H a r g r e a v e s S e r v i c e s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 9 Annual Report and Accounts 2019 Hargreaves Services plc About us Hargreaves Services plc delivers key services to the industrial and property sectors. Strategic Report 01 Highlights of the Year 02 Chairman’s Statement 04 Group Business Review 07 Operating Review 09 Financial Review 11 Audit & Risk Committee Report 13 Risk Management Directors’ Report 16 Board of Directors 17 Directors’ Report 19 Corporate Governance 23 Remuneration Report 26 Statement of Directors’ Responsibilities Financial Statements Independent Auditor’s Report 27 34 Consolidated Statement of Profit and Loss and Other Comprehensive Income 36 Balance Sheet 38 Statement of Changes in Equity 41 Consolidated Cash Flow Statement 42 Notes (forming part of the financial statements) 84 Alternative Performance Measure Glossary 85 Notice of Annual General Meeting IBC Shareholder Information Highlights of the Year The underlying performance of the Group has been satisfactory. Trading Board Revenue of £302.6m (2018: £297.1m) Roger McDowell appointed as Chairman on 1 August 2018 Underlying Operating Profit of £10.0m (2018: £9.4m) Operating Profit from Continuing Operations prior to exceptional items of £6.4m (2018: £2.1m) David Anderson recruited as Group Property Director in November 2018 Reported operating loss of £9.7m (2018: £1.4m) Balance Sheet Net Debt down to £17.9m (2018: £30.8m) Net Asset Value per share as at 31 May 2019 of £3.97 per share (2018: £4.24) Strategy for Shareholder Value To convert non-core assets, including Legacy assets, into cash for investment and distribution To deliver improving profits in Distribution & Services and to release capital To optimise investment in Hargreaves Land for growth and value creation Final dividend of 4.5p maintained bringing proposed full-year dividend to 7.2p (2018: 7.2p) To enhance shareholder returns through an extra annual dividend of 12p per share to be declared commencing in FY21 from repatriated German associate profits Exceptional Items £16.1m of provisions made against the insolvencies of British Steel & Wolf Minerals Energy Disposal of Brockwell Energy, treated as a Discontinued Operation, realising £5.2m pre-tax profit Distribution & Services Revenue up by 4.7% to £293.8m (2018: £280.7m) Construction of Carbon Pulverisation Plant by German associate nearing completion Property Conditional sales of first plots achieved at Blindwells Legacy Assets £13m left to realise down from £60m three years ago Notes: (1) Underlying Operating Profit is stated prior to exceptional items, the amortisation and impairment of intangible assets and including the Group’s share of operating profit in associates and joint ventures. See Alternative Performance Measure Glossary, page 84. (2) Operating Profit from Continuing Operations prior to exceptional items is stated before exceptional items of £16.1m (2018: £3.5m). (3) Net Debt comprises cash and cash equivalents, bank overdrafts and other interest-bearing loans and borrowings. Annual Report and Accounts 2019 01 Strategic ReportDirectors’ ReportFinancial Statements Chairman’s Statement Roger McDowell, Group Chairman The Board is focused on delivering reliable and growing profits in and unlocking capital from its Distribution & Services businesses enabling strong cash returns to shareholders alongside investment in the growth of Hargreaves land. Introduction In my first full year report as the Chairman of Hargreaves, it is very disappointing to have to report a loss for the year. The Group has been impacted by the insolvency of two notable customers, Wolf Minerals Limited and British Steel Limited. These events caused the Group to make substantial provisions totalling £16.1m against unrecoverable debtor and work in progress balances and equipment values and also against employment related liabilities, including redundancies. Putting those setbacks to one side, the underlying performance of the Group has been satisfactory and progress on non-core asset realisation and cash generation has continued including the successful disposal of Brockwell Energy Limited in October 2018 for a profit after tax of £4.5m. Results Revenue from continuing operations was £302.6m (2018: £297.1m), an increase of 1.9%, despite the loss of revenue arising from the Wolf Minerals contract. The insolvency of British Steel had no material impact on revenue in the financial year. Underlying Operating Profit from continuing operations for the year was £0.6m higher than the prior year at £10.0m (2018: £9.4m). Underlying Operating Profit is defined by the Board as Operating Profit prior to exceptional items, amortisation and impairment of intangible assets and includes the Group’s share of the operating profit of its German associate. The Board uses this measure as a Key Indicator in assessing the financial performance of the Group throughout the year and believes that its disclosure benefits readers of the financial statements. Further information on the trading performance of the businesses is given in the Chief Executive’s Review. Operating profit prior to exceptional items trebled to £6.4m (2018: £2.1m). After accounting for the provisions in respect of Wolf Minerals and British Steel of £16.1m (2018: £3.5m) as exceptional items, the operating loss under IFRS was £9.7m (2018: loss of £1.4m). After net finance expenses of £1.7m (2018: £1.3m) and accounting for the Group’s share of post-tax profits of the German associate of £1.5m (2018: £3.2m), the consolidated loss before tax was £9.9m (2018: profit of £0.5m). After a tax credit of £1.7m (2018: £0.7m), the profit from discontinued operations of £3.5m (2018: loss of £1.0m) reduced the loss for the year to £4.7m (2018: profit of £0.2m). Basic underlying earnings per share from continuing operations were 15.3p (2018: 14.9p) and a loss per share of 25.7p (2018: earnings of 3.8p) on a reported basis. Net Debt As previously reported, Net Debt at the year end was £17.9m (2018: £30.8m). The decrease of £12.9m largely relates to the successful disposal of Brockwell Energy. Additionally, cash generation from the continuing unwind of Legacy assets has been offset by a planned increase in inventory. Although Net Debt is likely to increase again in the first half of this financial year, due to planned increases in working capital including at Blindwells, Net Debt is expected to return to similar levels by 31 May 2020 as working capital unwinds. Further reductions in working capital are expected to contribute to a material reduction in Net Debt by the end of the year ending 31 May 2021. Dividend The Board is recommending an unchanged final dividend of 4.5p (2018: 4.5p) per ordinary share thus maintaining the full-year dividend at 7.2p (2018: 7.2p). This will be paid on 1 November 2019 to all shareholders on the register at the close of business on 20 September 2019. The shares will become ex-dividend on 19 September 2019. In my Interim Report, I stated that the Board intended to return with immediate effect to a more conventional dividend payment policy, distributing approximately one third of the anticipated full-year dividend at the interim stage and more generally that it would seek to increase dividends progressively, balancing this objective with continuing to reduce Net Debt. Despite the losses incurred this year, the Board believes it is appropriate to maintain the dividend, reflecting the Board’s confidence in both the strength of the Balance Sheet and the trading prospects of the underlying business, and will look to increase it appropriately in due course. People Over 2,000 people are employed by the Group across its operations and their efforts and commitment are vital in delivering value to our shareholders. The Board would like to take this opportunity to thank them all publicly and to encourage them to carry on their good work as the Group continues the process of repositioning itself for new opportunities. Board Changes I am delighted that we were able to secure the services of David Anderson who joined the Board on 14 November 2018 as Group Property Director. David is driving forward with the growth of Hargreaves Land, the Group’s property development business, as demonstrated by the announcements of the conditional disposal of plots at Blindwells. Following both David Morgan and Peter Jones leaving the Board during the year, the Board is undertaking a process to appoint a further Non-Executive Director. Brexit The uncertainty of the final outcome to the Brexit discussions continues. Hargreaves has very little trading activity with any country within the EU. Consequently, the Board expects no material direct impact on the Group’s trading activities whatever the final Brexit outcome may be. The Group’s German specialist raw material trading associate business, Hargreaves Raw Materials Services GmbH (“HRMS”), trades almost exclusively within the EU but imports much of its trading stock from outside the EU. The Board 02 Hargreaves Services plc An additional dividend of 12p per share will be declared in FY21 out of profits repatriated from our German associate. cannot meaningfully assess any wider macro- economic impact of Brexit which may affect business sentiment in trading and financial markets leading to a material change in the economic or financial environment within the UK and Europe for the Group or its customers. Strategy I reported at the interim stage that following my appointment as Chairman, the Board had conducted an initial review of strategy. Three key areas of focus were identified. First, the realisation of cash from the disposal of surplus assets and non-core activities, including the Legacy assets. Secondly, a focus to increase returns from the Distribution & Services business. Thirdly, the development of the Group’s Property business, Hargreaves Land, which the Board regards as an important area to generate greater medium and longer-term value. The Board considers that progress is being made in all three areas. Asset Realisation Legacy assets have reduced from over £60m in 2016 to £12.8m as at 31 May 2019, including a realisation of £15.7m during the year. A further reduction is expected during the new financial year as a result of the disposal of surplus plant and equipment in the Tower joint venture. UK Distribution & Services Following the failure of both British Steel and Wolf Minerals, the prospects for growth in the Distribution & Services business have been impacted. Both the Industrial Services and Specialist Earthworks business units have been adversely affected by these events although the UK Production & Distribution business remains stable. The emphasis across all revenue streams is on improving profits and generating cash, mainly from reductions in working capital. HRMS The investment by HRMS in a Carbon Pulverisation Plant (“CPP”) to provide both improved resilience for the existing European specialty minerals trading business and additional growth opportunities is almost completed. The CPP is expected to begin trial production in the autumn with initial shipments of material expected in the second half of the financial year to a contracted customer. Hargreaves Land The Board regards the property development business, Hargreaves Land, as an important area for future growth. Cash generated from the evolution of our UK mining operations is expected to be invested into property development opportunities. This investment is expected to gain further momentum in the financial year ending 31 May 2021. Typically, the return on investment in property developments can take approximately three years. Overhead Costs The programme of reducing operational and overhead costs is ongoing at both Group level and within the business units and remains a key area of focus for the Board. During the last financial year, over 70 employees left the Group providing almost £4m of annualised overhead salary savings. Corporate overhead reduced by over 21% to £4.4m (2018: £5.6m). Over the last four years, some 300 people have left the business with annualised salary costs totalling £14m. Further cost reductions will take place through the new financial year. Shareholder Value As part of the Board’s plans to create shareholder value, it is working with its German associate business, HRMS, to enhance the value of its investment whilst releasing capital where possible. HRMS is now an integrated business, including both the speciality trading activity, which has inherent market-driven volatility and the CPP, which as a production asset should provide more predictable earnings. HRMS is working to increase further the overall visibility of future earnings without committing further substantial capital. Over the last three financial years and continuing until the financial year ending 31 May 2021, HRMS is not permitted to pay dividends as a condition of its borrowing arrangements in connection with funding the construction of the CPP. Dividends, including the payment of previously undistributed reserves, should recommence in the financial year ending 31 May 2021, with cash being repatriated to the UK in the following financial year. The Board has decided that the dividends from HRMS will be passed through to shareholders in the form of an extra dividend in addition to any normal final dividend which would be declared in accordance with the dividend policy outlined above. The Board anticipates that this extra dividend would be in the region of 12p per share and would be maintained at that level for the foreseeable future. The first such extra dividend would be declared along with the final dividend for the year ending 31 May 2021 and paid in the following financial year. Outlook 2019 has been a challenging financial year for the Group and although progress has been made in several areas, following the setbacks that have arisen, much remains to be achieved. The Board is focused on delivering reliable and growing profits in and unlocking capital from its Distribution & Services businesses enabling strong cash returns to shareholders alongside investment in the growth of Hargreaves Land. Roger McDowell Chairman 30 July 2019 Annual Report and Accounts 2019 03 Strategic ReportDirectors’ ReportFinancial Statements Group Business Review Gordon Banham, Group Chief Executive Evolution of the Group’s mining strategy will release £20m of cash over the next three years. Distribution & Services The Distribution & Services business recorded revenue up 4.7% at £293.8m (2018: £280.7m). The increase in revenue was due to growth in Industrial Services and in Specialist Earthworks, partially offset by lower revenue in Production & Distribution. £2.8m (2018: £5.5m) of Specialist Earthworks revenue was attributable to legacy contracts which are recorded as exceptional. Underlying Operating Profit was £12.1m (2018: £12.9m). The slight fall in Underlying Operating Profit was primarily due to a £3.2m reduction in the contribution from HRMS, as a result of weaker German economic activity, partially offset by improved results from Industrial Services and Specialist Earthworks. On an IFRS basis, this business segment recorded an operating loss of £8.1m (2018: profit of £2.0m), with the loss being due to the charge for exceptional items which are set out below. Exceptional Items Wolf Minerals Limited As previously announced, in October 2018, one of the Group’s customers, Wolf Minerals Limited, announced that it had ceased trading and subsequently it went into liquidation. As a result, the Group incurred an exceptional charge of £8.1m. The Group continues to have a small presence at the Hemerdon mine site where it is carrying out minor maintenance and asset safeguarding activities. The future of the site remains unclear, but Hargreaves is well positioned to secure any restoration or other work which may arise in due course. Hargreaves is not considering operating the mine. British Steel Limited In late May 2019, British Steel Limited announced that it was being placed into liquidation. Currently the business is being operated under the aegis of the Official Receiver and the Group is continuing to provide services under similar commercial terms as prior to the insolvency. Until the future of British Steel is clarified, the final financial impact on the Group cannot be fully determined, however, the Board has made a provision of £4.5m against trade debt and work-in-progress balances which are unlikely to be recovered. Additionally, a further expense of £3.5m has been recognised in respect of redundancy and other associated employment costs and equipment write downs, resulting in a total exceptional charge of £8.0m. Further information on the performance of each business within Distribution & Services is given below. Production & Distribution UK Revenue was £119.4m (2018: £137.4m), primarily due to reduced volumes of low margin thermal coal being traded and so Underlying Operating Profit fell slightly to £3.2m (2018: £3.5m) although margins improved to 2.7% (2018: 2.5%). Mining operations have been conducted very efficiently through the financial year and as a result the business is carrying higher levels of inventory than is usual. It is more cost-effective to mine out coal whilst favourable conditions exist than to suffer the costs of poor output during spells of bad weather. Our mining operational strategy continues to evolve to meet the future demand for coal through focus on the speciality markets. This will lead to a release of cash from working capital and the sale of surplus assets of approximately £20m. This cash should be released through financial years ending 31 May 2021 and 2022. The Transport business has delivered a much improved result in the period, returning profit to acceptable levels as we continue to focus on core markets and margin improvement. HRMS HRMS contributed £3.3m (2018: £6.5m) to Underlying Operating Profit as economic activity in Germany weakened. As a speciality commodity trading business, the results of HRMS are subject to fluctuations depending upon market conditions. As previously reported, HRMS is constructing a Carbon Pulverisation Plant in Duisburg, Germany, to add resilience and greater predictability to future trading prospects. Construction work is almost completed. Initial trial product is expected to be supplied during the autumn with the first sales to a contracted customer by the start of calendar year 2020. The Board of HRMS is focused on securing further contracts for the CPP so that meaningful contribution to profit is expected in the financial year ending 31 May 2021. Industrial Services Revenue increased by 25% to £87.4m (2018: £70.0m) with Underlying Operating Profit up by 58% to £3.8m (2018: £2.4m), a margin of 4.3% (2018: 3.4%). UK In the UK, revenue grew by 22% to £57.9m (2018: £47.5m) with Underlying Operating Profit improving to £2.7m (2018: £1.7m), increasing margins to 4.7% from 3.6%. The UK business is focused on margin improvement as it transitions gradually from mainly supporting coal fired power stations and broadens its customer base. The main area of activity is in materials handling but increasingly the business is developing its skills in mechanical and electrical engineering within industrial complexes and is positioned to secure further work of that type. The forward order book and term contract positions held by the Industrial Services business mean that its budget revenue for the next financial year is almost fully secured. The insolvency of British Steel has caused a setback to this business’ growth plans and as a result both revenue and Underlying Operating Profit are likely to be materially lower in the financial year ending 31 May 2020. British Steel contributed approximately £1m of revenue each month. The exceptional charge of £8m, which is £1m lower than announced on 22 May 2019, assumes that British Steel operations cease as at 31 July 2019 as, at the date of signing these accounts, the Board has no better information upon which to base its judgement. 04 Hargreaves Services plc £10m of conditional sales have been achieved at the major Blindwells residential development site. International In the International business, which is primarily based in Hong Kong, revenue grew by 31% to £29.5m (2018: £22.5m) with an Underlying Operating Profit of £1.1m (2018: £0.7m), a margin of 4.1% (2018: 3.1%). The Hong Kong business continues to broaden both the range of services it provides to its clients and its customer base. The South African business broke even as it did in 2018. The Hong Kong business has been appointed to a new five-year NEC4 Term Service Contract by its principal customer, CLP Power Hong Kong Ltd (“CLP”). This contract has a wider scope than its predecessor, which Hargreaves has delivered over the past five years, and extends to CLP’s operations at both Castle Peak and Black Point power stations. Hargreaves will be providing a range of mechanical and electrical engineering services in annual planned and reactive maintenance operations. The successful award of this contract is seen as critical to the ongoing development within Hong Kong and the wider Asia region. It both secures Hargreaves position as a leading vendor to CLP and continues to develop this key and valued relationship whilst providing an enhanced platform for further diversified growth in the region. Specialist Earthworks The Specialist Earthworks business recorded revenue of £87.0m (2018: £78.8m) and an Underlying Operating Profit of £1.8m (2018: £0.5m). Most of the growth in revenue is as a result of increased sales of plant and equipment. The business has continued to manage to completion three legacy civils contracts inherited from the acquisition of C.A. Blackwell. These contracts reported £2.8m (2018: £5.5m) of revenue and incurred operating losses of £0.7m in the year (2018: £3.4m), which are recorded as exceptional and which have been offset by the recovery of £0.6m after legal costs from a claim against the vendors of C.A. Blackwell for breach of warranty. These contracts are now completed on site with only small demobilisation or defects corrections activities remaining. Final accounts remain to be agreed with a total of £9.2m contract assets outstanding in respect of these legacy contracts. Following the insolvency of Wolf Minerals, the business has only a small level of activity currently at the Hemerdon tungsten mine site. Over the last several months, Hargreaves has sought to position itself to take advantage of whatever the future holds for the site. This would include carrying out the site restoration, the costs of which will be met by a fund which has already been set aside for that purpose during Wolf’s tenure as mine operators. The Specialist Earthworks business is focused on major earthworks projects. The principal current contract is the A14 bulk earthworks project which is expected to be completed in the new financial year. Future business opportunities with similar operational and contractual characteristics are being pursued and, as previously reported, C.A. Blackwell has been selected as a strategic partner to one of the major contractor consortia for two sections of earthworks on the HS2 rail project. Currently the business is engaged in early stage enabling works on the site. The business is also providing early contractor involvement consultancy advice on other major planned infrastructure projects in the south of England. The timing of many of these projects is uncertain and some are subject to political influence, but the business is well placed to provide what is a specialist capability in a market with a small number of potential suppliers. As a result of the above events, both revenue and Underlying Operating Profit in this business are likely to be materially lower in the financial year ending 31 May 2020. Hargreaves Land Hargreaves Land, the Group’s Property business, contributed £2.8m (2018: £11.7m) of revenue and an Operating Profit of £2.2m (2018: £2.1m). Property revenue was principally derived from the sale of non-strategic land. Additionally, Hargreaves Land sold £6.8m of land at the old Maltby colliery and Monckton coke works. This land was previously classified within fixed assets and so is excluded from the measurement of revenue. There remains approximately £5m of non-strategic land to be sold. In last year’s Annual Report, an independent valuation was carried out which supported the values given by a similar independent exercise in 2017. As the land portfolio develops, it becomes increasingly difficult to make a meaningful comparison with historic valuations and so the Board has decided not to carry out a similar exercise this year. The Board continues to hold the view that the market value of its property portfolio is materially greater than its book value. Where appropriate levels of return can be generated, Hargreaves Land will seek to deliver greater development value if that can be extracted through additional investment or by enhancing planning conditions. At the major Blindwells site near Edinburgh, conditional sales of fully serviced plots to both Cruden Homes and Bellway have already been announced. These sales are expected to complete in the next financial year with a value in excess of £10m. £7.0m (2018: £1.6m) of infrastructure cost has been invested in the site during the year, which is included in Inventory in the Group Balance Sheet. Further investment of over £9m is planned in the next financial year with a further fifteen acres being brought to market in the autumn of this year. It is unlikely that sales of those plots will complete until the year ending 31 May 2021. The site development plan for phase one will take approximately ten years and provides an ongoing stream of revenue and profit which will underpin the Property business, including the sale of land for around 1,600 homes. The second phase, known as Greater Blindwells, now has approval in principle to be allocated through the local development plan. Annual Report and Accounts 2019 05 Strategic ReportDirectors’ ReportFinancial Statements Group Business Review continued Legacy Assets During the period, sales of Legacy Assets amounted to £6.1m (2018: £4.7m) with no Operating Profit being recorded (2018: £nil). £12.8m of Legacy Assets remain in the form of loans due from the Tower Joint Venture which are supported by underlying land and equipment. Further sales of joint venture equipment are expected to take place in the new financial year. Summary The insolvencies of both Wolf Minerals and British Steel have cast a shadow over the Distribution & Services business which has otherwise traded well. The Board is resolved to derive value and cash from the component businesses as the Group transitions to a model which requires less capital to be employed. HRMS, the German associate, is also transitioning to a more consistent business model as the CPP comes into production. This will add value to Hargreaves’ investment in that business. The Board has identified Hargreaves Land as a key area for growth given suitable investment into both existing assets and new opportunities, primarily utilising cash to be derived from the cessation of mining activities. Gordon Banham Group Chief Executive 30 July 2019 Hargreaves Land continued This phase would result in an additional 900 homes to be built on land owned by the Group. During the year, the business identified several other development opportunities in Scotland and the North of England which it plans to exploit either through joint venture arrangements or in other partnerships. One such opportunity is at Hatfield in Yorkshire. After the year end, Hargreaves Land entered into a joint venture there to develop a six hundred acre site with planning permission for 3,100 residential properties and 1.5 million square feet for a mixture of industrial, commercial and logistics use. Lead times on such developments can be unpredictable and as a result initial profits are not expected to arise on this scheme until 2021. Hargreaves Land’s strategic goal is that of a property developer rather than a long-term owner of investment properties and it will seek to exploit appropriate opportunities whilst restricting the amount of capital to be invested as much as possible. Brockwell Energy Limited The Board was pleased to complete the sale of the entire share capital of Brockwell Energy Limited (“Brockwell”) in October 2018. The initial gross proceeds of the disposal, including the reimbursement of certain costs, were £21.7m. An after-tax profit on the disposal of Brockwell of £4.5m, excluding the contingent consideration, has been recorded within discontinued operations. Brockwell’s new owners are specialist renewable energy investors and they have plans to develop a number of such assets, some of which will be on land which is owned by Hargreaves. As these assets are developed, they will provide the Group with long-term high-quality rental income streams. Currently, Brockwell is pursuing financial close to construct an Energy from Waste plant at the Hargreaves site at Westfield in Scotland and a further £2m in cash is receivable by Hargreaves should that financing be successful. At that point, Brockwell will also enter into a long-term lease at commercial rates. The availability of low cost energy at the site should provide a strong incentive to enable Hargreaves Land to attract other potential industrial and warehouse operators to this 100 acre site. 06 Hargreaves Services plc Operating Review At our German associate the Carbon Pulverisation Plant is due to commence production in the autumn. The Operating Review should be read in conjunction with both the Chief Executive’s Review and the Financial Review. Distribution & Services The Distribution & Services segment comprises three business units: Production & Distribution, Industrial Services and Specialist Earthworks. Production & Distribution The activities of this business unit include: coal mining, distribution and trading activities in the UK, the transport logistics business and the Group’s share of the results of HRMS, the associate German specialist raw materials trading business. The UK operation also includes the Maxibrite coal briquetting operation. Following successful investment to improve the