Repositioning
for a new era
Annual Report
and Accounts 2017
Hargreaves Services plc
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At a Glance – Page 2 }
Overview of our business
segments and operations.
Our Year
of Progress
– Page 4 }
A review of the key
events that shaped
the year at Hargreaves.
Group Business
Review – Page 13 }
A detailed analysis of
the performance of the
Hargreaves Group.
Hargreaves Services plc delivers key
projects and services in the infrastructure,
energy and property sectors.
The Group continues to evolve its strategy to reflect the changing market.
Strategic Report
01 Highlights of the Year
02 At a Glance
04 Our Year of Progress
06 Chairman’s Statement
08 Business Overview
13 Group Business Review
18
Review of Operating Performance
by Business Unit
21
Financial Review
24 Managing Risks
25
Statement on Risks Relating
to the Group’s Business
Directors’ Report
28 Board of Directors
29 Group Executive Management Team
30 Directors’ Report
33 Corporate Governance
37 Remuneration Report
40
Statement of Directors’ Responsibilities
in Respect of the Annual Report and
the Financial Statements
Financial Statements
41
Independent Auditor’s Report
42 Consolidated Statement of Profit and
Loss and Other Comprehensive Income
Statements of Changes in Equity
44 Balance Sheets
46
49 Cash Flow Statements
50 Notes (forming part of the financial statements)
91 Alternative Performance Measure Glossary
92 Notice of Annual General Meeting
IBC
Investor Information
Highlights of the Year
Excellent progress toward stated strategic targets for operating profit, value
creation from property and the conversion of legacy assets into cash
• The Group has delivered Continuing Underlying Operating Profit
of £9.8m, an increase of 113% on the prior year
• The development value of the property portfolio shows £52.1m
of potential unrealised gain on independent Red Book basis
• Strong progress in the orderly realisation of legacy assets into
cash, including the agreement to sell the surplus underground
mining equipment
Strong performance in trading operations in Germany compensated for legacy
contract issues in Earthworks and a challenging final quarter for Logistics
Continental European steel and specialised carbon markets remain buoyant,
offering long-term potential for investment and improved visibility and
resilience of forward earnings
Planning permission secured for Blindwells, a major new town development
close to Edinburgh
Brockwell Energy established to develop value from the Group’s energy
projects and assets without recourse to the Group’s balance sheet
Realisation of £25.5m of legacy assets into cash with an additional £3.2m
of underground mining assets contracted for sale post year end
The Net Asset Value per share excluding any unrealised property gains
as at 31 May 2017 was £4.32 per share
Focus on simplification continues
Final dividend of 4.5 pence in line with the Group’s 40% pay-out ratio target,
bringing proposed full year dividend to 7.2p, a 213% increase on prior year
Continuing Revenue
Continuing Operating Profit before Exceptionals(1)
Continuing Operating Profit/(Loss) after Exceptionals
Continuing Underlying Operating Profit(2)
Net Exceptional Costs
Continuing Profit/(Loss) Before Tax
Continuing Underlying Profit Before Tax(3)
Continuing Diluted EPS
Continuing Underlying Diluted EPS(3)
Dividend (including proposed final dividend)
Net Debt(4)
Year ended
31 May
2017
Year ended
31 May
2016
£342.9m £340.7m
£5.2m
£(7.2)m
£4.6m
£(12.4)m
£(10.6)m
£3.0m
(30.0)p
5.6p
2.3p
£32.3m
£1.2m
£0.7m
£9.8m
£(0.5)m
£4.1m
£7.7m
15.9p
17.9p
7.2p
£15.7m
Change
%
0.6
(76.9)
109.7
113.0
(96.0)
138.7
156.7
153.0
219.6
213.0
(51.4)
(1) Continuing Operating Profit before Exceptionals is stated before net exceptional costs of £470,000
(2016: £12,378,000).
(2) Continuing Underlying Operating Profit is stated excluding the net exceptional costs, the amortisation of
acquired intangibles and impairment of goodwill and including share of profit in associates and joint ventures
before tax.
(3) Continuing Underlying Profit before Tax and Continuing Underlying Diluted EPS are stated excluding the net
exceptional costs, the amortisation and impairment of acquired intangibles.
(4) Net Debt comprises cash and cash equivalents, bank overdrafts and other interest bearing loans and
borrowings (page 23).
Underlying Operating Profit (£m)
£9.8m
113.0%
59.5
55.7
42.8
9.8
4.6
2013
2014
2015
2016
2017
Net Debt (£m)
£15.7m
(51.4)%
77.9
68.8
32.3
15.7
2013
2014
1.0
2015
2016
2017
Continuing Revenue (£m)
£342.9m
0.6%
843.3
869.2
662.2
340.7
342.9
2013
2014
2015
2016
2017
01
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Property & Energy Portfolio
Target set in April 2016
We set a target of creating value of between £35m and
£50m from our portfolio of property and energy projects
within five years.
Attainment Update
Our recent and inaugural independent Red Book valuation
has highlighted a development value of £83m for our
portfolio of property that has a combined book value of
£31m. This suggest potential for an unrealised gain of £52m,
already at the top end of the £35m to £50m target range
we set for ourselves after less than two years.
Efforts are continuing to deliver that gain and seek
additional development and planning gain opportunities
to lift the development value potential for our portfolio.
The Group will be rigorous assessing the opportunity for
value gain against the capital costs of holding properties
on a property by property basis with a view to optimising
the time at which realisation events are sought.
At a Glance
Focusing on developing
and demonstrating value
from three clear areas.
Distribution &
Services Operations
Target set in April 2016
We set a target of achieving an underlying operating
profit from the Distribution and Services Operations
of between £10m and £15m per year by FY18, before
central overheads.
Attainment Update
In the year to 31 May 2017, we have already achieved
this objective a year early with an underlying
operating profit of £13.5m before central overheads.
Central overheads were reduced from £6.4m to £4.6m
and efforts are continuing to seek further central
overhead reductions. Group simplification efforts
continue and the scale of legacy assets to manage
has substantially decreased.
02
Hargreaves Services plcStrategic Report Map of Operations
With over 18,000 acres of land
throughout the UK, Hargreaves
has developed a pipeline of
exciting opportunities including
renewable energy, residential
& commercial property and
industrial use.
Westfield
Earls Gate
St Ninians
Poniel
Approved Wind Farm
Piperhill
Forestry & Agriculture
Blindwells
Broken Cross
Approved Wind Farm
Dalquhandy
Approved Wind Farm
Durham
Head Office
Monckton
Property & Industrial
Tower Colliery
Industrial & Residential
Mwyndy (Maxibrite)
Core Operations
Releasing Cash
from Legacy Assets
Target set in April 2016
We set a target of creating value by realising £60m
of legacy assets into cash, without the need for further
impairment within three years.
Attainment Update
This year we realised £25.5m of cash from our legacy assets
with a further £3.2m contracted to be sold before 31 May 2017,
with the cash to be received post 31 May 2017. This has resulted
in a net gain of £0.1m.
We remain confident on the realisation of cash at book value
from the remaining legacy assets. Opportunities to accelerate
the repayment of Tower loans through plant sales are actively
under review.
Pontefract
Grid Connections
Eggborough
Grid Connections
Kilingholme
Industrial Storage
Maltby Colliery
Grid Connections
Harlow
Southern Operational Base
Property
Industrial
Energy Projects
Grid Connections
Mixed Use/Restoration/
Forestry & Agriculture
Core Operations
Mixed Use/Recreational
03
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Our Year of Progress
July 2016
Expectation for full
recovery of Tower
loans improved
June 2016
Brexit vote impact
on Sterling boosts
realisable value of
legacy assets (coal
and yellow plant)
September 2016
Enabling works
commenced on
A14 project
October 2016
Customer
commitments
confirmed for
sale of £11m
of legacy
coal stocks
December 2016
Outperformance
of German
operation
signalled in
favourable
European
markets
04
Hargreaves Services plcStrategic Report January 2017
Earl’s Gate EfW
planning
permission
March 2017
Final coal delivery
from Tower to
Aberthaw Power
Station
March 2017
Blindwells
planning
permission
May 2017
Sale of Maltby
underground
mining equipment
announced
June 2017
Potential
spin-off of
energy projects
into new
subsidiary
announced
05
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Chairman’s Statement
David Morgan, Group Chairman
This has been a year of
continuing positive progress
in re-positioning the Group.
Results
Underlying Operating Profit increased from
£4.6m to £9.8m reflecting a strong performance
in our German trading business. Underlying
profit before tax increased from £3.0m to £7.7m.
Underlying Diluted EPS from Continuing Operations
increased by 220% from 5.6p to 17.9p reflecting
the benefit of a reduced tax charge stemming
from the utilisation of tax losses. Although the
Group experienced challenges in its Logistics and
Earthworks businesses last year, this was offset
by our other businesses that outperformed.
The achievement of our Group profit target was
a positive step forward which we believe marks
a real turning point for the Group. Net Debt
decreased from £32.3m to finish the year at
£15.7m, helped by excellent progress in realising
cash through the legacy assets disposal
programme. Operating Profit after Exceptionals
increased to a profit of £0.7m, compared with
a loss of £7.2m in 2016. Reported Profit before
Tax improved from a loss of £10.6m to a profit
of £4.1m.
Strategy
In April 2016, we set ourselves three key strategic
objectives as we came out of our extensive
restructuring exercise. These were to:
1. Achieve an Underlying Operating Profit from
our Distribution and Services Division of
between £10m and £15m before Group
overheads by FY18;
2. Create between £35m and £50m of value
from the Property and Energy portfolio over
a five-year period; and
3. Generate £60m of cash from the realisation
of legacy assets.
I am pleased to report we are confident that
the Group remains on track to achieve these
targets and in the case of the Underlying
Operating Profit, this has been achieved a year
ahead of target.
The Group businesses generated an Underlying
Operating Profit of £14.4m before Group
overheads of £4.6m. This performance places
the Group comfortably at the top end of the
£10m-£15m target range we set ourselves a year
earlier than planned in April 2016. We have also
taken the first steps to reduce Group overhead
which fell from £6.4m in the prior year to £4.6m.
Challenges in the civil engineering operations of
Blackwell have hastened our decision to curtail
these activities. The Board remains committed
to developing opportunities in the earthworks
sector but has instigated the wind-down of
legacy civils contracts.
The period saw the completion of the first
independent valuation of the Group’s property
portfolio. This valuation, which is discussed in
more detail in the Group Business Review,
highlights the opportunity to develop significant
value from our extensive land portfolio.
Pleasingly, as well as identifying a significant
increase in the Group’s Net Asset Value, the
exercise also suggests that we are on a trajectory
to achieve the £35-£50m value creation goal
within our targeted timeframe.
The successful development of the Energy
projects portfolio has led to the establishment
of Brockwell Energy Limited ("Brockwell Energy"),
recognising the need and value of seeking third
party capital. This highlights both our discipline
to manage capital deployment and our desire
to continue to focus and simplify the Group.
We are also very pleased with the progress that
has been made in the realisation of legacy assets
into cash. The solid financial platform we have
maintained has allowed us to conduct this process
in an orderly manner, helping us to take the time
to realise full value for the assets. At the end of last
year the carrying value of our net legacy assets
was £60m, at the end of May 2017 this had
reduced to £34.5m with disposals realising over
£25m in line with the Balance Sheet valuation.
In summary, excellent progress has been made
in repositioning the Group but we also recognise
that we must continue to refine our strategy and
this is discussed in more detail in the Group
Business Review.
Dividend
The Board proposes a final dividend of 4.5p,
consistent with the targeted 40% pay-out ratio.
If approved at the Annual General Meeting,
this will result in a dividend for the full year of
7.2p compared with 2.3p in the previous year,
an increase of 213%. The proposed final
dividend will be paid on 20 October 2017
to all shareholders on the register at the close
of business on 22 September 2017.
People
I would like to thank our staff for another year
of service and support. The Group has been
a challenging place to work over the past few
years and the Board thanks the staff for their
continuing loyalty through this difficult period.
Last year we highlighted the efforts and
achievements of the Hong Kong team. Despite
some setbacks and key project deferrals which
were out of their control, the Hong Kong
business delivered a strong profit last year along
with further progress. This year it is the German
team that merits significant mention, having
delivered an excellent result that has underpinned
the Group’s performance. Our thanks to them
and all of the rest of the Hargreaves team who
not only helped us exceed the profit targets that
we set ourselves at the start of the year, but who
also delivered the progress across our property
and legacy asset portfolios that have set us on
track to achieve our strategic targets in these
important areas.
Board
On 14 June 2017, we announced the formation
of Brockwell Energy and Iain Cockburn’s desire
to assume the role of CFO of Brockwell Energy.
We are continuing a process to find a successor
and Iain will remain in place until a replacement
is found. Although Iain has not yet left the Board,
I would like to note our appreciation for the help
and support he has provided the Group through
times of growth and times of challenge. He has
been a driving force in the Group and we look
forward to seeing the value that he will help
create in Brockwell Energy.
06
Hargreaves Services plcStrategic Report This has been a good year
in which we have made
excellent progress towards
our strategic goals.
Summary
This has been a good year in which we have
made excellent progress towards our strategic
goals. Strong performances from Germany and
Industrial Services, combined with the significant
development gains across the Property & Energy
portfolio, have more than offset weak performances
in the Earthworks and Logistics operations,
highlighting the benefit of a diversified portfolio
of activities. That said, following the dramatic
changes we have seen in our markets, we remain
committed to our strategy of simplification,
focusing on those opportunities that we believe
can deliver strong long-term growth and returns.
We will continue to refine our strategy, carefully
assessing risks and driving improved
performance, returns and cash generation
from our businesses.
David Morgan
Chairman
7 August 2017
07
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Business Overview
Property
We are developing significant
housing schemes and brownfield
property remediation.
Working in conjunction with the Group’s
in-house earthworks and remediation businesses,
the Group is ideally placed to compete in the
brownfield property remediation and
development sectors. Further opportunities
to add strategic sites to the portfolio will be
considered if the potential returns fit within
the Group’s risk appetite.
Iain Slater
Managing Director
Property
Securing planning permission in principle for the
flagship Blindwells site was a key milestone in the
Group’s strategy to develop and unlock value
from our extensive and varied portfolio of over
18,000 acres of multi-use potential land. This
portfolio spans from low grade former mining
sites through to prime consented residential land.
As such, the portfolio lends itself to a variety of
end uses and allows the Group to balance the risk
return ratio on a site by site basis.
The recent valuation exercise has reinforced
the belief of the Group in the inherent value
of its property assets and given the senior
management team some strong data points
regarding where development efforts and
capital should be focused for the best returns.
Key Statistics
£35m-£50m 18,550
1,600
Property and Energy five year
value creation target
Acres
Homes residential property
development (Blindwells)
08
Hargreaves Services plcStrategic Report Property Key Projects
Monckton
Case study
Blindwells
Case study
Location: Monckton, Barnsley
Scale: 35 Acres
Project: Regeneration of former coke works to include residential
property and commercial office buildings
Location: East Lothian
Scale: 390 Acres
Project: 1,600 home residential property development
The former Monckton coke works site ceased
production in December 2014 after 130 years
of operations.
Since this date, the Group has successfully executed an orderly
closure of the facility, completing the sale of remaining legacy
inventories and the demolition of the coke works plant.
During the year to May 2017, the existing office block underwent
a substantial refurbishment and as a result, the Group successfully
relocated teams from other offices in the region to the new facility.
A masterplan is now being progressed which would potentially
see the creation of a residential development of in the region of
270 new homes, supported by a substantial element of commercial
employment space.
The Group look forward to reporting progress in respect of the
planning for this site during the coming financial year.
Blindwells is a former open cast coal mining site
located to the east of Edinburgh. Planning
permission in principle was received in March 2017
for 1,600 new homes across a mixed use
development.
Since receiving the positive planning decision, the Group has
commenced the process to appoint a project team of professional
consultants who will advise on the development of the site. In
addition, the Group has been engaging with the local authority to
resolve the various planning obligations attached to the consent
and expects to be able to report favourable progress in this regard
in due course.
With regards to breaking ground on site, the initial phase of
compaction groundworks commenced in August 2017. Work in
respect of site infrastructure and utility connections is expected to
commence later in the financial year.
The Group continue to explore commercial opportunities for the
onward development of the site. It is expected that the mechanism
for this will be through the sale of serviced development plots, and
the Group anticipate reporting significant progress in respect of this
by the summer of 2018.
09
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Business Overview continued
Europe
Hargreaves Raw Materials
Services GmbH (HRMS)
is the Group’s European raw
material services division.
10
Hilmar Eller
Managing Director
Europe
Key Statistics
£115m
Revenues
£8.4m
Underlying
operating profit
Hargreaves Services plcStrategic Report Europe Key Projects
Germany
Case study
Location: Duisburg
HRMS is based in Duisburg,
Germany and is a key supplier of
specialist raw materials to major
European customers in the steel,
foundry, smelting, ferroalloy, sugar,
limestone, insulation, refractory
and ceramic industries.
The company was founded with three
employees (now eighteen) in June 2006
and has established a strong and profitable
trading record over more than 10 years.
The management team adopt a flexible and
low-risk trading model, with the agility to
take advantage of market opportunities (as
demonstrated by the strong result for the
current financial year) combined with the
discipline to wind down operations when
conditions are less favourable.
HRMS has worldwide expertise in raw material
sourcing, port operations and logistics
management. This, combined with the Group’s
expertise in production operations, material
handling, storage operations and logistics,
marketing and technical support, creates an
ideal platform for the company to compete
in the wider European market.
Specialist raw materials are sourced from,
amongst others, China, Eastern Europe,
South Africa, and South and North America.
Shipments of solid fuels can be combined
with industrial or refractory minerals, thus
optimising logistics and reducing costs.
Materials mainly arrive in the ARA ports
(Amsterdam – Rotterdam – Antwerp) and
are handled and distributed in accordance
with customer requirements. Storage
facilities are in the UK, Rotterdam and
Amsterdam (Netherlands), Ghent (Belgium),
and Duisburg and Hamburg (Germany)
as well as consignment storage within
clients’ sites.
The core markets for the business to date
have been coke and minerals trading,
including back-to-back sales contracts, as
well as securing options over raw materials
to trade in spot markets. In 2016, a ferroalloy
and pig iron trading team was established.
Trading in these markets is less subject to
variability in demand and provides a more
consistent and predictable source of
revenue to complement the opportunistic
trading activities in more volatile
commodity markets.
The business benefited historically from
trading around the raw material inputs and
production outputs of the Group’s coke
production facility at Monckton (closed
in December 2014) and the Group’s supply
arrangements with the Redcar steelworks
(closed in September 2015). Securing a
trading position connected to an alternative
strategic asset is a major opportunity for
HRMS. The team is in the process of
developing such an opportunity to take a
key position in the supply chain in Germany
which would represent an exciting and
important investment for HRMS and for
the Group. We look forward to providing
updates as this opportunity progresses.
11
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Business Overview continued
Legacy
The Group is ahead of
schedule in the recovery
of £60m from Legacy assets.
The Group owns a portfolio of assets obtained
through its coal and coke trading as well as our
mining operations. These assets were identified
at the end of the previous financial year, and the
Group has a target of realising these assets into
cash over a three year period.
The assets, identified as legacy, represent an
opportunity to generate a significant amount of
cash into the Group. The legacy assets comprise
largely coal and coke stocks, certain plant and
equipment and the balances related to the Tower
joint venture. The carrying value of the legacy
assets at 31 May 2016 was £60.1m.
The year ended 31 May 2017 represents the first
year of legacy asset realisations, and we are
pleased to report that we have generated cash
receipts in excess of £25m over the last twelve
months, in excess of our original expectations.
The majority of this unwind relates to the sale
of the coal and coke stocks from which, £16.8m
of cash was recovered. We also saw a return of
£5.6m in relation to loans into the Tower joint
venture as the funding position has improved.
We are pleased to note that the underground
mining equipment was also contracted for sale
with completion and cash receipt in the new
financial year.
The most significant balance remaining is the loan
to the Tower joint venture of £15.9m. Following the
completion of mining activities at the site and the
commencement of restoration, a large proportion
of these loan repayments will be achieved
through the sale of plant, equipment and land and
are therefore expected to be recovered towards
the end of the restoration profile.
Key Statistics
£60.1m
£25.5m
Legacy Asset Book Value
Cash from Legacy assets
12
Hargreaves Services plcStrategic Report Group Business Review
Gordon Banham, Group Chief Executive
We are pleased with the
performance of the Group
for 2017, in particular the excellent
progress towards achieving all
three of the key strategic goals
we set for ourselves in April 2016.
Results
We have exceeded the profit targets that we set
ourselves for the year delivering an Underlying
Operating Profit of £9.8m an increase of 113%
on the prior year outturn of £4.6m. The Group
reported a Profit before Tax of £4.1m, compared
with a loss of £10.6m in 2016. The strategic and
operational performance of the Group is
reviewed in more detail below.
Distribution & Services
The strong performance in Germany ensured
that the Coal Distribution Division as a whole
exceeded its profit target. Our German trading
associate was the star performer in the portfolio
last year. Germany contributed £8.4m before tax
to Underlying Operating Profits, far exceeding
the targets we had set for the business at the
start of the year. Before we progress, I would like
to acknowledge the skill shown by the German
management team and their staff in delivering
this excellent performance. Strong trading
discipline and favourable market conditions
combined to present the opportunity for
investment, increasing the size of the team to
support higher trading volumes. We have always
noted that the business is agile, benefitting from
a low fixed capital and overhead base, and can
respond quickly to changing market conditions.
The business will however continue to take a
conservative approach to forecasting in light of
lack of trading visibility as we look at opportunities
to make the income streams more resilient
and predictable.
The Underlying Operating Profit for the UK coal
business was £0.7m, which was slightly below
our expectations largely due to the impact of
another mild and disappointing winter. In light
of this we accelerated some further restructuring
in the UK coal distribution businesses during
the year, and paved the way for investment to
replace the Maxibrite production line with a new
cold-cure process that will significantly reduce
the future briquette production costs.
The Earthworks Division, which now incorporates
all of the Group’s substantial plant operations,
reported an Underlying Operating Profit of £2.4m.
Although this is an increase from the prior period
(2016: £1.9m), it was below our expectations by
approximately £1.0m. The prior year result only
included the five months to 31 May 2016 following
the acquisition of C. A. Blackwell in January 2016.
The shortfall against our Underlying Operating
Profit expectations was due to challenges on a
number of legacy contracts tendered to deliver
projects for a fixed price.
The three problematic contracts, which we first
reported on in December 2016, have resulted in
an exceptional charge in the year of £3.4m after
utilising fair value provisions of £2.7m arising on
the remeasurement of goodwill. This represents
a material loss of value. Although positive progress
has been made with these and other legacy
contracts, a number of challenging contractual
positions remain. The Blackwell business has
already made senior management changes to
improve the quality of the management team.
The Group continues to consider all potential
contractual and other remedies to mitigate the
losses we have incurred since the acquisition.
With the financial structures, warranty protections
and escrow arrangements that were put in place,
the Group was careful to create conditions
conducive to turning around the business whilst
protecting the Group from the impact of legacy
claims and other issues. Since acquiring the
business we have provided measured support
to deal with problematic contracts, improve the
quality of the management team and help the
business refocus around its core competencies.
We have made it clear to management that the
Group’s appetite to provide support for new
contracts will be based on assessment of future
risk and return. The Group’s equity share of net
assets in the Blackwell group was £1.2m as at
31 May 2017.
In spite of these challenges we believe the
Blackwell acquisition can provide core skills and
contracts in the mining, quarrying and heavy
earthworks sector that, when synergised with the
Groups’ skills, plant fleet and financial resources,
can offer value creation opportunities. Given the
problems that have been encountered, we have
made it clear that it is our desire to see the
Earthworks business cease tendering for large
and complex fixed price contracts and focus on
lower risk mining, quarrying and bulk earthworks
contracts of a cost-plus, target cost or re-measure
basis where they have a compelling core
competence to estimate and tender. This is noted
below as one of our four key strategic goals for
the current financial year.
On a more positive note, the Industrial Services
business reported an Underlying Operating Profit
of £1.8m. This was in line with our expectations,
but lower than the £3.6m reported in the prior
year following the closure of Redcar Steelworks
and the general downturn in steel activity levels.
As reported in February, we experienced delays
in starting a major project in Hong Kong. Despite
this Hong Kong delivered good growth with
revenue and Underlying Operating Profits of
£16.6m and £0.6m respectively, compared with
£11.0m and £0.3m in the prior year. The UK
business performed well during the year and
exceeded our target, compensating for the
contract delays and any softness in other
international operations.
The Logistics business reported a break-even
result at the Underlying Operating Profit level,
a reduction of £1.1m from the prior year. This was
a significantly behind expectations with the drop
off in performance particularly pronounced in
the final two months of the year. The market for
the logistics business has been difficult reflecting
increased competition and soft volumes which
created significant challenges towards the end
of the year. A programme is already underway to
re-shape the operation and reduce overhead costs.
Property & Energy
I am very pleased to report that the first
independent Red Book valuation of our property
assets has been completed. We have conducted
the valuations on two different bases – a "market
value" and the assets’ "development value". This
exercise has confirmed our confidence in the
13
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Group Business Review continued
Our key focus in the last two years
has been to reduce exposure to thermal
coal production, trading and related
ancillary services.
significant potential value gain available from
developing the property portfolio and offers a
clear view of what the value creation opportunity
is. The total development value of the portfolio
has been independently estimated at £83m,
a £52m premium to the current book value of
£31m. The valuation process also set out a
"market value"; an independent estimate of
the value that would be obtained from the
immediate sale of the property, taking account
of both market values and liquidity. The market
value of the entire portfolio has been estimated
at £49m, a premium of £18m against the book
value of £31m. We will update the property
valuation annually on a comparable basis.
The definitions of these methodologies are
very important and we would urge investors
to consider these carefully.
Development Value
Development value has been calculated by
the independent valuers using the residual
method of valuation. The residual method
of valuation involves estimating the gross
development value of the property using
market derived yield and future income stream
parameters, deducting gross development
costs and applying an appropriate level of
risk premium to reflect uncertainties such
as market and planning outcomes.
Market Value
Market value has been calculated by the
independent valuers in accordance with the
Royal Institution of Chartered Surveyors ("RICS")
Valuation – Professional Standards, and represents
the estimated amount for which a property
should exchange on the date of valuation
between a willing buyer and a willing seller in an
arm’s length transaction after proper marketing.
Important Note on Definitions of
"Development Value" and "Market Value"
There is small proportion of the property
portfolio for which the market and development
value has not been obtained from external
valuers and has been derived via other means.
14
Such means include:
•
•
•
the property is currently under offer, has
been sold on an open market basis post
period end, or is currently being actively
marketed for sale at approximately book
value (1.6% of total development value);
the property has been recently purchased
by the Group on an open market basis
and is therefore deemed to be recorded
at development value (0.6% of total
development value); and
the property is deemed materially
insignificant to the overall Group portfolio
and development value is deemed by
the directors to be materially consistent
with the current book value (2.2% of total
development value).
We believe that the Group is on track to achieve
our strategic goal of £35-£50m value creation
target. The publication of both measures will
assist investors in better understanding progress
and future opportunity. We will also use these
respective measures to carefully inform our
property strategy on a site-by-site basis and
help us to logically and rigorously manage
capital allocation.
In this regard, the market value is a better
indication than book value of the amount of the
Group’s capital that is tied up in each specific
asset. The difference between the market value
and the development value represents the
risk-adjusted value creation opportunity on each
property. It is our task to assess and monitor the
Category
Residential
Commercial/Industrial
Operational/Agricultural/Low Grade
Energy
Total
*Acreage
£m
446
3,351
10,471
4,282
18,550
likely time required to achieve the development
value, and hence calculate the rate of return
that is available from holding and developing
each property. If that return on investment falls
below our threshold we will seek to dispose of
a property as quickly as is practical.
The table below provides a segmentation of the
property portfolio by acreage and value.
The table below highlights the importance that
energy projects will play in delivering value from
a significant segment of the property portfolio.
The Group’s property portfolio contains 4,282
acres of low grade land. Much of this land is
ideally suited to the development of onshore
wind and without the development of onshore
wind, there is little potential to create significant
value in these land holdings. The development
and delivery of large-scale wind projects by
Brockwell Energy offers the Group the potential
for significant long-term rental streams to be
generated from this portion of the land portfolio.
The energy from waste and solar projects being
developed by Brockwell Energy provide a
catalyst for the development of the extensive
and well-positioned commercial/industrial
Westfield site in Fife. The master-planning
exercise that is being conducted will deliver
outline planning permission for the industrial
and energy project development of the site.
The energy projects will encourage further site
development through the opportunity to offer
highly competitive heat and power to other
industrial tenants.
**Book
Value
£m
6.3
11.4
10.7
2.4
30.8
Market
Value
£m
19.3
13.5
10.8
5.8
49.4
Development
Value
£m
37.4
25.4
12.8
7.3
82.9
Includes land held under short and long leasehold, and land under an option to buy.
*
** Book value is stated net of any site specific restoration provisions.
Hargreaves Services plcStrategic Report The key operational focus for the year was to
deliver a successful outcome on the planning
permission for Blindwells, which was received
and announced in March 2017. The development
of the Blindwells site is well underway and
represents the most significant opportunity for
the Group. The first plot sale is a key strategic
target for this financial year. Success at Blindwells
will help us translate a significant portion of
the development value increment into the
market value.
Legacy Assets
In the year ended 31 May 2017 we slightly
exceeded our own expectation as excellent
progress has been made in the realisation of cash
from legacy assets. We realised £25.5m of cash
with a further £5.5m of cash receipts contracted
but outstanding as at 31 May 2017. The target
remains to realise the remaining assets into cash,
as soon as possible, over the next 24 months
without any need for further impairment charges.
Legacy stocks of coal and coke were fully
contracted and largely cleared during the year.
The improved funding position at the Tower
joint venture facilitated the repayment of £5.6m
of loans in the year and we have seen some
improvement in market for heavy plant markets
and we currently see more potential for the early
realisation of surplus plant. This will not only help
to accelerate the run out of our own surplus plant
but may present an opportunity for earlier
repayments of the Tower loans, of which the
Group remains confident of full recovery.
We were very pleased to announce the
agreement for the sale of the underground
mining equipment for £5.5m of which £1.0m
cash has already been received. The remaining
balance is anticipated to be received early in the
second half of the current financial year. The
consideration achieved is in excess of book value
of these assets.
We have also booked two non-cash adjustments
to Legacy assets. The improved trading and
forecast run-out position at Tower allowed us to
reverse the impairment of the £2.0m receivable
that we took an exceptional charge for in the year
ended 31 May 2016. We have taken the reversal of
the impairment as exceptional income in the
year ended 31 May 2017. Secondly, in light of
OFGEM’s recent decision on embedded benefits
Core
Group Activities
Logistics
Industrial Services
UK Coal Distribution
Mining Earthworks
Growth/Valuation Potential
Challenging/
Limited Growth
Strategy
Optimise for
cash generation
Non-Core
Energy Projects
Property
Europe Coal
Distribution
Sustainable Growth
High Growth/High Capital
Focus for Long
Term Development
Spin Off
and diesel generation that affect our mothballed
diesel engines and switchgear that was formerly
operated by Rocpower, we have taken an
exceptional charge of £2.3m to fully impair the
legacy Rocpower assets. The net effect of these
impairment adjustments was a charge of £0.3m.
We remain committed to managing the Maltby
pension scheme over the long term. Given the
relative immaturity of the scheme, the optimal
strategy is to continue to service the scheme and,
hence, going forward we will no longer report
the retirement benefit obligation in the Legacy
category, but will instead sit in the Corporate
Balance Sheet.
Strategy – Continued Simplification
and Focus
Whilst significant progress has been made
in simplifying the Group and its strategy, the
business remains complex and this creates
challenges for stakeholders and investors and
increases the amount of overhead required to
manage the Group. As the markets in which we
operate adjust to the changes that have taken
place in and around the coal sector, we also
find that the longer-term growth prospects
and the balance between risk and return also
evolve. The table above summarises the current
Group activities.
