease right-of-use assets. Other adjusting items in 2020 of £11.5m relate to: • £7.6m costs relating to restructuring activities within the Packaging division. These relate to costs incurred in the re-evaluation of the divisional footprint, which resulted in the announced closure of manufacturing facilities in Portsmouth, UK, and Moorestown, USA, as well as additional workforce rationalisation costs • £2.1m of cost in relation to restructuring activities within the Components Europe business following a review of the operational footprint of the region. This comprises £0.6m costs incurred in the transfer of manufacturing activities out of Åstorp, Sweden into Barcelona and in Germany and £1.5m incurred on moving the warehousing capabilities of certain central northern European (Bergeijk in the Netherlands, Geretsried Bratislava in Slovakia) into the newly established North European Distribution Hub in Nettetal, Germany • £2.5m of cost in relation to restructuring activities within the Components Americas business following a review of the operational footprint of the region. The review has resulted in the announcement of closures of manufacturing sites in Schaumburg, Illinois, and Melbourne, Arkansas and the transfer of production to the Components site to Flippin, Arkansas, as well as the exit of three smaller warehousing and distribution express sites in Edison in New Jersey, Elgin in Illinois and Los Angeles in California • £1.2m credit in relation to the review of the compliance of certain Group companies’ export activities with US laws, as previously disclosed in the 2019 Annual Report. This comprises £0.2m of external advisory and consultancy costs, offset by a £1.4m release of excess provision held for potential penalties in relation to this activity as the Company does not anticipate any significant enforcement action • £0.5m of external advisory costs in relation to a strategic review of the Group’s operational structure and cost profile, following the significant structural changes in recent years. The tax effect of the adjusting items is a credit of £1.2m (restated 2020: credit of £6.4m). 163 ESSENTRA PLC ANNUAL REPORT 2021 163 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 2. Net operating expense continued Auditor’s remuneration Audit of these financial statements Amounts receivable by the Company’s auditor and its associates in respect of: Audit of financial statements of subsidiaries of the Company Audit-related assurance services1 2021 £m 0.2 2.4 0.1 2.7 2020 £m 0.2 2.0 0.2 2.4 1 These mainly relate to review of the half year financial statements. In addition, non-audit services primarily relating to statutory audit of local tax return required by law outside EU for which fees in the year total less than £0.05m (2020: less than £0.05m). 3. Net finance expense Finance income Bank deposits Other finance income* Net interest on pension scheme assets (note 18) Finance expense Interest on loans and overdrafts Amortisation of bank facility fees Other finance expense* Net interest on pension scheme liabilities (note 18) Interest on leases Net finance expense 2021 £m 0.4 2.2 0.2 2.8 (11.3) (1.1) (3.3) (0.8) (2.8) (19.3) (16.5) 2020 £m 0.8 0.8 0.3 1.9 (11.1) (0.7) (2.4) (1.0) (2.4) (17.6) (15.7) * Included within Other finance income is £2.2m (2020: £0.4m) relating to exchange gains on cash, borrowings and leases. Included within Other finance expense is £3.1m (2020: £1.9m) relating to exchange losses on cash, borrowings and leases. 4. Income tax expense/credit Amounts recognised in the consolidated income statement Current tax Prior years’ tax Deferred tax (note 16) Prior years’ deferred tax (note 16) Income tax expense/(credit) Amounts recognised in the consolidated statement of comprehensive income Tax (credit)/expense in respect of taxable foreign exchange taxable income/losses Tax expense/(credit) on remeasurement of defined benefit pension schemes Income tax expense/(credit) 2021 £m 2.7 0.7 2.5 (1.0) 4.9 (0.4) 7.9 7.5 (restated)* 2020 £m 5.9 0.5 (9.2) 0.2 (2.6) 0.5 (2.1) (1.6) 164 164 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 4. Income tax expense/credit continued Factors affecting income tax for the year The tax charge for the year ended 31 December 2021 is lower than (2020: lower than) the standard rate of corporation tax in the UK of 19.0% (2020: 19.0%). The differences are explained below: Profit/(loss) before income tax Tax at UK statutory rate of 19.0% (2020: 19.0%) Effects of: Permanent disallowable items (including adjusting items) Disposal of entities1 Overseas state and local tax Unrecognised tax attributes utilised2 Adjustments in respect of prior years Withholding tax (including on unremitted earnings) Change in tax rates3 Difference between UK and overseas tax rates4 Reassessment of deferred tax recognition5 Other6 Income tax expense/(credit) * See the note on accounting policies for further details of the prior year restatement. 2021 £m 33.2 6.3 (8.3) 1.6 (0.5) 1.0 (0.3) 2.4 (2.2) (0.2) 6.1 (1.0) 4.9 (restated)* 2020 £m (4.1) (0.8) (1.0) --- 0.6 (0.8) 0.7 2.9 (1.6) (2.2) --- (0.4) (2.6) Income tax expense in the UK is £2.5m (2020: £1.9m credit). The tax effect on adjusting items is disclosed in note 2. 1 This includes a £6.0m tax charge arising on an intra-group transfer of a subsidiary net of the release of an uncertain tax provision of £4.4m relating to a prior year disposal where the statute of limitations has now expired. 2 See further information regarding deferred tax asset recognition at note 16. 3 This reflects the impact of differences in substantively enacted, or enacted corporate tax rates, for future periods to those of the current period. 4 This reflects the impact of different tax rates in the jurisdictions in which Essentra operates by reference to the UK statutory rate. This impact may vary in future years due to changes in overseas tax rates or Essentra’s geographical profit split. 5 This reflects the de-recognition of deferred tax assets (primarily on tax losses) due to changes in the year and latest forecasts which mean it is no longer probable that the related tax benefits will be realised. 6 Other includes £0.8m (2020: £0.4m) reflecting the difference between the UK statutory rate of 19% and the 25% enacted rate at which the deferred tax asset arising on the change in SaaS accounting policy is recognised (see note 16). 5. Personnel expense Wages and salaries Social security expense Pension expense (note 18) Share option expense (note 18) Total personnel expense 2021 £m 251.6 25.5 8.6 0.8 286.5 2020 £m 236.8 24.5 9.3 1.2 271.8 In addition to the above, the following items were included within adjusting items: personnel expenses totalling £9.6m (2020 restated: £4.9m); and a pension curtailment credit of £nil (2020: £0.4m). The average number of employees is disclosed in note 1. The Report of the Remuneration Committee on pages 118 to 133 sets out information on Directors’ remuneration. Key management remuneration Short-term employee benefits Post-employment benefits Share-based payments Termination benefits 2021 £m 5.2 0.6 0.5 0.3 6.6 2020 £m 3.4 0.5 1.1 --- 5.0 Essentra considers key management personnel to be the Directors and the members of the Group Management Committee. The amounts disclosed are on the same basis as those used to determine the relevant amounts disclosed in the Annual Report on Remuneration. 165 ESSENTRA PLC ANNUAL REPORT 2021 165 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 6. Earnings per share Earnings Earnings attributable to equity holders of Essentra plc Adjustments Amortisation of acquired intangible assets Adjusting items Tax relief on adjustments Adjusted earnings Weighted average number of shares Basic weighted average ordinary shares outstanding (million) Dilutive effect of employee share option plans (million) Diluted weighted average ordinary shares (million) Earnings per share (pence) Basic earnings per share Adjustment Adjusted basic earnings per share Diluted earnings per share Adjusted diluted earnings per share 2021 £m 26.9 22.4 11.8 34.2 (6.3) 54.8 301.0 1.3 302.3 8.9p 9.3p 18.2p 8.9p 18.1p (restated)* 2020 £m (3.3) 22.6 28.1 50.7 (11.5) 35.9 272.7 2.0 274.7 (1.2)p 14.4p 13.2p (1.2)p 13.1p * See the note on accounting policies for further details of the prior year restatement. Adjusted earnings per share is provided to reflect the underlying earnings performance of Essentra. The basic weighted average number of ordinary shares in issue excludes shares held in treasury and shares held by an employee benefit trust. 166 166 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 7. Property, plant and equipment Cost Beginning of year Acquisitions (note 23) Additions Disposals Currency translation End of year Accumulated depreciation and impairment Beginning of year Charge in period Disposals Impairment Currency translation End of year Land and buildings £m Plant and machinery £m Fixtures, fittings and equipment £m 84.8 (0.5) 2.1 (4.2) (2.8) 79.4 17.2 3.2 (0.8) 0.2 (1.8) 18.0 387.2 2.4 31.8 (20.6) (14.3) 386.5 226.0 25.3 (19.2) 0.5 (8.9) 223.7 78.4 0.1 4.9 (3.2) (1.3) 78.9 44.7 8.1 (3.2) --- (0.8) 48.8 2021 Total £m 550.4 2.0 38.8 (28.0) (18.4) 544.8 287.9 36.6 (23.2) 0.7 (11.5) 290.5 Net book value at end of year 61.4 162.8 30.1 254.3 Cost Beginning of year Acquisitions Additions Disposals Currency translation End of year Accumulated depreciation and impairment Beginning of year Charge in period Disposals Impairment Currency translation End of year Land and buildings £m Plant and machinery £m (restated)* Fixtures, fittings and equipment £m 2020 (restated)* Total £m 81.9 1.5 2.2 (0.7) (0.1) 84.8 13.4 3.7 (0.5) 0.2 0.4 17.2 384.8 4.9 18.9 (14.5) (6.9) 387.2 215.4 25.5 (14.2) 1.7 (2.4) 226.0 76.3 0.3 6.8 (4.2) (0.8) 78.4 40.7 8.1 (4.1) 0.1 (0.1) 44.7 543.0 6.7 27.9 (19.4) (7.8) 550.4 269.5 37.3 (18.8) 2.0 (2.1) 287.9 Net book value at end of year 67.6 161.2 33.7 262.5 * See the note on accounting policies for further details of the prior year restatement. Included within land and buildings, plant and machinery and fixtures, fittings and equipment are assets in the course of construction of £1.7m (2020 restated: £1.8m) which were not depreciated during the year. Contractual commitments to purchase property, plant and equipment amounted to £0.4m at 31 December 2021 (2020: £1.4m). Property, plant and equipment with a net book value of £1.1m (2020: £2.5m) was impaired by £1.1m (2020: £2.0m) to a recoverable amount of £nil (2020: £0.5m), which represented fair value less cost to sell. £0.8m (2020: £1.9m) of this impairment relates to restructuring projects and has been charged to adjusting items. Furthermore, £0.4m (2020: £nil) has been written back to a recoverable amount of £0.4m (2020: £nil) and this has been charged to adjusting items. 167 ESSENTRA PLC ANNUAL REPORT 2021 167 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 8. Intangible assets Cost Beginning of year Acquisitions (note 23) Additions Currency translation End of year Amortisation and impairment Beginning of year Charge for the year Impairment Currency translation End of year Net book value at end of year Cost Beginning of year Acquisitions Additions Currency translation End of year Amortisation and impairment Beginning of year (restated)* Charge for the year (restated)* Currency translation End of year Net book value at end of year Goodwill £m Customer relationships £m Other intangible assets £m 356.0 4.5 --- (5.6) 354.9 27.8 --- --- 0.1 27.9 424.4 8.6 --- (9.8) 423.2 264.3 22.2 --- (5.6) 280.9 23.1 --- 3.2 0.1 26.4 9.0 2.8 0.3 0.1 12.2 2021 Total £m 803.5 13.1 3.2 (15.3) 804.5 301.1 25.0 0.3 (5.4) 321.0 327.0 142.3 14.2 483.5 Goodwill £m Customer relationships £m 339.0 20.9 --- (3.9) 356.0 28.3 --- (0.5) 27.8 402.1 25.4 --- (3.1) 424.4 243.8 22.3 (1.8) 264.3 (restated)* Other intangible assets £m 2020 (restated)* Total £m 19.3 --- 3.7 0.1 23.1 6.4 2.8 (0.2) 9.0 760.4 46.3 3.7 (6.9) 803.5 278.5 25.1 (2.5) 301.1 328.2 160.1 14.1 502.4 * See accounting policies for further details of the prior year restatement. Included within other intangible assets are assets in the course of construction of £0.9m (2020 restated: £1.1m) which were not amortised during the year. Salary costs of £0.7m (2020: £1.1m) were capitalised as part of other intangible assets during the year. Other intangible assets principally comprise trade names acquired with Reid Supply, developed technology acquired with Richco, order backlog, software development and e-Commerce development costs. 168 168 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 8. Intangible assets continued The e-Commerce development and software development costs were not acquired through a business combination, and their amortisation is included within operating profit before amortisation of acquired intangibles and adjusting items. Amortisation charged on other intangible assets is included within operating profit before amortisation of acquired intangibles and adjusting items. The weighted average remaining useful lives of customer relationships and other intangible assets at the end of the year were 9.0 years and 5.2 years (2020: 8.1 years and 5.8 years) respectively. Essentra tests intangible assets annually for impairment, or more frequently if there are indications of impairment. A discounted cash flow analysis is computed to compare the discounted estimated future operating cash flows to the net carrying value of the goodwill and other intangible and tangible assets for each cash generating unit or group of cash generating units as appropriate. Goodwill is allocated to groups of cash generating units, being the operating segments, as follows: Components Packaging Filters Intangible assets, apart from goodwill, are allocated to the businesses to which they relate as shown below: Business Components --- Businesses of former Moss and Skiffy Components --- Businesses of former Richco Components --- Business of former Mesan Components --- Business of former Abric Components --- Business of former Micro Plastics Components --- Industrial Supply Components --- Innovative Components Components --- Hengzhu Components --- e-Commerce development costs Components --- other businesses Packaging --- Americas Packaging --- Asia Packaging --- Europe Packaging --- Nekicesa Filters Not allocated to divisions --- software and development costs Operating segment Components Components Components Components Components Components Components Components Components Components Packaging Packaging Packaging Packaging Filters Central Goodwill 2020 £m 95.3 211.2 21.7 328.2 2021 £m 96.8 208.5 21.7 327.0 Customer relationships and other intangible assets 2021 £m 8.8 15.3 1.4 6.7 3.7 1.6 6.6 8.8 6.3 3.0 45.5 1.1 38.2 3.7 1.3 4.5 156.5 2020 £m 10.3 18.4 3.0 8.1 4.0 2.5 7.2 --- 5.6 3.9 50.3 1.3 49.0 4.2 0.9 5.5 174.2 At 31 December 2021, management has performed an impairment review of the assets in each division. Following the impairment assessment, no impairment loss was recognised in 2021. The impairment assessment for intangible assets (excluding goodwill) and property, plant and equipment is performed on the cash generating units within the divisions. The cash generating units are primarily the manufacturing sites. Goodwill is tested at the divisional level, which is the level that management monitors goodwill at. The recoverable amount is estimated on the basis of value in use, i.e. units In discounted cash flow projection expected to be generated by the group of cash generating units. For assets in the cash generating these cases, the fair value less costs to sell is based on estimated market prices reflecting the age and condition of the asset. assessed to be impaired, their fair value less costs to sell is also considered in determining the impairment loss to be recognised, if any. 169 ESSENTRA PLC ANNUAL REPORT 2021 169 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 8. Intangible assets continued The impairment tests for goodwill and intangible assets are based on the Board approved business plan (the ‘‘Plan’’). Cash flow projections are over five years using the approved annual budget for the first year and subsequent years based on the Group and Divisional Strategic Plan. The Group’s impairment test incorporates the following assumptions: • The key assumptions in the cash flow projections for the Plan are the revenue growth and operating margin for each division. Operating margin is primarily based on historical levels achieved, adjusted by targets set for revenue expansion and cost control and reduction for each individual division within the Plan period. The key assumptions underlying the estimation of cash flow projections for value in use are operating profit margin and revenue growth assumptions. The values assigned to these assumptions represent management’s assessment of market condition and scope for cost and profitability improvement, taking into account realisable synergies resulting from integration activities. The compound annual revenue growth rate assumption across all three divisions for the next five years ranges from 5.3% to 8.5%. The average operating profit margin assumption for the next five years included within the Packaging division impairment assessment ranges from 6.9% to 10.9%. In respect of Components and Filters, the combined average operating profit margin over the five year forecast period is assumed to improve by 300 bps from 2021 • In relation to the test for the Components and Filters divisions, cash flows beyond the first year of the model are based on the approved annual budget with growth rates specific to each business applied to revenue of up to 5.8% • The estimated cash flows are discounted using a pre-tax discount rate based upon Essentra’s estimated post-tax weighted average cost of capital of 6.5% (2020: 7.3%). The specific pre-tax discount rates applied for each group of cash generating units to which significant goodwill is allocated are as follows: 7.8% for Packaging, 8.4% for Components and 7.7% for Filters (2020: 8.8% for Packaging, 9.4% for Components and 9.7% for Filters) • In relation to the test for the Packaging division, management carried out a detailed assessment of the growth and profit margin assumptions for each of the next four years after the Plan period, and applied a terminal growth rate of 1.8% p.a. (2020: 1.5%) subsequently. The growth and profit margin assumptions are based on management’s assessment of market condition and scope for cost and profitability improvement, taking into account realisable synergies following the recent integration and reorganisation activities. The operating profit assumptions include an estimate for the impact of the key risks but not the