efficiency of Maxibrite’s production capabilities with a new manufacturing process, the unit cost of production for both bulk and pre- packed briquettes sales has been reduced. The business retains a strong position in the supply chain for domestic, industrial and export speciality coal markets. Demand in these markets is expected to continue for the next several years. The UK trading team continues to protect strong market share positions within all strategic markets and has increased penetration into targeted high-margin sectors. Revenue is likely to remain broadly stable within the UK operations for the next two years. As a result, the near-term focus in this business unit is on producing stable profits and cash generation. Logistics The transport logistics business improved profitability in the year, recording Underlying Operating Profit of £1.1m (2018: £0.5m) on revenues down slightly to £38.1m (2018: £39.2m). In particular, the business performed strongly in the second half of the financial year as it focused on servicing term contract work in sectors, such as waste, where sustainable demand delivers appropriate margins. Hargreaves Raw Material Services Gmbh (“HRMS”) 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. HRMS is an associate company and therefore its assets and liabilities are not consolidated into the Group’s results. The business’ trading operations are funded by a €10m interest bearing loan and working capital facilities which are provided by local banking relationships in Germany supported by a €5m guarantee from Hargreaves Services plc. As a specialist commodity trading business, HRMS’ financial performance can experience periodic fluctuations due to changing market conditions. Despite this it has reported profitable trading every year for more than 10 years. The management team adopts a low-risk trading model, with the flexibility to take advantage of market opportunities (as demonstrated by the particularly strong results in both 2017 and 2018) combined with the ability to reduce activity rapidly should adverse market conditions prevail. The vast majority of trading is supported by back to back contracts and residual commodity risk is limited. The business trades coke, minerals, ferroalloys and pig iron and employs eight specialist commodity traders. To balance the reliance on short-term trading opportunities which, by their nature, offer limited forward trading visibility, in 2017 HRMS management determined to invest in the construction of a Carbon Pulverisation Plant. The rationale was to establish a strategic production asset to improve forward trading visibility. The plant has been constructed close to the HRMS offices in Duisburg, Germany, a key hub for Central Europe which enjoys numerous logistical advantages. It will process carbon- based raw materials, including coal and coke, into a pulverised carbon product which will offer customers logistical, technical and cost advantages over alternative materials. The plant will have a capacity of about 400,000 tonnes per annum. Construction is nearing completion. Initial production supplies are due to commence in the autumn with the plant expected to build towards full production over the next two to three years. Funding has been provided by a ten-year loan from a German bank (€15m) together with a €3m loan from Hargreaves Services plc over the same period. The additional funds required have been provided from retained profits in HRMS. Industrial Services The Industrial Services business has operations in the UK, Hong Kong and South Africa, although each of these is very different in its business focus. There are growth opportunities in Hong Kong and in the UK, although the latter business is also continuing to manage the gradual reduction in activity at coal fired power stations. UK The business is focused on materials handling operations at a range of industrial complexes. As a result of uncertainty following the insolvency of British Steel, which contributed approximately £12m of annual revenue, the outlook for further growth in the year ending 31 May 2020 is diminished. The business has been developing its capabilities in mechanical and electrical engineering services to add to its core operations and aims to grow its activities in that area. International Overseas operations, which are focused on Hong Kong, are principally concerned with supporting the power generating operations of China Light & Power and Hong Kong Electric with a range of engineering services, including mechanical, electrical, minor civils and access solutions. The business’ growth plans include penetrating new customers and markets in addition to broadening the range of services provided to its existing key customers. Annual Report and Accounts 2019 07 Strategic ReportDirectors’ ReportFinancial Statements The strategy of Hargreaves Land is to identify and develop opportunities, either in its own right or in joint venture or partnership. Where possible, Hargreaves Land will seek independent funding to reduce the amount of capital to be invested. As a general principle, the business does not intend to own developments for investment purposes although there are certain sites in the historic portfolio, including Westfield, which are likely to be retained as investment properties at least in the medium term. Gordon Banham Group Chief Executive 30 July 2019 Operating Review continued Specialist Earthworks The Specialist Earthworks business comprises civil engineering which is now wholly focused on major bulk earthworks projects. During the last financial year, the business also had activity in more general civil engineering and soil stabilisation. The Board decided to withdraw from general civil engineering in 2017 but it has taken time to complete contractual obligations. Soil stabilisation will continue but only as part of a total solution offered in major earthworks projects. Future opportunities in the major earthworks market include the HS2 rail project where C.A. Blackwell has secured a position as a strategic earthworks partner with one of the major construction consortia, together with a number of planned major road and infrastructure projects in the South of England. Hargreaves Land The Board believes that the Group has the potential to unlock substantial shareholder value through its existing property portfolio and that it can use this portfolio as a platform upon which to build a successful property development business, Hargreaves Land. David Anderson, an experienced and successful property developer, joined the Board as Group Property Director in November 2018 to spearhead this initiative. 08 Hargreaves Services plc Financial Review John Samuel, Group Finance Director Underlying Operating Profit grew by over 6% on Revenue which increased by almost 2%. Results Group Revenue from continuing activities was £302.6m (2018: £297.1m) with Underlying Operating Profit of £10.0m (2018: £9.4m). Reported Underlying Operating Profit is defined by the Board as Operating Profit prior to exceptional items, amortisation and impairment of intangible assets and includes the Group’s share of the operating profit of its German associate. This is a key performance indicator for the Board in measuring the Group’s financial performance throughout the year. After taking professional advice, the Group engaged in a disclosable tax planning scheme relating to leasing which was implemented in 2011, the legality of which has been challenged by HMRC. In previous years, the Group has paid all cash payment obligations in relation to the scheme to HMRC. The Board has been advised that the scheme was lawful. The matter was heard by the tribunal in June 2019 and the determination of the judge is awaited. The Board has been advised that this may take a year or more. Investing activities contributed £3.8m of cash following the sale of £12.2m of property, plant & equipment and investment property (2018: £24.5m outflow). After a net outflow of £19.1m (2018: £1.7m) in finance facilities and the payment of £2.3m (2018: £2.3m) in dividends, there was a net increase of £5.5m (2018: £11.7m decrease) in cash balances to £21.6m (2018: £16.1m). After deducting debt of £39.5m (2018: £46.9m), the Group’s Net Debt was £17.9m (2018: £30.8m). Net Debt included £12.6m (2018: £7.6m) of finance lease obligations. Net finance expenses increased by £0.4m to £1.7m (2018: £1.3m), primarily due to an £0.2m reduction in finance income. Finance expenses were £2.2m (2018: £1.9m). After adjusting for exceptional items of £16.1m (2018: £3.5m), amortisation and impairment of goodwill and intangibles of £0.1m (2018: £0.9m) and adjusting for £1.8m (2018: £3.3m) which represents the Group’s share of tax and interest in associates, the Group’s reported Loss before Tax was £9.9m (2018: profit of £0.5m). A taxation credit of £1.7m (2018: £0.7m) and the Profit after Tax from discontinued operations of £3.5m (2018: loss of £1.0m) bring the loss for the year to £4.7m (2018: profit of £0.2m). Taxation The income tax credit for the year from continuing operations is £1.7m (2018: £0.7m). When the Group’s share of the tax charge on the profit of associates and joint ventures of £0.9m (2018: £1.6m) is included, this results in a total tax credit for continuing operations of £0.8m (2018: charge of £0.9m). The taxation credit is materially affected by the impact of HRMS as the German corporate tax rate is 33.5%. Pensions The Group has the obligation to fund two industry-wide defined benefit pension schemes and an unfunded concessionary fuel scheme, all of which are closed to new members and are related to the former mining operations at Maltby Colliery. The combined IAS 19 liability of these schemes as at 31 May 2019 is £4.2m (2018: £4.4m). Contributions in the year of £1.7m (2018: £1.8m) have been offset by interest and expenses of £0.3m (2018: £0.3m) and net changes in actuarial measurements of £1.2m (2018: £0.9m). The actuarial movement is accounted for through the Statement of Other Comprehensive Income. The triennial valuation of the schemes which is due as at 31 December 2018 is underway. In due course, the Board expects to engage in discussions with the Trustees to agree a future recovery plan, including setting levels of future employer contributions. Cash Flow The loss for the year from continuing operations of £8.2m (2018: profit of £1.2m) generated net cash from continuing operating activities of £7.5m (2018: £17.9m) after adjusting for depreciation of £16.1m (2018: £12.9m) and other items. The movement in working capital for this year was a cash inflow of £6.4m (2018: £7.6m), with the prior year figure including an £11m reduction in inventories, which reversed in the year. Following the disposal of Brockwell Energy Limited, discontinued operations contributed a net £15.6m of cash from operating activities (2018: £1.0m outflow). Capital Expenditure The net capital expenditure on continuing operations was an inflow of £3.8m (2018: £20.2m outflow), including £0.2m (2018: £0.5m) on investment properties. Depreciation and impairment for the year was £16.1m (2018: £13.6m), including £5.7m (2018: £2.6m) in relation to mining assets and mineral reserves. Banking Facilities In July 2018, the Group renegotiated its banking facilities and put a two-year agreement in place with its bankers which provides appropriate operational headroom without committing the Group to unnecessary excess facilities and associated non-utilisation costs. The facilities are committed through to 31 August 2020. Additionally, the Group has a small overdraft facility for short-term working capital purposes. Management has already commenced discussions with both prospective and existing lenders to replace the Group’s existing facilities well in advance of their expiry. This will enable management to plan the Group’s investment strategy and allocation of capital for the next few years. Annual Report and Accounts 2019 09 Strategic ReportDirectors’ ReportFinancial Statements Financial Review continued IFRS 15 And 16 IFRS 15, Revenue from Contracts with Customers, is applicable to the Group’s results for the year ended 31 May 2019 but its adoption has had no material impact on the reported revenue of the Group and has required no changes to the Group’s accounting procedures. Regarding IFRS 16, Leases, which comes into effect for the year ending 31 May 2020, the Board assesses that the net impact to the Income Statement will be immaterial. Both assets and liabilities on the Balance Sheet are expected to increase by corresponding amounts, which as at 31 May 2019 would have been approximately £6m. Distributable Profits The distributable profits of Hargreaves Services plc are £23.6m (2018: £20.2m). The Board is recommending an unchanged final dividend of 4.5p (2018: 4.5p) per share bringing the total for the year to 7.2p (2018: 7.2p). The proposed final dividend would cost approximately £1.4m and as a result, the Board can confirm that it has suitable levels of distributable profits to cover the dividend. Share Capital There are 33,138,756 (2018: 33,138,756) ordinary shares of 10p each in issue of which the Company holds 1,013,502 (2018: 1,069,904) in treasury. During the year, 56,402 shares were released from treasury to satisfy the exercise of share options. Going Concern The Group has material assets and financial resources at its disposal together with robust risk management and capital allocation processes. Committed banking facilities are in place until 31 August 2020 and the Board is confident that suitable new facilities will be secured to replace them. Therefore, and after making appropriate enquiries, including reviewing budgets and strategic plans, 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, the Board continues to adopt the going concern basis in preparing the Annual Report and Accounts. John Samuel Group Finance Director 30 July 2019 10 Hargreaves Services plc Audit & Risk Committee Report Nigel Halkes FCA, Chair of the Audit & Risk Committee The Audit & Risk Committee is responsible for reviewing financial reporting matters, monitoring internal controls and key corporate risks. On behalf of the Audit & Risk Committee I am pleased to present the Committee’s Report for the year ended 31 May 2019. Membership of the Committee The Committee consists of both Non-Executive Directors and is chaired by me as the Senior Independent Non-Executive Director. The composition of the Committee has changed during this financial year following both David Morgan and Peter Jones leaving the Company. The Board is in a process to recruit and appoint a further Non-Executive Director who will join the Committee in due course. The Board believes that the current members have the skills, qualifications and experience to discharge their duties in accordance with the Committee’s terms of reference and have appropriate knowledge and experience in the sectors within which the Group operates. The Committee met on three occasions during the year with both members in attendance. The Group Finance Director attends committee meetings by invitation to ensure that the Committee is fully informed of material matters within the Group. The external auditor attended two of the meetings and, for part of one of those meetings, the external auditor met with the Committee without any of the Executive Directors being present. For the financial year ending 31 May 2020, the Committee has set out a programme of four meetings to be held during the year so that the work of the Committee is more evenly spread, particularly with respect to Risk Management and internal audit. Terms of Reference of the Committee The Committee is established by and is responsible to the Board. It has written terms of reference, which are available for review at: www.hsgplc.co.uk. The Committee is responsible for reviewing a wide range of financial reporting and related matters including the half-year and annual accounts before their submission to the Board. In particular, the Committee is required to consider all critical accounting policies and practices adopted by the Group, and any significant areas of judgment that could materially impact reported results. The Committee provides a forum for reporting by the Group’s external auditors, and advises the Board on the appointment, independence and objectivity of the external auditors and on their remuneration both for statutory audit and non-audit work. It also discusses and agrees the nature, scope, planning and timing of the statutory audit with the external auditors. The Committee is also responsible for monitoring the internal controls that are operated by management to ensure the integrity of the information reported to the shareholders. An internal audit function, which reports directly to the Chair of the Audit & Risk Committee, supports the Committee in this process. The Committee reviews the appropriateness of the annual internal audit programme for the Group and ensures that the internal audit function is adequately sponsored and resourced. Additionally, the Committee receives reports on, and is responsible for, reviewing the Group’s arrangements and processes which exist for employees and others to raise concerns over possible wrongdoing in financial reporting or other matters. This work includes reviewing the Group’s systems for the prevention and detection of fraud and bribery and considering any matters arising under the General Data Protection Regulations. The Committee also receives reports on all litigation which the Group is engaged with either as plaintiff or defendant and recommends actions in respect of such to the Board. Internal Audit Before the start of each financial year, the Committee agrees a programme of work for the internal audit function. The programme is designed to test the effectiveness of the internal control systems and covers key financial and other controls which the Committee recognises are important in ensuring the integrity of the Group’s operations as well as its financial reporting. The programme includes self- assessment questionnaires, detailed testing of processes and the review of appropriate documentation. The Committee receives each full internal audit report, including any comments by management and any recommendations for improvement made by the internal audit function. The potential use of computer aided audit techniques, which could be applied using the Group’s existing management information systems, to improve the efficiency, scope and effectiveness of the function, is currently under consideration by the internal audit function. Risk Management The internal audit function reports quarterly to the Committee on the key risks identified by the Board as being so material that they need to be regularly monitored as to whether those risks have increased or decreased during the period and what remedial actions may need to be taken to counter them. The Risk Management Report which follows this report sets out those risks and the steps the Group has taken to mitigate them. External Auditor KPMG was reappointed external auditor in 2016 following a robust competitive tender process. The external auditor provides the Audit & Risk Committee with information about its internal procedures for maintaining independence and the rotation of personnel engaged on the audit, including the audit partner. After considering this information, the Committee is satisfied that the external auditor is independent. Annual Report and Accounts 2019 11 Strategic ReportDirectors’ ReportFinancial Statements Audit & Risk Committee Report continued External Auditor continued All non-audit services to be provided by the external auditor which exceed £10,000 in cost must be approved by the Committee in advance. During the financial year, £191,000 of non-audit services were provided by KPMG, £132,000 of which related to tax advisory matters principally in relation to the long running dispute with HMRC over the tax treatment of leases. £50,000 is in respect of matters related to the discontinued operation of Brockwell Energy and the remaining £9,000 to miscellaneous assurance services. The Committee is satisfied that the provision of these services, which did not involve any of the audit engagement personnel, did not compromise the external auditor’s independence. After due and careful enquiry and after reviewing the external auditor’s Audit & Risk Committee Memorandum and discussing the findings with the auditor, the Committee was satisfied that the scope of the audit was appropriate and that all significant accounting judgements exercised by management had been suitably challenged and tested including, but not limited to, the matters referred to in the long form Audit Report. The Committee recommended to the Board that in their opinion the audit had been carried out effectively and that the report of the external auditor be accepted. The Committee has recommended to the Board that KPMG be proposed for re-election as auditor at the forthcoming Annual General Meeting. The Audit & Risk Committee Report was approved by the Board on 30 July 2019 and signed on its behalf by: Nigel Halkes FCA Chairman of the Audit & Risk Committee 30 July 2019 12 Hargreaves Services plc Risk Management The Board retains overall responsibility for the identification, assessment and mitigation of risk throughout the Group. The identified areas of risk are monitored, reviewed and investigated as necessary by the internal audit function. The Audit & Risk Committee receives a written report on these risks every quarter, including a commentary which notes any material changes which have been identified. This report assesses whether each area has increased or decreased in the level of risk. The areas of critical corporate risk which have been identified are as follows: • Contractual Risk • Recruitment & Retention of Key Individuals • Regulatory & Legislative Compliance • Sudden Decline in Markets (particularly coal) • Environmental Risk • Fraud • • Liquidity & Credit Risk • Failure of a Material Business Unit IT Security A table describing these risks and the mitigations in place throughout the Group to protect against them is set out on pages 14 and 15. The Group is exposed to a number of risks, which it must assess, manage and control in the ordinary course of business to deliver shareholder value. It is accepted that some risks may never be entirely eliminated. However, the Board recognises 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. Safety, Health and the Environment The Board has identified that the risk of a material incident in the areas of Safety, Health and the Environment (“SHE”) is a particularly significant area and, as such, the Board receives a detailed monthly report from the Group Head of Health & Safety. The Group’s approach to SHE is set out below. The Board’s vision is to maintain an environment where all its employees, contractors and third parties experience zero harm as a result of its activities. To achieve this, the Group takes a proactive approach and is committed to achieving the highest standards of safety and health management and the minimisation of any adverse environmental impacts. The Board ensures that Health and Safety issues for employees, customers and the public are at the forefront of all Group activities. The Group Chief Executive, supported by both internal and external competent advice, is charged with overall responsibility. All divisions have formulated and implemented SHE management plans consisting of policies, procedures and objectives to meet both legislative and best practice requirements. SHE performance and delivery is ingrained in the operational delivery and day-to-day activities and not seen as a bolt on to the business. Where appropriate the management procedures are externally certificated to internationally recognised standards. Alongside management systems and legal compliance, the Group recognises the benefits that effective leadership and setting of clear expectations has upon workplace behaviour. Therefore, the Group has visible performance metrics, which are communicated at all levels throughout the organisation and are designed to enable the early identification of adverse trends and the development of suitable intervention and improvement measures. The Board carries out at least two site visits each year to see SHE processes at first hand and to emphasise to employees the importance the Board places on SHE activities. During the last 12 months its pleasing to note that the Group’s safety performance improved significantly, with a particularly pleasing reduction in both the Lost Time Incident Frequency Rate (“LTIFR”) and the severity of incidents. Key safety objectives for next year have been agreed with the aim of further improving this year’s performance. Corporate Risks The Board undertake a full annual review of the Group’s risk profile and strategic approach to risk in light of the ongoing substantial changes to the Group’s operations. A condensed high-level Risk Register, which identifies nine areas of corporate risk which the Board has determined are the most critical, was introduced last year and has been reviewed and deemed to remain appropriate. These areas were selected on the basis that a material adverse event in any one of them could potentially: • prevent the Group from achieving its financial or operational objectives; • cause material loss or damage to the Group’s assets or reputation. Annual Report and Accounts 2019 13 Strategic ReportDirectors’ ReportFinancial Statements Risk Management continued Key risks Description Mitigation Contractual Risk Multiple divisions of the Group enter into and manage diverse and complex contracts as part of their core operations. Bad planning, agreement to onerous terms, ineffective management and delivering services outside of the Group’s core competencies could all erode the value of the contract and increase the risk exposure to the Group. Attached to the risk surrounding contracts are the potential financial and reputational impacts on the resolution of defective works and warranty claims following contract completion. Recruitment and Retention of Key Executives and Skilled Employees Regulatory and Legislative Compliance 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. Failure of the Group or an element of the Group to comply with its applicable regulatory and legislative obligations, resulting in financial reputational, and potentially criminal implications for the Group or its responsible employees. Sudden Decline in Markets (particularly coal) Environmental Fraud IT Security Early decline of markets in which the Group participates, in particular the coal market, could negatively impact the Production & Distribution division’s ability to achieve its strategic objectives resulting in a material financial impact to the Group. There are inherent environmental risks within elements of the Group’s operations. If not properly managed, these risks 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 the Group’s property but also property belonging to third parties. In the course of its operations, the Group is exposed to fraud risks from a number of internal and external sources. There is an increasing reliance on the stability and security of the IT network for delivering day-to-day operations, whilst the volume and types of data held within it increases. This reliance on IT increases the potential for sophisticated cyber-attacks to target the Group’s computer systems, infrastructure, networks and personal devices with the intention of paralysing operations for an immeasurable amount of time, carrying material financial and reputational implications for the Group. • Delegated Authority Mandates in place throughout the Group requiring appropriate levels of senior personnel to approve contracts. • Requirement for legal review of all potential contracts which meet the agreed criteria, detailed within the Delegated Authority Mandates. • Recruitment and employment of suitably qualified and competent personnel at all levels to undertake works to minimise risk relating to defective works and associated warranty claims. • Targeting of contracts where scope of work fits core competency of available resources. • The provision of remuneration and terms of employment that are competitive in the market. Identification of key strategic roles across the Group. • • Succession planning for these identified key strategic roles. • Appropriate and specialist management systems are in place across the Group to ensure compliance with our obligations. • Competent and appropriately skilled individuals hold key roles in assuring our compliance to our regulatory and legislative obligations. • Memberships to various trade bodies to highlight any issues, allowing for early planning and appropriate representation. • The Board has implemented a strategic plan to lessen dependency on the coal market and to diversify the Group’s activities into other industries. • Provision of clear guidance on the environmental standards which the Group’s operations must adhere to. • Compliance with laws, regulations and industry best practice is a priority across the business. • Environmental management strategies are in place at all applicable sites. • Fraud risk management policy is in place across the Group. • 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. • A risk-based IT strategy is in place focusing on four strategic initiatives: security, resilience, digital transformation and delivery. 