The development of Energy projects has the
potential to create significant value and growth.
However, such projects also require significant
amounts of capital and expertise to deliver and
therefore we have decided that they are not
core to the Group and are better developed
in a separate entity. As announced in June, we
have formed a new company, Brockwell Energy
Limited ("Brockwell Energy"), and have identified
spinning Brockwell Energy out of the Group
as one of our four key strategic objectives for
this current year. This is discussed in more
detail below.
Following the restructuring of the last few years,
we have categorised the remaining businesses
as core. Looking at the core businesses, as we
refine and update our strategy to take account
of changing market conditions, we will further
segment the core activities into two categories
according to longer-term growth prospects.
In this regard, as shown, we regard Property
and European Coal Distribution as offering good
long-term growth and value creation prospects.
We categorise UK Coal Distribution, Earthworks,
Logistics and Industrial Services as currently
offering more limited growth opportunities.
In terms of strategy, we will prioritise management
attention and capital allocation to Property and
European Coal Distribution where the value
creation opportunity is considered greatest.
Although the other core businesses offer lower
growth potential, they do all offer good cash
generation opportunity. Whilst we see the
need and opportunity to deploy some capital
expenditure into the UK Coal Distribution and
Logistics businesses in the short-term to protect
or improve their market position, we see the
longer-term capital requirement from these
businesses as limited and therefore we will seek
to ration capital and run these operations to
maximise long-term cash generation.
15
The table below summarises the legacy asset position.
Asset Category
Property, Plant and Equipment
Assets Held for Sale
Inventory
Trade and Other Receivables
Total Legacy Assets
Retirement Benefit Obligation
Net Legacy Assets
31 May 2017
£m
31 May 2016
£m
7.9
5.0
3.6
23.1
39.6
(5.1)
34.5
9.0
5.0
20.5
31.3
68.8
(5.7)
60.1
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Group Business Review continued
Continuing to narrow the core focus of the Group
will help us better target capital allocation and
create more opportunity. This in turn will also
help us to reduce the level of overhead required
to support these activities, both in the businesses
and at the Group level.
Four Key Strategic Goals for 2018
Looking at the current financial year ending
31 May 2018, we have set ourselves four key
strategic goals. These are:
1. Energy – Deliver a successful spin-off of
Brockwell Energy
2. Germany – Grow and improve resilience
of European Coal Distribution profits
3. Property – Deliver the first plot sale at Blindwells
4. Earthworks – Re-focus around core
competencies
Strategic Goal No 1 – Energy – Deliver
a successful spin-off of Brockwell Energy
The decision to form Brockwell Energy and seek
to raise capital and spin it off from the Group has
been taken for several reasons:
•
•
•
•
•
the development of such projects requires
significant capital. It is easier to raise such
capital from specialist energy investors if the
investment proposition is focused and does
not include the portfolio of other interests
owned by the Group;
the separation of Brockwell Energy
recognises that energy project development
is not the Group’s core competence. The
appointment of Alex Lambie, as Brockwell
Energy’s CEO, recognises the need for
leadership that has expertise and experience
operating and investing in the energy markets;
the spin-off of the portfolio will avoid further
complexity being added to the Group at
a time when continuing simplification is
a key goal;
the Group retains the opportunity to invest
and retain a degree of interest in the value
of the energy portfolio through an equity
participation in Brockwell Energy; and
aside from any potential carried interest, the
Group would be a significant beneficiary
of the development and delivery of wind
and other energy projects on its property
portfolio through Brockwell Energy.
The successful spin-off of the Brockwell Energy
business will be closely tied to the ongoing
development of the Earl’s Gate project. As we
announced in June 2017, we have signed a
memorandum of understanding under which
the UK Green Investment Bank will take a 50%
equity stake in the project alongside the Group
through Brockwell Energy in the coming financial
year. Our respective teams are working well
together. A successful and timely financial close
on the Earl’s Gate project will greatly assist the
Group and Brockwell Energy in furthering our
ambitions and spin-off.
16
Strategic Goal No 2 – Germany – Grow
and improve resilience of European
Coal Distribution profits
Whilst the Group maintains a strong position in
the UK coal markets, the opportunities to trade
carbon-related products in the UK are limited by
the accelerated decline in heavy industry in the
UK. Whilst we are confident that the specialist UK
coal markets will continue to provide opportunity
for profit and cash generation, the industrial
markets are mature and declining. The investment
we are planning at Maxibrite will be the last
significant foreseeable investment for the UK
Coal Distribution business. This £2.5m investment
will provide Maxibrite with a market leading
cold-cure press manufacturing facility allowing it
to compete aggressively on cost in the lucrative
home heating markets where cost is increasingly
the most important market driver.
In contrast, the industrial coal markets in
Germany and Europe remain strong and resilient,
with major players investing in capacity for the
long term. Having weathered the challenging
conditions of the last few years the German
business has delivered an outstanding trading
result last year. The challenge with a pure trading
business is visibility of forward earnings. We have
always taken a conservative approach when
forecasting forward earnings, even when the
German business had the benefit of trading
around production assets such as Monckton
Coke Works that were owned by the Group.
Our second key strategic goal for FY18 will be to
look for opportunities to continue to grow the
underlying scale of the German business and to
improve the resilience of its profit stream.
Strategic Goal No 3 – Property –
Deliver first plot sale at Blindwells
The £83m Red Book valuation of the entire
property portfolio is a clear vindication of our
decision to hold and develop the property
portfolio over the last few years. The Blindwells
site remains a key development focus. The
granting of planning permission in March
represented a significant milestone and allows
us to move into the phase of working towards
the first realisation.
We are working with experienced industry
leading advisors to ensure that the strategy
to develop the site optimises long-term value.
Our plan remains to develop the basic site
infrastructure before selling the site in parcels to
housebuilding specialists. The style and quality of
the first Blindwells plot to be sold and developed
is a key factor in optimising the longer-term value
of the entire site. Our third key strategic goal for
this financial year will be to achieve a first land
sale of optimal style and design.
Strategic Goal No 4 – Earthworks –
Re-focus around core competencies
The Group remains committed to winning and
supporting the delivery of major bulk earthworks
projects such as the A14, Hemerdon and HS2.
The risk profile of such projects is attractive
and justifies the Group to selectively deploy its
Balance Sheet strength and extensive heavy
plant resources to win and support such
contracts. The Group will not support the
tendering of any further major "design and build"
or lump sum contracts. We have set ourselves
the objective of working with Blackwell
management to re-focus on lower risk cost-plus,
target cost and re-measure contracts. The
objective to win new business will include the
finalisation of the A14 contract and our first
contracts on the HS2 project. HS2 is set to be the
largest earthworks contracting opportunity since
the establishment of the UK motorway network.
We believe that the Group, drawing on the skills
and credentials of C. A. Blackwell, is well-
positioned to win significant business.
Shareholder Value
As we manage these strategic goals we will
remain focused on shareholder value. As our
track record demonstrates, we will continue to
carefully evaluate the optimal deployment of any
cash that we realise from the sale of legacy assets
or from the liberation of capital from non-core
businesses. We remain open to considering
investment in core businesses where a strong
return can be generated or to return capital
to shareholders through dividends, special
dividends or share-buy backs. As always, we will
be careful to maintain a strong balance sheet
position with an appropriate level of leverage.
Outlook
The outlook for the Group is more positive than
it has been for some time. In the past few years
we have explained to our stakeholders the need
to re-position our activities to deal with the
challenges we have faced. After several difficult
years, we are now talking about repositioning to
seize opportunity and maximise value creation.
The independent valuation of the property
portfolio demonstrates clearly the intrinsic value
of the Group. We are seeing an improvement in
the market for heavy plant which adds to our
optimism around realising cash and value from
our extensive plant fleet. The commencement
of HS2 offers our substantially re-profiled
Earthworks operation an exciting opportunity
to win flagship and game-changing contracts.
The performance in Germany highlights the
potential offered by the buoyant European
heavy industrial markets, especially if we can
find a strategy that delivers steadier and more
predictable profits.
Our finances remain in robust shape, thanks in a
large part to the prudent financial management
by our finance director, Iain Cockburn. The net
assets at the end of the year were £137.9m or
£4.32 per share. Including the market value
premium of the property portfolio that would
increase to £4.91 per share. The £83m
development valuation creates an obvious
opportunity to lift the net asset value further.
Gordon Banham
Group Chief Executive
7 August 2017
Hargreaves Services plcStrategic Report Earthworks Key Projects
A14
Case study
HS2
Case study
Location: Cambridgeshire
Scale: £1.5bn improvement to highways over 21 miles
Project: A14 Cambridge to Huntingdon Improvement Scheme
Location: London to Leeds/Manchester
Scale: £56bn High Speed Rail Network
Project: HS2
The Governments (Highways England) £1.5bn
upgrade of the A14 between Cambridge and
Huntingdon, commencing construction in
spring 2017 and expected to complete by the
end of 2020.
C. A. Blackwell has been involved with the A14 project since
mid-2015 when it was engaged under an ECI (early contractor
involvement) contract to support the main tier 1 contractors
in the design development and construction planning phase
of the project.
Following this early involvement an enabling works contract
was completed in FY17, prior to commencement of the main
construction phase in the spring of 2017. Blackwell are currently
engaged on the circa £50m subcontract for bulk earthworks in
relation to two of the five sections, which calls for 5 million cubic
metres of earth-movement over the next three years.
This project fits well with C. A. Blackwells core capability for large
scale linear earthworks, and is where the strong reputation and
brand was historically developed pre-Hargreaves acquisition in
January 2016.
The acquisition in 2016 created one of the largest mobile plant
fleets in Europe, allowing a large portion of the plant requirement
for the 2.5 year construction phase to be provided internally.
The Government is planning a new high-speed
rail network from London to Birmingham and
to Manchester and Leeds, known as HS2.
Phase 1 covers the route from London Euston
to Birmingham, with phase 2 the routes to
Manchester and Leeds.
Four consortiums have recently been awarded a combined £6.6bn
to deliver the seven civils packages in relation to phase 1 of the
project – the main civil engineering work including construction
of bridges, tunnels, embankments and viaducts.
Construction of phase 1 is expected to commence in summer
2019 after a 16-month period to develop a design, programme and
target cost. Phase 1 is expected to complete by 2026, with phase 2
expected to commence construction in c.2025.
C. A. Blackwell have been providing earthmoving advisory services
as a consultant since 2012 and are working alongside various
counterparties in order to explore opportunities for C.A. Blackwell
to become involved in the construction phase of the scheme as it
develops. The potential for sub-contract earthworks on a project
of this scale could be of the order of £100m-£200m dependent
upon how the strategy for constructing the project unfolds over
the next 12 months.
17
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Review of Operating Performance by Business Unit
Review of Performance
Revenues from Continuing Operations increased
during the year by £2.2m from £340.7m to
£342.9m, reflecting the first full year of results
from our Specialist Earthworks Division following
the acquisition of C.A. Blackwell Group in January
2016, which offset the reduction in revenues
from coal sales and Industrial Services activities
following the closure of Redcar Steelworks and
a number of coal fired power stations during
the prior year.
Underlying Group Operating Profit from
Continuing Operations for the year increased
by £5.2m from £4.6m to £9.8m. Underlying
Profit Before Tax increased by £4.7m to £7.7m
compared with £3.0m in the prior year, reflecting
our German associate performing significantly
ahead of management expectations in
favourable trading conditions, which more than
offset some softness in UK coal and logistics
markets and the effect of the run-down of legacy
civil engineering contracts. Reported Profit
Before Tax of the Group increased by £14.7m
from a loss of £10.6m to a profit of £4.1m after
exceptional costs. Exceptional costs reduced by
£11.9m from a net exceptional charge of £12.4m
reported in the prior year to a net exceptional
charge of £0.5m. These are outlined in more
detail in the Financial Review below.
The commentary below reflects the continuing
underlying performance of the four Divisions.
Distribution and Services
Coal Distribution
The activities of the Division include our
distribution and trading activities in the UK and
Germany. The UK operation encapsulates our
coal distribution business, our last mining project
at the House of Water site in East Ayrshire and
our Maxibrite coal briquetting operation. Our
German business operates through our associate
operation, Hargreaves Raw Material Services
GmbH ("HRMS"). HRMS trade and distribute coal,
coke, ferro alloys and pig iron, acting as a broker
or bulk-breaker and, most importantly, avoids
taking commodity price risks wherever practical.
The table below shows the breakdown of
underlying operating profit within the Coal
Distribution Division by key activity.
2017
2016
UK Coal Distribution
Operations (£’000)
Germany (Associate) (£’000)
Total
0.7
8.4
9.1
2.8
1.8
4.6
Following our recent restructuring, from the start
of the year commencing 1 June 2016, results
from our Property & Energy business and from
activities at the Tower project in South Wales are
no longer shown in the Coal Division. With
Property and Energy having become material
activities, from 1 June 2016 they have been
reported in a separate segment and are reported
on below. The Tower project and its related
income streams, having moved into its restoration
phase, are managed by and reported in the
Specialist Earthworks Division. The cash run out
of loans to the Tower joint venture continue to be
reported in our Legacy Assets Realisation segment.
UK Coal Distribution revenues fell from £148.6m
to £109.9m reflecting a £38.7m reduction in
metallurgical coal sales following the Group’s
exit from those markets in the UK in response
to the closure of Redcar steelworks. The
Underlying Operating Profit generated from
UK Coal Distribution fell from £2.8m to £0.7m
due to a combination of the withdrawal from
metallurgical coal trading and softness in
speciality markets.
The volume of UK third-party bulk trading
increased from 602,000 tonnes to 709,000 tonnes.
The increase in trading volume was due to the
sale of 140,000 tonnes of legacy coal stocks to
two coal-fired power stations to meet their
demands during the winter period. The legacy
coal volumes fulfilled part of the demand from
generators and were supplemented by
production from the House of Water surface
mine and imports from Russia.
Distribution &
Services
2017
£000
Property &
Energy
2017
£000
Legacy
2017
£000
Corporate
2017
£000
4,457
192
315
5,487
2,873
13,324
(1,942)
11,382
(1,252)
2,278
–
–
–
1,026
(644)
382
101
–
–
–
–
101
–
101
(2,613)
(2,000)
–
–
–
(4,613)
494
(4,119)
Distribution &
Services
2016
£000
Property &
Energy
2016
£000
Legacy
2016
£000
Corporate
2016
£000
1,545
10,378
584
(1,792)
628
11,343
(1,577)
9,766
(363)
–
–
–
–
(363)
(345)
(708)
–
–
–
–
–
–
–
–
(8,355)
2,000
–
–
–
(6,355)
290
(6,065)
Total
2017
£000
693
470
315
5,487
2,873
9,838
(2,092)
7,746
Total
2016
£000
(7,173)
12,378
584
(1,792)
628
4,625
(1,632)
2,993
Segment Operating Profit/(Loss) after Exceptionals
Net exceptional costs
Intangible amortisation/impairment
Share of profit in jointly controlled entities (net of tax)
Share of tax in associates and jointly controlled entities
Underlying Operating Profit/(Loss)
Net financing costs
Underlying Profit/(Loss) before Tax
Segment Continuing Operating Profit/(Loss) after
Exceptionals
Net exceptional costs
Intangible amortisation/impairment
Share of loss in jointly controlled entities (net of tax)
Share of tax in associates and jointly controlled entities
Underlying Continuing Operating Profit/(Loss)
Net financing costs – Continuing Operations
Underlying Continuing Profit/(Loss) before Tax
18
Hargreaves Services plcStrategic Report Sales of speciality coal into domestic and
industrial markets have increased from 556,000
to 836,000 mainly due to growth in cement and
export market volumes and strategic trading
arrangements with indigenous third-party
producers. Whilst competition and customer
buying habits continue to apply pressure to
margins, the trading team has been successful
in protecting market share. The Group continues
to benefit from a strong position in the supply
chain for domestic and industrial markets.
Volumes traded from the Group’s Maxibrite
briquetting facility in Wales were subject to
increased competition from lower cost products
manufactured using a "cold cure" process.
As disclosed previously, the Group retains coaling
options and planning permissions over a number
of sites, representing reserves of approximately
4.1 million tonnes. Following another year of
significant decline in UK coal-fired generating
capacity and a consequent further erosion of
potential future demand, the Group has taken
the decision to take an exceptional charge and
fully impair the balance sheet value of these
options. Management notes that the balance
of UK generating capacity remains subject to a
range of uncertain factors which may yet result
in a transitory recovery in power station coal
demand. Whilst there is no current expectation
for such a recovery in demand, the coal reserves
would provide a potentially valuable option
for the Group should that situation change in
the future.
The Group’s 86% share of Operating Profit from
our German associate increased from £1.8m
in the prior year to £8.4m in the year ended
31 May 2017. After tax this results in a profit
of £5.5m being recognised in respect of the
German associate. The European operation
generated revenue of £134m from the trading
of 578,000 tonnes of product compared with
£89m from 652,000 tonnes in the prior year.
This performance reflected favourable market
conditions in key continental markets that were
skilfully exploited by the German trading team.
Increased sales volumes of high margin pig iron
and ferro alloys were also achieved following
the expansion of the local team to target those
markets. Whilst the European business is an
associate and therefore its assets and liabilities
are not consolidated into the Group’s results,
it should also be noted that the increased
trading levels have been supported by greater
borrowing capacity following the renegotiation
of credit lines with two major German banks.
As the HRMS business grows in scale and the
Group considers opportunities to help improve
the resilience of revenues and profits, consideration
will be given to the appropriateness of
consolidating the results and Balance Sheet.
Specialist Earthworks
The Specialist Earthworks business contributed
its first full year of profits following the acquisition
of C. A. Blackwell part way through the prior
financial year. The Division reported Underlying
Operating Profit of £2.4m on revenues of £122.1m
for the year ended 31 May 2017 compared with
Underlying Operating Profit of £1.9m on revenues
of £64.1m. The performance was below
expectations as the Division focused on the
effective management and resolution of a
number of problematic pre-acquisition contracts.
Included in exceptional expenses is a net charge
of £3.4m in respect of three problematic
pre-acquisition contracts. No benefit has been
taken for any losses that could potentially be
recovered under warranty claims against the
sellers. Further provisions have been made in
respect of loss-making contracts and the
Directors believe that such provisions adequately
cover the Group’s commercial exposures against
other known loss-making contracts. Additionally,
the business recognised a £3.3m amount
receivable in respect of an historic plant
maintenance claim, this has been included within
exceptionals. After the net exceptional expense,
the Specialist Earthworks business reported an
Operating Profit of £2.3m.
Progress on the key A14 contract in the year
ended 31 May 2017 was encouraging, with
enabling works on two sections of the £1.5bn
road improvement scheme having commenced
and full deployment on the project expected
during the next financial year.
Activities have continued at the Hemerdon
tungsten mine operated by Wolf Minerals with
both parties benefiting from a variation made
to the existing contract arrangements during
the year. Whilst the customer continues to tackle
operational challenges relating to the processing
facility at the mine, the Group was encouraged
by the recent increase in funding provided by the
financers of the project, which provides visibility
over at least the next six months of operation
at the mine.
Our activities in South Wales at the Tower surface
mining project have been brought under the
direct management of the Specialist Earthworks
Division. The profits generated from the contract
to supply and operate the heavy earth moving
equipment at Tower are included in the results
of the Division. The onsite activities transitioned
during the year from mining to restoration as
the final shipment of coal was sent by train to
Aberthaw Power Station in March 2017. Whilst the
performance of the joint venture is not reported
in the Group’s results since the investment in
the project was impaired during the year ended
31 May 2016, a significant increase in the
international benchmark coal price and
favourable exchange rate movements benefited
the revenues and cash flows generated by the
joint venture. The Group was also pleased to
reach agreement with its joint venture partners
on a variation to the terms for the supply of
labour and plant to the site. The variation
includes a reduction in the margin charged by
the Group alongside an optimised operating
plan intended to protect the market value of the
joint venture’s plant fleet and, therefore, improve
the cash outturn of the project and the Group’s
visibility and confidence over the full recovery
of its legacy loan balances with Tower.
Industrial Services
The performance of the Industrial Services
Division was in line with expectations and
represented a significant reduction on the prior
financial year due to the closure of Redcar
steelworks and a number of coal-fired power
stations. Total revenue generated by the Division
reduced from £81.6m to £65.4m, producing
underlying operating profit of £1.8m compared
with £3.6m in the prior year. Activity levels in the
UK showed a slower rate of decline than
expected, supported by maintenance outages as
some generators continued to invest in their
assets. Group activities in the UK steel sector
continued to decline with the notice of pending
cessation of the Industrial Services contract at
Port Talbot following on from the demise of
Redcar Steelworks 12 months earlier.
The rate of growth in Hong Kong was behind
target following the delay of a major project
which has still not commenced. Year-on-year
growth in the Group’s operations in Hong Kong
continued with an increase in revenues of 51% on
the prior year. Whilst the timing delay on the new
major project was disappointing, there was
pleasing progress elsewhere as the Group was
invited to supplement the core contract at Castle
Peak Power Station with additional services.
Total revenue by destination market
£m
UK
Hong Kong
Other
Total
FY15
120.9
5.4
1.5
127.8
FY16
67.1
11.0
3.5
81.6
FY17
46.5
16.6
2.3
65.4
Logistics
The Logistics Division had another challenging
year, particularly in the final quarter as a highly
competitive market and pressure on
subcontractor margins resulted in a downturn
in performance. Revenues for the operation
fell from £54.5m to £48.0m with Underlying
Operating Profit reducing from £1.2m to £0.1m.
The significant decline reflects the challenges
faced by the business as it transitions from its
previous focus on large and predictable volumes
of coal movement to an operation targeted at
transporting a greater diversity of materials and
routes in the waste, construction and biomass
sectors. The management team has recently
been bolstered in order to adapt to these new
demands and a series of steps to reduce costs,
improve efficiency and update commercial terms
are being implemented.
19
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Review of Operating Performance by Business Unit continued
Property & Energy
The Property & Energy teams generated an
Underlying Operating Profit of £1.0m for the year
ended 31 May 2017 which was in line with
management expectations. Operating loss of
£0.4m generated in the prior year from the
Group’s Property & Energy activities was reported
within the Coal Distribution Division as shown
in the table above. The result reflects profit
generated on disposals of sundry properties with
no significant long-term strategic potential and
fair value gains recognised following the exercise
of options on newly restored areas of former
mining sites at House of Water and Broken Cross.
The business also incurred an exceptional cost
in respect of the impairment of the property
and plant at Commonside Lane of £2.3m. After
exceptional items, the Property and Energy
businesses reported an operating loss of £1.3m.
The Property team has been expanded to 11
and we now have in place the resource and
access to skills to deliver progress towards our
strategic targets. A particular area of focus for
the Property team was the Blindwells project
in East Lothian where the granting of planning
permission, as announced in March 2017,
represented an important milestone. The timing
of the Blindwells planning decision was delayed
compared to our original expectations and
consequently no plot sales were made during
the year ended 31 May 2017, with the first
realisations now expected in the current financial
year. This is one of our four key strategic goals
for the current financial year.
The progress made in the development of the
Group’s energy projects portfolio was reflected
in the decision announced on 14 June 2017 to
create a new wholly-owned subsidiary, Brockwell
Energy, to oversee the development and
potential spin-off of the Group’s energy project
interests. Significant development activity was
undertaken in the year in relation to the Earl’s
Gate Combined Heat and Power ("CHP") plant
project at Grangemouth and the Energy from
Waste project at Westfield in Fife. An acceleration
in development activity primarily in relation to
the Earl’s Gate project as it moves towards
financial close, is expected to result in the balance
sheet value of the Energy portfolio increasing by
November 2017 from its current value of £4.1m.
Plans for the Group’s 400MW portfolio of potential
onshore wind schemes have also progressed,
including an agreement of property options to
enable a single 300MW scheme, the construction
of which would deliver significant environmental
restoration benefits. It is believed that this will be
the largest single scheme in the UK.
Safety, Health and the Environment
Our vision is to create an environment where
all employees can work with zero harm to them.
To achieve this, the Group takes a proactive
approach to Safety, Health and the Environment
and remains committed to the highest practicable
standards of safety and health management and
the minimisation of adverse environmental impacts.
The Board ensures that Health and Safety issues
for employees, customers and the public are
of foremost concern in all Group activities. The
Group Chief Executive, supported by external
advice, is charged with overall responsibility. All
divisions have formulated safety management
systems. We continue with the programme to
achieve OHSAS 18001 Occupation Health and
Safety Assessment Series for health and safety
management systems and ISO 14001
environmental management.
During the year, we continued to strengthen
our approach to behavioural safety training,
with emphasis on raising the awareness and
understanding of our supervisory staff, who form
the "front line" in delivering our standards within
the workplace. This is being achieved through
internal safety champions and external
accredited training providers.
We have also developed our Senior Manager
Safety Engagement Programme to deliver
leadership across our operating sites. This
Programme is led by the Board members and
involves all senior managers undertaking site
based safety visits, engaging directly with the
workforce to discuss issues that impact on them.
This Programme has proved to be effective
in delivering a consistent approach across the
Group and will continue to be a cornerstone
of our safety strategy.
It is pleasing to note that our safety performance
improved slightly during the year, as measured
by Lost Time Incident Frequency Rate ("LTIFR").
This follows the previous year where a slight
deterioration occurred reflecting the pressures
created by the transition for the Group, with
a number of operating units closing and others
downsizing their workforce. Notwithstanding
the improvement in the year, we have set
a 5% improvement in performance for the
current year.
Iain Cockburn
Group Finance Director
Gordon Banham
Group Chief Executive
7 August 2017
20
Hargreaves Services plcStrategic Report Financial Review
Iain Cockburn, Group Finance Director
Underlying operating
profit has increased
by 113% to £9.8m.
Revenue
The Group has enjoyed a more stable period of
trading following the turbulent conditions in
prior periods. Revenues increased year-on-year
from £340.7m to £342.9m reflecting a first full
year of trading from the Blackwell acquisition
in the Earthworks Division which offset lower
revenues in the Coal Distribution and Industrial
Services Divisions.
Operating Profit and Margins
Underlying Operating Profit increased by 113%
to £9.8m from £4.6m. This increase is largely
attributable to the exceptional performance
of the German trading associate, due to some
favourable market conditions and the ability
of the management team to move quickly and
capitalise on trading opportunities. The strong
performance in Germany more than offset soft
trading in the UK coal trading business following
another mild winter.
The year to 31 May 2017 is the first full year
of operations within the Earthworks Division
following the acquisition of C. A. Blackwell
in the prior year. The division delivered an
Underlying Operating Profit of £2.4m. Whilst this
represented an increase of £0.5m, it was lower
than management’s expectations as the prior
year only included five months of operations.
The reduction in profit levels is a result of the
challenges across a number of contracts.
The Logistics business had a £0.1m Underlying
Operating Profit compared to a prior year
Underlying Operating Profit of £1.2m. This
reduction reflected challenges in the market
place through increased competition and
pricing pressures.
The first full year of Property and Energy trading
as a separate division has seen a significant
improvement in the divisional Underlying
Operating Profit, growing from a loss of £0.4m
to a profit of £1.0m. The Group has also reported
the result obtained from the realisation of legacy
assets into cash, which has delivered a cash
inflow of £25.5m and a profit before tax of £0.1m.
Reported Group Continuing Operating Profit
before exceptional costs decreased from £5.2m
to £1.2m whilst Continuing Profit before Tax
improved from a loss of £10.6m to a profit of
£4.1m reflecting the strong performance of the
German associate and the substantial reduction
in the level of exceptional costs from £12.4m
to £0.5m. Continuing Operating Profit after
exceptionals improved from a loss of £7.2m
to a profit of £0.7m.
Goodwill
The Group completed the acquisition of
CA Blackwell in January 2016. Following
experience within the business, the Group
re-measured the goodwill on acquisition in
respect of two legacy contracts, where it
became clear in the first half of the year that
further work and defect rectification would
be required due to circumstances that existed
prior to acquisition. Consequently, an increase
of £2.7m was recognised in goodwill in the first
half of the year. This brings goodwill associated
with the acquisition to £3.6m. The Board
remains comfortable with the carrying value
of the revised goodwill amount.
Exceptional Costs
As the Group continues to restructure and
simplify its operations, a number of items of
non-recurring income and cost have arisen
during the year, particularly as the Group settles
many of its legacy positions. As such, there is
a net exceptional charge of £0.5m in the year,
which is a reduction of £11.9m from £12.4m in
the prior year.
Exceptional credits/(charges)
Reversal of impairment of investment
and other assets relating to the Tower
project
Cost associated with early closure of
certain mining operations
Net losses on Legacy contracts in
Blackwell
Impairment of Property, Plant and
Equipment
Cash recovery from discontinued
operation
Historic plant rebate
Liquidator dividend
Other simplification costs
Total
2017
£000
2,000
(1,874)
(3,380)
(2,277)
1,096
3,280
796
(111)
(470)
This is offset by the write-off of several mine
development assets on potential locations that
the Group is no longer pursuing following the
strategic decision to reduce exposure to coal.
The only remaining mine development costs
on the balance sheet at 31 May 2017 was £0.3m
(excluding the IFRIC 20 stripping asset and mine
development assets) relating to the ongoing
House of Water mining operation that is being
amortised over the remaining five years of
forecast mine life.
The net £3.4m exceptional loss within the
Earthworks business relates to losses on three
specific legacy contracts. These contracts are
largely complete by the year end and no further
material downside is anticipated. Although
challenges remain with other continuing civil
engineering contracts as noted in the Group
21
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Financial Review continued
Business Review, the Group is actively exiting
civil engineering activity to focus on synergising
skills in bulk earthworks with the Group’s plant
fleet. The net position of £3.4m includes the
release of £2.7m of fair value accruals made at
the interim following the revision of the goodwill
on acquisition.
The impairment of property, plant and
equipment relates to the property and plant at
Commonside Lane, the former Rocpower site.
This was impaired by £2.3m down to a notional
amount, following OFGEMs decision to review
and subsequently significantly reduce the TRIAD
support regime, which significantly impacted the
future earnings potential of the site.
The Group was also pleased to receive the first
£1.1m recovery of cash relating to the historic
losses in Belgium which ceased operations in the
year ended 31 May 2013 and a dividend received
out of a liquidation, which exceeded the Balance
Sheet position by £0.8m.
Interest
In the year to 31 May 2017, continuing net
finance expenses for the Group increased by
£0.5m from £1.6m to £2.1m, predominantly due
to the reduction in interest receivable from our
Associates and Jointly Controlled Entities as
indebtedness and interest rates were reduced.
Taxation
The income tax credit for the year is £0.7m
compared with a tax credit of £1.1m for the year
ended 31 May 2016; including the share of tax
of equity accounted investees of £2.9m (2016:
£0.6m) this results in a total tax charge of
£2.2m (2016: credit of £0.5m). Whilst this charge
represents a reported effective tax rate for
the Group of 31.3% (2016: 4.6%), this rate is
significantly affected by the impact of the
German underlying tax rate. After taking into
account the impact of the overseas tax rates,
the underlying effective rate is 13.0% (2016: 7.4%)
reflecting the benefit of prior year tax recoveries
arising from utilisation of tax losses.
Movement in Net Debt
Item
Dividend
The Board is proposing a final dividend of
4.5p per share (2016: 0.6p), bringing the
dividend for the full year to 7.2p per share
(2016: 2.3p). This represents an increase of 213%
on the prior year that is in line with the improved
profit performance of the Group. This dividend
level reflects a pay-out ratio of 40% (2016: 40%)
of Underlying Diluted Earnings per Share.
The proposed final dividend will be paid
on 20 October 2017 to all shareholders
on the register at the close of business on
22 September 2017.
Pensions
Our former deep mining operation at Maltby
Colliery was a member of two defined benefit
pension schemes. Whilst our operations at
the mine have ceased, the obligation to fund
the schemes remains within the Group,
and the Directors remain committed to funding
the schemes.
In addition to the two industry-wide defined
benefit pension schemes, Maltby Colliery also
operates an unfunded concessionary fuel
scheme. The combined liability of both elements
as at 31 May 2017 is £5.1m, decreased from £5.7m
at 31 May 2016. Contributions in the year of £1.5m
(2016: £1.2m) have been offset by interest and
expenses of £0.4m (2016: £0.3m) and a net
re-measurement loss of £0.5m (2016: £1.0m).