opportunities from climate change and includes costs and risks related to meeting environmental, social and governance targets. performed additional sensitivity analysis to assess the robustness of the current headroom the recoverable amount has above the The Packaging division impairment test has historically been the most sensitive to changes in assumptions, therefore management has carrying amount. The following change to key assumptions will cause the carrying amount to exceed the recoverable amount in the Packaging division: • An increase in discount rate of 380 basis points • A reduction of 600 basis points in the operating profit margin in the terminal year • A reduction of 510 basis points in the terminal growth rate Management considered the following reasonably possible changes in the key assumptions, and the associated impact on the impairment assessment, in relation to the Packaging division: • A 1.0% increase in discount rate would reduce headroom to £229.3m • A 1.0% reduction in the terminal growth rate would reduce headroom to £251.2m • A 1.5% reduction in each year’s growth rate would reduce headroom to £337.5m • A 2.0% reduction in operating profit margin in the terminal year would reduce headroom to £253.7m. 170 170 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 9. Lease right-of-use assets Cost Beginning of year Additions, extensions and surrenders Terminations Acquisitions (note 23) Currency translation End of year Accumulated depreciation Beginning of year Charge for the year Terminations Impairment writeback Currency translation End of year Land and buildings £m Plant and machinery £m Fixtures, fittings and equipment £m 102.0 8.2 (6.3) 2.0 (5.4) 100.5 57.7 9.0 (6.0) (1.1) (3.0) 56.6 13.9 1.8 (1.7) --- (0.6) 13.4 5.7 2.9 (1.3) --- (0.3) 7.0 0.4 --- --- --- --- 0.4 0.2 0.1 --- --- --- 0.3 0.1 2021 Total £m 116.3 10.0 (8.0) 2.0 (6.0) 114.3 63.6 12.0 (7.3) (1.1) (3.3) 63.9 50.4 2020 Total £m 99.2 21.9 (5.4) 2.5 (1.9) 116.3 55.8 12.0 (5.2) 1.7 (0.7) 63.6 52.7 Net book value at end of year 43.9 6.4 Cost Beginning of year Additions, extensions and surrenders Terminations Acquisitions Currency translation End of year Accumulated depreciation Beginning of year Charge for the year Terminations Impairment Currency translation End of year Net book value at end of year Land and buildings £m Plant and machinery £m Fixtures, fittings and equipment £m 84.4 19.5 (2.5) 2.5 (1.9) 102.0 50.2 8.8 (2.3) 1.7 (0.7) 57.7 44.3 14.6 2.2 (2.9) --- --- 13.9 5.5 3.1 (2.9) --- --- 5.7 8.2 0.2 0.2 --- --- --- 0.4 0.1 0.1 --- --- --- 0.2 0.2 During the year there was an impairment write back of £1.1m (2020: impairment of £1.7m). This £1.1m impairment write back is disclosed in adjusting items section of note 2. The assets were uplifted to their recoverable amount, which represented their fair value. Contractual commitments to lease property, plant and equipment amounted to £nil at 31 December 2021 (2020: £4.0m). 171 ESSENTRA PLC ANNUAL REPORT 2021 171 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 9. Lease right-of-use assets continued The income statement shows the following amounts relating to leases: Lease right-of-use asset depreciation Interest expense (included in finance cost) Exchange losses (included in finance cost) Expense relating to short-term leases (included in cost of goods sold and administrative expenses) Expense relating to leases of low-value assets that are not shown above as short-term leases (included expenses) operating in 2021 £m 12.0 2.8 2.5 0.2 0.1 17.6 2020 £m 12.0 2.4 1.1 0.2 0.1 15.8 The lease expenses for short-term leases for the year ending 31 December 2022 is not expected to be materially different to the expense as disclosed above. The maturity analysis on the lease liabilities have been included within note 19. The total cash outflow for leases and analysis of movements in lease liabilities are included within note 22. For the year ended 31 December 2021 the weighted average lessee’s incremental borrowing rate applied to the lease liabilities was 5.2% (2020: 5.1%). 10. Inventories Raw materials and consumables Work-in-progress Finished goods and goods held for resale 2021 £m 60.0 12.5 56.2 128.7 Inventories with a total value of £0.1m (2020: £nil) were written down in the year. This relates to restructuring projects and has been charged to adjusting items. 11. Trade and other receivables Trade receivables Trade receivables subject to factoring Other receivables Prepayments and accrued income Trade receivables subject to factoring are financial assets at fair value through other comprehensive income. 12. Cash and cash equivalents Bank balances Short-term bank deposits and investments Cash and cash equivalents 2021 £m 144.8 4.0 19.9 6.5 175.2 2021 £m 123.9 12.4 136.3 2020 £m 44.5 10.7 47.4 102.6 2020 £m 131.8 --- 15.3 7.1 154.2 2020 £m 121.5 14.3 135.8 Included in cash and cash equivalents at 31 December 2021 were amounts totalling £12.6m (2020: £nil) subject to currency controls or other legal restrictions. 172 172 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 13. Trade and other payables Trade payables Other tax and social security contributions Other payables Accruals and deferred income Included within other tax and social security contributions are non-current liabilities of £nil (2020: £2.2m). 14. Interest bearing loans and borrowings Non-current liabilities Unsecured bank loans US Private Placement Loan Notes 2021 £m 103.3 13.2 15.2 49.2 180.9 2021 £m 55.6 257.7 313.3 2020 £m 88.3 11.3 13.7 44.3 157.6 2020 £m 212.6 72.6 285.2 At 31 December 2021, the Group had £59.2m (2020: £154.0m), and €nil (2020: €67.0m) of unsecured bank loans drawn in sterling and euros at floating rates of interest set by reference to SONIA (2020: LIBOR). The Group adopted SONIA from 1 January 2021 following the adoption of the Interest Rate Benchmark Reform as detailed in the Accounting Policies. Essentra’s $350.0m US Private Placement Loan Notes are at a weighted average interest rate of 4.02% per annum (2020: 4.44%). In April 2020, a $80m USPP loan note matured, and a new USPP facility of $25m was drawn (for which the note purchase agreement was signed in December 2019), of which $15m matures in April 2027 and $10m in April 2030. In addition, $75m of USPP loan notes raised in prior years remain in place, which mature between November 2024 and November 2029. A further issue of $250m was agreed and drawn in July 2021 (of which $80m matures in July 2028, $85m in July 2031 and $85m in July 2033). The RCF was made up of two tranches, £285m and €100.8m. The maturity of £225m of the overall borrowing under the RCF was extended on 11 January 2021 for a further year to November 2023, with the balance remaining on the original terms with a maturity date of November 2022. In October 2021 the facility was renegotiated and at 31 December 2021 the available bank facilities totalled £275.0m, of which £59.2m was drawn with a maturity date of October 2026. The currency profile of the carrying and nominal values of Essentra’s loans and borrowings is as follows: Sterling US dollar Euro Carrying value £m 55.6 257.7 --- 313.3 2021 Nominal value £m 59.2 259.3 --- 318.5 Carrying value £m 153.1 72.6 59.5 285.2 2020 Nominal value £m 154.0 73.0 59.8 286.8 The difference between the total nominal and carrying value of loans and borrowings relates to the amortised value of prepaid facility fees of £5.2m (2020: £1.6m). 173 ESSENTRA PLC ANNUAL REPORT 2021 173 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 15. Derivatives Essentra uses derivatives to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. In accordance with its Treasury policy, Essentra does not hold or issue derivatives for trading purposes. Current assets --- Derivative assets Forward foreign exchange contracts designated in cash flow hedge a Non-current assets --- Derivative assets Cross currency interest rate swaps designated in flow hedge cash a Current liabilities --- Derivative liabilities Forward foreign exchange contracts designated in cash flow hedge a Non-current liabilities --- Derivative liabilities Cross currency interest rate swaps designated in flow hedge cash a At 31 December 2021 At 31 December 2020 Fair values £m Contractual or notional amounts £m Change in fair value £m Fair values £m Contractual or notional amounts £m Change in fair value £m 0.5 0.5 0.7 0.7 0.1 0.1 --- --- 23.0 23.0 77.8 77.8 11.9 11.9 29.6 29.6 0.2 0.2 0.7 0.7 (0.4) (0.4) --- --- 0.3 0.3 --- --- 0.5 0.5 --- --- 17.4 17.4 --- --- 12.3 12.3 --- --- (0.5) (0.5) --- --- 0.2 0.2 --- --- Cash flow hedges are hedges of the currency risk exposure to variability in cash flows. They relate to trading transactions and interest and principal payments denominated in foreign currencies. Hedges of net investments are hedges of the currency risk exposure to changes in the carrying value of net investments in foreign operations. The net fair value gains or losses on open forward foreign exchange contracts that hedge foreign currency risk of anticipated future sales, purchases and interest payments are accounted for as cash flow hedges. The fair value will be transferred to profit or loss when the forecast transactions occur. All of these hedged transactions are expected to occur over the next 12 months and all derivative instruments mature in the next 12 months. In July 2021, Essentra entered into a number of cross currency interest rate swap contracts to hedge the foreign currency risk of $145m of its US Private Placement Loan Notes. The maturity profile of these match those of the underlying loan notes with $20m notional value maturing within three years and the remainder between five and seven years. These contracts are accounted for as cash flow hedges, with the impact of cross currency basis treated as a cost of hedging. Movements in the Group’s hedging reserves are analysed below. Balance at the beginning of the year Change in fair value of forward foreign exchange contracts recognised in other comprehensive income Change in fair value of cross currency swaps recognised in other comprehensive income Ineffectiveness recognised in profit or loss (finance income) Amounts recycled to finance expense to offset retranslation of hedged loans Balance at the end of the year Cost of hedging reserve £m --- 0.9 0.9 Cash flow hedging reserve £m (0.1) 0.2 (0.2) (0.5) (1.8) (2.4) 2021 Total hedging £m (0.1) 0.2 0.7 (0.5) (1.8) (1.5) Cost of hedging reserve £m --- Cash flow hedging reserve £m 0.3 (0.4) --- (0.1) 2020 Total hedging £m 0.3 (0.4) --- --- --- (0.1) 174 174 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 15. Derivatives continued The following movements were recognised for the purpose of calculating hedge ineffectiveness in the year: Movement in period Cumulative movement at 31 Dec 2021 Movement in hedging instrument £m Movement in hedged item £m Ineffectiveness recognised in the consolidated income statement £m 0.7 0.7 (0.2) (0.2) 0.5 0.5 Essentra had other US dollar and euro denominated borrowings which it designated as hedges of its net investments in subsidiary undertakings. The exchange losses of £2.8m (2020: losses of £1.2m) on these US dollar borrowings and the gains of £2.6m (2020: losses of £3.2m) on the euro borrowings were recognised in other comprehensive income. 16. Deferred tax Deferred tax assets and liabilities are attributable to the following: 2021 Income statement: Charge/ (credit) £m 1.9 (2.8) 1.5 0.9 --- --- --- 1.5 Net £m 2.2 39.9 --- (8.4) 33.7 --- 33.7 --- Assets £m Liabilities £m (13.9) --- (11.2) (18.7) (43.8) 23.2 (20.6) --- 13.2 43.5 2.4 9.6 68.7 (23.2) 45.5 --- 2020 (restated) Income statement: Charge/ (credit) £m (4.1) (3.5) 0.4 (1.8) --- --- --- (9.0) Net £m (0.7) 43.5 (8.8) (9.1) 24.9 --- 24.9 --- Assets £m Liabilities £m (11.0) --- (8.5) (20.2) (39.7) 28.1 (11.6) --- 13.2 39.9 8.5 11.8 73.4 (28.1) 45.3 --- Property, plant and equipment1 Intangible assets2 Employee benefits3 Other4 Tax (assets)/liabilities Set off of tax Net tax (assets)/liabilities Total income statement charge/(credit) 1 A deferred tax liability arises on property, plant and equipment as the tax value of assets is lower than the corresponding accounting value. This arises as tax deductions are determined by the applicable tax laws in each country the Group operates in whereas accounting depreciation is calculated in line with the Group’s accounting policy. 2 A deferred tax liability is provided on temporary differences arising on the Group’s intangible assets as in the majority of cases the local tax authorities do not allow deduction for amortisation of these intangible assets. The movement during the period is due to the acquisition of the Hengzhu business offset by reducing intangible asset value from the amortisation charge for the year. 3 This represents deferred tax on the Group’s defined benefit pension schemes and share-based incentives. 4 This includes expenditure that will be deductible in future periods for tax purposes when the amounts are settled in cash, tax losses expected to be utilised in future periods and withholding tax on overseas earnings from Group companies expected to be remitted in the foreseeable future of £8.2m (2020: £8.5m). Movements in the year: Beginning of the year Charge/(credit) to the income statement in respect of current year Charge to the income statement in respect of prior years Credit to other comprehensive income Credit to reserves on share-based incentives Acquisitions and disposals Currency translation End of year 2021 Total Net £m 24.9 2.5 (1.0) 7.9 (0.5) 0.6 (0.7) 33.7 2020 (restated) Total Net £m 30.2 (9.2) 0.2 (2.1) (0.3) 6.9 (0.8) 24.9 As at 31 December 2021 it was expected that earnings from certain overseas Group companies will be remitted and a deferred tax liability of £8.2m (2020: £8.5m) has been recognised accordingly. This represents withholding taxes payable on the remittance of these earnings under local tax laws. The amount of unrecognised deferred tax in respect of unremitted earnings is £13.3m (2020: £10.6m). 175 ESSENTRA PLC ANNUAL REPORT 2021 175 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 16. Deferred tax continued Based on available information, management determined whether it is probable for some or all of the deferred tax assets to be recognised. In determining this management considered the cumulative losses in prior years, the history of tax losses, the manner in which assets can be used (including time limitations under local laws), future earnings potential and expectation of future reversal of taxable temporary differences. Following management assessment, gross deferred tax assets of £0.2m (2020: £0.2m) in respect of capital losses and unutilised tax losses of £46.5m (2020: £26.8m) have not been recognised as their realisation is not probable. The capital losses have an unlimited expiry date. The income tax losses expire as follows: £6.5m within five years, £26.4m in five or more years and £13.6m with no expiry. If future conditions change the amount of unrecognised deferred tax assets will be reassessed. This may impact the income tax expense in the year of remeasurement. 17. Provisions Beginning of year Provisions made during year Provisions released during year Utilised during year Currency translation End of year Non-current Current End of year Beginning of year Business combinations Provisions made during year Provisions released during year Utilised during year Currency translation End of year Non-current Current End of year Reorganisation £m 5.2 0.2 (0.2) (4.3) --- 0.9 0.4 0.5 0.9 Reorganisation £m --- --- 5.2 --- --- --- 5.2 0.6 4.6 5.2 Other £m 8.3 0.1 (5.2) (0.3) (0.2) 2.7 2.1 0.6 2.7 Other £m 9.3 0.3 1.4 (1.7) (0.9) (0.1) 8.3 7.4 0.9 8.3 2021 Total £m 13.5 0.3 (5.4) (4.6) (0.2) 3.6 2.5 1.1 3.6 2020 Total £m 9.3 0.3 6.6 (1.7) (0.9) (0.1) 13.5 8.0 5.5 13.5 Reorganisation provisions are generally held against restructuring and redundancy costs, primarily related to the integration of acquired businesses and restructuring associated with acquisitions and other businesses. Other provisions relate primarily to non-lease contracts on vacant properties, lease dilapidations, employees’ compensation claims, regulatory claims and other claims. Non-current provisions are generally provisions for non-lease service contracts on vacant properties and lease dilapidations which are expected to be utilised within the next ten years. The timing of the utilisation of the lease dilapidations assumes the business continues to operate based on the most up to date business plan. The release of other provisions during the year relates mostly to claims and non-lease property-related provisions. 176 176 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 18. Employee benefits Post-employment benefits The Group operates a number of defined benefit and defined contribution pension schemes around the world covering many of its employees. The Group also has a number of other post-employment obligations in certain countries, some of which are required under local law. The defined benefit plans are administered by boards of trustees and the assets are held independently from Essentra. The boards of trustees comprise member nominated trustees, employer nominated trustees and independent advisory trustees. The articles of the plans prohibit a majority on the boards to be established by either the member or employer nominated trustees. Pension costs of the defined benefit schemes are assessed in accordance with the advice of independent professionally qualified actuaries. Full triennial actuarial valuations were carried out on the principal European defined benefit schemes as at 5 April 2021 and annual actuarial valuations are performed on the principal US defined benefit schemes. The assets and liabilities of the defined benefit schemes have been updated to the balance sheet date from the most recently completed actuarial valuations taking account of the investment returns achieved by the schemes and the level of contributions. The principal European defined benefit schemes entitle remaining members to a pension calculated on 1.25% or 2% of their capped final pensionable pay multiplied by the number of pensionable years of service. Some members have historical entitlements to accrual rates of 1.67%-1.9% and 3% for certain tranches of their service. The principal US defined benefit schemes entitle certain participating employees to annuity benefits equal to 50% of final average pensionable salary, reduced for years of service less than 30, and other participating employees to annuity benefits equal to $49 per month for each year of service. The amounts included in the consolidated financial statements are as follows: Amounts expensed against operating profit Defined contribution schemes Defined benefit schemes --- current service cost Defined benefit schemes --- curtailment gain Other post-employment obligations Total operating expense Amounts included as finance (income)/expense Net interest on defined benefit scheme assets (note 3) Net interest on defined benefit scheme liabilities (note 3) Net finance expense 2021 £m 6.9 1.5 (0.2) 0.4 8.6 (0.2) 0.8 0.6 2020 £m 7.2 1.6 (0.4) 0.5 8.9 (0.3) 1.0 0.7 Amounts recognised in the consolidated statement of comprehensive income Return on defined benefit scheme assets excluding amounts in net finance income Impact of changes in assumptions and experience to the present value of defined benefit scheme liabilities Remeasurement of defined benefit schemes 0.6 (29.1) (28.5) (32.4) 39.1 6.7 Curtailment gain of £nil (2020: £0.4m) in relation to defined benefit schemes has been included within adjusting items (see note 2). During 2015, the principal defined benefit pension schemes in the UK and the US were closed to future accrual. Following the closure of the Group’s principal defined benefit pension schemes to future accruals, the schemes are funded by the Group’s subsidiaries and employees are not required to make any further contribution. The funding of these schemes is based on separate actuarial valuations for funding purposes for which the assumptions may differ from those used in the valuation for IAS 19 purposes. 