14 Hargreaves Services plc Key risks Description Mitigation Liquidity and Credit Risk The Group’s capital structure requires the ongoing provision of liquid credit provision from banks and asset funding institutions. The Group’s trading relationships require contract and credit exposures to specific customers that are material to the results of the Group, sometimes over a long period. Credit risk arises from the possibility that customers may not be able to pay their debts. The failure of the Group to maintain access to liquidity or the failure of a material customer to meet its liabilities could result in a material adverse financial impact for the Group. • The Group maintains strong relationships with its lenders and seeks to put in place appropriate finance facilities aligned to both the short and medium-term requirements of the business with sufficient flexibility to manage liquidity fluctuations within reasonable parameters. • Short and medium-term cash flow forecasting is in place across the Group. • 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. • A robust capital expenditure procedure is in place Group- wide to control investment in illiquid assets. Failure of a Material Business Unit The Board assesses that the failure of HRMS in particular would create a material risk to the Group. HRMS 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 Group’s share of HRMS profits represents a material contribution to the Group profit before tax. • The Group’s investment in HRMS is governed by a shareholders’ agreement which provides a series of rights to the Group including controls over the approval of budgets, the granting of security and business activities. • The agreement provides step in rights to the Group in the event of a material breach of the agreement. • The Group Chief Executive is a member of the Board of HRMS which meets each month. • Monthly financial information is submitted to the Group. Nigel Halkes Chairman of the Audit & Risk Committee 30 July 2019 Annual Report and Accounts 2019 15 Strategic ReportDirectors’ ReportFinancial Statements Board of Directors Roger McDowell (aged 64) Non-Executive Chairman Gordon Banham (aged 55) Group Chief Executive John Samuel (aged 63) Group Finance Director 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 of the Company in 2004 and its subsequent flotation on the London Stock Exchange the following year. Gordon’s knowledge of the Group and its various business interests is unrivalled, and he continues to have a detailed involvement in all material matters with which the Group is engaged. John is a Chartered Accountant and qualified with Deloitte & Co in 1981. He became a partner with Baker Tilly in 1986, leaving that firm to join Filtronic plc in 1991, leading its flotation in 1994 and serving as finance director until 2004. He then served as Chief Financial Officer of Zetex plc for two years, before serving as Group Finance Director of Renew Holdings plc for twelve years from 2006, prior to joining the Company in January 2018. John’s many years of experience as the senior financial officer in a number of public companies, including those which have experienced substantial growth through business change, is particularly relevant to the Group. Roger was appointed Chairman of the Company and the Nominations Committee on 1 August 2018 after joining the Board in May 2018. He is also a member of the Remuneration and Audit & Risk Committees. Roger spent his executive career working in his family’s business, pipeline products distributor Oliver Ashworth. He was Managing Director for eighteen years, leading the business through dramatic growth (from £1m to £100m turnover), main market listing and ultimate sale to St Gobain. Thereafter he has taken on Chairman or non-executive roles in private-equity backed and listed businesses in a variety of sectors including; engineering, manufacturing, waste management, renewable energy, financial services, IT and telecoms. Roger currently serves as Chairman of Avingtrans plc. He is also a Non-Executive Director of Tribal Group plc, Swallowfield plc, Proteome Sciences plc, ThinkSmart plc, British Smaller Companies VCT2 PLC and Augean plc. As can be seen from the above, Roger has extensive business management experience in both executive and non-executive roles which provides the Board with relevant commercial and governance experience. He also has strong relationships with many of the Company’s major shareholders, built up over several years with a number of companies. David Anderson (aged 52) Group Property Director Nigel Halkes (aged 63) Non-Executive Director David joined the Board as Group Property Director in November 2018. David joined from Henry Boot Developments Limited, the principal property development subsidiary of Henry Boot PLC, where he had served as a Director since 1996 and as Managing Director since 2005. He led the growth in revenue of that business from less than £10m in 2005 to over £220m in 2017. David’s 25 years of experience and success in the field of property development brings the appropriate knowledge and understanding of that market necessary to assist the Group’s growth in that business area. Nigel was appointed to the Board in August 2015 and serves as Chairman of both the Audit & Risk Committee and the Remuneration Committee. He is also a member of the Nominations Committee. He is a Chartered Accountant and 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 i-nexus Global plc. Nigel’s extensive professional experience brings rigour and insight to the Board particularly with regard to financial accounting and risk management. 16 Hargreaves Services plc Directors’ Report The Directors present their Directors’ Report and Financial Statements for the year ended 31 May 2019. Principal Activities The principal activities of the Group are the provision of haulage services, waste transportation, mineral import, mining and processing, mechanical and electrical engineering and materials handling, dealing in plant and machinery, the development and sale of land, civil engineering, soil stabilisation and specialist earthworks. Results and Proposed Dividend The Group loss for the year after accounting for discontinued operations was £4,667,000 (2018: profit of £181,000). Following the payment of an interim dividend of 2.7p per share on 8 April 2019, the Directors recommend a final dividend for the year ended 31 May 2019 of 4.5p per share to be paid on 1 November 2019 to shareholders on the register on 20 September 2019. The shares will be ex-dividend on 19 September 2019. The proposed dividend has not been provided for in these financial statements as it was not declared and approved before the year end. 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. 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. Directors The Directors who held office during the year and to date are as follows: Roger McDowell Nigel Halkes Gordon Banham John Samuel David Anderson (appointed 12 November 2018) David Morgan (resigned 1 August 2018) Peter Jones (resigned 30 October 2018) The names and biographical details of the Directors at the date of this Directors’ Report are given in the Board of Directors section of this Annual Report. All Directors are required to retire by rotation every three years, in line with the Articles of Association. An 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 18. The Company provides 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 in the Remuneration Report. 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: Gordon Banham Roger McDowell Nigel Halkes John Samuel David Anderson Class of share Ordinary Ordinary Ordinary Ordinary Ordinary Interest at end of year Interest at beginning of year 2,632,575 300,000 5,000 28,000 32,775 2,559,575 – 5,000 28,000 – Details of Directors’ emoluments are set out in the Remuneration Report. All the Directors benefited from qualifying third-party indemnity provisions in place during the year and at the date of this Directors’ Report. Except as listed below, 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 during the financial year and up to the date of this Directors’ Report. None of the awards listed below may be exercised prior to 30 January 2022. No Director exercised any awards during the year. Director Gordon Banham Roger McDowell John Samuel David Anderson Exercise price per share Date of share award Number of shares awarded Nil Nil Nil Nil 30 January 2019 30 January 2019 30 January 2019 30 January 2019 75,250 285,144 75,250 64,157 These options were granted on 30 January 2019 under the Hargreaves Services plc Share Option Scheme 2019 which was approved by shareholders in General Meeting on 22 January 2019. Annual Report and Accounts 2019 17 Strategic ReportDirectors’ ReportFinancial Statements Directors’ Report continued 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 Roger McDowell and John Samuel, who being eligible, offer themselves for re-election. Additionally, David Anderson, who was appointed to the Board during the year, also offers himself for re-election. Disclosable Interests At 26 July 2019 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 Harwood Capital Artemis Investment Management LLP Shareholder Value Management AG Gordon Banham Downing The NFU Mutual Insurance Society Limited Number of ordinary shares % of issued share capital 6,801,281 4,271,000 3,519,551 3,020,327 2,632,575 2,249,927 1,360,000 21.17% 13.29% 10.96% 9.40% 8.19% 7.00% 4.23% 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. Regular meetings are held between the Chief Executive and senior managers who cascade relevant information through their reporting systems. The Group intranet also provides regular information to employees to inform them of developments within the Group. 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 30 October 2018. The Directors will seek authority to make market purchases of up to fifteen per cent of the Company’s own shares at the 2019 Annual General Meeting (full details are available in the 2019 Notice of Annual General Meeting). Approval to Issue Shares The Directors will seek authority to allot up to a maximum aggregate nominal amount of £1,070,842 at the 2019 Annual General Meeting (full details are available in the 2019 Notice of Annual General Meeting). 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 Audit & Risk Committee of the Board of Directors to agree their remuneration will be put to the forthcoming Annual General Meeting of the Company (full details are available in the 2019 Notice of Annual General Meeting). By order of the Board Andrew Robertson Company Secretary 30 July 2019 18 Hargreaves Services plc Corporate Governance The Company is committed to maintaining high standards of corporate governance. Following the changes made to AIM Rule 26 in 2018, the Board decided that the Company would adopt the Quoted Companies Alliance Corporate Governance Code 2018 (“the QCA Code”). The Company’s approach in relation to complying with each of the ten principles of the QCA Code is set out below. Where the Company departs from the QCA Code, the reasons for such departure are also set out below. Deliver Growth Principle 1: Establish a strategy and business model which promote the long-term value for shareholders The Board has established a strategy and business model which seeks to promote long-term value for shareholders. This is set out in the Strategic Report section of this Annual Report. Principle 2: Seek to understand and meet shareholder needs and expectations An important role of the Board is to represent and promote the interests of the Company’s 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 aims to do this 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 Company’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. The Company provides contact details on the investor relations page of its website which investors can use to contact the Company. Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long-term success The Board recognises that the Group’s customers, suppliers and employees are crucial to its success. The Group has established long-term relationships with key customers and suppliers and the Board encourages feedback from employees to improve the culture and working environment of the Group. The Group Chief Executive holds regular meetings with senior managers both to keep them informed of Board decisions and shareholder feedback but also to gather views and input from the business units. The senior managers then cascade that information down through the businesses through their reporting channels. Additionally, the Group’s intranet carries a range of statements and information updates which employees can access. There are specific information channels in respect of health & safety matters. 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 (as further detailed below at “Principle 8: Promote a corporate culture that is based on ethical values and behaviours”). Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organisation The Company’s approach to risk is set out within the Risk Management section of this Annual Report. The Board has devolved considerable levels of autonomy to management 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. The Audit & Risk 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 & Risk 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 the internal audit function. This is reinforced by the role fulfilled by the Audit & Risk Committee (as further detailed below at “Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board”). Principle 5: Maintain the Board as a well-functioning, balanced team led by the Chair The Board The Group is headed by an effective Board, which controls and leads the Group. 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 Directors attended the following meetings in the year ended 31 May 2019: Attendance at meetings Number of meetings David Morgan (resigned 1 August 2018) Gordon Banham Peter Jones (resigned 30 October 2018) Nigel Halkes John Samuel Roger McDowell David Anderson (appointed 12 November 2018) Board 10 2 attended 10 attended 4 attended 10 attended 10 attended 10 attended 6 attended Audit & Risk Committee Remuneration Committee Nominations Committee 3 2 attended n/a 2 attended 3 attended n/a 3 attended n/a 3 1 attended n/a 1 attended 3 attended n/a 3 attended n/a 1 1 attended n/a 1 attended 1 attended n/a 1 attended n/a Annual Report and Accounts 2019 19 Strategic ReportDirectors’ ReportFinancial Statements Corporate Governance continued Deliver Growth continued Principle 5: Maintain the Board as a well-functioning, balanced team led by the Chair continued The Board continued The Board is collectively responsible for the long-term success of the Group 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. 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 participate actively 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. 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. Further details of the composition of the Board and Director’s attendance at Board and Committee meetings are set out in this Annual Report. Non-Executive Directors Non-Executive Directors bring a wide range of experience to the Group. The QCA Code states that the Board should have at least two independent Non-Executive Directors and that, since independence can easily be compromised, Non-Executive Directors should not normally participate in performance-related remuneration schemes. The Board currently has two Non-Executive Directors including the Non-Executive Chairman. The Non-Executive Chairman is a participant in the Company’s Long-Term Incentive Plan scheme entitled the Hargreaves Services plc Share Option Scheme 2019, which was approved by shareholders at a general meeting of the Company on 22 January 2019. The Board considers that the Non-Executive Chairman is independent, save for his participation in the Hargreaves Services plc Share Option Scheme 2019. In any event, the Board is undertaking a process to appoint a new Non-Executive Director. 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 reviews conflicts of interests when considering new Board appointments. Principle 6: Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities Details of the Directors’ skills and experience are set out in Directors’ biography page within this Annual Report. The Directors bring a wide range of expertise on issues related to operations, strategy and governance. The Board is satisfied that, between the Directors, it has an effective and appropriate mix of skills and experience. All newly appointed 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 Group’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 compliance with Board procedures. Whilst there have been no significant matters during the year on which the Board or any Committee has sought external advice, the Board is advised by its nominated adviser N+1 Singer. Principle 7: Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement To further strengthen Group compliance, the Board undertakes an annual performance review that reviews and measures its effectiveness and that of its Committees. Each Board/Committee member completes an assessment, which provides numeric scoring against specific categories. Each Board/Committee member also provides recommendations for improvement of the effectiveness of the Board/Committee. The assessments provide an effective platform for reviewing performance and, over time, a greater focus has developed on particular recommendations, which has prompted fruitful discussions among the Board and influenced its operation. The criteria for effectiveness include assessing: • Key Board/Committee functions; • Board/Committee composition (including succession planning); • external reporting and information flows; • Board/Committee culture; • Board/Committee information for meetings and the meetings themselves; and • Board development. Following this year’s annual performance review, the Board debated categories that achieved scores outside of the minimum average range. In particular, the Board noted that a further Non-Executive Director was required in order to provide further balance and experience to the Board. As a result, the Board is undertaking a process to appoint a new Non-Executive Director. 20 Hargreaves Services plc Alongside the annual performance 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. For details regarding succession planning and the process for senior management appointments, please refer to the section entitled “Nominations Committee” (under the heading “Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board”) below. Principle 8: Promote a corporate culture that is based on ethical values Culture The Company has a strong ethical culture based upon its Code of Ethics which can be found on the Company’s website. The Company’s reputation is built on its values as a company, the values of its employees, and the collective commitment to acting at all times with integrity. Part of the work of the Audit & Risk Committee involves reviewing the Group Whistle-Blowing Policy by which employees of the Group may, in confidence, raise concerns about possible financial or other improprieties. The appropriateness of the Board’s corporate governance structures is reviewed as part of the Board and Committee effectiveness process described above. 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. 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. The Group has also taken appropriate steps to comply with the General Data Protection Regulation (“GDPR”) and has a Data Protection Officer who is responsible for managing information governance and implementing the requirements of GDPR. Safety, Health and 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 and ingrained in day-to-day 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. Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board The Board Please see details above at “Principle 5. Maintain the Board as a well-functioning, balanced team led by the Chair”. The Board has a schedule of matters which are specifically reserved for its decision which can be viewed on the Company’s website. Board Committees The Board has three Committees that assist in the discharge of its responsibilities: • Remuneration; • Audit & Risk; and • Nominations. Remuneration Committee The Remuneration Committee, which is chaired by Nigel Halkes and comprises the Non-Executive Directors, is responsible for making recommendations to the Board on the Group’s framework of executive remuneration and its cost. The Committee determines the contract terms, remuneration and other benefits for each of the Executive Directors, including performance-related bonus schemes, pension rights and compensation payments. The Board itself determines the remuneration of the Non-Executive Directors. The Remuneration Committee comprises the Non-Executive Directors. Further details on the composition and work of the Remuneration Committee are set out in the Remuneration Committee Report within this Annual Report. The Terms of Reference of the Remuneration Committee can be viewed on the Company’s website. Audit & Risk Committee The Audit & Risk Committee, which is chaired by Nigel Halkes and comprises the Non-Executive Directors, is responsible for reviewing a wide range of financial reporting and related matters including the half-year and annual accounts before their submission to the Board. The Committee is required to focus in particular on critical accounting policies and practices adopted by the Group, and any significant areas of judgment that materially impact reported results. It is also responsible for monitoring the internal controls that are operated by management to ensure the integrity of the information reported to the shareholders. An internal audit function, which reports directly to the Chair of the Audit & Risk Committee, supports the Audit & Risk Committee in this process. The Committee provides a forum for reporting by the Group’s external auditors, and advises the Board on the appointment, independence and objectivity of the external auditors and on their remuneration both for statutory audit and non-audit work. It also discusses the nature, scope and timing of the statutory audit with the external auditors. The Committee also reviews the appropriateness of the annual internal audit programme for the Group and ensures that the business risk management and internal audit functions are adequately sponsored and resourced. The Committee meetings are also attended, by invitation, by the Chief Executive and Group Finance Director. The Committee meets not less than three times annually. Further details on the composition and work of the Audit & Risk Committee are set out in the Audit & Risk Committee Report within this Annual Report. The Terms of Reference of the Audit & Risk Committee can be viewed on the Company’s website. Annual Report and Accounts 2019 21 Strategic ReportDirectors’ ReportFinancial Statements Corporate Governance continued Deliver Growth continued Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board continued Nominations Committee The Nominations Committee, which is chaired by Roger McDowell and comprises the Non-Executive Directors, is responsible for reviewing the structure, size and composition required of the Board when compared to its current position. It makes recommendations to the Board with regard to any changes and considers and reviews succession planning for Board Directors, taking into account the challenges and opportunities facing the Group. It identifies and nominates for Board approval suitable candidates to fill Board vacancies as and when they arise, and it keeps under review both the Executive and Non-Executive leadership needs of the Company to enable the Group to compete effectively in the marketplace. The Nominations Committee also has responsibility for evaluating the performance of Non-Executive Directors, recommending as appropriate re-appointment of Non-Executive Directors at the end of their specified terms of office, and overseeing the re-election by shareholders of any Director under the “retirement by rotation” provisions in the Company’s articles of association. The Terms of Reference of the Nominations Committee can be viewed on the Company’s website. 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. All Directors have service agreements or letters of appointment and the details of their terms are set out in the Remuneration Report. 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. The Nominations Committee is undertaking a process to appoint a new Non-Executive Director to provide further balance and experience to the Board. Evolution of Governance Framework The Board continuously monitors its composition and governance framework taking into account effectiveness and the Group’s strategy. Principle 10: Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and relevant stakeholders In addition to this Annual Report, the Company’s website contains full information on the governance, management and activities of the Group and features all presentations given by the Executive Directors to shareholders. Approval The Board approved the Corporate Governance Report on 30 July 2019. Roger McDowell Chairman 30 July 2019 22 Hargreaves Services plc Remuneration Report Nigel Halkes, 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. Membership of the Committee The members of the Committee, which met on three occasions during the year, were: Peter Jones (Chair resigned 30 October 2018) Nigel Halkes (Chair from 30 October 2018) Roger McDowell All members of the Committee are Non-Executive Directors and are recognised by the Board as capable of bringing independent judgement to bear. The Board is in a process to recruit and appoint a further Non-Executive Director who will join the Committee in due course. The Group Chief Executive is consulted and invited to attend meetings, when appropriate, but no Director can be present when his own remuneration is discussed. The Group Finance Director also attended meetings as required and provided relevant information to the Committee to ensure that the Committee’s decisions are informed and take account of pay and conditions across the Group. 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. At the annual salary review, which was carried out with effect from 1 June 2019, Gordon Banham’s salary was not increased. John Samuel received an increase of 6.1%, which was greater than the general increase of 2% given to the majority of employees in the Group at that date. The Committee considered that Mr Samuel’s basic salary should be increased to reflect his responsibilities and contribution to the Group. There have been no changes to the benefits which the Executive Directors receive. Annual Bonus Executive Directors participate in an annual incentive bonus scheme linked to the actual achievement of a Group profit before tax target set by the Committee. Additionally, should that target be achieved, a deduction of 10% is made if the Group Health & Safety target is not achieved. For the year ended 31 May 2020, the Committee has also set some specific cash targets for the Group which will result in a further deduction of 10% of any bonus earned should they not be achieved. The total bonus which can be earned is capped at 100% of salary. No bonus counts in the calculation of pension entitlement. The bonus target for the financial year ended 31 May 2019 was not achieved and accordingly no bonuses have been earned in respect of either the financial year ended 31 May 2019 or that ended 31 May 2018. Long-Term Incentives From time to time, the Executive Directors and other senior employees have been invited to participate in Long-Term Incentive Plans (“LTIPs”), whereby shares in the Group are awarded subject to performance criteria. The Board believes that such plans are an important element of overall executive remuneration and assist in aligning the financial interests of Executive Directors and other senior employees with those of the shareholders. Following the appointment of Roger McDowell to the Board, a new LTIP, the Hargreaves Services plc Share Option Scheme 2019, was proposed at a general meeting of shareholders held on 22 January 2019 and approved. Details of awards made under that plan are set out below. Additionally, the Board is proposing a new LTIP, details of which are set out below, which will be put to shareholders for approval at the Annual General Meeting to be held on 30 October 2019. 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. No Director has benefits under any of the Group’s defined benefit pension schemes. Non-Executive Directors’ Remuneration The Non-Executive Chairman’s basic salary is £80,000 per annum and other Non-Executive Directors receive a basic salary of £35,000 per annum. Additionally, Non-Executive Directors receive £3,000 for chairing each Board Committee. Annual Report and Accounts 2019 23 Strategic ReportDirectors’ ReportFinancial Statements Remuneration Report continued Directors’ Remuneration for the Year to 31 May 2019 (Audited) Gordon Banham John Samuel David Anderson Iain Cockburn Kevin Dougan Roger McDowell Nigel Halkes David Morgan Peter Jones Total Salary/Fees Share options exercised Benefits Total Pension 2019 £000 2018 £000 2019 £000 2018 £000 2019 £000 2018 £000 2019 £000 2018 £000 2019 £000 2018 £000 470 264 125 – – 76 43 46 23 463 108 – 188 368 2 40 100 40 1,047 1,309 – – – – – – – – – – 108 – – – – – – – – 108 53 19 13 – – – – – – 85 42 10 – 8 21 – – – – 81 523 283 138 – – 76 43 46 23 613 118 – 196 389 2 40 100 40 1,132 1,498 118 40 25 – – – – – – 183 116 16 – 45 – – – – – 177 Notes: John Samuel’s emoluments in 2018 represent the period from 2 January 2018 to 31 May 2018. David Anderson’s emoluments represent the period from 14 November 2018 to 31 May 2019. Iain Cockburn’s emoluments in 2018 represent the period from 1 June 2017 to 2 January 2018. Included within the 2018 figures were £15,000 salary/fees and £4,000 pension in relation to the discontinued operation. Kevin Dougan’s emoluments in 2018 represent the period from 1 June 2017 to 1 December 2017 and include £241,000 payment in lieu of notice. Roger McDowell’s emoluments in 2018 represent the period from 11 May 2018 to 31 May 2018. David Morgan’s emoluments in 2019 represent the period from 1 June 2018 to 31 July 2018 and include £29,000 payment in lieu of notice. Peter Jones emoluments in 2019 represent the period from 1 June 2018 to 30 October 2018. 