Earnings per Share
Reported basic Earnings per Share increased
from a loss of 33.0p to a profit of 16.1p reflecting
the significant improvement in the trading result
of the Group. Underlying Diluted Earnings per
Share increased by 220% from 5.6p to 17.9p.
The weighted average diluted number of shares
remained steady at 32.3m. The Group did not
undertake any further share buy backs during
the year.
Net Debt
Net Debt reduced by £16.6m from £32.3m
at 31 May 2016 to £15.7m at 31 May 2017
reflecting positive progress in the realisation
of legacy assets.
Group Net Assets increased from £131m at
31 May 2016 to £138m at 31 May 2017. Gearing
(measured as Net Debt compared with
Net Assets) at the end of May 2017 was 12%,
compared with 25% at 31 May 2016.
Net Cash Flow from Continuing Operating
Activities before Interest and Tax generated a
cash inflow of £41.8m during the year. Net Cash
Flow from Operating Activities before Interest,
Tax and Working Capital was £14.2m.
The Group has successfully realised a significant
proportion of its Legacy assets into cash and this
is the key driver behind the £27.6m positive working
capital movement. Included within the movement
are Legacy inventory realisations of £16.8m and
the first significant repayment of the loans to the
Tower joint venture of £5.6m. Aside from the
Legacy unwind, the underlying working capital
position has remained relatively consistent.
Tax payments in the year included £5.2m in
respect of a disclosable tax planning scheme
implemented in 2011. Following this payment the
Group has no further cash payment obligations
in relation to the scheme. The prior year accounts
had made provision for this payment, therefore
there was no impact on the income statement
for the year ended 31 May 2017. The Group and
its advisors, KPMG remain confident that the
scheme was sound and lawful.
Gross cash on capital expenditure was £20.0m
(2016: £15.1m) was offset by disposal proceeds of
£5.3m (2016: £1.6m). Net capital expenditure in
the financial year was £14.7m (2016: £13.5m). This
included an investment of £1.4m in the Group’s
Energy portfolio, as well as £3.9m spent on the
development of several of the Group’s key
Property projects. In addition to this, further
Net Cash from Operating Activities before Interest, Tax and Working Capital movements
Movement in working capital
Cash from Operating Activities before Interest and Tax
Interest payable
Taxation payable
Net capital expenditure
New finance leases
Business combinations
Dividends received
Dividends paid
Purchase of own shares
Discontinued cash flows
Total movement in Net Debt
22
2017
£m
14.2
27.6
41.8
(1.3)
(7.0)
(14.7)
(0.5)
(0.6)
–
(1.1)
–
–
16.6
2016
£m
14.9
5.3
20.2
(4.0)
(6.7)
(13.5)
(3.5)
(13.7)
0.8
(6.9)
(0.6)
(3.4)
(31.3)
Hargreaves Services plcStrategic Report additions have been made within the Plant fleet
totalling £6.0m and a further investment of £3.3m
in the House of Water mine development assets.
The proceeds from disposal relate mainly to the
disposal of surplus yellow plant, from which the
Group was able to generate net profits of £1.8m.
The Group acquired the share capital of Tru
Green Limited in March 2017 resulting in cash
outflow of £0.2m. The business included Net
Debt of £0.4m at the date of purchase. This
acquisition will sit within the existing Industrial
Services Division.
The Group’s current UK banking arrangements
consists of a £70m borrowing base facility ("BBF")
and a £40m revolving credit facility ("RCF"). The
arrangement was concluded with a three-bank
group comprising of HSBC, Lloyds and Barclays
and is committed through to August 2018.
The structure was designed to provide a greater
degree of flexibility for the Group in financing
working capital. Although the Group’s RCF is
subject to a Debt:EBITDA leverage covenant
maximum of only 2:1, the Group’s BBF facility
sits outside the leverage test and leverage test
parameters as it is secured against the underlying
working capital assets.
The Group paid dividends totalling £1.1m,
comprising of the prior year final dividend of 0.6p
and the current year interim dividend of 2.7p.
Capital Management and Bank Facilities
The capital structure of the Group consists of
debt, which includes borrowings, cash and cash
equivalents and equity attributable to equity
holders of the parent, comprising capital, reserves
and retained earnings.
The capital structure is reviewed regularly by
the Group’s Board of Directors in light of the
Group’s policy of maintaining gearing at levels
appropriate to the business. The Board principally
reviews gearing determined as a proportion
of debt to Earnings before Interest, Tax and
Depreciation. The Board also takes consideration
of gearing determined as the proportion of
Net Debt to total capital. It should be noted
that the Board reviews gearing taking careful
account of the working capital needs and flows
of the business.
Summary of Net Debt
Cash and cash
equivalents
Interest-bearing
borrowings
Finance lease liabilities
Net Debt
2017
£000
2016
£000
(27,817)
(21,161)
35,275
8,277
15,735
37,593
15,906
32,338
Going Concern
The Group has considerable financial resources
together with long-term contracts with a
number of customers and suppliers across
different geographic areas and industries.
As a consequence, the Directors believe that
the Group is well placed to manage its business
risks successfully. After making enquiries, the
Directors have a reasonable expectation that
the Company and the Group have adequate
resources to continue in operational existence
for the foreseeable future. Accordingly, they
continue to adopt the going concern basis in
preparing the annual report and accounts.
Iain Cockburn
Group Finance Director
7 August 2017
23
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Managing Risks
The Board retains overall responsibility
for the identification, assessment and
mitigation of risk throughout the Group.
Together with the coordinated, effective and economic
application of resources to minimise, monitor and control
the impact or likelihood of such risks occurring.
The Group is exposed to a number of risks, which, if not
properly managed and controlled have the potential to:
•
•
•
prevent the Group from achieving its financial or
operational objectives;
cause harm to Individuals or the environment; or
cause damage to the Group's assets or reputation.
It is accepted that some risks may never be entirely eliminated.
However, the Board recognise that it is essential that
management have good risk management systems and
practices in place to identify, assess and prioritise the
mitigation of risks affecting the Group.
The Group has undertaken a full review of its risk profile and
strategic approach to risk in light of the continued change over
recent years. This has led, via the restructuring of the Risk
Committee, to the creation of a formalised Group Risk Register.
For each risk identified, existing mitigating factors and controls
have been noted, as well as areas for further mitigation work.
All risks have been graded based on the expected impact on
the Group should they materialise, and the likelihood of the
risk coming to pass, as illustrated in the risk map opposite.
In determining the key risks, the Board has considered the
result of the referendum on the future of the UK’s membership
in the European Union.
The Corporate Risk Committee is the forum in which the Group
Risk Register is maintained and challenged. The Corporate
Risk Committee is comprised on divisional managing directors
and certain senior staff members across a variety of areas. This
Committee is supported by a number of sub-committees,
including a financial risk and performance forum, which allow
the Risk Committee to operative efficiently.
Risk map
Impact
Insignificant
Minor
Moderate
Major
Catastrophic
High
Unacceptable
Medium
High
n
i
a
t
r
e
c
t
s
o
m
A
l
y
l
e
k
i
L
l
e
b
i
s
s
o
P
y
l
e
k
i
l
n
U
e
r
a
R
d
o
o
h
i
l
e
k
i
L
Low
The Corporate Risk Committee reports into the Audit
Committee, with the risk registers being reviewed at least
twice a year.
This statement is an integral part of the Strategic Report.
IDENTIFICATION
ASSESSMENT
MITIGATION
MONITORING
24
Hargreaves Services plcStrategic Report
Statement on Risks Relating to the Group’s Business
Key to change in risk level since the previous year:
Risk Higher (Worsened)
Risk Lower (Improved)
Risk Stayed Level
Key Risks
Description
Mitigation
Change In
Risk Level
OPERATIONAL
Operational
and Project
Performance
Risk
UK Housing
Market Risk
Planning
Surface
Mining Risk
Markets and
Commodity
Prices
Ineffective and inefficient project management
could lead to additional costs being incurred,
which will affect the overall project performance
and therefore the financial performance of the
Group. Managing contract risk is essential, as
there is a risk that the Group may commit to
contractual terms and conditions that expose the
Group to excessive financial risks and potential
cost overruns.
•
•
•
Policies and procedures in place for contract approval
include bid approval models, peer review and Board
approval of key contracts.
Experienced management teams in place for all service
offerings with the relevant technical and industry
knowledge.
Review of all contracts by internal legal support, involving
external resource on material contractual commitments.
• Monthly project performance reviews are undertaken
involving finance, commercial and operational personnel.
Whilst the Group has always been exposed to
this type of risk, the Specialist Earthworks
business increases our exposure to construction
sector contracts and heightens this risk.
As the Property and Energy division gains more
prominence within the Group, we will become
more exposed to risks associated with the UK
housing market. Demand for UK housing can
have a marked impact on property and land
valuations, which may affect the viability of sites.
Increased complexity, cost and delay in the
planning process may slow down the project
pipeline. Changes in Government or Government
strategy towards planning policies could impact
on the speed of the planning consent process or
the value of sites.
•
•
•
The Group’s policy is to only progress and develop land
where it considers that significant value uplift will be
deliverable, resulting in a focus on the land that is deemed
to be of high quality and in prime locations.
Although "Brexit" has raised some additional concerns over
the UK property sector, the Group’s investment in Property
and Energy is long-term and should not be seriously
affected by short-term events, or economic cycles.
The Group’s highly skilled in-house technical and planning
teams monitor changes in the market and in the planning
process and react accordingly to ensure that planning
consents are achieved in the most cost-effective and timely
manner, whilst ensuring a broad spread of developments
remain in the planning system at any one time.
• Whilst the Group has sought to constrain and prioritise the
number of projects being taken through planning, the
portfolio does provide a good spread of different types of
projects in different planning jurisdictions.
Our surface mining operation is subject to all
of the hazards and risks normally encountered
in the exploration, development and production
of surface coal including unusual and unexpected
geological formations, geotechnical instability,
flooding and adverse weather conditions.
The Groups exposure to surface mining risks
have decreased significantly following the
closure of several mine sites in the previous
financial year.
The Group produces and trades in coal, coke
and other mineral commodities, the prices
of which are subject to variations that are both
uncontrollable and unpredictable. Further
trading risks are created through foreign
currency exposures. The Group has significantly
reduced its activity levels around commodity
trading however, a residual level of risk remains
as a result of exposure to the continuing
production activities at House of Water and
Tower and through the need to liquidate the
remaining legacy stocks.
•
•
•
•
•
The Group employs experienced management teams with the
relevant technical and surface mining industry knowledge.
The Group’s surface mining team undertakes appropriate
levels of site investigation, including extensive geological
assessment, drilling/borehole analysis and ongoing review,
and has the appropriate planning, development, technical
infrastructure and expertise to minimise these risks.
The Group continues to seek, where possible to minimise
price and foreign exchange risks through the use of
fixed-price contracts, hedging instruments and "back-to-
back" purchase and sale agreements.
Regular review meetings a held to consider any open
positions and determine the appropriate hedging strategy
under the Group hedging policy.
The Group also carefully monitors the fuel requirements of
any fixed price logistics or earthworks contracts seeking to
ensure that the cost of fuel to support these contracts is also
fixed through hedges.
25
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Statement on Risks Relating to the Group’s Business continued
Key Risks
Description
Mitigation
Change In
Risk Level
Commercial
Relationships
The Group benefits from many long-term and
partnership arrangements with key customers
and suppliers. Damage to, or loss of, these
relationships could be detrimental to the Group
results. These relationships include, but are
not limited to, customers, subcontractors and
professional advisors.
Political &
Economic Risks
There is a potential impact on the Group from
political, security and economic conditions both
in the UK and globally , including the impact of
the Brexit vote. In the UK alone we operate across
the energy, property and construction sectors,
each of which is subject to risk of sporadic or
cyclical economic or political turbulence. The UK
energy sector in particular is subject to the risk
of changes in political polices. We now have
international operations in countries including
South East Asia and South Africa, where political
and economical risk can be magnified due to
geographical constraints.
HEALTH, SAFETY & ENVIRONMENTAL RISKS
•
•
•
•
•
•
The Group continues to expand its commercial relationships
to restrict the reliance on one specific relationship, although
in practice opportunities for this can be restricted in the coal
reliant sectors of the Group.
The procurement team have key involvement in the
sourcing of significant subcontractor arrangements.
Commercial managers maintain onsite day-to-day
relationships with customers and subcontractors to
feedback on performance at an early stage.
Business development teams Identify future opportunities
and maintain five year pipelines, along with review of
market data.
The Group carefully appraises the risks and capital
requirements associated with any new contracts.
In light of the political, economic and foreign exchange risks
surrounding South Africa at this time, the decision has been
taken to pause any further deployment of capital.
Investment in other foreign jurisdictions will only be made
following careful appraisal by the Board.
Health & Safety
It is our duty as an employer to undertake
whatever is reasonably practical to protect the
health, safety and welfare of our employees
and other people who might be affected by
our operations.
This includes protecting workers from anything
that may cause harm, and effectively controlling
any risks to injury or health that could arise in
the workplace.
Serious breeches in our employer obligations
or compliance to relevant regulations could
result in an unlimited fine, and a court enforced
publicity order (in the case of corporate
manslaughter only).
• Health & Safety remains a priority consideration of all Group
and subsidiary board meetings.
• Health & Safety Management Systems are in place at all
•
•
•
•
•
Hargreaves sites.
Robust training, policies, procedures and monitoring are in
operation, with best practice being shared through the
Health & Safety managers network.
Internal Health & Safety Managers who conduct regular
random inspections.
Regular externally reviewed mock incidents.
Clear site signage stressing Health & Safety risk is provisioned
across all our locations.
The provision of onsite security and/or fencing is made
where it is deemed practical and measured.
• Health & Safety performance information is proactively
shared across the Group.
Environmental
Operations, if not properly managed, could result
in environmental contamination with disruption
of business, financial costs and loss of reputation.
In particular, the processes used in the mining
of coal present environmental risks which may
affect not only our property but also property
belonging to third parties.
Recruitment
and Retention
of Key
Executives
and Skilled
Employees
Key executives, senior management and skilled
employees possess the industry knowledge
and experience, without which, our strategic
objectives may not be achieved. If the Group is
unable to recruit or retain both key executives
and skilled employees, this could adversely affect
the Group both operationally and financially.
•
•
•
Provision of clear guidance on the environmental standards
we expect all our operations to achieve.
Compliance with laws, regulations and industry best practice
is a priority across the business.
The provision of remuneration and terms of employment
that are competitive in the market.
26
Hargreaves Services plcStrategic Report Key Risks
Description
Mitigation
Change In
Risk Level
FINANCIAL
Credit Risk
By necessity the nature of the Group’s trading
relationships necessitate contract and credit
exposures to individual customers that are
material to the results of the Group, sometimes
over a long tenor.
Credit risk arises from the possibility that
customers may not be able to pay their debts.
As the Group has reduced the scale of its coal
production and trading relationships, the
relative materiality of some of these exposures
has increased.
Interest Rate
The Group predominantly borrows in Sterling
at floating rates. If interest rates rise the cost of
borrowing for the Group will rise accordingly.
As at 31 May 2017 £8.3m of the Group’s financial
liabilities were at fixed rates (2016: £15.9m).
Foreign
Currency
Pension
IT
The Group has operations and carries out trade
in overseas countries and is therefore exposed
to foreign exchange translation risk when the
profits of these entities are reflected in the Group
accounts. The Group does not hedge exposure
on the translation of profits of overseas
operations. Transactional foreign exchange
exposures arise when entities within the Group
enter into contracts to pay or receive funds in a
currency different from the functional currency
of the entity concerned.
The Group operates a defined benefit pension
scheme. Times of economic instability can have
an impact on scheme asset values with the result
that the reported pension deficit increases.
Furthermore, the relationship between implied
inflation and long-term gilt yields has a major
impact on the pension deficit and the business
has little control over those variables.
There is an increasing reliance on our IT network
for delivering day-to-day operations, and an
increase in the volume and types of data held
within our network.
Partial or total loss of the IT network or data held
within it could result in significant reputational
and financial damage.
Cyber attacks are increasing in their sophistication
and frequency and have the potential to seriously
disrupt or halt business operations for an
immeasurable amount of time.
•
•
•
•
The Group periodically assesses the financial reliability
of customers.
The Credit Control function closely monitors and chases
any overdue debts and the majority of the Group’s trade
receivables are due for payment within 45 days.
The Group remains vigilant to monitoring and controlling
counterparty exposures that are material to the results of the
Group. All such exposures are carefully considered before
contractual commitments are made to take account of the
risks presented by the contract or relationship, the returns
available and the opportunities that are, or are not, available
to mitigate that exposure.
Authorisation of credit limits is restricted to a limited number
of individuals, with the input of third-party credit scoring.
• Where appropriate the Group will use derivatives to
generate the desired effective currency and interest rate
under the Group's hedging policy.
At current levels of debt and interest rates the Group’s
exposure to changes in interest rates is not considered
significant, in light of the considerable amount of cash
realisations to date and over the coming period.
The translation risk is reduced by ensuring that net assets
are financed where possible by borrowing in local currency.
It is Group policy to hedge material net exposure to cash
transactions in foreign currencies when a commitment
arises, usually through the use of a foreign exchange
forward contract.
The Group takes a proactive approach with the Trustees to
ensure that an optimal balance is struck between managing
risk and volatility in asset values and seeking a reasonable
long-term return on the assets.
The Group operates a Trustee approved deficit recovery plan.
The scheme has been closed to new members since the
acquisition of Maltby Colliery in 2007 and, following the
closure of that operation in 2012 there are no active
members or continuing service accrual.
The Group make use of high quality external experts for
actuarial and investment advice.
The Group has a dedicated IT function, with a high degree
of skill and experience in maintaining and monitoring the
IT infrastructure.
Business data Is regularly backed up and stored in a secure
location.
Email and internet filtering technology and firewall software
is in place to restrict the impact of cyber attacks.
Regular notifications are sent to all staff regarding the
importance of remaining vigilant of phishing emails.
•
•
•
•
•
•
•
•
•
•
•
27
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Board of Directors
David Morgan (aged 59)
Non-Executive Chairman
Gordon Banham (aged 53)
Group Chief Executive
Iain Cockburn (aged 52)
Group Finance Director
David, a Chartered Accountant, has had
wide-ranging board and senior management
experience. Having trained with KPMG, he then
spent over 20 years with Johnson Matthey plc,
a FTSE 100 global business and was Executive
Director, Corporate Development from 1999 to
2009. He is Chairman of Nordgold S.E. and of
Econic Technologies Ltd and a Non-Executive
director of The Royal Mint as well as a number of
other companies. His career has involved general
and financial management as well as corporate
governance and he has had M&A experience in
all parts of the world.
Gordon was Managing Director of his family
firm, F Banham Limited, until 1994 when he
negotiated its sale to Charrington Fuels and was
appointed as General Manager of the combined
businesses. On the acquisition of Charringtons by
the CPL Group in 1995, he was made Distribution
Director responsible for the enlarged group’s coal
distribution activities. Gordon joined Hargreaves
in 2001, subsequently being appointed as Group
Chief Executive. He led the management buyout
in 2004 and subsequent flotation on the London
Stock Exchange the following year. He has since
guided a series of major acquisitions.
Iain is a Chartered Accountant. After five years
with PricewaterhouseCoopers in the UK and
Luxembourg he held a number of finance roles
in both the UK and the USA, within Courtaulds
plc and GenRad Inc. groups. Prior to joining
Hargreaves, he was Finance Director and
subsequently CEO and Finance Director of
Knowledge Support Systems plc.
David is the Chairman of the Nominations
Committee and a member of the
Remuneration Committee.
Kevin Dougan (aged 63)
Group Commercial Director
Peter Jones (aged 62)
Non-Executive Director
Nigel Halkes (aged 61)
Non-Executive Director
Kevin spent the early part of his career with
British Coal, specialising in opencast coal mining
becoming Assistant Regional Engineer. In 1986,
Kevin joined Andrew Golightly Limited as
Contracts Director, subsequently joining
Hargreaves in 1995 as a Divisional Director. He
was appointed to the Group Board in April 2004.
Peter brings to Hargreaves many years of senior
management and board experience. Previously
he was Chief Executive of The Mersey Docks &
Harbour Co Limited (to 2006) before serving as
Chief Executive of Associated British Ports until
March 2013. Peter currently serves as Chairman
of the Port of Milford Haven and is Chairman
of Henderson Opportunities Trust plc and
also a Non-Executive Director of SKIL Ports &
Logistics Limited.
Peter is the Chairman of the Remuneration
Committee and a member of the Audit and
Nominations Committees.
Nigel was a partner at Ernst & Young for 25 years,
rising to become Managing Partner of Markets
for the UK and Ireland, responsible for the firm’s
growth strategy, relationships with major
clients and the business development function.
He served some of the firm’s largest clients,
including auditing British Coal in the period up
to privatisation. He served three years as an
elected member of the CBI London Council.
He retired from Ernst & Young at the end of 2013
to pursue a portfolio non-executive career
spanning the public, private and charitable
sectors. Nigel currently sits on the board of Visit
England and is a Non-Executive Director of
FreeAgent Holdings PLC.
Nigel is the Chairman of the Audit Committee
and a member of the Remuneration and
Nominations Committees.
28
Hargreaves Services plcDirectors’ Report Group Executive Management Team
The Executive Directors and the following key managers comprise the Executive Management Team:
Steve Anson
Managing Director
Julie Haynes
Managing Director
Andrew Spence-Wolrich
Managing Director
Specialist Earthworks Division
Previously: Regional Director,
Tarmac Limited; Commercial Director,
Tilcon Limited.
Industrial Services Division
Previously: Business Development Director,
Norec Ltd; Operations and Development
Manager, Alfred McAlpine plc; Operations
Manager, Serco Group plc.
Logistics Division
Previously: Managing Director,
The Spence-Wolrich Partnership; Business
Director, Bulmers Transport Ltd; Commercial
Manager, Hoyer GmbH.
John Burks
Managing Director
Coal Production and
Distribution Division
Iain Slater
Managing Director
Property Division
29
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Directors’ Report
The Directors present their Directors’ Report and Financial Statements for the year ended 31 May 2017.
Principal Activities
The principal activities of the Group are the provision of key projects and services within the infrastructure, energy and property sectors. Additionally, the
Group delivers haulage services, waste transportation, mineral import, mining and processing, together with specialist earthworks and related activities.
Financial Instruments
The financial risks faced by the Group and its policy in respect of these risks are set out in Note 29 of the accounts.
Proposed Dividend
Following the payment of an interim dividend of 2.7p per share on 7 April 2017, the Directors recommend a final dividend for the year ended 31 May 2017
of 4.5p per share to be paid on 20 October 2017 to shareholders on the register on 22 September 2017. The shares will be ex-dividend on 21 September 2017.
This dividend has not been recognised within creditors as it was not declared and approved before the year end.
Policy and Practice on Payment of Creditors
The Group does not operate a defined code of practice regarding payment to suppliers. The Group determines conditions of payment for its own supply of
goods and services. It is the Group’s policy that transactions are then settled in compliance with these legal or other contractual obligations having regard to
good commercial practice. Average creditor days at 31 May 2017 for the Group were 30 days (2016: 26 days). It is not meaningful to disclose a similar statistic
for the Company since it does not trade in its own right.
Directors
The Directors who held office during the year and to date are as follows:
David Morgan
Gordon Banham
Iain Cockburn
Kevin Dougan
Peter Jones
Nigel Halkes
The names and biographical details of the Directors at the date of this Directors’ Report appear on pages 28 and 29.
All Directors are required to retire by rotation every three years, in line with the Articles of Association. A formal evaluation of the performance of each Director
and of the Board is carried out and the performance of each continues to be effective and demonstrates commitment to the role. The Directors required to
retire by rotation at this year’s AGM are noted on page 31.
The Company provided indemnities to each of its Directors in accordance with the provisions of the Company’s Articles of Association. Additional information
relating to Directors’ remuneration, service contracts and interests in the Company’s shares is given on pages 37 to 39.
The Directors who held office at the end of the financial year had the following interests in the shares of the Company according to the register of Directors’ interests:
David Morgan
Gordon Banham
Iain Cockburn
Kevin Dougan
Peter Jones
Nigel Halkes
Class of share
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Interest at
end of year
Interest at
beginning of year
30,000
2,478,466
7,680
118,272
10,000
5,000
30,000
2,478,466
7,680
118,272
10,000
5,000
Details of Directors’ emoluments are set out in the Remuneration Report on page 37.
All the Directors benefited from qualifying third-party indemnity provisions in place during the year and at the date of this Directors’ Report.
According to the register of Directors’ interests, no rights to subscribe for shares in Group companies were granted to any of the Directors or their immediate
families, or exercised by them, during the financial year and up to the date of this Directors’ Report except as indicated below. The options referred to below
which have vested are held by ESOT Trustees Limited. Options that have vested are held on trust until such time as the Directors exercise their options.
Vested options are therefore included within the total issued share capital.
30
Hargreaves Services plcDirectors’ Report Director
Iain Cockburn
Exercise price
per share
Period during which option is exercisable
Number of
options granted
–
June 2011 to June 2018
20,287
These options were granted under the Long-Term Incentive Plan on 20 June 2008 and are outstanding at the end of the year.
Director
Iain Cockburn
Exercise price
per share
Period during which option is exercisable
Number of
options granted
–
June 2012 to June 2019
28,500
These options were granted under the Long-Term Incentive Plan on 30 June 2009 and are outstanding at the end of the year.
Director
Iain Cockburn
Exercise price
per share
Period during which option is exercisable
Number of
options granted
–
June 2014 to September 2021
16,989
These options were granted under the Long-Term Incentive Plan on 16 September 2011, and are outstanding at the end of the year. The options partially
vested at 41.71%. Iain Cockburn’s beneficial holding is therefore 7,086.
No options were granted under a Long-Term Incentive Plan in 2012, 2014, 2015 nor 2016. The options awarded under a Long-Term Incentive Plan in 2010 and
2013 lapsed.
Director
Gordon Banham
Iain Cockburn
Kevin Dougan
Exercise price
per share
Period during which option is exercisable
–
–
–
October 2017 to May 2018
October 2017 to May 2018
October 2017 to May 2018
Number of
options granted
31,109
20,642
16,990
These options were granted under Deferred Share Bonus Scheme A and are outstanding at the end of the year. The options are subject to conditions as
outlined in Note 26.
Retirement of Directors
In accordance with the Articles of Association one-third of Directors retire by rotation each year. The Directors retiring by rotation are David Morgan and Nigel
Halkes. David Morgan and Nigel Halkes, being eligible, offer themselves for re-election.
Significant Shareholdings
At 7 August 2017 the Company had been notified or was aware of the following shareholders with 3% or more of the issued share capital of the Company:
Shareholder
Schroder Investment Management Ltd
Artemis Investment Management LLP
Fidelity Worldwide Investment (UK) Ltd
Shareholder Value Management AG
Gordon Banham
The NFU Mutual Insurance Society Limited
Number of
ordinary shares
% of issued share
capital
6,397,608
4,238,062
3,208,568
2,970,123
2,478,466
1,360,000
20.05%
13.28%
10.05%
9.31%
7.77%
4.26%
Employees
Applications for employment by disabled persons are always fully considered. Employment policies are designed to provide opportunities irrespective
of colour, ethnic or national origin, nationality, sex, sexual orientation or marital status. In the event of employees becoming disabled every effort is made,
including appropriate training, to ensure that their employment with the Group continues.
The Directors recognise the importance of good communications and good relations with employees.
31
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Directors’ Report continued
Purchase of Own Shares
The Directors are authorised to make market purchases of the Company’s own shares under an authority granted at the Annual General Meeting held on
5 October 2016. The Directors will seek authority to make market purchases of up to fifteen per cent of the Company’s own shares at the 2017 Annual General
Meeting (full details are available in the 2017 Notice of Annual General Meeting).
Approval to Issue Shares
The Directors will seek authority to allot up to a maximum aggregate nominal amount of £1,063,689 at the 2017 Annual General Meeting (full details are
available in the 2017 Notice of Annual General Meeting).
Employee Share Schemes
The Company operates share option schemes for the benefit of employees. Information regarding the schemes and the number of options outstanding
is given in Note 26 on page 81.
Political Contributions
The Group made no political contributions during the current or prior year.
Disclosure of Information to Auditor
The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information
of which the Company’s auditor is unaware and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any
relevant audit information and to establish that the Company’s auditor is aware of that information.
Independent Auditor
The Board proposes to reappoint KPMG LLP as auditor. Resolutions concerning their continued appointment and to authorise the Directors to agree their
remuneration will be put to the forthcoming Annual General Meeting of the Company (full details are available in the Notice of Annual General Meeting).
By order of the Board
Andrew Robertson
Company Secretary
West Terrace
Esh Winning
County Durham
DH7 9PT
7 August 2017
32
Hargreaves Services plcDirectors’ Report Corporate Governance
The Company is committed to maintaining high standards of corporate governance. Whilst the Company, which is listed on AIM, is not required to report on
corporate governance matters, it is the Board’s intention to both disclose and report on the corporate governance structures and processes that are operated
and to develop these further to meet the standards appropriate for a group of Hargreaves’ size and complexity.
The following sections set out how the Company and the Group have applied the principles and spirit of the UK Corporate Governance Code.
The Board
The Group is headed by an effective Board, which controls and leads the Group. A biography of each Director and details of the membership of the Board
and its associated committees are provided on pages 28 and 29.
During the year the Board comprised a Non-Executive Chairman, three Executive Directors, and two independent Non-Executive Directors.
The Board meets at least ten times per year, receiving appropriate information from management on a timely basis, and making further detailed enquiries
where necessary to enable it to fully discharge its duties. The Board is collectively responsible for the long-term success of the Company and has ultimate
responsibility for the management, direction and performance of the Group and its businesses. The Board is required to exercise objective judgment on all
corporate matters and is accountable to shareholders for the proper conduct of the business.
The Board has a schedule of matters which are specifically reserved for its decision. All Directors have access to the advice and services of the Company
Secretary who is a solicitor. The Company Secretary is responsible to the Board for ensuring that procedures are followed and for compliance with applicable
rules and regulations.
There is a clearly defined division of responsibilities between the Chairman and the Group Chief Executive. The Chairman is primarily responsible for the
leadership and effective working of the Board. This is achieved by:
•
•
•
•
•
•
chairing Board meetings, setting the agendas in consultation with the Group Chief Executive and Company Secretary and encouraging the Directors to
actively participate in Board discussions;
leading the performance evaluation of the Board, its Committees and individual Directors;
promoting high standards of corporate governance;
ensuring timely and accurate distribution of information to the Directors and effective communication with shareholders;
periodically holding meetings with the Non-Executive Directors without the Executive Directors present; and
establishing an effective working relationship with the Group Chief Executive by providing support and advice whilst respecting executive responsibility.
There have been no significant changes in the commitments of the Chairman throughout the year which may impact upon his time and commitment to
the Company.
The Group Chief Executive is responsible for the executive management of the Group and for ensuring the implementation of Board strategy and policy
within approved business plans, budgets and timescales.
Non-Executive Directors
Non-Executive Directors bring a wide range of experience to the Group and throughout the year the Chairman and the Non-Executive Directors were
considered by the Board to be independent.
Board Meetings
The Board meets regularly during the year as well as on an ad hoc basis, receiving appropriate information from management on a timely basis and making
further detailed enquiries where necessary to enable the Board to discharge its duties. At each meeting the Board receives regular reports covering, for example,
current trading, treasury, health and safety issues and capital expenditure proposals. There is a detailed process to ensure that the Board formally reviews and
approves annual budgets and business plans. Throughout the year the Board reviews performance against these annual budgets and business plans.
The Board also receives regular updates on strategy and reviews other topics, including material risks, legal issues affecting the Group and uncertainties facing
the business. The Board also evaluates its own performance. In addition, each year the senior management succession plan for the Group is reviewed.