177 ESSENTRA PLC ANNUAL REPORT 2021 177 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 18. Employee benefits continued The principal assumptions used by the independent qualified actuaries for the purposes of IAS 19 are as follows: Increase in salaries (pre-2010)1 Increase in salaries (post-2010)1 Increase in pensions1 at RPI capped at 5% at CPI capped at 5% at CPI minimum 3%, capped at 5% at CPI capped at 2.5% Discount rate Inflation rate --- RPI Inflation rate --- CPI Europe n/a n/a 3.1% 2.7% 3.3% 2.2% 1.9% 3.2% 2.7% 2021 US n/a n/a n/a n/a n/a n/a 2.8% n/a n/a Europe n/a n/a 2.70% 2.20% 3.10% 1.90% 1.30% 2.70% 2.20% 2020 US n/a n/a n/a n/a n/a n/a 2.45% n/a n/a 1 For service prior to April 2010, pension at retirement is linked to salary at retirement. For service after April 2010, pension is linked to salary at April 2010 with annual increases capped at 3%. Due to the timescale covered, the assumptions applied may not be borne out in practice. The life expectancy assumptions (in number of years) used to estimate defined benefit obligations at the year-end are as follows: Male retiring today at age 65 Female retiring today at age 65 Male retiring in 20 years at age 65 Female retiring in 20 years at age 65 Europe 22.0 24.4 23.2 25.8 2021 US 20.5 22.5 22.0 23.9 Europe 22.5 24.3 23.8 25.7 2020 US 20.4 22.4 21.9 23.8 The allocation of assets between different classes of investment is reviewed regularly and is a key factor in the trustees’ investment policies. The allocation of assets is arrived at taking into consideration current market conditions and trends, the size of potential returns relative to investment risk and the extent to which asset realisation needs to match liability maturity. There are risks underlying these considerations. If asset returns fall below the returns required for scheme assets to match the present value of scheme liabilities, a scheme deficit results. Persistent deficits represent an obligation the Group has to settle through increased cash contributions. If asset maturities are not properly matched with liability maturities, there is also the risk that the Group could be required to make unplanned short-term cash contributions to resolve resulting liquidity issues. Scheme assets are invested by the trustees in asset classes and markets that are considered to be reasonably liquid, so through this matching liquidity risk is considered to be sufficiently mitigated. The fair value of scheme assets, which are not intended to be realised in the short-term and may be subject to significant change before they are realised, and the present value of the pension scheme liabilities, which are derived from cash flow projections over long periods and are therefore inherently uncertain, are: 28% 71% 1% Europe £m 68.6 174.7 2.8 246.1 (215.6) 30.5 62% 36% 2% 2021 Total £m 105.4 196.0 4.5 305.9 (293.1) 12.8 US £m 36.8 21.3 1.7 59.8 (77.5) (17.7) Equities Bonds/LDI Other Fair value of scheme assets Present value of scheme liabilities Net retirement benefit assets/(obligations) 178 178 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 18. Employee benefits continued Equities Bonds/LDI Other Fair value of scheme assets Present value of scheme liabilities Net retirement benefit assets/(obligations) 26% 74% --- Europe £m 67.1 189.8 0.6 257.5 (248.7) 8.8 61% 38% 1% 2020 Total £m 100.5 210.2 1.3 312.0 (332.0) (20.0) US £m 33.4 20.4 0.7 54.5 (83.3) (28.8) The equity, corporate bond and government bond assets are either direct investments or investments made via a managed fund for those asset classes. All of these assets have a quoted market price in an active market. The other asset class relates primarily to property and hedge funds, which are valued at their cumulative unit offer price. No direct investment in property is held. No plan assets are invested directly in the shares of Essentra plc. The pension surplus in Europe is not restricted as the asset is considered realisable on the basis of the Group’s unconditional right to a refund. The average expected duration of the Group’s European defined benefit pension liability at 31 December 2021 is 18.0 years (2020: 19.0 years). The average expected duration of the Group’s US defined benefit pension liability at 31 December 2021 is 12.1 years (2020: years). 12.7 The Group’s contributions to its defined benefit pension schemes are determined in consultation with trustees, taking into consideration actuarial advice, investment conditions and other local conditions and practices. The outcome of these consultations can impact the timing of future cash flows. In 2022, the Group expects to make defined benefit contributions of $2.3m to its US schemes and £nil in respect of the Group’s European schemes. Movement in fair value of post-employment obligations during the year Defined benefit pension scheme assets £m Defined benefit pension scheme liabilities £m 2021 Other £m Total £m Defined benefit pension scheme assets £m Defined benefit pension scheme liabilities £m 312.0 (332.0) (3.9) (23.9) 287.8 (301.2) --- --- 0.1 --- (0.3) --- --- (1.8) --- 6.4 (1.6) --- 1.1 --- (0.6) 32.4 --- --- 0.1 --- 2020 Total £m (17.4) (2.1) --- 1.2 Other £m (4.0) (0.5) --- --- --- 32.4 18.5 0.3 18.8 4.5 --- 4.5 5.8 (5.1) 16.1 --- (1.0) (293.1) --- (0.2) --- 0.2 0.1 (3.8) 5.8 (0.6) --- 0.2 0.2 9.0 --- --- --- 6.4 (12.0) --- (2.1) 312.0 (39.0) 0.2 (38.8) 1.9 --- 1.9 (2.2) (6.9) 12.0 --- 3.3 (332.0) --- (0.2) --- 0.4 0.2 (3.9) (2.2) (0.7) --- 0.4 1.4 (23.9) Beginning of year Current service cost and administrative expense Past service cost Employer contributions Return on plan assets excluding amounts in net finance income Actuarial gain/(losses) arising from change in financial assumptions Actuarial gains arising from change in demographic assumptions Actuarial gains/(losses) arising from experience adjustment Finance income/(expense) Benefits paid Curtailments Currency translation End of year (1.5) --- 6.3 (0.6) --- --- --- 4.7 (16.1) --- 1.1 305.9 Included within the other category above are other post-employment obligations outside of Europe and the US which are required under local law. 179 ESSENTRA PLC ANNUAL REPORT 2021 179 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 18. Employee benefits continued Sensitivity For the significant assumptions used in determining defined benefit costs and liabilities, the following sensitivity analysis gives the estimate of the impact on the measurement of the scheme liabilities as at 31 December 2021. 0.5% decrease in the discount rate 1.0% increase in the rate of inflation 1.0% increase in rate of salary/pension increases 1 year increase in life expectancy 1 year decrease in life expectancy 0.5% increase in the discount rate 1.0% decrease in rate of salary/pension increases 1.0% decrease in the rate of inflation (Increase)/decrease in schemes’ net liabilities Europe £m (20.2) (15.7) n/a (9.4) 9.4 17.7 n/a 15.3 US £m (4.8) n/a n/a (0.3) 0.3 4.4 n/a n/a Total £m (25.0) (15.7) n/a (9.7) 9.7 22.1 n/a 15.3 Share-based incentives Essentra operates equity-settled share-based incentive plans for its Executive Directors and employees. The total expense in respect of these plans during the year was £0.8m (2020: £1.2m). Details of these plans are set out below: Share options outstanding Weighted average exercise price Granted during the year Weighted average exercise price Lapsed during the year Weighted average exercise price Exercised during the year Weighted average exercise price At 1 Jan 2021 Weighted average exercise price Exercisable at 31 Dec 2021 Weighted average exercise price At 31 Dec 2021 2021 A B LTIP Part LTIP Part DASB SAYE 3 year plan SAYE 5 year plan US SAYE 2 year plan 113,980 607.8p --- --- 3,279,124 4,176,820 --- 629,662 --- 515,255 339.5p 141,726 349.0p 32,994 338.2p --- --- (2,068,570) (16,543) --- 694,862 248.0p 193,408 248.0p 37,561 266.5p --- (15,245) 339.8p --- (16,522) --- (196,127) --- --- (396,142) 331.9p (107,563) 339.1p (20,244) 331.0p --- --- 5,370,852 --- --- 416,992 --- --- 813,975 265.7p --- 227,571 267.8p (3,493) 324.5p 46,818 284.8p 98,735 649.1p 98,735 649.1p --- --- --- --- --- 5,610,437 4,204,955 (2,624,307) (216,142) 6,974,943 38,199 --- --- --- --- 136,934 Weighted average exercise price Granted during the year Weighted average exercise price At 1 Jan 2020 Lapsed during the year Weighted average exercise price Exercised during the year Weighted average exercise price At 31 Dec 2020 Weighted average exercise price Exercisable at 31 Dec 2020 Weighted average exercise price 2020 LTIP Part A LTIP Part B DASB SAYE 3 year plan SAYE 5 year plan US SAYE 2 year plan 379,197 453.9p --- 6,105,729 --- 423,385 851,995 357.7p 186,821 357.7p 81,363 365.6p 8,028,490 --- --- 246,117 --- --- --- 246,117 412.4p (37,146) 236.9p --- (228,071) --- (1,791,808) --- (8,542) --- --- --- (336,740) 385.5p 385.1p (45,095) (43,028) 377.9p (2,453,284) --- (137,101) --- (31,298) --- --- 113,980 --- 4,176,820 --- 629,662 --- 515,255 141,726 --- 32,994 (5,341) 163.3p 5,610,437 (210,886) 607.8p 113,980 607.8p --- --- --- --- --- --- --- 339.5p 349.0p 338.2p --- --- --- --- --- 113,980 The exercise prices of options outstanding at the end of the year range from nil to 692p. 180 180 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 18. Employee benefits continued The weighted average share price at the date of exercise for options exercised during the year was 293.5p (2020: 300.0p). The following table shows the weighted average fair value at the date of grant for options granted during the year: Year ended 31 December 2021 Year ended 31 December 2020 Fair value model inputs for cumulative share options awarded Weighted average fair value at grant Weighted average share price at grant Weighted average exercise price Weighted average volatility Weighted average dividend yield Weighted risk free rate Expected employee retention rates Expected term Valuation model Weighted average fair value at grant Weighted average share price at grant Weighted average exercise price Weighted average volatility Weighted average dividend yield Weighted risk free rate Expected employee retention rates Expected term Valuation model LTIP Part A n/a n/a LTIP Part B 257.0p n/a DASB n/a 212.3p SAYE 3 year plan 68.7p n/a LTIP Part A LTIP Part B 133.1p 649.1p 649.1p 27.2% 1.88% 0.46% 86.0% 3.00 years 273.6p 337.1p --- 32.4% 3.72% 0.24% 83.3% 3.00 years Binomial Monte Carlo DASB 274.4p 317.5p --- 34.6% 3.97% 0.33% 100.0% 3.00 years Binomial LTIP Part A LTIP Part B 127.5p 607.8p 607.8p 28.6% 2.00% 0.54% 86.5% 3.07 years 293.5p 413.0p --- 32.9% 5.06% 0.54% 90.9% 3.00 years Binomial Monte Carlo DASB 301.4p 348.7p --- 36.4% 4.20% 0.49% 100.0% 3.00 years Binomial SAYE 3 year plan 75.7p 319.0p 265.7p 36.9% 3.21% 0.31% 81.1% 3.20 years Binomial SAYE 3 year plan 97.8p 417.5p 339.5p 40.2% 4.98% 0.75% 85.8% 3.17 years Binomial SAYE 5 year Plan 74.7p n/a 2021 SAYE 5 year plan 77.8p 318.6p 278.7p 40.1% 3.02% 0.46% 82.0% 5.19 years Binomial 2020 SAYE 5 year plan 83.8p 428.6p 420.0p 35.7% 4.90% 0.83% 90.7% 5.16 years Binomial Where relevant, market conditions are taken into account in determining the fair value of the awards at grant date. The three year average historic volatility at grant date has been used as the volatility input for the LTIP Part A, LTIP Part B, DASB and SAYE 3 year awards, and the five year average historic volatility at grant date has been used as the volatility input for the SAYE 5 year award. Contractual life 3 --- 10 years 3 --- 6 years 3 years 3 years 5 years Details of the vesting conditions of the LTIP Part A, LTIP Part B and DASB share option schemes are set out in the Report of the Remuneration Committee on pages 118 to 133. LTIP Part A LTIP Part B DASB 2021 and 2020 SAYE 3 year plan SAYE 5 year plan 181 ESSENTRA PLC ANNUAL REPORT 2021 181 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 19. Financial risk management Essentra’s activities expose the business to a number of key financial risks which have the potential to affect its ability to achieve its business objectives. The Board has overall responsibility for Essentra’s system of internal control and financial risk management and for reviewing the effectiveness of this system. Such a system can only be designed to mitigate, rather than eliminate, the risk of failure to achieve business objectives and can therefore only provide reasonable, and not absolute, assurance against material misstatement or loss. Essentra has a centralised treasury function to manage funding, liquidity and exposure to interest rate and foreign exchange risk. Treasury policies are approved by the Board and cover the nature of the exposure to be hedged, the types of derivatives that may be employed and the criteria for investing and borrowing cash. Essentra uses derivatives only to manage currency and interest rate risk from underlying business activities. No transactions of a speculative nature are undertaken. The Treasury function is subject arising to periodic independent reviews by the Group Assurance function. Underlying policy assumptions and activities are reviewed by the Treasury Committee. Controls over exposure changes and transaction authenticity are in place and dealings are restricted to those banks with the relevant combination of geographical presence, expertise and suitable credit rating. The following describes Essentra’s financial risk exposure and management from a quantitative and qualitative perspective. (i) Credit risk Credit risk is the risk of financial loss if a customer or counterparty to a financial asset or liability fails to meet its contractual obligations, and arises principally from trade receivables and cash and cash equivalents. Essentra has no significant individual concentrations of credit risk. The following is an overview of how Essentra manages its credit risk exposures. Trade and other receivables Essentra’s exposure to credit risk is driven by the profile of its customers. This is influenced by the demographics of the customer base, including the industry and country in which customers operate. Essentra monitors significant customers’ credit limits and recognises an impairment of trade receivables in specific instances where a customer’s credit standing has deteriorated to the extent that a credit default is considered probable. Following implementation of IFRS 9, Essentra also recognises an expected credit loss impairment of trade receivables through an accounting policy election, whereby default losses are expected for each receivables ageing category as follows: Current: 0.2%, Overdue 1-30 days: 0.5%, Overdue 31-60 days: 1%, Overdue 61-90 days: 5%, Overdue 91-180 days: 10%, Overdue 181-360 days: 50% and Overdue over 360 days: 100%. Trade receivables were assessed for impairment using the expected credit loss model which requires expected credit losses and changes to expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. As at 31 December 2021, gross trade receivables were £151.4m (2020: £134.5m) of which £27.1m (2020: £25.3m) were past due. The ageing analysis of past due trade receivables is as follows: 1---60 days 61---180 days 181---360 days 360+ days 2021 £m 21.6 3.2 0.6 1.7 27.1 As at 31 December 2021, the combined specific and expected credit loss impairment of trade receivables was of £2.6m (2020: £2.7m). The analysis of the combined impairment based on the underlying receivables is as follows: Current 1---60 days 61---180 days 181---360 days 360+ days 182 182 ESSENTRA PLC ANNUAL REPORT 2021 2021 £m 0.4 --- 0.1 0.4 1.7 2.6 2020 £m 20.3 3.6 0.8 0.6 25.3 2020 £m 0.5 0.4 0.6 0.6 0.6 2.7 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 19. Financial risk management continued The movement in the provision for impaired receivables is as follows: Beginning of year Impaired receivables acquired/(disposed) Impairment loss recognised Utilisation End of year 2021 £m 2.7 (0.1) 0.3 (0.3) 2.6 2020 £m 5.3 (0.3) 0.4 (2.7) 2.7 On a periodic basis the Group undertakes the sale of certain trade receivables to banks using facilities set up by its customers. These trade receivables are factored on a non-recourse basis and therefore are derecognised from the Group’s balance sheet at the point of sale to the invoice discounting facilities (2020: £6.1m), representing cash collected before it was contractually due from the customer. bank. The Group does not operate its own invoice discounting or factoring facilities. As at 31 December 2021, £19.9m was drawn under Derivative assets Credit risk with respect to derivatives is controlled by limiting transactions to major banking counterparties where internationally agreed standard form documentation exists. The credit ratings of these counterparties are monitored regularly. Cash and cash equivalents Credit risk relating to cash and cash equivalents is monitored daily, on a counterparty by counterparty basis. The credit limits imposed specify the maximum amount of cash which can be invested in, or with, any single counterparty. These limits are determined by geographic presence, expertise and credit rating. Essentra monitors the credit ratings of counterparties. The following credit risk table provides information regarding the credit risk exposure of Essentra by classifying derivative assets, short-term investments and cash and cash equivalents