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 2018/19 annual salary (£) 3 September 2013 Gordon Banham Group Chief Executive 1 October 2001 2 January 2018 John Samuel Group Finance Director 2 January 2018 470,442 263,900 14 November 2018 David Anderson Group Property Director 14 November 2018 225,000 11 May 2018 Roger McDowell Non-Executive Chairman 11 May 2018 21 August 2015 Nigel Halkes Non-Executive Director 21 August 2015 80,000 40,000 Notice period 12 months 6 months 6 months 1 month n/a Non-Executive Directors are not generally 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 although, as a condition of Roger McDowell’s appointment, he was granted LTIPs as set out below. Directors’ Share Options 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. In the financial year ended 31 May 2018, Gordon Banham exercised his right to acquire 31,109 shares at nil cost on 10 October 2017. These options were granted under Deferred Bonus Scheme A. At 31 May 2019, no Director holds any rights to subscribe for shares in Group companies. Long-Term Incentive Plan (“LTIP”) (Audited) On 22 January 2019, shareholders in general meeting approved a new LTIP scheme, the Hargreaves Services plc Share Option Scheme 2019 (“the Share Option Scheme 2019”). The following awards were granted in the year ended 31 May 2019: Director Roger McDowell Gordon Banham John Samuel David Anderson Date of grant 30 January 2019 30 January 2019 30 January 2019 30 January 2019 Exercise price 10p per share 10p per share 10p per share 10p per share No. of options granted Exercise period 285,144 75,250 75,250 64,157 31 Jan 2022-30 Jan 2024 31 Jan 2022-30 Jan 2024 31 Jan 2022-30 Jan 2024 31 Jan 2022-30 Jan 2024 The Share Option Scheme 2019 was created as a condition of the recruitment of Roger McDowell as Non-Executive Chairman. The Share Option Scheme 2019 requires a minimum 35% Total Shareholder Return to be achieved over the three-year period ending on 31 July 2021 (“the Vesting Period”) from a base value of £3.515 (“Base Value”) before vesting can commence. 100% vesting would occur at an 85% Total Shareholder Return over the above period from the Base Value. The rules of the Share Option Scheme 2019 allow participants to exercise options, to the extent they have satisfied the performance conditions, after the expiry of the Vesting Period. An option will lapse five 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. No disposal may be made of any shares arising from the exercise of an option until 24 Hargreaves Services plc five years after the date of grant other than to satisfy any tax liability arising on exercise. The options under the Share Option Scheme 2019 will lapse if the minimum performance criterion is not met. It is not anticipated that any further options will be granted under this Share Option Scheme 2019. No Director has any other outstanding options. No option shall be granted under the Share Option Scheme 2019 on any date if, as a result, the total number of shares issued or issuable pursuant to options and other rights granted under the Share Option Scheme 2019 and any other employee share scheme established by the Company on or after Admission, would exceed 10% of the issued ordinary share capital of the Company on the date of grant. Ordinary shares issued pursuant to the Share Option Scheme 2019 scheme shall rank pari passu in all respects with the ordinary shares already in issue. Additionally, the Board will propose that shareholders approve the creation of a further LTIP scheme at the Annual General Meeting to be held on 30 October 2019. The proposed scheme, to be known as the Hargreaves Services plc Executive Share Option Scheme (“the Executive Share Option Scheme”), will contain performance criteria which will measure both the Company’s own Total Shareholder Return over a three-year period but will also measure its comparative performance against a basket of other listed companies. It is envisaged that awards with a value up to 50% of a recipient’s base salary would be made annually under the Executive Share Option Scheme to Executive Directors and other senior management as determined by the Committee. Full details of the Executive Share Option Scheme are included in the notes to the notice of the Annual General Meeting. Deferred Bonus Scheme A Deferred Bonus Scheme (“the Deferred Bonus Scheme”) was implemented in December 2014. Deferred Bonus Scheme F was granted on 31 July 2018. Details are set out in Note 26 to the financial statements. The Deferred Bonus Scheme was designed to allow awards to be made to Executive Directors and eligible employees in order to attract and retain key members of staff. The awards under the Scheme are based on a percentage of salary. This figure in turn is converted into a number of shares using the mid-closing price of a Hargreaves Services plc share on the day preceding the award. Other than serving a retention period, the Deferred Bonus Scheme has no performance criteria. The Remuneration Committee Report was approved by the Board on 30 July 2019 and signed on its behalf by: Nigel Halkes Chair of the Remuneration Committee 30 July 2019 Annual Report and Accounts 2019 25 Strategic ReportDirectors’ ReportFinancial Statements 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 Group and Parent Company 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. Under the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs as adopted by the EU) and applicable law and they 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, relevant and reliable; • • assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have state whether they have been prepared in accordance with IFRSs as adopted by the EU; no realistic alternative but to do so. 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 are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and 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. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. 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. 26 Hargreaves Services plc Independent Auditor’s Report to the Members of Hargreaves Services plc 1 Our Opinion is Unmodified We have audited the financial statements of Hargreaves Services plc (“the Company”) for the year ended 31 May 2019 which comprise the Consolidated Statement of Profit and Loss and Other Comprehensive Income, Group Statement of Changes in Equity, Group Balance Sheet, Group Cash Flow Statement, Company Balance Sheet, Company Statement of Changes in Equity, Company Cash Flow Statement and the related notes, including the accounting policies in Note 1. 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 2019 and of the Group’s loss for the year then ended; the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (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. • • • Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. 2 Key Audit Matters: Including Our Assessment of Risks of Material Misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters were as follows: The impact of uncertainties due to the UK exiting the European Union on our audit Refer to page 2 (Chairman’s statement). Risk vs 2018: New risk Unprecedented levels of uncertainty All audits assess and challenge the reasonableness of estimates, in particular as described in the going concern key audit matter below, related disclosures and the appropriateness of the going concern basis of preparation of the financial statements (see below). All of these depend on assessments of the future economic environment and the Group’s future prospects and performance. Brexit is one of the most significant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included: • Our Brexit knowledge: we considered the directors’ assessment of Brexit-related sources of risk for the Group’s business and financial resources compared with our own understanding of the risks. We considered the directors’ plans to take action to mitigate the risks; • Sensitivity analysis: when addressing going concern and other areas that depend on forecasts, we compared the directors’ analysis to our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty; and • Assessing transparency: as well as assessing individual disclosures as part of our procedures on going concern, we considered all of the Brexit related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit. Annual Report and Accounts 2019 27 Strategic ReportDirectors’ ReportFinancial Statements Independent Auditor’s Report to the Members of Hargreaves Services plc continued 2 Key Audit Matters: Including Our Assessment of Risks of Material Misstatement continued Going concern Refer to page 9 (Financial Review) and pages 43 and 44 (Accounting Policies). Disclosure quality The financial statements explain how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the group and parent company. Risk vs 2018: New risk That judgement is based on an evaluation of the inherent risks to the Group’s and Company’s business model and how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over a period of at least a year from the date of approval of the financial statements. The risks most likely to adversely affect the Group’s and Company’s available financial resources over this period were: the ongoing availability of the Group’s borrowing base • facility which matures on 31 August 2020, including the impact of Brexit; and the potential impacts of Brexit on the Group’s supply chain and customer base. • There are also less predictable but realistic second order impacts, such as the impact of Brexit and the erosion of customer or supplier confidence, which could result in a rapid reduction of available financial resources. The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed. Our procedures included: • Funding assessment: assessing the current and available committed facilities to understand the financial resources available to the Group during the forecast period from the balance sheet date and the potential refinancing risks to the Group’s and Company’s business model. In this context we considered the mitigating actions available to the Group in the event that existing facilities are not renewed, and considered any related covenants requirements and the evidence available regarding whether they will be met; • Market analysis: we performed inquiries with key management personnel to better understand the implications of the Company’s share price performance and implied market expectations on the Company’s going concern assessment; • Historical comparisons: assessing historical forecasting accuracy, by comparing forecast cash flows to those actually achieved by the Group; • Sensitivity analysis: considering sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from through a lack of refinancing, and risks individually and collectively resulting from Brexit; • Benchmarking assumptions: comparing the Group’s assumptions used in the cash flow projections to externally derived data and post year end trading results in respect of key inputs such as projected growth and cost inflation; • Evaluating directors’ intent: Evaluating the intent of the directors and the achievability of the actions they would take to improve the position should certain risks materialise; and • Assessing transparency: assessing the completeness and accuracy of the Going concern disclosures in the Annual Report and considering whether they reflect the position of the Group’s financing and the risks associated with the Group’s ability to continue as a going concern. 28 Hargreaves Services plc Contract risk in C.A. Blackwell (Contracts) – including contract revenue, profit recognition and recoverability of contract assets Refer to page 14 (Risk Management) and page 42 (Accounting Estimates involving Judgments), page 49 (Accounting Policies) and pages 53, 69 and 75 (Financial Disclosures). Risk vs 2018: Subjective estimate For long term contracts in C.A. Blackwell (Contracts), the recognition of contract revenue over time, profit/loss and contract assets rely on estimates in relation to forecast total revenues and costs of each contract. Contingencies may also be included in these estimates to take account of specific uncertain risks, or disputed claims against the Group, arising within each contract. Contract revenue may also include variations involving estimates. These are recognised on a contract-by-contract basis when evidence supports the assessment that it is highly probably that a significant reversal in the amount of revenue recognised will not occur. The effect of these matters is that, as part of our risk assessment, we determined that contract revenue, profit recognition and the recoverability of contract assets involve a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. Using a variety of quantitative and qualitative criteria, we assessed and challenged the most significant and complex contract estimates. Our audit procedures included: • Site visits: completing site visits subsequent to the balance sheet date to certain higher risk or larger value contracts, physically inspecting the progress on site for individual projects and identifying areas of complexity through observation and discussion with key site personnel; • Challenge key judgements: for selected higher risk or larger value contracts, obtaining the detailed project review papers and challenging the Group’s judgements in respect of contract forecasts, contingencies, and the recoverability of contract assets via agreement to third-party certifications and confirmations, challenge of senior operational, commercial and financial management and with reference to our own expertise. We also performed corroborative inquiries of the Group’s in-house legal counsel; • Involvement of specialists: involving our own quantity surveyor specialists to challenge the Group’s estimates of variations and to challenge the underlying judgements compared to our knowledge of the business and industry norms; • Our sector experience: using our sector experience to assess forecast contract outturns by challenging the Group’s judgements in this area with reference to our own assessments of the reasonably possible range of outcomes for each selected contract based on our understanding of contract work performed, issues encountered and relevant contract terms. • Contract clauses scrutiny: inspecting selected higher risk or larger value contracts for key clauses; identifying relevant contractual mechanisms such as pain/gain shares and liquidated damages and assessing how these have been reflected in the amounts recognised in the financial statements; and • Assessing transparency: considering the adequacy of the Group’s contract related disclosures including those around the nature of estimates and judgements in respect of contract revenues. Annual Report and Accounts 2019 29 Strategic ReportDirectors’ ReportFinancial Statements Independent Auditor’s Report to the Members of Hargreaves Services plc continued 2 Key Audit Matters: Including Our Assessment of Risks of Material Misstatement continued Recoverability of parent company’s investment in subsidiaries (£31.7m; 2018: £33.4m) and recoverability of parent’s debt due from group entities (£100.9m; 2018: £121.8m) Refer to page 43 (Accounting Policies) and page 66 and 68 (Financial Disclosures). Risk vs 2018: Low risk, high value The carrying amount of the intra-group debtor balance represents 67% (2018: 70%) of the parent company’s total assets. The carrying amount of the parent company’s investments in subsidiaries represents 21% (2018: 19%) of the company’s total assets. The recoverability of the intra-group debtor balances and the carrying amount of the parent company’s investments in subsidiaries are not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent company financial statements, these are considered to be the areas that had the greatest effect on our overall parent company audit. Our procedures included: • Tests of detail: assessing all investments, and selected higher value group debtors representing 100% (2018: 100%) of the total group debtors balance to identify, with reference to the relevant draft balance sheets of those subsidiaries, whether their net assets, being an approximation of their minimum recoverable amount, were in excess of the carrying amount of the cost of investment and debtor balances, as well as assessing whether those subsidiaries have historically been profit-making; • Assessing subsidiary audits: assessing the work performed by the subsidiary audit teams on the sample of subsidiaries noted above, and considering the results of that work, on the profit/loss and net assets of those subsidiaries, including, for those subsidiaries the company has receivables due from, assessing the liquidity of the assets and therefore the ability of the subsidiary to fund the repayment of the receivable; • Benchmarking assumptions: where recoverable amounts are not supported by the net assets of the subsidiary but are instead supported by discounted cash flows, we challenged the cash flow forecast assumptions included in the budgets based on our knowledge of the Group and the markets in which the subsidiaries operate; and • Historical comparison: assessing historical forecasting accuracy, by comparing forecast cash flows to those actually achieved. We continue to perform procedures over property carrying amounts and related disclosures. However, the risk was considered to be higher in 2018 due to the repositioning of the Group’s strategy in that year which resulted in an increased focus on the property related balances and disclosures. We have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not separately identified in our report this year. 30 Hargreaves Services plc 3 Our Application of Materiality and an Overview of the Scope of Our Audit Materiality for the Group financial statements as a whole was set at £2.0m (2018: £1.85m), determined with reference to a benchmark of total revenue of £302.6m (2018: £297.1m) of which it represents 0.66% (2018: 0.62%). We consider total revenue to be the most appropriate benchmark as it provides a more stable measure year on year than group profit before tax. Materiality for the parent company financial statements as a whole was set at £1.2m (2018: £1.2m), determined with reference to a benchmark of total assets of £151.1m (2018: £173.1m) of which it represents 0.8% (2018: 0.7%). We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £100k (2018: £92.5k), in addition to other identified misstatements that warranted reporting on qualitative grounds. Of the Group’s 90 (2018: 98) reporting components, we subjected 45 (2018: 40) to full scope audits for group purposes. We conducted reviews of financial information (including enquiry) at a further 4 (2018: 4) non-significant components which were not individually significant but were included in the scope of our group reporting work in order to provide further coverage over the group’s results. For the residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these. The components within the scope of our work accounted for the percentages illustrated below. Number of components Group revenue Group profit before tax Group total assets Audits for group reporting purposes Reviews of financial information (including enquiry) Total Total (2018) 45 4 49 44 99% 1% 100% 99% 94% 5% 99% 97% 99% 1% 100% 91% The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team performed the audit work over 44 of the 45 (2018: 37 of the 40) reporting components subject to full scope audits for group purposes, including the audit of the parent company, and 4 of the 4 (2018: 4 of the 4) components subject to reviews of financial information (including inquiry). The remaining component that was subject to full scope audit for group purposes was in Germany (2018: 1 significant component in Germany and 2 non-significant components in Wales). The Group Audit Team participated in the component audit clearance meeting and inspected the working papers prepared by the component audit team, (2018: in addition telephone meetings were held in respect of both non-significant reporting components), during which the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor. The Group team approved the component materiality levels, which ranged from £0.01m to £1.3m (2018: £0.02m to £1.7m) for the full scope audits for group purposes, having regard to the mix of size and risk profile of the Group across the components. Annual Report and Accounts 2019 31 Strategic ReportDirectors’ ReportFinancial Statements Independent Auditor’s Report to the Members of Hargreaves Services plc continued 4 We Have Nothing to Report on Going Concern The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”). Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor’s report is not a guarantee that the Group and the Company will continue in operation. We identified going concern as a key audit matter (see section 2 of this report). Based on the work described in our response to that key audit matter, we are required to report to you if: • we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least a year from the date of approval of the financial statements. We have nothing to report in these respects. 5 We Have Nothing to Report on the Other Information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and directors’ report Based solely on our work on the other information: • we have not identified material misstatements in the strategic report and the directors’ report; • • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and in our opinion those reports have been prepared in accordance with the Companies Act 2006. 6 We Have Nothing to Report on the Other Matters on Which We Are Required to Report by Exception Under the Companies Act 2006, we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the parent Company financial statements are not in agreement with the accounting records and returns; or • • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 7 Respective Responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 26, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 32 Hargreaves Services plc 8 The Purpose of Our Audit Work and to Whom We Owe Our Responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Johnathan Pass (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Quayside House 110 Quayside Newcastle upon Tyne 30 July 2019 Annual Report and Accounts 2019 33 Strategic ReportDirectors’ ReportFinancial Statements Consolidated Statement of Profit and Loss and Other Comprehensive Income for the year ended 31 May 2019 Continuing operations Revenue Cost of sales Gross profit Other operating income/(expense) Administrative expenses Operating loss Analysed as: Operating profit (before exceptional items) Exceptional items – Cost of sales Exceptional items – Administrative expenses Exceptional items Operating loss (after exceptional items) Finance income Finance expenses Share of profit in associates and joint ventures (net of tax) (Loss)/profit before tax Taxation (Loss)/profit for the year from continuing operations Discontinued operations Profit/(loss) for the year from discontinued operations (Loss)/profit for the year Other comprehensive income Items that will not be reclassified to profit or loss Remeasurements of defined benefit pension schemes 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 (expense)/income for the year, net of tax Total comprehensive (expense)/income for the year 34 Hargreaves Services plc Note 2 3 2019 £000 302,613 (285,902) 16,711 4,291 (30,690) 2018 £000 297,119 (266,746) 30,373 (185) (31,564) (9,688) (1,376) 6,448 (12,645) (3,491) (16,136) (9,688) 450 (2,154) 1,534 (9,858) 1,665 (8,193) 5 8 8 15 9 2,108 (3,025) (459) (3,484) (1,376) 626 (1,937) 3,175 488 693 1,181 10 3,526 (1,000) (4,667) 181 25 9 9 (1,197) 203 318 (1,269) 216 (1,729) (6,396) (857) 120 (22) 1,123 (192) 172 353 Profit attributable to: Equity holders of the Company Non-controlling interest (Loss)/profit for the year Total comprehensive (expense)/income attributable to: Equity holders of the Company Non-controlling interest Total comprehensive (expense)/income for the year Basic (loss)/earnings per share (pence) Diluted (loss)/earnings per share (pence) Basic (loss)/earnings per share from continuing operations (pence) Diluted (loss)/earnings per share from continuing operations (pence) Non-GAAP Measures Basic underlying earnings per share from continuing operations (pence) Diluted underlying earnings per share from continuing operations (pence) Note 11 11 11 11 11 11 2019 £000 (4,741) 74 (4,667) (6,470) 74 (6,396) (14.75) (14.75) (25.71) (25.71) 15.30 15.30 2018 £000 229 (48) 181 401 (48) 353 0.72 0.71 3.84 3.82 14.90 14.79 Annual Report and Accounts 2019 35 Strategic ReportDirectors’ ReportFinancial Statements Group Company Note 2019 £000 Represented 2018 (See Note 1) £000 2019 £000 2018 £000 12 13 14 15 15 18 10 19 16 20 21 22 23 25 27 17 23 24 27 17 45,528 10,067 10,983 11,744 – 6,229 84,551 – 48,040 25 75,562 17,596 21,583 162,806 53,777 11,909 11,121 10,116 – 3,814 90,737 16,660 34,652 1,044 103,245 18,970 16,110 190,681 – – – 4,984 31,688 – 36,672 – – – 114,102 – 312 114,414 – – – 4,984 33,406 – 38,390 – – – 134,716 – – 134,716 247,357 281,418 151,086 173,106 (35,222) (4,184) (3,718) (137) (43,261) (4,289) (69,259) (2,327) (594) (150) (76,619) (4,434) (4,395) (2,947) (30) (11,806) (42,460) (88,425) (2,633) – (7) (133,525) (26,924) – – – (26,924) – (18,962) – (613) – (19,575) – – – – – (39,522) (32,546) – – – (72,068) (119,880) (145,331) (46,499) (72,068) 127,477 136,087 104,587 101,038 Balance Sheet at 31 May 2019 Non-current assets Property, plant and equipment Investment property Intangible assets including goodwill Investments in associates and joint ventures Investments in subsidiary undertakings Deferred tax assets Current assets Assets held for sale Inventories Other financial assets Trade and other receivables Contract assets 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 Provisions Income tax liability Other financial liabilities Total liabilities Net assets 36 Hargreaves Services plc Equity attributable to equity holders of the Parent Share capital Share premium Other reserves Translation reserve Merger reserve Hedging reserve Capital redemption reserve Share-based payment reserve Retained earnings Non-controlling interest Total equity Note 28 28 28 28 28 28 28 28 Group 2019 £000 3,314 73,955 211 (692) 1,022 102 1,530 1,139 46,841 2018 £000 3,314 73,955 211 (1,010) 1,022 1,155 1,530 1,043 54,886 Company 2019 £000 3,314 73,955 – – 1,022 – 1,530 1,139 23,627 2018 £000 3,314 73,955 – – 1,022 – 1,530 1,043 20,174 127,422 136,106 104,587 101,038 55 (19) – – 127,477 136,087 104,587 101,038 These financial statements were approved by the Board of Directors on 30 July 2019 and were signed on its behalf by: Gordon Banham Director Registered number: 4952865 Annual Report and Accounts 2019 37 Strategic ReportDirectors’ ReportFinancial Statements Statement of Changes in Equity for year ended 31 May 2019 Group At 1 June 2017 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 schemes 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 Share- based payment reserve £000 Retained earnings £000 Total Parent equity £000 Non- controlling interest £000 Total equity £000 3,314 73,955 (988) 224 211 1,530 1,022 936 57,694 137,898 29 137,927 – – – – – – – – – – – – – – – – – – – – – (22) – – – – – 1,123 – (192) (22) 931 (22) 931 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 229 229 (48) 181 – – (22) 1,123 (857) (857) 120 (72) (737) 172 – – – – – (22) 1,123 (857) (72) 172 (508) 401 (48) 353 107 – – (2,300) 107 (2,300) 107 (2,300) (2,193) – – – 107 (2,300) (2,193) At 31 May 2018 3,314 73,955 (1,010) 1,155 211 1,530 1,022 1,043 54,886 136,106 (19) 136,087 38 Hargreaves Services plc Group At 1 June 2018 Total comprehensive income for the year (Loss)/profit 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 schemes 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 Share- based payment reserve £000 Retained earnings £000 Total Parent equity £000 Non- controlling interest £000 Total equity £000 3,314 73,955 (1,010) 1,155 211 1,530 1,022 1,043 54,886 136,106 (19) 136,087 – – – – – – – – – – – – – – – – – – – – – 318 – – – – – (1,269) – 216 318 (1,053) 318 (1,053) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (4,741) (4,741) 74 (4,667) – – – – – – – 318 (1,269) (1,197) (1,197) 203 419 (994) (1,729) – – – – – 318 (1,269) (1,197) 419 (1,729) – (5,735) (6,470) 74 (6,396) 96 – – (2,310) 96 (2,310) 96 (2,310) (2,214) – – – 96 (2,310) (2,214) At 31 May 2019 3,314 73,955 (692) 102 211 1,530 1,022 1,139 46,841 127,422 55 127,477 Annual Report and Accounts 2019 39 Strategic ReportDirectors’ ReportFinancial Statements Statement of Changes in Equity for year ended 31 May 2019 continued Company At 1 June 2017 Total comprehensive income for the year Profit for the year 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 Share capital £000 3,314 Share premium £000 73,955 Capital redemption reserve £000 1,530 Merger reserve £000 1,022 Share-based payment reserve £000 Retained earnings £000 Total Parent equity £000 936 21,900 102,657 – – – – – – – – – – – – – – – – – – – – – – 107 – 107 574 574 574 574 – (2,300) (2,300) 107 (2,300) (2,193) At 31 May 2018 and 1 June 2018 3,314 73,955 1,530 1,022 1,043 20,174 101,038 Total comprehensive income for the year Profit for the year 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 – – – – – – – – – – – – – – – – – – – – – – 96 – 96 5,763 5,763 5,763 5,763 – (2,310) (2,310) 96 (2,310) (2,214) At 31 May 2019 3,314 73,955 1,530 1,022 1,139 23,627 104,587 40 Hargreaves Services plc Consolidated Cash Flow Statement for year ended 31 May 2019 Cash flows from operating activities (Loss)/profit for the year from continuing operations Adjustments for: Depreciation and impairment of property, plant and equipment Impairment of investment properties Amortisation and impairment of goodwill and intangible assets Net finance expense Share of profit in associates and joint ventures (net of tax) Impairment of investment in subsidiaries (Profit)/loss on sale of property, plant and equipment and investment property Equity-settled share-based payment expenses Income tax (credit)/expense Contributions to defined benefit pension schemes Translation of non-controlling interest and investments Change in assets held for sale 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 received/(paid) Group 2019 £000 Company 2018 £000 2019 £000 2018 £000 Note (8,193) 1,181 (211) 575 12 13 14 8 15 15 3 26 9 25 16,136 – 142 1,704 (1,534) – (4,291) 96 (1,665) (1,746) (100) 549 8,961 (11,262) 26,172 (17,454) 1,817 8,783 (1,635) 307 12,936 621 880 1,311 (3,175) – 185 107 (693) (1,829) (24) 11,500 – 10,976 (2,984) (387) (1,475) 17,630 (905) 1,127 – – – 203 – 1,814 – – 1,960 – – 3,766 – – 20,249 (13,636) – 10,379 (189) (1,425) – – – 1,602 – 779 – – 124 – – 3,080 – – 71,495 (76,776) – (2,201) (1,440) 1,764 Net cash inflow/(outflow) from continuing operating activities Net cash inflow/(outflow) from operating activities in discontinued operations 7,455 15,593 17,852 (1,017) 8,765 6,419 (1,877) – Net cash inflow/(outflow) from operating activities 23,048 16,835 15,184 (1,877) Cash flows from investing activities Proceeds from sale of property, plant and equipment and investment property Acquisition of property, plant and equipment and investment property Net cash inflow/(outflow) from investing activities in continuing operations Net cash outflow from investing activities in discontinued operations Net cash inflow/(outflow) from investing activities Cash flows from financing activities Payment of finance lease liabilities Dividends paid (Repayment of)/proceeds from Group banking facilities Net cash (outflow)/inflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 June Effect of exchange rate fluctuations on cash held 12,231 (8,433) 3,798 – 3,798 1,001 (21,227) (20,226) (4,309) (24,535) – – – – – 28 (6,780) (2,310) (12,300) (21,390) (5,461) (2,300) 3,800 – (2,310) (12,300) (3,961) (14,610) 5,456 16,110 17 (11,661) 27,817 (46) 574 (262) – – – – – – – (2,300) 3,800 1,500 (377) 115 – Cash and cash equivalents at 31 May 22, 23 21,583 16,110 312 (262) Annual Report and Accounts 2019 41 Strategic ReportDirectors’ ReportFinancial Statements 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 the 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”). In publishing the Parent Company financial statements 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 financial statements are presented in Sterling since this is the currency in which the majority of the Group’s transactions are denominated. 