Attendance at meetings
Number of meetings
David Morgan
Gordon Banham
Iain Cockburn
Kevin Dougan
Peter Jones
Nigel Halkes
Board
10
10 attended
10 attended
10 attended
10 attended
10 attended
10 attended
Audit
Committee
Remuneration
Committee
Nominations
Committee
3
3 attended
n/a
n/a
n/a
3 attended
3 attended
3
3 attended
n/a
n/a
n/a
3 attended
3 attended
1
1 attended
n/a
n/a
n/a
1 attended
1 attended
33
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Corporate Governance continued
Board Committee
The Board has three Committees which assist in the discharge of its responsibilities:
Remuneration;
•
Audit; and
•
• Nominations.
Each Committee reports to, and has its terms of reference approved by, the Board and each Committee’s terms of reference can be found on the
Group’s website.
Remuneration Committee
The composition and work of the Remuneration Committee is described in the Remuneration Report found on page 37.
The Audit Committee and Independent Auditor
The Committee meets at least three times a year to review; the Group’s accounting and financial reporting practices; the work of the independent auditor;
and compliance with policies, procedures and applicable legislation. The objectivity of the independent auditor is maintained by ensuring that they have
direct access to the Committee and, as appropriate, the Board.
During the year the Committee reviewed the half-year and annual financial statements before submission to the Board. The Committee is also responsible
for receiving and reviewing reports from the Risk Committee and for reviewing the scope, remit and effectiveness of internal audit provisions and the
effectiveness of the Group’s internal control systems. It also reviews the Group Whistle-Blowing Policy by which employees of the Group may, in confidence,
raise concerns about possible financial or other improprieties and the Anti-Corruption Policy. The minutes of the Committee are circulated to all Directors
for information.
During the year the Committee reviewed the half year and annual financial statements before submission to the Board. The Committee is also responsible
for receiving and reviewing reports from the Risk Committee and for reviewing the scope, remit and effectiveness of internal audit provisions and the
effectiveness of the Group’s internal control systems. It also reviews the Group Whistle-Blowing Policy by which employees of the Group may, in confidence,
raise concerns about possible financial or other improprieties, and the Anti-Corruption Policy. The minutes of the Committee are circulated to all Directors
for information.
The independence and objectivity of the independent auditor are considered annually by the Committee. The Board recognises the importance of
safeguarding auditor objectivity and has taken the following steps to ensure that auditor independence is not compromised:
•
•
•
•
•
the Committee reviews the audit appointment periodically and undertakes a review of the effectiveness of the external audit process on an annual basis;
at least once per year the independent auditor meets with the Committee, or the Chairman of the Committee on its behalf, without members of
management being present;
non-audit work is limited to work that requires detailed knowledge derived from the statutory audit or work where fees are not considered to be material,
and exceptions to this are specifically approved by the Committee;
the Committee reviews and approves all fees paid for audit, and all other fees paid to the Independent auditor, with a view to ensuring that there is value
of delivery and appropriate cost-effectiveness; and
the independent auditor provides a report to the Board and the Committee confirming its independence in accordance with Auditing Standards.
The effectiveness of the annual audit process is reviewed each year when the robustness of the audit process, quality of delivery and service levels provided are
assessed. During the year, the Audit Committee took the opportunity of the five-year audit partner rotation to re-tender our audit, in order to re-benchmark the
cost and quality of audit provision. Three of the Big 4 audit firms were invited to tender for the appointment. The Audit Committee decided unanimously to
re-appoint KPMG as independent auditors, because they demonstrated a deeper understanding of the group’s businesses than their competitors, took steps
to enhance the specialist skills on their team and refined their audit fees to take account of recent changes to the composition of the Group.
Nominations Committee
The Nominations Committee leads the process for the appointment of Directors by making recommendations to the Board about filling vacancies and
appointing additional persons to the Board and to senior management positions. This approach assists in maintaining an appropriate balance of skills and
experience both on the Board and throughout the Group. It also considers and makes recommendations to the Board on its composition, balance and
membership and on the re-appointment by shareholders of any Director under the retirement by rotation provisions in the Company’s Articles of Association.
Following such appointment, the Director is required to retire and seek re-appointment at the next Annual General Meeting. There is a process of rotation,
which ensures that approximately one-third of all Directors are required to retire and seek re-appointment at each Annual General Meeting.
During the year the Nominations Committee reviewed the composition of the Board, leadership requirements and succession planning, together with
a performance evaluation of Non-Executive time commitment. The Committee also reviews its own effectiveness.
The Committee’s members are the independent Non-Executives. The Committee evaluates the balance of skills, knowledge and experience on the Board
and in light of this evaluation, prepares a description of the roles and capabilities required for a particular appointment.
All Directors have service agreements or letters of appointment and the details of their terms are set out in the Remuneration Report on page 37.
The Committee recognises the benefits to the Group of diversity in the workforce and in the composition of the Board itself. While the Company will
continue to make all appointments based on the best candidate for the role and without prejudicing its policy of appointing the most suitable applicant
for any role, it is aware of the desirability of female representation.
34
Hargreaves Services plcDirectors’ Report Executive Management Committee
The Group Chief Executive is assisted by the work of the Group Executive and its sub-committees. Together these form part of the Company’s corporate
governance framework, but are not formally appointed committees of the Board.
•
•
Executive Management Team – responsible under the leadership of the Group Chief Executive for the day-to-day management of the business,
setting performance targets and implementing the Group’s strategy and direction as determined by the Board. Regular meetings attended by the Group
Executive Management Team are held to review operational performance and assess the strategic development of each division.
Risk Committee – responsible for driving effective risk management throughout the business; reporting and making recommendations to the
Audit Committee as appropriate; and monitoring and reporting on all material business risks which might impact the delivery of the Group’s strategic
goals and objectives. Members of the Committee include the Group Finance Director, the Head of Internal Audit and senior financial and operational
management. Day-to-day risk management is the responsibility of senior management as part of their everyday business processes. This is underpinned
by the Group’s policies and procedures to ensure that risk management is fully embedded throughout the organisation. The Board has ultimate
responsibility for ensuring that business risks are effectively managed. The Board has considered and approved the Risk Committee policy and has
delegated the regular review of the risk management process to the Audit Committee. The Audit Committee receives regular reports and monitors
progress against agreed action plans arising out of reviews.
Induction, Development and Support
All new Directors receive a full, formal and tailored induction on joining the Board, including meetings with senior management and advisers and visits to the
Group’s operational locations. The Board calendar is planned to ensure that Directors are briefed on a wide range of topics throughout the year and are given
the opportunity to visit sites and discuss aspects of the business with employees. The Board recognises that the Directors have a diverse range of experience,
and encourages them to attend external seminars and briefings that will assist them individually.
Directors have access to independent professional advice at the Company’s expense where they judge this to be necessary to discharge their responsibilities
as Directors. All Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are
complied with.
Board Performance Evaluation
To further strengthen Group compliance the Board undertakes an annual performance review that reviews and measures its effectiveness and that of its
Committees. Alongside this review each Director receives an appraisal. The Chairman conducts appraisals in respect of the Group Chief Executive and
Non-Executive Directors; the Non-Executive Directors (following discussions with the other Directors) conducts the Chairman’s appraisal; and the Group
Chief Executive conducts appraisals in respect of the other Executive Directors.
Conflicts of Interest
The Articles of Association enable the Directors to authorise any situation in which a Director has an interest that conflicts or has the potential to conflict with
the Company’s and Group’s interests and which would otherwise be a breach of the Director’s duty under section 175 of the Companies Act 2006. The Board
has a formal system in place for Directors to declare such situations to be considered for authorisation by those Directors who have no interest in the matter
being considered. The Nominations Committee will reviews conflicts of interests when considering new Board appointments.
Internal Control
Management has considerable autonomy to run and develop the business of the Group. The Board believes that a well-designed system of internal reporting
and control is necessary. The Board therefore continues to have overall responsibility to develop and strengthen internal controls further. The Audit Committee,
on behalf of the Board, has the responsibility for reviewing internal controls. The system is designed to provide reasonable, but not absolute, assurance that
the assets of the Group are safeguarded, that proper accounting records are maintained, and that reliable financial information is produced.
All subsidiary undertakings are required to adhere to specified internal control procedures. The Audit Committee receives regular reports on internal control.
Monitoring of compliance with the Group’s system of internal control is undertaken by all levels of management and reinforced by the role fulfilled by the
Audit Committee.
Relations with Shareholders
An important role of the Board is to represent and promote the interests of its shareholders as well as being accountable to them for the performance
and activities of the Group. The Board believes it is important to engage with its shareholders and does this in a number of ways through presentations,
conference calls, face-to-face meetings and the Annual General Meeting. Following the announcement of the Group’s half-year and year-end results,
presentations are made to analysts and major shareholders to update them on progress and invite them to ask questions.
The Board is updated on the latest shareholder information by the receipt of shareholder register movements, analyst reports and feedback from the Group’s
brokers following investor road shows after half-year and year-end results.
All Directors attend the Annual General Meeting and engage in discussion with shareholders present.
35
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Corporate Governance continued
Safety, Health and the Environment
The Group has a proactive approach to Safety, Health and the Environment and is committed to the highest practicable standards of safety and health
management and the minimisation of adverse environmental impacts.
The Board ensures that Health and Safety issues for employees, customers and the public are of foremost concern in all Group activities. The Group Chief
Executive, supported by external advice, is charged with overall responsibility. The Group encourages both internal and external training through a formal
network of full-time officers and Health and Safety nominated "champions" at all levels. Statistical analysis is used to highlight any areas where additional
training or improved working practices would be beneficial, and positive action is promptly implemented. All divisions have formulated safety management
systems. We continue with the programme to achieve OHSAS 18001 Occupation Health and Safety Assessment Series for health and safety management
systems and ISO 14000 environmental management.
Compliance with Laws
The Group has systems in place designed to ensure compliance with all applicable laws and regulations and conformity with all relevant codes of
business practice.
Compliance with the Bribery Act 2010 involves an Anti-Corruption Policy and a Group Whistle-blowing Policy, which can be found on the website. Training
is given to all appropriate employees through the use of online tools to ensure that there is full understanding of the Bribery Act 2010 and awareness of the
consequences of not adhering to Group policies.
The Group has taken the appropriate steps to comply with the provisions of the Market Abuse Regulation and the Modern Slavery Act, which can be found
on the website.
Going Concern
The Group’s business activities and financial position; the factors likely to affect its future development and performance and its objectives and policies in
managing financial risks are discussed in the Financial Review on page 21.
The Directors have assessed, in light of current and anticipated economic conditions, the Group’s ability to continue as a going concern. The Directors are
satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt
the "going concern" basis for preparing the accounts.
36
Hargreaves Services plcDirectors’ Report Remuneration Report
Peter Jones, Chairman of the Remuneration Committee
Responsibilities and Role of the Remuneration Committee
The Committee’s principal function is to review the remuneration of the Executive
Directors. It also monitors the remuneration of the Group’s senior managers. The
remuneration strategy, policy and approach for all staff, is also reviewed annually by the
Committee. The full Terms of Reference of the Committee are available on the website.
The policy for the current and future financial years for the remuneration and
incentivisation of the Executive Directors is as follows:
•
•
ensure that individual rewards and incentives are aligned with the performance
of the Company and the interests of shareholders;
ensure that performance-related elements of remuneration constitute a significant
proportion of an executive’s remuneration package; and
• maintain a competitive remuneration package which enables the Company to
attract, retain and motivate high-calibre executives.
The Committee reviews the Company’s executive remuneration arrangements and
implements incentive arrangements to support the objective of rewarding those
individuals who deliver real and genuine shareholder value. In developing the
arrangements the Committee and its advisers consider current market practice.
The Committee invites individuals to attend meetings to provide advice to ensure that the Committee’s decisions are informed and take account of pay and
conditions across the Group. During the year the Group Chief Executive and Group Head of Human Resources attended meetings and provided relevant
information to the Committee.
Membership of the Committee
The members of the Committee, which met on three occasions during the year, were:
Peter Jones
David Morgan
Nigel Halkes
Chairman
All members of the Committee are Independent Non-Executive Directors and are recognised by the Board as capable of bringing independent judgement
to bear. The Group Chief Executive is consulted and invited to attend meetings, when appropriate, but no Director is allowed to be present when his own
remuneration is discussed.
During the year the Committee reviewed and considered annual pay rises and conditions of service for employees earning over £100,000; bonus scheme
arrangements; the vesting and granting of Long-Term Incentive Plans; the Group’s annual pay review; and the effectiveness of the Committee.
Components of Remuneration
Basic Salary
This is a fixed cash sum, payable monthly. Salaries are reviewed annually by the Remuneration Committee in the light of individual performance, experience
in the role and market comparisons.
Annual Bonus
Executive Directors participate in an annual incentive bonus scheme linked to the actual achievement of Group targets set by the Committee. These being
profit before tax, net debt and safety. Such bonus is capped at 100% of salary. No bonus counts in the calculation of pension entitlement.
Long-Term Incentives
The Executive Directors and other senior employees have traditionally been invited to participate in Long-Term Incentive Plans, whereby shares in the Group
are awarded subject to performance criteria. The Group LTIP scheme was replaced by a deferred bonus scheme in 2014.
37
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Remuneration Report continued
Benefits in Kind and Pensions
In addition to basic salary, Executive Directors are entitled to the following benefits: paid holiday, company car, contributions to a personal pension plan and
life assurance, private medical insurance and permanent health insurance.
Directors’ Remuneration for the Year to 31 May 2017
Gordon Banham
Iain Cockburn
Kevin Dougan
Tim Ross (resigned
8 October 2015)
David Morgan
Peter Jones
Nigel Halkes
Total
Salary/Fees
Bonus in cash
Benefits
Total
Pension
2017
£000
457
303
249
–
100
40
40
2016
£000
407
270
224
27
85
40
28
2017
£000
457
303
227
–
–
–
–
1,189
1,081
987
2016
£000
–
–
–
–
–
–
–
–
2017
£000
51
35
18
–
–
–
–
2016
£000
45
27
25
–
–
–
–
2017
£000
965
641
494
–
100
40
40
2016
£000
452
297
249
27
85
40
28
2017
£000
114
76
–
–
–
–
–
2016
£000
113
75
–
–
–
–
–
104
97
2,280
1,178
190
188
Directors’ Service Contracts and Letters of Appointment
The Directors have entered into service agreements and letters of appointment with the Company and the principal terms are as follows:
Date of latest agreement
Name
Position
Commencement of
period of office
3 September 2013
3 September 2013
3 September 2013
3 September 2013
6 June 2014
21 August 2015
David Morgan
Gordon Banham
Kevin Dougan
Iain Cockburn
Peter Jones
Nigel Halkes
24 February 2012
1 October 2001
Non-Executive Chairman
Group Chief Executive
Group Commercial Director 23 June 1997
Group Finance Director
Non-Executive Director
Non-Executive Director
8 October 2007
6 June 2014
21 August 2015
2017/18
Salary (£)
100,000
463,489
230,118
307,545
40,000
40,000
Notice period
6 months’ notice
12 months’ notice
12 months’ notice
12 months’ notice
n/a
n/a
Non-Executive Directors are not eligible to participate in any incentive plans, share option schemes or Company pension arrangements and are not entitled
to any payment in compensation for any early termination of their appointment.
Directors’ Share Options
Details of Directors’ share options, held under the Savings-Related Share Option Scheme and Executive Long-Term Incentive Plan, are noted in the Directors’
Report on pages 30 and 31.
Savings-Related Share Option Scheme
The Sharesave Scheme is a ten-year savings-related share option scheme and was implemented in December 2005. This was not renewed in 2016 and the
final remaining scheme matured during the year to 31 May 2017.
All employees (including Executive Directors) of the Group, or any participating member of the Group whose earnings are subject to income tax and who
have the requisite minimum period of continuous employment, are eligible to participate.
The exercise price of an option shall be fixed by the Group and shall normally be at a 10% discount on the market value of a share on the date invitations are
issued to eligible employees. In the case of an option to subscribe for shares the exercise price may not be less than the nominal value of a share.
Participants may, at the absolute discretion of the Committee, be invited to apply for three, five or seven-year options. All options must be linked to a
contractual savings scheme entered into by each participant with the savings institution nominated by the Company and approved by HMRC. Participants
may save between £5 and £250 per month (or weekly equivalent), such sums to be deducted from the relevant participant’s pay.
At the end of the chosen savings period, a bonus is payable.
No option shall be granted under the Sharesave Scheme on any date if, as a result, the total number of shares issued or issuable pursuant to options and other
rights granted under the Sharesave Scheme and any other employees share scheme established by the Company on or after Admission, would exceed 10%
of the issued ordinary share capital of the Company on that date of grant.
Ordinary shares issued pursuant to the Sharesave Scheme shall rank pari passu in all respects with the ordinary shares already in issue.
38
Hargreaves Services plcDirectors’ Report
In normal circumstances, options may be exercised during the period of six months commencing on the maturity (that is the relevant bonus date) of the
savings contract. Options will become exercisable immediately on the death of a participant for a period of 12 months after the date of death or the bonus
date, whichever is earlier. If a participant ceases to be an employee on reaching the age of 65 or at such other age at which that employee is bound to retire
in accordance with the terms of his contract of employment or ceases to be in employment due to injury, disability, redundancy or as a result of the sale of
the business or subsidiary by which the participant is employed, options will become exercisable for a period of six months. If a participant has held an option
for at least three years, it will become exercisable for a period of six months. Options will also become exercisable on an employee attaining the age of 65
if they should continue in employment and on a change in control, reconstruction, amalgamation or voluntary winding-up of the Company.
An option will lapse six months following the bonus date, except if the participant dies, in which case an option will lapse 12 months following death, if later.
Executive Long-Term Incentive Plan ("LTIP")
The LTIP scheme was implemented in November 2006. No LTIP awards were granted in the year ended 31 May 2017.
The scheme was designed to allow awards to be made to eligible employees selected by the Remuneration Committee.
The vesting of an award granted to an Executive Director of the Company shall, or in the case of an award granted to any other Group employee may, be
subject to the satisfaction of one or more Performance Conditions. The Remuneration Committee may determine or recommend to the Trustee that the
vesting of an award will be subject to any other objective condition in addition to the Performance Conditions. The Performance Conditions on current
awards, are included in Note 26.
The rules of the LTIP schemes allow participants to exercise options, to the extent they have satisfied the performance conditions, after the expiry of the
vesting period.
No option shall be granted under the LTIP scheme on any date if, as a result, the total number of shares issued or issuable pursuant to options and other rights
granted under the LTIP scheme and any other employee share scheme established by the Company on or after Admission, would exceed 10% (5% excluding
other share schemes) of the issued ordinary share capital of the Company on date of grant.
Ordinary shares issued pursuant to the LTIP scheme shall rank pari passu in all respects with the ordinary shares already in issue.
An option will lapse ten years after the date of the grant, except if the participant dies, in which case the option will lapse 12 months following death,
whichever date is earlier.
Deferred Bonus Scheme
A Deferred Bonus Scheme ("the Scheme") was implemented in December 2014. The Scheme was introduced as a temporary replacement for the Executive
Long-Term Incentive Plan ("LTIP") for the year ended 31 May 2015. The Scheme was introduced as a one-year scheme, with a focus on incentivising the
Executive team during a transitional period for the Group.
The Scheme was designed to allow awards to be made to Executive Directors selected by the Remuneration Committee. The value of any award made under
the Scheme was sixty percent of any bonus received under the Group Annual Bonus Scheme for the year ended 31 May 2015. This figure in turn was converted
into shares using the mid-closing price of a Hargreaves Services plc share on the day preceding the award.
By order of the Board
Peter Jones
Non-Executive Director
7 August 2017
39
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Statement of Directors’ Responsibilities
in Respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year. As required by the AIM Rules of the
London Stock Exchange they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and
have elected to prepare the parent company financial statements on the same basis.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs
of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the
Directors are required to:
select suitable accounting policies and then apply them consistently;
•
• make judgements and estimates that are reasonable and prudent;
•
•
state whether they have been prepared in accordance with IFRSs as adopted by the EU; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue
in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose
with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the
Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to
prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in
the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
40
Hargreaves Services plcDirectors’ Report
Independent Auditor’s Report
to the Members of Hargreaves Services plc
We have audited the financial statements of Hargreaves Services plc for the year ended 31 May 2017 set out on pages 42 to 90. The financial reporting
framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the EU and,
as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has
been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members,
as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and Auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page 40, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices
Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
•
the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 May 2017 and of the Group’s profit
for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with
the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
•
•
•
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year is consistent with the financial statements.
Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic Report and the
Directors’ Report:
• we have not identified material misstatements in those reports; and
•
in our opinion, those reports have been prepared in accordance with the Companies Act 2006.
Matters on which we are required to report by exception
• We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
•
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches
not visited by us; or
the parent company financial statements are not in agreement with the accounting records and returns; or
•
•
certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Johnathan Pass (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
Quayside House
110 Quayside
Newcastle upon Tyne
NE1 3DX
7 August 2017
41
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Consolidated Statement of Profit and Loss
and Other Comprehensive Income
for year ended 31 May 2017
Continuing operations
Revenue
Cost of sales
Gross profit
Other operating income
Administrative expenses
Operating profit/(loss)
Analysed as:
Operating profit (before exceptional costs)
Exceptional costs – Cost of sales
Exceptional costs – Administrative expenses
Exceptional costs
Operating profit/(loss) (after exceptional costs)
Financial income
Financial expenses
Share of profit/(loss) in associates and joint ventures (net of tax)
Profit/(loss) before tax
Taxation
Profit/(loss) for the year from continuing operations
Discontinued operations
Result/(loss) for the year from discontinued operations
Profit/(loss) for the year
Other comprehensive income/(expense)
Items that will not be reclassified to profit or loss
Remeasurements of defined benefit pension plans
Tax recognised on items that will not be reclassified to profit or loss
Items that are or may be reclassified subsequently to profit or loss
Foreign exchange translation differences
Effective portion of changes in fair value of cash flow hedges
Tax recognised on items that are or may be reclassified subsequently to profit or loss
Other comprehensive income for the year, net of tax
Note
1,2
4
5
2017
£000
342,868
(309,832)
33,036
4,870
(37,213)
2016
£000
340,665
(299,764)
40,901
265
(48,339)
693
(7,173)
1,163
5,205
6
9
9
16
11
10
25
11
11
(3,566)
3,096
(470)
693
1,766
(3,858)
5,487
4,088
694
4,782
(3,473)
(8,905)
(12,378)
(7,173)
1,153
(2,785)
(1,792)
(10,597)
1,082
(9,515)
–
(940)
4,782
(10,455)
(544)
36
2,594
349
(63)
2,372
(1,098)
181
149
1,119
(40)
311
Total comprehensive income/(expense) for the year
7,154
(10,144)
42
Hargreaves Services plcFinancial Statements Profit/(loss) attributable to:
Equity holders of the Company
Non-controlling interest
Profit/(loss) for the year
Total comprehensive income/(expense) attributable to:
Equity holders of the Company
Non-controlling interest
Total comprehensive income/(expense) for the year
Basic earnings per share (pence)
Diluted earnings per share (pence)
Basic earnings per share from continuing operations (pence)
Diluted earnings per share from continuing operations (pence)
Non GAAP Measures
Basic underlying earnings per share from continuing operations (pence)
Diluted underlying earnings per share continuing operations (pence)
Note
12
12
12
12
2017
£000
5,138
(356)
2016
£000
(10,498)
43
4,782
(10,455)
7,510
(356)
(10,187)
43
7,154
(10,144)
16.14
15.93
16.14
15.93
18.12
17.88
(32.96)
(32.96)
(30.01)
(30.01)
5.70
5.63
43
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report
13
14
15
16
16
17
19
10
20
17
21
22
23
25
27
18
23
24
27
18
Group
Company
Note
2017
£000
2016 Restated
(See Note 3)
£000
63,664
12,124
12,389
6,917
–
7
2,844
68,095
5,126
12,223
1,043
–
–
3,207
2017
£000
–
–
–
4,984
34,078
–
401
2016
£000
–
–
–
4,984
40,123
–
185
97,945
89,694
39,463
45,292
5,040
29,147
139
121,657
27,817
5,040
46,983
32
117,310
21,161
–
–
–
207,675
115
–
–
–
218,873
–
183,800
190,526
207,790
218,873
281,745
280,220
247,253
264,165
(38,587)
(5,103)
(5,344)
(12)
(46,098)
(5,699)
(4,189)
(66)
(35,275)
–
–
–
(37,593)
–
–
–
(49,046)
(56,052)
(35,275)
(37,593)
(4,965)
(88,958)
–
(600)
(249)
(7,401)
(77,844)
(6,271)
(867)
(430)
–
(109,321)
–
–
–
(3,895)
(116,877)
–
–
(268)
(94,772)
(92,813)
(109,321)
(121,040)
(143,818)
(148,865)
(144,596)
(158,633)
137,927
131,355
102,657
105,532
Balance Sheets
at 31 May 2017
Non-current assets
Property, plant and equipment
Investment property
Intangible assets
Investments in associates and joint ventures
Investments in subsidiary undertakings
Other financial assets
Deferred tax assets
Current assets
Assets held for sale
Inventories
Other financial assets
Trade and other receivables
Cash and cash equivalents
Total assets
Non-current liabilities
Other interest-bearing loans and borrowings
Retirement benefit obligations
Provisions
Other financial liabilities
Current liabilities
Other interest-bearing loans and borrowings
Trade and other payables
Income tax liabilities
Provisions
Other financial liabilities
Total liabilities
Net assets
44
Hargreaves Services plcFinancial Statements Equity attributable to equity holders of the parent
Share capital
Share premium
Other reserves
Translation reserve
Merger reserve
Hedging reserve
Capital redemption reserve
Retained earnings
Non-controlling interest
Total equity
Note
28
28
28
28
28
28
Group
Company
2017
£000
2016 Restated
(See Note 3)
£000
3,314
73,955
211
(988)
1,022
224
1,530
58,630
3,314
73,955
211
(3,582)
1,022
(62)
1,530
54,582
2017
£000
3,314
73,955
–
–
1,022
–
1,530
22,836
2016
£000
3,314
73,955
–
–
1,022
(268)
1,530
25,979
137,898
130,970
102,657
105,532
29
385
–
–
137,927
131,355
102,657
105,532
These financial statements were approved by the Board of Directors on 7 August 2017 and were signed on its behalf by:
Gordon Banham
Director
Iain Cockburn
Director
Registered Number: 4952865
45
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report
Statements of Changes in Equity
for year ended 31 May 2017
Group
Balance at 1 June 2015
Total comprehensive income
for the year
Loss for the year
Other comprehensive income/
(expense)
Foreign exchange translation
differences
Effective portion of changes in fair
value of cash flow hedges
Remeasurements of defined benefit
pension plans
Tax recognised on other
comprehensive income
Total other comprehensive expense
Total comprehensive income/(expense)
for the year
Transactions with owners recorded
directly in equity
Equity settled share-based
payment transactions
Dividends paid
Purchase of own shares
Total contributions by and
distributions to owners
Share
capital
£000
Share
premium
£000
Translation
reserve
£000
Hedging
reserve
£000
Other
reserves
£000
Capital
redemption
reserve
£000
Merger
reserve
£000
Retained
earnings
£000
Total
parent
equity
£000
Non-
controlling
interest
£000
Total
equity
£000
3,314
73,955
(3,731)
(1,141)
211
1,530
1,022
72,999
148,159
342
148,501
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
149
–
–
–
–
–
1,119
–
(40)
149
1,079
149
1,079
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(10,498)
(10,498)
43
(10,455)
–
–
–
–
–
–
–
–
–
–
–
–
149
1,119
(1,098)
(1,098)
181
(917)
141
311
–
–
–
–
–
149
1,119
(1,098)
141
311
(11,415)
(10,187)
43
(10,144)
520
(6,924)
(598)
520
(6,924)
(598)
(7,002)
(7,002)
–
–
–
–
520
(6,924)
(598)
(7,002)
Balance at 31 May 2016
3,314
73,955
(3,582)
(62)
211
1,530
1,022
54,582
130,970
385
131,355
46
Hargreaves Services plcFinancial Statements
Group
Balance at 1 June 2016
Total comprehensive income
for the year
Profit/(loss) for the year
Other comprehensive
income/(expense)
Foreign exchange
translation differences
Effective portion of changes in
fair value of cash flow hedges
Remeasurements of defined benefit
pension plans
Tax recognised on other
comprehensive income
Total other comprehensive
income/(expense)
Total comprehensive income/
(expense) for the year
Transactions with owners
recorded directly in equity
Equity settled share-based payment
transactions
Dividends paid
Total contributions by and distributions
to owners
Share
capital
£000
Share
premium
£000
Translation
reserve
£000
Hedging
reserve
£000
Other
reserves
£000
Capital
redemption
reserve
£000
Merger
reserve
£000
Retained
earnings
£000
Total
parent
equity
£000
Non-
controlling
interest
£000
Total
equity
£000
3,314
73,955
(3,582)
(62)
211
1,530
1,022
54,582
130,970
385
131,355
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,594
–
–
–
–
–
349
–
(63)
2,594
286
2,594
286
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,138
5,138
(356)
4,782
–
–
2,594
349
(544)
(544)
36
(27)
(508)
2,372
–
–
–
–
–
2,594
349
(544)
(27)
2,372
4,630
7,510
(356)
7,154
471
(1,053)
471
(1,053)
(582)
(582)
–
–
–
471
(1,053)
(582)
Balance at 31 May 2017
3,314
73,955
(988)
224
211
1,530
1,022
58,630
137,898
29
137,927
47
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Statements of Changes in Equity
for year ended 31 May 2017 continued
Company
Balance at 1 June 2015
Total comprehensive income for the year
Profit for the year
Other comprehensive income
Effective portion of changes in fair value of cash flow hedges
Total comprehensive income for the year
Transactions with owners recorded directly in equity
Equity settled share-based payment transactions
Dividends paid
Purchase of own shares
Total transactions with owners
Share
capital
£000
3,314
Share
premium
£000
73,955
Capital
redemption
reserve
£000
1,530
Merger
reserve
£000
1,022
Hedging
reserve
£000
Retained
earnings
£000
Total
parent
equity
£000
(466)
32,918
112,273
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
198
198
–
–
–
–
63
–
63
63
198
261
520
(6,924)
(598)
520
(6,924)
(598)
(7,002)
(7,002)
Balance at 31 May 2016
3,314
73,955
1,530
1,022
(268)
25,979
105,532
Balance at 1 June 2016
3,314
73,955
1,530
1,022
(268)
25,979
105,532
Total comprehensive income for the year
Loss for the year
Other comprehensive income
Effective portion of changes in fair value of cash flow hedges
Tax recognised on other comprehensive income
Total comprehensive income for the year
Transactions with owners recorded directly in equity
Equity settled share-based payment transactions
Dividends paid
Total contributions by and distributions to owners
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Balance at 31 May 2017
3,314
73,955
1,530
1,022
–
(2,561)
(2,561)
268
–
268
–
–
–
–
–
–
268
–
(2,561)
(2,293)
471
(1,053)
(582)
471
(1,053)
(582)
22,836
102,657
48
Hargreaves Services plcFinancial Statements Cash Flow Statements
for year ended 31 May 2017
Cash flows from operating activities
Profit/(loss) for the year from continuing operations
Adjustments for:
Depreciation
Impairment of property, plant and equipment
Depreciation of mining assets
Amortisation and impairment of goodwill and intangible assets
Dividend income
Net finance expense
Share of (profit)/loss in associates and joint ventures (net of tax)
Impairment of investment in subsidiaries and joint venture
Profit on sale of property, plant and equipment
Equity settled share-based payment expenses
Income tax credit
Gain on derivative financial instruments
Translation of non-controlling interest and investments
Change in inventories
Change in trade and other receivables
Change in trade and other payables
Change in provisions and employee benefits
Interest paid
Income tax paid
Net cash from continuing operating activities
Net cash from operating activities in discontinued operations
Net cash from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Dividends received
Acquisition of subsidiaries (net of cash acquired)
Acquisition of property, plant and equipment
Net cash from investing activities
Cash flows from financing activities
Payment of finance lease liabilities
Payment of other loan balances
Dividends paid
Purchase of own shares
(Repayment of)/proceeds from Group banking facilities
Net cash from financing activities in continuing operations
Net cash from financing activities in discontinued operations
Group
2017
£000
Company
2016
£000
2017
£000
2016
£000
Note
4,782
(9,515)
(2,561)
63
13
13
13
15
9
15
26
11
13
28
23
11,333
2,655
862
315
–
2,092
(5,487)
–
(1,783)
471
(694)
–
(373)
14,173
17,828
2,178
7,641
(38)
41,782
(1,306)
(6,994)
33,482
–
9,261
–
7,263
1,026
–
1,632
1,792
4,302
(265)
520
(1,082)
–
(5)
14,929
15,541
10,696
(21,775)
754
20,145
(4,011)
(6,702)
9,432
(3,156)
–
–
–
–
–
(451)
–
6,600
–
–
(327)
–
–
3,261
–
11,095
(7,557)
–
6,799
633
214
7,646
–
–
–
–
–
(839)
(128)
–
–
–
–
(1,098)
(1,066)
–
(3,068)
–
327,257
(339,554)
–
(15,365)
(52)
–
(15,417)
–
33,482
6,276
7,646
(15,417)
5,284
–
(248)
(19,971)
(14,935)
(8,612)
–
(1,053)
–
(2,500)
(12,165)
–
1,613
839
(4,110)
(15,075)
(16,733)
(6,591)
(2,890)
(6,924)
(598)
5,000
(12,003)
(282)
–
–
(83)
–
(83)
–
–
(1,053)
–
(2,500)
(3,553)
–
–
839
(6,701)
–
(5,862)
–
–
(6,924)
(598)
5,000
(2,522)
–
Net cash from financing activities
(12,165)
(12,285)
(3,553)
(2,522)
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 June
Effect of exchange rate fluctuations on cash held
6,382
21,161
274
(22,742)
43,853
50
4,010
(3,895)
–
(23,801)
19,906
–
Cash and cash equivalents at 31 May
22
27,817
21,161
115
(3,895)
49
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Notes
(forming part of the financial statements)
1 Accounting Policies
Hargreaves Services plc (the “Company”) is a public company incorporated, domiciled and registered in England, UK.