according to credit ratings of the counterparties. AAA is the highest possible rating and all of the assets are neither impaired nor past due. Current derivative assets Non-current derivative assets Cash and cash equivalents Current derivative assets Non-current derivative assets Cash and cash equivalents AAA £m --- --- 1.5 1.5 AAA £m --- --- 3.4 3.4 AA £m --- --- 11.3 11.3 AA £m --- --- 1.7 1.7 A £m 0.5 0.7 107.5 108.7 A £m 0.3 --- 115.6 115.9 BBB £m --- --- 15.2 15.2 BBB £m --- --- 8.2 8.2 BB £m Not rated £m --- --- --- --- BB £m --- --- 5.1 5.1 --- --- 0.8 0.8 Not rated £m --- --- 1.8 1.8 2021 Total £m 0.5 0.7 136.3 137.5 2020 Total £m 0.3 --- 135.8 136.1 Essentra’s maximum credit risk exposure is £311.4m (2020: £287.9m) and no collateral is held against this amount (2020: £nil). (ii) Market price risk Market price risk is the risk that changes in foreign exchange rates and interest rates will affect income or the value of financial assets and liabilities. Essentra has produced a sensitivity analysis that shows the estimated change to the income statement and equity of a 1%, 5% or 10% weakening or strengthening in sterling against all other currencies or an increase or decrease of 50 basis points (‘‘bps’’), 100bps and 200bps in market interest rates. The amounts generated from the sensitivity analysis are estimates and actual results in the future may materially differ. Essentra is exposed to two types of market price risk: currency risk and interest rate risk. 183 ESSENTRA PLC ANNUAL REPORT 2021 183 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 19. Financial risk management continued a) Currency risk Essentra publishes its consolidated financial statements in sterling but conducts business in several foreign currencies. Therefore it is subject to currency risk due to exchange rate movements which affect the translation of results and underlying net assets of its operations and their transaction costs. Hedge of net investment in foreign operations The majority of Essentra’s net assets are in currencies other than sterling. The Company’s normal policy is to limit the translation exposure and the resulting impact on shareholders’ funds through measures such as borrowing in those currencies in which the Group has significant net assets. Essentra’s US dollar denominated assets were approximately 53% (2020: 27%) hedged by $205m of US dollar denominated borrowings. Essentra’s euro loan was repaid in the year and so the euro denominated assets were no longer hedged by any euro denominated borrowings (2020: 32%). Transaction exposure hedging Essentra does not formally define the proportion of highly probable forecast sales and purchases to hedge, but agrees an appropriate percentage on an individual basis with each business by reference to the Group’s risk management policies and prevailing market conditions. The Group documents currency derivatives used to hedge its forecast transactions as cash flow hedges. To the extent that cash flow hedges are effective, gains and losses are recognised in other comprehensive income until the forecast transaction occurs, at which point the gains and losses are transferred either to the income statement or to the non-financial asset acquired. The majority of Essentra’s transactions are carried out in the functional currencies of its operations and therefore transaction exposure is limited. However, where such exposure does occur, Essentra uses forward foreign currency contracts to hedge its exposure to movements in exchange rates on its highly probable forecast foreign currency sales and purchases over a period of up to 18 months. Hedging of foreign currency loan principal and interest payments In July 2021, Essentra entered into a number of cross currency interest rate swap contracts to hedge the foreign currency risk (principal and interest) of $145m of its US dollar loan notes. The maturity profile of these match those of the underlying instruments with $20m notional value maturing within three years and the remainder between five and seven years. The following table shows Essentra’s sensitivity to a 1%, 5% and 10% weakening or strengthening in sterling against all currencies. To calculate the impact on the income statement for the year all currencies’ average rates have been increased or decreased by 1%, 5% or 10%. The translational effect on equity is limited as a proportion of US dollar and euro exposure is hedged. Accordingly the effect on equity is calculated by increasing or decreasing the closing rate of all currencies with an adjustment for the movement in currency hedges. It is assumed that all net investment and cash flow hedges will continue to be 100% effective. The sensitivity on profit before tax is calculated by increasing or decreasing the average rate of all currencies. Impact on the profit before tax --- gain/(loss) Impact on equity --- gain/(loss) Impact on the profit before tax --- gain/(loss) Impact on equity --- gain/(loss) Weakening in sterling Strengthening in sterling 2021 5% £m 0.8 31.0 1% £m 0.2 6.0 10% £m (1.4) (53.6) 5% £m (0.8) (28.1) 1% £m (0.2) (5.8) 2020 Weakening in sterling Strengthening in sterling 5% £m 0.1 31.4 1% £m --- 6.0 10% £m (0.2) (54.2) 5% £m (0.1) (28.4) 1% £m --- (5.9) 10% £m 1.8 65.5 10% £m 0.3 66.3 A 1 cent change to the US dollar rate against sterling will impact the adjusted operating profit by £0.2m (2020: £0.2m). A 1 cent change to the euro rate against sterling will impact the adjusted operating profit by £0.3m (2020: £0.3m). 184 184 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 19. Financial risk management continued b) Interest rate risk Essentra’s strategy is to ensure that at least 30% of the total debt with maturities of more than one year is protected with fixed interest rates or approved interest rate derivatives. The following table shows Essentra’s sensitivity to a 50bps, 100bps and 200bps decrease or increase in sterling, US dollar and euro interest rates. To calculate the impact on the income statement for the year, the interest rates on all external floating rate interest bearing loans and borrowings have been increased or decreased by 50bps, 100bps or 200bps and the resulting increase or decrease in the net interest charge has been adjusted for the effect of Essentra’s interest rate derivatives. Decrease in interest rates Increase in interest rates 2021 Impact on the income statement --- gain/(loss) 200bps £m 2.9 100bps £m 1.5 50bps £m 0.7 200bps £m (2.9) 100bps £m (1.5) 50bps £m (0.7) 2020 Impact on the income statement --- gain/(loss) Decrease in interest rates Increase in interest rates 200bps £m 5.1 100bps £m 2.6 50bps £m 1.3 200bps £m (5.1) 100bps £m (2.6) 50bps £m (1.3) See note 14 for interest rate disclosure on loans and borrowings. (iii) Liquidity risk Liquidity risk is the risk that Essentra, although solvent, will encounter difficulties in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Essentra’s objective is to maintain a balance between continuity of funding and flexibility. Essentra is primarily funded by a series of US Private Placement Loan Notes from various financial institutions totalling $250m and syndicated multi-currency five-year revolving credit facilities of £275.0m from its banks. The series of Loan Notes have original maturities ranging from seven to 12 years. In April 2020, a $80m USPP loan note matured, and a new USPP facility of $25m was drawn (for which the note purchase agreement was signed in December 2019), of which $15m matures in April 2027 and $10m in April 2030. In addition, $75m of USPP loan notes raised in prior years remain in place, which mature between November 2024 and November 2029. A further issue of $250m was agreed and drawn in July 2021 (of which $80m matures in July 2028, $85m in July 2031 and $85m in July 2033). The RCF was made up of two tranches, £285m and €100.8m. The maturity of £225m of the overall borrowing under the RCF was extended on 11 January 2021 for a further year to November 2023, with the balance remaining on the original terms with a maturity date of November 2022. In October 2021 the facility was renegotiated and at 31 December 2021 the available bank facilities totalled £275.0m, of which £59.2m was drawn with a maturity date of October 2026. Amounts drawn by Essentra on its committed facilities are subject to standard banking covenants. The financial covenants require the net debt to EBITDA ratio to be less than 3.0x and interest cover to be greater than 3.5x. There has been no covenant breach during the period. Essentra’s available undrawn committed facilities at 31 December were: Expiring before two years Expiring after two years 2021 £m --- 215.8 2020 £m 161.2 --- Any loans drawn on these facilities would bear interest at floating rates with reference to SONIA for the currency and period of the loan. 185 ESSENTRA PLC ANNUAL REPORT 2021 185 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 19. Financial risk management continued The maturity of Essentra’s financial liabilities, including estimated interest payments, is analysed below. Unsecured bank loans US Private Placement Loan Notes Derivative liabilities Trade and other payables Lease liabilities Other unsecured loans Deferred consideration Unsecured bank loans US Private Placement Loan Notes Derivative liabilities Trade and other payables Lease liabilities Other unsecured loans Deferred consideration Fair value £m Carrying amount £m Contractual cash flows £m 59.2 270.5 0.1 167.7 57.7 --- 5.6 560.8 55.6 257.7 0.1 167.7 57.7 --- 5.6 544.4 64.6 349.1 0.1 167.7 68.1 --- 5.6 655.2 Fair value £m Carrying amount £m Contractual cash flows £m 213.8 78.5 0.5 143.1 61.0 --- 4.4 501.3 212.6 72.6 0.5 143.1 61.0 --- 4.4 494.2 219.9 95.9 0.5 143.1 73.1 --- 4.4 536.9 <1 yr £m 1.1 10.4 0.1 167.7 14.3 --- --- 193.6 <1 yr £m 3.2 3.2 0.5 143.1 14.5 --- 3.2 167.7 1-2 yrs £m 1.1 10.4 --- --- 12.2 --- 5.6 29.3 1-2 yrs £m 216.7 3.2 --- --- 11.7 --- --- 231.6 2-5 yrs £m 62.4 44.7 --- --- 24.4 --- --- 131.5 2-5 yrs £m --- 23.7 --- --- 24.2 --- 1.2 49.1 2021 >5 yrs £m --- 283.6 --- --- 17.2 --- --- 300.8 2020 >5 yrs £m --- 65.8 --- --- 22.7 --- --- 88.5 Total trade and other payables carried at £180.9m (2020: £157.6m) including other taxes and social security contributions of £13.2m (2020: to £11.3m) which are not financial liabilities and are therefore excluded from the above analysis. All trade and other payables are due be settled in less than six months. The value of deferred consideration is primarily based on the post-acquisition financial performance of the acquired business, and reflects management’s expectation of the performance during the earn-out period. The fair value of the unsecured bank loans is the same as the carrying amount as the loans are at floating rate, except for unamortised facility fees. The fair value of the US Private Placement Loan Notes is estimated by discounting the future cash flows (interests and principal) at the prevailing market rates. The fair value of the trade and other payables approximate the carrying amount as they are due to be settled within six months. 186 186 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 19. Financial risk management continued Total financial assets and liabilities The table below sets out Essentra’s accounting categories and fair value for each class of financial asset and liability. Trade and other receivables (except those subject to factoring) Cash and cash equivalents Other financial assets Interest bearing loans and borrowings Lease liabilities Trade and other payables Level 2 of fair value hierarchy Derivative assets Derivative liabilities Level 3 of fair value hierarchy Trade receivables subject to factoring Trade and other payables Other non-current financial liabilities Fair value £m Amortised cost £m --- --- --- --- --- --- 1.2 (0.1) 4.0 --- (5.6) (0.5) 169.9 136.3 --- (313.3) (57.7) (167.7) --- --- --- --- --- (232.5) 2021 Total carrying value £m 169.9 136.3 --- (313.3) (57.7) (167.7) 1.2 (0.1) 4.0 --- (5.6) (233.0) 2020 Total carrying value £m 151.8 135.8 --- (285.2) (61.0) (143.1) Fair value £m Amortised cost £m 151.8 135.8 --- (285.2) (61.0) (143.1) --- --- --- --- --- --- 0.3 (0.5) --- (3.2) (1.2) (4.6) --- --- 0.3 (0.5) --- --- --- (201.7) --- (3.2) (1.2) (206.3) Total trade and other receivables carried at £175.2m (2020: £154.2m) include prepayments of £6.5m (2020: £7.1m) which are not financial assets and are therefore excluded from the above analysis. Fair values of forward foreign exchange contracts and cross currency swaps have been calculated at year end forward exchange rates compared to contracted rates. These are determined to be level 2 in the fair value hierarchy. Trade receivables subject to factoring are measured at fair value through other comprehensive income. Their fair value is determined based on management’s expectation of recoverable amount, taking into account expected credit losses and, if material, time value of money. Included within trade and other payables and other non-current financial liabilities, which is classified as level 3 in the fair value hierarchy, is the deferred consideration of £5.6m relating to the acquisitions of Micro Plastics and Hengzhu (2020: £4.4m). The value of deferred consideration is primarily based on the post-acquisition financial performance of the acquired business, and reflects management’s expectation of the performance during the earn out period. During the year, no fair value gain or loss (2020: £nil) was recognised in respect of financial instruments at level 3 fair value hierarchy, and £nil (2020: £nil) was settled in cash. No other fair value gains or losses were recorded in profit or loss and other comprehensive income. There are no non-recurring fair value measurements. Included within interest bearing loans and borrowings are $350m (2020: $100m) US Private Placement Loan Notes. The Loan Notes are held at amortised cost with a carrying value of £257.7m (2020: £72.6m). The Group estimates that the total fair value of the Loan Notes at 31 December 2021 is £270.5m (2020: £78.5m). All other financial assets are held at amortised cost and mostly have short terms to maturity. For this reason, their carrying amounts at the reporting date approximate the fair values. Unsecured bank loans, included within interest bearing loans and borrowings, incur interest at floating rates and as a result their carrying amounts also approximate their fair values at the reporting date. The table below shows the amount of bank overdrafts offset against the bank balances under enforceable master netting agreements with banks: Cash and cash equivalents: At 31 December 2021 At 31 December 2020 Gross amount of recognised financial assets £m Gross amount of recognised financial liabilities set off in the balance sheet £m Net amount of financial assets presented in the balance sheet £m 137.7 139.5 (1.4) (3.7) 136.3 135.8 187 ESSENTRA PLC ANNUAL REPORT 2021 187 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 19. Financial risk management continued (iv) Capital structure Essentra defines its capital structure as its equity and non-current interest bearing loans and borrowings, and aims to manage this to safeguard its ability to continue as a going concern, so that it can continue to provide returns to shareholders and benefits for other stakeholders. Essentra sets the amount of capital in proportion to risk. Essentra manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, Essentra may return capital to shareholders through dividends and share buybacks, issue new shares or sell assets to reduce debt. Essentra monitors its capital structure on the basis of the medium-term net debt-to-EBITDA ratio. EBITDA is defined as operating profit before depreciation and other amounts written off property, plant and equipment, share option expense, intangible amortisation and adjusting items. The net debt-to-EBITDA ratios at 31 December were as follows. Net debt Operating profit before intangible amortisation and adjusting items Plus depreciation and other amounts written off property, plant and equipment, and amortisation of non-acquired intangible assets Plus share option expense EBITDA Net debt-to-EBITDA ratio Net debt-to-EBITDA ratio excluding the impact of IFRS 16 20. Issued share capital Issued, authorised and fully paid ordinary shares of 25p (2020: 25p) each Number of ordinary shares in issue Beginning of year Issue of shares during the year End of year Note 22 27 18 2021 £m 234.7 83.9 51.2 0.8 135.9 1.7 1.5 2021 £m 75.6 (restated) 2020 £m 210.4 62.3 51.8 1.2 115.3 1.8 1.5 2020 £m 75.6 302,590,708 --- 264,129,170 38,461,538 302,590,708 302,590,708 The issue of share capital during 2020 was in relation to a placement offering of 38,461,538 new shares with par value of 25p issued at per share. 260p At 31 December 2021, the Company held 905,157 (2020: 908,650) of its own shares with a nominal value of £0.2m (2020: £0.2m) in treasury. This represents 0.3% (2020: 0.3%) of the number of ordinary shares in issue. 188 188 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 21. Reserves Within retained earnings the Company has deducted the value of own shares purchased for an employee trust and treasury shares held by the Company with a total cost of £7.3m (2020: £9.0m). Employee trust shares are ordinary shares of the Company held in an employee benefit trust. The purpose of this trust is to hold shares in the Company for subsequent transfer to Executive Directors and employees relating to deferred share awards and options granted under the Company’s share-based incentive plans. Full details are set out in the Annual Report on Remuneration on pages 118 to 133. The held and market value of £2.2m (2020: £2.6m). assets, liabilities and expenditure of the trust have been incorporated in these financial statements. At 31 December 2021, the trust 645,507 (2020: 864,912) shares, upon which dividends have been waived, with an aggregate nominal value of £0.2m (2020: £0.2m) The other reserve relates to the Group reorganisation, which took place as part of the de-merger from Bunzl plc. It represents the difference between Essentra plc’s share capital and Essentra International Limited’s share capital and share premium on 6 June 2005 and is not distributable. In 2020, the Company raised £96.7m through an issue of share capital. An amount of £87.1m was recognised with the merger relief reserve, being the excess of net proceeds over the nominal value of shares issued under s612 of the Companies Act 2006. 