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 IFRSs which are effective for the first time have been adopted, including the following standards, amendments and interpretations: • • IFRS 9, Financial Instruments; IFRS 15, Revenue from Contracts with Customers. The new accounting standard IFRS 15 sets out a single and comprehensive framework for revenue recognition. The guidance in IFRS 15 is more detailed than previous IFRSs for revenue recognition (IAS 11 Construction Contracts and IAS 18 Revenue and associated interpretations). The Group has adopted IFRS 15 and has chosen to apply the retrospective approach. The adoption of IFRS 15 has resulted in a representation of contract assets and contract provisions in the 2018 balance sheet (see notes 20, 21, 24 and 27), this representation has not resulted in a change to the previously reported net assets of the Group. The new accounting standard IFRS 9 Financial Instruments addresses the classification and measurement of financial assets and liabilities and replaces IAS 39. Among other things, the standard introduces a forward looking credit loss impairment model whereby entities need to consider and recognise impairment triggers that might occur in the future (an “expected loss” model). The Group has adopted IFRS 9 and has chosen to apply the retrospective approach. None of the IFRSs adopted by the Group had a material impact on the Group’s result for the year or its equity. Accounting Estimates involving 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 Board considers that the key areas requiring the use of estimates and judgements which may materially affect the financial statements are: a) Construction Contract Revenue IFRS 15, Revenue from Contracts with Customers, is applicable to these financial statements, commencing on 1 June 2018, for the first time. Whilst it applies to all revenue recognition, it has replaced IAS 11, “Construction Contracts”, insofar as the Group carries out construction contracts in its Specialist Earthworks business and represents a key area of judgement. Management must assess the performance obligations under each contract and the point at which those obligations have been fulfilled, allocating the transaction price as necessary to each obligation. The estimates and judgements which management must carry out to assess the total expected costs on a contract remain necessary under IFRS 15. The Group has control and review procedures in place to monitor, and evaluate, regularly, the estimates being made to ensure that they are consistent and appropriate. This includes reviewing the independent certification of the value of work done, the progress of work against contracted timescales and the costs incurred against plan. In particular, management makes judgements on the expected recoverability of value recorded in respect of performance obligations which have been completed but not yet agreed with the customer and on the likelihood of the entitlement to any variable consideration. Differences arising on the ultimate completion of the contract and any unforeseen changes or events as the contract progresses may result in material changes to expected financial outcomes. The transition to IFRS 15 has had no impact on the measurement of revenue in the comparative period. Construction contract revenue in the year ended 31 May 2019 was £57.6m (2018: £55.8m). b) Mining Production and Profitability The Group has a surface mining business. Estimates of mine life and production levels, and the profitability of future production (which in the medium- term continues to be partly dependent on future prices for coal) are included in Group forecasts. These forecasts are used in the impairment assessment of mining assets, including goodwill. Estimates of mine life and production levels also form the basis of depreciation of capitalised mining costs. The carrying value of the mining assets as at 31 May 2019 is £4.3m (2018: £5.7m). c) Restoration Costs In accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” the Board makes provisions for liabilities which exist but where judgements have to be made as to the quantification of such liabilities. 42 Hargreaves Services plc The Group’s surface mining activities give rise to obligations for site restoration. The restoration provisions, which are set out in Note 27, 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. The carrying value of restoration provisions as at 31 May 2019 is £4.1m (2018: £4.0m). d) Redundancy Provision Following the announcement that British Steel Limited was going into an insolvency process, management has made a provision in respect of possible redundancy costs in respect of all employees engaged on contracts for that customer. Currently, British Steel is continuing to trade under the aegis of the Official Receiver, but the Group has no certainty as to how long this may continue. As a result, formal notice has been served on each employee affected and the Group has made a provision for possible redundancy costs based upon the contract ceasing as at the date of these financial statements. Should the contract continue, or British Steel be sold, and a new contract undertaken by the Group which involves the retention of some or all of the employees, then this provision may require reassessment. The carrying value of the redundancy provision as at 31 May 2019 is £1.7m (2018: £nil). e) Post Retirement Employee Benefits The Group operates two funded defined benefit schemes and an unfunded concessionary fuel scheme. Independent actuaries calculate the Group’s asset/liability in respect of the defined benefit schemes. The actuaries make assumptions as to discount rates, salary escalations, net interest on scheme assets/liabilities, future pension increases, mortality rates applicable to members and future rates of inflation. These assumptions are made under the Board’s direction. The Board determines the appropriateness of these assumptions by benchmarking them against those used by other schemes and by taking advice from the independent actuaries. If the actual experience of the schemes is different from the assumptions used, then the pension asset/ liability may differ from that shown in these financial statements. More information is given in Note 25 to these financial statements. The impact of the equalisation of Guaranteed Minimum Pensions has been assessed to be negligible. The carrying value of the defined benefit schemes in the balance sheet as at 31 May 2019 is £4.2m (2018: £4.4m). f) Measurement of the Recoverable Amounts of Cash-Generating Units (“CGUs”) Containing Goodwill, Property Assets and Parent Company Intra-Group Balances In accordance with IAS 36 “Impairment of Assets”, the Board identifies appropriate CGUs and the allocation of goodwill to these units. The assessment of impairment involves assumptions on the estimated future operating cash flows from these CGUs, the discount rate applied in the calculations and the comparison of the cash flows to the carrying value of the goodwill. These are key areas of judgement and include significant accounting estimates. Management has assessed the sensitivity of carrying amounts of CGUs containing goodwill to reasonably possible changes in key assumptions. More information on the assumptions used and the sensitivities applied are set out in Note 14 to these financial statements. Freehold property assets, including investment properties and properties held for development and resale are recorded at the lower of cost and net realisable value. The carrying value is assessed on the basis of the strategy for each asset and the expected net proceeds arising, with reference to estimated market value where relevant. An assessment is made regarding the recoverability of intra-Group balances on a regular basis. This assessment includes, but is not restricted to, a review of net assets and future trading opportunities within each Group business. Accounting Judgements g) Discontinued Operations In accordance with IFRS 5 “Non-current assets held for sale and discontinued operations”, a non-current asset or a group of assets containing a non-current asset (a disposal group) is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable within one year. On initial classification as held for sale, non-current assets and disposal groups are measured at the lower of previous carrying amount and fair value less costs to sell with any adjustments taken to profit or loss, this represents an area of judgement. The same applies to gains and losses on subsequent re-measurement although gains are not recognised in excess of any cumulative impairment loss. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets and investment property, which continue to be measured in accordance with the Group’s accounting policies. Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortised or depreciated. In accordance with IFRS 5, the above policy is effective from the start of the accounting period in which the operation meets the criteria to be classified as held for sale. A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Income Statement is restated as if the operation has been discontinued from the start of the comparative period. 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 Statement of Profit and Loss or as available for sale are stated at their fair value. 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 Operating Review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review. 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. Annual Report and Accounts 2019 43 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 1 Accounting Policies continued Going Concern continued The Group has material assets and financial resources at its disposal together with robust risk management and capital allocation processes. Committed banking facilities are in place until 31 August 2020. Discussions on new facilities with existing and prospective new lenders are underway and the Board is confident that suitable new facilities will be secured to replace them well before they expire. Therefore, and after making appropriate enquiries including reviewing budgets and strategic plans, 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, the Board continues to adopt the going concern basis in preparing the Annual Report and Accounts. The financial statements were approved by the Board of Directors on 30 July 2019. 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. 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. 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. 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. 44 Hargreaves Services plc 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 Financial Assets Financial assets classified as “loans and receivables” under IAS 39 (being trade and other receivables and amounts due from undertakings in which the Group has a participating interest) continue to be classified within the “amortised cost” category according to IFRS 9. The Group classifies financial assets under the following measurement categories: • Measured at amortised cost (non-derivative financial assets); • Measured subsequently at fair value through either profit or loss or comprehensive income. Non-derivative Financial Assets Non-derivative financial assets include trade and other receivables and contract assets, as defined by IFRS 15. Neither of these two categories contain a significant financing element and, as such, expected credit losses are measured under IFRS 9 using the simplified impairment approach. This approach requires expected lifetime losses to be recognised upon the initial recognition of the asset. At initial recognition, the Group measures a non-derivative financial asset at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. The Group subsequently measures trade and other receivables and contract receivables at amortised cost. Derivative Financial Instruments The Group uses 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 and fuel prices and exchange rate risk. Derivative financial instruments are recognised initially at fair value and are subsequently remeasured to fair value at each reporting date and changes therein are accounted for as described as follows. 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. The Group continues to apply IAS 39 for the purposes of hedge accounting as permitted under IFRS 9. Non-Financial Assets The carrying amounts of the Group’s non-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 CGU exceeds its estimated recoverable amount. Impairment losses are recognised in the Income Statement. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to CGUs and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A CGU 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. 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. Annual Report and Accounts 2019 45 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 1 Accounting Policies continued Property, Plant and Equipment Property, plant and equipment is 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. Freehold land is not depreciated. Depreciation rates are as follows: Freehold buildings Leasehold improvements Motor vehicles and plant Furniture and equipment Fixtures and fittings – – – – – 2% to 4% p.a. 15% p.a. 10% to 20% p.a. 25% p.a. 15% p.a. Assets in the course of construction are not depreciated until they are brought into use. Mining Assets Surface mine development – – Stripping activity asset – Mineral reserves units of coal production. units of coal production from the specific box cut to which the associated stripping asset relates. units of coal production. 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: • • drilling, pumping, geology and mine design costs; and • the costs associated with achieving the necessary planning permission and consents, licences and permits required to operate the site; 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. Mineral Reserves Costs associated with the acquisition of mining reserves, such as coal, are referred to as “mineral reserves” and are capitalised within “property, plant and equipment” as part of “Mining assets”. This asset is amortised to the statement of comprehensive income on a units of production method. 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 impairment. Investment properties are not remeasured to fair value at each reporting date, however, a review for impairment is carried out at each reporting date, giving consideration to the fair value of the property. An impairment is recognised when the fair value of the property is lower than the book value. Investments Investments in joint ventures, associates and subsidiaries are carried at cost less impairment in the Parent Company accounts. 46 Hargreaves Services plc 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 CGUs 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. 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. Annual Report and Accounts 2019 47 Strategic ReportDirectors’ ReportFinancial Statements Notes (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. Where necessary, provisions are made against obsolete, defective or slow-moving inventories. Finished goods includes items of plant and machinery which are regarding as trading stock. 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. 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. 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. 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 Maltby Colliery Limited on 26 February 2007, the Group operates a concessionary fuel retirement benefit scheme. In addition, following the acquisition of Maltby Colliery, the Group is a member of two 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. The 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. 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. 48 Hargreaves Services plc 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 recognised when control over a product or service is transferred to the Group’s customer. The value attributed to revenue is measured based on the consideration specified in the contract and excludes any amounts collected on behalf of third parties. In circumstances where consideration is not clearly defined in the contract, the revenue is subject to variability. When revenue is variable, the Group estimates the amount of consideration to be recovered. Revenue is only recognised to the extent that it is highly probable that a significant reversal in a future period will not occur. When an amendment to an existing contract arises, the Group reviews the nature of the modification and whether or not it reflects a separate or new performance obligation to be satisfied, or whether it is an amendment to an existing performance obligation. Revenue is measured excluding value added tax, for goods and services supplied to external customers in line with the fulfilment of contractual performance obligations. All directly attributable expenses in respect of goods supplied and services provided are recognised in the Income Statement in the period to which they relate. The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust its transaction price for the time value of money. The Group’s activities cover a variety of disciplines, therefore, depending on the nature of the product or service delivered and the timing of when control is passed onto the customer, the Group will account for revenue both over time and at a point in time. Where revenue is measured over time, the Group uses the input method to measure progress of delivery. Sales of Plant, Coal, Coke and Other Mineral Sales Revenue is recognised at a point in time when delivery of the product has been made and title has passed to the customer. A number of mineral 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 at a point in time 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 over time as contractual performance obligations are fulfilled. A proportion of sales are subject to long-term contracts, typically on a cost-plus or similar basis. Typically, these contracts take the form of a continuing performance obligation. The revenue and profit on such contracts is recognised (and invoiced) using the input method of measuring progress on completion of the performance obligation. Profit is recognised in line with the recognition of revenue allocating costs to each separate performance obligation as appropriate. Any losses on contracts are recognised in full immediately. Construction Contract Revenue When the outcome of individual contracts can be estimated reliably, contract revenue and costs are recognised as revenue and expenses respectively over time by reference to the fulfilment of performance obligations using the input method of estimating progress of delivery at the reporting date. Costs are recognised as incurred, and revenue is recognised using the input 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. Revenue includes an assessment of any variable consideration which may become receivable based upon relevant performance measures. Variable consideration is included based on the expected value or most likely amount only to the extent that it is highly probable that there will not be a significant reversal in the amount of cumulative revenue recognised. Provision is made for all known or expected losses on contracts as soon as they are foreseen. These provisions are reviewed throughout the contract life and are adjusted as required. However, the nature of the risks on contracts are such that is often not possible to resolve them until the end of the contract and therefore the provisions may not reverse until the contract is concluded. Property Sales of freehold land are recognised at a point in time upon legal completion. Contract Assets Contract assets represent amounts for which the Group has an unconditional right to consideration in respect of unbilled revenue recognised at the balance sheet date and comprises costs incurred plus attributable margin. Contract Liabilities Contract liabilities represent the obligation to transfer goods or services to a customer for which consideration has been received, or consideration is due, from the customer. 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. Annual Report and Accounts 2019 49 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 1 Accounting Policies continued Leases continued 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. 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. Restoration provisions are adjusted for changes in estimates, which are accounted for as a change in the corresponding capitalised cost within non-current assets, 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. 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 and changes in the estimated cost and scope of anticipated activities. 50 Hargreaves Services plc Adopted IFRSs Not Yet Applied At the date of these financial statements the following Adopted IFRSs have been endorsed but have not been applied in these financial statements. In respect of IFRS 16, no material net impact on the Net Assets from the adoption of this new standard is expected, although assets and liabilities will increase correspondingly, which as at 31 May 2019 would have been approximately £6m. The Group has chosen not to adopt any of the standards noted below earlier than required: • IFRS 16: Leases (will apply to the accounting period commencing 1 June 2019). 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, Hargreaves Land, Legacy and Unallocated. • Distribution & Services: Provides coal distribution, including mining operations, materials handling and contracting services and logistics to a range of industrial, wholesale and public sector customers. The business unit also provides earth moving and infrastructure services across the UK and trades in plant and machinery. • Hargreaves Land: The development and realisation of value from the land portfolio including rental income from investment properties. • Legacy: The realisation of surplus assets which are not associated with the continuing operations into cash in a timely manner, whilst obtaining full value. • Unallocated: 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. Underlying Operating Profit is defined by the Board as Operating Profit prior to exceptional items, amortisation and impairment of intangible assets and includes the Group’s share of the operating profit of its German associate. 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 (loss)/profit before tax in the tables below: Revenue Total revenue Intra-segment revenue Revenue from external customers Underlying operating profit/(loss) Amortisation and impairment of intangibles Taxation on associates and joint ventures Exceptional items Operating (loss)/profit including share of associate Interest on associates and joint ventures Net financing costs Loss/(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 2019 £000 Hargreaves Land 2019 £000 Legacy 2019 £000 Unallocated 2019 £000 Total 2019 £000 293,787 – 3,634 (862) 293,787 2,772 6,054 – 6,054 – – – 303,475 (862) 302,613 12,110 (142) (875) (16,770) (5,677) (967) (1,646) 2,232 – – – 2,232 – (144) (8,290) 2,088 (15,416) (15,535) (192) (15) – – – – – – – – – – (4,376) – – 634 (3,742) – 86 9,966 (142) (875) (16,136) (7,187) (967) (1,704) (3,656) (9,858) (528) (365) (16,136) (15,915) 188,199 (83,675) 104,524 11,744 27,288 (2,970) 24,318 – 12,824 – 12,824 – 7,302 (33,235) (25,933) – 235,613 (119,880) 115,733 11,744 127,477 Unallocated net liabilities of £25.9m include the Group banking facilities liability (£26.9m), cash and cash equivalents (£0.9m liability), derivative financial instruments (£0.3m liability), corporation tax liability (£0.6m) and deferred tax asset (£6.2m), retirement benefit obligations (£4.2m) and other corporate items (£0.8m asset). Annual Report and Accounts 2019 51 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 2 Segmental Information continued Revenue Total revenue Intra-segment revenue Revenue from external customers Underlying operating profit/(loss) Amortisation of intangibles Taxation on associates and joint ventures Exceptional items Operating profit/(loss) including share of associate Interest on associates and joint ventures Net financing costs Profit/(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 2018 £000 Hargreaves Land 2018 £000 Legacy 2018 £000 Unallocated 2018 £000 Total 2018 £000 286,188 (5,505) 280,683 12,872 (880) (1,632) (3,484) 6,876 (1,654) (1,968) 3,254 (12,019) (23,585) 203,256 (93,634) 109,622 10,116 11,730 – 11,730 2,085 – – – 2,085 – (491) 1,594 (467) (5,545) 34,115 (6,492) 27,623 – 4,706 – 4,706 – – – 302,624 (5,505) 297,119 46 – – – 46 – – 46 – – 28,547 – 28,547 – (5,554) – – – (5,554) – 1,148 (4,406) (450) (295) 5,384 (45,205) (39,821) – 9,449 (880) (1,632) (3,484) 3,453 (1,654) (1,311) 488 (12,936) (29,425) 271,302 (145,331) 125,971 10,116 136,087 Unallocated net liabilities of £39.8m include Group banking facilities liability (£39.3m), cash and cash equivalents (£0.6m liability), derivative financial instruments (£1.0m asset), corporation and deferred tax assets (£3.9m asset), retirement benefit obligations (£4.4m) and other corporate items (£0.4m liability). 52 Hargreaves Services plc The following table analyses revenue by significant category: Sale of goods Provision of services Construction contracts The timing of revenue recognition is analysed as follows: Over time At a point in time Revenue Over time At a point in time Revenue Geographical Information Revenue Non-current assets 3 Other Operating Income/(expense) Profit/(loss) on disposal of property, plant and equipment Profit on disposal of investment property Total other operating income/(expense) 4 Expenses and Auditor’s Remuneration The following items have been charged to the Statement of Profit and Loss: Amortisation and impairment of goodwill and other intangibles Depreciation of property, plant and equipment owned Depreciation of property, plant and equipment held under finance lease Depreciation of mining assets and mineral reserves Impairment of investment properties 2019 £000 104,349 140,711 57,553 302,613 Legacy 2019 £000 – 6,054 6,054 Legacy 2018 £000 – 4,706 4,706 Distribution & Services 2019 £000 198,264 95,523 293,787 Distribution & Services 2018 £000 174,931 105,752 280,683 Hargreaves Land 2019 £000 – 2,772 2,772 Hargreaves Land 2018 £000 – 11,730 11,730 2019 UK £000 251,073 84,098 Overseas £000 51,540 453 2018 UK £000 271,205 89,776 2019 £000 2,718 1,573 4,291 2019 £000 142 8,250 2,154 5,732 – 2018 £000 122,188 119,114 55,817 297,119 Total 2019 £000 198,264 104,349 302,613 Total 2018 £000 174,931 122,188 297,119 Overseas £000 25,914 961 2018 £000 (185) – (185) 2018 £000 880 7,146 3,170 2,620 621 Annual Report and Accounts 2019 53 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 4 Expenses and Auditor’s Remuneration continued Auditor’s Remuneration: Audit of these financial statements Amounts receivable by the Company’s auditor and its associates in respect of: Audit of financial statements of subsidiaries of the Company Taxation compliance services Other tax advisory services Other assurance services All other services 2019 £000 52 182 2 130 9 – 2018 £000 25 189 9 38 6 28 In addition to the above, fees of £50,000 (2018: £73,000) were receivable by the Company’s auditor for other advisory services in respect of discontinued operations. 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. 