The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the “Group”) and equity account the Group’s
interest in associates and joint ventures. The parent company financial statements present information about the Company as a separate entity and not about
its Group.
Both the parent company financial statements and the Group financial statements have been prepared and approved by the Directors in accordance with
International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”). On publishing the parent company financial statements here together
with the Group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual
income statement and related notes that form a part of these approved financial statements.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements.
In these financial statements various Adopted IFRSs which are effective for the first time have been adopted, including the following standards, amendments
and interpretations:
•
•
•
•
•
•
Amendments to IAS 27: Equity Method in Separate Financial Statements
Amendments to IAS 1: Disclosure Initiative
Annual Improvements to IFRSs 2012–2014 Cycle
Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation
Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations
Amendments to IAS 16 and IAS 41: Bearer Plants
None of the Adopted IFRSs adopted by the Group had a significant impact on the Group’s result for the year or its equity.
Accounting Estimates and Judgements
The preparation of financial statements requires the Directors to make judgements, estimates and assumptions that may affect the application of accounting
policies and the reported amounts of assets and liabilities, and income and expenses. The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements
about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The key areas
requiring the use of estimates and judgements which may significantly affect the financial statements are considered to be:
a) Measurement of the recoverable amounts of cash-generating units containing goodwill, assets held for sale and other property assets
This requires the identification of appropriate cash-generating units and the allocation of goodwill to these units. The assessment of impairment involves
assumptions on the estimated future operating cash flows from these cash-generating units, the discount rate applied in the calculations and the comparison
of the cash flows to the carrying value of the goodwill. Management have assessed the sensitivity of carrying amounts of cash-generating units containing
goodwill to reasonably possible changes in key assumptions. Assets held for sale relate to residual equipment from discontinued operations. Estimates have
been made of the net proceeds from these disposals. Other property assets are assessed on the basis of the strategy for each asset and the estimated net
proceeds arising. Definitions for and analysis of the properties valuations can be found on page 17.
b) Mining production and profitability
The Group has a significant surface mining business primarily comprising the Tower joint venture and the operations in Scotland. Estimates of mine life
and production levels, and the profitability of future production (which in the medium-term continues to be part dependent on future prices for coal
and coke) are included in Group forecasts. These forecasts are used in the impairment assessment of certain related mining assets, including goodwill.
Estimates of mine life and production levels also form the basis of depreciation of capitalised mining costs.
c) Restoration costs
Obligations exist at both Maltby Colliery and Monckton Coke Works to carry out restoration at the end of the productive life. The related provisions
(see Note 27) are based on the nature and extent of the contamination and the estimated costs of restoration. These key assumptions are reviewed
on a regular basis and these reviews may lead to adjustments to the provisions over their lives.
The Group’s surface mining activities also give rise to obligations for site restoration. The restoration provisions are based on the Group’s current obligation
for the cost of future site restoration. Restoration provisions are measured at the expected value of future cash flows, discounted to their present value
applying an appropriate risk-adjusted rate. Significant judgements and estimates are involved in forming an expectation of future activities and the amount
and timing of the associated cash flows. Such expectations are based on existing planning requirements and management’s future development plans
which may give rise to a constructive obligation.
d) Post retirement employee benefits
The Group operates both funded defined benefit schemes and unfunded concessionary fuel schemes. The determination of the Group’s obligations
under these schemes is dependent on a number of long-term assumptions including the discount rate, inflation rate and mortality rates. Differences
arising from actual experience or future changes in assumptions will be reflected in future years.
50
Hargreaves Services plcFinancial Statements
1 Accounting Policies continued
Accounting Estimates and Judgements continued
e) Share-based payments
The estimation of share-based payment costs requires the selection of an appropriate valuation model together with assumptions in respect of the key
inputs into the model, including the achievement of certain service and performance conditions. Differences arising from actual experience may be
reflected in future years.
f) Deferred tax asset
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
g) Revenue and margin recognition on construction contracts
The Group’s revenue and margin recognition policies in respect of construction contracts require forecasts to be made in respect of the outcomes of
long-term contracts and services. These forecasts require assessments and judgements to be made, not least in respect of estimated contract costs and
project scope changes. Use of the percentage of completion method also requires the Group to estimate the contract work performed to date as a
proportion of the total contract work to be performed. Differences arising from unforeseen changes or events as the contract progresses may be reflected
in future years.
Measurement Convention
The financial statements are prepared on the historical cost basis except that derivative financial instruments and financial instruments classified as fair value
through the profit or loss or as available-for-sale are stated at their fair value.
The 2016 consolidated balance sheet includes the measurement period adjustments relating to acquisitions made in 2016 in accordance with IFRS 3 “Business
Combinations” The measurement period adjustments are disclosed in Note 3.
Going Concern
The Group’s business activities, together with the factors likely to affect its future development performance and position are set out in the Group Business
Review on pages 16 to 22. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review
on pages 23 to 25. In addition, Note 29 to the financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial
risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.
The Group has considerable financial resources together with long-term contracts with a number of customers and suppliers across different geographic
areas and industries. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. In making this assessment,
the Board has reviewed projections for the next five years, taking into account key assumptions and uncertainties.
After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational
existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.
The financial statements were approved by the Board of Directors on 7 August 2017.
Basis of Consolidation
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement
with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential
voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of
subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable
to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have
a deficit balance.
Change in Subsidiary Ownership and Loss of Control
Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
Where the Group loses control of a subsidiary, the assets and liabilities are derecognised along with any related non-controlling interest and other
components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when
control is lost.
Joint Arrangements
A joint arrangement is an arrangement over which the Group and one or more third parties have joint control. These joint arrangements are in turn classified as:
•
•
joint ventures – whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities; and
joint operations – whereby the Group has rights to the assets and obligations for the liabilities relating to the arrangement.
Associates
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence
is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity.
51
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report
1 Accounting Policies continued
Basis of Consolidation continued
Application of the Equity Method to Associates and Joint Ventures
Associates and joint ventures are accounted for using the equity method (equity accounted investees) and are initially recognised at cost. The Group’s
investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group’s
share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence or joint control
commences, until the date that significant influence or joint control ceases. When the Group’s share of losses exceeds its interest in an equity accounted
investee, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal
or constructive obligations or made payments on behalf of an investee.
Transactions Eliminated on Consolidation
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising
from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised
losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
Separate Parent Company Financial Statements
In the parent company financial statements, all investments in subsidiaries, joint ventures and associates are carried at cost less impairment.
Foreign Currency
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate ruling at the date of
the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at the
foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated
using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the income statement except
for differences arising on qualifying cashflow hedges which are recognised directly in other comprehensive income.
The assets and liabilities of foreign operations are translated into Pounds Sterling, the Group’s presentational currency, at the exchange rates ruling at the
balance sheet date. The revenues and expenses of foreign operations are translated at rates approximating to the foreign exchange rates ruling at the dates
of the transactions. Exchange differences arising from this translation of foreign operations are reported as an item of other comprehensive income and
accumulated in the translation reserve or non-controlling interest, as the case may be. When a foreign operation is disposed of, such that control, joint control
or significant influence is lost, the entire accumulated amount in the translation reserve, net of amounts previously attributed to non-controlling interests,
is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign
operation while still retaining control, the relevant proportion of the accumulated amount is reattributed to non-controlling interests.
Classification of Financial Instruments Issued by the Group
Financial instruments issued by the Group are treated as equity (i.e. forming part of shareholders’ funds) only to the extent that they meet the following
two conditions:
•
they include no contractual obligations upon the Group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with
another party under conditions that are potentially unfavourable to the Group; and
• where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver
a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s exchanging a fixed amount of cash
or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form
of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts
in relation to those shares.
Where a financial instrument that contains both equity and financial liability components exists these components are separated and accounted for
individually under the above policy. The finance cost on the financial liability component is correspondingly higher over the life of the instrument.
Finance payments associated with financial liabilities are dealt with as part of finance expenses. Finance payments associated with financial instruments that
are classified in equity are dividends and are recorded directly in equity.
Financial Instruments
Non-Derivative Financial Instruments
Non-derivative financial instruments include investments, trade and other receivables, cash and cash equivalents, loans and borrowings and trade and other
payables. These are initially recognised at fair value and subsequently are measured at amortised cost.
Derivative Financial Instruments
The Group uses interest rate swaps to help manage its interest rate risk, and forward foreign currency contracts to manage its exchange rate risk. The Group
also uses derivative sale and purchase contracts to mitigate the risk of fluctuating coal prices and exchange rate risk.
Derivative financial instruments are recognised initially at fair value and are subsequently re-measured to fair value at each reporting date and changes therein
are accounted for as described as follows.
52
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 1 Accounting Policies continued
Cash Flow Hedges
Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a highly probable forecast transaction (for example, interest
payments, sales and purchases denominated in foreign currency, sale and purchase of commodities), changes in the fair value of the derivative hedging
instrument designated as a cash flow hedge are recognised directly in the hedging reserve to the extent that the hedge is effective. Amounts deferred in
equity are recognised in the Consolidated Statement of Comprehensive Income when the hedged item affects profit or loss. To the extent that the hedge is
ineffective, changes in fair value are recognised immediately in profit or loss.
Derivatives designated as hedging instruments are accounted for in line with the nature of the hedging arrangement. Derivatives are intended to be highly
effective in mitigating the above risks, and hedge accounting is adopted where the required hedge documentation is in place and the relevant test criteria
are met.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement as part
of financing costs.
Intra-Group Financial Instruments
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the Company considers
these to be insurance arrangements and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until
such time as it becomes probable that the Company will be required to make a payment under the guarantee.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Where parts of an item of property, plant and
equipment have different useful economic lives, they are accounted for as separate items of property, plant and equipment.
Mine development costs associated with the Group’s surface mining operations are depreciated on a tonnage extracted basis over the estimated production
life of the site.
Depreciation is charged to the income statement on a straight-line basis over the estimated useful economic lives of each part of an item of property, plant
and equipment. Land is not depreciated. Depreciation rates are as follows:
Mineral reserves
Freehold buildings
Leasehold improvements
Motor vehicles and plant
Furniture and equipment
Fixtures and fittings
Investment properties
– 12.5% p.a.
– 2% to 4% p.a.
– 15% p.a.
– 10% to 20% p.a.
– 25% p.a.
– 15% p.a.
– 2% to 4% p.a.
Mining Assets
Surface mine development – units of coal production
– units of coal production
Restoration asset
– units of coal production from the specific box cut to which the associated stripping asset relates
Stripping activity asset
Depreciation methods, useful lives and residual values are reviewed at each balance sheet date. Depreciation on assets in the course of construction
commences when the assets are available for use.
Mining Assets
Surface Mine Development Asset
Costs incurred in preparing and developing sites are referred to as “surface mine development costs” and are capitalised within “property, plant and
equipment” as part of “Mining assets”. Surface mine development costs principally comprise:
•
•
•
the costs associated with achieving the necessary planning permission and consents, licences and permits required to operate the site;
drilling, pumping, geology and mine design costs; and
site development and infrastructure costs.
This asset is amortised to the statement of comprehensive income on a units of production method. Production is deemed to commence when work
to extract coal from the first production box cut begins.
Income from incidental coal that is extracted during the development phase is included within the consolidated statement of comprehensive income
together with the associated direct costs.
Stripping Asset
During the production phase, a non-current “stripping activity asset” is recognised within “Mining assets” to capitalise costs of removing overburden in order
to gain access or improve access to coal deposits; to the extent that future economic benefits are probable, the deposit of coal to which access has been improved
can be identified, and costs reliably measured. The stripping activity asset is initially measured at cost and subsequently carried at cost or its revalued amount
less amortisation and impairment. The stripping activity asset is amortised over the units of production of the coal deposit identified as being made more
accessible as a result of the directly associated stripping activity.
53
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 1 Accounting Policies continued
Business Combinations
Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the purchase method. Goodwill arises from the acquisition
of businesses and represents the difference between the cost of the acquisition and the fair value of the identifiable assets, liabilities and contingent liabilities
acquired. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable.
Acquisitions on or After 1 June 2010
For acquisitions on or after 1 June 2010, the Group measures goodwill at the acquisition date as:
•
•
•
•
the fair value of the consideration transferred; plus
the recognised amount of any non-controlling interests in the acquiree; plus
the fair value of the existing equity interest in the acquiree; less
the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured
and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss.
On the acquisition of a business, fair values are attributed to the identifiable assets, liabilities and contingent liabilities acquired, reflecting conditions at the
date of acquisition. Adjustments to fair values include those made to bring accounting policies into line with those of the Group. Provisional fair values are
finalised within 12 months of the business combination date and, where significant, are adjusted by restatement of the comparative period in which the
acquisition occurred.
On a transaction-by-transaction basis, the Group elects to measure non-controlling interests, which have both present ownership interests and are entitled
to a proportionate share of net assets of the acquiree in the event of liquidation, either at its fair value or at its proportionate interest in the recognised amount
of the identifiable net assets of the acquiree at the acquisition date. All other non-controlling interests are measured at their fair value at the acquisition date.
Acquisitions Between 1 June 2006 and 1 June 2010
Goodwill arising on acquisitions that have occurred between 1 June 2006 and 1 June 2010 is capitalised and is subject to impairment review, both annually and
when there are indications the carrying value may not be recoverable. Negative goodwill arising on an acquisition is recognised immediately in profit or loss.
Acquisitions Prior to 1 June 2006 (Date of Transition to IFRSs)
Goodwill arising on acquisitions prior to 1 June 2006 was capitalised and amortised under UK GAAP. This goodwill is carried at the UK GAAP carrying value at
the date of transition to adopted IFRS and is subject to impairment reviews as described above.
Acquisitions and Disposals of Non-Controlling Interests
Acquisitions and disposals of non-controlling interests that do not result in a change of control are accounted for as transactions with owners in their capacity
as owners and therefore no goodwill is recognised as a result of such transactions. The adjustments to non-controlling interests are based on a proportionate
amount of the net assets of the subsidiary. Any difference between the price paid or received and the amount by which non-controlling interests are adjusted
is recognised directly in equity and attributed to the owners of the parent.
Prior to the adoption of IAS 27 (2008), goodwill was recognised on the acquisition of non-controlling interests in a subsidiary, which represented the excess
of the cost of the additional investment over the carrying amount of the interest in the net assets acquired at the date of the transaction.
Intangible Assets and Goodwill
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually
for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the
investee.
Other intangible assets that are acquired by the Group, which have finite useful economic lives, are stated at cost less accumulated amortisation and
accumulated impairment losses. Amortisation is recognised in profit and loss on a straight-line basis over the estimated useful lives of intangible assets from
the date that they are available for use.
Investment Property
Investment properties are properties which are held either to earn rental income, or for capital appreciation, or for both. Investment properties are stated at
cost less accumulated depreciation.
Assets Held for Sale
The Group has classified non-current assets as held for sale if the carrying value will be recovered principally through sale rather than continuing use,
they are available for immediate sale and the sale is highly probable within one year.
On initial classification as held for sale, assets are measured at the lower of carrying amount and fair value less costs to sell, with any adjustments taken to the
Income Statement. In accordance with IFRS 5, no reclassifications are made in prior periods.
54
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 1 Accounting Policies continued
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is based on the weighted average method and includes expenditure incurred
in acquiring the inventories, production or conversion costs and other costs in bringing them to their existing location and condition.
Work in progress includes work to date on service contracts where project milestones have not yet been reached.
Properties Held for Development and Resale
Properties held for development and resale are included within inventories on the basis that their carrying value will be recovered principally through sale
in the ordinary course of business, rather than through continuing use within the Group. These assets are not available for immediate sale and will be subject
to further development before being available for sale. Properties held for development and resale are shown in the financial statements at the lower of cost
and net realisable value. Cost represents the acquisition price including legal and other professional costs associated with the acquisition together with
subsequent development costs net of amounts transferred to cost of sales. Net realisable value is the expected net sales proceeds of the developed property.
Trade and Other Receivables
Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost less any impairment
losses. A provision for impairment of trade receivables is established where there is objective evidence that the Group will not be able to collect all amounts
due according to the agreed terms of the receivables concerned.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s
cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement.
Trade and Other Payables
Trade and other payables are non-interest-bearing and are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised
cost using the effective interest method.
Investments
Investments in joint ventures, associates and subsidiaries are carried at cost less impairment in the parent company accounts.
Interest-Bearing Borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transactions costs. Subsequent to initial recognition, interest-bearing
borrowings are stated at amortised cost using the effective interest method, less any impairment losses.
Impairment
The carrying amounts of the Group’s financial assets, other than inventories and deferred tax assets, are reviewed at each balance sheet date to determine
whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses
are recognised in the Income Statement.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-
generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash-generating unit is the smallest identifiable
group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Reversals of Impairment
An impairment loss in respect of goodwill is not reversed.
In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist and there has been a change
in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined,
net of depreciation or amortisation, if no impairment loss had been recognised.
Employee Benefits
Defined Benefit Pension Plans
Following the acquisition of The Monckton Coke & Chemical Company Limited on 17 June 2005 and Maltby Colliery Limited on 26 February 2007, the Group
operates two concessionary fuel retirement benefit schemes. The scheme in respect of The Monckton Coke & Chemical Company Limited was settled in full
during the year, however, the scheme in respect of Maltby Colliery Limited remains.
In addition, following the acquisition of Maltby Colliery, the Group is a member of two additional pension schemes providing benefits based on final
pensionable pay. The assets of the schemes are held separately from those of the Group.
The retirement benefit scheme liabilities are calculated by a qualified actuary using the projected unit method. The concessionary fuel retirement benefit
schemes are unfunded retirement benefits and as such there are no assets in the schemes. The retirement benefit deficits are recognised in full, the
movement in the scheme deficits is split between operating charges, finance items and, in other comprehensive income, remeasurement gains and losses.
55
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 1 Accounting Policies continued
Employee Benefits continued
Defined Benefit Pension Plans continued
The additional defined benefit pension schemes are funded retirement benefit schemes. Pension scheme assets are measured using market values. Pension
scheme liabilities are measured using a projected unit method and discounted at the current rate of return on a high-quality corporate bond of equivalent
term and currency to the liability. The pension scheme surplus (to the extent that it is recoverable) or deficit is recognised in full. The movement in the scheme
surplus/deficit is split between operating charges, finance items and, in other comprehensive income, remeasurement gains and losses.
Defined Contribution Pension Plans
The Group operates a Group defined contribution personal pension scheme. The assets of the scheme are held separately from those of the Group in an
independently administered fund. The amount charged against profits represents the contributions payable to the scheme in respect of the financial period.
Obligations for contributions to defined contribution pension plans are recognised as an expense in the Income Statement as incurred.
Share-Based Payment Transactions
The Group operates a share option scheme for certain employees. The fair value of options granted is recognised as an employee expense with a corresponding
increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the
options. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the
options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options for which the related service and
non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of share options
that do not meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting
conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between
expected and actual outcomes.
Where the Company grants share-based payment awards over its own shares to the employees of its subsidiaries it recognises, in its individual financial
statements, an increase in the cost of investment in its subsidiaries equivalent to the equity settled share-based payment charge recognised in its
consolidated financial statements with the corresponding credit being recognised directly in equity.
Shares purchased by the Group are deducted from retained earnings at the total consideration paid or payable.
Simplification Costs
During the previous year the Group undertook a “Simplification Programme” whereby significant changes were made to the Group’s business model. The net
costs arising from these changes, to the extent that they were material by size and/or nature, were separately disclosed as Simplification costs (representing
exceptional administrative expenses and unrealised fair value gains and losses on derivative financial instruments), to enable a reader of the accounts to
understand the impact of the programme on the Group’s performance.
Exceptional Items
Exceptional items are defined as items of income and expenditure which are material and unusual in nature and which are considered to be of such significance
that they require separate disclosure on the face of the Income Statement. Any future movement on items previously classified as exceptional will also be
classified as exceptional.
Revenue
Revenue is measured at the fair value of consideration received or receivable, excluding value added tax, for goods and services supplied to external
customers. All directly attributable expenses in respect of services provided are recognised in the income statement in the period to which they relate.
Coal, Coke and Other Mineral Sales
Revenue is recognised when delivery of the product has been made and title has passed to the customer. A number of sales are sold on long-term contracts,
whereby quantities and pricing are agreed with customers for a defined future period. Revenue is recognised on individual sales when the conditions above
have been met.
Revenue is measured at the invoiced price net of VAT and any discounts. If, as a separate transaction, the Company has entered into a derivative contract
to hedge the sale price, any gains or losses on that hedge instrument are also included in revenue at the same time as the hedged transaction is recorded
as revenue.
Services
Revenue is recognised when the service has been delivered and the Group has performed its obligations under the sales contract. A large proportion of sales
are subject to long-term contracts, typically on a cost-plus or similar basis. The profit on such contracts is recognised (and invoiced) evenly over the term of
the contract unless it is clear that the timing of contract performance requires profit to be recognised on an alternative basis. Certain contracts, for example,
include specific programmes of work to be carried out. In these instances, revenue is recognised on achievement of specific programme milestones through
agreement with the customer. Any losses on such contracts are recognised in full immediately.
56
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued
1 Accounting Policies continued
Construction Contract Revenue
When the outcome of individual contracts can be estimated reliably, contract revenue and costs are recognised as revenue and expenses respectively by
reference to the stage of completion at the reporting date. Costs are recognised as incurred, and revenue is recognised using the percentage of completion
method. The stage of completion of a contract is assessed by reference to completion of a physical proportion of the contract work. Revenue includes the
initial amount agreed in the contract plus any variations in contracted work, to the extent that it is probable that they will result in revenue and can be
measured reliably. Provision is made for all known or expected losses on an individual contract as soon as they are foreseen.
Construction Contract Debtors
Construction contract debtors represent the gross unbilled amount for contract work performed to date. It is measured at cost plus profit recognised to date
(see the construction contract revenue accounting policy) less a provision for foreseeable losses and less progress billings. Variations are included in contract
revenue when they are reliably measurable and it is probable that the customer will approve the variation itself and the revenue arising from the variation.
Claims are included in contract revenue only when they are reliably measurable and negotiations have reached an advanced stage such that it is probable
that the customer will accept the claim. Cost includes all expenditure related directly to specific projects and an allocation of fixed and variable overheads
incurred in the Group’s contract activities based on normal operating capacity.
Construction contract debtors are presented as part of trade and other receivables in the balance sheet. If payments received from customers exceed the
income recognised, then the difference is presented as deferred income in the Balance Sheet.
Leases
As Lessee
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance
leases are capitalised at the lease inception date at the lower of the fair value of the leased asset and the present value of the minimum lease payments.
The corresponding rental obligations, net of finance charges, are included in other payables. Each lease payment is allocated between the liability and finance
charges so as to achieve a constant rate of interest costs charged to the Income Statement on the outstanding balance. The property, plant and equipment
acquired under finance leases are depreciated over the shorter of the asset’s useful economic life and the lease term.
Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating
leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the term of the lease.
As Lessor
Where the Group also acts as lessor and substantially all the risks and rewards of ownership have passed to the lessee, the Group derecognises the related
equipment and recognises a receivable for the minimum lease payments discounted at a rate which reflects a constant periodic rate of return over the life
of the lease.
Net Financing Costs
Net financing costs comprise interest payable, finance charges on finance leases and interest receivable on funds invested together with changes in the fair
values of interest rate swaps and foreign currency forward contracts recognised through the profit and loss and the net interest on the defined benefit
pension scheme liability. This is determined by applying the discount rate used to measure the defined benefit obligation at the beginning of the year to the
net defined benefit asset/liability.
Interest income and interest payable is recognised in the income statement as it accrues, using the effective interest method. Dividend income is recognised
in the Income Statement on the date the entity’s right to receive payment is established.
Taxation
Tax on the profit or loss for the period comprises both current and deferred tax. Tax is recognised in the income statement except to the extent that it relates
to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the Balance Sheet date, and
any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of
assets and liabilities, using tax rates enacted or substantively enacted at the Balance Sheet date.
The following temporary differences are not provided for: the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither
accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will
probably not reverse in the foreseeable future.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
Provisions
A provision is recognised in the Balance Sheet when the Group has a present legal or constructive obligation as a result of a past event, that can be reliably
measured and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined
by discounting the expected, risk adjusted, future cash flows at a pre-tax risk-free rate.
57
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 1 Accounting Policies continued
Restoration and Rehabilitation Costs
The mining, extraction and processing activities of the Group normally give rise to obligations for site restoration. Restoration works can include site
decommissioning and dismantling and site and land rehabilitation. The extent of work required and the associated costs are dependent on the requirements
of relevant authorities and the Group’s environmental policies.
An initial provision reflecting the current obligation for the cost of future site restoration is recognised at the commencement of the production phase for all
liabilities created through development of the surface mine. Production activities give rise to further restoration obligations and provisions are made for these
liabilities as they arise.
Restoration provisions are measured at the expected value of future cash flows. Significant judgements and estimates are involved in forming an expectation
of future activities and the amount and timing of the associated cash flows. Such expectations are based on existing planning requirements and management’s
future development plans which give rise to a constructive obligation. Upon initial recognition of the restoration provision, the corresponding cost is capitalised as
an asset, representing part of the cost of acquiring the future economic benefits of the operation. The capitalised cost is recognised as “restoration assets” within
“mining assets”. This asset is amortised to the statement of comprehensive income on a units of production method over the life of mine. Further “restoration
assets” are capitalised as additional provisions are created through production activities. These assets are amortised to the statement of comprehensive income
on a units of production method over the coal tonnage extracted from the area identified as giving rise to the additional restoration obligation.
Restoration provisions are adjusted for changes in estimates, which are accounted for as a change in the corresponding capitalised cost, except where
a reduction in the provision is greater than the unamortised capitalised cost of the related assets, in which case the capitalised cost is reduced to nil and
the remaining adjustment is recognised in the statement of comprehensive income. Changes to the capitalised cost result in an adjustment to future
amortisation and financial charges.
Restoration and Rehabilitation Costs
Given the significant judgements and estimates involved, adjustments to the estimated amount and timing of future restoration and rehabilitation cash
flows are a normal occurrence. Factors influencing those changes include but are not limited to: revisions to estimated reserves and site operations; planning
requirements and management’s development plans; changes in the estimated cost and scope of anticipated activities.
Adopted IFRSs Not Yet Applied
At the date of issue of these financial statements the following Adopted IFRSs have been endorsed but have not been applied in these financial statements.
The impact of these standards on the financial statements is being assessed:
•
•
•
IFRS 9: Financial Instruments;
IFRS 15: Revenue from Contract with Customers; and
IFRS 16: Leases.
2 Segmental Information
The following analysis by industry segment is presented in accordance with IFRS 8 on the basis of those segments whose operating results are regularly
reviewed by the Board of Directors (the Chief Operating Decision Maker as defined by IFRS 8) to assess performance and make strategic decisions about
allocation of resources.
The sectors distinguished as operating segments are Distribution & Services, Property & Energy, Legacy and Corporate. As described in more detail in the
prior year accounts the segments have been changed during this year, reflecting the changes experienced within the business, as the Group continues to
transition away from coal. The comparative period has been restated accordingly.
• Distribution & Services: Provides coal distribution, including mining operations, handling and contracting services and logistics to a range of industrial,
wholesale and public sector customers. The division also provides earth moving and infrastructure services across the UK.
Property & Energy: The development and realisation of value from our extensive land portfolio through a variety of property and energy projects.
Legacy: The realisation of legacy coal and coke assets into cash, the division is focused on turning the historic assets into cash in a timely manner, whilst
obtaining full value.
Corporate: The corporate overhead contains the central functions that are not devolved to the individual business units.
•
•
•
These segments are combinations of subsidiaries, jointly controlled entities and associates. They have separate management teams and provide different
products and services. The four operating segments are also reportable segments.
Transactions between divisions are carried out at rates that do not give a competitive advantage to a particular division of the Group.
58
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 2 Segmental Information continued
The segment results, as reported to the Board of Directors, are calculated under the principles of IFRS. Performance is measured on the basis of underlying
operating profit/(loss), which is reconciled to profit/(loss) before tax in the tables below:
Revenue
Total revenue
Inter-segment revenue
Revenue from external customers
Underlying operating profit/(loss)
Amortisation of intangibles
Taxation on associates and joint ventures
Net financing costs
Net profit before taxation (pre-exceptional)
Exceptional costs
Profit before taxation
Depreciation charge
Capital expenditure
Net assets/(liabilities)
Segment assets
Segment liabilities
Segment net assets/(liabilities)
Associates and joint ventures
Total net assets
Distribution &
Services
2017
£000
Property &
Energy
2017
£000
Legacy
2017
£000
Corporate
2017
£000
Total
2017
£000
322,088
(638)
3,581
–
17,283
–
554
–
343,506
(638)
321,450
3,581
17,283
554
342,868
13,324
1,026
101
(4,613)
9,838
(315)
(2,873)
(2,092)
4,558
(470)
4,088
(11,128)
(644)
(14,756)
(5,319)
–
–
(423)
(378)
(12,195)
(20,453)
202,924
(98,464)
28,791
(7,099)
40,090
(5,560)
3,023
(32,695)
104,460
21,692
34,530
(29,672)
274,828
(143,818)
131,010
6,917
137,927
Corporate net assets include Group banking facilities liability (£32.3m), cash and cash equivalents (£0.7m liability), derivative financial instruments (£0.1m
liability), corporation and deferred tax assets (£4.3m) and other corporate items (£0.9m).