22. Analysis of net debt Cash at bank and in hand Short-term deposits and investments Cash and cash equivalents in the statement of cash flows Debt due after one year Lease liabilities due within one year Lease liabilities due after one year Debt from financing activities Net debt 1 Jan 2021 £m Cash flow £m Business combinations £m Lease additions £m Exchange movements £m Non-cash movements £m 31 Dec 2021 £m 121.5 14.3 135.8 (285.2) (11.9) (49.1) (346.2) (210.4) 4.2 (1.7) 2.5 (24.5) 15.6 --- (8.9) (6.4) --- --- --- --- (0.3) (1.7) (2.0) (2.0) --- --- --- --- (2.0) (8.0) (10.0) (10.0) (1.8) (0.2) (2.0) (2.5) 0.3 1.2 (1.0) (3.0) --- --- --- (1.1) (13.3) 11.5 (2.9) (2.9) 123.9 12.4 136.3 (313.3) (11.6) (46.1) (371.0) (234.7) The non-cash movements in debt due after one year represent the amortisation of prepaid facility fees £1.1m. The net non-cash movement in lease liabilities represents lease liability surrender of £1.0m due to renegotiated lease terms, offset by interest on leases £2.8m. The net cash outflow relating to lease liabilities for low value, short-term and variable lease payments was £0.3m (see note 9). During the year £10.5m of lease liabilities moved from due after one year to due within one year. Cash at bank and in hand Short-term deposits and investments Cash and cash equivalents in the statement of cash flows Debt due within one year Debt due after one year Lease liabilities due within one year Lease liabilities due after one year Debt from financing activities Other financial assets Net debt 1 Jan 2020 £m Cash flow £m Business combinations £m Lease additions £m Exchange movements £m Non-cash movements £m 31 Dec 2020 £m 62.6 7.8 70.4 (60.7) (249.0) (11.4) (39.3) (360.4) 5.6 (284.4) 57.7 6.9 64.6 68.1 (34.0) 14.3 --- 48.4 (5.6) 107.4 0.7 --- 0.7 (4.1) --- (0.2) (2.3) (6.6) --- (5.9) --- --- --- --- --- (2.6) (19.3) (21.9) --- (21.9) 0.5 (0.4) 0.1 (3.3) (1.2) --- --- (4.5) --- (4.4) --- --- --- --- (1.0) (12.0) 11.8 (1.2) --- (1.2) 121.5 14.3 135.8 --- (285.2) (11.9) (49.1) (346.2) --- (210.4) The non-cash movements in debt due after one year represent the amortisation of prepaid facility fees £0.7m. The net non-cash movement in lease liabilities represents lease liability reduction of £2.2m due to renegotiated lease terms, offset by interest on leases £2.4m. The net cash outflow relating to lease liabilities for low value, short-term and variable lease payments was £0.3m (see note 9). During the year £9.6m of lease liabilities moved from due after one year to due within one year. Included within other financial assets at 1 January 2020 was £5.0m of loan receivables arising from the disposal of Porous Technologies and £0.6m of short-term liquid investments. 189 ESSENTRA PLC ANNUAL REPORT 2021 189 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 23. Acquisitions and disposals Acquisition of 3C! On 17 September 2020, Essentra acquired 100% of the share capital of 3C! Packaging, Inc. (‘‘3C!’’). 3C!, headquartered in North Carolina, USA, is a leading designer and manufacturer of folding cartons, printed literature, foil and flexible packaging and labels focused on the pharmaceuticals and healthcare sectors. 3C! is reported under the Packaging division. During 2021, Essentra reassessed the fair value adjustments and made changes to the carrying amount of certain property, plant and equipment and deferred tax balances. The net impact on goodwill is an increase of £0.6m. In addition, during 2021 Essentra paid out the remaining deferred consideration on the acquisition amounting to £0.1m. Establishment of joint venture China Tobacco Essentra (Xiamen) Filters Co., Ltd. On 2 April 2020 Essentra plc confirmed that it has completed the establishment of the new joint venture company, China Tobacco Essentra (Xiamen) Filters Co., Ltd. Essentra’s capital contribution into this business is $10.3m, to be paid in three equal instalments over 18 months following its establishment. As at 31 December 2021, Essentra has paid all three of these instalments. During 2021, proceeds contributions from non-controlling interests into this joint venture company were £3.1m. from capital Acquisition of Innovative Components On 26 June 2019, Essentra acquired 100% of the share capital of Innovative Components Inc. and Componentes Innovadores Limitada (together ‘‘Innovative Components’’). During 2021, Essentra paid out the remaining deferred consideration relating to the acquisition of Innovative Components, amounting to £1.8m. Acquisition of Micro Plastics On 12 December 2017, Essentra acquired 100% of the share capital of Micro Plastics Inc. The transaction was settled with cash consideration of £19.7m and deferred consideration of £3.7m. During 2021, £1.2m of deferred consideration was paid out to the vendor, with the remainder to be paid in the future. Acquisition of Hengzhu On 2 August 2021, Essentra acquired the majority of the share capital of Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd (‘‘Hengzhu’’), an access hardware manufacturer and distributor in China. Essentra initially acquired 73% of the business for ¥103m (approximately £11.8m), with the remaining 27% stake subject to put and call options whereby Essentra may acquire the minority shareholding for consideration determined by the future operating performance of the business to 31 December 2022 and capped at a maximum of ¥37.5m (approximately £4.2m) and are exercisable 18 months after the acquisition. The capped consideration has not changed since acquisition. The remaining 27% stake does not confer any shareholder right (including voting right, entitlement to dividends and right to transfer to other parties) to the vendor shareholder. Therefore it is concluded that the amount payable under the put option in substance represents deferred consideration and is accounted for as a financial liability. No non-controlling interest is recognised in respect of this acquisition. On acquisition, the assets and liabilities of the business acquired were adjusted to reflect their fair value to Essentra. Due to the timing of the transaction, the purchase price allocations and fair value adjustments are provisional and subject to finalisation for up to one year from the date of acquisition. Had the acquisition been completed on 1 January 2021, the contribution to the Group’s revenue and operating profit would have been £17.4m and £0.7m higher respectively. Included within the consolidated accounts are £7.2m of revenue and £nil of operating profit from Hengzhu since acquisition. Included within adjusting items in the consolidated income statement are £1.3m of costs incurred in acquiring the business. 190 190 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES NOTES 23. Acquisitions and disposals continued The fair value of assets and liabilities acquired as part of the acquisition of Hengzhu are detailed below: Intangible assets Property, plant and equipment Lease right-of-use asset Inventories Trade and other receivables Trade and other payables Lease liabilities Goodwill Consideration Satisfied by: Cash consideration Deferred consideration Cash consideration Cash outflow in respect of the acquisition Hengzhu £m 8.6 2.2 2.0 2.2 0.2 (1.4) (2.0) 11.8 3.9 15.7 11.5 4.2 11.5 11.5 Goodwill represents the expected operating and financial synergies, and the value of an assembled workforce. Goodwill is not deductible for tax purposes. 24. Dividends 2020 final: paid 1 June 2021 2021 interim: paid 29 October 2021 2021 proposed final: payable 1 June 2022 25. Related parties Per share 2020 p 3.3 2021 p 2.0 4.0 2021 £m 6.0 12.1 Total 2020 £m 10.0 Other than the compensation of key management (note 5) and the capital injection into the Filters joint venture entity China Tobacco Essentra (Xiamen) Filters Co., Ltd. (note 23), Essentra has not entered into any material transactions with related parties since the last Annual Report. ITC Essentra Limited is 50% owned by the Group. The results were fully consolidated within the Group’s financial statements as it is deemed Essentra has control by virtue of having control of the board. As at 31 December 2021 the entity had gross assets of £27.6m (2020: £24.3m) and gross liabilities of £9.9m (2020: £7.4m). Operating profit for the year amounted to £5.0m (2020: £4.8m) and movement in cash for the year amounted to £0.8m (2020: £1.7m). China Tobacco Essentra (Xiamen) Filters Co., Ltd is 49% owned by the Group. The results were fully consolidated within the Group’s financial statements as it is deemed Essentra has control by virtue of having control of the board. As at 31 December 2021 the entity had gross assets of £20.3m (2020: £9.9m) and gross liabilities of £5.4m (2020: £nil). Operating loss for the year amounted to £0.8m (2020: £0.1m) and movement in cash for the year amounted to £0.2m (2020: £9.9m). For the Group’s policy on the basis of consolidation, see note b within Accounting Policies. 26. Parent company Essentra plc is a limited company incorporated and domiciled in the United Kingdom. It operates as the ultimate parent company of the Essentra Group. Its registered office is Langford Locks, Kidlington, Oxford, OX5 1HX, United Kingdom. The principal subsidiary undertakings of Essentra plc are listed in note 10 to the Essentra plc Company Financial Statements. 191 ESSENTRA PLC ANNUAL REPORT 2021 191 FINANCIAL STATEMENTSNOTESESSENTRA PLC ANNUAL REPORT 2021 NOTES Notes continued 27. Adjusted measures Management reviews the adjusted operating profit and operating cash flow as measures of the performance of the business. Adjusted operating profit is stated before amortisation of acquired intangible assets and adjusting items which are considered not relevant to measuring the underlying performance of the business. Operating profit Amortisation of acquired intangible assets Adjusting items Adjusted operating profit Finance income Finance expenses Adjusted profit before income tax Tax on adjusted profit Adjusted profit Attributable to: Equity holders of Essentra plc Non-controlling interests Adjusted profit Basic adjusted earnings per share Diluted adjusted earnings per share Note 2 3 3 6 6 2021 £m 49.7 22.4 11.8 83.9 2.8 (19.3) 67.4 (11.2) 56.2 54.8 1.4 56.2 18.2p 18.1p (restated)* 2020 £m 11.6 22.6 28.1 62.3 1.9 (17.6) 46.6 (8.9) 37.7 35.9 1.8 37.7 13.2p 13.1p Adjusted operating cash flow is presented to exclude the impact of tax, adjusting items, interest and other items not impacting operating profit. Net capital expenditure is included in this measure as management regards investment in operational assets (tangible and intangible) as integral to the underlying cash generation capability of the Company, except amounts relating to adjusting items. Adjusted operating profit Depreciation of property, plant and equipment Lease right-of-use asset depreciation Amortisation of non-acquired intangible assets Share option expense Other non-cash items1 Working capital movements Net capital expenditure2 Adjusted operating cash flow Reconciliation of cash flows from adjusting items: Adjusting items as shown on income statement Non-cash credit/(charge) in adjusting items Cash outflow on adjusting items recognised in the year Utilisation of prior period and acquired accruals and provisions Cash outflow from adjusting items 2021 £m 83.9 36.6 12.0 2.6 0.8 (0.2) (29.9) (41.3) 64.5 11.8 6.6 18.4 7.2 25.6 (restated)* 2020 £m 62.3 37.3 12.0 2.5 1.2 (0.6) 6.2 (34.2) 86.7 28.1 (9.8) 18.3 3.0 21.3 1 Other non-cash items comprise impairment of fixed assets £0.5m (2020: £0.1m), outflow from hedging activities and other movements £0.5m (2020: inflow of £1.3m), less movement in provisions £0.2m (2020: £nil) and profit on lease termination £nil (2020: £2.0m). 2 Net capital expenditure within adjusted operating cash flow excludes £8.5m (2020: £nil) of property, plant and equipment disposal proceeds realised during site closures which relate to adjusting items. For further information on alternative performance measures applied by the Group refer to pages 43 and 44. 28. Post balance sheet events The Group has assessed the impact of the current conflict between Russia and Ukraine. Essentra has no significant operations or infrastructure in Russia or Ukraine and no employees in either country. Sales to these markets are around 2% of total revenue. All sales to Russia have been suspended and will continue to be suspended until further notice. Essentra has made a donation of £100,000 to the Disasters Emergency Committee (‘‘DEC’’) Ukraine Appeal. 192 192 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021NOTES ESSENTRA PLC COMPANY BALANCE SHEET ESSENTRA PLC COMPANY BALANCE SHEET Essentra plc Company Balance Sheet At 31 December 2021 Fixed assets Investment in subsidiary undertaking Current assets Debtors Current liabilities Creditors: amounts falling due within one year Net current assets Non-current liabilities Creditors: amounts falling due after more than one year Net assets Capital and reserves Issued share capital Merger relief reserve Capital redemption reserve Profit and loss account Shareholders’ funds: equity interests Note 2021 £m 2020 £m 2,10 466.6 465.8 3 4 498.3 325.7 (3.5) (0.2) 494.8 325.5 5,6 (257.7) (72.6) 703.7 718.7 7 8 75.6 385.2 0.1 242.8 703.7 75.6 385.2 0.1 257.8 718.7 The profit attributable to the equity holders included in the accounts of the Company is £0.2m (2020: £0.7m). The Company Financial Statements on pages 193 to 204 were approved by the Board of Directors on 18 March 2022 and were signed on its behalf by: Paul Forman Chief Executive Lily Liu Chief Financial Officer 193 ESSENTRA PLC ANNUAL REPORT 2021 193 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY STATEMENT OF CHANGES IN EQUITY ESSENTRA PLC COMPANY STATEMENT OF CHANGES IN EQUITY Essentra plc Company Statement of Changes in Equity For the year ended 31 December 2021 1 January 2021 Profit for the year Total comprehensive income for the year Shares issued to satisfy employee share option exercises Share-based payments Dividends paid Issued share capital £m 75.6 Merger relief reserve £m 385.2 --- --- Capital redemption reserve £m 0.1 --- 31 December 2021 75.6 385.2 0.1 1 January 2020 Profit for the year Total comprehensive income for the year Issue of share capital Shares issued to satisfy employee share option exercises Share options exercised Share-based payments 31 December 2020 Issued share capital £m 66.0 --- 9.6 Merger relief reserve £m 298.1 --- 87.1 Capital redemption reserve £m 0.1 --- 75.6 385.2 0.1 Profit and loss account Retained earnings £m Own shares £m 266.8 0.2 0.2 (1.7) 0.8 (16.0) 250.1 (9.0) --- 1.7 (7.3) Profit and loss account Retained earnings £m 266.2 0.7 0.7 (1.4) 0.1 1.2 266.8 Own shares £m (10.4) --- 1.4 (9.0) Total equity £m 718.7 0.2 0.2 --- 0.8 (16.0) 703.7 Total equity £m 620.0 0.7 0.7 96.7 --- 0.1 1.2 718.7 194 194 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY ACCOUNTING POLICIES ESSENTRA PLC COMPANY ACCOUNTING POLICIES Essentra plc Company Accounting Policies a. Authorisation of financial statements and statement of compliance with FRS 101 The parent company financial statements of Essentra plc (‘‘the Company’’) for the year ended 31 December 2021 were authorised for issue by the Board of Directors on 18 March 2022 and the balance sheet was signed on the Board’s behalf by Paul Forman and Lily Liu. Essentra plc is a public limited company that is incorporated, domiciled and has its registered office in England and Wales. The Company’s ordinary shares are publicly traded on the London Stock Exchange and it is not under the control of any single shareholder. These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101). The profit and loss account of the Company is not presented as permitted by Section 408 of the Companies Act 2006. b. Basis of preparation The Company transitioned to FRS 101 from the UK Generally Accepted Accounting Practice during the year ended 31 December 2015. No adjustments were required as part of this transition. In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: • the requirements of paragraph 45(b) and 46-52 of IFRS 2 Share-Based Payment • the requirements of paragraphs 62, B64(b), B64(e), B64(g), B64(h), B64(j) to B64(m), b64(n)(ii), B64(o)(ii), B64(p), B64(q)(ii), B66 and B67 of IFRS 3 Business Combinations • the requirement of IFRS 7 Financial Instruments: Disclosures • the requirement of paragraphs 91-99 of IFRS 13 Fair Value Measurement • the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information in respect of paragraph 79(a)(iv) of IAS 1, paragraph 73(e) of IAS 16 Property, Plant and Equipment and paragraph 118(e) of IAS 38 Intangible Assets • the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D, 111 and 134-136 of IAS 1 Presentation of Financial Statements • the requirements of IAS 7 Statement of Cash Flows • the requirements of paragraphs 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors • the requirements of paragraph 17 of IAS 24 Related Party Disclosures • the requirements in IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member and • the requirements of paragraphs 134(d)-134(f) and 135(c)-135(e) of IAS 36 Impairment of Assets. Where required, equivalent disclosures are given in the consolidated financial statements. These accounts have been prepared in accordance with The Companies Act 2006 as applicable to companies using FRS 101 and are prepared on a going concern basis. The going concern assessment for the Company is carried out as part of the Group assessment. From the assessment performed, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, and accordingly have adopted the going concern basis in preparing the Company Financial Statements. Further details are included on page 148 of the consolidated financial statements. These accounts are prepared under the historical cost convention. Other pronouncements The Company adopted the following new pronouncements during 2021, which did not have a material impact on the Company’s financial statement: • Interest Rate Benchmark Reform --- Phase 2 (Amendments to IFRS 7, IFRS 4 and IFRS 16), which address the effects of the reform on a company’s financial statements that arise when an interest rate benchmark used to calculate interest on a financial asset is replaced with an alternative benchmark • Amendments to UK and Republic of Ireland accounting standards as a result of the UK’s exit from the European Union • Amendment to IFRS 16, which clarifies the extension of the practical expedient where the lessee is not required to assess whether eligible COVID-19 related rent concessions are lease modifications • Amendments to IAS 1, which address the presentation of financial statements on classification of liabilities • Revised Conceptual Framework for Financial Reporting (Amendments to IFRS 9, IAS 39 and IFRS 7) 195 ESSENTRA PLC ANNUAL REPORT 2021 195 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY ACCOUNTING POLICIES ESSENTRA PLC COMPANY ACCOUNTING POLICIES Essentra plc Company Accounting Policies continued b. Basis of preparation continued The following standards and amendments issued before 31 December 2021 with an effective date on or after 1 January 2022 have not been early adopted by the Group, they do not have a material impact on the Group’s financial statement: • Amendment to IAS 12 --- deferred tax related to assets and liabilities arising from a single transaction • A number of narrow-scope amendments to IFRS 3, IAS 16, IAS 37 and some annual improvements on IFRS 1, IFRS 9, IAS 41 and IFRS 16 The following principal accounting policies have been consistently applied. c. Investment in subsidiary undertaking Investment in subsidiary undertaking is held at cost less any provision for impairment. The Company assesses at each balance sheet date whether the investment in its subsidiary has been impaired. d. Share-based payments The fair value of share options is measured at grant date. It is recognised as an addition to the cost of investment in the subsidiary in which the relevant employees work over the expected period between grant and vesting date of the options, with a corresponding adjustment to reserves. Detailed disclosures for the share-based payment arrangements of the Company are provided in note 18 to the consolidated financial statements. e. Own shares The shares held in the Essentra Employee Benefit Trust for the purpose of fulfilling obligations in respect of share incentive plans are treated as belonging to the Company and are deducted from its retained earnings. The cost of shares held directly (treasury shares) is also deducted from retained earnings. f. Dividends Dividend distributions to the Company’s shareholders are recognised as a liability in the period in which they are approved by the shareholders of the Company (final dividend) or paid (interim dividend). Dividend income is recognised when the right to receive payment is established. g. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the profit and loss account. Exchange differences arising from movements in spot rates are included in the profit and loss account as exchange gains or losses, while those arising from the interest differential elements of forward currency contracts are included in external interest income or expense. h. Financial assets Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are included in current assets, except for those with maturities greater than 12 months after the end of the reporting period which are classified as non-current assets. The Company’s financial assets at amortised cost comprise receivables in the balance sheet. Receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Interest income is recognised accordingly using the effective interest method. 196 196 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY ACCOUNTING POLICIES ESSENTRA PLC COMPANY ACCOUNTING POLICIES i. Financial liabilities Interest bearing loans and borrowings and other financial liabilities (excluding derivatives) are initially recognised at fair value net of transaction costs incurred. They are subsequently held at amortised cost using the effective interest method. Any difference between proceeds, net of transaction costs, and the settlement or redemption of borrowings is recognised in profit or loss over the term of the borrowings. the The Company holds financial instruments which hedge the net investments in the foreign operations of its subsidiary undertakings. Gains and losses on these instruments are recognised in the profit and loss account of the Company. j. Taxation Income tax in the profit and loss account comprises current and deferred tax. Income tax is recognised in the profit and loss account except to the extent that it relates to items recognised in equity or other comprehensive income. Current tax is the expected tax payable on the taxable income for the year using the applicable tax rates enacted or substantively enacted at the balance sheet date and any adjustment to tax payable in prior years. Deferred tax is provided, using the balance sheet liability method, on temporary differences arising between the tax bases and the carrying amounts of assets and liabilities in the financial statements. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they will not reverse in the foreseeable future. Deferred tax is determined using tax rates that are expected to apply when the related deferred tax asset or liability is settled, using the applicable tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profit will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 197 ESSENTRA PLC ANNUAL REPORT 2021 197 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY NOTES ESSENTRA PLC COMPANY NOTES Essentra plc Company Notes 1. Net operating charges The auditor was paid £5,125 (2020: £5,125) for the statutory audit of the Company. Fees paid to the Company’s auditor for services other than the statutory audit of the Company are disclosed in note 2 to the consolidated financial statements. The Directors’ remuneration, which was paid by Essentra International Limited, is disclosed in the Annual Report on Remuneration on pages 118 to 133. The only employees of the Company are the seven Directors and Company Secretary. 2. Investment in subsidiary undertaking Beginning of year Additions End of year 3. Debtors Amounts receivable from subsidiary undertakings Investment in subsidiary undertaking 2021 £m 465.8 0.8 466.6 2021 £m 498.3 498.3 2020 £m 464.6 1.2 465.8 2020 £m 325.7 325.7 Receivables due from Group companies to the Company are interest free and repayable on demand. Receivables from Group companies have been assessed based on lifetime expected credit losses. As all balances are repayable on demand, and the Company expects to be able to recover the outstanding intercompany balances if demanded, no provision has been recognised in the year ended 31 December 2021 (2020: nil). 4. Creditors: amounts falling due within one year Accruals and deferred income 5. Creditors: amounts falling due after more than one year US Private Placement Loan Notes 2021 £m 3.5 3.5 2021 £m 257.7 257.7 2020 £m 0.2 0.2 2020 £m 72.6 72.6 198 198 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY NOTES ESSENTRA PLC COMPANY NOTES 6. Maturity of financial liabilities Debt can be analysed as falling due: Between one and five years More than five years Less prepaid facility fees 7. Issued share capital Issued, authorised and fully paid ordinary shares of 25p (2020: 25p) each Number of ordinary shares in issue Beginning of year Issue of shares during the year End of year Non bank loans 2021 £m 14.8 244.4 (1.5) 257.7 2021 £m 75.6 2020 £m 14.6 58.4 (0.4) 72.6 2020 £m 75.6 302,590,708 --- 264,129,170 38,461,538 302,590,708 302,590,708 The issue of share capital during 2020 was in relation to a placement offering of 38,461,538 new shares with par value of 25p issued at 260p per share. At 31 December 2021, the Company held 905,157 (2020: 908,650) of its own shares in treasury. 8. Reserves As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the Company has not been separately presented in these Financial Statements. The profit attributable to equity holders included in the accounts of the Company is £0.2m (2020: £0.7m). Included in the profit and loss account are accumulated share-based payments of £49.9m (2020: £49.1m) which are credited directly to reserves. Full details of these share-based payments are set out in the Annual Report on Remuneration on pages 118 to 133. 9. Dividends 2020 final: paid 1 June 2021 2021 interim: paid 29 October 2021 2021 proposed final: payable 1 June 2022 Per share 2020 p 3.3 2021 p 2.0 4.0 2021 £m 6.0 12.1 Total 2020 £m 10.0 199 ESSENTRA PLC ANNUAL REPORT 2021 199 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY NOTES ESSENTRA PLC COMPANY NOTES Essentra plc Company Notes continued 10. Subsidiary undertakings The companies named below (including dormant entities) are subsidiary undertakings of Essentra plc and are included in the consolidated financial statements of the Group. The investments in the companies below relate to ordinary shares or common stock. The principal country in which each company operates is the country of incorporation. All entities below are wholly owned subsidiaries of the Group except for ITC Essentra Limited (India) (50% owned) and China Tobacco Essentra (Xiamen) Filters Co., Ltd (49% owned). The ownership held by the Group in these companies are through holding of ordinary shares in these companies and they are accounted for as subsidiaries of the Group in the consolidated financial statements due to a control achieved via board membership. On 2 August 2021, Essentra acquired the majority of the share capital of Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd (‘‘Hengzhu’’), an access hardware manufacturer and distributor in China. Essentra initially acquired 73% of the business for ¥103m (approximately £11.8m), with the remaining 27% stake subject to put and call options whereby Essentra may acquire the minority shareholding for consideration determined by the future operating performance of the business to 31 December 2022 and capped at a maximum of ¥37.5m (approximately £4.3m) and are exercisable 18 months after the acquisition. The remaining 27% stake does not confer any shareholder right (including voting right, entitlement to dividends and right to transfer to other parties) to the vendor shareholder. Therefore it is concluded that the amount payable under the put option in substance represents deferred consideration and is accounted for as a financial liability in the consolidated financial statements. No non-controlling interest is recognised in the consolidated financial statements in respect of this acquisition. Due to statutory requirements, ITC Essentra Limited (India) has a financial year end of 31 March. All other subsidiaries have the same year end as the parent company of 31 December. Essentra International Limited is the only direct subsidiary of Essentra plc. Essentra (Bangor) Ltd. Essentra Components Limited Essentra Filter Products Limited Essentra Packaging Limited Essentra Packaging & Security Limited ESNT Filter Products Limited ESNT Holdings (No.1) Limited ESNT Holdings (No.2) Limited ESNT International Limited ESNT Packaging & Securing Solutions Limited Essentra Filter Products International Limited Essentra International Limited Essentra Overseas Limited Essentra Filter Holdings Limited Essentra Pension Trustees Limited Essentra Finance Limited Essentra (Northampton) Ltd. Essentra Services Limited Filtrona Limited Alliance Plastics Limited Cigarette Components Limited ESNT Components Limited ESNT Limited Filtrona Custom Moulding Limited North West Plastics Limited Skiffy Limited Stera Tape Limited Country of incorporation UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK Principal activity Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Holding Company Holding Company Holding Company Holding Company Holding Company Holding Company Holding Company Holding Company Holding Company Pension Trustee Treasury activities Non-trading Non-trading Non-trading Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Address of registered office Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX Langford Locks, Kidlington, Oxfordshire, OX5 1HX 200 200 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY NOTES ESSENTRA PLC COMPANY NOTES 10. Subsidiary undertakings continued Country of incorporation Principal activity Address of registered office Essentra Filter Products Inc Essentra Packaging Inc Essentra Plastics LLC Essentra Packaging Puerto Rico, Inc. Essentra Packaging US Inc Innovative Components, Inc. Micro Plastics, Inc. 3C! Packaging, Inc Essentra Components Inc Essentra Components Japan Inc ESNT Holdings Inc ESNT (Porous) Holdings Inc. ESNT US Holdings Corp Essentra Corporation Essentra Holdings Corp. (DE) US NewCo LLC ESNT Components Co. Essentra Components B.V. Essentra Packaging B.V. Blue NewCo 1 B.V. Blue NewCo 2 B.V. Blue NewCo 3 B.V. Blue NewCo 4 B.V. ESNT Holdings Cooperatie 1 W.A. ESNT Holdings (Netherlands) B.V. Essentra B.V. Essentra Holdings Cooperative W.A. US US US US US US US US US US US US US US US US US Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Essentra Holdings (No.2) Cooperative W.A. Netherlands Distribution Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Holding Company Manufacturing Distribution 1675 South State Street, Ste B Dover, DE 19901, United States 10 S Jefferson Street, Ste 1400 Roanoke, VA 24011, United States 1675 South State Street, Ste B Dover, DE 19901, United States Two Westbrook Corporate Center, Suite 200, Westchester IL 60154, United States Two Westbrook Corporate Center, Suite 200, Westchester IL 60154, United States 1315 W Lawrence Avenue, Springfield, IL 62704, United States Two Westbrook Corporate Center, Suite 200, Westchester IL 60154, United States 1000 CCC Drive, Clayton, NC 27520, United States Two Westbrook Corporate Center, Suite 200, Westchester IL 60154, United States Two Westbrook Corporate Center, Suite 200, Westchester IL 60154, United States Two Westbrook Corporate Center, Suite 200, Westchester IL 60154, United States Two Westbrook Corporate Center, Suite 200, Westchester IL 60154, United States 1675 South State Street, Ste B Dover, DE 19901, United States 1675 South State Street, Ste B Dover, DE 19901, United States 1675 South State Street, Ste B Dover, DE 19901, United States Two Westbrook Corporate Center, Suite 200, Westchester IL 60154, United States Two Westbrook Corporate Center, Suite 200, Westchester IL 60154, United States Distribution Dragonder 3, 5554 GM Valkenswaard, Netherlands Distribution Celsiusweg 37, 8912 AM, Leeuwarden, Netherlands Holding Company Beatrixstraat 7, BUITENPOST, 9285 TV, Netherlands Holding Company Beatrixstraat 7, BUITENPOST, 9285 TV, Netherlands Holding Company Beatrixstraat 7, BUITENPOST, 9285 TV, Netherlands Holding Company Beatrixstraat 7, BUITENPOST, 9285 TV, Netherlands Holding Company Celsiusweg 37, 8912 AM, Leeuwarden, Netherlands Dragonder 3, 5554 GM Valkenswaard, Netherlands Holding Company Holding Company Holding Company Holding Company Holding Company Non-trading Holding Company --- Dissolved 6 January 2022 Holding Company Beatrixstraat 7, BUITENPOST, 9285 TV, Netherlands Dragonder 3, 5554 GM Valkenswaard, Netherlands Dragonder 3, 5554 GM Valkenswaard, Netherlands Holding Company --- Dissolved 6 January 2022 Holding Company --- Dissolved 6 January 2022 Essentra International B.V. / LLC ESNT Holding B.V. ESNT Holdings Cooperatie 2 W.A. Fijnmechanica Surhuisterveen B.V. Linde Vouwkartonnage B.V. Richco Benelux B.V. Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Holding Company Dragonder 3, 5554 GM Valkenswaard, Netherlands Non-trading Dragonder 3, 5554 GM Valkenswaard, Netherlands Beatrixstraat 7, Buitenpost, 9285 TV, Netherlands Non-trading Beatrixstraat 7, Buitenpost, 9285 TV, Netherlands Non-trading Non-trading Beatrixstraat 7, Buitenpost, 9285 TV, Netherlands Non-trading Dragonder 3, 5554 GM Valkenswaard, Netherlands 201 ESSENTRA PLC ANNUAL REPORT 2021 201 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY NOTES ESSENTRA PLC COMPANY NOTES Essentra plc Company Notes continued 10. Subsidiary undertakings continued Skiffy B.V. Essentra Packaging Ireland Limited ESNT (Cherry Orchard) Holdings Limited C.B. Packaging Limited ESNT (Cherry Orchard) Limited ESNT Finance Ireland Limited Essentra Finance (Euro) Ireland Limited Country of incorporation Netherlands Ireland Ireland Ireland Ireland Ireland Ireland Essentra Pte.Ltd Singapore Essentra Filter Products Leasing Pte. Ltd Singapore Essentra (MEA) Pte. Ltd Essentra Filter Products Development Co. Pte. Ltd Essentra Components GmbH Essentra Pty Ltd Singapore Singapore Austria Australia Essentra Industria E Commercio LTDA Brazil Essentra Limited Essentra Hengzhu Precision Components Co., Ltd China Tobacco Essentra (Xiamen) Filters Co., Ltd Essentra Precision Machinery Components (Ningbo) Co. Ltd. Essentra Trading (Ningbo) Co. Ltd Essentra Components International Trading (Shanghai) Co Ltd Canada China China China China China Essentra Plastic Trading (Ningbo) Co. Ltd China Componentes Innovadores Limitada Costa Rica Essentra Components sro Czech Republic Essentra Packaging S.a.r.l. Essentra Components SAS Essentra International GmbH Essentra Components GmbH Essentra Packaging GmbH Essentra Components Limited --- Branch Germany France France Germany Germany Germany Germany 202 202 ESSENTRA PLC ANNUAL REPORT 2021 Manufacturing Holding Company --- strike off listed Holding Company --- strike off listed Holding Company --- strike off listed Holding Company --- strike off listed Holding Company --- strike off listed Distribution Principal activity Address of registered office Non-trading Dragonder 3, 5554 GM Valkenswaard, Netherlands 8 Airways, Industrial Estate, Dublin 17, Ireland Unit 629 Ida Industrial Park Northern Extension, Old Kilmeaden Road, Watherford, Ireland 8 Airways Industrial Estate, Dublin 17, Ireland 8 Airways Industrial Estate, Dublin 17, Ireland Non-trading Leasing Company Holding Company Manufacturing Manufacturing Holding Company Treasury activities 7 Airways Industrial Estate, Cloghran, Dublin 17, D17 RR88, Ireland 7 Airways Industrial Estate, Cloghran, Dublin 17, D17 RR88, Ireland 36 Robinson Road #17-01, City House, Singapore, 068877, Singapore 36 Robinson Road #17-01, City House, Singapore, 068877, Singapore 36 Robinson Road #17-01, City House, Singapore, 068877, Singapore 36 Robinson Road #17-01, City House, Singapore, 068877, Singapore Schubertring 6, 1010 Wien, Austria 503-505 Victoria Street, Wetherill Park, NSW, 2145, Australia Manufacturing Room 7, No 1000 Avenida Emilio Marconato, Centro Comercial, Chacara Primavera, Jaguariuna, Sao Paulo, 13.916-074, Brazil 2538 Spears Road, Oakville ON L6L 5K9, Canada No. 12 Jingfa Avenue, Yichun, Economic and Technological, Development Zone, Yichun City, Jiangxi Province, China Floor 2 No.289 Binshui Road, Qiaoying Street, Ditrict, Xiamen City, China 99 Huanghai Road, Beilun District, Ningbo, Zhejiang Province, China No.99 Huanghai Road, Beilum District, Ningbo, Zhejiang Province, China Room 347, Xinmaolou Building, 2 Taizhong South Road, China (Shanghai) Pilot Free Trade Zone, Pudong New Area, Shanghai, 200120, China 99 Huanghai Road, Beilun District, Ningbo, Zhejiang, China Cartago-Cartago Parque Industrial Y Zona Franca Zeta, Cartago, Edificios, 48C3 48C4, Costa Rica Vídenská 101/119, Dolní Heršpice, Brno, 619 00, Republic Holding Company F-27200, Sarreguemines, Rue Guillaume, Schoettke, France 280 rue de la Belle Étoile, 95700, Roissy, France Filmstr. 