5 Exceptional Items The Group incurred a number of exceptional items in the year primarily related to the losses sustained due to the insolvency of Wolf Minerals (UK) Limited and British Steel Limited. Additionally, there were two other items relating to the C.A. Blackwell subsidiary. Losses due to the insolvency of Wolf Minerals (UK) Limited Losses due to the insolvency of British Steel Limited Losses on legacy contracts in C. A. Blackwell Net amounts recovered from C. A. Blackwell breach of warranty claim Other restructuring costs relating to C. A. Blackwell Credit associated with early closure of certain mining operations Total 2019 £000 (8,130) (7,964) (676) 634 – – 2018 £000 – – (3,435) – (459) 410 (16,136) (3,484) 6 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 Administration Production 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 pension scheme (see Note 25) Expenses of defined benefit pension schemes (see Note 25) 54 Hargreaves Services plc Number of employees Group 2019 25 333 1,700 2,058 Group 2019 £000 80,536 96 6,698 3,153 241 90,724 2018 30 427 1,563 2,020 2018 £000 79,076 107 4,697 2,078 220 86,178 7 Directors’ Remuneration Directors’ emoluments Company contributions to defined contribution pension schemes 2019 £000 1,132 183 1,315 2018 £000 1,498 177 1,675 Included within the 2018 figures above are £150,000 of Directors’ emoluments and £4,000 of pension contributions in relation to the discontinued operation. The aggregate of emoluments and amounts receivable under long-term incentive schemes of the highest paid Director was £523,000 (2018: £613,000), and £118,000 (2018: £116,000) was paid in lieu of Company pension contributions. Gordon Banham John Samuel David Anderson Iain Cockburn Kevin Dougan Roger McDowell Nigel Halkes David Morgan Peter Jones Total Salary/Fees Share options exercised Benefits Total Pension 2019 £000 470 264 125 – – 76 43 46 23 2018 £000 463 108 – 188 368 2 40 100 40 1,047 1,309 2019 £000 – – – – – – – – – – 2018 £000 108 – – – – – – – – 108 2019 £000 2018 £000 53 19 13 – – – – – – 85 42 10 – 8 21 – – – – 81 2019 £000 523 283 138 – – 76 43 46 23 2018 £000 613 118 – 196 389 2 40 100 40 1,132 1,498 2019 £000 118 40 25 – – – – – – 183 2018 £000 116 16 – 45 – – – – – 177 Notes: John Samuel’s emoluments in 2018 represent the period from 2 January 2018 to 31 May 2018. David Anderson’s emoluments represent the period from 14 November 2018 to 31 May 2019. Iain Cockburn’s emoluments in 2018 represent the period from 1 June 2017 to 2 January 2018. Included within the 2018 figures were £150,000 salary/fees and £4,000 pension in relation to the discontinued operation. Kevin Dougan’s emoluments in 2018 represent the period from 1 June 2017 to 1 December 2017 and include £241,000 payment in lieu of notice. Roger McDowell’s emoluments in 2018 represent the period from 11 May 2018 to 31 May 2018. David Morgan’s emoluments in 2019 represent the period from 1 June 2018 to 31 July 2018 and include £29,000 payment in lieu of notice. Peter Jones emoluments in 2019 represent the period from 1 June 2018 to 30 October 2018. Retirement benefits are accruing to the following number of Directors under: Defined contribution 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 None of the Directors hold any rights to subscribe for shares in the Group (2018: nil). All of the Directors benefited from qualifying third-party indemnity provisions. Number of Directors 2019 2018 3 – 3 2 1 2 Annual Report and Accounts 2019 55 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 8 Finance Income and Expense Recognised in Profit or Loss Finance income Bank interest receivable Early settlement discount Foreign exchange gain Interest received from jointly controlled entities Total finance income Finance expense Total interest expense on financial liabilities measured at amortised cost Interest payable on finance leases Foreign exchange loss Interest on defined benefit pension scheme obligation (see Note 25) Total finance expense 9 Taxation Recognised in the Income Statement Current tax Current year Adjustments for prior years Current tax expense Deferred tax Origination and reversal of temporary timing differences Adjustments for prior years Deferred tax credit Tax credit in Income Statement (excluding share of tax of equity accounted investees) Share of tax of equity accounted investees Total tax (credit)/expense from continuing operations 2019 £000 183 168 – 99 450 1,450 489 118 97 2,154 2019 £000 87 344 431 (1,178) (918) (2,096) (1,665) 875 (790) 2018 £000 122 – 248 256 626 1,608 220 – 109 1,937 2018 £000 469 (173) 296 (712) (277) (989) (693) 1,632 939 The deferred tax adjustment in respect of prior years of £918,000 relates to capital allowances, which were disclaimed within the Group provision previously. 56 Hargreaves Services plc Recognised in Other Comprehensive Income Deferred tax income/(expense) Effective portion of changes in fair value of cash flow hedges Remeasurements of defined benefit pension schemes Reconciliation of Effective Tax Rate (Loss)/profit for the year from continuing operations Total tax (credit)/expense (including share of tax of equity accounted investees) (Loss)/profit excluding taxation from continuing operations Tax using the UK corporation tax rate of 19.00% (2018: 19.00%) Effect of tax rates in foreign jurisdictions Previously unrecognised/(unrecognised) tax losses Non-deductible expenses Adjustment in respect of previous periods Effective total tax (credit)/expense 2019 £000 216 203 419 2019 £000 (8,193) (790) (8,983) (1,707) 378 576 537 (574) (790) 2018 £000 (192) 120 (72) 2018 £000 1,181 939 2,120 403 741 (508) 753 (450) 939 The UK corporation tax rate has been 19.00% for the duration of the financial year (2018: 19.00%). Factors That May Affect Future Current and Total Tax Charges The UK corporation tax rate reduced from 20% to 19% (effective from 1 April 2017) and remained at 19% for the tax year beginning 6 April 2019. On 16 March 2016 it was announced that the main rate of UK Corporation Tax would reduce further to 17% on 6 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 2019 and 2018 have been calculated based on the rate of 17%, the rate substantively enacted at the balance sheet date. 10 Discontinued Operations and Assets Held for Sale Discontinued Operations All discontinued operation results are attributable to equity holders. The Group’s discontinued operations made a profit of £3,526,000 (2018: loss of £1,000,000) after tax during the year. The discontinued operations represent the activities and disposal of Brockwell Energy Limited (“Brockwell”). The Company disposed of the whole of its shareholding in Brockwell on 19 October 2018 generating a profit after tax of £4,534,000. Proceeds includes the reimbursement of certain costs and expenses incurred by or in respect of Brockwell. Possible contingent consideration of £2m has not been recognised on grounds that any fair value attributable under IFRS 9 would be immaterial. In addition to this, discontinued operations include a loss after tax of £1,008,000 relating to a write off of a receivable in relation to the Belgian fraud uncovered in 2012. There are no remaining balances relating to this matter. Proceeds from disposal of subsidiary Assets disposed Administrative expenses Profit/(loss) before tax of discontinued operations Current tax (charge)/credit Deferred tax (charge)/credit Profit/(loss) for the year from discontinued operations 2019 £000 21,733 (10,034) 11,699 (7,760) 3,939 (313) (100) (413) 3,526 2018 £000 – – – (1,144) (1,144) 91 53 144 (1,000) Annual Report and Accounts 2019 57 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 10 Discontinued Operations and Assets Held for Sale continued Assets Held for Sale In the prior year the assets and liabilities of Brockwell Energy group were classified as held for sale. In addition to the assets associated with the disposal group, there was property, plant and equipment relating to the closure of Maltby Colliery which was also classified as held for sale in the previous year. Additionally, certain items of Freehold Land and Buildings were transferred into Assets Held for Sale as discussions regarding their sale were ongoing at the prior year end, these assets were disposed of during the year for proceeds of £8.4m. Assets held for sale Property, plant and equipment – Land and Buildings Property, plant and equipment – Other Goodwill Other current assets Other current liabilities Total assets held for sale The Company has no assets held for sale (2018: £nil). 2019 £000 – – – – – – 2018 £000 8,433 9,016 383 138 (1,310) 16,660 11 Earnings per Share The calculation of earnings per share (“EPS”) is based on the profit for the year attributable to equity holders and on the weighted average number of shares in issue and ranking for dividend in the year. Underlying earnings per share from continuing operations Exceptional items and amortisation (net of tax) Continuing basic (loss)/earnings per share Discontinued operations Basic (loss)/earnings per share Earnings £000 4,918 (13,185) (8,267) 3,526 (4,741) 2019 EPS Pence 15.30 (41.01) (25.71) 10.96 (14.75) DEPS Pence Earnings £000 15.30 (41.01) (25.71) 10.96 (14.75) 4,764 (3,535) 1,229 (1,000) 229 2018 EPS Pence 14.90 (11.06) 3.84 (3.12) 0.72 DEPS Pence 14.79 (10.97) 3.82 (3.11) 0.71 Weighted average number of shares 32,150 32,150 31,981 32,214 The calculation of weighted average number of shares includes the effect of own shares held of 1,013,502 (2018: 1,069,904). The calculation of diluted (loss)/earnings per share is based on the (loss)/profit for the year and the weighted average number of ordinary shares in issue in the year the potentially dilutive effect of the share options outstanding (effect on weighted average number of shares) is 425,491 (2018: 232,834); however the effect of these on basic (loss)/earnings per ordinary share in the current year is 0.00p as these instruments would have had an anti-dilutive impact (2018: 0.01p). Effect on continuing basic (loss)/earnings per ordinary share is 0.00p (2018: 0.02p). 58 Hargreaves Services plc 12 Property, Plant and Equipment Group Cost At 1 June 2017 Other acquisitions Disposals Transfers Transfer to current assets At 31 May 2018 At 1 June 2018 Other acquisitions Disposals Transfers Transfer to current assets Effect of movements in foreign exchange At 31 May 2019 Depreciation and impairment At 1 June 2017 Depreciation Disposals Transfers Transfer to current assets Effect of movements in foreign exchange At 31 May 2018 At 1 June 2018 Depreciation Disposals Effect of movements in foreign exchange At 31 May 2019 Net book value At 1 June 2017 At 31 May 2018 At 31 May 2019 Freehold land and buildings and leasehold improvements £000 Assets in the course of construction £000 Furniture and equipment £000 Motor vehicles and plant £000 Fixtures and fittings £000 Mining assets £000 Mineral reserves £000 28,776 1,078 (1,869) 6,109 (18,890) 15,204 15,204 37 (312) 524 (1,139) (1) 14,313 8,333 525 (1,791) (2) – – 7,065 7,065 278 (88) – 7,255 20,443 8,139 7,058 2,706 5,255 – (7,961) – – – – – – – – – – – – – – – – – – – – – 6,422 296 (599) 263 (5) 6,377 6,377 318 (1,567) 19 – 4 49,310 20,760 (12,960) 1,571 (17,930) 40,751 40,751 9,850 (16,005) (538) – (152) 5,151 33,906 5,493 439 (597) (3) – (1) 5,331 5,331 586 (1,542) 3 16,191 9,261 (11,859) 5 (11,690) 21 1,929 1,929 9,528 (9,400) (117) 4,378 1,940 2,706 – – 929 1,046 773 33,119 38,822 31,966 539 89 (88) 25 (35) 530 530 4 (259) (5) – – 270 476 91 (83) – – – 484 484 12 (259) – 237 63 46 33 Total £000 95,514 29,425 (15,640) – (36,860) 72,439 72,439 15,915 (18,143) – (1,139) (149) 7,761 1,947 (124) (7) – 9,577 9,577 3,371 – – – – – – – – – – – 2,335 – – – – 12,948 2,335 68,923 1,357 2,620 (124) – – – 3,853 3,853 4,818 – – 8,671 6,404 5,724 4,277 – – – – – – – – 914 – – 31,850 12,936 (14,454) – (11,690) 20 18,662 18,662 16,136 (11,289) (114) 914 23,395 – – 63,664 53,777 1,421 45,528 The Company has no property, plant and equipment. Leased Plant and Machinery At 31 May 2019 the net carrying amount of leased plant and machinery was £14,211,000 (2018: £17,608,000). 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). Annual Report and Accounts 2019 59 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 13 Investment Property At cost At 31 May Additions Disposals Impairment Transfer to stock At 31 May Group 2019 £000 11,909 232 (1,086) – (988) 10,067 2018 £000 12,124 469 (63) (621) – 11,909 Company 2019 £000 – – – – – – 2018 £000 – – – – – – The fair value of the Investment Properties is estimated by the Directors at £16,595,000 (2018: £19,073,000). The reduction in the estimated fair value is due to disposals and transfers made during the year. During the prior year an impairment of £621,000 was made against one of the investment properties following the completion of the restoration works as the expected market value was below the book value. 14 Intangible Assets including Goodwill Group Cost At 1 June 2017 Transfer to assets held for sale Exchange movements Goodwill £000 22,418 (383) 5 Customer contracts £000 13,776 – 9 Supply contracts £000 Other intangibles £000 8,148 – – 1,015 – – Total Cost £000 45,357 (383) 14 At 31 May 2018, 1 June 2018 and 31 May 2019 22,040 13,785 8,148 1,015 44,988 10,926 4 – 4 12,892 264 612 17 10,934 13,785 10,934 142 (4) 13,785 – – 8,148 – – – 8,148 8,148 – – 1,002 – – (2) 1,000 1,000 – – 32,968 268 612 19 33,867 33,867 142 (4) 11,072 13,785 8,148 1,000 34,005 11,492 11,106 10,968 884 – – – – – 13 15 15 12,389 11,121 10,983 Amortisation and impairment At 1 June 2017 Amortisation Impairment Exchange movements At 31 May 2018 At 1 June 2018 Impairment Exchange movements At 31 May 2019 Net book value At 31 May 2017 At 31 May 2018 At 31 May 2019 60 Hargreaves Services plc Amortisation and Impairment Charge The amortisation and impairment charge is recognised in the following line items in the Income Statement: Administrative expenses The Company has no intangible assets (2018: £nil). 2019 £000 142 2018 £000 880 Impairment Testing During the year following a review of the future cash flows of the relevant CGUs the remaining intangible asset relating to the customer contracts was impaired. The remaining goodwill has been allocated to cash-generating or groups of CGUs as follows: Hargreaves Industrial Services Limited Coal 4 Energy Limited/Maxibrite Limited C.A. Blackwell Group Limited Other Goodwill 2019 £000 1,252 6,140 3,572 4 10,968 2018 £000 1,252 6,140 3,572 142 11,106 The recoverable amounts of the above CGUs 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 Discount rate 2019 5 years 9% 2018 5 years 9% In order to test goodwill for impairment the Group performs value in use calculations by preparing cash flow forecasts for each cash generating unit derived from the most recent financial budget and strategic plan approved by management going forward five years. No further growth is assumed. Assuming no long-term growth provides management with a conservative estimate against which to compare the corresponding CGU carrying values. Sustaining maintenance capital expenditure in each CGU has been included in the calculations but no cash flows relating to enhancement capital expenditure have been included. A pre-tax discount rate of 9% (2018: 9%) has been used in the first instance. Management consider this to be higher than a market participant’s discount rate for each individual CGU. Other than changes to the discount rate, the key assumption which would impact the carrying value of goodwill is the margin generated by each CGU. Whilst the sensitivities vary according to CGU, for a material impairment to take place the discount rate would have to increase to 21% (2018: 27%) or the assumed operating margins would have to decrease by more than 40% (2018: 81%) before any impact on any single CGU. Each of the CGUs had significant headroom under the annual impairment review, which remains after allowing for reasonably possible changes in assumptions. The Company has no intangible assets. Annual Report and Accounts 2019 61 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 15 Investments in Subsidiaries, Associates and Joint Ventures List of Registered Offices: 15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8 15.9 15.10 15.11 West Terrace, Esh Winning, Durham, DH7 9PT Tower Colliery, Tirherbert Road, Rhigos, Aberdare, CF44 9UF Böningerstraβe 29, 47051 Duisburg, Germany H. Farmanstraat 47, 9000 Gent, Belgium Van Heetveldelei 178, 2100 Deurne, Antwerp, Belgium 31F, Tower Two, Times Square, 1 Matheson Street, Causeway Bay, HK Plac Rodla, 8/914, 70-419 Szczecin, Polska Flat No.333, 3rd Floor, Devika Tower, 6 Nehru Place, Delhi-110019, India 3 Nobel Boulavard, Cape Gate NE3, Vanderbijlpark, Gauteng, 1900 Lot 6.05, Level 6, 8 First Avenue, Bandar Utama, 47800 Petaling Jaya, Selangor Darul Ehsan, Malaysia Room 1117-8, 11th Floor, Tuen Mun Central Square, N0.22 Hoi Wing Road, Tuen Mun, New Territories, HK The Group and Company have the following investments in subsidiaries, associates and joint ventures at the end of the year: Address of registered office Class of shares held Ownership 2019 2018 Company Subsidiary undertakings Hargreaves (UK) Limited Hargreaves Industrial Services Limited Forward Sound Limited Hargreaves Services (HK) Limited Hargreaves Land Limited (formerly Hargreaves Surface Mining Limited) Hargreaves Technical Resources Limited Hargreaves Carbon Products Europe Limited Hargreaves Maltby Limited Hargreaves Property Ventures 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 Services South Africa (Pty) Ltd Hargreaves Mining India Private Limited Hargreaves Services (Muir Dean) Limited C.A. Blackwell Group Limited Hargreaves Aggregates Limited Hargreaves Industrial Services Sdn Bhd Monckton Energy Limited Maltby Energy Limited Featherstone Energy Limited Selby Energy Limited Hargreaves Pension Company Limited Coal 4 Energy Limited Hargreaves Corporate Director Limited Hargreaves Land Holdings Limited Drakelands Restoration Limited Dormant Hargreaves (Bulk Liquid Transport) Limited R Hanson & Son Limited Hargreaves ESOT Trustee Limited Hargreaves Services Australia Limited Hargreaves Europe Limited Joint ventures and associate undertakings Mir Trade Services Limited Hargreaves Services Europe Limited 62 Hargreaves Services plc 15.1 15.1 15.1 15.6 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.9 15.8 15.1 15.1 15.1 15.10 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 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 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% 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% 100% 100% – – – 100% 100% 100% 100% 100% 50% 86% Address of registered office Class of shares held Ownership 2019 2018 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 Access Services (HK) Limited Mekol NV OCCW (St Ninians) Limited OCCW (Duncanziemere) Limited OCCW (Chalmerston) Limited OCCW (Netherton) Limited OCCW (Damside) Limited OCCW (Broken Cross) Limited OCCW (House of Water) Limited 517EPA Limited C. A. Blackwell (Contracts) Limited HBR Limited Geofirma Soils Engineering Limited Renaissance Land Regeneration Limited Hargreaves Land (North) Limited (formerly Renaissance Land (D20) Limited) Renaissance Land Management Limited Hargreaves Land (South) Limited (formerly Renaissance (Padiham) Limited) Tru-Green Limited Hargreaves Hatfield Limited Eastgate Materials Handling Limited Hargreaves EG Limited Hargreaves Regeneration Limited Drakelands Holdings Limited Joint ventures and associate undertakings Tower Regeneration Limited Tower Regeneration Leasing Limited Hargreaves Raw Material Services GmbH Hargreaves Carbon Products Polska Sp. z o.o. Carbon Action Ltd Hargreaves Darlington Limited 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 Norton Wind Energy Limited Premier Lime and Stone Company C.A. Blackwell (Plant) Limited 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.5 15.6 15.11 15.4 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.2 15.2 15.3 15.7 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 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 Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 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% 100% 100% 100% 100% 100% 100% 100% 50% 50% 86% 86% 50% 50% 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% 100% 100% 100% 100% 100% 100% – – – 50% 50% 86% 86% – – 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Tower Regeneration Leasing Limited is a 100% owned subsidiary of Tower Regeneration Limited. 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 2019 was a profit of £1,534,000 (2018: profit of £3,175,000). Annual Report and Accounts 2019 63 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 15 Investments in Subsidiaries, Associates and Joint Ventures continued Associates and Joint Ventures Carrying amount of equity accounted investees: Tower Regeneration Limited £000 Hargreaves Raw Material Services GmbH £000 Interests in immaterial associate undertakings £000 Interests in immaterial joint ventures £000 – – – – 7,036 3,071 24 10,131 (171) 104 – (67) 52 – – 52 Tower Regeneration Limited £000 Hargreaves Raw Material Services GmbH £000 Interests in immaterial associate undertakings £000 Interests in immaterial joint ventures £000 – – – – 10,131 1,522 94 11,747 (67) 12 – (55) 52 – – 52 Tower Regeneration Limited £000 Hargreaves Raw Material Services GmbH £000 Interests in immaterial associate undertakings £000 Interests in immaterial joint ventures £000 (1,612) 1,612 – – 10,400 – (269) 10,131 (67) – – (67) 52 – – 52 Tower Regeneration Limited £000 Hargreaves Raw Material Services GmbH £000 (3,917) 3,917 – – 12,012 – (265) 11,747 Interests in immaterial associate undertakings £000 Interests in immaterial joint ventures £000 (55) – – (55) 52 – – 52 Total £000 6,917 3,175 24 10,116 Total £000 10,116 1,534 94 11,744 Total £000 8,773 1,612 (269) 10,116 Total £000 8,092 3,917 (265) 11,744 Group At 1 June 2017 Group’s share of total comprehensive income Exchange differences At 31 May 2018 Group At 1 June 2018 Group’s share of total comprehensive income Exchange differences At 31 May 2019 Group Hargreaves share of net (liabilities)/assets Amount not recognised Non-distributable reserves Investment at 31 May 2018 Group Hargreaves share of net (liabilities)/assets Amount not recognised Non-distributable reserves Investment at 31 May 2019 64 Hargreaves Services plc The figures below are prepared under IFRS, all numbers are presented in £000s. At cost Voting rights Cash and cash equivalents Other current assets Total current assets Non-current assets Current liabilities Non-current liabilities Net (liabilities)/assets (100%) Revenue 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 Hargreaves Raw Material Services GmbH 2019 50% 357 6,471 6,828 1,101 (15,474) (3,647) (11,192) 5 (4,900) 25 (1,281) (6,151) – (6,151) 2018 50% 698 26,615 27,313 1,255 (24,154) (9,020) (4,606) 201 (4,430) 20 (1,288) (5,497) – (5,497) 2019 49% – 51,960 51,960 20,401 (45,498) (12,895) 13,968 149,580 (145,663) 8 (1,144) 2,781 (1,011) 1,770 2018 49% – 55,462 55,462 10,382 (47,799) (5,952) 12,093 207,554 (200,204) – (1,910) 5,440 (1,869) 3,571 The total financial liabilities included in current liabilities is: Tower Regeneration Limited £nil (2018: £nil); Hargreaves Raw Material Services GmbH (“HRMS”) £42,217k (2018: £29,086k) borrowing base facility and term loans. Included within non-current liabilities above and disclosed in Note 33 Related parties are loans amounting to €13m (2018: €13m) due from HRMS to Hargreaves Services plc, the amounts represent £11.4m (2018: £11.8m). These loans are not due for repayment until 31 May 2027. Interest on the loans is charged at a rate of 2.45% being 1.7% over UK base rate. 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 purpose of this joint venture was to enable the Group’s access to an open cast mine in the South of Wales. 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 the ownership of voting rights is split 50:50 between both parties. HRMS, is the Group’s only material associate investment. HRMS 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. 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 HRMS to compete in the supply of bulk carbon products in Europe. The Group is entitled to 86% of the profits of HRMS, however the Group does not exert control over 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 the Board treats 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, Hargreaves Carbon Products Polska Sp. z o.o, Carbon Action Limited and Hargreaves Darlington Limited. Annual Report and Accounts 2019 65 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 15 Investments in Subsidiaries, Associates and Joint Ventures continued Company Shares at cost and net book value At 1 June 2017 Capital contribution arising on share options (Note 26) Impairment At 31 May 2018 At 1 June 2018 Capital contribution arising on share options (Note 26) Impairment Group undertakings £000 Joint ventures £000 34,078 107 (779) 33,406 33,406 96 (1,814) 4,984 – – 4,984 4,984 – – At 31 May 2019 31,688 4,984 The capital contribution arising on share options is as a result of the share-based payment charge during the year. 16 Other Financial Assets Current Currency contracts designated as fair value through profit or loss Other derivatives designated as fair value through hedging reserve 17 Other Financial Liabilities Non-current Other derivatives designated as fair value through hedging reserve Current Currency contracts designated as fair value through hedging reserve Other derivatives designated as fair value through hedging reserve Group 2019 £000 25 – 25 Group 2019 £000 137 137 Group 2019 £000 36 114 150 2018 £000 35 1,009 1,044 2018 £000 30 30 2018 £000 7 – 7 Company 2019 £000 – – – Company 2019 £000 – – Company 2019 £000 – – – 2018 £000 – – – 2018 £000 – – 2018 £000 – – – 66 Hargreaves Services plc 18 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 timing differences Tax assets/(liabilities) 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 Tax value of loss carry-forwards utilised Other Assets 2019 £000 1,405 45 710 59 3,454 556 6,229 31 May 2018 £000 1,709 (171) 747 86 1,043 400 2018 £000 1,709 – 747 86 1,043 400 3,985 Liabilities 2019 £000 – – – – – – – Recognised in income £000 Recognised in equity £000 (304) – (240) (27) 2,411 156 – 216 203 – – – 419 3,814 1,996 31 May 2017 £000 (281) 21 867 191 1,008 1,038 2,844 Recognised in income £000 Recognised in equity £000 1,990 – (240) (105) 35 (638) 1,042 – (192) 120 – – – (72) 2018 £000 – (171) – – – – (171) 31 May 2019 £000 1,405 45 710 59 3,454 556 6,229 31 May 2018 £000 1,709 (171) 747 86 1,043 400 3,814 The amount recognised in income includes £100,000 deferred tax charge (2018: £53,000 deferred tax credit) in relation to discontinued operations, see Note 10. The Group has an unrecognised deferred tax asset of £2,455,000 relating to trading losses (2018: £2,085,000). Company Recognised Deferred Tax Assets and Liabilities The Company has no recognised deferred tax assets or liabilities (2018: £nil). The deferred tax asset has been calculated based at the rate of 17% (2018: 17%) substantively enacted at the balance sheet date. Annual Report and Accounts 2019 67 Strategic ReportDirectors’ ReportFinancial Statements Company 2019 £000 – – – – – Company 2019 £000 2018 £000 – – – – – 2018 £000 – 121,847 11,613 1,194 – – 62 Notes (forming part of the financial statements) continued 19 Inventories Raw materials and consumables Work in progress Finished goods Properties held for development and resale Group 2019 £000 6,355 – 25,426 16,259 2018 £000 6,166 555 21,763 6,168 48,040 34,652 All amounts included within raw materials, work in progress and finished goods are expected to be recovered within 12 months. 20 Trade and Other Receivables Trade receivables Amounts due from Group undertakings Amounts due from undertakings in which the Group/Company has a participating interest Other receivables Other tax and social security Prepayments and accrued income Corporation tax Group 2019 £000 27,318 – 27,005 4,384 – 16,855 – 75,562 2018 £000 36,522 – 29,768 9,519 1,470 25,697 269 – 100,900 11,681 1,521 – – – 103,245 114,102 134,716 Prior to the adoption of IFRS 15, construction contract receivables arising under IAS 11 were included in Trade and other receivables. Following the adoption of IFRS 15, £18,970,000 has been represented as contract assets in Note 21. Included within prepayments and accrued income is £2,975,000 (2018: £5,056,000) expected to be recovered in more than 12 months. Included within Other receivables is an amount of £nil (2018: £930,000) in relation to monies held in escrow following the completion of the acquisition of C.A. Blackwell Group Limited. The Group has a variety of credit terms depending on the customer. These terms generally range from 30 to 60 days. Trade receivables are shown net of an allowance for bad debts of £486,000 (2018: £418,000) arising from the ordinary course of business, as follows: 2019 £000 418 205 (58) (79) 486 2018 £000 242 221 (25) (20) 418 Group At 1 June Provided during the year Released Utilised during the year At 31 May 68 Hargreaves Services plc 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 was: 31 May 2019 Group Not past due date Past due date (0-90 days) Past due date (over 90 days) Individually impaired amounts 31 May 2018 Group Not past due date Past due date (0-90 days) Past due date (over 90 days) Individually impaired amounts The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: UK European customers Other regions Gross trade receivables £000 Doubtful debt £000 Net trade receivables £000 20,693 5,327 1,640 144 – (35) (307) (144) 20,693 5,292 1,333 – 27,804 (486) 27,318 Gross trade receivables £000 Doubtful debt £000 Net trade receivables £000 20,509 15,859 525 47 36,940 – – (371) (47) (418) 2019 £000 22,446 630 4,242 20,509 15,859 154 – 36,522 2018 £000 24,706 222 11,594 27,318 36,522 Further details on the Group’s exposure to credit and currency risks and impairment losses related to trade receivables are disclosed in Note 29. 