Revenue
Total revenue
Inter-segment revenue
Revenue from external customers
Underlying operating profit/(loss)
Amortisation of intangibles
Taxation on associates and joint ventures
Net financing costs
Profit before taxation (pre-exceptional)
Exceptional costs
Loss before taxation
Depreciation charge
Capital expenditure
Net assets/(liabilities)
Segment assets
Segment liabilities
Segment net assets/(liabilities)
Associates and joint ventures
Total net assets
Distribution &
Services
2016
£000
Property &
Energy
2016
£000
Legacy
2016
£000
Corporate
2016
£000
Total
2016
£000
336,973
(1,610)
335,363
5,302
–
5,302
11,344
(364)
(18,239)
(12,803)
184,597
(92,957)
(316)
(5,244)
27,553
(5,174)
–
–
–
–
–
–
–
–
–
342,275
(1,610)
340,665
(6,355)
(403)
(667)
4,625
(584)
(628)
(1,632)
1,781
(12,378)
(10,597)
(18,958)
(18,714)
65,713
(5,700)
1,314
(45,034)
279,177
(148,865)
91,640
22,379
60,013
(43,720)
130,312
1,043
131,355
59
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 2 Segmental Information continued
Corporate net assets include Group banking facilities liability (£37.6m), cash and cash equivalents (£4.5m liability), derivative financial instruments (£0.4m liability),
deferred and corporation tax balances (£3.4m liability) and other corporate items (£2.2m).
Information About Key Customers
Included in revenue is an amount of £23,313,000 arising from sales to the Group’s largest customer; (2016: £12,751,000) relating to the Distribution & Services
division.
The following table analyses revenue by significant category:
Sale of goods
Rendering of services
Construction contracts
Geographical Information
Revenue
Non-current assets
2017
£000
167,697
113,499
61,672
2016
£000
178,321
131,011
31,333
342,868
340,665
2017
UK
£000
323,952
96,218
Restated
2016
Overseas
£000
18,916
1,727
UK
£000
Overseas
£000
326,128
88,506
14,537
1,188
3 Acquisition of Subsidiaries
Current Year
Acquisition of Tru Green Limited
In March 2017, the Group acquired 100% of the share capital of Tru Green Limited. The principal activity of the company is Landscape services. The fair value of
the assets and liabilities at the date of acquisition was a net liability position of £99,000. The acquisition price of £140,000 was settled partly in cash £95,000 and
£45,000 payable as contingent consideration. The company had an overdraft at acquisition of £75,000.
Goodwill measurement period adjustment
During 2016, the Group completed the acquisition of C. A. Blackwell Group Limited. The initial assessment of fair values to identifiable net assets acquired was
performed on a provisional basis. As part of the finalisation of the fair value exercise in respect of this acquisition, the Group considered the overall level of
goodwill arising on the acquisitions and the valuations applied to intangible and tangible assets acquired, increasing the overall level of goodwill arising on
acquisitions by £2.7m and as a result increased the accruals balances by the same amount. The amendments to these fair values were made to the
comparative figures during the subsequent reporting window within the measurement period imposed by IFRS 3.
60
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 3 Acquisition of Subsidiaries continued
Prior Year
Acquisition of C. A. Blackwell Group Limited
On 11 January 2016, the Group acquired 100% share capital of CA Blackwell Group Limited. The principal activity of the company is that of bulk earthmoving
and civil engineering.
In the five months to 31 May 2016, CA Blackwell Group Limited contributed profit after tax of £857k to the consolidated loss after tax for the year.
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
LIABILITIES
Current liabilities
Trade and other payables
Net identifiable assets and liabilities
Net purchase consideration
Goodwill on consolidation
Satisfied by:
Consideration paid
Recognised values
on acquisition
£000
13,379
4,794
16,028
4,663
25,485
(33,088)
5,776
6,600
824
6,600
The above does not include the impact of the goodwill measurement adjustment which is explained previously.
£4,250,000 is held in escrow (2016: £5,250,000) pending certain performance measurements. The fair value of this contingent payment is estimated at £4,250,000.
Acquisition of Earl’s Gate Energy Centre Limited
In November 2015, the Group acquired 100% of the share capital of Earl’s Gate Energy Centre Limited. The principal activity of the company is the development
of a replacement Combined Heat and Power (CHP) Plant at Earl’s Gate Business Park, Grangemouth. The fair value of the assets and liabilities at the date of
acquisition was a net liability position of £66,000. The acquisition price of £317,000 was settled in cash. The company had net cash at acquisition of £44,000.
4 Other Operating Income
Net gain on disposal of property, plant and equipment
Other operating income
Total Other Operating Income
2017
£000
1,783
3,087
4,870
2016
£000
265
–
265
Other operating income includes the fair value gains on the options to acquire 100% of the shares of two companies holding certain areas of land.
61
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 5 Expenses and Auditor’s Remuneration
Included in profit/loss are the following:
Amortisation of intangibles
Impairment of goodwill
Impairment of other intangibles
Impairment loss on inventories
(Reversal)/Impairment loss on trade and other receivables*
Impairment of property, plant and equipment
Depreciation of property, plant and equipment owned
Depreciation of property, plant and equipment held under finance lease
Depreciation of mining assets
*
Includes write back of £2,000k (2016: £2,000k impairment) in respect of other receivables due from Tower Colliery Limited.
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
Taxation compliance services
Other tax advisory services
Other assurance services
All other services
2017
£000
315
–
–
–
(2,000)
2,655
5,514
5,819
862
2017
£000
25
160
–
16
6
36
2016
£000
399
187
440
4,242
2,062
–
5,579
3,682
7,263
2016
£000
30
224
6
36
145
90
Amounts paid to the Company’s auditor and its associates in respect of services to the Company, other than the audit of the Company’s financial statements,
have not been disclosed as the information is required instead to be disclosed on a consolidated basis.
6 Exceptional costs
The Group incurred a number of exceptional costs in the year as it continues to adapt and restructure away from thermal coal.
Reversal/(impairment) of investment and other assets relating to the Tower project
Redundancy and related site closure cost at Redcar Steelworks
Redundancy and related site closure costs in Industrial Services
Cost associated with early closure of certain mining operations
Cost attributable to the acquisition of Blackwell
Net losses on legacy contracts in Blackwell
Redundancy costs from central overhead cost reduction programme
Impairment of Property, Plant and Equipment
Cash recovery from discontinued operation
Historic plant rebate
Liquidator dividend
Other simplification costs
Total
2017
£000
2,000
–
–
(1,874)
–
(3,380)
–
(2,277)
1,096
3,280
796
(111)
2016
£000
(4,743)
(1,559)
(1,091)
(4,033)
(679)
–
(273)
–
–
–
–
–
(470)
(12,378)
7 Staff Numbers and Costs
The average number of persons employed by the Group in continuing and discontinued operations (including Directors) during the year, analysed by
category, was as follows:
Directors and senior management
Traffic and administration
Production, maintenance and drivers
62
Number of employees
Group
2017
31
547
1,382
1,960
2016
31
470
1,604
2,105
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 7 Staff Numbers and Costs continued
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Share-based payments (see Note 26)
Social security costs
Contributions to defined contribution plans (see Note 25)
Current service costs of defined benefit plans (see Note 25)
8 Directors’ Remuneration
Directors’ emoluments
Company contributions to money purchase pension plans
Group
2017
£000
80,569
471
3,961
1,480
205
86,686
2017
£000
2,280
190
2016
£000
81,504
520
7,013
1,654
174
90,865
2016
£000
1,178
188
The aggregate of emoluments and amounts receivable under long-term incentive schemes of the highest paid Director was £965,000 (2016: £452,000), and
company pension contributions of £114,000 (2016: £113,000) were made to a money purchase scheme on his behalf.
Retirement benefits are accruing to the following number of Directors under:
Money purchase schemes
Defined benefit schemes
The number of Directors who exercised share options was
The number of Directors in respect of whose services shares were received or receivable under long-term incentive schemes was
Directors’ rights to subscribe for shares in or debentures of the Company and its subsidiaries are indicated below:
Number of Directors
2017
2016
2
–
–
3
2
–
–
3
GFC Banham
KJ Dougan
ID Cockburn
All of the Directors benefited from qualifying third-party indemnity provisions.
9 Finance Income and Expense
Recognised in Profit or Loss
Finance income
Interest income on unimpaired financial assets
Interest received from jointly controlled entities
Total finance income
Finance expense
Total interest expense on financial liabilities measured at amortised cost
Bank interest payable
Foreign exchange loss
Interest on defined benefit pension plan obligation
Total finance expense
Number of options
At start
of year
31,109
16,990
86,418
At end
of year
Exercise price
pence
31,109
16,990
86,418
–
–
–
2017
£000
–
1,766
2016
£000
31
1,122
1,766
1,153
2,791
844
52
171
2,785
–
–
–
3,858
2,785
63
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 10 Discontinued Operations and Assets Held for Sale
All discontinued results are attributable to equity holders.
The Group’s discontinued operations made a loss of £nil (2016: loss of £0.9m) after tax during the year. These losses related to residual events arising from
the closure of Maltby Colliery and Belgium and the associated results were classified as discontinued in the prior year. In addition, certain related assets were
reclassified in the balance sheet as “assets held for sale” in a prior period.
An amount of £1,096,000 has been recovered in respect of the Belgian operation during the year. This has been treated as an exceptional item, see Note 6.
Administrative expenses
Operating loss
Net finance expense
Loss before tax of discontinued operations
Taxation
Current tax (charge)/credit
Deferred tax (charge)/credit
Loss for the year from discontinued operations
The major classes of assets directly attributable to the discontinued operations are:
Assets Held for Sale
Property, plant and equipment
11 Taxation
Recognised in the Income Statement
Current tax (credit)/expense
Current year
Adjustments for prior years
Current tax credit
Deferred tax credit
Origination and reversal of temporary differences
Adjustments for prior years
Reduction in tax rate
Deferred tax charge/(credit)
Tax credit in income statement (excluding share of tax of equity accounted investees)
Share of tax of equity accounted investees
Total tax expense/(credit) from continuing operations
Tax expense from discontinued operations
Total tax expense/(credit)
Recognised in Other Comprehensive Income
Deferred tax (expense)/income
Effective portion of changes in fair value of cash flow hedges
Remeasurements of defined benefit pension plans
64
2017
£000
–
–
–
–
–
–
–
–
2016
£000
(552)
(552)
(189)
(741)
(105)
(94)
(199)
(940)
2017
£000
5,040
2016
£000
5,040
2017
£000
200
(1,230)
2016
£000
213
(738)
(1,030)
(525)
191
67
78
336
(694)
2,873
2,179
–
(831)
(128)
402
(557)
(1,082)
628
(454)
199
2,179
(255)
2017
£000
(63)
36
(27)
2016
£000
(40)
181
141
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 11 Taxation continued
Reconciliation of Effective Tax Rate
Profit/(loss) for the year from continuing operations
Total tax expense/(credit) (including tax on equity accounted investees)
Profit/(loss) excluding taxation from continuing operations
2017
Rate
2017
£000
4,782
2,179
6,961
2016
Rate
2016
£000
(9,515)
(454)
(9,969)
Tax using the UK corporation tax rate of 19.83% (2016: 20.0%)
19.83%
1,380
20.0%
(1,994)
Effect of tax rates in foreign jurisdictions
Unrecognised tax losses
Non-deductible expense
Reduction in tax rate on deferred tax balances
Over provided in prior years
18.33%
–
8.68%
1.12%
(16.65)%
1,276
–
604
78
(1,159)
(2.8%)
(3.9%)
(6.4%)
(4.2%)
1.9%
276
389
644
417
(186)
Effective tax rate and total tax expense/(credit)
31.30%
2,179
4.6%
(454)
The current tax adjustment in respect of prior years relates to the refund of taxes received from HMRC following the carry back of losses.
The UK corporation tax rate reduced to 19% on 1 April 2017, giving an effective base rate of 19.83% (2016: 20%).
Factors That May Affect Future Current and Total Tax Charges
Reductions in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017) with a further reduction to 18% on 1 April 2020 were substantively
enacted on 26 October 2015. On 16 March 2016 it was announced that the main rate of UK Corporation Tax would reduce to 17% on 1 April 2020. This change
was substantively enacted on 6 September 2016. This will reduce the Group’s current tax charge accordingly. The deferred tax balances at 31 May 2017 have
been calculated based on the rate of 17% substantively enacted at the Balance Sheet date.
12 Earnings per Share
Ordinary Shares
Basic earnings per share
Diluted earnings per share
2017
2016
Continuing and
discontinued
Continuing
Discontinued
Continuing and
discontinued
Continuing
Discontinued
16.14p
15.93p
16.14p
15.93p
n/a
n/a
(32.96)p
(32.96)p
(30.01)p
(30.01)p
(2.95)p
(2.95)p
The calculation of earnings per share is based on the profit/(loss) for the year attributable to equity holders and on the weighted average number of shares in
issue and ranking for dividend in the year.
Profit/(loss) for the year attributable
to equity holders (£000)
Weighted average number of shares
Basic earnings per share
2017
2016
Continuing and
discontinued
Continuing
Discontinued
Continuing and
discontinued
Continuing
Discontinued
5,138
31,842,023
16.14p
5,138
31,842,023
16.14p
n/a
n/a
n/a
(10,498)
31,851,053
(32.96)p
(9,558)
31,851,053
(30.01)p
(940)
31,851,053
(2.95)p
The calculation of weighted average number of shares includes the effect of own shares held of 1,228,072 (2016: 1,228,072). The calculation of diluted earnings
per share is based on the profit/(loss) for the year and the weighted average number of ordinary shares in issue in the year adjusted for the dilutive effect of
the share options outstanding (effect on weighted average number of shares is 424,804 (2016: 400,444); effect on earnings per ordinary share is 0.21p (2016: nil
p). Effect on continuing earnings per ordinary share is 0.21p (2016: nil p).
Profit/(loss) for the year attributable
to equity holders (£000)
Weighted average number of shares
Diluted earnings per share
2017
2016
Continuing and
discontinued
Continuing
Discontinued
Continuing and
discontinued
Continuing
Discontinued
5,138
32,266,827
15.93p
5,138
32,266,827
15.93p
n/a
n/a
n/a
(10,498)
32,251,497
(32.96)p
(9,558)
32,251,497
(30.01)p
(940)
32,251,497
(2.95)p
65
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 12 Earnings per Share continued
Continuing underlying basic and diluted earnings per share are calculated on the diluted weighted average number of shares of 32,266,827 (2016: 32,251,497)
and on underlying profit/(loss) after tax, as reconciled below:
Profit/(loss) for the year attributable to equity holders from continuing operations
Amortisation/impairment of intangibles/goodwill
Exceptional items
Tax effect of above items
Underlying Profit after Tax from Continuing Operations
2017
£000
5,138
315
470
(156)
5,767
2016
£000
(9,558)
584
12,378
(1,587)
1,817
32,266,827
32,251,497
17.88
5.63
Weighted average number of shares
Underlying diluted earnings per share
13 Property, Plant and Equipment
Group
Cost
Balance at 1 June 2015
Other acquisitions
Disposals
Acquisitions through business combinations
Effect of movements in foreign exchange
Balance at 31 May 2016
Balance at 1 June 2016
Other acquisitions
Disposals
Transfers to investment property
Category transfers
Effect of movements in foreign exchange
Balance at 31 May 2017
Depreciation and impairment
Balance at 1 June 2015
Depreciation charge for the year
Disposals
Effect of movements in foreign exchange
Balance at 31 May 2016
Balance at 1 June 2016
Depreciation charge for the year
Impairment
Disposals
Transfers
Effect of movements in foreign exchange
Balance at 31 May 2017
Net book value
At 1 June 2015
At 31 May 2016 and 1 June 2016
Freehold land and
buildings and
leasehold
improvements
£000
Assets under
Course of
Construction
£000
Furniture and
equipment
£000
Motor
vehicles and
plant
£000
Fixtures and
fittings
£000
Mining assets
£000
Total
£000
28,776
2,706
6,422
49,310
23,587
5,783
(3,872)
4,298
(7)
29,789
29,789
5,981
(181)
(6,998)
171
14
–
–
–
–
–
–
–
2,937
–
–
(257)
26
7,854
228
(522)
4
7,564
7,564
811
–
(64)
15
7
8,333
15,733
22,225
–
–
–
–
–
–
–
–
–
–
–
–
–
6,463
363
(98)
50
10
67,404
9,518
(18,120)
9,417
(416)
455
3
–
6
(4)
19,993
3,047
(18,552)
–
–
117,902
18,714
(40,642)
13,771
(417)
6,788
67,803
460
4,488
109,328
6,788
138
(288)
–
(255)
39
67,803
8,072
(27,384)
–
320
499
5,001
484
(98)
21
35,767
8,483
(16,707)
(194)
5,408
27,349
5,408
453
–
(286)
(104)
22
27,349
10,012
2,655
(23,993)
89
79
460
52
–
–
21
6
539
352
66
–
(1)
417
417
57
–
–
–
2
4,488
3,273
–
–
–
–
109,328
20,453
(27,853)
(6,998)
–
584
7,761
95,514
11,784
7,263
(18,552)
–
60,758
16,524
(35,879)
(170)
495
41,233
495
862
–
–
–
–
41,233
12,195
2,655
(24,343)
–
110
5,493
16,191
476
1,357
31,850
1,462
31,637
103
8,209
57,144
1,380
40,454
43
63
3,993
68,095
6,404
63,664
At 31 May 2017
20,443
2,706
929
33,119
66
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 13 Property, Plant and Equipment continued
Group continued
The impairment of property, plant and equipment includes the impairment of the property and plant at Commonside Lane, the former Rocpower site. This
was impaired by £2.3m down to a notional amount, following OFGEMs decision to review and subsequently significantly reduce the TRIAD support regime,
which significantly impacted the future earnings potential of the site.
The Company has no property, plant and equipment.
Leased Plant and Machinery
At 31 May 2017 the net carrying amount of leased plant and machinery was £17,106,000 (2016: £21,865,000). The leased equipment secures lease obligations
(see Note 23).
Security
The Group’s property, plant and equipment is used to secure some of its interest-bearing loans and borrowings (see Note 23).
14 Investment Property
At cost
Balance at 31 May
Transfer from property, plant and equipment
Balance at 31 May
Group
Company
2017
£000
5,126
6,998
12,124
2016
£000
5,126
–
5,126
2017
£000
2016
£000
–
–
–
–
–
–
An independent valuation has been undertaken in respect of the Groups Investment Properties to determine the development value as at 31 May 2017. The
fair value of the Investment Properties is £27,544,000 (2016: £nil). During the year land and buildings with a net book value of £6,998,000 (2016: nil) have been
transferred into investment properties following a review of future strategy of the portfolio.
67
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 15 Intangible Assets
Group
Cost
Balance at 1 June 2015
Additions
Exchange movements
Restated*
Goodwill
£000
Customer
contracts
£000
Supply
contracts
£000
Other
intangibles
£000
18,436
3,955
27
13,431
–
(223)
8,148
–
–
1,015
–
–
Total
£000
41,030
3,955
(196)
Restated Balance at 31 May 2016
22,418
13,208
8,148
1,015
44,789
Balance at 1 June 2016
Additions
Exchange movements
Balance at 31 May 2017
Amortisation and impairment
Balance at 1 June 2015
Amortisation for the year
Impairment
Exchange movements
22,418
–
–
13,208
239
329
8,148
–
–
1,015
–
–
44,789
239
329
22,418
13,776
8,148
1,015
45,357
10,739
–
187
–
12,252
256
–
(18)
8,148
–
–
–
419
143
440
–
31,558
399
627
(18)
Restated Balance at 31 May 2016
10,926
12,490
8,148
1,002
32,566
Balance at 1 June 2016
Amortisation for the year
Exchange movements
Balance at 31 May 2017
Net book value
At 31 May 2015
Restated balance at 31 May 2016 and 1 June 2016
At 31 May 2017
10,926
–
–
12,490
315
87
8,148
–
–
1,002
–
–
32,566
315
87
10,926
12,892
8,148
1,002
32,968
7,697
1,179
11,492
11,492
718
884
–
–
–
596
9,472
13
13
12,223
12,389
The supply contracts were amortised over the weighted average expected life of the contracts, of 60 months.
£2,596,000 of the customer contracts were being amortised over 71 months, £7,061,000 of the customer contracts were being amortised over 75 months,
£2,540,000 of the customer contracts were being amortised over 36 months, £1,340,000 of the customer contracts are being amortised over 48 months
and £239,000 of the customer contracts are being amortised over 60 months each being the weighted average expected life of the contracts.
£1,000,000 of other intangibles relates to an exclusivity agreement and is being amortised over the expected life of the project to which it relates, which is
expected to be seven years.
Amortisation and Impairment Charge
The amortisation and impairment charge is recognised in the following line items in the income statement:
Other administrative expenses
2017
£000
315
2016
£000
1,026
68
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 15 Intangible Assets continued
Impairment Testing
During the prior year, as a result of the decision taken to shorten the mine life at the Tower project and run to maximise cash following Aberthaw ceasing to
buy Welsh coal after the end of the current contract the intangible asset attributed to the Tower exclusivity contract was fully impaired, resulting in a charge
of £440,000.
The remaining goodwill has been allocated to cash-generating units or groups of cash-generating units as follows:
Hargreaves Industrial Services Limited
Coal 4 Energy Limited/Maxibrite Limited
CA Blackwell Group Limited
Earl’s Gate Energy Centre Limited
Other
Goodwill
2017
£000
1,252
6,140
3,572
383
145
Restated*
2016
£000
1,252
6,140
3,572
383
145
11,492
11,492
* Goodwill has been restated to reflect the impact of the remeasurement of the Blackwell goodwill of £2,748,000, as explained in note 3.
The recoverable amounts of the above cash-generating units have been calculated with reference to their value in use. The key features of this calculation are
shown below:
Period on which management approved forecasts are based
Growth rate applied beyond approved forecast period
Discount rate
2017
2016
5 years
2%
9%
5 years
2%
9%
The growth rates used in value in use calculations reflect a conservative estimate of the average industry growth rate.
The recoverable amount of each cash-generating unit has been calculated with reference to its value in use. In calculating this value, management have used
the following assumptions:
•
•
•
cash flows were projected based on budgeted operating results for the preceding year with the short-term growth rate applied to the next four years.
A conservative growth rate of 2% (2016: 2%) has been applied in perpetuity. This rate does not exceed the long-term average growth rate for any of the
cash-generating units’ industries;
sustaining capital expenditure in each cash-generating unit has been used in the calculations equivalent to the current levels of annual depreciation; and
a pre-tax discount rate of 9% (2016: 9%) has been used in the first instance. Management consider this to be higher than a market participant’s discount rate
for each individual cash-generating unit. The latter would be reassessed if the initial 9% indicated potential impairment of any individual cash-generating unit.
Each of the cash-generating units had significant headroom under the annual impairment review, which remains after allowing for reasonably possible
changes in assumptions.
The Company has no intangible assets.
16 Investments in Subsidiaries, Associates and Joint Ventures
List of Registered Offices:
16.1 West Terrace, Esh Winning, Durham, DH7 9PT
16.2 Tower Colliery, Tirherbert Road, Rhigos, Aberdare, CF44 9UF
16.3 Coggeshall Road, Earls Colne, CO6 2JX
16.4 Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2EN
16.5 1 West Regent Street, Glasgow, G2 1AP
16.6 C/O Cms Cameron Mckenna Llp, Saltire Court, 20 Castle Terrace, Edinburgh, Scotland, United Kingdom, EH1 2EN
16.7 Böningerstraβe 29, 47051 Duisburg, Germany
16.8 H. Farmanstraat 47, 9000 Gent, Belgium
16.9 Van Heetveldelei 178, 2100 Deurne, Antwerp, Belgium
16.10 36F, Tower Two, Times Square, 1 Matheson Street, Causeway Bay, HK
16.11 Plac Rodla, 8/914, 70-419 Szczecin, Polska
16.12 Flat No.333, 3rd Floor, Devika Tower, 6 Nehru Place, Delhi -110019, India
16.13 3 Nobel Boulavard, Cape Gate NE3, Vanderbijlpark, Gauteng, 1900
16.14 Lot 6.05, Level 6, 8 First Avenue, Bandar Utama, 47800 Petaling Jaya, Selangor Darul Ehsan, Malaysia
69
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 16 Investments in Subsidiaries, Associates and Joint Ventures continued
The Group and Company have the following investments in subsidiaries, associates and joint ventures:
Nature of business
Address of
registered office
Class of shares held
2017
2016
Ownership
Company
Subsidiary undertakings
Hargreaves (UK) Limited
Hargreaves Industrial Services Limited
Forward Sound Limited
Hargreaves Services (HK) Limited
Hargreaves Surface Mining Limited
Hargreaves Technical Resources Limited
Hargreaves Carbon Products Europe Limited
Hargreaves Maltby Limited
Hargreaves Services (Westfield) Limited
Hargreaves Services (Castlebridge) Limited
Hargreaves Services (Blindwells) Limited
Hargreaves Services Forestry Limited
Hargreaves Services Wind Farm
(Damside) Limited
Hargreaves Services Wind Farm
(Broken Cross) Limited
Hargreaves Services Wind Farm
(Glentaggart) Limited
Hargreaves Services Wind Farm
(House of Water) Limited
Hargreaves Services Wind Farm
(Chalmerston) Limited
Hargreaves South Africa (Pty) Limited
Hargreaves Mining India Private Limited
Hargreaves Energy Projects Limited
Hargreaves Services (Muir Dean) Limited
CA Blackwell Group Limited
Hargreaves Aggregates Limited
Hargreaves Industrial Services Sdn Bhd
Monckton Energy Limited
Maltby Energy Limited
Featherstone Energy Limited
Selby Energy Limited
Brockwell Energy Limited
Hargreaves Pension Company Limited
Holding company
Contract management service
Holding company
Holding company
Coal mining
Contract management service
Sale of carbon-based materials
Holding company
Property holding
Property holding
Property holding
Property holding
Property holding
Property holding
Property holding
Property holding
Property holding
Steel
Mining services
Holding company
Property holding
Holding company
Freight transport
Contract management service
Electricity production
Electricity production
Electricity production
Electricity production
Electricity production
Pension holding company
Dormant companies
Coal 4 Energy Limited
Hargreaves (Bulk Liquid Transport) Limited
R Hanson & Son Limited
Hargreaves ESOT Trustee Limited
Hargreaves Services Australia Limited
Hargreaves Europe Limited
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Joint ventures and associate undertakings
Mir Trade Services Limited
Hargreaves Services Europe Limited
Import and sale of
carbon-based materials
Import and sale of
carbon-based materials
16.1
16.1
16.1
16.10
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.13
16.12
16.5
16.1
16.1
16.1
16.14
16.1
16.1
16.1
16.1
16.6
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
86%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
–
–
–
–
–
–
–
–
100%
100%
100%
100%
100%
100%
50%
86%
70
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 16 Investments in Subsidiaries, Associates and Joint Ventures continued
Nature of business
Address of
registered office
Class of shares held
2017
2016
Ownership
Group
Subsidiary undertakings
Hargreaves (UK) Services Limited
The Monckton Coke & Chemical
Company Limited
Maltby Colliery Limited
Hargreaves Engineering & Contracts Limited
Maxibrite Limited
RocFuel Limited
RocPower Limited
Hargreaves Carbon Products NV
Hargreaves Industrial Services (HK) Limited
Mekol NV
OCCW (St Ninians) Limited
Earl’s Gate Energy Centre Limited
OCCW (Duncanziemere) Limited
OCCW (Chalmerston) Limited
OCCW (Netherton) Limited
OCCW (Damside) Limited
OCCW (Broken Cross) Limited
CA Blackwell (Contracts) Limited
HBR Limited
Geofirma Soils Engineering Limited
Renaissance Land Regeneration Limited
Renaissance Land (D20) Limited
Renaissance Land Management Limited
Renaissance (Padiham) Limited
Tru-Green Limited
Haulage, mineral import
and processing
Manufacture of coke
Coal mining
Engineering maintenance services
Smokeless fuel briquette
manufacturing
Renewable energy solutions
Renewable energy solutions
Import and sale of
carbon-based materials
Contract management service
Port facilities
Coal working
Renewable energy solutions
Coal working
Coal working
Coal working
Coal working
Coal working
Civil engineering
Land remediation
Soil stabilisation
Holding company
Property holding
Property holding
Property holding
Landscape services
Joint ventures and associate undertakings
Tower Regeneration Limited
Tower Regeneration Leasing Limited
517EPA Limited
Hargreaves Raw Material Services GmbH
Coal mining
Lease of heavy plant
Dormant
Import and sale of
carbon-based materials
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.9
16.10
16.8
16.1
16.5
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.2
16.2
16.1
16.7
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Hargreaves Carbon Products Polska Sp. z o.o.
Sale of carbon-based materials
16.11
Ordinary
Dormant companies
Hargreaves Metallurgical Supplies Limited
R&A Fuels Limited
Squire Distribution Services Limited
Hargreaves Transport Limited
Hargreaves Industrial Dormant Limited
Hargreaves Transport Services Limited
DWL Engineering Services Limited
SCCL (Option Co) Limited
Eastgate Materials Handling Limited
Norton Wind Energy Limited
Premier Lime and Stone Company
CA Blackwell (Plant) Limited
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
16.1
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Tower Regeneration Leasing Limited is a 100% owned subsidiary of Tower Regeneration Limited.
100%
100%
100%
100%
85.2%
50.1%
85%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
50%
50%
86%
86%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
85.2%
50.1%
85%
100%
100%
100%
100%
100%
100%
100%
100%
100%
–
100%
100%
100%
100%
100%
100%
100%
–
50%
50%
50%
86%
86%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
71
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 16 Investments in Subsidiaries, Associates and Joint Ventures continued
The Group’s share of post-acquisition total recognised profit or loss in the above associates and jointly controlled entities for the year ended 31 May 2017 was
a profit of £5,487,000 (2016: loss of £1,792,000).
Associates and Joint Ventures
Carrying amount of equity accounted investees:
Group
At 1 June 2015
Dividends received by the Group
Group’s share of total comprehensive income
Impairment of investment
Exchange differences
At 31 May 2016
Group
At 1 June 2016
Group’s share of total comprehensive income
Exchange differences
At 31 May 2017
Voting rights
Cash & cash equivalents
Other current assets
Total current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets (100%)
Revenue
Depreciation
Other expenses
Interest income
Interest expense
(Loss)/profit before tax from continuing operations
Income tax expense
Post tax (loss)/profit from continuing operations (100%)
Tower
Regeneration
Limited
£000
Hargreaves Raw
Material Services
GmbH
£000
Interests in
immaterial
associate
undertakings
£000
Interests in
immaterial joint
ventures
£000
5,181
–
(2,940)
(2,241)
–
–
765
(802)
1,132
–
33
1,128
(124)
–
16
–
(25)
(133)
141
(37)
–
(61)
5
48
Tower
Regeneration
Limited
£000
Hargreaves Raw
Material Services
GmbH
£000
Interests in
immaterial
associate
undertakings
£000
Interests in
immaterial joint
ventures
£000
–
–
–
–
1,128
5,487
421
7,036
(133)
–
(38)
(171)
48
–
4
52
Total
£000
5,963
(839)
(1,792)
(2,302)
13
1,043
Total
£000
1,043
5,487
387
6,917
Tower Regeneration Limited
Hargreaves Raw Material Services GmbH
2017
50%
3,564
22,480
26,044
4,042
(6,743)
(19,545)
3,798
37,825
–
(41,660)
14
(1,726)
(5,547)
–
(5,547)
2016
50%
–
24,065
24,065
15,742
(12,815)
(20,586)
6,406
35,996
(9,834)
(31,836)
75
(2,801)
(8,400)
–
(8,400)
2017
49%
–
65,242
65,242
697
(56,486)
–
9,453
133,750
–
(123,416)
18
(637)
9,715
(3,341)
6,374
2016
49%
–
30,816
30,816
102
(29,606)
–
1,312
88,993
(35)
(86,424)
31
(516)
2,049
(730)
1,319
The total financial liabilities included in current liabilities is: Tower Regeneration Limited £nil k (2016: £1,039k); Hargreaves Raw Material Services GmbH £36,443k
(2016: £15,566k).
Group Composition
Management have considered the level of control of each of the Group’s individual Joint Venture arrangements and associate investments and are satisfied
that the Group does not have control, either through voting rights or other circumstances, of any of these arrangements. Tower Regeneration Limited is a
Joint Venture between the Group and a third party. The Group is entitled to 35% of the profits from the operation. The strategic business decisions of the Joint
Venture are taken by both the Group and the third party equally, this is reflected in the equal representation on the board of each investing party and further
the ownership of voting rights is split 50:50 between both parties.