5, 06766, Bitterfeld-Wolfen, Germany 3, Montel-Allee, Nettetal, 41334, Germany Filmstrasse. 5, D-06766, Edisonstrasse, Wolfen, Germany Montel-Allee 3, 41334 Nettetal, Germany Non-trading Holding Company Manufacturing Manufacturing Holding Company Holding Company Holding Company Manufacturing Manufacturing Manufacturing Distribution Distribution Czech Jimei FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 ESSENTRA PLC COMPANY NOTES ESSENTRA PLC COMPANY NOTES 10. Subsidiary undertakings continued Essentra (Hong Kong) Limited Essentra Components Kft Essentra Filter Products Kft PT Essentra PT Essentra Trading Surabaya Essentra (India) Private Limited ITC Essentra Limited ESNT Holdings SpA Essentra Packaging Srl Essentra Components srl Essentra Filter Products Spa Country of incorporation Hong Kong Hungary Hungary Indonesia Indonesia India India Italy Italy Italy Italy Essentra Packaging Luxembourg Sarl Abric Encode Sdn Bhd Luxembourg Malaysia Essentra Malaysia Sdn Bhd Essentra Asia Sdn Bhd Malaysia Malaysia Essentra Components SEA (M) Sdn Bhd Malaysia Essentra Components S.A. de C.V. de R.L. Mexico ESNT Limited New Zealand Essentra Filter Products S.A. Essentra Sp. z o.o. Boxes Prestige Poland Sp. z o.o. Essentra Packaging Spólka z o.o. Paraguay Poland Poland Poland Holding Company Holding Company Manufacturing Manufacturing Principal activity Address of registered office Distribution Non-trading Non-trading Non-trading Manufacturing 36/F, Tower Two, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong 1113, Nagyszolos ut 11-15, Budapest, Hungary 2310 Szigetszentmiklos, Leshegy ut 30, Hungary Jalan Berbek Industri 1, 18-20 Surabaya Industrial Estate Rungkut (SIER), Sidoario, 61256, Indonesia Jalan Berbek Industri I/23, Kel. Berbek, Kec, Waru, Kab. Sidoarjo Prov,Surabaya, Jawa Timur, Indonesia Manufacturing No.3, (old plot nos. 18 & 23), 3rd Main Road, Peenya Industrial Area, Phase 1, Bangalore, Yeshwantpur Hobli, 560 058, India Manufacturing Doddajala Post, Yarthiganahally, (Via) Bettahalasur, Bangalore North, 562 157, India Podenzano (PC), Loc.I Casoni Fraz. Gargia, Via Copernico no. 54, 29027, Italy Via Copernico n.54, Loc. 1 Casoni Fraz., Gariga, 29027, Podenzano, Italy Via Massarenti, 1 Loc, 1 Maggio, 40013, Castel Maggiore, Italy Casoni di Gariga, Via Copernico n. 54, Casoni PC, 29027, Italy 8-10, Avenue de la Gare, L-1610, Luxembourg Unit 1110 Block A, Pusat Dagangan Phileo Damansara II, 15 Jalan 16/11 Off Jalan Damansara, 46350 Petaling Jaya, Selangor Darul Ehsan, Malaysia Unit 1110 Block A, Pusat Dagangan Phileo Damansara II, 15 Jalan 16/11 Off Jalan Damansara, 46350 Petaling Jaya, Selangor Darul Ehsan, Malaysia Non-trading Unit D --- 3A --- 10, 4th Floor, Greentown Square, Jalan Dato’ Seri Ahmed Said, 30450 Ipoh, Perak, Malaysia Non-trading D5-5-6, Solaris Dutamas 1 , Jalan Dutamas 1, 50480, Kuala Lumpur, Malaysia Carretera a Huinala #510, Apodaca, NL 66640, Mexico Quigg Partners, Floor 7, 36 Brandon Street, Wellington Central, Wellington, 6011, New Zealand Calle 12, Acacary, Cuidad del Este, Paraguay 11 Lakowa Street, 90-562, Lodz, Poland Tokarska 25, 20-210, Lublin, Poland Tokarska 25, 20-210, Lublin, Poland Distribution Non-trading Dormant Manufacturing Non-trading Manufacturing Manufacturing Non-trading Services 203 ESSENTRA PLC ANNUAL REPORT 2021 203 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 Principal activity Address of registered office Distribution Youngdeungpo-gu, Seoul, 07326, Korea, Republic 5th Floor, One IFC, 10, Gukjegeumyung-ro, of Distribution Burcuresti Sectorul 1, Strada Polana, Nr. 68-72, Etaj 2, Biroul NR.5, Romania Gogol’ova 18, 852 02 Bratislava, Slovakia Distribution Holding Company Distribution Distribution Non-trading Manufacturing Manufacturing Unit 2. Sage Corporate Park, Corner Suni and Tsessebe Streets, South Midrand, Gauteng, 1683, South Africa Carrer dels Fusters 18-20, Poligono Industrial Can Cuyas, Montcada I Reixac, 08110, Barcelona, Spain Carrer dels Fusters 18-20, Poligono Industrial Can Cuyas, Montcada I Reixac, 08110, Barcelona, Spain Non-trading Ctra. de Navalcarnero a Chinchon km., 21,2 Grinon, 28971, Madrid, Spain Manufacturing Ctra. de Navalcarnero a Chinchon km., 21,2 Grinon, 28971, Madrid, Spain Calle Roure Gros 1-11, Poligono Industrial Mas d’En Cisa, 08181, Spain Askims Verkstadsvag 13Sweden, 436 34 Askim, Vastra Gotalands Ian, Goteborg kommun, Sweden MCE Avocats, rue du Grand-Chêne 1-3, 1003 Lausanne, Switzerland 111/5 Moo 2 Tambon Makamku, Amphur Nikom Pattana, Rayong Province, Thailand 116/3 Soi Thiantalay 24, Bangkhunthian-Chaitalay Road, Sub-District Thakam, District Bangkhunthian, Bangkok, 10150, Thailand 116/3 Soi Thiantalay 24, Bangkhunthian-Chaitalay Road, Sub-District Thakam, District Bangkhunthian, Bangkok, 10150, Thailand 116/3 Soi Thiantalay 24, Bangkhunthian-Chaitalay Road, Thakam, Bangkhunthian, Bangkok, 10150, Thailand 31/2 Rama 3 Road, Chongnonsee, Yannawa, Bangkok 10120, Thailand Distribution Ilitelli Organzie Sanayi, Bolgesi Metal Is San, Sit.7.Blok No24 Basaksehir, Istanbul, Turkey Manufacturing Plot No. S20403, Jebel Ali Free Zone (JAFZA), PO Box No 261392, Dubai, United Arab Emirates Manufacturing Non-trading Non-trading Holding Company Holding Company ESSENTRA PLC COMPANY NOTES ESSENTRA PLC COMPANY NOTES Essentra plc Company Notes continued 10. Subsidiary undertakings continued Essentra Co., Ltd. Essentra Components SRL Essentra Components sro Essentra Components (Pty) Ltd ESNT Holdings S.A.U. Essentra Packaging S.A. Nekicesa Global Packaging SL Nekicesa Packaging S.L.U Essentra Components S.L.U Essentra Components AB Essentra Components Sarl Essentra Eastern Limited San Yai Holding Company Limited Country of incorporation Republic of Korea Romania Slovakia South Africa Spain Spain Spain Spain Spain Sweden Switzerland Thailand Thailand Pranakorn Holding Company Limited Thailand Essentra Limited Apex Filters Company Limited Mesan Kilit A.S. Essentra FZE Thailand Thailand Turkey United Arab Emirates 204 204 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC Independent auditors’ report to the members of Essentra plc Report on the audit of the financial statements Opinion In our opinion: • Essentra plc’s Group financial statements and Parent company financial statements (the ‘‘financial statements’’) give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 December 2021 and of the Group’s profit and the Group’s cash flows for the year then ended; • the Group financial statements have been properly prepared in accordance with UK-adopted international accounting standards; • the Parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 ‘‘Reduced Disclosure Framework’’, and applicable law); and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual Report 2021 (the ‘‘Annual Report’’), which comprise: the Consolidated Balance Sheet and Essentra plc Company Balance Sheet as at 31 December 2021; the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Cash Flows, Consolidated Statement of Changes in Equity and Essentra plc Company Statement of Changes in Equity for the year then ended; the Accounting Policies, Critical Accounting Judgements and Estimates, Essentra plc Company Accounting Policies; and the Notes to the financial statements. 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. Other than those disclosed in note 2, we have provided no non-audit services to the Parent company or its controlled undertakings in the period under audit. Our audit approach Context Strategic review: On 26 October 2021, the Group announced the strategic goal to become a pure play Components business with the first step in this process being to review the full range of strategic options for the Filters business. On 26 November 2021, it was announced the Group had decided to commence a strategic review of the Packaging division. As part of our audit planning, we have considered the impact of the strategic reviews on our audit risk assessment including evaluating management’s analysis of its impact on the Group financial statements. As part of this risk assessment, we have considered the potential impact on the goodwill impairment and going concern assessments, along with management’s assessment of the criteria to recognise assets held for sale, and concluded there to be no material impact based on the information available up to the date of signing our report. 205 ESSENTRA PLC ANNUAL REPORT 2021 205 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC Independent auditors’ report to the members of Essentra plc continued Climate change: In planning our audit, we considered the potential impact of climate change on the Group and Parent company financial statements. Given the principal activities of the Group, it is highly likely that climate risk will have a significant impact on the Group’s business. As part of our audit, we evaluated management’s climate change risk assessment including the identified physical and transitional risks and the assessment of the impact of those risks on the Group financial statements. We note management’s conclusion that material physical risks are likely to arise in the longer term and therefore have no current financial statement impacts. Transitional risks are considered to have a more significant impact on the business. However, these are only expected to arise in the medium to long term as set out in the Task Force on Climate-Related Financial Disclosures (‘‘TCFD’’) on page 29. We performed procedures to evaluate the appropriateness of management’s risk assessment including the use of our climate change experts. We considered the Group’s externally published environmental targets and understood the progress made towards these targets to date in addition to plans in place to bridge to meeting these targets in the future. We challenged management on the potential additional future costs associated with meeting these targets. We assessed that the key financial statement line items and estimates which are more likely to be impacted by climate risks are those associated with future cash flows, given the more notable impacts of climate change on the business are expected to arise in the medium to long term. These included the assessment of goodwill impairment in the Packaging division, as discussed in our key audit matter below, and the long term viability assessment. However, our procedures did not identify any material impact on either the Group or Parent company financial statements or our key audit matters for the year ended 31 December 2021. We reviewed management’s financial statement disclosures relating to climate change, in the Critical Accounting Judgements and Estimates and note 8, to confirm they are consistent with the results of management’s risk assessment and our audit procedures. Overview Audit scope • Local PwC component teams engaged to perform full scope audit procedures over 33 reporting units. • PwC Group audit team performed full scope audit procedures over a further 7 reporting units. • Specified audit procedures were performed by component auditors over certain balances, including revenue, at a further 6 reporting units. • PwC Group audit team also performed audit procedures over specific balances within a further 41 reporting units. • The audit of the Parent company financial statements was undertaken by the PwC Group audit team and included substantive procedures over all material balances and transactions. Key audit matters • Presentation of adjusting items (Group). • Goodwill impairment in the Packaging division (Group). • Recoverability of the Parent company’s investment in subsidiary undertakings (Parent company). Materiality • Overall group materiality: £3,300,000 (2020: £3,300,000) based on 5% of profit before tax. • Overall Parent company materiality: £7,000,000 (2020: £7,100,000) based on 1% of net assets. • Performance materiality: £2,500,000 (2020: £2,500,000) (Group) and £5,250,000 (2020: £5,300,000) (Parent 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. 206 206 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA 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. Recoverability of the Parent company’s investments in subsidiary undertakings (Parent company) is a new key audit matter this year. Impact of COVID-19 (Group and Parent company) and Compliance with US sanctions legislation (Group), which were key audit matters last year, are no longer included because the impact of COVID-19 is considered to be reduced to a sufficiently low level and compliance with US sanctions legislation is now embedded within the business with no compliance issues noted in the year. Otherwise, the key audit matters below are consistent with last year. Key audit matter How our audit addressed the key audit matter Presentation of adjusting items (Group) The financial statements include certain items which are disclosed as adjusting items. The nature of the adjusting items is explained within the Group accounting policies and includes transaction costs relating to acquisition and disposals of businesses, acquisition integration and restructuring costs, customisation and configuration costs of significant Software as a Service (‘‘SaaS’’) arrangements and other items such as site closure costs and one- off projects. In the year the most significant adjusting items relate to write off of customisation and configuration costs of SaaS arrangements (£11.8 million), restructuring costs (£5.8 million), external professional costs associated with the strategic reviews and certain corporate development activities (£4.1 million), acquisition and integration related costs associated with acquisition of Jiangxi Hengzhu Electrical Cabinet Lock Co. Limited and the commencement of production in the Filters China joint venture (£1.5 million). These costs have been offset by a £4.5 million gain on sale of the former Packaging Moorestown property and £4.8 million release of provision relating to historical claims which have been settled in the year. We focused on this area as there is limited guidance relating to this presentational matter within IFRS and judgement is required by the directors in determining whether items classified as adjusting are consistent with the Group’s accounting policy. Consistency in identifying and disclosing items as adjusting is important to maintain comparability of the results year on year. See note 2 to the Group financial statements for details of adjusting items and the Critical Accounting Judgements and Estimates section for management’s disclosure of this significant judgement. Also see the Significant financial judgements section in the Audit and Risk Committee report. We assessed the appropriateness of the Group’s accounting policy for the recognition of adjusting items with reference to the applicable accounting guidance. We challenged management and considered whether the items disclosed as adjusting items were consistent with the accounting policy and the approach taken in prior years, to determine that items were appropriately classified. We did not identify any material items which we would expect to be reported in earnings before adjusting items. Customisation and configuration costs relate to costs incurred in system development and implementation written off which have historically been capitalised in the balance sheet. In April 2021 the International Accounting Standards Board (‘‘IASB’’) ratified an earlier IFRS Interpretations Committee (‘‘IC’’) agenda decision on Configuration and Customisation (‘‘CC’’) costs in a Cloud Computing Arrangement. This clarified the status of SaaS arrangements including consideration of whether spend on such arrangements creates an asset that the Group controls. We have tested a sample of projects previously capitalised and inspected contracts, held discussions with external service providers together with our internal specialist to test management’s assessment. Due to the highly material value of the adjustment in the current and prior year, we agree with management’s conclusions and presentation of this item as adjusting in the year for projects of significant value. Restructuring costs include employee redundancy (£3 million), write down of assets (£1.2 million) and other closure costs such as external project management consultants, site closure and legal costs (£1.6 million). We have performed sample testing across all balances and verified those samples to payroll records, supporting invoices, agreements or other evidence. For asset write-offs, we have agreed the book value to the accounting records and evaluated management estimates around potential resale values of fixed assets. The remaining cost of £4.1m relating to external professional costs and acquisition and integration related costs of £1.5 million have been tested through sampling and items have been traced to supporting invoices and other documentation. We have traced the sales proceeds on sale of the Packaging Moorestown property to bank statements and recomputed the gain on disposal. We have tested other one off releases of provisions recognised in adjusting items to underlying settlement agreements. The classification of these items is considered appropriate as the release mirrors the treatment of the charge when the provisions were created in prior years. The disclosures included in note 2 were reviewed and deemed reasonable. 