21 Contract Assets Group At 1 June 2018 Transfers from contract assets recognised at the beginning of the year to receivables Increase related to services provided in the year Impairments on contract assets recognised at the beginning of the year At 31 May 2019 2019 £000 18,970 (9,342) 9,086 (1,118) 17,596 Aggregate costs incurred under open construction contracts and recognised profits, net of recognised losses, amounted to £135,179,000 (2018: £148,093,000). Progress billings and advances received from customers under open construction contracts amounted to £117,346,000 (2018: £136,136,000). Contract liabilities being advances for which related work has not started, and billings in excess of costs incurred and recognised profits are included in deferred income and amounted to £13,000 (2018: £11,000). Contract assets include £2,543,000 (2018: £4,169,000) relating to retentions, of which £1,949,000 (2018: £2,259,000) are expected to be recovered in more than 12 months. The Company has no contract assets. Annual Report and Accounts 2019 69 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 22 Cash and Cash Equivalents Cash and cash equivalents per Balance Sheet Cash and cash equivalents per Cash Flow Statement Group Company 2019 £000 21,583 21,583 2018 £000 16,110 16,110 2019 £000 312 312 2018 £000 – – Included in cash and cash equivalents above is £1,039,116 (2018: £538,825) in respect of cash which is ring-fenced for settlement of restoration works in the mining business and £nil (2018: £164,218) 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’s and the Company’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group’s and the Company’s exposure to interest rate and foreign currency risk, see Note 29. Non-current liabilities Finance lease liabilities Borrowing base facility Current liabilities Current portion of finance lease liabilities Borrowing base facility Revolving credit facility Bank overdraft Terms and Debt Repayment Schedule Group 2019 £000 8,298 26,924 2018 £000 4,434 – Company 2019 £000 – 26,924 35,222 4,434 26,924 4,289 – – – 3,200 29,300 9,960 – 4,289 42,460 – – – – – 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% 2016–2024 2020 2018 Face value 2019 £000 12,587 27,000 – Carrying amount 2019 £000 12,587 26,924 – Face value 2018 £000 7,634 29,300 10,000 2018 £000 – – – – 29,300 9,960 262 39,522 Carrying amount 2018 £000 7,634 29,300 9,960 In accordance with the presentation requirements of IFRS 9, these liabilities have been classified according to the maturity date of the longest permitted refinancing. These amounts have been classified as falling due within more than one year due to the Group’s facilities in existence at 31 May 2019 maturing on 31 August 2020. The Group has a two-year committed facility consisting of a £50m borrowing base facility. This facility is secured by a debenture over the Group’s assets and matures on 31 August 2020. Additionally, the Group has a £15m overdraft facility which is repayable on demand. 39,587 39,511 46,934 46,894 Finance Lease Liabilities Finance lease liabilities are payable as follows: Group Less than one year Between one and five years 70 Hargreaves Services plc Minimum lease payments 2019 £000 4,679 8,702 13,381 Interest 2019 £000 (390) (404) (794) Principal 2019 £000 4,289 8,298 12,587 Minimum lease payments 2018 £000 3,415 4,678 8,093 Interest 2018 £000 (215) (244) (459) Principal 2018 £000 3,200 4,434 7,634 Group Loans and borrowings £000 39,260 Finance lease liabilities £000 7,634 (12,300) – (12,300) – 1,450 (1,486) (36) 26,924 – (6,780) (6,780) 11,733 489 (489) 11,733 12,587 2018 £000 – 32,509 – 37 – 32,546 Changes in Liabilities from Financing Activities At 1 June 2018 Changes from financing cash flows Repayment of loans and borrowings Payment of finance lease liabilities Total changes from financing cash flows Other changes New finance leases Interest expense Interest paid Total other changes At 31 May 2019 24 Trade and Other Payables Current Trade payables Amounts due to Group undertakings Amounts due to undertakings in which the Group has a participating interest Other trade payables Non-trade payables and accrued expenses Group 2019 £000 Represented 2018 £000 Company 2019 £000 22,561 – 29 1,368 45,301 69,259 28,967 – 3,086 1,204 55,168 88,425 – 18,144 – 406 412 18,962 Prior to the adoption of IFRS 15, construction contract provisions arising under IAS 11 were included in Trade and other payables. Following the adoption of IFRS 15, £1,375,000 has been represented as contract provisions in Note 27. 25 Pension Schemes and Other Retirement Benefits Defined Contribution Scheme 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 £3,153,000 (2018: £2,078,000). There were no outstanding or prepaid contributions, at either the beginning or end of the financial year. Defined Benefit Schemes The Group acquired a concessionary fuel retirement benefit scheme and became responsible for two defined benefit schemes on the acquisition of Maltby Colliery on 26 February 2007. The defined benefit schemes are part of two industry-wide schemes which relate to the coal industry. Details of these two schemes are consolidated in the tables below because the two schemes share the same characteristics and risks, and as such, the disclosures have been aggregated. The Group is only liable for its own section of the scheme. Any deficit or surplus is not shared with other members of the multi employer scheme. The latest full actuarial valuation of these schemes was carried out at 31 December 2015 by AON Hewitt. The valuation of the Industry Wide Coal Staff Superannuation Scheme (“IWCSSS”) showed a deficit of £7.5m and a contribution schedule was agreed at £1.2m per annum to meet the technical provisions of the scheme by 30 April 2023. The valuation of the Industry Wide Mineworkers Pension Scheme (“IWMPS”) showed a deficit of £2.7m and a contribution schedule was agreed at £0.4m per annum to meet the technical provisions of the scheme by 31 July 2020. The schemes’ actuaries are in the process of carrying out the triennial valuations as at 31 December 2018 the results of which are not yet available. For accounting purposes under IAS 19, actuaries use different assumptions than for the triennial valuation. The major difference relates to assumptions concerning the future return on the growth assets portfolio. The 2015 valuations have been used as the basis, adjusted for the requirements of IAS 19 to 31 May 2019 by a qualified independent actuary, to enable the Board to account for the schemes as follows: Present value of unfunded defined benefit obligations Present value of funded defined benefit obligations Fair value of scheme assets Deficit in the schemes – Pension liability 2019 £000 (2,072) (55,506) 53,394 (4,184) 2018 £000 (1,882) (52,715) 50,202 (4,395) Annual Report and Accounts 2019 71 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 25 Pension Schemes and Other Retirement Benefits continued Defined Benefit Schemes continued Movements in Present Value of Defined Benefit Obligation At the beginning of the year Interest cost Remeasurement (gains)/losses: – Changes in demographic assumptions – Changes in financial assumptions – Experience Benefits paid At the end of the year Movements in the Fair Value of Scheme Assets At the beginning of the year Net interest on scheme assets Remeasurement gain Employer contributions Benefits paid Expenses paid At the end of the year Expense Recognised in the Income Statement Expenses paid from schemes Interest expense on net defined benefit pension schemes The expense is recognised in the following line items in the Income Statement: Administrative expenses Financial expenses Remeasurement gains and (losses) recognised directly in equity in the Statement of Other Comprehensive Income since 26 February 2007: 2019 £000 (7,012) (1,197) (8,209) At 1 June Recognised in the year At 31 May 72 Hargreaves Services plc 2019 £000 54,597 1,483 (1,257) 3,959 167 (1,371) 2018 £000 53,719 1,350 (293) (5,073) 6,492 (1,598) 57,578 54,597 2019 £000 50,202 1,386 1,672 1,746 (1,371) (241) 53,394 2019 £000 241 97 338 2019 £000 241 97 338 2018 £000 48,616 1,241 269 1,829 (1,533) (220) 50,202 2018 £000 220 109 329 2018 £000 220 109 329 2018 £000 (6,155) (857) (7,012) Scheme Assets The fair value of the schemes’ assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, were: Growth assets Matching assets Cash Fair value at 2019 £000 28,702 23,678 1,014 Fair value at 2018 £000 28,265 21,673 264 53,394 50,202 As part of the two industry-wide schemes, the schemes’ assets represent an allocation of larger investment portfolios. The growth assets include equities, diversified funds and interest-bearing securities and are managed by Legal & General Investment Management, Invesco and PIMCO. These assets also include property investments. The matching assets are managed by Legal & General Investment Management and include corporate bonds, gilts and other fixed interest securities. The matching assets portfolio is designed to match certain liabilities of the schemes over a defined period. The growth assets portfolio seeks to deliver returns in excess of benchmark targets set by the independent Trustees. 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 2019 3.20% 3.20% 2.40% 3.30% 2018 3.20% 3.20% 2.75% 3.30% The assumptions used by the actuary and approved by the Board 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 liabilities at the balance sheet date are based on the SAPS S2 actuarial tables and include an allowance for future improvements in longevity based on the CMI 2017 projections with an increase of 1% per annum. The assumptions are equivalent to expecting a 60-year-old to live for a number of years as follows: IWMPS Current pensioner aged 60: 22.9 years (male), 26.7 years (female) (2018: 23.5 years (male), 27.2 years (female)). Future retiree upon reaching 60: 24.2 years (male), 28.0 years (female) (2018: 24.8 years (male), 28.5 years (female)). IWCSSS Current pensioner aged 60: 24.7 years (male), 26.8 years (female) (2018: 25.2 years (male), 27.2 years (female)). Future retiree upon reaching 60: 25.9 years (male), 28.0 years (female) (2018: 26.4 years (male), 28.6 years (female)). Sensitivity Analysis The Group considers the discount rate and inflation rate assumptions to be the most significant actuarial assumptions and therefore the only assumptions relevant for sensitivity analysis purposes. 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) The Group expects to contribute approximately £1,800,000 to the defined benefit schemes in the next financial year. The Company has no retirement benefit obligation (2018: £nil). 2019 £000 (10,364) 10,916 2019 £000 13,668 (9,600) 2018 £000 (9,339) 9,519 2018 £000 12,140 (8,595) Annual Report and Accounts 2019 73 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 26 Employee Share Schemes The Group has established an Executive Long-Term Incentive Plan and a deferred bonus scheme. The terms and conditions of the schemes are as follows, whereby all options are settled by physical delivery of shares: Deferred bonus scheme A Deferred bonus scheme B (50%) Deferred bonus scheme B (50%) Deferred bonus scheme C Deferred bonus scheme D Deferred bonus scheme E Deferred bonus scheme F Share option scheme 2019 Share Option Schemes Date of grant Employees entitled December 2014 December 2014 December 2014 August 2016 November 2016 May 2017 July 2018 January 2019 Senior employees Senior employees Senior employees Senior employees Senior employees Senior employees Senior employees Directors Number of shares granted 112,122 91,722 91,722 135,034 20,000 29,260 60,240 499,801 Principal vesting conditions Contractual life 3 years’ service 3 years’ service 4 years’ service 3 years’ service 3 years’ service 3 years’ service 3 years’ service 3 years’ service and Total Shareholder Return of between 35% and 85% 3 years 3 years 4 years 3 years 3 years 3 years 3 years 3 years Outstanding at the beginning of the 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 2019 Weighted average exercise price – 10p – – 10p – 2019 Number of options – 499,801 – – 499,801 – 2018 Weighted average exercise price 2018 Number of options – – – – – – – – – – – – There were 499,801 options granted in the year with a weighted average exercise price of 10p per share. These options are not exercisable before 30 January 2022. Deferred Bonus Schemes Outstanding at the beginning of the 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 2019 Weighted average exercise price – – – – – – 2019 Number of options 240,458 60,240 – (56,402) 244,296 25,774 2018 Weighted average exercise price – – – – – – 2018 Number of options 397,112 29,260 (43,172) (142,742) 240,458 22,137 The options outstanding at 31 May 2019 have an exercise price of £nil and a weighted average contractual life of 11 months. There were 56,402 options exercised in the year with a weighted average market value of 313p. There were 60,240 options granted in the year with a weighted average exercise price of £nil. 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 in respect of the Deferred Bonus Schemes is measured based on the Black-Scholes model. The contractual life of the option is used as an input into this model. A Monte Carlo model is used for the 2019 Share Option Scheme due to its more complex measurement characteristics. 74 Hargreaves Services plc The fair value of options and the assumptions used in these calculations for the options outstanding are as follows: Fair value at grant date Exercise price Share price Expected volatility Option life Expected dividend Risk-free rate 2015 Deferred Bonus Scheme A 2015 Deferred Bonus Scheme B 2017 Deferred Bonus Scheme C 2017 Deferred Bonus Scheme D 2017 Deferred Bonus Scheme E 2019 Deferred Bonus Scheme F 2019 Share option scheme 3.28 – 3.49 20% 3 years 2% 5.8% 4.42 – 4.70 20% 3–4 years 2% 5.8% 1.48 – 1.73 20% 3 years 5% 5.8% 2.11 – 2.25 40% 3 years 2% 5.8% 3.05 – 3.25 40% 3 years 2% 5.8% 3.32 – 3.54 40% 3 years 2% 1.7% 0.34 0.10 2.96 29% 3 years 2.44% 0.87% Volatility was calculated with reference to the Group’s daily share price volatility. The average share price in the year was 319p (2018: 340p). Share options outstanding at the end of the year have the following expiry date and exercise prices: Options outstanding Deferred Bonus Scheme A Deferred Bonus Scheme B (3 Year) Deferred Bonus Scheme B (4 Year) Deferred Bonus Scheme C Deferred Bonus Scheme D Deferred Bonus Scheme E Deferred Bonus Scheme F Share option scheme 2019 Expiry date Exercise price 2019 31 August 2019 31 August 2019 31 August 2019 31 May 2020 31 May 2020 31 May 2021 31 May 2022 30 January 2024 – – – – – – – 10p 16,990 5,147 3,637 109,022 20,000 29,260 60,240 499,801 744,097 Long-Term Incentive Plans and Deferred Bonus Schemes The costs (credited)/charged to the Income Statement relating to share-based payments were as follows: Share options granted in 2014 Share options granted in 2015 Share options granted in 2016 Share options granted in 2018 Share options granted in 2019 27 Provisions Group At 31 May 2018 (represented) Provisions made Provisions utilised Provisions reversed 2019 £000 (66) – 68 30 64 96 Contract provisions £000 Surface restoration £000 Maltby restoration £000 Maltby subsidence £000 Redundancy provision £000 1,375 – (1,110) – 3,281 1,800 (982) – 164 2 – (166) – 1,681 – – 760 – – (760) – At 31 May 2019 265 4,099 – 1,681 6,045 Included within the Surface mining restoration provisions is an amount of £381,000 (2018: £1,523,000) that is expected to be utilised in the next 12 months. The redundancy provision of £1,681,000 (2018: £nil) and the contract loss provision of £265,000 (2018: £1,110,000) is expected to be utilised in the next 12 months. Annual Report and Accounts 2019 75 2018 16,990 5,147 60,039 109,022 20,000 29,260 – – 240,458 2018 £000 19 – 58 30 – 107 Total provision £000 5,580 3,483 (2,092) (926) Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 27 Provisions continued Provisions comprise: 1 2 3 The contract provisions represent losses expected to arise, but not yet incurred on construction contracts. A £4,099,000 restoration provision, which relates to the surface mining obligation to restore the sites once mining operation is completed. A £760,000 restoration provision which related to Maltby Colliery’s obligation to restore the site has been removed following the sale of the associated land. 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, has now been satisfied. A redundancy provision of £1,681,000 was created following the announcement that the Group’s customer British Steel had entered into insolvency proceedings. 4 5 The Company has no provisions. 28 Capital and Reserves Share Capital In issue at 1 June and 31 May Allotted, called up and fully paid 32,125,254 (2018: 32,068,852) ordinary shares of 10p each (excluding own shares held) Own shares held of 10p each 1,013,502 (2018: 1,069,904) Group and Company ordinary shares 2019 Number 2018 Number 33,138,756 33,138,756 2019 £000 3,213 101 3,314 2018 £000 3,207 107 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 1,013,502 (2018: 1,069,904) within Treasury shares, representing own shares purchased as part of the Group’s share buyback programme. These shares have a market value of £2.3m at 31 May 2019 (2018: £3.8m) and were purchased for an aggregate consideration of £5.8m (2018: £6.0m). Share Premium The share premium represents the excess amount paid for share capital issued at prices higher than the nominal value. 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. 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. Share-based Payments Reserve The Share-based Payments reserve comprises cumulative charge in relation to the Group’s long term incentive plans (Note 26). This reserve is expected to move in line with the charge recognised in the Share-based Payment charge recognised in the Income Statement. 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 (4.5p per share (2018: 4.5p)) Interim dividends paid in respect of the current year (2.7p per share (2018: 2.7p)) Proposed dividend (4.5p per share (2018: 4.5p)) The proposed dividend is not included in liabilities as it was not approved before the year end. 76 Hargreaves Services plc 2019 £000 1,443 867 2,310 1,448 2018 £000 1,436 864 2,300 1,439 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 to 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: 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). Level 3: In both 2019 and 2018 all of the forward exchange contracts and the commodity contracts are considered to be Level 2 contracts. 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 value 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 maximum Group exposure to credit risk at the balance sheet date was £76,303,000 (2018: £94,779,000) being the total of the carrying amount of trade receivables, other receivables, contract assets and amounts due from undertakings in which the Group has a participating interest. The maximum Company exposure to credit risk at the balance sheet date was £114,102,000 (2018: £134,654,000) being the total of the carrying amount of trade receivables, other receivables and amounts due from Group undertakings. 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 20. (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 Group’s principal existing bank borrowing facilities do not expire until 31 August 2020; however, management has already commenced initial discussions with both existing and potential lenders with the intention of securing replacement facilities well before the expiry date of the existing facilities. Annual Report and Accounts 2019 77 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 29 Financial Instruments continued The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effect of netting agreements: Group 2019 2018 Carrying amount £000 Contractual cash flow £000 1 year or less £000 1 to <2 years £000 2 to <5 years £000 5 years and over £000 Represented Carrying amount £000 Contractual cash flow £000 1 year or less £000 1 to <2 years £000 2 to <5 years £000 5 years and over £000 Non-derivative financial liabilities Finance lease liabilities 12,587 Trade and other payables* Group banking facilities 26,924 69,259 13,381 4,679 4,178 4,524 69,259 69,259 – 26,924 – 26,924 Derivative financial liabilities Forward exchange contracts used for hedging: Outflow Commodity contracts: Outflow 36 251 36 251 36 114 – 137 109,057 109,851 74,088 31,239 4,524 * Excludes derivatives (shown separately). Company – – – – – – – – – – 7,634 8,093 3,415 2,067 2,611 88,425 88,425 88,425 39,260 39,260 39,260 7 30 7 30 7 – – – – – – – – 30 135,356 135,815 131,107 2,067 2,641 – – – – – – 2019 2018 Carrying amount £000 Contractual cash flow £000 1 year or less £000 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 1 to <2 years £000 2 to <5 years £000 5 years and over £000 Non-derivative financial liabilities Trade and other 18,962 payables Group banking facilities 26,924 18,962 26,924 18,962 – – 26,924 45,886 45,886 18,962 26,924 – – – – – – 32,546 39,260 32,546 39,260 32,546 39,260 71,806 71,806 71,806 – – – – – – – – – (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. Levels of interest bearing borrowings are monitored to minimise the exposure to interest rate risk, when appropriate the Group will utilise interest rate swaps to mitigate the remaining risk. Currently, the Group does not have any interest rate swaps in place. 78 Hargreaves Services plc 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 surface mining activities, the Group has a longer-term exposure to price movements, favourable or unfavourable, in international coal 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. US Dollar £000 10 246 Hong Kong Dollar £000 1,479 3,958 South African Rand £000 659 1 Indian Rupee £000 81 – Malaysian Ringgit £000 95 – 31 May 2019 Cash and cash equivalents Trade receivables Loans due from undertakings in which the Group has a participating interest Trade receivables due from undertakings in which the Group has a participating interest Other receivables Prepayments and accrued income Trade payables Other trade payables Non-trade payables and accrued expenses Balance Sheet exposure Contracted future sales Contracted future purchases Gross exposure Forward exchange contracts Net exposure 31 May 2018 Cash and cash equivalents Trade receivables Loans due from undertakings in which the Group has a participating interest Other receivables Prepayments and accrued income Trade payables Other trade payables Non-trade payables and accrued expenses Balance Sheet exposure Contracted future sales Contracted future purchases Gross exposure Forward exchange contracts Net exposure Euro £000 61 258 11,404 540 13 1 (7) – (18) 12,252 652 (3,572) 9,332 2,920 12,252 Euro £000 89 94 11,821 2,703 1 (21) – (4) 14,683 – (601) 14,082 601 14,683 – – – – – – – 256 – – 256 – 256 – – 4,116 4,588 (1,828) (1,232) (4,056) 7,025 1,001 – 8,026 (1,001) 7,025 – – 6 187 (30) – (337) 486 – – 486 – 486 US Dollar £000 Hong Kong Dollar £000 South African Rand £000 1 – – – – – – – 1 391 (1,148) (756) 757 1,022 3,534 – 60 3,937 (4,150) (2) (3,054) 1,347 1,720 – 3,067 (1,720) 1 1,347 378 1 – – 160 (83) (34) (297) 125 – – 125 – 125 – – – – – (13) – 68 – – 68 – 68 Indian Rupee £000 104 – – – – – (14) – 90 – – 90 – 90 Total £000 2,385 4,463 11,404 540 4,136 4,776 (1,865) (1,245) – – 1 – – – (14) (4,425) 82 – – 82 – 82 Malaysian Ringgit £000 95 – – – – – – – 95 – – 95 – 95 20,169 1,653 (3,572) 18,250 1,919 20,169 Total £000 1,689 3,629 11,821 2,763 4,098 (4,254) (50) (3,355) 16,341 2,111 (1,749) 16,703 (362) 16,341 Annual Report and Accounts 2019 79 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 29 Financial Instruments continued Company The Company’s exposure to foreign currency risk is as follows. 31 May 2019 Trade receivables due from Group undertakings Loans due from undertakings in which the Group has a participating interest Trade receivables due from undertakings in which the Group has a participating interest Trade payables due to Group undertakings Balance Sheet exposure Contracted future sales Gross exposure Forward exchange contracts Net exposure 31 May 2018 Trade receivables due from Group undertakings Loans due from undertakings in which the Group has a participating interest Trade payables due to Group undertakings Balance Sheet exposure Contracted future sales Gross exposure Forward exchange contracts Net exposure Euro £000 – 11,404 277 (1,011) 10,670 – 10,670 – 10,670 Euro £000 – 11,613 (1,011) 10,602 – 10,602 – 10,602 Hong Kong Dollar £000 South African Rand £000 5 – – – 5 1,001 1,006 (1,001) 5 852 – – – 852 – 852 – 852 Hong Kong Dollar £000 South African Rand £000 1,745 – (1,734) 11 1,720 1,731 (1,720) 11 852 – – 852 – 852 – 852 Total £000 857 11,404 277 (1,011) 11,527 1,001 12,528 (1,001) 11,527 Total £000 2,597 11,613 (2,745) 11,465 1,720 13,185 (1,720) 11,465 Sensitivity Analysis Group A 10% weakening of the following currencies against the Pound Sterling at 31 May 2019 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 2018. € $ HKD ZAR INR MYR Equity Profit or loss 2019 £000 1,084 23 639 44 6 7 2018 £000 1,335 – 122 11 8 9 2019 £000 1,084 23 639 44 6 7 2018 £000 1,335 – 122 11 8 9 A 10% strengthening of the above currencies against the Pound Sterling at 31 May 2019 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. 80 Hargreaves Services plc 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 liabilities Variable rate instruments Financial assets Financial liabilities Group 2019 £000 2018 £000 Company 2019 £000 (12,587) (7,634) (12,587) (7,634) – – 2018 £000 – – 21,583 (26,924) 16,110 (39,260) – (26,924) – (39,522) (5,341) (23,150) (26,924) (39,522) 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 2018. Profit or loss Decrease Group Company 2019 £000 (142) 2018 £000 (153) 2019 £000 (328) 2018 £000 (371) (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: 2019 Expected cash flows 2018 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 years £000 1 to <2 years £000 2 to <5 years £000 5 years and over £000 Forward exchange contracts: Assets Liabilities Commodity contracts: Assets Liabilities 25 (36) – (251) 25 (36) – (114) – – – (137) (262) (125) (137) – – – – – – – – – – 35 (7) 1,009 (30) 35 (7) 1,009 – 1,007 1,037 – – – – – – – – (30) (30) – – – – – Annual Report and Accounts 2019 81 Strategic ReportDirectors’ ReportFinancial Statements Notes (forming part of the financial statements) continued 29 Financial Instruments continued (f) Capital Management The Group manages its capital to ensure that 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 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. The nature of the Group’s principal borrowing facility is that of an asset-based lending structure based upon eligible inventories and receivables. As a result, the facility varies in line with the Group’s working capital requirements. The Board considers the allocation of capital delivered from asset realisation and cash flows from operations, taking into account the growth opportunities and return on capital employed in each business unit. 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 2019 £000 2,313 3,442 29 5,784 2018 £000 3,574 3,935 – 7,509 Company 2019 £000 – – – – 2018 £000 – – – – Group During the year £5,548,000 was recognised as an expense in the Income Statement in respect of operating leases (2018: £9,166,000). Company During the year £nil was recognised as an expense in the Income Statement in respect of operating leases (2018: £nil). 31 Capital Commitments Group As at 31 May 2019, the Group did not have any capital commitments however as at 31 May 2018 the Group was committed to contracts to purchase freehold land, property, plant and equipment for £3,928,000. Company As at 31 May 2019, the Company did not have any capital commitments (2018: £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 (2018: £nil). The Group has performance bonds and guarantees in place in relation to various performance obligations under certain contracts. The total value of these bonds as at 31 May 2019 is £4.8m (2018: £2.0m). In relation to HRMS, the Group has provided a €5m or £4.4m (2018: €5m or £4.4m) guarantee in connection with the banking facilities of HRMS. 82 Hargreaves Services plc 33 Related Parties Identity of Related Parties with which the Group has Transacted The Group and the Company have a related party relationship with their subsidiaries and joint ventures (Note 15) and its Directors. Group Other Related Party Transactions Joint ventures Tower Regeneration Limited Tower Regeneration Leasing Limited Associate undertakings Hargreaves Raw Materials Services GmbH Joint ventures Tower Regeneration Limited Associate undertakings Hargreaves Darlington Limited Hargreaves Raw Materials Services GmbH Joint ventures Tower Regeneration Limited Tower Regeneration Leasing Limited Hargreaves Darlington Limited Associate undertakings Hargreaves Raw Materials Services GmbH Sales to 2019 £000 9,518 – 2,228 2018 £000 15,510 – 46 11,746 15,556 Purchases from 2019 £000 – 687 – 687 2018 £000 – 2,570 785 3,355 Interest received from Interest paid to 2019 £000 2018 £000 2019 £000 – 16 83 99 2018 £000 205 – 51 256 – – – – – – – – 2018 £000 – 3,086 – – 3,086 Loan receivables outstanding Trade receivables outstanding Payables outstanding 2019 £000 12,825 – 2,026 11,404 2018 £000 17,870 77 – 11,821 26,255 29,768 2019 £000 192 18 – 540 750 2018 £000 – – – – – 2019 £000 4 – – 25 29 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 7. In addition to this, the element of the share-based payment charge for the year that relates to key management personnel is £20,000 (2018: £36,000) and the social security costs is £146,000 (2018: £248,000). There are no other post-employment or other long-term benefits. Company Other Related Party Transactions Subsidiaries Joint ventures Receivables outstanding Payables outstanding 2019 £000 100,900 11,681 2018 £000 121,847 11,613 2019 £000 18,144 – 2018 £000 32,509 – 112,581 133,460 18,144 32,509 Annual Report and Accounts 2019 83 Strategic ReportDirectors’ ReportFinancial Statements 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. The Board believes that these APMs provide readers with important additional information on the business. Alternative Performance Measure Definition and Purpose Underlying Operating Profit Basic underlying earnings per share Represents the operating profit from continuing operations of the Group before net exceptional items, the amortisation and impairment of intangible assets and includes the Group’s share of the operating profit of its German associate. See Note 2 for reconciliation to statutory profit before tax. This measure is consistent with how the business measures performance and is reported to the Board. Profit attributable to the equity holders of the Parent before net exceptional items and the amortisation and impairment of intangible assets after tax divided by the weighted average number of ordinary shares during the financial year adjusted for the effects of any potentially dilutive options. See Note 11. Net Debt Represents the net position of the Group’s cash and loan balances including leases and hire purchase. Calculated as follows: Cash and cash equivalents Non-current interest bearing loans and borrowings Current interest bearings loans and borrowings Net Debt Net Asset Value per share Represents the Net Asset value of the Group divided by the number of shares in issue less those shares held in treasury. Calculated as follows: Total shares in issue Less shares in treasury Shares for calculation 2019 £’000 21,583 (35,222) (4,289) (17,928) 2018 £’000 16,110 (4,434) (42,460) (30,784) 2019 £’000 2018 £’000 33,138,756 (1,013,502) 33,138,756 (1,069,904) 32,125,254 32,068,852 Net Asset Value per Balance Sheet £127,477,000 £136,087,000 Net Asset Value per share £3.97 £4.24 84 Hargreaves Services plc Notice of Annual General Meeting – Hargreaves Services plc (incorporated and registered in England and Wales under company number 4952865) NOTICE IS GIVEN that this year’s Annual General Meeting of Hargreaves Services plc (the Company) will be held at The Solarium, Durham Cathedral, Durham, DH1 3EH on 30 October 2019 at 11.00am to consider and, if thought fit, approve the following resolutions: Ordinary Business 1. 