72
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 16 Investments in Subsidiaries, Associates and Joint Ventures continued
Hargreaves Raw Materials Services GmbH (“HRMS”), is the Group’s only material associate investment. The Group is entitled to 86% of the profits on the operation,
however the Group does not exert control on the business. The Group holds 49% of the voting rights, with the remainder being held by the HRMS management
team, and has one of the four Directors. The Group does not have the power to change these arrangements. A shareholder agreement is in place to provide
the Group with safeguards designed to protect its investment; however, the key strategic decisions affecting the operation and its results are not taken by
the Group. In the event of a dispute between the Group and the operation which could not be resolved, the operation would be subject to an orderly wind
down. Whilst the voting rights demonstrate significant influence, the Group does not control the operation and therefore management have treated the
investment as an associate.
The Group also has a non-material interest in the following companies: Tower Regeneration Leasing Limited, MIR Trade Services Limited, Hargreaves Services
Europe Limited and Hargreaves Carbon Products Polska Sp. z o.o.
The Group also has options to acquire 100% of the shares in one subsidiary of Aardvark (“TMC”) Limited. This option is measured at fair value which, at 31 May 2017,
was £715,000 (31 May 2016: £2). This fair value increase has been recorded in other operating income.
Company
Shares at cost and net book value
At 1 June 2015
Acquisitions
Capital contribution arising on share options
At 31 May 2016
At 1 June 2016
Acquisitions
Capital contribution arising on share options
Impairment
At 31 May 2017
17 Other Financial Assets
Non-current
Other derivatives designated as fair value through hedging reserve
Current
Currency contracts designated as fair value through profit or loss
Other derivatives designated as fair value through hedging reserve
Group
undertakings
£000
Joint
ventures
£000
32,902
6,701
520
40,123
40,123
84
471
(6,600)
34,078
2016
£000
–
–
2016
£000
32
–
32
Group
2017
£000
7
7
Group
2017
£000
51
88
139
4,984
–
–
4,984
4,984
–
–
–
4,984
Company
2017
£000
–
–
Company
2017
£000
–
–
–
Total
£000
37,886
6,701
520
45,107
45,107
84
471
(6,600)
39,062
2016
£000
–
–
2016
£000
–
–
–
73
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 18 Other Financial Liabilities
Non-current
Other derivatives designated as fair value through hedging reserve
Current
Interest rate swaps designated as fair value through hedging reserve
Currency contracts designated as fair value through hedging reserve
Other derivatives designated as fair value through hedging reserve
19 Deferred Tax Assets and Liabilities
Group
Recognised Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are attributable to the following:
Property, plant and equipment
Financial assets
Employee benefits
Share-based payments
Tax value of loss carry-forwards
Other temporary trading differences
Group
2017
£000
12
12
Group
2017
£000
–
9
240
249
2016
£000
66
66
2016
£000
268
25
137
430
Company
2017
£000
–
–
Company
2017
£000
–
–
–
–
Assets
Liabilities
2017
£000
–
(21)
(867)
(191)
(1,008)
(1,038)
2016
£000
–
(84)
(1,008)
(106)
(1,102)
(964)
2017
£000
281
–
–
–
–
–
281
Tax (assets)/liabilities
(3,125)
(3,264)
Deferred tax assets and liabilities have been netted as the Group has a legally enforceable right of offset and settlement will be on a net basis.
Movement in Deferred Tax During the Year
Property, plant and equipment
Financial assets
Employee benefits
Share-based payments
Tax value of loss carry-forwards utilised
Other
Movement in Deferred Tax During the Prior Year
Property, plant and equipment
Financial assets
Employee benefits
Share-based payments
Provisions
Tax value of loss carry-forwards utilised
Other
74
31 May
2016
£000
57
(84)
(1,008)
(106)
(1,102)
(964)
(3,207)
Recognised in
income
£000
Recognised in
equity
£000
224
–
177
(85)
94
(74)
336
–
63
(36)
–
–
–
27
31 May
2015
£000
380
(607)
(1,103)
(147)
(942)
(17)
(76)
(2,512)
Acquisition of
subsidiaries
£000
Recognised in
income
£000
Recognised in
equity
£000
(36)
–
–
–
–
(55)
–
(91)
(287)
483
276
41
49
(1,030)
5
(463)
–
40
(181)
–
–
–
–
(141)
2016
£000
–
–
2016
£000
268
–
–
268
2016
£000
57
–
–
–
–
–
57
31 May
2017
£000
281
(21)
(867)
(191)
(1,008)
(1,038)
(2,844)
31 May
2016
£000
57
(84)
(1,008)
(106)
(893)
(1,102)
(71)
(3,207)
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 19 Deferred Tax Assets and Liabilities continued
Group continued
Movement in Deferred Tax During the Prior Year continued
The amount recognised in income includes £nil deferred tax charge (2016: £94,000 deferred tax charge) in relation to discontinued operations, see Note 10.
Company
Recognised Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are attributable to the following:
Share-based payments
Temporary timing difference
Tax assets
Net of tax liabilities
Net tax assets
Movement in Deferred Tax During the Year
Share-based payments
Temporary timing difference
Liabilities
2017
£000
2016
£000
Assets
2017
£000
(123)
(278)
(401)
–
(401)
2016
£000
(123)
(62)
(185)
–
(185)
–
–
–
–
–
At 31 May
2016
£000
Recognised in
income
£000
Recognised in
equity
£000
(123)
(62)
(185)
–
(216)
(216)
–
–
–
–
–
–
–
–
31 May
2017
£000
(123)
(278)
(401)
There is no expiry date on the above recognised deferred tax asset.
A deferred tax asset has been recognised as projections indicate that there will be sufficient future profits to utilise losses.
The deferred tax asset at 31 May 2017 has been calculated based on the rate of 17% substantively enacted at the balance sheet date.
20 Inventories
Raw materials and consumables
Work in progress
Finished goods
Properties held for development and resale
Group
2017
£000
3,716
4,845
15,868
4,718
2016
£000
2,569
7,632
32,552
4,230
29,147
46,983
Company
2017
£000
–
–
–
–
–
2016
£000
–
–
–
–
–
All amounts included within raw materials, work in progress and finished goods are expected to be recovered within 12 months.
The write-down of inventories to net realisable value amounted to £nil (2016: £4,242,000). The write-down is in cost of sales.
21 Trade and Other Receivables
Trade receivables
Trade receivables due from Group undertakings
Trade receivables due from undertakings in which the Company
has a participating interest
Other receivables
Construction contract receivables
Prepayments and accrued income
Corporation tax
Group
2017
£000
34,566
–
25,161
17,766
16,547
26,130
1,487
121,657
2016
£000
43,583
–
31,805
14,661
7,248
20,013
–
117,310
Company
2017
£000
–
188,099
11,604
6,422
–
–
1,550
2016
£000
–
201,113
10,579
5,528
–
–
1,653
207,675
218,873
75
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 21 Trade and Other Receivables continued
Included within trade and other receivables is £nil (2016: £nil) for the Group and £nil (2016: £nil) for the Company expected to be recovered in more than
12 months. Included within prepayments is £10,492,000 (2016: £7,966,000) expected to be recovered in more than 12 months. Included within Other receivables
is an amount of £4.25m (2016: £5.25m) in relation to monies held in escrow following the completion of the acquisition of C. A. Blackwell Group Limited.
At 31 May 2017 aggregate costs incurred under open construction contracts and recognised profits, net of recognised losses, amounted to £280,009,000
(2016: £207,308,000).
Progress billings and advances received from customers under open construction contracts amounted to £267,766,000 (2016: £196,336,000).
Advances for which related work has not started, and billings in excess of costs incurred and recognised profits are presented as deferred income and
amounted to £374,000 (2016: £243,000) at 31 May 2017.
At 31 May 2017 construction contract receivables includes £4,361,000 (2016: £4,375,000) relating to retentions.
The Group has a variety of credit terms depending on the customer. The majority of the Group’s sales are made to blue-chip companies and consequently
have very low historical default rates.
At 31 May 2017 trade receivables are shown net of an allowance for bad debts of £242,000 (2016: £356,000) arising from the ordinary course of business,
as follows:
Group
Balance at 1 June
Assumed upon acquisition of subsidiaries
Provided during the year
Reversed
Utilised during the year
Balance at 31 May
2017
£000
356
–
210
(41)
(283)
242
2016
£000
981
23
62
(675)
(35)
356
The allowance for bad debts records impairment losses unless the Group is satisfied that no recovery of the amount owing is possible, at that point the
amounts considered irrecoverable are written off against the trade receivables directly.
The ageing of trade receivables at the Balance Sheet date was:
31 May 2017:
Group
Not past due date
Past due date (0-90 days)
Past due date (over 90 days)
Individually impaired amounts
31 May 2016:
Group
Not past due date
Past due date (0-90 days)
Past due date (over 90 days)
Individually impaired amounts
Gross trade
receivables
£000
24,908
9,293
555
52
34,808
Gross trade
receivables
£000
34,553
7,572
1,542
272
43,939
Doubtful
debt
£000
Net trade
receivables
£000
–
–
(190)
(52)
(242)
24,908
9,293
365
–
34,566
Doubtful
debt
£000
Net trade
receivables
£000
–
–
(84)
(272)
(356)
34,553
7,572
1,458
–
43,583
Management have no indication that any unimpaired amounts will be irrecoverable.
The Group’s most significant trade receivable at 31 May 2017 is Wolf Minerals (UK) Limited which accounts for £2,967,558 of the trade receivables carrying
amount at 31 May 2017 within Distribution and Services segment (2016: Tata Chemicals Europe Limited £3,025,499).
76
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 21 Trade and Other Receivables continued
The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:
UK
European customers
Other regions
2017
£000
29,551
1,942
3,073
34,566
Further details on the Group’s exposure to credit and currency risks and impairment losses related to trade receivables are disclosed in Note 29.
22 Cash and Cash Equivalents
Cash and cash equivalents per Balance Sheet
Bank overdrafts per Balance Sheet
Cash and cash equivalents per Cash Flow Statement
Group
Company
2017
£000
27,817
–
27,817
2016
£000
21,161
–
21,161
2017
£000
115
–
115
2016
£000
40,912
339
2,332
43,583
2016
£000
–
(3,895)
(3,895)
Included in cash and cash equivalents above is £538,825 (2016: £569,675) in respect of cash which is ring-fenced for settlement of restoration works in the Scottish
mining business and £477,627 (2016: £647,654) in respect of cash which is ring-fenced for settlement of subsidence liabilities in relation to Maltby Colliery.
The Group’s exposure to credit and currency risk related to cash and cash equivalents is disclosed in Note 29.
23 Other Interest-bearing Loans and Borrowings
This note provides information about the contractual terms of the Group and Company’s interest-bearing loans and borrowings, which are measured
at amortised cost. For more information about the Group and Company’s exposure to interest rate and foreign currency risk, see Note 29.
Non-current liabilities
Finance lease liabilities
Borrowing base facility
Revolving credit facility
Current liabilities
Current portion of finance lease liabilities
Revolving credit facility
Bank overdraft
Terms and Debt Repayment Schedule
Finance lease liabilities
Borrowing base facility
Revolving credit facility
Currency
Sterling
Sterling
Sterling
Nominal interest rate
Year of maturity
2.0% – 4.8%
LIBOR + 1.5%
LIBOR + 1.6%
2016–2019
2018
2018
Group
2017
£000
3,312
32,500
2,775
2016
£000
8,505
33,000
4,593
Company
2017
£000
–
32,500
2,775
2016
£000
–
33,000
4,593
38,587
46,098
35,275
37,593
4,965
–
4,965
–
7,401
–
7,401
–
4,965
7,401
–
–
–
–
–
Face value
2017
£000
8,277
32,500
3,000
Carrying
amount
2017
£000
8,277
32,500
2,775
Face value
2016
£000
15,906
33,000
5,000
–
–
–
3,895
3,895
Carrying
amount
2016
£000
15,906
33,000
4,593
43,777
43,552
53,906
53,499
In July 2015, the Group completed a new 37-month multi-bank committed facility consisting of a £70m borrowing base facility and a £40m revolving credit
facility. This facility is secured by a debenture over the Group’s assets.
77
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 23 Other Interest-bearing Loans and Borrowings continued
Terms and Debt Repayment Schedule continued
In accordance with the presentation requirements of IAS32 and IAS39, these liabilities have been classified according to the maturity date of the longest
permitted refinancing. Without these committed facilities, these amounts would have been classified as falling due within one year.
Finance Lease Liabilities
Finance lease liabilities are payable as follows:
Group
Less than one year
Between one and five years
24 Trade and Other Payables
Minimum lease
payments 2017
£000
5,199
3,468
8,667
Interest 2017
£000
Principal 2017
£000
234
156
390
4,965
3,312
8,277
Minimum lease
payments 2016
£000
7,837
8,854
16,691
Interest 2016
£000
Principal 2016
£000
436
349
785
7,401
8,505
15,906
Current
Trade payables
Trade payables due to Group undertakings
Trade payables due to undertakings in which the Group/Company
has a participating interest
Other trade payables
Non-trade payables and accrued expenses
Group
Company
2017
£000
33,257
–
3,802
973
50,926
88,958
Restated*
2016
£000
31,438
–
455
2,219
43,732
77,844
2017
£000
2016
£000
–
109,212
–
116,779
–
–
109
11
39
48
109,321
116,877
* Non-trade payables and accrued expenses has been restated to reflect the impact of the remeasurement of the Blackwell goodwill of £2,748,000, as explained in Note 3.
No amounts included within trade and other payables for the Group or Company are expected to be settled in more than 12 months (2016: £nil).
25 Pension Schemes and Other Retirement Benefits
Defined Contribution Plans
The Group operates a Group personal pension scheme. The pension cost charge for the year represents contributions payable by the Group to the employees’
funds and amounted to £1,480,000 (2016: £1,654,000). There were no outstanding or prepaid contributions, at either the beginning or end of the financial year.
Defined Benefit Plans
The Group acquired a concessionary fuel retirement benefit scheme on the acquisition of The Monckton Coke & Chemical Company Limited on 17 June 2005.
During the existence of the scheme, the Group provided for concessionary fuel retirement benefits, for the current members of the scheme, payable at
retirement on attaining the age of 65. The amounts payable were determined in the employee terms and conditions and were subject to a qualifying period
of service. The costs of the concessionary fuel benefits were determined by a qualified actuary on the basis of triennial valuations. The latest full actuarial
valuation was carried out on 31 December 2012 and updated for IAS 19 purposes to 31 May 2017.
Concessionary fuel is an unfunded retirement benefit and as such there were no assets in the scheme. The scheme was settled in full by cash settlement
during the previous year and therefore there is no remaining liability outstanding at the current or prior year end.
Present value of unfunded defined benefit obligations
2017
£000
–
2016
£000
–
78
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 25 Pension Schemes and Other Retirement Benefits continued
Defined Benefit Plans continued
Movements in Present Value of Defined Benefit Obligation
At beginning of year
Benefits paid
Remeasurement loss
At the end of the year
Remeasurement gains and (losses) recognised directly in equity in the Statement of Other Comprehensive Income since 17 June 2005:
Cumulative amount at 1 June
Recognised in the year
Cumulative amount at 31 May
2017
£000
–
–
–
–
2017
£000
367
–
367
2016
£000
15
(101)
86
–
2016
£000
453
(86)
367
The Group acquired another concessionary fuel retirement benefit scheme and became a member of two defined benefit schemes on the acquisition of
Maltby Colliery on 26 February 2007. Details of these three schemes are consolidated in the tables below.
The latest full actuarial valuation of all these schemes was carried out at 31 December 2015 and was updated for IAS 19 purposes to 31 May 2017 by a qualified
independent actuary.
Present value of unfunded defined benefit obligations
Present value of funded defined benefit obligations
Fair value of plan assets
Deficit in the schemes – Pension liability
Movements in Present Value of Defined Benefit Obligation
At the beginning of the year
Interest cost
Remeasurement losses/(gains):
– Changes in demographic assumptions
– Changes in financial assumptions
– Experience
Benefits paid
At the end of the year
Movements in the Fair Value of Plan Assets
Fair value of plan assets at beginning of year
Net interest on plan assets
Remeasurement gain/(loss)
Employer contributions
Benefits paid
Expenses paid
Fair value of plan assets at end of year
2017
£000
(2,165)
(51,554)
48,616
2016
£000
(1,764)
(45,281)
41,346
(5,103)
(5,699)
2017
£000
47,045
1,559
2,214
9,736
(5,704)
(1,131)
2016
£000
47,348
1,639
(311)
217
(878)
(970)
53,719
47,045
2017
£000
41,346
1,388
5,702
1,516
(1,131)
(205)
2016
£000
41,847
1,465
(1,984)
1,162
(970)
(174)
48,616
41,346
79
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 25 Pension Schemes and Other Retirement Benefits continued
Defined Benefit Plans continued
Expense Recognised in the Income Statement
Expenses paid from plan
Interest expense on net defined benefit pension plans
The expense is recognised in the following line items in the Income Statement:
2017
£000
205
171
376
2016
£000
174
174
348
In Continuing
Operations
2017
£000
In Discontinued
Operations
2016
£000
Administrative expenses
Finance expense
205
171
376
Remeasurement gains and (losses) recognised directly in equity in the Statement of Other Comprehensive Income since 26 February 2007:
174
174
348
2016
£000
(4,599)
(1,012)
2017
£000
(5,611)
(544)
(6,155)
(5,611)
Cumulative amount at 1 June
Recognised in the year
Cumulative amount at 31 May
Scheme Assets
The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to significant change before they are
realised, were:
Equities and hedge funds
Corporate bonds
Property
Alternative investment mandate
Other – cash
The major assumptions used in this valuation were:
Rate of increase in deferred pensions
Rate of increase in pensions in payment
Discount rate applied to scheme liabilities
Inflation assumption
Fair value
at 2017
£000
26,822
15,931
2,637
–
3,226
Fair value
at 2016
£000
21,080
14,445
2,528
3,289
4
48,616
41,346
2017
3.50%
3.50%
2.55%
3.60%
2016
3.25%
3.20%
3.35%
3.25%
The assumptions used by the actuary are chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be
borne out in practice.
The assumptions relating to longevity underlying the pension liability at the Balance Sheet date are based on standard actuarial mortality tables and include
an allowance for future improvements in longevity. The assumptions are equivalent to expecting a 60-year-old to live for a number of years as follows:
IWMPS
Current pensioner aged 60: 23.6 years (male), 27.2 years (female) (2016: 21.8 years (male), 25.7 years (female))
Future retiree upon reaching 60: 24.9 years (male), 28.5 years (female) (2016: 22.4 years (male), 26.5 years (female))
IWCSSS
Current pensioner aged 60: 25.3 years (male), 27.2 years (female) (2016: 24.4 years (male), 26.9 years (female))
Future retiree upon reaching 60: 26.5 years (male), 28.5 years (female) (2016: 25.0 years (male), 27.6 years (female))
80
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 25 Pension Schemes and Other Retirement Benefits continued
Sensitivity Analysis
Reasonably possible changes at the reporting date to one of the actuarial assumptions, holding other assumptions constant, would have increased/(decreased)
the defined benefit obligation by the amounts shown below.
Discount rate (1% increase)
Inflation (1% increase)
Discount rate (1% decrease)
Inflation (1% decrease)
2017
£000
(9,079)
9,091
2017
£000
11,872
(7,973)
2016
£000
(7,662)
8,015
2016
£000
9,918
(7,405)
The Group expects to contribute approximately £1,652,000 to its defined benefit plans in the next financial year.
26 Employee Share Schemes
The Group has established a Savings-Related Share Option Scheme and an Executive Long-Term Incentive Plan. An additional Long-Term Incentive Plan was
established for certain senior employees as part of the acquisition of Hargreaves Industrial Services Limited in September 2006. In addition, a deferred bonus
scheme was implemented as a temporary replacement for the Executive Long-Term Incentive Plan (“LTIP”) for the year ended 31 May 2015. No new employee
share schemes have been implemented in the year ended 31 May 2017.
The terms and conditions of the grants are as follows, whereby all options are settled by physical delivery of shares:
Long-Term Incentive Plan – Norec
Long-Term Incentive Plan 2
September 2006
June 2008
Senior employees
Senior employees
96,572
128,621
3 years’ service
3 years’ service
11 years
3.5 years
Date of grant
Employees entitled
Number of
shares granted
Vesting conditions
Contractual life
and EPS growth of
35.4% (30% award) –
63.5% (100% award)
over RPI over those 3
years
Long-Term Incentive Plan 3
June 2009
Senior employees
193,658
3 years’ service
3.5 years
and EPS growth of
18.9% (30% award) –
30.0% (100% award)
over RPI over those 3
years
Long-Term Incentive Plan 5
September 2011
Senior employees
134,626
3 years’ service
3.5 years
and EPS growth of 9.3%
(30% award) – 22.5%
(100% award over RPI
over those 3 years)
Long-Term Incentive Plan 6
October 2013
Senior employees
192,098
3 years’ service
3.5 years
Savings-Related Share Option Scheme 9
Deferred bonus scheme A
Deferred bonus scheme B (50%)
Deferred bonus scheme B (50%)
Deferred bonus scheme C
Deferred bonus scheme D
April 2014
March 2015
March 2015
March 2015
September 2016
November 2016
All employees
Senior employees
Senior employees
Senior employees
Senior employees
Senior employees
140,346
112,122
91,722
91,722
135,034
20,000
and EPS growth of 3%
pa (30% award) – 9% pa
(100% award) over
those 3 years
3 years’ service
3 years’ service
3 years’ service
4 years’ service
3 years’ service
3 years’ service
3.5 years
3 years
3 years
4 years
3 years
3 years
81
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 26 Employee Share Schemes continued
Savings-Related Share Option Schemes
The number and weighted average exercise price of share options is as follows:
Outstanding at beginning of year
Lapsed during the year
Outstanding at the end of the year
Exercisable at the end of the year
2017
Weighted average
exercise price
2017
Number of
options
2016
Weighted average
exercise price
760p
776p
53,079
(32,965)
733p
20,114
–
–
820p
860p
760p
793p
The options outstanding at 31 May 2017 have an exercise price of 733p and have a weighted average contractual life of one month.
There were no options exercised during the year (2016: none).
Long-Term Incentive Plans
Outstanding at beginning of year
Lapsed during the year
Exercised during the year
Outstanding at the end of the year
Exercisable at the end of the year
2017
Weighted average
exercise price
2017
Number of
options
2016
Weighted average
exercise price
55p
–
–
73p
100,601
–
(25,593)
75,008
–
75,008
15p
–
–
55p
55p
2016
Number of
options
133,858
(80,779)
53,079
23,520
2016
Number of
options
292,699
(192,098)
–
100,601
100,601
The options outstanding at 31 May 2017 have an exercise price in the range of £nil to 393.5p and have a weighted average contractual life of no years as all
options are now exercisable.
There were 25,593 options exercised in the year with a weighted average market value of 263p (2016: no options).
Deferred Bonus Scheme
Outstanding at beginning of year
Granted during the year
Lapsed during the year
Exercised during the year
Outstanding at the end of the year
Exercisable at the end of the year
2017
Weighted average
exercise price
2017
Number of
options
2016
Weighted average
exercise price
–
–
–
–
–
–
268,567
155,034
(26,489)
–
397,112
–
–
–
–
–
–
–
2016
Number of
options
346,956
–
(78,389)
–
268,567
–
The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of the
fair value of the services received is measured based on the Black-Scholes model. The contractual life of the option is used as an input into this model.
The fair value of options and the assumptions used in these calculations for the options granted in the year are as follows: (2016: no options).
Fair value at grant date
Exercise price
Share price
Expected volatility
Option life
Expected dividend
Risk-free rate
Deferred Bonus
Scheme C
Deferred Bonus
Scheme D
1.48
–
1.73
20%
3 years
5%
5.8%
2.11
–
2.25
40%
3 years
2%
5.8%
Volatility was calculated with reference to the Group’s daily share price volatility. The average share price in the year was 239p (2016: 274p).
82
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 26 Employee Share Schemes continued
Long-Term Incentive Plans and Deferred Bonus Schemes
The costs charged to the Income Statement relating to share-based payments were as follows:
Share options granted in 2013
Share options granted in 2014
Share options granted in 2015
Share options granted in 2016
27 Provisions
Group
Balance at 31 May 2016
Provisions made during the year
Provisions utilised during the year
Provisions reversed
Balance at 31 May 2017
2017
£000
–
111
293
67
471
Surface
restoration
£000
Monckton
ground water
contamination
£000
Maltby
restoration
£000
Maltby
subsidence
£000
3,456
2,577
(1,190)
(137)
4,706
179
–
(179)
–
–
775
–
–
(15)
760
646
–
(168)
–
478
2016
£000
113
133
274
–
520
Total
provision
£000
5,056
2,577
(1,537)
(152)
5,944
Included within the Maltby and Surface mining restoration provision is an amount of £600,000 (2016: £867,000) that is expected to be utilised in the next 12 months.
Provisions comprise:
1 A £4,706,000 restoration provision, which relates to the surface mining obligation to restore the sites once mining operation is completed.
2 A £760,000 restoration provision which relates to Maltby Colliery’s obligation to restore the site now that coal mining has been completed.
3 A statutory provision payable to the UK Coal Authority at a set rate, in order to rectify any potential subsidence of the local area around Maltby Colliery.
Any unused provision will be released after the statutory period.
The Company has no provisions.
28 Capital and Reserves
Share Capital
In issue at 1 June
Issued for cash
In issue and fully paid at 31 May
Allotted, called up and fully paid
31,910,684 (2016: 31,910,684) Ordinary Shares of 10p each (excluding own shares held)
Own shares held of 10p each 1,228,072 (2016: 1,228,072)
Ordinary Shares
2017
Number
33,138,756
–
2016
Number
33,138,756
–
33,138,756
33,138,756
2017
£000
3,191
123
3,314
2016
£000
3,191
123
3,314
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.
As at the year end the Group held 1,228,072 within Treasury shares, representing own shares purchased as part of the Group’s share buyback programme.
These shares have a market value of £4.1m at 31 May 2017 and were purchased for an aggregate consideration of £6.9m.
Translation Reserve
The translation reserve comprises all foreign exchange differences arising since 1 June 2007, the transition date to Adopted IFRSs, from the translation of the
financial statements of foreign operations.
83
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 28 Capital and Reserves continued
Cash Flow Hedging Reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged
transactions that have not yet occurred.
Other Reserves
Other reserves, the Merger reserve, and the Capital Redemption reserve are historical reserves for which no movements are anticipated.
Dividends
The aggregate amount of dividends comprises:
Final dividends paid in respect of prior year but not recognised as liabilities in that year (0.6p per share (2016: 20.0p))
Interim dividends paid in respect of the current year (2.7p per share (2016: 1.7p))
Proposed dividend (4.5p per share (2016: 0.6p))
The proposed dividend is not included in liabilities as it was not approved before the year end.
2017
£000
194
859
1,053
1,433
2016
£000
6,382
542
6,924
191
29 Financial Instruments
The Group’s and Company’s principal financial instruments comprise short-term receivables and payables, bank loans and overdrafts, obligations under
finance leases and cash. Neither the Group nor the Company trades in financial instruments but uses derivative financial instruments in the form of forward
rate agreements and forward foreign currency contracts to help manage its foreign currency, interest rate and commodity price exposures. The main
purpose of these financial instruments is to raise finance for the Group’s and Company’s ongoing operations and manage its working capital requirements.
(a) Fair Values of Financial Assets and Financial Liabilities
Derivative Financial Instruments
Fair Value Hierarchy
The following hierarchy classifies each class of financial asset or liability depending on the valuation technique applied in determining its fair value:
Level 1:
Level 2:
Level 3:
The fair value is calculated based on quoted prices traded in active markets for identical assets or liabilities.
The fair value is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The fair value is based on inputs for the asset or liability that are not based on observable market data (unobservable inputs).
In both 2017 and 2016 all of the interest rate swaps, the forward exchange contracts and the commodity contracts are considered to be Level 2 and
the options to acquire subsidiaries Level 3 in the fair value hierarchy. There have been no transfers between categories in the current or preceding year.
The fair value of financial instruments held at fair value have been determined based on available market information at the Balance Sheet date.
The fair values of the options has been determined based upon the fair value of the assets and liabilities of the entities.
(b) Credit Risk
Financial Risk Management
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises
principally from the Group’s receivables from customers. The Group’s risk is influenced by the nature of its customers. New customers are analysed for
creditworthiness before the Group’s standard payment terms and conditions are offered and appropriate credit limits set.
Exposure to Credit Risk
The carrying amount of trade receivables represents the maximum credit exposure. Therefore, the maximum exposure to credit risk at the Balance Sheet date
was £59,727,000 (2016: £75,388,000) being the total of the carrying amount of trade receivables and amounts due from undertakings in which the Group has
a participating interest.
The allowance account for trade receivables is used to record impairment losses unless the Group or Company is satisfied that no recovery of the amount
owing is possible; at that point the amounts considered irrecoverable are written off against the trade receivables directly. Further information on credit risk
is provided in Note 21.
84
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 29 Financial Instruments continued
(c) Liquidity Risk
Financial Risk Management
Liquidity risk is the risk that the Group and Company will not be able to access the necessary funds to finance their operations. The Group finances operations
through a mix of short and medium-term facilities.
The Group manages its liquidity risk by monitoring existing facilities and cash flows against forecast requirements based on a rolling cash forecast.
The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effect of netting agreements:
Group
Carrying
amount
£000
Contractual
cash flow
£000
1 year
or less
£000
2017
1 to <2
years
£000
2 to <5
years
£000
5 years
and over
£000
Carrying
amount
£000
Contractual
cash flow
£000
1 year
or less
£000
2016
1 to <2
years
£000
2 to <5
years
£000
5 years
and over
£000
Non-derivative
financial liabilities
Finance lease liabilities
8,277
Trade and other payables* 88,958
Invoice discounting facility
–
35,275
Group banking facilities
8,667
2,553
4,956
–
88,958 88,958
–
–
– 35,275
–
35,275
Derivative financial
liabilities
Interest rate swaps used
for hedging
Forward exchange
contracts used for
hedging:
Outflow
Commodity contracts:
Outflow
–
9
–
9
–
9
–
–
252
252
240
12
1,158
–
–
–
–
–
–
132,771
133,161
94,163 37,840
1,158
*
Excludes derivatives (shown separately).
Company
–
–
–
–
–
–
–
–
15,906
75,096
–
37,593
16,691
75,096
–
37,593
7,837
75,096
–
–
5,457
–
–
–
3,397
–
–
37,593
268
268
268
–
25
203
25
203
25
137
–
66
–
–
–
129,091
129,876
83,363
5,523
40,990
–
–
–
–
–
–
–
–
Carrying
amount
£000
Contractual
cash flow
£000
1 year
or less
£000
2017
1 to <2
years
£000
2 to <5
years
£000
5 years
and over
£000
Carrying
amount
£000
Contractual
cash flow
£000
1 year
or less
£000
2016
1 to <2
years
£000
2 to <5
years
£000
5 years
and over
£000
Non-derivative
financial liabilities
Trade and other payables 109,321
35,275
Group banking facilities
109,321 109,321
35,275
–
– 35,275
Derivative financial
liabilities
Interest rate swaps used
for hedging
Forward exchange
contracts used for
hedging:
Outflow
–
–
–
–
–
–
–
–
144,596 144,596 109,321 35,275
–
–
–
–
–
–
–
–
–
–
116,877
37,593
116,877
37,593
116,877
–
268
268
268
–
–
–
154,738
154,738
117,145
–
–
–
–
–
–
37,593
–
–
37,593
–
–
–
–
–
85
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report
29 Financial Instruments continued
(d) Market Risk
Financial Risk Management
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and commodity prices will affect the Group’s or Company’s
income or the value of its holdings of financial instruments.
Group
The Group is exposed to currency risk on sales and purchases that are denominated in a currency other than the respective functional currencies of Group
entities. The Group’s policy is to reduce currency exposures on sales and purchasing through forward foreign currency contracts.