207 ESSENTRA PLC ANNUAL REPORT 2021 207 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC Independent auditors’ report to the members of Essentra plc continued Key audit matter Goodwill impairment in the Packaging division (Group) The Group has goodwill of £327.0 million, of which £208.5 million is allocated to the Packaging division, £96.8 million to Components, and £21.7 million to Filters. Under IAS 36 Impairment of Assets, all cash generating units (‘‘CGUs’’) containing goodwill and indefinite lived intangible assets must be tested for impairment at least annually. Management has prepared a value in use (‘‘VIU’’) calculation for each of the three divisions in order to assess their recoverability. Consistent with prior years, the headroom on the annual impairment assessment for the Packaging division is more sensitive to changes in key assumptions and as such is the focus area for our key audit matter. The headroom against the asset carrying value as at 31 December 2021 is £380.8 million as compared to £252.5 million in 2020. The increase in headroom is mainly due to the decrease in the discount rate used and increase in long term revenue growth rate used by management in the VIU model. The changes in these assumptions has been partially offset by the impact of COVID-19 on short term trading performance, which has affected both the beauty and pharmaceuticals markets in 2020 and 2021 and has disrupted management’s plans to return to industry average margins. The impairment reviews performed by management contain a number of significant judgements and estimates including revenue growth rates, operating profit margins and discount rates. A change in these assumptions can result in an impairment of the assets. Management considered the impact of climate change on their impairment reviews, including an assessment of the impact of the Group’s externally published environmental targets, along with the output of the climate risks and opportunities assessment performed by their external advisors. See note 8 to the Group financial statements for details of management’s impairment exercise and the Critical Accounting Judgements and Estimates section for management’s disclosure of this significant accounting estimate. Also see the Significant financial judgements section in the Audit and Risk Committee report. How our audit addressed the key audit matter We assessed the methodology applied by management in performing their impairment review and tested the integrity of management’s cash flow model for the VIU calculation. We agreed key assumptions made in the impairment review, related to operating profit margins to industry and competitor data. We evaluated the future cash flow forecasts, including short term cash flows, and the process by which they were determined. In doing so we compared the cash flow forecasts to the latest Board approved plans and compared prior year budgets to 2021 actual performance in order to assess the quality of management’s forecasting process. Whilst the actual performance in 2021 was below plan due to the impact of COVID-19, based on the forecasting history to date, we did not identify any indicators of bias in management’s medium to long term forecasts for the Packaging division. With the support of our valuation experts, we tested key assumptions, including the long term revenue growth rate and discount rate. We compared growth rates to third party published economic and industry forecasts and analyst reports and found the long term revenue growth assumption to be reasonable. We validated the discount rate by recalculating the Group’s weighted average cost of capital and found the assumption used by management to be outside our reasonable range. Utilising a discount rate that we would consider to be within an appropriate range would reduce the headroom in the VIU calculation but would not indicate any impairment. We performed sensitivity analyses around the key assumptions to ascertain the extent of change in those assumptions that, either individually or collectively, would be required for goodwill to be impaired. We noted that the required level of change was beyond that which we would consider likely given the current market conditions and recent performance of the business. We challenged management on how they had incorporated the impact of climate change into their VIU calculation. We obtained a copy of the climate risks and opportunities assessment performed by management’s external advisors, and understood the scenario analysis performed. We obtained management’s bridge between the report produced by their external advisors and future financial impact included in the VIU model. We performed sensitivity analyses around the assumptions included within management’s bridge and noted that the assessment was not materially sensitive to changes in these assumptions. We also considered the Group’s externally published environmental targets and the progress made towards these targets to date including the potential costs of meeting these targets in the future. Furthermore, given the announcement of the strategic review of the Packaging business we considered any indicators of potential fair value less cost to sell (‘‘FVLCTS’’) up to the date of signing the report. Based on our inquiries of management, we are not aware of any indications that the FVLCTS for the division would be lower than the asset carrying values and did not identify any evidence which contradicts the conclusions reached by management’s VIU impairment test. We also assessed disclosures included within note 8 against the requirements of IFRS and found them to be reasonable. 208 208 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC How our audit addressed the key audit matter We challenged management’s assertion that no impairment triggers were identified that would necessitate a full impairment review to be performed. We performed a review of the market capitalisation of the Group and the net assets of the subsidiary entity against the investment carrying value, considered the external market and economic factors and also our review of the discounted cash flow models prepared for the purpose of testing impairment of the carrying value of goodwill across all three divisions. (Please see our Key Audit Matter in respect of Goodwill impairment in the Packaging division above). Based on these procedures, we concluded that we concur with management’s assessment that there were no triggers that would indicate the directors were required to perform a full impairment test. Key audit matter Recoverability of the Parent company’s investment in subsidiary undertakings (Parent company) The value of the investment held by the Parent company at year end is £466.6 million. Essentra plc holds a direct investment in Essentra International Limited, and through this entity an indirect investment in the Group as a whole. The valuation of this investment is significant to the Parent company balance sheet. Investments are tested for impairment if impairment indicators exist. If such indicators exist, the recoverable amounts of the investments in subsidiaries are estimated in order to determine the extent of the impairment charge, if any. Any such impairment charge is recognised in the income statement. Judgement is required in this area, particularly in assessing: (1) whether an event has occurred that may indicate that the related asset values may not be recoverable; and (2) whether the carrying value of an asset can be supported by the recoverable value, being the higher of FVLCTS or VIU which is estimated based on the continued use of the asset in the business. No impairment triggers were identified as a result of management’s assessment. Given the magnitude of the investment and the judgement involved we have identified this area as a key audit matter for the audit of the Parent company. See notes 2 and 10 in the Parent company financial statements for details of the Parent company’s investment in subsidiary entities. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Parent company, the accounting processes and controls, and the industry in which they operate. The Group is split into three divisions being Components, Packaging and Filters. Each division consists of a large number of reporting sites spread globally across 34 territories. There are 468 reporting units within the consolidation, which include the reporting sites and other consolidation units. We did not identify any individually significant components within the Group, with the largest contribution to revenue being 6.9% from one reporting site, and the average being 1%. We determined the most effective approach was to engage PwC local component teams to perform full scope procedures over 33 reporting units, with the Group audit team performing full scope audit work over a further 7 reporting units. In addition, specified audit procedures were performed over certain balances, including revenue, at a further 6 reporting units. In the larger sites in North America, specified procedures over fixed assets, inventory and trade receivables were also performed. The Group audit team also performed audit procedures over specific balances within a further 41 reporting units. This approach ensures that appropriate audit coverage has been obtained over all financial statement line items. Where work was performed by component auditors, we determined the appropriate level of involvement we needed to have in that audit work to ensure we could conclude that sufficient appropriate audit evidence had been obtained for the Group financial statements as a whole. We issued written instructions to all component auditors and had regular communications with them throughout the audit cycle. This included a virtual clearance meeting with each component team and review of all significant matters reported. In addition members of the Group engagement team have reviewed working papers of a number of component audit teams and attended clearance meetings virtually with local management for sites in the UK and the US. Based on the detailed audit work performed across the Group, we have gained coverage of 68% of revenue, 62% of profit before tax and 74% of net assets. 209 ESSENTRA PLC ANNUAL REPORT 2021 209 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC Independent auditors’ report to the members of Essentra plc continued 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: Overall materiality £3,300,000 (2020: £3,300,000). £7,000,000 (2020: £7,100,000). Financial statements -- Group Financial statements -- Parent company How we determined it 5% of profit before tax, amortisation of acquired intangible assets and adjusting items. 1% of net assets. Rationale for benchmark applied (2020: Three year average of 5% of profit before tax, amortisation of acquired intangible assets and adjusting items). The Group is profit-oriented, therefore it is considered most appropriate to apply a rule of thumb based upon a profit-based benchmark. The directors, management and the users of the Group financial statements focus on adjusted numbers, being adjusted operating profit, adjusted net income or adjusted pre-tax profit. The Group defines ‘adjusted’ as excluding the impact of amortisation of acquired intangible assets and adjusting items. Based on this, we consider a benchmark based on profit before tax, amortisation of acquired intangible assets and adjusting items to be most appropriate. The entity is a holding company of the rest of the Group and is not a trading entity. Therefore an asset based measure is considered appropriate. 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 £60,000 and £2,000,000. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality. We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% (2020: 75%) of overall materiality, amounting to £2,500,000 (2020: £2,500,000) for the Group financial statements and £5,250,000 (2020: £5,300,000) for the Parent company financial statements. In determining the performance materiality, we considered a number of factors --- the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls --- and concluded that an amount at the upper end of our normal range was appropriate. We agreed with the Audit and Risk Committee that we would report to them misstatements identified during our audit above £160,000 (Group audit) (2020: £160,000) and £160,000 (Parent company audit) (2020: £160,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Conclusions relating to going concern Our evaluation of the directors’ assessment of the Group’s and the Parent company’s ability to continue to adopt the going concern basis of accounting included: • obtaining and agreeing management’s going concern assessment to the board approved business plan and ensuring that the base case scenario for the period to 31 October 2023 indicates that sufficient cash flows are generated to meet the obligations of the business as they fall due while complying with covenant arrangements; • identifying revenue growth and operating margin as the key assumptions inherent in the plan and validating these to historical precedent and market or industry forecasts; • analysing the cash flows in the forecast models to identify unexpected trends and relationships and ensuring the mathematical accuracy of management’s models; • evaluating management’s severe but plausible downside scenario including the impact on the Group’s liquidity headroom and its ability to meet debt covenants; • evaluating management’s analysis of the likely impacts of the ongoing strategic reviews on the going concern assessment; and • validating that climate change is expected to have a limited impact during the period of the going concern assessment. 210 210 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s and the Parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the Group’s and the Parent company’s ability to continue as a going concern. In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. 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, which includes reporting based on the Task Force on Climate-related Financial Disclosures (‘‘TCFD’’) recommendations. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below. 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 December 2021 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the Group and Parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Directors’ Report. Directors’ Remuneration In our opinion, the part of the Annual Report on Remuneration to be audited has been properly prepared in accordance with the Companies Act 2006. Corporate governance statement The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the Parent company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement, included within the Risk Management Report and Other Statutory Information is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to: • The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks; • The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated; • The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the Group’s and Parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • The directors’ explanation as to their assessment of the Group’s and Parent company’s prospects, the period this assessment covers and why the period is appropriate; and • The directors’ statement as to whether they have a reasonable expectation that the Parent company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. 211 ESSENTRA PLC ANNUAL REPORT 2021 211 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC Independent auditors’ report to the members of Essentra plc continued Our review of the directors’ statement regarding the longer-term viability of the Group was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and understanding of the Group and Parent company and their environment obtained in the course of the audit. In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit: • The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and Parent company’s position, performance, business model and strategy; • The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and • The section of the Annual Report describing the work of the Audit and Risk Committee. We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the Parent company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors. Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of Directors’ Responsibilities in Respect of the Financial Statements, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the Parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below. 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, UK and overseas tax legislation, employment laws and regulations , health and safety legislation and import and export restrictions including US sanctions legislation, 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 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 journal entries to improve revenue performance or to manipulate metrics relating to bank covenants, and management bias in key accounting estimates. 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: • Review of correspondence with regulators and government authorities. • Review of correspondence with legal advisors. • Review of matters reported through the Group’s whistleblowing helpline and the results of management’s investigation of such matters. • Enquiries of management at the Group, divisional and local levels. • Enquiries of the Group’s legal team. • Enquiries with component auditors. • Evaluation of management’s controls designed to prevent and detect irregularities, in particular their compliance procedures in respect of sanction market trading. • Review of internal audit reports in so far as they related to the financial statements. • Identifying and testing journal entries, in particular any journal entries posted with unusual account combinations which result in an impact to revenue or to metrics relevant to banking covenants. • Challenging estimates and judgements made by management in determining significant accounting estimates, in particular in relation to impairment of goodwill in the Packaging division, adjusting items and going concern. 212 212 ESSENTRA PLC ANNUAL REPORT 2021 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. 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. Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the Parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not obtained all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of directors’ remuneration specified by law are not made; or • the Parent company financial statements and the part of the Annual Report on Remuneration 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 20 April 2017 to audit the financial statements for the year ended 31 December 2017 and subsequent financial periods. The period of total uninterrupted engagement is 5 years, covering the years ended 31 December 2017 to 31 December 2021. Other matter In due course, as required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial statements will form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct Authority in accordance with the ESEF Regulatory Technical Standard (‘‘ESEF RTS’’). This auditors’ report provides no assurance over whether the annual financial report will be prepared using the single electronic format specified in the ESEF RTS. Nicholas Stevenson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Milton Keynes 18 March 2022 213 ESSENTRA PLC ANNUAL REPORT 2021 213 FINANCIAL STATEMENTSESSENTRA PLC ANNUAL REPORT 2021 Printed in the UK by Pureprint Group, a CarbonNeutral® company. Both the paper mill and printer are registered to the Environmental Management System ISO 14001 and are Forest Stewardship Council® (FSC®) chain-of-custody certified. A n n u a l R e p o r t 2 0 2 1 – F i n a n c i a l S t a t e m e n t s – B u i l d i n g f o r t h e f u t u r e Essentra plc essentraplc.com Langford Locks Kidlington Oxford OX5 1HX United Kingdom Telephone: +44 (0)1908 359100 Email: enquiries@essentra.com Registered in England No. 05444653