2. 3. 4. 5. 6. 7. 8. 9. To adopt and receive the Directors’ Report, the Strategic Report, the Directors’ Corporate Governance and Remuneration Reports, the Audit & Risk Committee Report, the Auditor’s Report and the Financial Statements for the year ended 31 May 2019. To approve the Directors’ Corporate Governance and Remuneration Reports for the year ended 31 May 2019. To declare a final dividend for the year ended 31 May 2019 of 4.5 pence per ordinary share to bring the dividend for the year ended 31 May 2019 to a total of 7.2 pence per ordinary share. To re-appoint Roger McDowell as a director of the Company in accordance with article 34 of the Company’s articles of association, who offers himself for re-appointment. To re-appoint John Samuel as a director of the Company in accordance with article 34 of the Company’s articles of association, who offers himself for re-appointment. To re-appoint David Anderson as a director of the Company in accordance with article 29.2 of the Company’s articles of association, who offers himself for re-appointment. To re-appoint KPMG LLP as auditors of the Company to hold office from the conclusion of this meeting to the conclusion of the next general meeting at which accounts are laid before the Company. To authorise the Audit & Risk Committee of the board of directors to determine the remuneration of the auditors. To authorise the directors of the Company pursuant to section 551 of the Companies Act 2006 (the Act) generally and unconditionally 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): 9.1 up to an aggregate nominal value of £1,070,842 (representing approximately one-third of the total ordinary share capital in issue as at 26 July 2019); and 9.2 comprising equity securities (within the meaning of section 560 of the Act) up to an aggregate nominal amount of £2,141,684 (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 9 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 offers or agreements 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 9 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 9 revoked but without prejudice to any allotment or grant of Rights made or entered into prior to the date of this resolution 9. For the purposes of this resolution 9, 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 whatsoever. 10. Subject to and conditional upon the passing of resolution 9 (and in substitution for all existing like powers granted to the directors of the Company (to the extent they remain in force and unexercised)), 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 pursuant to the authority conferred upon them by resolution 9 or where the allotment constitutes an allotment of equity securities by virtue of section 560(3) of the Act as if section 561(1) of the Act and sub-sections (1) – (6) of section 562 of the Act did not apply to any such allotment, provided that this power shall be limited to the allotment of equity securities: 10.1. in connection with or pursuant to an offer of such securities by way of a pre-emptive offer (as defined below); and 10.2. (otherwise than pursuant to resolution 10.1) up to an aggregate nominal value of £321,253 (representing approximately 10% of the total ordinary share capital in issue as at 26 July 2019); and 10.3 pursuant to the authority conferred upon them by resolution 9.2, in connection with or pursuant to a rights issue, as if section 561(1) of the Act and sub-sections (1) – (6) of section 562 of the Act did not apply to any such allotment, and the powers 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 offers or agreements 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 as if the power had not expired. rights issue has the meaning given in resolution 9; and For the purpose of this resolution 10: (a) (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 whatsoever. Annual Report and Accounts 2019 85 Strategic ReportDirectors’ ReportFinancial Statements Notice of Annual General Meeting – Hargreaves Services plc continued (incorporated and registered in England and Wales under company number 4952865) Special Business 11. 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: 11.1 the maximum aggregate number of Ordinary Shares authorised to be purchased by the Company pursuant to this resolution 11 is 4,818,788 (representing approximately 15% of the total ordinary share capital in issue as at 26 July 2019); and 11.2 the minimum price which may be paid for each of those Ordinary Shares (exclusive of expenses) is 10 pence; and 11.3 the maximum price (exclusive of expenses) which may be paid for each of those Ordinary Shares is not more than the higher of (i) 5% 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 European 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 11 which contract would or might be executed wholly or partially after the expiration of this authority as if the authority conferred by this resolution 11 had not expired. 12. To approve the Hargreaves Services plc Executive Share Option Scheme (the Scheme), the principal terms of which are as described in the Remuneration Report and the explanatory notes below and to authorise the directors of the Company to do all things necessary to implement, complete or to procure the implementation or completion of the grant of the options under the Scheme. 31 July 2019 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. This notice is the formal notification to members of the Company’s Annual General Meeting (the Meeting), its date, time and place and the matters to be considered. If you are in doubt as to what action you should take you should consult an independent adviser. Resolutions 1 to 9 and Resolution 12 will be proposed as ordinary resolutions. A simple majority (being more than 50%) or votes cast must be in favour of each such resolution in order for it to be passed. Resolutions 10 and 11 will be proposed as special resolutions. A special resolution requires 75% or more of votes cast to be in favour of the resolution in order for it to be passed. All business proposed at the Meeting is ordinary business, pursuant to Article 24.1, save for Resolutions 11 and 12. Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001 (as amended), only those shareholders registered in the register of members of the Company at close of business on 28 October 2019 as holders of ordinary shares of £0.10 each in the capital of the Company shall be entitled to attend and vote at the Meeting in respect of the number of shares registered in their name at the time. Changes to entries in the register of members after close of business on 28 October 2019 shall be disregarded in determining the rights of any person to attend and vote at the Meeting. If you are a member of the Company at the time set out in Note 2 above, you are entitled to appoint a proxy to exercise all or any of your rights to attend and to speak and vote on your behalf at the Meeting. You can only appoint a proxy using the procedures set out in these notes and the notes to the proxy form. A shareholder may appoint more than one proxy in relation to the Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by you. You may not appoint more than one proxy to exercise rights attached to any one share. 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. If you wish your proxy to speak on your behalf at the Meeting you will need to appoint your own choice of proxy (not the Chairman of the Meeting) and give your instructions to them. 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, Link Asset Services, Proxies Department, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU no later than 11.00am on 28 October 2019. The return of a completed proxy form, other such instrument or any CREST Proxy Instruction (as described in Note 11 below) will not prevent a shareholder 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. 2. 3. 4. 5. 6. 86 Hargreaves Services plc 7. 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 4 above) also applies in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be disregarded. 9. 8. 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 Link 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. 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 Link 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 Link Asset Services at Proxies Department, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU no later than 11.00am on 28 October 2019. If you attempt to revoke your proxy appointment but the revocation is received after the time specified then, subject to Note 6 above, your appointment will remain valid. 10. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the 11. procedures 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 11.00am on 28 October 2019. 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. 12. 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(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. 13. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities 14. Regulations 2001 (as amended). 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. 15. As at 26 July 2019 (being the last business day prior to the publication of this Notice) the Company’s issued share capital consists of 32,125,254 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 26 July 2019 are 32,125,254. 16. The following documents will be available for inspection at 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; • copies of the letters of appointment of Non-Executive Directors of the Company; and the proposed rules of the Hargreaves Services plc Executive Share Option Scheme. • Explanatory Notes to the Notice of Annual General Meeting The notes on the following pages explain the proposed resolutions. 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 2019 to the meeting as required by law. These reports and statements are set out on pages 17 to 83 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 2019 which is set out in full on pages 23 to 25 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 for the financial year ended 31 May 2019 of 4.5 pence per share. If the meeting approves resolution 3, the final dividend will be paid on 1 November 2019 to shareholders on the register of members on 20 September 2019. Annual Report and Accounts 2019 87 Strategic ReportDirectors’ ReportFinancial Statements Notice of Annual General Meeting – Hargreaves Services plc continued (incorporated and registered in England and Wales under company number 4952865) Explanatory Notes to the Notice of Annual General Meeting continued 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. Roger McDowell and John Samuel are both offering themselves for re-appointment. Brief biographical details of Roger McDowell and John Samuel are set out on page 16 of this document. Resolutions 6: Appointment of Director As David Anderson was appointed to the Board subsequent to the date of the last Annual General Meeting, he is required by the Company’s articles of association to be re-appointed at this year’s Annual General Meeting. Accordingly, the directors recommend that David Anderson be re-appointed as a director and resolution 6 proposes his re-appointment. Brief biographical details of David Anderson are set out on page 16 of this document. Resolutions 7 and 8: Re-appointment and Remuneration of Auditors 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 7 proposes their re-appointment and, in accordance with standard practice, resolution 8 authorises the Audit & Risk Committee of the board of directors of the Company to determine the level of the auditors’ remuneration. Resolution 9: Renewal of Board’s Authority to Allot Shares Resolution 9.1 grants the directors authority to allot relevant ordinary shares up to an aggregate nominal amount of £1,070,842 being approximately one-third of the Company’s issued ordinary share capital as at 26 July 2019. In line with guidance issued by the Association of British Insurers (the ABI), resolution 9.2 grants the directors authority to allot ordinary shares in connection with a rights issue up to an aggregate nominal amount of £2,141,684 (representing 21,416,840 ordinary shares of 10 pence each), as reduced by the nominal amount of any shares issued under resolution 9.1. This amount, before any such reduction, represents approximately two-thirds of the Company’s issued ordinary share capital as at 26 July 2019. 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 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 9.1, 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 9.2, 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 of these authorities. The authorities granted by resolution 9 replace the existing authorities to allot shares. Resolution 10: Disapplication of Statutory Pre-emption Rights Resolution 10.1 grants the directors power to allot shares without first offering them to existing shareholders in proportion to their existing shareholdings, where such offers are made in connection with or pursuant to a pre-emptive offer of shares. Resolution 10.2 permits the directors to allot shares without first offering them to existing shareholders and otherwise than in connection with a pre- emptive offer, but only up to a limit of 10% of the total ordinary share capital. 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% 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 authority to allot up to 10% of issued share capital for cash on a non pre-emptive basis (which the Company has done each year since joining AIM). Resolution 10.3 grants the directors power to allot those shares issued further to the powers granted to them under resolution 9.2 without first offering them to existing shareholders. Resolution 11: Purchase of Own Shares Resolution 11 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 Company’s current financial year end, whichever is the sooner, up to a total of 4,818,788 ordinary shares. This represents approximately 15% of the issued ordinary share capital of the Company as at 26 July 2019. 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 European 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 shares 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 shares. 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. 88 Hargreaves Services plc The directors will consider making use of the renewed authority pursuant to resolution 11 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. Resolution 12: Approval of the Hargreaves Services plc Executive Share Option Scheme (the Scheme) Introduction Capitalised terms have the meaning given to them in the definitions at the end of this explanatory note. Subject to the approval by ordinary resolution by shareholders, the Scheme will be adopted, and Options granted annually subject to the Rules and at the discretion of the Remuneration Committee. Grant of Options Options (envisaged as equating to 50% but which may be up to a maximum of 100%) of an Option Holder’s annual salary will be granted annually under the Scheme to Executive Directors and senior management as determined by the Remuneration Committee. No Option will be granted under the Scheme If the grant of that Option would cause the total number of Shares under Option whether pursuant to the Scheme or any other employee share scheme or share Incentive plan operated by the Company to exceed 10% of the enlarged ordinary share capital of the Company. Exercise of Options Subject to the fulfilment of the performance criteria described below, the Options may be exercised at any time between the third anniversary and the fifth anniversary of the Date of Grant (except where the fifth anniversary date falls within a Close Period when the period shall be extended until ten working days after the end of such Close Period). Performance Criteria The performance criteria will use the average mid-market closing Share price for the 21 Trading Days preceding 1 June during the year of the grant of the Option as a “Base Value”. The number of Shares to be acquired on the exercise of an Option will be dependent on the Total Shareholder Return on the third anniversary of the Date of Grant (Strike Date) calculated by reference to the average Share price for the 21 Trading Days preceding the Strike Date. The performance parameters for Total Shareholder Return will be split equally between two parts. 1. 50% of the Option will be based upon the Company’s performance (the Company Performance Option). If the Total Shareholder Return figure on the Strike Date reflects 100% or more growth in excess of the Base Value, the Company Performance Option may be exercised in full. If the Total Shareholder Return figure at the Strike Date reflects less than 25% growth in excess of the Base Value, the Company Performance Option will lapse and cease to be exercisable. In the event that the Total Shareholder Return figure at the Strike Date reflects percentages between 25% growth and 100% growth above the Base Value, the number of shares to be acquired under the Company Performance Option will be based on a linear calculation between the 25% growth and 100% growth outcomes from zero at 25% growth to 100% of the Company Performance Option at 100% growth or greater. The performance criteria in respect of the Company Performance Option is therefore expressed as follows: • • If the Strike Value is less than the 25% Growth Value, the Company Performance Option will lapse and cease to be exercisable. In the event that the Strike Value is equal to or greater than the 25% Growth Value but less than the 100% Growth Value, the Company Performance Option may be exercised only to the extent determined by multiplying the number of Shares under the Company Performance Option by the value of X, calculated as follows: X = (Strike Value – 25% Growth Value) 100% Growth Value – 25% Growth Value • If the Strike Value is equal to or greater than the 100% Growth Value, the Company Performance Option may be exercised in full. 2. 50% of the Option will be based upon benchmarking the Company’s performance against the Peer Group (the Peer Group Performance Option). The growth of each of the companies in the Peer Group will be measured using the average mid-market closing share price of such company for the 21 Trading Days preceding 1 June during the year of grant of the Option and calculating the growth at the Strike Date by reference to the average share price for the 21 Trading Days preceding the Strike Date. The growth of the Company (measured using the Base Value and the Strike Value) will be ranked in the “Peer Group TSR List” alongside the growth of the companies in the Peer Group. If the Company: • • • is ranked below the median position of the Peer Group TSR List, the Peer Group Performance Option will lapse and not be exercisable; is ranked first in the Peer Group TSR List, the Peer Group Performance Option may be exercised in full; and is ranked at or above the median of the Peer Group TSR List but below first, the number of shares in respect of which the Peer Group Performance Option may be exercised shall be calculated on a straight line basis from 25% of the Peer Group Performance Option at the median position to full exercise of the Peer Group Performance Option for ranking first (rounded up to the nearest whole number of Shares). Disposal of Shares Acquired Under the Options The Rules provide that, following the acquisition of Shares pursuant to the exercise of an Option, no disposal of any such Shares can be made until or after the fourth anniversary of the Date of Grant, except to the extent that such disposal is permitted by the Board in order to facilitate the satisfaction of any tax liability as a result of an exercise of an Option. The Rules provide that an Option Holder will be entitled to transfer some or all of the Shares acquired in respect of an Option to a spouse or civil partner at any time, provided that the Option Holder procures that such Shares will be held until on or after the fourth anniversary of the Date of Grant (unless such disposal is permitted by the Board in order to facilitate the satisfaction of any tax liability as a result of the exercise of an Option). Annual Report and Accounts 2019 89 Strategic ReportDirectors’ ReportFinancial Statements Notice of Annual General Meeting – Hargreaves Services plc continued (incorporated and registered in England and Wales under company number 4952865) Explanatory Notes to the Notice of Annual General Meeting continued Resolution 12: Approval of the Hargreaves Services plc Executive Share Option Scheme (the Scheme) continued Change of Control In the event of a change of Control, an Option may be exercised within six months of: a person making an offer to acquire the whole or part of the issued share capital of the Company and obtaining Control of the Company; and any condition subject to which an offer is made having been satisfied (or such shorter period of not less than 21 calendar days as the Board shall specify in writing to the Option Holder). In the event of a change of Control, the Strike Date will be the date of such exercise and the Total Shareholder Return shall be calculated by reference to the price per share being paid as part of such change of Control. The Company Performance Option criteria will be adjusted on a time-weighted basis to reflect the realised Total Shareholder Return by reference to the earlier Strike Date. Share Buy-backs In the calculation of Total Shareholder Return, the Board (excluding any members of the Board who are Option Holders under the Scheme) will be entitled to exercise its reasonable discretion in relation to making any adjustment to the Total Shareholder Return as a result of any buy-back of Shares made by the Company between the Date of Grant and the Strike Date. Cash Alternative Where an Option has been exercised by an Option Holder, the Board may (at its sole discretion) and subject to the Option Holder’s consent, pay to the Option Holder a cash alternative in relation to some or all of the Shares to be exercised equal to the market value in relation to such Shares (being the bid price as notified by the Company’s brokers at the close of business on the day that the Option Holder exercises his Option) less the Option Price. Definitions 25% Growth Value means either: (a) a Total Shareholder Return figure which exceeds which exceeds the Base Value by 25%; (b) if exercise of the Option in permitted earlier than the Third Anniversary pursuant to a change of Control, the figure calculated as follows: ( D x 0.25 1,095 +1) x Base Value where “D” is the number of days between the Date of Grant and the Strike Date (inclusive). 100% Growth Value means either: (a) a Total Shareholder Return figure which exceeds which exceeds the Base Value by 100%; (b) if exercise of the Option in permitted earlier than the Third Anniversary pursuant to a change of Control, the figure calculated as follows: ( D 1,095 +1) x Base Value where “D” is the number of days between the Date of Grant and the Strike Date (inclusive). AIM means the Alternative Investment Market of the London Stock Exchange; Average Value means the mean average, being the sum of the figures in question divided by the number of figures in question; Base Value means the Average Value of the mid-market closing Share Price for the 21 Trading Days preceding 1 June in the year that the Option is granted; Board means the Board of Directors of the Company; Close Period means any period during which the Company is prohibited from issuing shares to employees or directors of the Company under its share dealing policy or otherwise; Control has the same meaning as in Section 719 of the Income Tax (Earnings and Pension) Act 2003; Date of Grant means in relation to any Option the date on which the Option was or is to be granted; Option means a right to acquire shares in accordance with the Rules; Option Holder means an individual to whom an Option has been granted; Option Price means 10 pence per share; 90 Hargreaves Services plc Peer Group means in relation to an Option a list of companies comparable to the Company determined by the Board (which for the purposes of this paragraph shall exclude any members of the Board who are Option Holders under the Scheme) having taken professional advice as appropriate prior to the granting of the Option; Peer Group Total Shareholder Return means the total shareholder return on any ordinary shares achieved in the Company and each company in the Peer Group as determined by the Board providing that: (a) in determining the share price element of total shareholder return of each of the companies in the Peer Group at the Strike Date, the share price shall be calculated using the Average Value of the mid-market closing share price of such company for the 21 Trading Days preceding 1 June during the year of the grant of the Option and calculating the total shareholder return by reference to the Average Value of the share price for the 21 Trading Days preceding the Strike Date; in determining the share price element of total shareholder return achieved by the Company at the Strike Date, the Base Value and Strike Value shall be used; and if the Board, which for the purposes of this sub-paragraph shall exclude any members of the Board who are Option Holders under the Scheme, (exercising its reasonable discretion) so determines, any adjustment to the total shareholder return calculation of the Company and/or any of the companies in the Peer Group so as to ensure that total shareholder return is measured on a fair and comparative basis; (b) (c) Peer Group TSR List means a list of the Peer Group Total Shareholder Returns of the Company and each company in the Peer Group ranked in order, with the company with the highest Peer Group Total Shareholder Return ranked first; Remuneration Committee means the Remuneration Committee of the Board; Rules means the rules of the Scheme as from time to time amended in accordance with their provisions; Scheme means the Hargreaves Services plc Executive Share Option Scheme; Share means a fully paid ordinary share of 10p in the capital of the Company; Share Price means either: (a) (b) the closing mid-market value of a share in the Company listed on AIM; or (in the context of an Option exercise pursuant to a change of Control) the price per share being paid in connection with the change of Control. Strike Date means either: (a) (b) the Third Anniversary; or (if exercise of the Option is permitted earlier than the Third Anniversary pursuant to the Rules) the date of such earlier exercise. Strike Value means either: (a) (b) the Total Shareholder Return value calculated by reference to the Average Value of the Share Price for the 21 Trading Days preceding the Strike Date; or (if the Option is being exercised pursuant to a change of Control), the Total Shareholder Return value calculated by reference to the price per share being paid as part of such change of Control; Third Anniversary means the date falling three years after the Date of Grant; Trading Day means the ordinary business days of AIM, being all weekdays other than specified public and bank holidays; Total Shareholder Return means the total shareholder return in respect of any Share on any given date, being the combined total of: (a) (b) (c) the Share Price; and the value of any dividends or special dividends paid or declared in respect of such Share during the period since the Date of Grant; and if the Board, which for the purposes of this sub-paragraph shall exclude any members of the Board who are Option Holders under the Scheme, (exercising its reasonable discretion) so determines, any adjustment to the total sum derived from sub-paragraphs (a) and (b) above as a result of any buy-back of shares made by the Company between the Date of Grant and the Strike Date. Annual Report and Accounts 2019 91 Strategic ReportDirectors’ ReportFinancial Statements Notes 92 Hargreaves Services plc Joint Stockbroker Investec Bank plc 30 Gresham Street London EC2V 7QP Registered Office West Terrace Esh Winning Durham DH7 9PT Registrar Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Hargreaves Services plc West Terrace Esh Winning Durham DH7 9PT Tel: 0191 373 4485 Fax: 0191 373 3777 www.hsgplc.co.uk Shareholder Information Company Secretary Andrew Robertson Auditor KPMG LLP Quayside House 110 Quayside Newcastle upon Tyne NE1 3DX Bankers HSBC Floor 3 Central Square South Orchard Street Newcastle upon Tyne NE1 3AZ Lloyds Banking Group 4th Floor 102 Grey Street Newcastle upon Tyne NE1 6AG Legal Advisers Walker Morris Kings Court 12 King Street Leeds LS1 2HL Nominated Adviser and Joint Stockbroker N+1 Singer One Bartholomew Lane London EC2N 2AX For more information Please visit us online at www.hsgplc.co.uk for up to date investor information, company news and other information. H a r g r e a v e s S e r v i c e s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 9 Hargreaves Services plc West Terrace Esh Winning Durham DH7 9PT Tel: 0191 373 4485 Fax: 0191 373 3777 Company number: 4952865 www.hsgplc.co.uk