The Group is exposed to interest rate risk principally where its borrowings are at a variable interest rate. The Group’s policy is to reduce this exposure through
interest rate swaps.
Commodity Price Risk
Commodity price risk is the risk of financial loss to the Group through open positions on the trading of coal, coke and other mineral commodities, prices for
which are subject to variations that are both uncontrollable and unpredictable.
The Group mitigates these risks wherever practicable, through the use of measures including fixed price contracts, hedging instruments and “back to back”
purchase and sale agreements.
Although short-term trading risks are managed in this way, through the Group’s participation in the Tower surface mining jointly controlled entity and the
former Aardvark and Scottish Coal sites, the Group does have a longer-term exposure to price movements, favourable or unfavourable, in international coal
and coke prices.
Foreign Currency Risk
Group
The Group’s exposure to foreign currency risk is as follows. This is based on the carrying amount for monetary financial instruments except derivatives when
it is based on notional amounts.
Sterling
£000
26,053
31,763
25,161
(30,638)
(3,802)
(907)
(35,275)
12,355
31 May 2017
Cash and cash equivalents
Trade receivables
Trade receivables due from
undertakings in which the Group
has a participating interest
Trade payables
Trade payables due to
undertakings in which the Group
has a participating interest
Other trade payables
Group banking facilities
Balance Sheet exposure
Contracted future sales
Contracted future purchases
Gross exposure
Forward exchange contracts
Net exposure
Euro
£000
51
266
–
(31)
–
–
–
286
417
(518)
185
(120)
65
US Dollar
£000
16
–
–
(1,959)
–
–
–
(1,943)
–
–
(1,943)
1,959
Hong Kong
Dollar
£000
918
2,454
–
(583)
–
(1)
–
2,788
–
–
2,788
(1,252)
16
1,536
South African
Rand
£000
513
–
–
(46)
–
(34)
–
433
–
–
433
–
433
Indian
Rupee
£000
266
83
–
–
–
(31)
–
318
–
–
318
–
318
Total
£000
27,817
34,566
25,161
(33,257)
(3,802)
(973)
(35,275)
14,237
417
(518)
1,781
587
2,368
86
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued 29 Financial Instruments continued
(d) Market Risk continued
Foreign Currency Risk continued
31 May 2016
Cash and cash equivalents
Trade receivables
Trade receivables due from
undertakings in which the Group
has a participating interest
Trade payables
Trade payables due to
undertakings in which the Group
has a participating interest
Other trade payables
Group banking facilities
Balance Sheet exposure
Contracted future sales
Contracted future purchases
Gross exposure
Forward exchange contracts
Net exposure
Sterling
£000
19,461
41,088
31,805
(30,050)
(455)
(2,137)
(37,593)
22,119
Company
The Company has no exposure to foreign currency risk.
Euro
£000
161
205
–
(221)
–
–
–
145
136
(513)
(232)
383
151
US Dollar
£000
Hong Kong
Dollar
£000
South African
Rand
£000
103
–
–
(421)
–
–
–
(318)
929
(1,333)
(722)
409
329
2,191
–
(659)
–
–
–
1,861
–
–
1,861
(1,259)
(313)
602
252
14
–
(81)
–
(25)
–
160
–
–
160
–
160
Indian
Rupee
£000
855
85
–
(6)
–
(57)
–
877
–
–
877
–
877
Total
£000
21,161
43,583
31,805
(31,438)
(455)
(2,219)
(37,593)
24,844
1,065
(1,846)
1,944
(467)
1,477
Sensitivity Analysis
Group
A 10% weakening of the following currencies against the Pound Sterling at 31 May 2017 would have increased equity and profit or loss by the amounts shown
below. This calculation assumes that the change occurred at the Balance Sheet date and had been applied to risk exposures existing at that date.
This analysis assumes that all other variables, in particular other exchange rates and interest rates, remain constant. The analysis is performed on the same
basis for 2016.
€
$
HKD
ZAR
INR
Equity
Profit or loss
2017
£000
(6)
(2)
(154)
(43)
(32)
2016
£000
(14)
28
(55)
(15)
(80)
2017
£000
(6)
(2)
(154)
(43)
(32)
2016
£000
(14)
28
(55)
(15)
(80)
A 10% strengthening of the above currencies against the Pound Sterling at 31 May 2017 would have had the equal but opposite effect on the above
currencies to the amounts shown above, on the basis that all other variables remain constant.
87
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report 29 Financial Instruments continued
(d) Market Risk continued
Interest Rate Risk
Profile
At the Balance Sheet date the interest rate profile of the Group’s interest-bearing financial instruments was:
Fixed rate instruments
Financial assets
Financial liabilities
Variable rate instruments
Financial assets
Financial liabilities
Group
2017
£000
–
(8,277)
2016
£000
–
(15,906)
(8,277)
(15,906)
Company
2017
£000
–
–
–
2016
£000
–
–
–
27,817
(35,275)
21,161
(37,593)
115
(35,275)
–
(41,488)
(7,458)
(16,432)
(35,160)
(41,488)
Sensitivity Analysis
An increase of one basis point in interest rates throughout the period would have affected profit or loss by the amounts shown below. This calculation assumes
that the change occurred at all points in the period and had been applied to the average risk exposures throughout the period.
This analysis assumes that all other variables, in particular foreign currency rates, remain constant and considers the effect of financial instruments with variable
interest rates, financial instruments at fair value through profit and loss or available for sale with fixed interest rates and the fixed rate element of interest rate
swaps. The analysis is performed on the same basis for 2016.
Profit or loss
(Decrease)/increase
Group
Company
2017
£000
(119)
2016
£000
103
2017
£000
(364)
2016
£000
(2)
(e) Cash Flow Hedges
Cash Flow Hedges – Group
The following table indicates the periods in which the cash flows associated with cash flow hedging instruments are expected to occur:
Interest rate swaps:
Assets
Liabilities
Forward exchange contracts:
Assets
Liabilities
Commodity contracts:
Assets
Liabilities
2017 Expected cash flows
2016 Expected cash flows
Carrying
amount
£000
1 year or
less
£000
1 to <2
years
£000
2 to <5
years
£000
5 years
and over
£000
Carrying
amount
£000
1 year or
less
£000
1 to <2
years
£000
2 to <5
years
£000
5 years
and over
£000
–
–
51
(9)
–
–
51
(9)
–
–
–
–
95
(252)
88
(240)
7
(12)
(115)
(110)
(5)
–
–
–
–
–
–
–
–
–
–
(268)
32
(25)
–
(203)
–
(268)
32
(25)
–
(137)
–
–
–
–
–
(66)
–
(464)
(398)
(66)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(f) Capital Management
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern, whilst maximising the return to shareholders.
The capital structure of the Group consists of debt, which includes borrowings, cash and cash equivalents, and equity attributable to equity holders of the
parent, comprising capital, reserves and retained earnings.
The capital structure is reviewed regularly by the Group’s Board of Directors. The Group’s policy is to maintain gearing at levels appropriate to the business.
The Board principally reviews gearing determined as a proportion of debt to earnings before interest, tax, depreciation and amortisation (“EBITDA”). The Board
also takes consideration of gearing determined as the proportion of net debt to total capital. It should be noted that the Board reviews gearing taking careful
account of the working capital needs and flows of the business. In the trading businesses, where working capital cycles are regular, predictable and generally
less than 90 days, the Board is comfortable to maintain higher levels of debt and gearing as measured against EBITDA.
88
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued
29 Financial Instruments continued
(f) Capital Management continued
The Board believes that the Group’s dividend cover remains conservative. The average dividend cover over the past three years has been just under three
times, representing an average pay out ratio of 37.3%.
There are no externally imposed capital requirements but the bank debt is subject to certain covenants in line with normal commercial practice. Historic and
projected compliance with these covenants is reviewed by the Board on a regular basis.
30 Operating Leases
Non-cancellable operating lease rentals are payable as follows:
Less than one year
Between one and five years
More than five years
Group
2017
£000
5,283
5,976
–
2016
£000
11,494
5,477
18
11,259
16,989
Company
2017
£000
–
–
–
–
2016
£000
–
–
–
–
Group
During the year £14,231,000 was recognised as an expense in the income statement in respect of operating leases (2016: £13,594,000).
Company
During the year £nil was recognised as an expense in the income statement in respect of operating leases (2016: £nil).
31 Capital Commitments
Group
As at 31 May 2017, the Group was committed to contracts to purchase property, plant and equipment for £716,000 (2016: £nil).
32 Contingencies
Group and Company
The Company and certain of its subsidiary undertakings have debenture and composite arrangements in connection with banking facilities. The Company
acts as a guarantor, or surety, for various subsidiary undertakings in banking and other agreements entered into by them in the normal course of business.
The Company’s maximum unprovided exposure is £nil (2016: £nil).
The Group is defendant in a small number of lawsuits incidental to its operations which, in aggregate, are not expected to have a material adverse effect on
the Group.
33 Related Parties
Identity of Related Parties with which the Group has Transacted
The Group and Company have a related party relationship with their subsidiaries and joint ventures (Note 16) and its Directors.
Group
Other Related Party Transactions
Joint ventures
Tower Regeneration Limited
Tower Regeneration Leasing Limited
Associate undertakings
Hargreaves Services Europe Limited
Hargreaves Raw Materials Services GmbH
Joint ventures
Tower Regeneration Limited
Associate undertakings
Hargreaves Raw Materials Services GmbH
Sales to
2017
£000
26,730
–
–
6,329
2016
£000
28,612
–
–
7,215
Purchases from
2017
£000
252
3,940
–
–
2016
£000
466
4,575
2
–
33,059
35,827
4,192
5,043
Interest received from
Interest paid to
2017
£000
863
40
903
2016
£000
1,060
186
1,246
2017
£000
2016
£000
–
–
–
–
–
–
89
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report
33 Related Parties continued
Group continued
Other Related Party Transactions continued
Joint ventures
Tower Regeneration Limited
Tower Regeneration Leasing Limited
Associate undertakings
Hargreaves Raw Materials Services GmbH
Hargreaves Services Europe Limited
Hargreaves Carbon Products Polska Sp. z o.o.
Receivables outstanding
Payables outstanding
2017
£000
15,962
–
8,917
–
282
2016
£000
22,367
60
9,096
–
282
2017
£000
2,199
1,602
1
–
–
25,161
31,805
3,802
2016
£000
–
441
10
4
–
455
Transactions with Key Management Personnel
The Board of Directors are the key management personnel of the Group. Details of Directors’ remuneration, share options, pension benefits and other
non-cash benefits can be found in Note 8. In addition to this, the element of the share-based payment (credit)/charge for the year that relates to key
management personnel is £67,000 (2016: £24,000) and the social security costs is £160,000 (2016: £163,000). There are no other post-employment or other
long-term benefits.
Sales to
2017
£000
–
–
–
2016
£000
–
–
–
Purchases from
2017
£000
2016
£000
–
–
–
–
–
–
Receivables outstanding
Payables outstanding
2017
£000
188,099
11,604
2016
£000
201,113
10,579
2017
£000
109,212
–
2016
£000
116,790
48
199,703
211,692
109,212
116,838
Company
Other Related Party Transactions
Joint ventures
Tower Regeneration Limited
Mir Trade Services Limited
Subsidiaries
Joint ventures
90
Hargreaves Services plcFinancial StatementsNotes (forming part of the financial statements) continued Alternative Performance Measure Glossary
This report provides alternative performance measures (“APMs”), which are not defined or specified under the requirements of International Financial
Reporting Standards. We believe these APMs provide readers with important additional information on our business.
Alternative Performance Measure
Definition and Purpose
Continuing Underlying
Operating Profit (also described
as “Underlying Operating Profit”)
Represents the operating profit of the Group before net exceptional costs, the amortisation of intangible assets and
impairment of goodwill and including the share of profit in associates and joint ventures before tax. See page 18 for
reconciliation to statutory operating profit. This measure is consistent with how the business measures performance
and is reported to the Board.
Continuing Underlying Profit
before Tax (also described as
“Underlying Profit before Tax”)
Represents the profit before tax of the Group before net exceptional costs, the amortisation of intangible assets and
impairment of goodwill and including the tax on share of profits from associates and joint ventures. See page 18 for
reconciliation to statutory operating profit. This measure is consistent with how the business measures performance
and is reported to the Board.
Continuing Underlying
Diluted EPS (also described
as “Underlying Diluted EPS”)
Profit attributable to the equity holders of the parent before the net exceptional costs, amortisation of intangible assets
and impairment of goodwill divided by the weighted average number of ordinary shares during the financial year adjusted
for the effects of any potentially dilutive options. Calculation is shown on page 66.
Net Debt
Net Asset per Share
Represents a combination of the net position of the Groups cash and loan balances. See page 21 for calculation.
Represents the net asset value of the balance sheet divided by the total number of allocated, called up and fully paid
ordinary shares.
£’000
Net Assets
Ordinary shares
Net Asset per Share
137,927
31,911
4.32
91
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Notice of Annual General Meeting – Hargreaves Services plc
(incorporated and registered in England and Wales
under number 4952865)
NOTICE IS HEREBY GIVEN that this year’s Annual General Meeting will be held at Prior’s Hall, Durham Cathedral, Durham, DH1 3EH on 3 October 2017 at 11am
for the following purposes:
Ordinary Business
To consider and, if thought fit, pass the following resolutions, of which resolutions 1 to 8 will be proposed as ordinary resolutions and resolution 9 as a special
resolution.
1. To adopt and receive the Directors’ Report, the Strategic Report, the Directors’ Corporate Governance and Remuneration Reports, the Auditor’s Report
and the Financial Statements for the year ended 31 May 2017.
2. To approve the Directors’ Corporate Governance and Remuneration Reports for the year ended 31 May 2017.
3. To declare a final dividend for the year ended 31 May 2017 of 4.5 pence per ordinary share to bring the dividend for the year ended 31 May 2017 to a total
of 6.6 pence per ordinary share.
4. To re-appoint David Morgan as a Director of the Company in accordance with article 34 of the Company’s articles of association, who offers himself
for re-appointment.
5. To re-appoint Nigel Halkes as a Director of the Company in accordance with article 34 of the Company’s articles of association, who offers himself
for re-appointment.
6. To appoint KPMG LLP as auditor of the Company to hold office from the conclusion of this meeting to the conclusion of the next meeting at which
accounts are laid before the Company.
7. To authorise the Directors to agree the remuneration of the auditor.
8. That the Directors of the Company be and are generally granted and unconditionally authorised for the purposes of Section 551 of the Companies Act
2006 (the Act) to exercise all the powers of the Company to allot shares in the Company and to grant rights to subscribe for or to convert any security into
such shares in the Company (Rights):
8.1 up to an aggregate nominal value of £1,063,689 (representing approximately one-third of the total ordinary share capital in issue as at the date of this
notice); and
8.2 comprising equity securities (within the meaning of section 560 of the Act) up to an aggregate nominal amount of £2,127,379 (after deducting from
such amount any shares allotted under the authority conferred by virtue of resolution 9.1) in connection with or pursuant to an offer or invitation by
way of a rights issue (as defined below), provided that such authorities conferred by this resolution 8 shall expire on the earlier of the conclusion of
the next Annual General Meeting of the Company or the date falling six months after the end of the Company’s current financial year unless varied,
revoked or renewed by the Company in general meeting, save that the Company may at any time before such expiry make an offer or agreement
which would or might require shares to be allotted or Rights to be granted after such expiry and the Directors may allot shares and grant Rights
pursuant to such offers or agreements as if the relevant authorities conferred by this resolution 8 had not expired. These authorities shall be in
substitution for all previous authorities previously granted to the Directors to allot shares and grant Rights which are pursuant to this resolution 8
revoked but without prejudice to any allotment or grant of Rights made or entered into prior to the date of this resolution 8. For the purposes of this
resolution 8, rights issue means an offer or invitation to (i) holders of ordinary shares in proportion (as nearly as may be practicable) to the respective
numbers of ordinary shares held by them on the record date for such allotment and (ii) persons who are holders of other classes of equity securities
if this is required by the rights of such securities (if any) or, if the Directors of the Company consider necessary, as permitted by the rights of those
securities, to subscribe for further securities by means of the issue of a renounceable letter (or other negotiable instrument) which may be traded for
a period before payment for the securities is due, but subject in both cases to such exclusions or other arrangements as the Directors of the Company
may deem necessary or expedient in relation to fractional entitlements, treasury shares, record dates or legal, regulatory or practical difficulties which
may arise under the laws of, or the requirements of, any recognised regulatory body or any stock exchange in any territory or any other matter whatever.
9. That, subject to and conditional upon the passing of resolution 8 above, the Directors be and are empowered pursuant to Sections 570 and 573 of the Act
to allot equity securities (as defined in Section 560 of the Act) of the Company for cash:
9.1 pursuant to the authority conferred upon them by resolution 8.1 or where the allotment constitutes an allotment of equity securities by virtue of
section 560(3) of the Act, provided that this power shall be limited to the allotment of equity securities:
9.1.1 in connection with or pursuant to an offer of such securities by way of a pre-emptive offer (as defined below); and
9.1.2 (otherwise than pursuant to sub-paragraph 9.1.1 above) up to an aggregate nominal value of £319,107 (representing approximately 10% of the
total ordinary share capital in issue); and
9.2 pursuant to the authority conferred upon them by resolution 8.2, in connection with or pursuant to a rights issue, as if section 561(1) of the Act did not
apply to any such allotment and the authorities given shall expire on the earlier of the conclusion of the next Annual General Meeting of the Company
or the date falling six months after the end of the Company’s current financial year unless renewed or extended prior to such expiry, save that the
Directors of the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such
expiry and the Directors may allot equity securities in pursuance of any such offer or agreement notwithstanding that the power conferred by this
resolution 9 has expired.
For the purpose of this resolution 9:
(a) rights issue has the meaning given in resolution 8; and
(b) pre-emptive offer means a rights issue, open offer or other pre-emptive issue or offer to (i) holders of ordinary shares in proportion (as nearly as may
be practicable) to the respective numbers of ordinary shares held by them on the record date(s) for such allotment; and (ii) persons who are holders
of other classes of equity securities if this is required by the rights of such securities (if any) or, if the Directors of the Company consider necessary, as
permitted by the rights of those securities, but subject in both cases to such exclusions or other arrangements as the Directors of the Company may
deem necessary or expedient in relation to fractional entitlements, treasury shares, record dates or legal, regulatory or practical difficulties which may
arise under the laws of, or the requirements of, any recognised regulatory body or any stock exchange in any territory or any other matter whatever.
92
Hargreaves Services plcFinancial Statements
Special Business
To consider and, if thought fit, pass the following resolution 10 as a special resolution.
10. The Company be and is generally and unconditionally authorised for the purpose of section 701 of the Act to make market purchases (which in this
resolution shall have the meaning given to this term in section 693 (4) of the Act) of its ordinary shares of 10 pence each in the capital of the Company
(Ordinary Shares) on the terms set out below:
10.1 the maximum aggregate number of Ordinary Shares authorised to be purchased by the Company pursuant to this resolution 10 is 4,786,603
(representing approximately fifteen per cent of the number of Ordinary Shares in issue); and
10.2 the minimum price which may be paid for each of those Ordinary Shares (exclusive of expenses) is 10 pence; and
10.3 the maximum price (exclusive of expenses) which may be paid for each of those Ordinary Shares is not more than the higher of (i) five per cent above
the average of the middle market quotations for Ordinary Shares (as derived from the Daily Official Lists of the London Stock Exchange) for the five
dealing days immediately preceding the date of purchase and (ii) the price stipulated by Commission-adopted Regulatory Technical Standards
pursuant to Article 5(6) of the Market Abuse Regulation.
but so that this authority shall (unless previously varied, revoked or renewed) expire on the earlier of the conclusion of the next Annual General Meeting
of the Company or the date falling six months after the end of the Company’s current financial year, save that the Company may before the expiry of
this authority conclude any contract for the purchase of its own shares pursuant to the authority conferred by this resolution 10 which contract would
or might be executed wholly or partially after the expiration of this authority as if the authority conferred by this resolution 10 had not expired.
7 August 2017
By order of the Board
Andrew Robertson
Company Secretary
Registered Office:
West Terrace
Esh Winning
Durham
DH7 9PT
Registered in England and Wales No. 4952865
Notes
1. To be entitled to attend and vote at the Annual General Meeting (and for the purpose of the determination by the Company of the votes they may cast),
Shareholders must be registered in the Register of Members of the Company by close of business on 1 October 2017 (or, in the event of any adjournment,
by close of business two days prior to the day of the adjourned meeting). Changes to the Register of Members after the relevant deadline shall be
disregarded in determining the rights of any person to attend and vote at the meeting.
2. Members are entitled to appoint a proxy to exercise all or any of their rights to attend and to speak and vote on their behalf at the meeting. A shareholder
may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a
different share or shares held by that shareholder. A proxy need not be a shareholder of the Company. A proxy form which may be used to make such
appointment and give proxy instructions accompanies this notice.
3. To be valid any proxy form or other instrument appointing a proxy must be received by post or (during normal business hours only) by hand at the office
of the Registrars of the Company, Capita Asset Services, Proxies Department, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU no later than
11am on 1 October 2017.
4. The return of a completed proxy form, other such instrument or any CREST Proxy Instruction (as described in paragraph 9 below) will not prevent a shareholder
5.
attending the Annual General Meeting and voting in person if he/she wishes to do so.
If a member appoints a proxy or proxies and then decides to attend the Annual General Meeting in person and vote using his poll card, then the vote in
person will override the proxy vote(s). If the vote in person is in respect of the member’s entire holding, then all proxy votes will be disregarded. If, however,
the member votes at the meeting in respect of less than the member’s entire holding, then if the member indicates on his polling card that all proxies are
to be disregarded, that shall be the case; but if the member does not specifically revoke proxies, then the vote in person will be treated in the same way
as if it were the last received proxy and earlier proxies will only be disregarded to the extent that to count them would result in the number of votes being
cast exceeding the member’s entire holding. If you do not have a proxy form and/or believe that you should have one or if you require additional forms,
please contact the Company at its registered office.
6. To change your proxy instructions simply submit a new proxy appointment using the methods set out above. Note that the cut-off time for receipt of
proxy appointments (see Note 3 above) also applies in relation to amended instructions; any amended proxy appointment received after the relevant
cut-off time will be disregarded.
Where you have appointed a proxy using the hard-copy proxy form and would like to change the instructions using another hard-copy proxy form,
please contact Capita Asset Services Proxies Department, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU. If you submit more than one
valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take precedence.
93
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report
Notice of Annual General Meeting – Hargreaves Services plc
(incorporated and registered in England and Wales
under number 4952865) continued
7.
In order to revoke a proxy instruction you will need to inform the Company by sending a signed hard copy notice clearly stating your intention to revoke
your proxy appointment to Capita Asset Services. In the case of a member which is a company, the revocation notice must be executed under its
common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under
which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the revocation notice. The revocation
notice must be received by Capita Asset Services at Proxies Department, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU no later than 11am
on 1 October 2017. If you attempt to revoke your proxy appointment but the revocation is received after the time specified then, subject to paragraph 5
above your appointment will remain valid.
8. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures
9.
described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed voting
service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.
In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”)
must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s (Euroclear) specifications, and must contain the information required
for such instruction, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or is an amendment
to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA10) by
11am on 1 October 2017. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the
CREST Application Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this
time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.
10. CREST members and, where applicable, their CREST sponsors, or voting service providers should note that Euroclear does not make available special
procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy
Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored member,
or has appointed a voting service provider, to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to
ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable,
their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the
CREST system and timings.
11. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations
2001 (as amended).
12. If a corporation is a member of the Company, it may by resolution of its Directors or other governing body authorise one or more persons to act as its
representative or representatives at the Meeting and any such representative or representatives shall be entitled to exercise on behalf of the corporation
all the powers that the corporation could exercise if it were an individual member of the Company. Corporate representatives should bring with them
either an original or certified copy of the appropriate board resolution or an original letter confirming the appointment, provided it is on the corporation’s
letterhead and is signed by an authorised signatory and accompanied by evidence of the signatory’s authority.
13. As at 4 August 2017 (being the last business day prior to the publication of this Notice) the Company’s issued share capital consists of 31,910,684 ordinary
shares, carrying one vote each. Therefore, the total voting rights in the Company as at 4 August 2017 are 31,910,684.
14. The following documents will be available for inspection of the Company’s registered office at West Terrace, Esh Winning, Durham, DH7 9PT during
normal business hours on any week day (Saturdays and English public holidays excepted) from the date of this notice until the close of the Meeting and
at the place of that Meeting for at least 15 minutes prior to and during the Meeting:
• copies of the service contracts for the Executive Directors of the Company; and
• copies of the letters of appointment of Non-Executive Directors of the Company.
Explanatory Notes to the Notice of Annual General Meeting
The notes on the following pages give an explanation of the proposed resolutions.
Resolutions 1 to 8 are proposed as ordinary resolutions. This means that for each of those resolutions to be passed, more than half of the votes cast must be in
favour of the resolution. Resolutions 9 and 10 are proposed as special resolutions. This means that for these resolutions to be passed, at least three-quarters of
the votes cast must be in favour of the resolution.
Resolution 1: Accounts
The Directors will present their Report, the Directors’ Corporate Governance and Remuneration Reports, the Auditor’s Report and the audited Financial
Statements for the financial year ended 31 May 2017 to the meeting as required by law. These reports and statements are set out on pages 30 to 90 of the
Company’s annual report.
Resolution 2: Approval of the Directors’ Remuneration Report
Shareholders are asked to approve the Directors’ Remuneration Report for the financial year ended 31 May 2017 which is set out in full on pages 37 to 39
of the Company’s annual report. The vote is advisory and the Directors’ entitlement to remuneration is not conditional upon this resolution being passed.
Resolution 3: Final Dividend
The Board proposes a final dividend of 4.5 pence per share. If the meeting approves resolution 3, the final dividend will be paid on 20 October 2017 to
shareholders on the register of members on 18 August 2017.
Resolutions 4 and 5: Re-appointment of Directors
At each Annual General Meeting one-third of the Directors for the time being (other than those appointed since the last Annual General Meeting) are
required to retire. If the number of relevant Directors is not a multiple of three, the number nearest to one-third of Directors, but not less than one-third,
must retire. Directors due to retire by rotation are those longest in office since their last re-election or re-appointment. A retiring Director is eligible for
re-appointment. David Morgan and Nigel Halkes are both offering themselves for re-appointment.
Brief biographical details of David Morgan and Nigel Halkes are set out on page 30 of this document.
94
Hargreaves Services plcFinancial Statements
Resolutions 6 and 7: Appointment and Remuneration of Auditor
The Company is required to appoint auditors at each general meeting at which accounts are laid, to hold office until the next general meeting. KPMG LLP are
willing to continue in office for a further year and resolution 6 proposes their re-appointment and, in accordance with standard practice, resolution 7 proposes
that their remuneration be fixed by the Directors.
Resolution 8: Renewal of Board’s Authority to Allot Shares
Resolution 8.1 grants the Directors authority to allot relevant ordinary shares up to an aggregate nominal amount of £1,063,689 being approximately
one-third of the Company’s issued ordinary share capital.
In line with guidance issued by the Association of British Insurers, resolution 8.2 grants the Directors authority to allot ordinary shares in connection with a
rights issue up to an aggregate nominal amount of £2,127,379 (representing 21,273,789 ordinary shares of 10 pence each), as reduced by the nominal amount
of any shares issued under resolution 8.1. This amount, before any such reduction, represents approximately two-thirds of the Company’s issued ordinary
share capital. Under a rights issue, ordinary shareholders are invited to subscribe for further ordinary shares in proportion (as near as is practicable) to their
holdings of shares in the Company and, if they accept the invitation, their holding of shares is not diluted (and if they decline the offer then they can sell their
“rights” in the market for value).
Guidelines issued by the Association of British Insurers (“ABI”) provide that an authority for directors to allot new shares up to an amount equal to one-third of
the existing share capital, such as that granted by resolution 8.1, will be regarded as routine. The ABI guidelines also state that an authority for directors to allot
a further amount equal to one-third of the existing issued share capital, such as that granted by resolution 8.2, will also be regarded as routine as long as that
additional authorisation applies only to fully pre-emptive rights issues.
It is not the Directors’ current intention to exercise either such authorities. The authorities granted by resolution 8 replace the existing authorities to allot shares.
Resolution 9: Disapplication of Pre-emption Rights
This resolution grants the Directors authority to allot shares equivalent to 10 per cent of the issued ordinary share capital for cash (as distinct from non-cash
consideration) without first offering them to existing shareholders in proportion to their existing shareholdings. The resolution also allows the Directors to
make pre-emptive offers (such as rights issues) to shareholders without following certain detailed procedures in company law. This replaces the existing
authority to disapply pre-emption rights and expires at the conclusion of the next Annual General Meeting of the Company.
The Pre-Emption Group’s Statement of Principles (the “PEG Principles”) recommend that boards of directors should not seek authority to issue more than
5 per cent of the issued share capital of a company for cash on a non-pre-emptive basis. The PEG Principles are designed for officially listed companies, rather
than AIM companies, and the National Association of Pension Funds has confirmed that AIM companies should be permitted to take an authority to allot up
to 10 per cent of issued share capital for cash on a non pre-emptive basis (which the Company has done each year since joining AIM).
Resolution 10: Purchase of Own Shares
Resolution 10 authorises the Company to purchase its own shares (in accordance with section 701 of the Act) during the period from the date of this Annual
General Meeting until the end of the next Annual General Meeting of the Company or the expiration of six months after the 2017 Company financial year end,
whichever is the sooner, up to a total of 4,786,603 ordinary shares. This represents approximately 15% of the issued ordinary share capital. The maximum price
payable for a share shall not be more than the higher of 5% above the average of the middle market quotations of such shares for the five business days
before such purchases and the price stipulated in the Commission-adopted Regulatory Technical Standards pursuant to Article 5(6) of the Market Abuse
Regulation (being the higher of the price of the last independent trade and the highest current independent bid on the trading venue where the purchase is
carried out). The minimum price payable for a share will be 10 pence. Companies are permitted to retain any of their own shares which they have purchased
as treasury stock with a view to possible re-issue at a future date, rather than cancelling them. The Company will consider holding any of its own shares that it
purchases pursuant to the authority conferred by this resolution as treasury stock. This would give the Company the ability to re-issue treasury shares quickly
and cost-effectively, and would provide the Company with additional flexibility in the management of its capital base.
The Directors will consider making use of the renewed authorities pursuant to resolution 10 in circumstances which they consider to be in the best interests
of shareholders generally after taking account of market conditions prevailing at the time, other investment opportunities, appropriate gearing levels, the
effect on earnings per share and the Company’s overall financial position. No purchases will be made which would effectively alter the control of the Company
without the prior approval of the shareholders in a general meeting.
95
Annual Report and Accounts 2017Financial StatementsDirectors’ ReportStrategic Report Notes
96
Hargreaves Services plcFinancial Statements Investor Information
Company Secretary
Andrew Robertson
Independent Auditor
KPMG LLP
Quayside House
110 Quayside
Newcastle upon Tyne
NE1 3DX
Bankers
HSBC
4th Floor
City Point
29 King Street
Leeds
LS1 2HL
Barclays
Barclays House
5 St Ann’s Street
Quayside
Newcastle upon Tyne
NE1 3DX
Lloyds Banking Group
1st Floor Black Horse House
91 Sandyford Road
Newcastle upon Tyne
NE99 1JW
Legal Advisers
Walker Morris
Kings Court
12 King Street
Leeds
LS1 2HL
Nominated Adviser and Joint Stock Broker
N+1 Singer
One Bartholomew Lane
London
EC2N 2AX
Joint Stock Broker
Jefferies Hoare Govett
Vintners Place
68 Upper Thames Street
London
EC4V 3BJ
Registered Office
West Terrace
Esh Winning
Durham
DH7 9PT
Registrar
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
For more information
Please visit us online at www.hsgplc.co.uk
for up to date investor information,
company news and other information.
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Hargreaves Services plc
West Terrace
Esh Winning
Durham DH7 9PT
Tel: 0191 373 4485
Fax: 0191 373 3777
www.hsgplc.co.uk